Q3 2022 Brown & Brown Inc Earnings Call

October 25, 2022

But at that quarter and are intended to fall within the safe Harbor provisions.

Provisions of the Securities law.

Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward looking statements made.

As a result of a number of factors such factors include the company's determination as it finalizes its financial results for the third quarter that its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday.

Other factors that the company may not have currently identified or quantified and those risks and uncertainties identified from time to time in the company's report.

Filled 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 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 or in the Investor presentation for this call on the company's website at Www Dot B B.

<unk> dot com by clicking on Investor Relations, and then calendar of events with that site I will now turn the call over to Powell Brown, President and Chief Executive Officer, you may begin.

Thank you Laura before we begin I wanted to say, we apologize for any mix up there was.

A transition from one calling or coordinating company to another I think is how I would describe that and we were just made aware of that.

15 minutes ago. So we apologize for any inconvenience. So good morning, everybody and thank you for joining us for our third quarter 2022 earnings call before we get into our results I wanted to make a few comments regarding hurricane Ian first our thoughts and prayers go out to everyone in Florida, and South Carolina that had been impacted.

<unk> by this massive storm.

We have a number of teammates and their family members that suffered wind and flood damage to their homes thankfully none of them were hurt.

All the people in Florida, and South Carolina were that were impacted are in a recovery phase and will need a lot of help during the rebuilding process.

So we encourage everyone to support in any way find appropriate.

I'm extremely proud of how our team prepared for the storm by enacting our catastrophic events planned across our offices.

So we were ready no matter, where the storm hit.

This enabled us to respond quickly and support our customers as well as others in the impacted communities.

Florida will recover and rebuild it as it has after other storms is just going to be a long road.

Regarding our financial performance, we had another good quarter and delivered strong total and organic revenue growth for most of our businesses.

Additionally, our margins and bottom line results.

<unk> estimated losses in our two captive facilities as well as reduced contingent commissions in certain programs, both or is a direct result of hurricane Ian will talk more about our quarterly results and the impact of the storm a bit later, we continue to anticipate good and profitable growth through the remainder of 2022.

During the quarter, we completed the acquisitions of <unk> in July and BBB in August both businesses performed well and are in line with our expectations for their first few months, we're very pleased with the strong cultural alignment the quality of the team. There is strong operating results and the prospects for the future.

Now, let's transition to the results for the quarter I'm on slide number four.

We delivered $928 million of revenue growing 24% in total and six 7% organically. Our adjusted EBITDA margin was 31, 2% for the quarter. Our net income per share was <unk> 57, and our adjusted net income per share was <unk> 50.

Later in the presentation, Andy will discuss our financial results in more detail.

We have a number of items impacting the results for the quarter. We also completed 11 acquisitions during the quarter with annual revenues of approximately $340 million I'm on slide five let's talk about the potential impacts of Hurricane E.

Based on what we're seeing with current claims there is a lot of damage from wind, but the great majority appears to be flood related as a result, we're going to see material claims in our Wright flood business, we're estimating somewhere in the range of 11% to 12000 claims.

And anticipate this will drive about $11 million to $14 million of revenue. However, it's still too early to fully assess the total number of claims and the severity of each claim rig.

Regarding to a one one reinsurance treaties they will be under significant pricing pressure. This will drive commercial and residential cat exposed property rates up and will lead to increases in winded up bowls. This will prevent present further financial challenges for businesses and consumers. After four years of significant premium increases.

And the reductions in capacity, we are well positioned to help our customers navigate these challenging times.

During the quarter, we continue to see businesses and industries, such as construction manufacturing and healthcare expand even with continued downward moderation in GDP to more traditional levels inflation and rising interest rates are the key areas of concern some business owners are becoming more call.

It's just about the level of investment they're making.

Or the number of employees. They are seeking to hire most employers are still trying to find workers, but some are reducing their hiring needs as revenue growth is slowing where the outlook is not as robust as it was six to 12 months ago.

The carrier landscape remained relatively consistent with previous quarters with rate increases being fairly similar the main themes, where availability of capacity or appetite for certain classes of coverage and enhanced underwriting rigor customers continued to modify their deductibles and limits to best manage the <unk>.

<unk> increases it does appear the market is getting to a level where customers cannot reduce their limits much more for certain lines like excess liability without either substantially dropping coverage or bearing the higher premiums.

Admitted market rate increases were similar to prior quarters were up 3% to 7% across most lines with the outlier being workers' compensation, which remained down 1% to three from an employee benefits perspective rates were up 7% to 10%.

From an E&S perspective premium rate increases premium rates increased in the range of 10% to 20% cat when rates were up 15% to 35%, obviously, that's pre storm.

While our quake rates were up 7% to 10% the impact of Hurricane Ian losses will put additional upward pressure on property rates in the fourth quarter rate increases for the first half of 2023 will then be influenced by the outcome of one one reinsurance treaties early indications would suggest material.

Upward pricing on cat property.

The placement of professional liability and excess liability for many accounts remains challenging and were up 5% to 10%. However, public company D&O rates were down 5% to 20% regarding cyber of the story is substantially the same.

As with the last three or four or five quarters with rates and deductibles continuing to increase and carriers requiring effective security protocols.

