BRO - NYSE

Good morning and welcome to the Brown & Brown Incorporated Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions] As a reminder, 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 security laws. Actual results or events in the future are subject to a number of risk 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 press release issued yesterday. Other factors that the company may not have currently identified or quantified and those risks and uncertainties identified from time to time in the company's 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 statements, whether as a result of new information, future events or otherwise. In addition, there are certain non-GAAP financial measures used in this conference call. A reconciliation of any non-GAAP financial measures to the most comparable GAAP financial measures 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, good day, everyone and welcome to our Q2 2023 earnings call. We had an outstanding second quarter and the first half of the year. We're very pleased with our strong top and bottom-line results with a robust total revenue, organic revenue, and earnings per share growth. Today, Andy and I are in London headquarters at GRP where we've wrapped up our quarterly Board Meeting and then had the opportunity to engage with our European businesses and reviewed strategic plans for the coming years. After our discussions, we feel even better about our leaders and the growth opportunities for our businesses here. Now let's get into the results for the quarter. I'm on Slide number 4. We delivered over $1 billion of revenue growing 24.7% in total and 11.2% organically as compared to the second quarter of 2022. As a reminder, our calculation of organic revenue does not include contingent commissions, investment income, other income or gains and losses on business sales. Our adjusted EBITDAC margin expanded 150 basis points to 34.2% and our adjusted earnings per share grew 55% to $0.68. On the M&A front, we completed six acquisitions with estimated annual revenues of $24 million. This outstanding performance is a direct result of the relentless daily commitment by our 15,000 plus teammates to create innovative solutions for our customers. Now, on Slide 5, the insurance marketplace continued to be very challenging for customers. They remain focused on the overall spend for insurance and how to best manage their costs. Across most lines and coverage, rate increases for similar to recent quarters with admitted markets up 4% to 10% and excess and surplus markets up 10 to 20%. However, there are exceptions workers compensation rates continue to decrease at a consistent rate. E&S professional liability rates including public company D&O and cyber continue to moderate downward with flat, rates being flat to down, 10% or more. The area remains the most challenging and CAT exposed property. Carriers continue to evaluate their coastal property portfolios and we're seeing more admitted carriers exiting the Californian and Florida personal lines space. As a result of these placements are becoming even more difficult, consequently more properties are moving to state sponsored plans and into the E&S space that might have otherwise been written by an admitted carrier. At the same time, we continue to see underwriters seeking to increase insured value per square foot due to inflation and higher replacement costs. Thus customers are seeing premiums rise significantly due to inflation and higher values. These factors are causing buyers to purchase loss limits, increase deductibles, decrease overall limits or even self-insure certain layers within a placement. Regarding the Florida insurance market, that is not materially improved, we have more admitted carriers either reducing their appetite or stepping away from the market entirely. This is pushing more policies to citizens and the E&S market. From a customer perspective, any businesses grew and hired employees during the quarter at levels similar to the first quarter, while the overall rate of inflation continue to slow, business leaders remain cautious regarding the level of investment in their business in the second quarter, but incrementally are feeling better than they did in Q1 and Q4 of last year. As it relates to overall M&A,the mark, the level of deals primarily from financial backers continue to slow during the second quarter. As a result, we're seeing fewer bidders for businesses and valuations have come down slightly from their peak. But that doesn't mean that a good business won't trade at high multiples. From our perspective, we remained active during the quarter of acquiring six great companies. We completed the acquisition of Highcourt Breckles, a retail agency, based in Canada; two acquisitions in the United States and three here in the United Kingdom. We announced in May, the pending acquisition of Kentro Capital Limited, which we announced - which we anticipate closing in the fourth quarter. Kentro is an MGA Retail agency headquartered in London with a team of over 350, annual revenues, approximately of $90 million and with locations primarily in the UK, and US and Continental Europe, Kentro’s MGA Nexus underwrite across a diversified portfolio of 20 risk classes including trade, credit financial lines, and aviation. Xenia, its retail agency is one of the largest trade credit brokers in the United Kingdom. We're excited to have Colin Thompson and his team joined Brown & Brown. Overall, we're very pleased with the success of our M&A efforts and are in a strong position to leverage our disciplined approach that remains centered on identifying high quality companies that fit culturally and makes sense financially. I'm on Slide number 6. Our Retail segment had a good quarter, delivering organic growth of 6.3%. This growth was driven by solid new business, continued rate increases and modest exposure and even expansion. Most Lines of business performed well, while our dealer services business continue to face headwinds due to vehicle inventory levels and higher interest rates. To give some context around that, the impact to our organic growth was approximately 200 basis points for the quarter. Our Program, segment delivered a spectacular quarter with organic growth over 23% driven by strong new business, good retention and continued rate increases, especially around CAT property. The majority of our Programs grew nicely during the quarter. Wholesale brokerage delivered and excellence quarter with organic growth of 13% driven by new business and retention, as well as rate increases for most lines of business. Our open brokerage and delegated authority businesses had a great quarter. Organic Services segment declined about 2% for the quarter due to the external factors that continue to impact our advocacy businesses. This decline was partially offset by higher claims processing revenue for certain businesses. In summary, we're very pleased with our first half results, delivering, organic growth of nearly 12% adjusted EBIDAC margin expansion of 70 basis points and adjusted earnings per share growth of nearly 19%. Now turn it over to Andy discuss our financial results in more detail.

