Brown & Brown, Inc.

Good morning and welcome to the Brown and Browning second quarter earnings call. Today's call is being recorded. Please note that certain information discussed during this call including information contained in the slide presentation posted in connection with this call and including answers given in response to your questions may relate to future results and events or otherwise be forward looking in nature. Such statements reflect our current views with respect to future events including those relating to the company's anticipated financial results for the second quarter and are intended to fall within the safe harbor provisions of the securities laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired 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 second quarter that its financial results differ from the current preliminary unaudited numbers set forth in the test release issued yesterday. Other factors that the company may not have currently identified or qualified and those risks and uncertainties identified from time to time in the company's reports filed with the Securities and Exchange Commission. Additional discussion of these and other factors affecting the company's business and prospects, as well as additional information regarding forward-looking statements, is contained in the slide presentation posted in connection with this call and in the company's filings with the Securities and Exchange Commission. We disclaim any intention or obligation to update or revise any forward-looking statement, 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. 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.bbinsurance.com by clicking on Investor Relations and then Calendar of Events. With that said, I will now turn the call over to Powell Brown, President and Chief Executive Officer. You may begin.

Thank you, Anita, and good morning, everyone, and thank you for joining us for our second quarter 2020 earnings call. Over the last four months, we've successfully transitioned over 10,000 teammates to a remote work environment and have commenced a staged return to the workplace for our business's we will remain focused on the safety of our teammates, their families, our customers, and trading partners. I wanted to mention that I did contract COVID-19 a number of weeks ago. While I felt a little sluggish at times, it did not prevent me from making phone calls and engaging with people virtually. I'm feeling fine now and have received my negative test results yesterday. As it relates to the economy, We believe a full return of the economy to pre-COVID-19 levels is going to be slow and sporadic. Therefore, we as a society cannot lose our focus and determination to do our best to contain the coronavirus. This is possible through the efforts of all our frontline workers and each of us taking our own personal responsibility to help contain further spread. Our teammates continue to do an outstanding job of focusing on our customers and providing them with creative and innovative risk management solutions. During the quarter, we continue to host regular COVID-19 response calls for customers and prospects with the goal of helping other companies share best practices and successfully manage through these difficult times. In addition, our COVID-19 Relief Center has been well received and we and we will continue to find creative ways to help everyone get back to the new normal. Like last quarter, I continue to be humbled by the determination, dedication, and the commitment of our teammates to our customers. Now let's transition to the results of the quarter. I'm on slide three. For the second quarter, we delivered $599 million of revenue, growing 4.1% in total and 50 basis points organically. I will get into more detail in a few minutes about the performance of each of our segments. Our EBITDA margin was 29.5%, which is up 20 basis points over the second quarter of 2019. Our net income per share for the second quarter was $0.34, increasing 3%. on an as reported basis and 6.3 on an adjusted basis as compared to the prior year when excluding the change in acquisition earn out payables. During the quarter, we completed another three acquisitions with annual revenues of approximately 46 million in revenue with the largest being loan protector insurance services. We'd like to extend a warm welcome to all of our new teammates that joined during the quarter. In summary, we're pleased with our performance for the quarter, given the headwinds. I'd like to thank all of our teammates for doing their best to retain our customers and win new business. They're all doing an excellent job. Later in the presentation, Andy will further discuss our financial results in more detail. I'm now on slide four. During the second quarter, we started to see the financial effects of the pandemic, with certain industries significantly slowing down, including hospitality, restaurants, and entertainment. resulting in corresponding reductions in exposure units. Conversely, other industries such as healthcare and construction were resilient and in some cases continued to expand. For the quarter, we expected there would be significant decline in payrolls and consequently, our employee benefits and workers' compensation lines of business would be the most impacted. However, what occurred is that our employee benefits business grew during the quarter due to new business and many employers furloughed employees rather than reducing their workforce. On the other hand, our workers' compensation lines of business declined faster than we anticipated. As a solutions provider, we worked with many customers during the quarter to manage their costs. This included collaborating with carriers to provide mid-term premium adjustments for certain coverages that are impacted by changes in sales or payrolls. While there has already been a significant impact on many businesses, it's unknown what the full effect will be over the coming quarters. A lot depends on how much additional funding is provided at the federal or state level for businesses and individuals. We'll talk more about our views on outlook later in the presentation. From a rate perspective, we continue to see upward movement from most lines of coverage as carriers further tightened underwriting standards and reduced their participation in certain lines of coverage, geographies, industries, or limits. These increases were generally above what we experienced for the first quarter and continued the trend from the past few quarters. Ultimately, the amount of rate increase was driven by the loss experience for a given account or the class of business for the carrier. During the quarter, we did see a slowing in the rate of decline for workers' compensation rates being down 1% to 5%. Premium rates for accounts in the admitted markets generally increased 2% to 7%, excluding commercial auto, which continued to increase 5% to 10% or more. From an ENF perspective, coastal property rates increased 15% to 25%. General property rates increased 5% to 10%. Professional liability rates increased 10% to 20%. And cyber rates were up 10% to 20%. Based on what we experienced in the second quarter, we expect rate increases will remain fairly consistent for the remainder of the year. Regarding the M&A landscape, I thought things would slow down a bit for a while. However, we were still able to close three transactions with an estimated annual revenues of $46 million. and have already completed a few deals in July. The biggest questions for buyers and sellers remains how to project the financial implications of the pandemic and therefore how to appropriately value businesses. With this uncertainty, the percentage of money paid at closing might decrease somewhat, but it does not appear valuations will materially change at this point. I'm now on slide five. Let's talk about the performance of our four segments. Our retail segment's organic revenue declined 2.6% for the second quarter. This quarter, we recorded a reduction in organic revenues of approximately $8 million for general liability policies resulting from the economic disruption associated with COVID-19. This adjustment represents an impact to organic revenue growth of over 250 basis points for the quarter. We also experienced rate increases for most lines and good retention. While we experienced a decline in new business, as it was harder to engage with prospects, we still had a number of great wins and are pleased with our results for Q2. Our national program segment grew an impressive 15.5% organically, delivering another strong quarter. Once again, the organic revenue growth was one of the highest we've ever delivered. Our growth was driven by continued strong performance from many of our programs, including our lender place, our commercial and residential earthquake, and wind programs, just to name a few. This growth was driven by new business, good retention, and rate increases. Some of our programs did experience headwinds during the quarter, such as our sports and entertainment and workers' compensation programs. In early May, we completed the acquisition of Loan Protector, as I said earlier. We're pleased with this acquisition and the solutions we'll be able to deliver to our customers over the coming months and into the future. Overall, it was a great quarter for national programs. Our wholesale brokerage segment organic revenue growth was slightly positive for the quarter. Our performance was impacted by lower new business and retention driven by the impact of the pandemic and the continued reduction in appetite for carriers for certain lines of coverage. industries, and geographies, primarily in the binding authority space. The organic revenue for our services segment decreased 15.4% for the quarter. The main drivers of our decline were Social Security advocacy businesses driven by lower claims volume, a terminated customer contract in one of our claims processing businesses, lower claims for many of our businesses related to the pandemic, and related weather related claims as compared to the prior year. As we've seen in the past, our services segment can have more volatility in its revenues depending on the volume and timing of claims activity. Based on what we're seeing now, we expect organic revenues for the services segment to decline 5 to 10 percent in the second half of the year as compared to the second half of the prior year. Overall, it was a good quarter, and we'd like to thank all of our teammates who delivered innovative solutions in this very challenging environment. Now let me turn it over to Andy to discuss our financial performance in more detail.