Personal lines for property in California, Florida, and Louisiana continued to be challenging due to losses in aggregate concentrations. During the third quarter. We started to see increased underwriting rigor and reductions in capacity for Texas property, We expect carrier appetite in these markets will remain constrained as a result, some additional.

We'll move into state plans each state program will be under significant pressure due to the influx of policies and losses.

On the acquisition front the volume of deals in the third quarter slowed for the entire industry. However, we acquired 11 businesses with approximately $340 million in annual revenue, which is the largest acquired revenue quarter in our history.

The slowdown for the rest of the industry was mainly driven by private equity reducing their activity as.

As the increased cost of debt and the potential for the economic slowdown appears to be driving them to be more selective. However, if a business is considered to be a platform private equity is still very aggressive on pricing now on slide six let's transition and discuss the performance of our four segments, our retail segment delivered.

Organic growth of five 1% as a result of good new business solid retention rate increases and modest exposure unit expansion, but was partially offset by downward pressure within specialty lines. We delivered strong organic growth in our employee benefits business solid growth in our commercial business and we had some headwinds.

Our dealer services business due to the slowdown in auto and RV sales.

National programs had another very strong quarter with organic growth of 14, 5%. This growth was driven by an increase in lender placed coverage as well as strong new business. Good retention exposure unit expansion across many of the other programs.

The wholesale brokerage segment delivered organic growth of four 5% led by another quarter of strong growth in our open brokerage business. This organic growth was driven by solid new business and rate increases, but was partially offset by continued headwinds within personal lines. In addition, we had a specialty business.

Miss that negatively affected our organic growth by about 200 basis points, which we sold in on October one.

The organic revenue of our services segment declined four 6% with the main driver being the higher prior year weather related claims now with that let me turn it over to Andy to discuss our financial performance in more detail.

Thanks, Paul Good morning, everybody.

Over on slide number seven like previous quarters will discuss our GAAP results and then certain non-GAAP financial highlights for the third quarter, we delivered 24% total revenue growth and organic revenue growth of six 7%. Our EBITDA margin decreased by 460 basis points, primarily driven by estimated loss.

Says from Hurricane and that resulted in adjustments to accrued contingent commissions and estimated losses within our captive programs as well as higher year over year variable in health care costs, and one time integration cost.

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.

As we've mentioned before when the market changes year over year, we realize offsetting movements within these expenses as a percentage of revenue the year over year benefit to salaries and related was approximately 60 basis points and there was a corresponding offset in other operating expenses.

Our net income grew 10% for $14 $7 million due to approximately $27 million of adjustments, we recorded for earn out liabilities and our diluted net income per share increased by nine 6% to 57.

The effective tax rate increased to 26, 1% for the third quarter of this year as compared to 25, 5% in the third quarter of last year.

Our weighted average number of shares was substantially flat compared to the prior year and our dividends per share for the quarter increased to $10 three or.

Or 10, 8% compared to the third quarter of 2021, we're on slide number eight.

This slide presents our results on an adjusted basis, which excludes the impacts of movements in foreign currencies on both revenues and expenses.

Net gain or loss on disposals.

One time acquisition and integration costs associated with ERP, <unk> and BBB and the changes in earn out payables.

Please refer to slides 15, and 16 for a reconciliation of these amounts to our most comparable GAAP measures.

On an adjusted basis income before income taxes decreased 11, 8%, while EBIT increased by five 8% and adjusted EBITDA margin declined by 440 basis points from the prior year, which was impacted by the previously mentioned drivers the incremental decline in adjusted income before income tax.

As compared to adjusted EBITDAX was driven by higher year over year quarterly interest cost of $25 million and higher amortization of $14 million with both largely driven by the <unk> ERP orchid and BBB acquisitions net the net income for the quarter decreased by 12, 5%.

And adjusted diluted net income per share was <unk> 50.

We're on slide number nine.

Our retail segment delivered adjusted total revenue growth of 25, 1% driven by acquisition activity over the last 12 months and organic revenue growth of five 1%.

Adjusted EBITDA grew 12, 7% with EBIT margin decreasing by 310 basis points for the quarter.

Substantially due to higher variable operating expenses the seasonality of profit associated with our recent acquisitions timing of incentive compensation and certain one time cost we view the margin decline for the third quarter to be isolated and are expecting good profitable growth for the fourth quarter and full year.

We're on slide number 10, our national programs segment delivered adjusted total revenue growth of 21, 2% and organic revenue growth of 14, 5% for the quarter contingent commissions were negatively impacted by approximately $15 million due to the estimated insured losses associated with hurricane Ian.

We will also reduce our accrual for contingent commissions for the fourth quarter by approximately $4 million for the same reason.

Depending on the severity of claims it may impact our ability to earn contingent commissions for certain of our programs in 2023.

Paul mentioned earlier that we expect to realize 11% to $14 million of revenues for flood claims processing associated with Hurricane. Ian This is based on what we know at this stage regarding the number of claims and estimated severity.

As we know more during the fourth quarter, our estimates may need to be refined we're expecting to recognize about 60% to 65% of the revenues in the fourth quarter of this year with the remainder in the first half of 2023.

Adjusted EBITDA grew by one 1% over the prior year and our adjusted margin decreased 740 basis points to 36, 8%. The decline was due to the decrease in contingent commissions and estimated losses of approximately $11 $5 million and our captive facilities.