Great. Thanks, Powell and good day, everybody. I'll review our consolidated financial results on an adjusted basis in more detail. As a reminder, our adjusted measures for the second quarter exclude the change in estimated earn-out payables, one-time acquisition and integration cost associated with GRP Orchid and BdB and gains and losses on business divestitures. We believe, isolating the above items provides a better reflection of the performance of the business and enhanced comparability. The reconciliations of our non-GAAP financial measures, including these adjusted amounts to the most closely comparable GAAP amounts can be found either in the appendix to the presentation or in the press release issued yesterday. On an adjusted basis, total revenues were over $1 billion for the second quarter, growing 24.7%, as compared to the second quarter of the prior year. Income before income taxes increased by 32.1% and EBITDAC grew by 30.5%. Our EBITDAC margin was 34.2%, increasing 150 basis points as compared to the second quarter of 2022. The effective tax rate for the quarter was 25%, which is in line with our expectations and compares 27% in second quarter of last year. The lower tax rate was impacted by the change in the market value of assets associated with our deferred compensation plan in the current year, as compared to the prior year. Our adjusted diluted net income per share increased by 33.3% from last year to $0.68. Due to the changes in market value, our deferred compensation plan negatively impacted the ratio of salaries and related expenses to revenue by approximately 250 basis points year-over-year. Keep in mind, there's an offsetting benefit within other operating expenses. Lastly, our weighted average share count remained relatively flat and dividends paid increased by nearly 12%, both as compared to the second quarter of 2022. Overall, the performance by our team for the quarter was outstanding. We're on Slide number 8. The Retail segment grew significantly, delivering adjusted total revenue growth of 25.5%, driven by acquisitions completed in the last year, higher profit sharing contingent commissions and organic growth of 6.3%. Adjusted EBITDAC grew slightly faster than revenues and our adjusted EBITDAC margin expanded to 28.4%. This expansion was primarily driven by increased profit share and contingent commissions, which were substantially offset by higher non-cash, stock-based compensation and to a lesser extent the hiring of incremental teammates to support our current and future growth. We're moving over Slide number 9. National Programs had another outstanding quarter with adjusted total revenue growing of 25.7% and organic growth of 23.3%. Through the combination of revenue growth and leveraging our expense base, our adjusted EBITDAC margin expanded 510 basis points. We're on slide number 10. Our Wholesale segment delivered an excellent quarter with adjusted total revenue growth of 23.8% and organic growth of 13.1%. Our adjusted EBITDAC margin contracted slightly due to some non-recurring cost in the second quarter that impacted by approximately 200 basis points. We are on Slide number 11. The Services segment’s organic revenue contracted by 1.8% for the quarter and the adjusted EBITDAC margin increased by 220 basis points. The primary driver of the margin decline was lower organic revenues and the impacts of inflation. I've got a few comments regarding cash generation and capital allocation. We generated approximately $390 million of cash flow from operations for the first six months of this year, growing over $40 million or 12%. Our ratio of cash flow from operations as a percentage of total revenues was approximately 18% for the first six months of this year, as compared to 20% in the first six months of last year. As we discussed last quarter, the lower year-to-date ratio has been impacted by higher interest expense and paying taxes in the first quarter of this year related to the fourth quarter of last year that we deferred as a result of Hurricane Ian relief. With that being said, the second quarter was very strong for cash generation and we ended the quarter with approximately $630 million of operating cash. As we mentioned previously, post the acquisitions of GRP, BdB and Orchid last year, we are committed to delivering to our more traditional levels. In the second quarter, we reduced our outstanding debt by making incremental payments of approximately $130 million. We’re in a strong capital position to continue to invest in our company, acquire great businesses and delever. With that, let me turn it back over to Powell for closing comments.