Thank you, pal. Good morning, everybody. I'm over on slide number six. Consistent with previous quarters, we'll discuss our gap results, certain non-gap financial highlights, and then our adjusted results, excluding the impact of the change in acquisitions and outpayables. For the second quarter, we delivered total revenue growth $23.6 million or 4.1% and organic revenue growth of 50 basis points. Our EBITDA increased by 4.8% growing faster than revenues as we were able to manage our expenses in relation to lower organic revenues and offset the headwinds associated with increased non-cash stock based compensation cost of approximately $10 million. lower guaranteed supplemental commissions or GFCs and the results from one of our acquisitions from the third quarter of 2019 that recognizes substantially all its revenue in the first quarter of each year. We're pleased with the expansion of the EBITDA margin as it demonstrates the power of our operating model and the focus of our leaders to manage their costs. A quick comment regarding our employee compensation and benefits and other operating expenses. as a percentage of revenue. The employee compensation and benefit ratio increased as compared to the prior year driven by higher non-cash stock-based compensation cost and an increase in the value of deferred compensation liabilities driven by changes in market values with this increase offset within other operating expenses. The ratio of other operating expenses decreased due to proactively managing our variable expenses and to a lesser extent the benefit from the aforementioned change in deferred compensation costs. Our income before income tax increased by 4.8%, growing in line with EBITDA. While we had incremental amortization and depreciation from recent acquisitions, our interest expense declined due to lower rates. Our net income increased by $4.2 million, or 4.5%, and our diluted net income per share increased by 3% to 34 cents. Our effective tax rate for the second quarter was 25.2% compared to 25% in the second quarter of 2019. The effective tax rate for the quarter was impacted by a one-time state tax refund as well as the change in the market valuation of our company-owned life insurance related to our deferred compensation plan. Our weighted average number of shares were substantially flat compared to the prior year and our dividends per share increased to eight and a half cents or 6.3% compared to the second quarter of 2019. We're over on slide number seven. This slide presents our results after removing the change in estimated acquisition earn out payables for both years. We believe this presentation provides a more comparable year on year basis. During the second quarter of 2020, we had minimal changes in our earn-out liabilities. Isolating the change in acquisition and earn-outs in both years, our income before income taxes grew $9.3 million, or 7.7%. Our net income on an adjusted basis increased by $6.8 million, or 7.5%. And our adjusted diluted net income per share was 34 cents, increasing 6.3%. All of these increased faster than total revenue growth of 4.1%. Overall, it was a really good quarter. Over to slide number eight. This slide presents the key components of our revenue performance. For the quarter, our total commissions and fees increased by 4.4%. Our contingent commissions and GFCs decreased by $1.7 million as compared to the second quarter of last year. This decrease was driven by a one-time GSC in the second quarter of 2019, but was partially offset by qualifying for incremental contingent commissions within our national program segment and a positive adjustment related to finalization of the estimates we recorded in 2019. Organic revenue, which isolate the net impact of M&A activity, increased by 50 basis points for the second quarter. Over to slide number nine. Our retail segment delivered total revenue growth of 60 basis points, primarily driven by acquisition activity and higher profit sharing contingent commissions, which were substantially offset by declining organic revenue growth at 2.6%, driven primarily by the impact of COVID-19. In accordance with ASC 606, we lowered our estimates for the revenues we expect to earn from existing general liability and other policies where the premiums are subject to modification based on changes in exposure units, such as the revenue of the insured. Our revenue estimates were revised after assessing the projected impact of the pandemic, which resulted in a reduction of organic revenue by approximately $8 million and organic revenue growth by over 250 basis points for the quarter. Our EBITDAQ margin for the quarter decreased by 150 basis points and EBITDAQ declined 5.1% due to the profit impact of the $8 million negative revenue adjustment, the impact of the aforementioned prior year acquisition, decreased organic revenue, higher non-cash stock-based compensation, and intercompany IT costs. All of these items offset material cost savings achieved in response to the pandemic. Our income before income tax margin decreased 240 basis points and grew slower than total revenues due to higher acquisition amortization expense and an increase in acquisition earnouts. We're over on to slide number 10. Our national program segment increased total revenues by $22.9 million, or 17.4%, and organic revenue by 15.5. The increase in total revenue was driven by strong organic growth, new acquisitions, and an increase in profit sharing contingent commissions, which were partially offset by decreased GFCs. The organic growth was driven by many programs due to good retention, new business, and rate increases, and was partially offset by certain programs impacted by COVID-19. EBITDA increased by 22.7% and our margin increased by 180 basis points due to strong organic growth and increased contingent commissions. The continued leveraging of our expense base as well as decreased variable cost but was partially offset by lower GFCs. It was another great quarter for our national program segment growing EBITDA substantially faster than total revenues. Income before income taxes increased $8.1 million, or 20.1%, increasing the margin by 70 basis points. This was driven by EBITDA margin expansion, which was partially offset by higher acquisition earnouts and intercompany interest expense. Over to slide number 11, our wholesale brokerage segment delivered total revenue growth of 9.5% and organic growth of 10 basis points. Total revenues grew faster than organic revenue due to new acquisitions and higher contingent commissions. EBITDA grew by 9.1% and the margin was substantially flat as compared to the prior year due to lower organic growth, higher intercompany IT expenses, and increased non-cash stock-based compensation. We were able to offset these headwinds with higher contingent commissions and the delivery of reduced variable expenses. Our income before income taxes grew by 7.9%, and the margin decreased by 40 basis points, due primarily to higher intercompany interest expense. Over to slide number 12. Total revenues and organic revenues for our services segment declined 15.4%, driven by the items that Al mentioned earlier. For the quarter, income before income taxes decreased 31.2%, and our margin decreased by 340 basis points. EBITDA declined by 25.2% and the margin declined by 280 basis points, driven by the mix of profitability associated with lower organic revenue and higher intercompany IT expenses. These were partially offset by reducing certain variable expenses. Your comments regarding outlook and liquidity and cash conversion for the quarter. First on outlook. We mentioned earlier that contingent and non-cash stock compensation for the second quarter increased as compared to the prior year. As of now, we are not expecting material differences for either of these items for the second half of the year versus the same period last year. As it relates to liquidity and cash conversion, early in the second quarter, we borrowed $250 million on a revolving line of credit to pay for the loan protector acquisition and to have additional liquidity in case the premium payment moratoriums impacted our cash receipts. Based on our financial performance, we repaid $150 million on the revolver before the end of the quarter. You'll also see our cash flow from operations as the percentage of revenue increased to levels higher than normal. This was primarily due to the CARES Act allowing companies to pay their first quarter federal taxes in July. We expect our cash flow from operations as a percentage of revenues for the third quarter will decrease from historical conversion levels due to making this payment of approximately $50 million. At the end of the quarter, we remain in a strong financial and liquidity position. With that, let me turn it back over to Powell.