These items were both driven by hurricane in.

In order to provide additional capacity to incrementally grow our cat programs. We started our first captive facility in January and then acquired another in connection with orchid.

On an annual basis the losses on these captives are limited and we are projecting good organic growth and margin to date, both captives are performing in line with our expectations.

On slide number 11.

Wholesale brokerage.

Segment delivered adjusted total revenue growth of 12, 3% driven by recent acquisitions and organic revenue growth of four 5% adjusted EBIT deck increased by eight 1% with the associated margin declining by 140 basis points, which is impacted primarily by higher broker commissions related to any.

<unk> performance for our open brokerage business increase.

Increased higher variable operating expenses and the seasonality of our recent acquisitions.

We're on slide number 12, adjusted total revenue on our services segment decreased five 9% and organic revenue declined by four 6% due to lower claims from weather related events for the quarter adjusted EBITDA decreased approximately $2 5 million or 25, 5% due to lower revenues.

A few comments regarding liquidity and cash conversion for the first nine months of 2022, we delivered cash flow from operations of $600 million our.

Our ratio of cash flow from operations as a percentage of total revenues was 22, 4% for the first nine months of this year as compared to 27, 1% in the first nine months of last year. This lower ratio was due to the payment of earn outs as certain acquisitions have over performed our original expectation.

<unk>.

Incremental interest expense and paying higher incentive bonuses to our teammates for their outstanding performance. In 2021 overall, we are in a strong cash generation and capital position, finishing the quarter with $580 million of available cash.

During the third quarter, we repaid $100 million on our revolving line of credit and plan to continue to delever over the coming quarters as we've done in the past post larger acquisitions.

As a result of increasing interest rates, we're projecting interest expense for the fourth quarter to be in the range of 44% to $46 million.

Lastly, we still expect our full year adjusted EBITDA margin to be down slightly to up slightly as compared to 2021. This would represent a very strong performance for the year given the increase in variable costs as compared to 2021 and the impact of hurricane Ian on our captives and <unk>.

Finjan commissions with that let me turn it back over to Powell for closing comments. Thanks, Andy for a great report overall it was a good quarter, even with a number of moving parts relating to hurricane Ian We're very pleased with how our team is performing and have good momentum as we continue to win more new business and retain our existing customers regarding.

Hurricane and Theres still a number of unknowns that will play out over the coming months. The first will be the ultimate losses incurred by carriers and how these will impact our reinsurance programs second there is uncertainty around how state plans will react based on the severity of losses. It will influence the one one reinsurance treaties.

And pricing for all cat exposed property.

Capacity for commercial and residential property is going to become even more constrained driving rates and deductibles even higher.

For all other rates were expecting increases to be relatively consistent for the next couple of quarters.

From an economic standpoint, we expect the fed will continue to increase interest rates in order to cool the economy and reduce inflation we.

We will see how this plays out and what the ultimate impact on economic growth will be.

We are well positioned to help our customers customers manage their risks and costs of insurance as a result of our broad capabilities.

We wanted to reiterate how pleased we are with our international expansion, our MGA and Canada is performing very well our retail business in Ireland is firing on all cylinders and our recently completed acquisitions of BBB and <unk> are well positioned for future growth while still in the early days for <unk> ERP and BBB, we feel very good about.

This cultural alignment.

And along with their leadership teams and how we are all working together.

While acquisitions this quarter were down in the industry, we do not see an overall long term decline in brokerage M&A, even with the prospects of an economic slowdown however, with increasing interest rates, we may see private equity sponsors adjust the multiples they are willing to pay.

As usual, we are well positioned with a good pipeline and are talking with lots of companies. We will maintain our disciplined approach as it's worked well for many decades.

In closing we feel good regarding how well our team is positioned and executing we're attracting and developing talent and are investing in our capabilities for good long term profitable growth based on our momentum over the first nine months, we anticipate delivering a good fourth quarter and strong top and top and bottom line results for 2000.

'twenty two with that let me turn it back over to Laura for Q&A.

Thank you.

Once again, ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star one on your telephone keypad will now take our first question from Michael Phillips of Morgan Stanley . Your line is open. Please go ahead.

Thanks, Good morning.

You talked a little bit about this in your opening remarks I guess.

Stent that your clients are kind of buying less it seems like that's more of an issue today than it was before but I guess I want to hear your thoughts on that and how widespread is that.

Cost cutting through all of your clients are they buying less now than what you thought last quarter and what do you think about that going forward.

Okay. Thanks, Michael So, let let's talk about.

Remember if if you think about some of this could be in cat prone areas.

<unk> all other so let's make sure we're clear on that.

And in terms of a property or and it might casually could be affected similarly in these areas as well.

But if what we're trying what we're seeing is if your umbrella as an example went up to a very very high level in the last quarter or two or three meaning the premium went up substantially than what they may have done is buy a smaller limit of liability. So if they bought a 25.

Umbrella before they might have bought a $15 million or a $10 million that same.

Our lower limit might cost the same amount as they paid last year. Okay. That's the first thing the second thing is and we haven't gotten there yet, but we're we're proposing.

Proposing or speculating that theyre going to be places.

Particularly in the near term near term defined as 369 months where property rates.

We'll go up substantially due to the storm impact.