Thanks, Andy. Great report. We continue to monitor the impacts of inflation and increases in interest rates on our customers in the economies in which we operate. We expect business leaders will remain cautious regarding the taste of their hiring and how much they will invest over the coming quarters. With that said, consumers are still spending money and most of our customers are prospering. We believe this trend will continue for at least the next few quarters. From an insurance standpoint, buyers remain fatigue due to continued increases in insurance rates, especially for CAT properties, which we expect similar increases through the end of the year. With these market conditions, buyers will continue to either decrease limit, increase deductibles in certain cases opt for loss limits. In regard to our carrier partners, they remain focused on capacity, as well as a flight to quality and diversification. Historically, we've delivered good underwriting results and are uniquely positioned with the breadth of our MGA and MGUs to provide an opportunity for carriers to allocate capacity across multiple programs. The combination of our diversification and strong underwriting results positions us well to retain and possibly increase our capacity, which will support incremental organic growth from our programs. A few comments regarding our recent international acquisitions of GRP and BdB. We're extremely pleased with the performance these businesses as they're ahead of our expectations for the first year. The leadership teams are focused on driving continued growth vver the coming quarters and years, both organically and through M&A. GRP has been active over the past year acquiring over 20 high quality businesses. Additionally, we'd like to welcome all teammates that joined us over the past few months. Overall, we feel great about our business and how our team continues to execute and deliver. Our focus is on hiring and retaining the best teammates and leveraging the total capabilities of Brown & Brown to retain our existing customers and win more new business. In summary, we had a great first half of the year and have great momentum heading into the second half of the year. With that, we'll turn it back over to Michelle and open it up for Q&A.

[Operator Instructions] Our first question comes from Weston Bloomer with UBS. Your line is open.

Hi, thanks. Good morning. My first question is on the Retail segment organic growth. You’d highlighted a 200 basis point headwind from dealer services in the quarter. I’m curious, if you can disclose what that impact was in 1Q? Or how you're thinking about that headwind for the remainder of the year? And, given those headwinds there, is just a fair to say Retail organic may be lower in the second half, just given the property outlook that you took - see in the second quarter?

Yeah. Hey, good morning, Weston. Still we had a little bit of colors and context around this is, we had mentioned this back during the Q1 as well as Q4 of last year that we did anticipate some headwinds for dealer services in the first quarter. And we did see that it was probably in the range of about 50 to 100 basis points in that range. If you recall, when we released earnings for third quarter of last year, we had talked about the fact that we were starting to see the headwinds on the Dealer Services business in late 2Q of last year. And we saw those through the third quarter and fourth quarter and kind of now continuing through the impact in kind of the back end of last year was about 1% by the course. So it kind of gives you an idea when you look at the organic and what the impact is. As we now head into the second half of the year and similar or consistent with the commentary we had in Q1 as we get on to a more comparable basis now in the second half of the year, we don't see the same level of headwinds for the Dealer Services business. We are very, very proud of those businesses. They performed really well, just go into a little bit of a cycle right now, but they are, they're great businesses and we made significant investments in there overtime to our capabilities.

Got it. Thank you. And I guess, sticking on retail, can you maybe quantify the uplift you saw from property in the second quarter? And just remind us how much of that business is 2Q weighted maybe relative to the third quarter or fourth quarter?

Yeah, we don't disclose that level of granularity, Weston. But what we've talked about in the past is, we do play significantly more CAT property in the second quarter than we do in the third quarter. And the third quarter is probably potentially, almost a third less than what we see in the second quarter. That's pretty consistent with what we talked about last year. So it's why when - when we said that normally our organic is generally a little bit lower in the second half of the year versus the first half of the year because of the amount of CAT property, as well as employee benefits that we see in the first quarter.

Great. Thank you. And just last one on professional lines. Are we close to the point where we're starting to lap the headwinds just given the lower pricing within that market? Just maybe you could expand on that and what you're seeing in professional lines more broadly as we move into the second half?