Thanks, Andy, for a good report. Lastly, I've started with comments about our teammates and their families, and I want to close with the same focus. We are a team of 10,000 plus dedicated and hardworking individuals who are driven to serve our customers. We cannot deliver great solutions and grow our business if we don't have our team at full strength. Therefore, our focus is always on the safety and health of our teammates. We previously provided guidance that our revenues could be up slightly to down low to mid-single digits for the year. Based on the continued uncertainty of the recovery, we believe our full-year organic growth could be slightly positive to slightly negative. However, there are still a lot of questions regarding how and when the economy will recover. We believe it's going to be slow and sporadic, and we might not see a recovery to pre-pandemic levels until 2022. The big questions right now are will employment levels continue to increase? Will consumers continue to increase their spending? how much additional stimulus will be needed and provided. Regarding rates, we think most rates will continue to increase in the second half of the year. We continue to talk with a lot of acquisition candidates and have a really good pipeline. Through the end of the second quarter, we've closed 10 transactions with estimated annual revenues of $85 million. We've also closed a few deals already in July and are hopeful we'll close more over the remainder of the year. But we expect the marketplace will remain highly competitive. The main questions will be around financial forecasts and valuations. In these times, customers need innovative and creative risk management solutions. We believe our teammates and capabilities are well positioned to be great partners for our customers. At Brown & Brown, we're committed to delivering as many innovative solutions as possible for the benefit of our customers and teammates. We look forward to a successful second half of 2020. And with that, let me turn it back over to Anita for the Q&A session.

Thank you, sir. If you would like to ask a question, please signal by pressing Start Run on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment. Again, the start one, to ask a question. We'll take a first question from Mike Saransky from Credit Suisse. Please go ahead.

Hey, good morning, and Paolo, we're all happy to hear you've recovered. First question, in terms of the $8 million adjustment. It sounds like you described it as, it sounded kind of similar to an audit premium adjustment. It sounds like it's something that could recur to the extent your clients, you know, remain, some clients remain under pressure or was this kind of, you looked through the entire book and hopefully it was kind of a one and done. I'm just trying to better understand how to think about that adjustment.

Hi, good morning, Mike. It's Andy here. Yeah, you're correct. What we tried to do for this quarter, after working with customers and our carrier partners and seeing that the carriers were receptive in a number of cases to doing mid-term premium adjustments, which we would traditionally see at the end of audits for those GL policies, what we tried to do is for all of the outstanding policies that were out there, we looked at consumer spend and tried to come up with an estimate as to what we thought revenues could be down in general across the outstanding policies that we have. Hopefully, we've captured that well. It all depends on how the next few quarters play out for us. We may need to adjust that up and down, but that's our best estimate right now.

Okay. That's helpful. I'm thinking about, um, Powell, you, thank you for giving us an update. I'm kind of, um, clearly a lot of uncertainty on organic, uh, in the back half of the year. Um, you know, year to date, uh, organic's been fairly healthy, uh, fairly resilient. Um, would you say some of your peers have talked about pulling expense levers? Uh, you guys have as well this quarter. Would you say that, you know, if, if, if the back half starts tilting, you know, like it could be mildly negative. Are these expense levers you cited on the call, can those continue to help in terms of the margin impact?