And so.

As you May know the governor and the state of Florida is called a special session in early December to talk about the property environment among other things and.

How companies can one get off policies here, if they can or they may be given more direction are on pricing and terms and conditions, but as you know in the non admitted market, it's freedom of rate and form and so a lot of things and tier one counties are.

And that.

Category, So it's a little bit more of we're in a wait and see.

We want you to be aware of it we have seen it already on casualty.

We think that it could also play out in property.

There are also potentially scenarios in the property market, where they will not be able to buy the entire limit.

And we Havent, we havent gotten that yet, but we're seeing indications of that where a market that provided.

Full power of the entire total tier IV will now say that we want we want to provide $10 million or $25 million.

So that means the rest of the market either has to come in and support it or they may not decide to supported and they may have to buy something less than the total limit.

So it's early days Michael on that.

Okay, Yeah that makes sense. Thank you for those details.

Second question.

Separately NASA program that contingent commission hit there I mean that obviously makes sense with Ian.

What's the.

How do you think about the risk score.

That continuing at the same level in <unk>.

Hey, good morning, Mike It's Andy here, when you say going forward at the same rate.

Well guess what.

I'll say as much headwind and contingent that you saw in third quarter could that spill over in the fourth quarter.

Yes, So let me clarify a couple of things just on this one so one of the in our prepared comments, we said that we're anticipating we're going to reduce our estimated accrual in the fourth quarter by about $4 million for contingent commissions and then the $15 million that we have adjusted in the <unk>.

Third quarter keep in mind, that's for the nine months, that's the year to date impact.

So somewhere in the range of about $12 million or so was for kind of the first six months of the year.

Yes, okay.

Okay.

Yeah, Okay. Thank you and well thank you. Thank you.

Thank you, we'll now move onto our next question from Greg Peters of Raymond James Your line is open. Please go ahead.

Yes, good morning, everyone.

The first question I would like to focus on just on the revenue side.

There's a lot of moving parts in your comments and just trying to understand where we are on the balance between rate and exposure I feel like that's changing.

And its impact on organic and then I know you just commented about profit.

Got it.

Contingent commission for the fourth quarter, but you also previewed in your comments Andy that there could be some risk.

Fiscal year 'twenty, three and I was wondering if you could give us some more color on that.

Okay. So why don't I start with rates and exposures, Greg as you know, we've historically said that.

Our business is kind of a reflection of the middle and upper middle market economy.

And historically, it's been two thirds exposure units one third rate Thats, a very good model.

And what I would say to you is I am not going to say that is vastly different than that now with certain exceptions. When you get into offices that right a lot of cat prone property that could be in Texas that could be in Louisiana that could be in Florida that could be up the coast apparel line.

Those.

Those offices.

Particularly and there is some seasonality in terms of the amount of property that are written in certain quarters. As you know you don't have a lot of property written in wind season, they try to move it out of it but you could have a bigger impact of.

Right and those offices, but you can compare Fort Lauderdale, Florida, with Nashville, Tennessee, and Nashville, Tennessee would be the opposite direction. So it would be less than a third right.

So there is a little bit of a balance so again I can't tell you exactly the theme the amount Greg but it's.

It's probably it's a little more than a third now, but it's not as much.

As you might think.

You mean, a little more than the third rate at the moment, yes versus direct.

So right I don't think is what I'm trying to say is I don't think right at the half, but I am saying in certain offices it could be a half.

Got it.

And do you want to talk to you we're going to comment on the contingents, yes. So on the continuous and we made this comment earlier I think one of the items that we don't know right now is depending upon the severity of the total losses on some of the programs that we had they've got they have a lot of cash.

Sorry over calculation inside of them that may as a result of knock us out of earning contingent in 'twenty. Three we don't know yet just wanted to get on.

Everybody's radar, we'll know more over the kind of the next quarter potentially into the next two quarters. Once they do calculations, we let some of the dust settle on this thing but.

At least have an idea as to what the impact was for 'twenty. Two so if they all got knocked out for 'twenty three it would be in a similar range.

Greg I want to point out one thing that I know <unk> already thought about and everybody else on the call, but there are some very large numbers that are being tossed around in terms of total loss and I know that you know there is a difference between the total loss and the total insured loss and.

So one of the things that we're seeing in the impacted areas as we're seeing.

A number of homes as an example that are damaged by flood, where they werent technically in a flood zone and many of those people don't have flood insurance.

I, just mentioned that because when Andy and I are saying, we arent clear on the impact I don't think anyone is clear on the impact because.

Of what losses are actually insured losses, yet so we're in that process.

Got it and Theres a lot of information coming out of Tallahassee, So I totally get it is a fluid situation.

Can I pivot to the margin for my second question, because I was trying to go through.

Recognize that your guidance for the full year, Andy but I was trying to reconcile the.

Some of the items that you called out in your press release, and I'm still coming up short on a year over year basis.

You can help us.

The items are pretty clear, maybe you can help us quantify some of the items that are less clear as to the headwinds in the margin in the third quarter.

Well, let's see if we can go through a few of those we didn't break all these down in granular detail for Greg, but I know, we talked about seasonality some of our recent acquisitions and as we mentioned in previous calls.

We'd anticipated.

