Brown & Brown Inc (BRO) — Q3 2022 Earnings Call Transcript

Thank you, Laura. I want to start by apologizing for any confusion. We recently transitioned from one coordinating company to another, and we were just informed about this change about 15 minutes ago. I apologize for any inconvenience this may have caused. Good morning, everyone, and thank you for joining us for our third quarter 2022 earnings call. Before discussing our results, I want to address Hurricane Ian. Our thoughts and prayers are with everyone in Florida and South Carolina affected by this major storm. Several of our teammates and their families experienced wind and flood damage to their homes, but thankfully, they are safe. Many in these areas are in the recovery phase and will need a lot of assistance during the rebuilding process, so we encourage everyone to help however they can. I'm extremely proud of how our team activated our catastrophic events plan across our offices, ensuring we were prepared for any impact of the storm. This allowed us to respond swiftly and support our customers and affected communities. Florida will recover and rebuild as it has in the past; it will just take time. In terms of our financial performance, we had another strong quarter with robust total and organic revenue growth across most of our businesses. Our margins and bottom line results reflect estimated losses in our two captive facilities and reduced contingent commissions in certain programs, both stemming from Hurricane Ian. We will delve more into our quarterly results and the storm's impact later. We continue to expect solid and profitable growth through the remainder of 2022. During this quarter, we finalized the acquisitions of GRP in July and BdB in August. Both businesses are performing well and meeting our expectations in their initial months. We are pleased with the cultural alignment, the quality of the teams, their operating results, and future prospects. Now, let's look at the quarterly results. We generated $928 million in revenue, representing a total growth of 20.4% and an organic growth of 6.7%. Our adjusted EBITDAC margin for the quarter was 31.2%. Our net income per share was $0.57, while our adjusted net income per share stood at $0.50. Andy will later provide more details on our financial results as several factors impacted this quarter. We completed 11 acquisitions during the quarter, with annual revenues totaling approximately $340 million. Next, let's examine the potential effects of Hurricane Ian. Current claims indicate that while there is significant wind damage, the majority seems to be flood-related. Consequently, we anticipate substantial claims in our right flood business, estimating around 11,000 to 12,000 claims, which we predict will generate approximately $11 million to $14 million in revenue. However, it's still too early to fully gauge the complete number of claims and the seriousness of each. As for 1/1 reinsurance treaties, they will face considerable pricing pressures, leading to increased rates for both commercial and residential CAT exposed properties, along with higher wind deductibles. This situation will create further financial challenges for businesses and consumers after four years of substantial premium increases and a reduction in capacity. We are well-positioned to assist our customers during these difficult times. Throughout the quarter, we observed growth in sectors like construction, manufacturing, and healthcare, despite continued moderation in GDP. Key concerns remain inflation and rising interest rates, causing some business owners to be cautious about their investments and hiring. Most employers are still in search of workers, though some are scaling back their hiring as revenue growth continues to slow or the outlook appears less robust than in the past year. The carrier landscape has remained stable compared to previous quarters, with rate increases being relatively uniform. Availability of capacity and appetite for specific classes of coverage, along with enhanced underwriting standards, were notable themes. Customers are adjusting their deductibles and limits to manage premium increases effectively. It seems the market is reaching a point where customers may not be able to further reduce limits for certain lines like excess liability without significantly lowering coverage or absorbing higher premiums. Admitted market rate increases matched those of prior quarters, yielding a rise of 3% to 7% across most lines, with workers' compensation noted to be down 1% to 3%. In the employee benefits space, rates increased by 7% to 10%. In the E&S market, premium rates rose by 10% to 20%. CAT win rates increased by 15% to 35%, while earthquake rates improved by 7% to 10%. The impact of Hurricane Ian losses is expected to exert further upward pressure on property rates in the fourth quarter. Rate hikes for the first half of 2023 will also be influenced by the outcomes of 1/1 reinsurance treaties, which currently suggest significant upward price adjustments for CAT property. The placement of professional and excess liability remains challenging, with increases of 5% to 10%, while public company D&O rates decreased by 5% to 20%. Concerning cyber insurance, the pattern remains consistent with recent quarters, marked by rising rates and deductibles amid carriers seeking effective security protocols. Personal property lines in states like California, Florida, and Louisiana continue to face challenges due to high levels of losses, and during the third quarter, we began noticing increased underwriting standards and reduced capacity for Texas property, with carrier appetite in these markets likely to remain limited. As a result, more accounts may shift to state plans, which will face significant pressure due to an influx of policies and losses. On the acquisition side, the overall deal volume slowed for the industry in the third quarter. However, we successfully acquired 11 businesses with around $340 million in annual revenue, marking our largest revenue-acquired quarter to date. The reduction in activity across the industry was primarily due to private equity firms becoming more selective, influenced by rising debt costs and the potential for an economic downturn. Still, private equity remains aggressive in pricing for businesses identified as platforms. Now, let’s move on to discuss the performance of our four segments. Our Retail segment achieved organic growth of 5.1%, driven by strong new business, solid retention rate increases, and modest exposure unit expansion, although this was partially offset by challenges in specialty lines. Our employee benefits business showed robust organic growth, and we saw positive results in our commercial sector, though the dealer services segment faced headwinds due to a slowdown in auto and RV sales. National Programs posted another strong quarter, with organic growth of 14.5%, fueled by increased lender-placed coverage, strong new business, and good retention across various programs. The Wholesale Brokerage segment saw organic growth of 4.5%, primarily from sustained growth in our open brokerage business, supported by solid new business and rate increases, despite continued challenges in personal lines. Additionally, one of our specialty businesses negatively impacted our organic growth by around 200 basis points, which we divested on October 1. Our Services segment experienced a 4.6% decline in organic revenue, mainly due to higher claims from the previous year’s weather events. With that, I’ll hand it over to Andy to provide more detailed insights into our financial performance.