Well, let's talk about that for just a moment. So, again, there are certain costs that are fixed in our structure, and there's going to be certain variable costs. And in those operating expenses, a variable cost would be travel T&E. Just use that as a fairly easy one. And so we have a lot of teammates that travel a lot to see customers under normal circumstances. So obviously, if a customer says, we want you to come, we ask our customers, but we go. So we have people that are flying to see customers now, but it's just not as frequently. And so I don't want to leave you with some impression that we have some lever yet to pull or something. It's not like that. It's basically each office is running their business the best way they see fit to serve the customers that we serve there. And as a result, our T&E and some other variable expenses are down because of this operating environment. Those could go up if, in fact, the economy started to open up and grow more and the coronavirus situation was a little healthier, not like it looks right now, or conversely, we could stay in this current environment and I would anticipate that those variable operating expenses would also be down in future quarters in the current environment. It's more speculative, it's predicated on what happens going forward.

Hello?

Sorry, one last follow-up to your answer. T&E, we've got any The way we can estimate what percentage of your expense base T&E is just to kind of get a feel for how much that's moving up and down given the benefits it's having on everyone's bottom lines.

Sorry, Mike. We don't disclose that.

Okay. No problem. Thank you for the answers.

All right.

Thank you. And now we take our next question from Alice Greenspan from Wells Fargo. Please go ahead.

Hi, thanks. Good morning. I would just echo Mike's comments. Glad to hear you're feeling a lot better. My first question goes to the updated organic guide. I think when we spoke last quarter, you and most of your peers had pointed to there being a lag, so the third quarter could conceptually be worse than the second quarter. I just wanted to get an updated thought there, and maybe you might, in that question, might just want to include the eight million adjustment or whatever you think we should think about the third quarter, just in terms of the lag and if the impact could be more negative.

All right, Elise. Actually, when we made those comments in the Q1 call, we believed that Q3 would be the toughest quarter. And again, you're not going to like this because it's not with enough certainty because no firm will be able to give you what you want. It's going to be speculation. But We, with the adjustment in Q2, as Andy said earlier, for the $8 million, we believe that that is our best estimate of the impact on future policies that we can see right at this moment. So again, remember, there are things at play that are very hard to anticipate, and this is not an excuse, this is an observation, and you might say, like what? First of all, solvency of a customer. Are they going to be solvent in the next quarter or not? We hope so, but I'm saying they're going to be firms that are going to struggle even more, and that's number one. Number two, the impact of rate increases on the purchase of insurance. So there is a point at which some people cannot pay or they have to dramatically change their program. There are certain things that are mandated by law. There are certain things that are nice to have or you'd rather transfer that risk to other people. That's number two. Number three, I'm very interested, as all of us are, What is the next round of stimulus going to be? And how is that going to impact consumer behavior? And then the other thing that you have to keep in the back of your mind is, by the way, just take a look at, for example, Portland and the businesses in the area that's affected downtown that are unable to operate. So you've got to put all that into sort of a mixer and mix it up. And by the way, the final thing that I didn't say would be the ability to get to new prospects. So some people are willing for us to come out there. Some people want to see us virtually. Some people just got their hands so full that they just want to renew with who they've got. If it's with us, that might be good, but we may – see in the future our new business continue to wane a little bit. Don't know. I would tell you what, and this doesn't translate to the numbers, but I'm going to just say this so everybody knows. I couldn't be happier with the way that our team is responding under what I would call a very difficult situation.

That's helpful. To sum up some of those comments, do you think that the reason, right, you guys are obviously narrowing that side, right? And so, you know, the organic short, you know, slowdown is going to be significantly better than what you were thinking could have been a worst case three months ago. And so would you say that that's a combination of, you know, better price, also, you know, the impact of, the economy holding up better from some of the stimulus money, and then, you know, perhaps exposure is also just in general not declining as much as you would have expected?

Well, I actually – there's a couple parts to that story. Number one – As you know, we don't historically give guidance on organic growth, and these are very unusual circumstances, so we've tried to give our best snapshot that we can. That, again, takes into consideration that there are lots of variables, many of which we don't have control over. And the final thing that I think is that merits a discussion is this. I know that some of you all have tried to draw a parallel between the first quarter performance in retail or the business and the second quarter. And I want to make sure that we clarify something because I think it's very important. That is definitely like comparing an apple to an orange. So I don't think that you can compare the performance, whether it be our business or anybody else's business, the performance of a business unit, let's just say our retail, in Q2 to the performance in Q1 and draw some dramatic conclusion because what you've got to understand is our business is a reflection of what we've said, the middle and upper middle market economy in the United States. And our mix of business, our customer base, may be impacted differently than others. Don't know that. But what I'm saying is if the economy had just kept on banging along in Q2 or Q3 like it was in Q1, I think that our organic growth numbers, as an example, would have been dramatically higher in our other business segments. So I just want to make sure we're clear on that, and we're trying to give the best estimate. And I know it frustrates you, Elise, and it frustrates us, Andy and I and everybody else on the team. But we were very pleased with the second quarter, as I said. both our financial results, but more importantly, the attitude internally, how we're working with our customers, our teammates. You know, this is a much different environment than anybody's operated in, and I think that we're doing remarkably well under the circumstances.

That's helpful, Powell. And then my last question maybe goes back to one of Mike's questions. You guys mentioned reduced variable expenses several times in the prepared remarks, and then in the responses section, it sounds like a good chunk of that is from T&E, like lower T&E costs, which you guys are not quantifying. Am I understanding that correctly, or was there perhaps some other expenses that you're pointing down as well? I'm just trying to get a sense of kind of the go-forward impact, at least for the balance of the year, on margin from, you know, some of your initiatives on the expense side?

Hey, good morning. It's Andy here. Yeah, there was more than just T&E inside of there. So everything from, you know, professional services, overtime, et cetera. So those are kind of any of our variable costs all of our leaders looked at. in order to adjust them accordingly.

I just used that as an example. It was not the only. It was just one that came first to mind.

That's why we're trying to give you some additional color regarding the movement between employee benefits and compensation and other operating costs because it was the offsets between the deferred compensation costs that are in the two different categories.

Okay, so if you guys maybe don't want to quantify the full impact that you think about going forward with the other operating expense as a percent of revenue, right, you were saying was low in the QQ, is that a good way to think about that ratio for the balance of the year?