The revenues and profit would be relatively even across all of the quarters, but again didn't know exactly how that will fall, we still feel really good on a full year basis for all the acquisitions theyre going to have a little bit of movement. So that had some impact during the quarter. So we took that into consideration when making a comment about the full year in the fourth quarter.

We did have some timing just on wind some expenses got recorded during the year and those can always just kind of move around by quarters based upon performance and when people are hitting individual tiers inside of there get it doesn't really change a full year perspective, but it was.

The quarters for US and then we just had a number of kind of miscellaneous onetime items out there and we normally don't break onetime items out unless they are really big in nature, but when we kind of look at those we felt good with the underlying performance on the business for the quarter and what it looks like for the fourth quarter and for the full year.

Got it thanks for the answers.

Thank you.

Thank you we'll move onto our next question is from Robert <unk> of Goldman Sachs. Your line is open. Please go ahead.

Hey, Thanks for taking my question.

So, Florida property pricing increases will be a benefit in Florida in the coming quarters or years, but.

There are some associated headwinds with reduced capacity and business going to state funds. So I'm wondering if there's a scenario where florida growth actually becomes a headwind at some point.

And.

If that's a possibility what you think the probability of that scenario happening is.

Okay.

So Robert I.

I think that the probability is low but it is a possibility so you're tapping on something that is.

Is possible what I would tell you is in 2007 are then covenant or Charlie Crist.

Who is running for reelection.

Right now against currently Ron the Santos our existing.

Sitting governor he took the market of last resort in Florida, The citizens property insurance company and made it the most competitive market.

And the state of Florida.

That in turn had a.

It was a headwind for us in 2007.

That said.

There are more policies in citizens today.

Citizens.

Is backstopping some of the Florida takeout companies today, we don't know what the loss picture of citizen is today in terms of surplus that will be exposed.

And so the answer is.

Is it possible yes.

I think it's a low probability.

Knowing that you don't live I don't think you live here in Florida, but there is a unique dynamic going on in Florida, right now, which is we have a.

Gubernatorial campaign election that will happen on the eighth of November .

Have a president.

Governor who has aspirations beyond the the state of Florida.

And he is going to try to continue to manage the property market for the benefit of the customers in Florida in a difficult scenario.

So there will be lots to watch and.

And probably the coming short weeks and months, but we are not.

We're not.

Like I said I think it's a low probability the other thing that I want to make sure that everybody knows is in 2007.

The percentage of Florida business overall for Brown <unk> Brown was substantially higher than it is today, we've talked a lot about being a very diversified.

Now more international company, 12% of our revenues going forward will be international and I would say around 15% of our business.

Is in Florida.

And so and not all of that is property. So so I want to make sure that the impact then was different than the impact today.

So not only are.

Are we more diversified but our capabilities are much more enhanced today than they were.

15 years ago, so our ability to work with complex property.

Schedules.

And bring even more effective solutions to our customers and our prospects I think that we're very well positioned so.

Thanks for the question.

That's really helpful. Thank you and then just on group benefits the 7% to 10% increases in pricing is higher than I would've expected can you just talk about what's driving that.

And if the.

The commission structure there is similar in terms of of waiting to revenues as P&C brokerage.

Yes, so so let's start with saying that I think if youre going to make a broad statement. You. We are seeing increased medical claims post COVID-19.

In all sizes of accounts it could be a group of 12 people it could be a group of 120 people or it could be at 12000 like group Youre seeing more so there were delayed medical services that are being there's like a catch up that's the first thing the second thing is no.

So it's not as easy as let's say a P&C. So remember in small group was call it.

Broadly defined as under 100 lives on an insured plan.

That's fully insured those are many times paid on a per employee per month. So if you add another employee you would get you get additional commission, but the increase in the price of the overall plan does not impact our revenue growth that's number one number two.

<unk>.

There are lower commissions, because the premiums are higher as a percentage on fully insured and in some instances self insured business.

From a 100 lives and up and then there are certain segment of our business, where it's a fee based.

Above and the really large accounts typically it's a fee based for services rendered so that's how I would see it Ed.

The health plans.

That that we see which we see a lot of them all around the country.

There is regional nuances.

About how people consume healthcare they think about health care. They think about the plans they want in healthcare and so all of that drives expense.

Yeah, Rob keep in mind, when we made the comment in there also that that includes pharmacy cost and <unk>.

Pharmacy cost are probably not in all cases, but in many cases, they are actually outpacing healthcare cost today because of specialty drugs that are in there. So it would not be uncommon to see pharmacy costs were running.

In the double digits.

On on increases year over year, so it's kind of take that into consideration when looking at the overall structure of the plan and the pricing of the plants.

Great. Thanks.

Thank you. Thank you.

If you find that your question has been answered you may remove yourself from the queue by pressing star.

We will now move on to our next question from Elyse Greenspan of Wells Fargo. Your line is open. Please go ahead.

Hi, Thanks, good morning.

Hoping to go back.

<unk> discussion.

Yes.

Reaffirm the guidance for the year.

<unk>.

Hi.

The good side by potential flat with some margin improvement, which seems to imply that things go pretty well in the fourth quarter. So is that just some of the seasonality that went against you in the third quarter reversing itself in the fourth quarter with some of the deal.

Can you just help us thanks a lot.

What what's the health care market in the fourth quarter relative to the full year guide.