Thanks, Powell. Good morning, everybody. We're over on Slide number 7. Like previous quarters, we'll discuss our GAAP results and then certain non-GAAP financial highlights. For the third quarter, we delivered 20.4% total revenue growth and organic revenue growth of 6.7%. Our EBITDAC margin decreased by 460 basis points, primarily driven by estimated losses from Hurricane Ian that resulted in adjustments to our accrued contingent commissions and estimated losses within our captive programs, as well as higher year-over-year variable and healthcare costs and one-time integration costs. 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 mentioned before, when the market changes year-over-year, we realized 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% or $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 9.6% to $0.57. 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 $10.3 or 10.8% compared to the third quarter of 2021. We're on Slide number 8. This slide presents our results on an adjusted basis, which excludes the impacts of movements in foreign currencies on both revenues and expenses, the net gain or loss on disposals, the one-time acquisition and integration costs associated with GRP, Orchid and BdB 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 EBITDAC increased by 5.8% and adjusted EBITDAC 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 taxes as compared to adjusted EBITDAC 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 GRP, Orchid and BdB acquisitions. Net income for the quarter decreased by 12.5% and adjusted diluted net income per share was $0.50. We're on Slide number 9. 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 5.1%. Adjusted EBITDAC grew 12.7%, with EBITDAC margin decreasing by 310 basis points for the quarter substantially due to higher variable operating expenses, the seasonality of profit associated with the 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 Program 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. Powell mentioned earlier that we expect to realize $11 million 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 EBITDAC grew by 1.1% 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 in our captive facilities. These items were both driven by Hurricane Ian. In order to provide additional capacity to incrementally grow our CAP 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 in margin. To date, both captives are performing in line with our expectations. On Slide number 11. Our Wholesale Brokerage segment delivered adjusted total revenue growth of 12.3%, driven by recent acquisitions and organic revenue growth of 4.5%. Adjusted EBITDAC increased by 8.1% with the associated margin declining by 140 basis points, which is impacted primarily by higher broker commissions related to increased performance for our open brokerage business, increased higher variable operating expenses and the seasonality of recent acquisitions. We're on Slide number 12. Adjusted total revenue on our Services segment decreased 5.9% and organic revenue declined by 4.6% due to lower claims from weather-related events. For the quarter, adjusted EBITDAC decreased approximately $2.5 million or 25.5% due to lower revenues. Few comments regarding liquidity and cash conversion. For the first-nine months of 2022, we delivered cash flow from operations of $600 million. 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 overperformed our original expectations, 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 a 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 are projecting interest expense for the fourth quarter to be in the range of $44 million to $46 million. Lastly, we still expect our full year adjusted EBITDAC 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 contingent 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 Ian, there's 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 the reinsurance programs. Second, there's uncertainty around how state plans will react. Based on the severity of losses, it will influence the 1/1 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, we're 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 will see how this plays out and what the ultimate impact on economic growth will be. We are well positioned to help our customers manage their risks and cost of insurance as a result of our broad capabilities. We wanted to reiterate how pleased we are with our international expansion. Our MGA in Canada is performing very well. Our retail business in Ireland is firing on all cylinders, and our recently completed acquisitions of BdB and GRP are well positioned for future growth. While still in the early days for GRP and BdB, 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're willing to pay. As usual, we're 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 bottom line results for 2022. With that, let me turn it back over to Laura for Q&A.