No. Don't use that low of a ratio because, again, it's artificially low because of the deferred comp item. So, again, you've got a credit sitting down in other operating expenses, and then expense of employee benefits. What I was talking about earlier, what we would expect is if the economy continues to open up, we would expect the variable costs will start to go up over time. Will they jump back to where they were in the first quarter of this year or 2019? Probably not. They'll probably slowly increase because a lot depends on can we go see customers and how that works out, but we would expect to see some growth in that area over the back end of the year.

Okay, thank you for the caller.

Yeah, and then, Elise, did you just want to make sure that you understood the reason for the change in the guidance on the third quarter? Because of the piece that we just didn't understand in Q1 is what midterm adjustments could be. We had just no idea at that stage. I think we got better visibility in the second quarter. We originally thought we might see more of that in kind of the third and fourth quarter. The $8 million adjustment that we recorded in the second quarter hopefully is our best estimate. That should take some pressure off of the third and fourth quarter and maybe a little bit into the first quarter of next year.

Okay, that's helpful. Appreciate the extra color. Thanks, Andy. Thank you.

Thank you. And now we take our next question from Phil Stefano from Deutsche Bank. Please go ahead.

Yeah, thanks. And just echoing everyone's comments, the help seems to be coming back to Brown and Brown. That's great to hear. I just wanted to continue your question on the expense actions. It feels like variable costs has been addressed, and I don't need to dig into that. But going back to the first quarter earnings call, it felt like – some of the non-variable expenses would be handled or at least strategically thought about in the regions. Are you getting any commentary from the regions about actions they might be taking or how they might be thinking about the business differently that would impact the non-variable expenses?

Yeah. The short answer is our leaders are looking at the businesses and in the best way they see fit to run the business long term. So I want to clarify something because I think it's very important. I know that when people talk about things like levers and variable and fixed costs and are there things that you can pull in the field that will impact, we don't think about that. That's like a way that big companies think, in my opinion. And so The short answer is we think about what is the best thing to do for our company, our customers, and our teammates for the long term. There are lots of companies that are laying people off and or furloughing and all of that. They have all their reasons. We're not commenting because their businesses are under intense pressure. We understand that. You know, up to this point, you know, if we've had somebody depart the team, it's been performance related. It's not a wide, you know, impact across a number of teammates. And so we think about it because although this is going to impact the business in the near to intermediate term, we will come out of this difficult operating environment having learned a lot of things, as evidenced by going to a remote work environment in seven working days and how we've done that and interfacing with customers in different ways via video and etc. But no, I want to make sure that you understand that there's not some hidden agenda out in the field that we're going to do to clip off some big number. I think that Under the circumstances, I think that our margins and our growth were quite good in Q2. We're very pleased with that.

Yeah, Phil, I mean, what we were trying to hopefully convey at the first quarter and just give everybody additional insight, how do we run our company? And, you know, we talked about it on the first call, first quarter. We don't put out mandates. It's just not our operating culture. We rely upon the leaders of our businesses to know how to adjust their costs and If you look at the second quarter, it demonstrates exactly how it works. It worked perfectly. They did an outstanding job of managing all of their variable cost of the needs of their customers up and down. We're very, very pleased with how well everybody did inside of the team. We think it works very well inside of Brown & Brown. It might need to be differently in other companies, but it's part of the reason why we have the great margins and we've had them for so many years because of how we run the organization.

That's a fair point. The growth, particularly in programs, was much stronger than at least I was expecting. And just focusing on that segment, I guess, I was hoping you could help me understand the makeup of that portfolio and how it might be positioned to have stronger growth in economic downturns. I mean, what are the negative correlations versus the broader market there I know lender place is something that's been highlighted the past couple quarters as a particularly strong business. Maybe the proportionality of things that run counter cyclical that we might be able to think about the growth continuing in this segment.

Okay, so let's just use two big comments just broadly. What about wind coverage and quake coverage? So you heard me say in the prepared comments that ENS property, in some instances, coastal ENS property is up 15%, 20%, 25%. So if you have a program that provides wind cover, it could be habitational, it could be other than habitational, it could be frame, it could be good construction, a mix of all of the above. they're seeing rate increases. So capacity constraints create a very unusual tension in a period like this. So unlike 2008 to 2011, you had the economy going down and you had rates going down. We would tell you, as we said in Q1, the rates are going up now and the economy is going down. So you have this unique dynamic And so whether it be, there could be some seasonality in some instances about when some accounts come up for renewal. I'll just make something up. I mean, not make it up, but give you an example that's not a program specific. We have programs in this area, but let's just think about public entities for a moment. Public entities usually date on 7-1, 9-1, 10-1, those are big dates for public entities, and 6-30. So they may renew a school board on 6-30 or 7-1, whether you're in Texas or you're in Oklahoma, you're in Florida or New York or Washington. And so that same school board, obviously, I mean, if it renews in June, and they have this huge quake exposure, hypothetically, wherever they are, then that's going to be in the month of June with this big exposure, as opposed to in July, you may not have any large school boards, or you might not have any large companies that are seeking, I mean, we have a lot of large companies that are seeking quake coverage and wind coverage. But I want to acknowledge something here that I think is an important nuance. All of you have seen and or read and heard about additional capacity that is allegedly coming into the marketplace. And you hear about management teams that are forming new startup risk bearers, be it insurance or reinsurance or both. Is that a good thing or a bad thing for us? We believe it's a good thing because it gives us more capacity to serve our customer base. Having said that, you might think of it as saying, okay, that could be a governor, potentially, we haven't seen this yet, a governor on the upward pressure on rates because that new capacity comes in and now competes against some of these large standard carriers in America or overseas that want X rate, and they're not able to get X, they're able to get half of X because there's this new capacity that comes to them. online. That has not happened yet. I want to make sure everybody knows that, but there is a lot of activity out there and a lot of discussion. That capacity could be plugged in to our program businesses in certain areas, and if in fact that case were to occur, that may moderate the rate increases. Conversely, if in fact capacity in some instance dried up, dried up, and that's an extreme example. It's not going to do that, but dried up to an extent where you could only continue to write your renewals, and your renewals would go up on rate alone, and you didn't have additional capacity to write new business. That would also impact the organic growth. So I say this. We're very pleased with the organic growth of national programs. We do not want you to think that the growth this quarter is what we think it's going to be next quarter. We're more, we have a moderated view on that. We think the outlook is very good for the business and we're very pleased with how it's going and a lot of it will be impacted by the actions that or inactions of existing capital providers and then the entrance of new capital providers.