Yes morning lease, yes, it'd be a few of those items inside there so part of it would be the seasonality of the business.

On some of the recent acquisitions.

There is also just the seasonality of the amount of property that we place in the fourth quarter as you saw that coming through in retail and Paul mentioned that earlier.

Significantly less than the third quarter, which would make sense with hurricane season.

Thats out there and then we just have kind of a normal timing of expenses throughout the year. Some of them. We had in the fourth quarter of last year. Some of them. This year. So when we put all that together, we feel really good about the outlook for the fourth quarter on the organic and profitability, that's where it got us back to reaffirming the guidance.

Okay, and then in terms of.

Thank you guys took a loss for the quarter can you just provide some more color on it.

Our underwriting and pricing.

Holding their concern about film premium.

Organic revenue on the captive.

Yeah.

So.

Let me try to hit those multiple questions there so.

We have very limited exposure in terms of our captive risk and.

That amount, we have pretty much exhausted and this and the losses in that right Andy.

It is so let's see if we can the way you want to think about those leases it's difficult to look at them on a quarterly basis.

Because what we're doing is and Youre right. We are participating in the underwriting risk to an extent is very limited in nature and it does help us drive organic growth across our win in property programs.

So when there are events youre going to see kind of the ups and downs in the business. So could be if we had a quake in Q1 with.

We had record losses and nothing else during the year then.

Would have higher margins in the business. So we try to we need to look at those or we look at those on a 12 month basis.

And feel really good with the programs and the growth coming off of them as well as projected profit, but we're not in a situation, where we're actually losing money. So just want to clarify we're not losing money. It's just we recorded losses in in the quarter.

For the captives, but theyre right in line with what we expected and the other thing that you said elyse about organic growth any additional capacity that we get can translate into organic growth in our programs.

So whether that are captive provided capacity or additional capacity from a risk bearer.

Either one of those translate into organic growth for the program in the Nash group.

We reflected in national programs.

Okay.

Oh, sorry go ahead.

Yes, just going to say so when you look at the programs growth for this year.

That is part of what's giving us the incremental organic growth, we would not expect to get as much incremental growth off of the captives next year, just because it's a first year startup and then we get into next year, we will have a little bit of additional premium and probably some rate inside of there.

So that will moderate some of the growth in national programs going into next year.

Okay. Thanks, and then one last one I know you guys provided.

Updates on the revenue that you expect on those large deals.

C N equals closure Thats clogging does that mean.

In line with what you guys at all that with second quarter earnings.

Yes.

It's down a little bit because of where FX has moved so from the previous numbers that we had talked about and again the FX rates are moving around.

Quite a bit they're down I think about 8% from where we were before we will see where it plays out in the fourth quarter.

For us and they May go back up into that range. So one of the I guess, maybe a little bit of the challenge is while we're trying to break these out because we haven't made a lap all the way around.

It's hard to call out what the actual FX year on year and because there is no year on year FX right now it's just based upon what we estimated so.

If you want to use 8% that probably seems fair for right now it's more than likely its going to move in the fourth quarter and we'll we'll try to give color on that at the end of the quarter.

Okay. Thanks for the color.

Thank you.

Hello, Laura.

Okay.

Laura do we have the next person up.

Okay.

Yes.

Got it.

Laura.

Okay.

Hi.

Well.

We may we may take a pause for just a moment.

Okay. We can't hear her can we go in and put the next person into the.

The queue for questions. Please.

Hello.

We can't hear anyone here.

Hey, it's Mike ramps can you can you hear me.

<unk> alright.

Alright, we got you Mike Okay.

I, just guess I heard someone say, Mike thanks for taken the.

A question quick follow up on the contingents discussion of appreciating that it's early days.

In terms of sizing up ultimate insured losses, but is there.

I don't know.

A number of out there like an insured losses that you guys are using.

30 billion or $50 billion, something we can kind of think about.

<unk>.

In terms of sizing up whereas the contingents.

Discussion could go in in future quarters.

Sorry, Mike we don't.

It's too it's too.

It's too hard to estimate what we're just trying to do is we're trying to be very mindful of the insured losses that are impacting one our customers.

And two as we hear of other large losses, how that may play into the mix in their market, but no. We don't have an estimate there.

Yeah and Mike.

Keep in mind when we do these many of the programs their relationship with one carrier maybe a couple of carriers. So its not like these are spread across 50 carriers. So you could take a broad based industry approach. This is very folks. That's why so we just need to see how this plays out over the next <unk>.

90 to 180 days and then we'll have a much better view, it's so hard to tell right now.

Okay got it I thought I'd try and it makes sense Andy.

The revenues that you expect to come in from.

<unk> slide.

Should we just look at kind of <unk>.

How it hits the bottom line in terms of kind of margin.

Prior catastrophes or is there any nuances, we should be thinking about.

Due to this catastrophe division.

Yes, it's probably at least a reasonable start.

More than likely you want to probably put some sort of an adjustment for inflation in there just because of what the cost of field adjusters are today versus what they were.

A couple of years ago, so probably want to haircut that a little bit.

Okay got it and.

And I guess, just stepping back I'm sorry go ahead.

No No go ahead, Mike go ahead, Mike.

I guess just stepping back.

Feel like the captive.