Thanks. Good morning. You talked a little bit about this in your opening remarks. I guess the extent that your clients are kind of buying less, it seems like that's more of an issue today than it was before. And I guess, I want to hear your thoughts on that and how widespread is that cost cutting throughout all your clients. And are they buying less now than what you thought last quarter and what do you think about that going forward?

Thanks, Michael. Let's discuss how some of these changes may impact areas prone to CAT events compared to others. It's important to distinguish this when considering property or casualty coverage, as both could be similarly affected in these regions. What we've observed is that if an umbrella policy significantly increased in premium over the last few quarters, clients might respond by opting for a smaller limit of liability. For instance, if they previously had a $25 million umbrella, they may now choose a $15 million or $10 million limit. Interestingly, this reduced coverage could cost the same as their previous purchase. Additionally, we anticipate that property rates may rise substantially in the near term, defined here as three to nine months, particularly due to the impact of recent storms. The governor of Florida has scheduled a special session in early December to address the property insurance situation and how companies can navigate policies, including potential directions regarding pricing and terms. In the non-admitted market, companies have more flexibility with rates and terms, which is relevant for Tier 1 counties. At this moment, it's more of a wait-and-see scenario. We want to keep you informed that we are already witnessing changes in casualty markets, which may also affect property insurance. There may be instances where clients cannot purchase their full desired limit; some markets that previously offered complete coverage are now indicating they will only cover a portion, such as $10 million or $25 million. This shift means the remaining market must either fill the gap or clients may need to secure less than their total limit. It’s still early to draw conclusions on this matter, Michael.

Okay, that makes sense. Thank you for those details. My second question is about the National Program and the impact of the contingent commission there. How do you view the risk of that continuing at the same level in the fourth quarter?

Hey. Good morning, Mike. It's Andy here. When you say going forward the same rate...

You'll see as much headwind in contingent that you saw in third quarter. Could that still be in the fourth quarter?

I want to clarify a few points regarding our estimates. We expect to reduce our projected accrual in the fourth quarter by approximately $4 million for contingent commissions. Additionally, the $15 million adjustment made in the third quarter reflects the year-to-date impact from the first nine months, with about $12 million attributed to the first six months of the year.

Yeah. Okay.

Yeah.

Good morning, everyone. For my first question, I want to focus on the revenue aspect, as there are several factors in your comments. I'm trying to understand our current position regarding the balance between rate and exposure, which seems to be shifting and affecting organic growth. Additionally, I know you mentioned the contingent commission for the fourth quarter, but you also indicated that there might be some risks for fiscal year '23. Could you provide more details 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. That's a very good model. And what I would say to you is, I'm not going to say that it's vastly different than that now with certain exceptions. When you get into offices that write 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 in the Carolinas, those offices particularly and there's 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 rate in those offices. But you could compare Fort Lauderdale, Florida with Nashville, Tennessee, and Nashville, Tennessee would be the opposite direction. So it would be less than a third in rate. So there's a little bit of a balance. So again, I can't tell you exactly the amount, Greg, but 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 a third rate at the moment versus the closure?