Got it. Thanks so much. You're welcome.

Thank you. And now we take our next question from Greg Peters from Raymond James. Please go ahead.

Good morning. Can we circle back to your comments around M&A? Have you seen any continuing lack of involvement in the private equity side, or is the private equity side back up and running in full steam? And then also, can you speak to any potential benefit or fallout, year-to-date, from the Aon Willis Towers Watson proposal?

Okay, private equity is going full steam. So I would tell you, Greg, the analogy we would use is think about somebody that's driving on the highway about 85 miles an hour and you come into this initial COVID environment and they take their foot off the gas. That does not mean they put the brake on. It means they take their foot off the gas So for a period of, let's say, two months or maybe three months, you go from 85 miles an hour to 65 miles an hour. And now they've put the pedal back to the floor, and they're going back up towards 85. So very active environment continuing in the acquisition space. Again, as it relates to the proposed merger of the two firms, We don't really speculate on that. There are people that we hear about and talk to and things about that that seem to be interested in exploring other opportunities, but we're not going to really speculate on all of that and we wish them the best and however that all works out. It's a complex, complicated deal and we're going to just keep on trying to write new business and get the best people we can on our team. So I don't really want to speculate too much about that.

That's fair. I mean, you brought it up. Can you talk about how your producer retention has held up through the first six months relative to historical standards?

Yeah, sure. And the answer is I think it has held up exceptionally well. I think that our producer retention and our overall teammate retention has been really, really good.

Okay. Fair enough. Maybe, Andy, you can circle back to the comments on profit sharing and guaranteed supplementals. Can you review the puts and takes on the results year-to-date and how we should be thinking about that again for the full year? I know you commented in your prepared remarks, but if we can go back to that, it would be helpful.

Sure. Yeah, no problem, Greg. Good morning. So let's just go through and look at them combined. So for the first quarter, We were up year over year about $8.8 million. Second quarter we were down about $1.7 million, $1.8 million, and that was primarily due to the one-time GFC that we got the second quarter of last year. The comment that we made in there is at least for the first half of the year, those either represented new GFCs or contingents that we qualified for, or adjustments to finalize the estimates that we recorded in 2019. Again, if you recall with the new ASC, we have to record our contingents throughout the year based upon written policies to the best that we can. Then when we receive the cash in the first and second quarter, we have to do our final true-ups. So that's a combination of all of those which really drives the upside. We don't anticipate that for the second half of the year, as we mentioned earlier. So as of right now, we think that contingent GFCs will look fairly similar in the second half of this year as to what they did in the second half of last year, barring something new pops up that we just don't know about.

Great. Thanks. And then the final piece, I know we've been watching the struggles with your services segment for several quarters now. It kind of feels like this could be a trough year in terms of organic and just total revenue for that business. Is that the right sort of sense that you guys have about that business, or is there something structurally going on there that might lead to further revenue shrinkages, we think, beyond this year?

I think your first assessment was correct. I think we look at it as a trough eater. We don't believe there's anything structurally wrong with the business or anything like that. There's just a combination of things, as we outlined in my comments and in Andy's comments, that have alluded to that. So we kind of work our way through it. And it'll be better in the future.

Yeah, Greg, the piece that's always one of the unknowns inside of that we've been talking about for a few quarters is around the Social Security advocacy business. We are definitely impacted at times what happens at Social Security Administration and the federal government. So it depends on how quickly they are processing and claims on their end, the amount of resources they flow out. So that does adjust things up and down over time, and we've seen that over a number of years. So it's just kind of one of those wild cards. We just don't know about it until it kind of starts coming along, so we have to watch that and then see what happens with general property claims that are out there. Those, again, just move back and forth based on weather-related.

Got it. Thanks for the answers. And, Powell, stay away from the nightclubs and the beaches in the third and fourth quarter, okay?

Thanks a lot. Actually, as you know, Greg, I have 10 weeks of immunity. Thank you.

And now we take our next question from Yaron Kinnar from Goldman Sachs. Please go ahead.

Hi, good morning, everybody. Just a couple of ones, the $8 million of revenue adjustment for COVID. So first, I guess, I think you took like $10.5 million on workers' comp and employee benefits last quarter. You took $8 million on GL. Are there any other lines that you could see such adjustments take hold?

Good morning, Aaron.

As of right now, no, we don't see any other lines that we've not captured at this stage. If other facts seem to pop up, we'll have to address those. What we tried to do is for the outstanding policies in Q1 and again the outstanding policies in Q2, we tried to incorporate those into our adjustments. So that's kind of the best estimate right now. We just need to see how things continue to play out. One of the challenges we had going into the second quarter was how to estimate because we had that lag effect on reporting. So we really didn't start getting real good reporting for some of the monthly on employee benefits or work comp until May and June. So we've only got a couple months down. So we're going to continue to monitor and see what things look like. And then we'll also start to see some of the renewals in the third quarter. And that will start to give us an idea also of what return audit premiums look like and how well we did estimating that for the $8 million.

Okay. And so far, the workers' comp and employee benefits estimates are holding well?

Sorry, one more time. You were hard to hear.

Sorry about that. The workers' comp and employee benefits estimates were the ones that you had to address last quarter. Are those still holding well as of now?

Yes, they are. The mix is different, but in full, yes. Okay.

Okay. And can you see what the earnings impact was from those $8 million this quarter?

Sorry, again, you're hard to hear on it here, and you're breaking up a little bit. Can you repeat, please?