I guess the impact this quarter caught some folks.

Surprise, just wanted to maybe you learn a little bit more about it.

Is this an impact we should.

So be thinking about.

Kind of on a floor basis whenever theres, a large catastrophe and as it is this kind of nationwide E&S I know you mentioned earthquake in or is it kind of more Florida.

Any geographic.

Kind of color or anything you could provide to silly, we can think about this.

In the future.

Sure.

Mike The way I would want you to think about it is this it is first of all limited to two.

Two of our National programs. Currently those are a wind facility that writes countrywide and an earthquake facility, which is predominantly an earthquake areas, which is really California, and the west coast predominantly and having said that we have an enormous among.

<unk> of data.

On those.

Two programs and so.

The answer to your question is yes national.

Currently restricted to two facilities quake and wind.

We have a lot of data on them.

And feel really good about.

The participation.

And how they are operating and as Andy said.

In light of the loss.

Is that we've called out in this quarter, we still don't believe that we will lose money on our captives this year.

So again, it's a very limited amount of risk that we're taking.

And it has helped us build additional capacity to grow and support those two programs, which has performed really well.

Yes, Mike Thank you very much.

Yes, Mike because of the potential volatility by quarter, that's why we want to call out the 11 5 million.

Let's just if you play forward a scenario, let's say there is no weather related events in the third quarter of next year.

Then you're going to see the profitability margin jump up from what we saw this year same thing could happen in Q1, if there is a quake. So thats why we thought it's helpful to break it out by quarter. So you will have an idea of kind of from a quality standpoint, how to adjust those.

We figured that there's going to be some sort of events throughout a year. So that's why we say it's working almost exactly the way that its model we did a tremendous amount of work on this one.

All right.

Thank you.

Thank you Mike.

Okay.

We can hear you Laura can you just put the next question.

Okay.

Hey, Yes can you hear me.

Go ahead go ahead Weston.

So my first question is a follow up two leases just on.

By the quarters. So if we look back to last year.

Thank you.

Great. Thanks, good morning.

Good morning quick question.

Yes.

Hi.

Okay. So remember.

Okay. So there might be some other firms that you follow that have reinsurance brokers, but I'd like to kind of give sort of a.

101 on the process.

So there is reinsurance for reinsurers, that's called retro sessional.

The retro market and there is a lot of.

Speculation that there's 20 plus billion dollars of shortfall.

In the retro sessional market for reinsurers, that's the first part.

Then reinsurance is sold typically through reinsurance brokers to two primary carriers and the reinsurance carriers are currently saying as you probably already know that theyre looking to.

Their rates May go up 50 up to 50% and their attachments or their retentions could double.

So if you have a one one reinsurance renewal.

And you're a primary carrier, which you can pick any one you want I would guess that the reinsurance renewal would go deep into December before they finalize everything because of the disruption in the marketplace.

That's how I would want that's how we would want you to think about it.

Okay.

Thats helpful.

And then final quick question when you talk about the.

$4 million adjustments contingent commissions, if thats the bottom line number or is that the offset you expect two other contingent commissions that would be accrued in the fourth quarter.

Morning, there that would be offset in revenue within the profit sharing contingent commissions.

Bottom how kind of.

Thank you.

Thank you once again, if you find that your question has been answered you may remove yourself from the queue by pressing star will.

We will take our next question from Mark Hughes of <unk>. Your line is open. Please go ahead.

Okay. Thank you Andy anything you can say about the specific accretion or dilution from the acquisitions in the third quarter.

So we didn't break out the amount of the accretion from them. They were positive on EPS, which we anticipated that they would be.

And so that was in our comments that we've made mark that they are kind of right in line with what we thought for their first I'll call. It 90 days quite exactly 90 days, but pretty close for for both of those and then we've obviously got the cost of the debt and the amortization, but businesses are doing well for us.

Pal, just reflecting on where you're seeing the environment from the past, where there's been a lot of dislocation in coastal property.

Florida.

<unk> generally been accretive for growth or brown in brown.

Understanding there is a lot of moving parts you said, it's a low probability would be negative.

Generally <unk>.

<unk>.

Environment, but one might not.

Hope for clients to have to pay more for insurance.

Your services are valuable and therefore positively and pulse growth or.

Or otherwise.

Right I mean.

First Mark this is why we're in the insurance business, which is to serve our customers after.

A loss, particularly a covered cause of loss.

And so theres a lot of.

Working through complex claims issues.

On their behalf to get their claims settled not only fairly but as quickly as possible. That's the first thing. The second thing is in an environment, which you might describe a little bit as chaotic.

There creates great challenges and great opportunities and I put that kind of.

And one big bucket.

So what do I mean by that Youre going to have existing customers that are going to be impacted by.

Rate increases and deductible increases.

And then youre going to have lots of new business opportunities.

Cuz.

There will be other firms that are not able to think about the or provide the most creative solutions or that might translate into in some instances the most affordable solutions. So.

I'm not trying to avoid your question but.

But what I'm trying to say is in this environment I would describe it as a potential positive.

Overall, yet it comes with an enormous amount of.

Work and so that's.

Additional stress on our teammates stress on our customers stress on the carrier partners, we're dealing with in order to kind of.

<unk>.