Yes, that's correct. What I'm trying to say is that I don't think the rate is half, but in certain offices, it could be half.

Got it. You were going to comment on the contingents?

We previously mentioned the contingents. Right now, we are uncertain about the severity and total losses of some of our programs. There is a carryover calculation involved that might prevent us from earning contingents in 2023. We still don't know for sure, but I wanted to bring this to everyone's attention. We should have a clearer picture over the next quarter or two once the calculations are completed and things settle down. We'll at least have an understanding of the impact for 2022, and if things are unfavorable for 2023, the result would likely be in a similar range.

Greg, I want to point out one thing that I know you've 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's 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 is we're seeing a number of homes, as an example, that are damaged by flood where they weren't technically in a flood zone and many of those people don't have flood insurance. So I just mentioned that because when Andy and I are saying we aren't 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. There's a lot of information coming from Tallahassee, so I understand that it's a changing situation. Can I shift to the margin for my second question? I know your guidance for the full year, Andy, but I'm trying to reconcile some of the items mentioned in your press release, and I’m still having difficulties on a year-over-year basis. Perhaps you can clarify some of the less clear items regarding the headwinds affecting 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 it, Greg. But I know we talked about seasonality in 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 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. They're going to have little bit of movement, so that had some impact during the quarter. So again, we took that into consideration when making our comment about the full year and the fourth quarter. We did have some timing just on when 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. Again, it doesn't really change the full year perspective, but it would be around the quarters for us. And then we just had a number of kind of miscellaneous one-time items out there. Again, we normally don't break one-time items out unless they're 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.

Yeah. Thank you.

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 the 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 of what you think the probability of that scenario happening is.

Okay, Robert, I think the likelihood is low, but it is a possibility. You’re addressing something that could happen. In 2007, our then Governor, Charlie Crist, who is currently running for reelection against Ron DeSantis, took the Citizens Property Insurance Company, Florida's market of last resort, and made it very competitive. That created a challenge for us back in 2007. However, there are now more policies with Citizens, and they are supporting some of the Florida takeout companies today. We currently don’t know the financial stability of Citizens regarding the surplus that may be at risk. So, is it possible? Yes, but I believe it’s a low probability. I understand you might not live in Florida, but there’s a unique situation happening here with a gubernatorial election set for November 8. The governor has ambitions that extend beyond Florida and will work to manage the property market in challenging conditions for the sake of Florida customers. There will be a lot to monitor in the coming weeks and months, but, as I said, I think the odds of it becoming a significant issue are low. Additionally, I want to highlight that in 2007, Florida represented a much larger portion of Brown & Brown's business than it does today. We’ve emphasized our diversification and are now a more international company, with 12% of our future revenues coming from international sources and around 15% of our business in Florida, not all of which is property. Thus, the effects back then were different than they are now. Our capabilities have also greatly improved since then, allowing us to better manage complex property situations and offer more effective solutions to our customers and prospects. I believe we are in a strong position. Thanks for your question.

That's very helpful. Thank you. And then just on group benefits, the 7% to 10% increases in pricing is higher than I would have expected. Can you just talk about what's driving that and if the commission structure there is similar in terms of weighting to revenues as P&C brokerage?

Yes, to start, I want to emphasize that we are observing an increase in medical claims following COVID across all account sizes. This includes small groups of 12, medium groups of 120, and large groups up to 12,000 members. The rise in claims is largely due to delayed medical services being addressed now. Additionally, it's important to note that the process is not as straightforward as in property and casualty insurance. In small groups, defined as those with fewer than 100 participants on a fully insured plan, commissions are often based on a per-employee monthly fee. Adding employees results in additional commissions, but overall plan price increases do not contribute to our revenue growth. Furthermore, as premiums rise, commissions typically decrease for fully insured plans and sometimes for self-insured business segments with 100 or more lives. In certain large accounts, we operate on a fee-for-service basis. Our observations of health plans across the country reveal regional differences in healthcare consumption and preferences, all of which affect expenses.