Yeah. Weston, what I would say is, we continue to see downward pressure on public D&O. That's really where it's pronounced. In other places it's not nearly as pronounced. So, do we still see pressure? Yes, but will that continue for an extended period of time? Don't know? But that's the - that's the one place where we really see real softening in the market. And so, my instinct would tell me the near to intermediate term, we're going to continue to see that kind of pressure in that part of the space.

Yeah, Weston, you see it probably in the commentary in our deck. It's the one that we did call out that actually softened a little bit more, the second quarter versus the first quarter. So it could go a little bit more potentially.

Great. Thank you. Appreciate the color.

Thank you.

Please stand by for the next question. The next question comes from Michael

Hey. Great. Good morning. Wanted to touch on a topic that you guys have brought up within in the deck as well about challenging placements in certain parts of the marketplace. So, I know, net - net, now that we're in July, is there any - should we be thinking that there's the potential for some lack of capacity that could impact your revenue growth rate or net- net between just much higher pricing and maybe there isn't a lack of capacity Brown is a big beneficiary? Just kind of curious if there's any nuances we should be thinking about in the back half of the year on the challenging marketplace?

Right. So, Michael, the way I would look at it is this, let's set the stage for what the market is right now. And what's happening is, insurers in many instances are getting back to us on a renewal business and even new business with very limited time or very close to the expiration date. So there's a lot of activity around analyzing limits and quotations and things like that before we give it to a customer. I've also - we've also said that you have this fatigue inside of the marketplace with buyers, which have had in - particularly CAT from property increases for five and six years in a row. So, what I would tell you is, do we think that capacity is going to be dramatically constrained in Q3? There is a - this is the hypothetical scenario. That depends if there's a storm. So if we don't have a hurricane hit Florida, that's a different answer than if we do have a hurricane hit Florida. So we can't answer that question right now. Number two, there is also the uncertainty that any broker not just Brown & Brown faces, which is, at what point does a buyer of insurance basically say, I can't take any more increase. So what might happen is, they may be buying a lower limit or self-insuring certain layers in their property placement, but they've gotten to a point where they can't take anymore increased cost. So, our growth would be driven more by new business at that point than just increased growth on the renewal building. So what I would tell you this, it's a challenging market. We're writing a lot of new business. I'm very pleased with how retail is performing and I would say that the question really hinges upon things that are a little bit outside of our control specifically weather. And so we don't think that something is going to happen and relative to the State of Florida or hopefully not any other coastal areas between now and in the hurricane season. But if we did have that scenario, you're going to have a much different discussion around a business flowing into state pools i.e., Florida with the citizens and other places. It’s because the market will have to sort itself out.

That's helpful commentary. I know it's not an easy question to parse out. My follow-up is on, I guess contingents and ultimately margins should in the National Program segment we can see there we are seeing a higher share of contingents, which I'm assuming help drive the margin higher. So any commentary on the sustainability and maybe just stepping back on the contingent commissions if or - for the overall company, are the contingents more weighted towards property or any specific business lines? And I guess, I was just thinking, when we're looking at kind of outer year forecasts for the insurance carriers we are all saying, hey, this is year five or six of a lot of meaningful rate increases, which you mentioned and ROEs are expected to be much higher on a go-forward basis on the property side of the business than they have been historically. So, I'm just curious maybe that could give Brown and other brokers kind of a lift in contingents, as well, in future years.

Okay. Mike, you got a bunch in there. Let's see if we can unpack some of those. Let's start first with contingents because there's kind of there maybe two pieces to this. Let's first take the retail and you'll see that it's up about $5 million year-over-year. That is primarily driven by acquisition activity. And most of that out of GRP as we've now kind of made the one year anniversary, we would expect to see that level of growth year-over-year and contingents should drop off quite a bit in the back end of the year. So that hopefully gives you a little color on the second quarter on retail. As it relates to National Programs, so there's a couple things going on. If you recall in the third quarter of last year, remember we called out about a $15 million adjustment in one of our programs associated with estimated claim costs or losses for Hurricane Ian. I don’t know if you recall at that stage, we had said, we did think we were at quarter eight contingents for the fourth quarter for that program. When we released fourth quarter earnings, we actually we did earned some contingents there, which is a good thing. And now, as we're getting through the year end we're seeing development on those claims. It is not as high as what was estimated at the time. So when you take the $5 million or so that we ticked up in the second quarter in National Programs, that split about in half related to adjustment to last year's amount. And then we are accruing about the other half for higher estimated commissions this year, okay? So we’d not anticipate that you would see $5 million increases in contingents in the third and fourth quarter for National Programs, okay. That was really primarily isolated to the second quarter. Now again, keep in mind, when we get to the third quarter, you are going to have comparability for the adjustment that we made last year, okay?