Deliver for them, but but yes, I think youre thinking about it the correct way and it's not a this is not a Florida only thing I want you to keep that in mind. This is a coastal thing. This is a cat property thing. This is things that people think about differently how.

How did losses in wind impact away carriers think about quake and you might say well the totally unrelated and the answer is technically they are unrelated but theyre still in our portfolio of risk that people assume and if you haven't had a quake loss in a long time, then one day there'll be a quake.

So I want you to please remember first of all we feel really good about our capabilities as a company, where we're positioned the way we've invested in the business and our alignment.

With our entire leadership team.

That said, it's not a Florida only challenge. This is we're going to see this in lots of different places. So thanks for the question Mark.

Thank you I appreciate it.

So we'll take one more question Laura Please share we will now take our last question from Yaron <unk> of Jefferies. Your line is now open. Please go ahead.

Good morning, and thanks for fitting me in.

I wanted to start with going back to the seasonality of the acquired revenues.

I guess what quarters do you think will be a catch up quarters is it more of a first quarter, that's going to be a big quarter.

It'll probably good morning Erinn.

Probably get spread over kind of the.

The fourth quarter of this year and then.

First and second half of next year.

So it does get kind of spread over the three quarters and again, it's not anything that is.

Super material as we talked about before it does move around a little bit. So it's not like we're going to lump it all into the fourth quarter all into Q1, it kind of spread out.

Okay and is that true for both the retail and the wholesale segment because it seemed like maybe wholesale have more of a seasonal.

Yes, I think thats, probably a fair comment that it's.

Across both of the businesses, a little bit more accentuated in wholesale because of the property.

Okay.

And then.

Uh huh.

I hesitate ending a call with us, but considering that you are not only an insurance broker, but youre also.

An employer that is base in Florida, and you live in Florida.

With all of that.

How are you thinking or wood.

If youre talking to politicians.

In Florida like what is your recommendation how are you thinking about the potential insurance brewing insurance problem in Florida.

Okay. So you're on two.

At the start and I want to reiterate something that I said earlier. The first thing we think about is.

Or any of our teammates and their family members affected in terms of injured by the storm and we said no.

That is not the case in the entire state of Florida, There were a number of deaths in the storm that's the first thing.

And so to answer your question the way we think about it is how do you have.

A viable.

Residential and commercial property market in the state of Florida, knowing that those there can be.

Two competing interests there. So if you look at it from a consumer.

Advocacy standpoint that may not make financial sense.

So there's got to be a balance there.

Now I also think.

And that that there is going to be a lot of speculation around flood in Florida, and what that means going forward, we don't know.

But there are numbers of people that their homes were flooded and theyre not in flood zones.

And they are uninsured.

So we don't know if FEMA will respond in some way to those individuals, but it's a big number.

So.

I think it's a very very very delicate.

Balance between.

Wanting to come to have a viable competitive <unk>.

Property market in Florida, which it can happen but.

But with.

Having said that with consumer protection and giving them because remember.

We have an election here on the ace.

And it's not just about the election on the eight it's about what do people think about and aspire to down the road and lots of people are moving to Florida, and so affordability of insurance is top of mind.

So I think that it's going to have to be.

There is going to have to be some real.

They're going to have to give it some real significant thought about how you craft something that would be deemed a win win as opposed to one side, winning and the other side whatever the other side is whether that's the consumer or the carrier.

Because that is a very fine line right now and so remember carriers were already evaluating capacity and potentially restricting capacity in cat prone areas prior to the storm.

So this wasn't just storm related this was an accentuation of something that was already happening.

Does that answer your question.

Yes, it does and I appreciate the thoughts.

Maybe if I could sneak just one last one in.

So you're reiterating the margin guidance for full year 'twenty to be slightly up to slightly down I think first three quarters, you're down a bit.

Are you seeing.

Is that guidance and <unk> guidance or are you, saying, but for some adjustment.

No what we're saying is if we on a full year basis, we think down slightly to up slightly.

Which is the same guidance that we provided at the beginning of the year and that includes the losses that we recorded on the captives as well as adjusting the contingent commissions.

So if you were up to you. So inclined if you want to back those out and look at it separately then obviously the margins look better, but we just try to look at it all in total.

Perfect. That's what I was getting at thank.

Thank you Darin I'd like to I'd like to add one final thing as we wrap up I know that was your last question, but I think it's important that we're very consistent.

What we've said over a long periods of time number one we don't believe.

One quarter starts.

Start to trend so that's number one number two.

We don't focus on although we report quarter to quarter results, we focus on performance over more of an extended period of time like years.

And so as Andy said and I've alluded to in my remarks, we're positive we are finishing.

We believe we will finish in a very good place at the end of the year, particularly under the circumstances.

Both from a growth standpoint, and a margin standpoint, we acknowledge that the economy is going to continue to have pressure and headwinds because fed the fed will increase rates.

But.

We are very optimistic about our business and most importantly.

We have great capabilities and better yet great teammates and so our teammates are doing their very best to to deliver for our customers and those that were affected in particular, but all over the country and overseas and so we appreciate everybody's time, we apologize for the slight.

Delay our mix up in the beginning and we look forward to talking to you all in January so Laura. Thank you very much and have a wonderful day.

Thank you very much ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect.

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Q3 2022 Brown & Brown Inc Earnings Call

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