Yeah, Rob. Keep in mind when we make the comment and they're also that includes pharmacy costs and pharmacy costs are probably not in all cases, but in many cases, they're actually outpacing health care costs today because of specialty drugs that are in there. So you have to kind of take that into consideration when looking at the overall structure of the plan and the pricing of the plans.

Great. Thanks.

Hi. Thanks. Good morning. I was hoping to go back to the margin discussion. I know you reaffirmed the guidance, right, for the year, which implies that the good side, right, potential flat to some margin improvement which seems to imply that things should 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 deals, et cetera.? Can you just help us think through what should help your margin in the fourth quarter relative to the full year guide?

Yeah. Good morning, Elyse. Yeah. It would 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's also just a seasonality of the amount of property that we place in the fourth quarter. So you saw that coming through in retail. And Powell mentioned that earlier, just significantly less in the third quarter, which would make sense with hurricane season that's out there. And then we just have kind of normal timing of expenses throughout the year, some of them we had in the fourth quarter 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.

Yeah. So let me try to hit those multiple questions there. So we have a very limited exposure in terms of our captive risk. And that amount, we have pretty much exhausted in this and the losses, isn't that right, Andy?

It's challenging to assess those leases quarterly. We are involved in underwriting risk to a limited extent, which supports our organic growth in wind and property programs. When events occur, there will be fluctuations in the business. For example, if we experience a quake in Q1 and note losses with no additional incidents for the rest of the year, it could result in higher margins for the business. Therefore, we evaluate these metrics on a 12-month basis and feel positive about the programs and their growth, as well as the expected profit. However, I want to clarify that we are not losing money. We recorded losses in the quarter for the captives, but these are consistent with our expectations.

And the other thing that you mentioned, Elyse, regarding organic growth, any additional capacity that we acquire can lead to organic growth in our programs. Whether it's our own provided capacity or additional capacity from a risk bearer, either option results in organic growth for the program and would be reflected in National Programs.

Okay. And one last thing, sorry, go ahead if you…

Yeah. I was just going to say, Elyse, when you look at the program's 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 start-up and then we get into next year, we'll 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 for the color.

Thank you.

Hello, Laura?

Laura, do we have the next person up?

Okay. We can’t hear her. Can we go ahead and put the next person into the queue for questions, please.

Hello. We can’t hear anyone here.

Hey. It’s Mike Zaremski. Can you hear me.

Hey, Mike. How are you doing?

All right. We got you Mike.

Thanks for taking the question. I’d like to follow up on the contingent discussion and understand that it's still early in assessing the ultimate insured losses. But is there a figure, perhaps $30 billion or $50 billion, that you are considering to help us gauge where the contingents discussion might lead in the upcoming quarters?

Sorry, Mike, we don't. 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 the market. But no, we don't have an estimate there.

Yeah. And Mike, keep in mind that when we implement these programs, they typically involve one or maybe a couple of carriers. This is not a widespread approach across 50 carriers, so it's very focused. We need to see how this develops over the next 90 to 180 days to get a clearer picture. It's difficult to make any predictions at this moment.

Okay. Got it. I thought I would try and then make sense. And the revenues that you expect to come in from right flood, should we just look at kind of how it hit the bottom line in terms of kind of margin in prior catastrophes or is there any nuances we should be thinking about due to this catastrophe to the Ian?

Yeah. 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 I guess just stepping back, sorry, go ahead if you…

No. Go ahead, Mike.

I guess just stepping back, I feel like the captive, I guess, the impact this quarter caught some folks by surprise. Just want to maybe learn a little bit more about it. Is this an impact we should be thinking about kind of on a forward basis, whenever there's a large catastrophe? And is this kind of nationwide E&S? I know you mentioned earthquake or is it kind of more Florida? Any geographic kind of color or anything you could provide to so we can think about this in the future?

Sure, Mike. The way I want you to think about it is this, it is, first of all, limited to two of our national programs currently. Those are a wind facility that writes countrywide and an earthquake facility, which is predominantly in earthquake areas, which is really California and the West Coast predominantly. And having said that, we have an enormous amount 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 losses 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 have performed really well.