I’d like to also make a comment there around property in general. And this is kind of our view on this. The rates in property today are at, what I would call all times high levels. And if you spoke to a risk bearer and they would talk to you honestly about their view on property rates, I think that you might hear that if we don't have an event this season, that there would be a leveling or even possibly a slight moderation in pricing next year. So, I just want you to kind of keep that in the back of your mind and not every program or not every placement as qualified for contingents, but the contingents are driven on loss experiences. So you got a higher rate, obviously, you can sustain higher losses before you ex out the qualification. So just keep that in mind on the property thing, because it is a thing that we talk to our clients about all the time. If there is one thing that comes up time after time after time, is what's going to happen to property rates? When are we going to see some relief? How, you know, that type of thought process?

And Mike other question you ask is - is around kind of which ones that you earn on it. As a general rule, this is not hard and fast, but to just kind of give you a direction on it. Normally, you'll see that in the employee benefits business, we earn incentives to the industry does not just us normally incentives, and then kind of all other lines are contingents and then guaranteed supplemental commissions and it depends upon the individual lines that are inside there. But that's at least a reasonable rule of thumb to work by.

Thank you for the color.

Yes. Thank you.

Please stand by for the next question. The next question comes from Gregory Peters with Raymond James. Your line is open.

Great. Good afternoon, Powell and Andy. I guess, spending a fair amount of time so far talking about what's going on in the property market and Powell on slide 5, you called out the personal lines business in Florida, Texas, and California being challenging. And maybe step back and give us some perspective because I think Brown & Brown is a much bigger organization just personal lines in Florida, Texas, and California. Can you give us some perspective and size up how that business fits inside the bigger Brown & Brown footprint?

Yes. Sure. Just to give you a context on that, personal lines inside of our organization about $130 million of revenue.

In retail.

In retail, sorry. Yeah, yeah. And so, when we're talking about that, we do also have a program, I mean personal lines business in wholesale and we have it in programs.

Is that - so it's $130 million in retail for personal lines across the country and wholesale and programs what’s the mix? Or I guess, coming at it a different way, because you talked about, you're speculating about what, what may happen if there's an event or not an event in Florida or Texas, I am just trying to understand the magnitude as what's the impact, as I think about Brown & Brown. Maybe, you could use that as an entry to talk about the cactus I think those were an issue for you in the second half of last year related to Ian. Maybe you could give us an update on that.

Yeah Greg, we’ll see - we maybe had a little context to the to the personal lines. If you recall you and this is, good 18 months ago or so when we had all of the fires on the west coast. And that was kind of the start of that process and so we've been facing the headwinds of declines in personal lines for a while, right? And that bled over from California, then into Florida, Louisiana and north part of Texas. And so, that's been some of our numbers for a while. So don't read anything into this that we're actually saying, we think that there are incrementally larger headwinds now in our business. We've been working our way through those. The one where you probably see it or we would see in percentage-wise the biggest impact is actually in our wholesale business. And that's back to Powell’s comment about properties in the past moving over into the state sponsored plans. And back to our earlier discussion about the admitted carriers pulling out at certain markets, that is forcing some policies back into the E&S space. And so, we are actually seeing some uptick in our submissions and our binary in our wholesale business that's there. So, don't know how long that continues on. Carriers change appetites and they decide to readjust their portfolios. But it definitely was for once, at least not a headwind in the wholesale business, which is, which is a really good thing.

Can I make a comment on that Andy, before you talk about the captives? I also want you to understand that we have personal lines business all over the country. So that could be in the Northeast, it could be in Long Island, it can be in Illinois, it can be in Colorado, it can be California, it could be in Florida. What I'm - what we're trying to say there, Greg, is to give you kind of some color around the dynamics in the marketplace, not so much to say that all of our personal lines is based on those two or three states. That's not what we're saying. What we're basically trying to say is, the impact of the state sponsored markets or the potential impact, when you see big admitted carriers, like State Farms and farmers and Allstate pulling out of a state like California, that creates a lot of challenges for people that are writing homeowners in getting homeowners. Do you want to talk about captives and like captive events?