I was asking if you could say what the earnings impact was from the $8 million this quarter.

Oh, it's quite high on there.

Okay. And then one other question. How many of your customers, specifically in retail and wholesale, have taken actions or chosen to cut programs in order to cut insurance costs? As opposed to the carrier coming in and saying, you know, we're lowering them.

I think what I would say is I want to clarify. I'm not aware of, well, maybe I should back up. There's two segments. Let's think about small business first. So we have small business in both retail and wholesale, and that's a scenario where we have people that call and say, we're done. Here's the keys. They're out of business. So we've had a lot of that in small business areas, but those are small accounts. In larger accounts, what you might find is the cost goes up substantially, and therefore they buy less of the coverage, but that doesn't mean they don't buy the coverage. Let me give you a perfect example. Let's say you're on, your company is a large manufacturer, and you have a $25 million umbrella, and that $25 million, you manufacture, let's just say something like, baby cribs and children's infant clothing, something like that. And your $25 million umbrella was, just for sake of this discussion, a million dollars in premium. And the carrier that put the $25 million up comes back to you through your broker and says, we're going to quote $10 million of coverage for $1 million of premium. So then your broker goes out and gets the other $15 million, and let's say that's $800,000 or something. So your limit for $25 million just went up to $1.8 million or $2.5 million or whatever the number is, but your primary $10 million was the same price as the $25 the year before. You may say, hey, I can only buy $10 million of coverage. That's what I'm talking about in larger customers. They're not saying we're not going to buy an umbrella. That's not what they're saying. But what they're saying is there are certain extreme examples. If you're in the transportation business, let's say you have 1,000 long-haul trucks, your excess liability premium is gone through the roof multiples of times. And so if you bought $80 million of limits before, you might only be able to buy $40 million now because the price is so high. So we haven't seen in the small accounts area, we see people going out of business. In the middle market accounts area, we see people mostly renewing, but there's some gnashing of the teeth. In the large accounts, particularly in tougher classes of business, we may see lower excess limits purchased because the rate increases are so substantial.

Got it. I understand. Thank you for the call. And, Powell, I hope that you and your teammates and families all stay healthy.

Thank you very much.

Thank you. And now we take our next question from Mark Hughes from SunTrust. Please go ahead.

Yeah, thank you. Thank you. On the wholesale, I think you said the binding authority was a little slower this quarter. What are the prospects for that to pick back up? Is this the new normal, or should we go back to more mid-single-digit growth?

Yeah, Mark, I'll tell you what you've got in wholesale. It's interesting. You've got two segments in that business, as you know. The brokerage, so that's transactional brokerage, And then you have binding authority. The binding authority is primarily smaller premium accounts, not small, but smaller. So think of accounts that are primarily $25,000 in premium and under. It could be higher than that, but let's say 25 and under. And then transactional, large transactional wholesale would be bigger accounts or layered property or an umbrella or something like that. I think what you've got is in our business, the binding authority is being impacted and it's hard to estimate the full impact because as I said in the previous question, a lot of that business is impacted by the business prospects. So let me give you an example. April and May, binding authority new business was way down because the economy was closed And the whole deal, and in June when it opened up, I mean, the number of new businesses we wrote was significantly more than the prior two months. But now it's going back the other direction. And so I kind of think that the binding authority business is going to be under pressure in the near to intermediate term. So let's say the rest of the year. Brokerage is there's an opportunity for it to grow nicely, but you've got to remember that there's also an enormous amount of pressure in some instances where some of that business might go from the non-admitted market to the admitted market in certain instances. You don't normally think of that, but there are certain instances where that's happening. So I would moderate... the growth expectations in the second half of the year for that just because there's a lot of uncertainty around how that part of the market responds. Normally, I'd say, no, I think it's great and it's going, but I just think that there's some headwinds there.

Understood. Then a quick follow-up. Interest expense, Andy, is this a good run rate absent from the bigger use of capital?

Yes, second quarter is probably a good run rate, presuming that rates stay where they are, Mark, and we don't have any incremental borrowings for acquisitions.

Thank you.

Hey, Mark, I want to clarify something that I think is important, and it's a very timely example. One of the areas that we write a lot of binding authority business, an example would be personal lines in California. As you know, California has been burning and there's all kinds of things over the last couple of years. A number of carriers have basically just said, we're not going to write personalized coverage in the state of California in brush zones, which is not admitted areas. What that does is there's a lot of disruption in that market. You might find some of that in Florida in certain pockets where carriers have already gotten hit or exceeded their capacity, and so they're backing off. So again, there are forces that are a little different. It doesn't mean that we don't, you know, we're just going to work through it, but it's just kind of interesting where you have all of a sudden, you know, a place like California, which is the sixth largest economy in the world, and a big personalized market, they're choking on it. And so a lot of it's going to the state plans.

Thank you.

Thank you. And now we take our next question from Maya Shields from KDW.

Please go ahead. Sorry. Thanks. Good morning. I'll tell them that you're doing well. If I understand your comment correctly, it sounds like there's more revenue pressure on the small accounts, whether that's in retail or in wholesale. And obviously, overall margins are surviving that. but does that market shift itself have any margin implications, or does that mix shift have any margin implications?

Well, I think we like small business, and it's been a nice part of our business. And so remember, as a part of the whole, it's a smaller segment, but it does have a positive impact on our margins or a negative impact.

So negative impact when it goes away.

I'm sorry. Could you repeat that? You were unclear.

I'm sorry. So when you say that it has a positive or negative impact, you're saying that having less small account business is positive or negative for margins? I'm not sure I understood.

Yes. The answer is the fact that you have less small business is a negative impact.

Okay, so that makes the quarter's results even more impressive. So that's good to hear. On the first quarter call, I think you anticipated less new business and higher retention. And I'm just wondering what happened in, and we just talked about this, in wholesale segment, we talked about less, lower retention as a consequence of COVID. Is that a small business component?