Thank you very much.

Mike, due to the potential volatility we might experience by quarter, we wanted to highlight the $11.5 million. If we envision a scenario where there are no weather-related events in the third quarter of next year, we would see profitability margins increase compared to what we observed this year. A similar situation could occur in Q1 if there were a seismic event. That's why we thought breaking it down by quarter would be useful for you to understand how to make adjustments from a quality perspective. We anticipate some events will happen throughout the year, and that's why we believe it's operating almost precisely as we predicted. We put in substantial effort into this analysis.

Thank you.

Thank you, Mike. We can't hear you, Laura. Can you just put the next question in?

Yeah.

Okay. We can’t hear her. Can we go ahead and put the next person into the queue for questions, please.

Hello. We can’t hear anyone here.

Hey. Yes. Can you hear me?

Yeah. And go ahead.

Go ahead, Weston.

Great. So my first question is a follow-up to leases just on the growth that you're seeing from your lease and large M&A. I know you said most of that deceleration was FX. I just wanted to confirm if there's any also slowdown maybe in exposure just given the recessionary environment that we're seeing in the UK and Eurozone. Just wondering if you could also just expand on the growth that you're seeing in that market, given the recessionary headwinds.

We don’t disclose organic growth during the first year of an acquisition, but it is performing as we expected. I should mention that the UK is experiencing 10% inflation, which is affecting salaries and related costs for our employees and insureds. There has been much excitement over the last 6 to 8 weeks due to the new Prime Minister, and there is speculation about what actions will be taken to support small and medium-sized businesses in the UK. We're awaiting the new Prime Minister's comments on this matter. While we are beginning to notice an impact, the business growth and performance are in line with our expectations.

Great. Thank you. And then just a follow-up on the growth that you saw in retail in the quarter. I know you called out some headwinds with dealer services in auto, but did decelerate somewhat meaningfully just year-over-year. Is there any way that we can think about growth in the 4Q? Was there any seasonality to the business that we should be thinking about or anything else one-off for the fourth quarter?

Good morning, Weston. This is Andy. I’d like to provide some context on the organic growth for the quarter. Looking back to last year, our retail growth percentages were 9.8, 17.6, 8.3, and 9.5. The numbers fluctuate from quarter to quarter due to the seasonality of our business. Year-over-year, the differences in the quarters are more influenced by dealer services compared to the previous quarter, Q3 versus Q2, which is largely driven by seasonal factors in the property.

Great. Thanks for the color.

Thank you.

Great. Thanks. Good morning.

Good morning.

Two quick questions. Hi. I think, Powell, you mentioned a 2-point negative impact in wholesale or 2-point negative organic growth impact in wholesale from a business that was sold. Is it because of the sale, or is it just that this business was an offset to organic growth?

In light of that not being part of our results, we would have grown 6.5% in Q3. Does that answer your question?

Yes. Okay. No. That’s helpful. When during the year, do you actually obtain the reinsurance capacity for the captive? I'm asking because there's a lot of commentary about some attachment points not being available in 2023, I was hoping to get your thoughts on that.

We do not have a reinsurance brokerage operation. Some other firms might have reinsurance brokers, so I want to explain the process. There is reinsurance for reinsurers, known as retrocessional, and there is significant speculation that there is more than 20 billion dollars in shortfall in the retro market for reinsurers. Typically, reinsurance is sold through brokers to primary carriers, and reinsurance carriers are currently indicating that their rates could increase by up to 50% and their attachment points or retentions may double. If you have a reinsurance renewal on January 1 and you are a primary carrier, I would estimate that the renewal process could extend deep into December before everything is finalized due to marketplace disruptions. That's the perspective I want you to consider.

Okay. That’s helpful. And then, final quick question, when you talk about the $4 million adjustment contingent commissions, is that the bottom line number, or is that the offset you expect to other contingent commissions that would be accrued in the fourth quarter?

Yeah. Good morning, Meyer. That would be offset in revenue within the profit sharing contingent commissions.