Yes. Hey, Greg, add one other piece. And we've talked about this on our calls before. We think diversification is extremely powerful. And so, just as you know we - you know, the discussion here about potential headwinds California, Florida, et cetera, keep in mind, we bought a outstanding business at the end of the first quarter of last year called Working and they primarily focused on high-net-worth personal lines in the Southeast all the way up the Eastern Seaboard. That business is growing really well. So, just while there's headwinds, we also have things that are going well. That's what diversifications about inside of our business and that's how we want to make sure that hopefully we continue to grow the organization, because everything doesn't work perfect every day. But if we have a lot of businesses, that can move back and forth that balances everything out. So just a little bit of perspective for you. On the captives, another good quarter for us. So this was really kind of our last quarter of meaningful organic growth. Recall, we started writing policies in the first quarter of last year. We got up to basically full written premium at the end of the fourth quarter. As we said before, that will be will have minimal organic impact in the fourth quarter. We had about $6.5 million of organic benefit this quarter. We still think we're going to be in the upper range of the previous guidance that we gave. We said somewhere around 30 to 35, we think will be on the high end of that. And then it'll come down to what happens with storm activity in the back end of this year or if there happens to be an earthquake on the west coast. But the they're performing right in line with what we expected, which is a good thing. Just keep in mind, when we get to the third quarter in National Programs is we did accelerate the recognition of premiums last year with the claim cost that we had. So that will actually be about a $5 million to $7 million headwind on organic in the third quarter of this year as we get on to the comparatives, okay?

Thank you. I just close the loop on your captive commentary. Is there any change with the way the reinsurance structure way that's structured and what the loss profile that business looks for the remainder of the year?

No, not substantial. I think a couple pieces on that. One is, we were pleased to see that the reinsurance market was a little bit more orderly this year than it was last year. So we actually got all of our reinsurance treaties put in place back before they're back in kind of the May time frame, which is good. And then, with that, we were able to slight reduce our maximum exposure. So, we feel really good about kind of how the captives are performing. The organic growth that they've delivered, as well as the profitability.

Got it. Thanks for the answers.

Thank you.

Please stand by for the next question. The next question comes from Rob Cox with Goldman Sachs. Your line is open.

Hey, thanks. So, some of the comments in the presentation were for the economy to continue moderating in the back half. Curious, what you're seeing in your data that informs that view aside from the headwind and dealer services. And if you're seeing the economy moderate from 2Q levels so far in July?

Yeah, Rob, it’s Powell. I would tell you this, it's interesting because when you go out in Florida or you're here in London or whatever restaurants are packed and people are spending money. And so, what we're saying and lots of economists are dropping the probability of a recession and the second half of the year, I would just tell you that a lot of the customers that I've talked to and I hear about are just they just are approaching it kind of cautiously. That doesn't mean that everything they're - said, we're going into a recession or anything. It's a little bit of a wait and see. So, do I have any data - real-time data in July that would tell me, no, I don't. But I don't think that's really, I think it's more of an instinct rather than something that they're seeing every day in their businesses. That's how we - that's how we interpret that.

Okay. Got it. Thanks. Maybe just a follow-up on wholesale. There's really a step change in the organic growth. They're accelerating and I think you commented on it a little bit, but I'm just curious if you give us a little more color on what drove that substantial growth quarter-over-quarter. Was it submission growth? Market share gains? Business mix?

I think it's a little bit of everything actually. Remember, if you have, there's a lot of property business that comes up in Q2 whether that's in our retail business, but also in our wholesale business and that doesn't necessarily mean it with Brown & Brown retailers. It could be with independent retailers. So there's just a lot of property. That's number one. Number two, I think that from a standpoint of submission, count it’s very good. So we're getting a lot of opportunities and in some of those opportunities we’re having some higher hit ratios I think and it's not something so pronounced, but it's just a little uptick I think in certain areas and by doing that and you put all that together with the increase in race and you get a 13% organic growth, which is a great quarter for wholesale.

Yeah, Rob, but we’d also, our coming earlier about personal lines. It was a headwind in the second quarter of last year. We actually had tailwind in second quarter of this year, which is good. So that also helped contribute to the strong 13 plus percent organic growth.

Great. Thank you.

Thank you.

Please stand by for the next question. The next question comes from Mark Hughes with Truist Securities. Your line is open.