That's some of it, but it's not exclusively that. I mean, remember, think about it, a... A retention rate in retail, as you've heard us say before, in an office, overall might be 92% to 95% overall revenue retention. In a wholesale business, depending on if it's binding authority or brokerage, it's 15 points less than that, maybe more. So there's a lot of churn in that book. And so if you're either not able to replace it, i.e. more new business, there's impact there. Or if you lose a couple of accounts, and if those accounts were big, that puts pressure on it. So I'll give you an example. Think about any industry that would be dramatically impacted in this period of time. I'll pick one for you. car rental. Okay? So how many cars have you rented in the last four months? Let's say not very many compared to the normal that you might rent. And so if that's the case, you can have customers, I just used that as an example, the customer might be a restaurant or a bar. It might be an entertainment environment. You know, think about if it's a, you know, it's got a, it's a some sort of, I was going to say, like a fair or something like that, where usually it's based on receipts, which translates to the number of people, and you could say, okay, $10 to get in or whatever the number it is. Well, guess what? What they said, now the receipts are, you know, one-tenth, if that. So the rate that there's compression in the existing book, so remember, let's not lose sight of the fact that in retail we call this out, but just in general, compression in hospitality, restaurants, entertainment. We talked about sports. Think about whether it's professional sports or, you know, Little League soccer. You know, all of that's impacted. So we may renew the account, but the account is all of a sudden 30% of what it was. So there's inherent compression in certain segments of the book. By the way, Meyer, it's not exclusive to wholesale. We have that in programs. We have that in services. We have that in retail. Very important distinction.

No, that was very helpful. Thank you very much.

Yep.

Thank you. We have a follow-up question from Michael Phillips from Morgan Stanley. Please go ahead.

Hey, thanks. Actually, first question. Two quick ones. I appreciate sitting in. Paul, you mentioned a big theme here is a number of those early capsules simply can't pay. Have you seen any examples or any pressure from any outside parties to issue any kind of rate relief or rebates that we've seen on the personal side? Anything about commercial ones at all?

The answer to the question is we've seen some things on the health side where there have been some actions taken by some insurers around the country more regionally, and I'm not aware off the top of my head of commercial, and yet I say that, and I know of several large carriers that are trading partners who have been more than willing to adjust prices midterm, maybe more so than others. And so that gives rate relief right there. So they might not have said, like a personalized auto policy, we're gonna give you a 15% reduction in your premium. What they basically said is, hey, you have 100 trucks on the road, and right now you're only driving, let's say, 20 of them, we're going to give you, you can adjust your exposure units down or your payrolls down or whatever, so it's going to give them the benefit of not being charged for the trucks that are sitting in a warehouse. So it's the same thing, but it's not a rate cut. It's an adjustment in exposures. And then there are some carriers that are not willing to do that. I mean, we've seen every scenario. I mean, boy, have we seen them.

Okay, I can imagine. I guess, last one on the MMA side. You mentioned private equity still going full steam. There's still opportunities out there. Can you make any comments on what you're seeing in terms of the valuation level of what's being had out there today relative to recent park orders?

Yeah, I mean, I would tell you that the... The acquisition prices, the multiples that are being paid, and remember, I'm always one that likes to say a multiple of what. If you have a seller saying to somebody what they got versus the buyer, I want to know what the real EBITDA is, the sustainable ongoing EBITDA, not a jacked up, modified dramatically EBITDA. I would tell you that our sense of it is the multiples being paid today are very similar to what they were being paid in the first quarter and maybe even the last quarter of last year. So the multiples are not necessarily that different, Michael. It's just how to get comfortable with the impact of the pandemic on the earnings. That's really important.

Okay. No, that makes sense. Thanks for your time. Appreciate it, Paul.

Stay healthy. Absolutely. Hey, Anita, it's about 17 past the time of the hour. We'll take one last question in the queue, and then we'll go ahead and wrap it up for today, okay?

Thank you, sir. This is our last question, actually, from Alice Greenspan. It's a follow-up question. Chief Provost Fargo, please go ahead, ma'am.

Thanks, and thanks for taking me back in the queue. My follow-up, I was just trying to tie the comments throughout the call back to the guide, and I do recognize, you know, you guys have kind of checked, you know, not necessarily normally given an organic guide, but as we think about kind of the slightly positive, the slightly negative for the year, a couple questions there. You know, in the best case, right, the slightly positive, can you see yourself on an overall basis, this is an overall guide, staying positive for the next two quarters? And my second question, Paolo, maybe you want to answer that together. Following on the, you know, you pointed out that $8 million adjustment this quarter could help the back two quarters. Do you see the Q3 or the Q4 better as you think about the next two quarters of the year?

Okay, so the answer to the question, again, with the unknown of how the economy is impacted by the number of spikes in the COVID cases confirmed and all the resulting issues, could our growth be positive? Of course it could be. It could also be negative. I'm not trying to be, you know, diverting the comment, could it be positive? Yes, it could be positive. There's a lot of variables. Like I said, if a bunch of insureds all of a sudden had their exposure units all go down 20% between now and the end of the year, the idea of growing out of that, even with a good amount of new business, might be hard. I don't know, at least. That's the first thing. As it relates to the the adjustment that Andy referenced. And I think this is kind of an important, this is a non-GAAP answer. Okay? So, but it's based on GAAP principles. The adjustment that Andy and the team has made, not only in Q1, but in Q2, those adjustments were the best estimate at the time of what we could see in the business. So the reason I bring that up is we could get into Q3 and there's very possibly another adjustment. We don't know. But we know that right now, the way we looked at the business, we have made the best judgment on the business as we see it today. And I think that's an important distinction So I just mention it for what it's worth. I hope that helps. I know it's frustrating because, again, it frustrates me too, but it is what it is.

Okay, that's very helpful, Paolo. Thank you.

Thank you. We have no further questions at this time.

Okay, thank you all very much for your time today. We look forward to talking to you in Q3. Please be well and be safe. I will tell you that I got it and you don't want it, and I have a number of people that I know that have gotten it or come through it. So it seems like it's touching almost everybody. So be well and be safe, and we look forward to talking to you next quarter. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.