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 made, Mark, that they're 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 both of those. And then we've obviously got the cost of the debt and the amortization. But the businesses are doing well for us.

And Powell, just reflecting on where you've seen environments in the past where there's been a lot of dislocation in coastal property in Florida, has that generally been accretive for growth for Brown & Brown? Understanding there's a lot of moving parts, you said it's a low probability. It would be a negative. Just generally speaking, is this a environment that one might not hope for clients to have to pay more for insurance, but your services are valuable and therefore, positively impacts growth or otherwise?

Right. First, this is why we're in the insurance business—to serve our customers after a loss, especially a covered cause of loss. We work through complex claims issues on their behalf to ensure their claims are settled fairly and quickly. Secondly, in a somewhat chaotic environment, there are both challenges and opportunities. Existing customers may be affected by rate increases and deductible hikes, while also, there will be many new business opportunities as other firms struggle to provide creative or affordable solutions. I'm not dodging your question, but I would characterize this environment as potentially positive overall, though it comes with significant work. This situation adds stress to our teammates, customers, and carrier partners as we strive to deliver for them. It's important to note that this issue is not limited to Florida; it's a coastal issue, a CAT property issue, and it influences how people think about risk across different areas. Even if there's a lack of quake losses, one day there could be a quake. We feel confident in our company's capabilities, our position, and our investments, as well as our alignment with our leadership team. However, this is not just a Florida challenge; it will manifest in various locations. Thank you for the question, Mark.

Thank you. Appreciate it.

Thanks.

We'll take one more question, Laura, please.

Good morning and thanks for fitting me in. I want to start with going back to the seasonality of the acquired revenues. I guess what quarters do you think will be the catch-up quarters? Is it more of a first quarter that's going to be a big quarter?

Good morning, Yaron. Probably get spread over kind of the fourth quarter of this year and then first and second 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 if it kind of spread out.

And is that true for both the retail and the wholesale segment? Because it seems like maybe wholesale had more of a seasonal impact.

Yeah. I think that's probably a fair comment that it's across both of the businesses, a little bit more accentuated in wholesale because of the property.

Okay. I hesitate to end the call on this note, but considering that you are not only an insurance broker but also an employer based in Florida, how are you approaching the potential insurance concerns in the state when discussing these issues with Florida politicians?

To start, I want to emphasize something I mentioned earlier: our primary concern is whether any of our team members or their families were injured by the storm, and fortunately, the answer is no. However, there were several fatalities due to the storm. This leads us to consider how to maintain a viable residential and commercial property market in Florida amid competing interests. Achieving a balance is essential. Additionally, I anticipate significant speculation regarding flooding in Florida moving forward. Many individuals experienced flooding even outside designated flood zones and are uninsured. We are uncertain whether FEMA will assist these individuals, but the number affected is substantial. Striking a delicate balance is crucial to ensure a competitive property market in Florida while ensuring consumer protection. Moreover, as we approach the election on the 8th, public perception and aspirations for the future, particularly regarding housing affordability and insurance, will be pivotal. It is essential to devise solutions that benefit all parties involved rather than favor one side over another, whether it be consumers or carriers. This situation is further complicated as carriers were already assessing and possibly limiting their capacity in catastrophe-prone areas before the storm, indicating that this trend predates the recent events. Did that address your question?

Right. Yes. I appreciate your thoughts. Could I ask one last question? You're reiterating the margin guidance for the full year 2022, suggesting it may fluctuate slightly up or down. In the first three quarters, you've seen a slight decline. Is this guidance absolute, or are there adjustments to consider?

No. What we meant is that on a full year basis, we expect it to be either slightly down or slightly up, which is the same guidance we provided at the start of the year. This estimate includes the losses recorded on the captives along with adjustments to the contingent commissions. If you choose to exclude those and evaluate it separately, the margins would look more favorable, but we are trying to view everything in total.

Perfect. That’s what I was getting at. Thank you.

Yaron, 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 in what we said over long periods of time. Number one, we don't believe one quarter starts 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 the Fed will increase rates. But we're 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 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 or 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.