Yeah, thanks. Good morning. Powell, the higher submission count, higher hit rate, is that broad within wholesale or is that influence most of that property?

I think it's sort of across the entire platform. But I don’t know you're reading too much into that. I mean, the point is that you can have an incremental uptick in your quoted and bound ratio and that has a positive impact. But you got rate in there. You have lots of new submissions. Remember, one of the things in terms of providing color on the marketplace, let's just use Andy made a comment about personal lines, if you're in a state where all of a sudden your admitted carrier non-renews you, you may be going one, to the state plan, Two, you may – the state plan, depending on what they hear and may not even provide enough coverage for your coverage A on your homeowners, and therefore you may be going into the E&S market. So, a lot of those things there is just unique dynamics because of the market being in sort of turmoil or disrupted, that creates more opportunity in E&S. Just plain and simple.

Understood. And then Andy, you mentioned the $6.5 million benefit from this quarter from the captive and that it it’s going to have positive impact in the third quarter. Can you quantify that perhaps?

No, so the – good morning Mark. So the $6.5 million was the benefit year-over-year to organic from the captives in the second quarter. Okay?

Yeah.

When we get to the third - when we get to the third quarter, we’ll actually have a $5 million to $7 million headwind. And that's because we accelerated the recognition of the revenue on the premiums in connection with the projected claims cost in the third quarter of last year. You get – I have no idea what will happen if we have if any source storm in the third quarter. We're just telling you kind of what we know right now. And then it will be, there will be minimal organic benefit in the fourth quarter, because we're writing a specific amount of premium which is what we're going to write in the four quarter of this year, which is the same amount that we wrote in the fourth quarter of last year.

Okay. And then, any updated thoughts on margin for this year and for the full year with the good 2Q results?

No, we're not just stage changing our overall outlook. We adjusted that at the end of the first quarter and said we would be up slightly for the whole year very pleased with the second quarter results and things can always move around. But we feel real good about the business and the outlook for the year and everything. But no, we're not going to have any major changes on that front right now. But feel very good about the business and potential for profitable growth.

Thank you.

Please stand by for the next question. The next question comes from Elyse Greenspan with Wells Fargo. Your line is open.

Hi, thanks, Good morning. My first question is on the captive. Appreciate the disclosure on the expected revenue, Andy, by quarter. I just want to understand the loss dynamics and you guys have provided some color with the Q4 deck in terms of the underwriting risk. So am I thinking about it correctly if that - if there's no losses this year, that's a 100% margin business? Are you guys assuming some losses, I know you gave us $13 million per occurrence or $25 million per year as your exposure.

So couple things on that front. Elyse is, one is no, we’d not be 100% margin. We do have running cost of the actual captive insiders there – There will be higher margin if there's no storms that are there. But what we said is, we retain $13 million on a per occurrence and up to a maximum of $25 million. We’re capped at $25 million on this year either through a combination of a wind event or a quake event that’s out there. So it gives you a at least, it gives you an idea of we’re on the higher end of our revenue range. You get an idea things really go completely sideways with the potential profit that we can still participate in on these captives. That's why we created them. That's why we're participating. Because we're on - we have put these over top of two very, very well performing programs for a long period of time. And as we mentioned before, the captives, while they don’t read for that name, the actual outcome is identical to a contingent. We're participating in the underwriting profit. So it's you'll see some - you'll see some volatility back and forth, but now they are working right as we designed.

Thanks. And then, you went through right in the segments, which drove the stronger contingents year-over-year. If my question related to the contingents was, if contingents had been flat, would you guys have still seen margin expansion in the quarter? I believe the answer is yes, I just wanted to confirm that.

That would be an absolutely, yes, we would have seen margin expansion in the quarter and if you to back out the incremental net investment income, because that might be your other question is, the answer is yes, we still expanded margins in the quarter. So we feel really good about the performance.

Great. And then, last one within the Retail segment, you guys did call out the dealer services, right, the headwind there in the Q2 related to the rest of - the rest of the segment, so, just core retail and benefits. Can you give us a sense of the growth between the two pieces in the second quarter?

Can you repeat that please, Elyse?

Sorry. I was saying, away from dealer services, how did - like the rest of retail versus benefits perform in the Q2 organically, were they both pretty close to each other was benefit within the retail?

Yeah. No. The answer, just so you know, is first of all, we were very pleased with both the commercial and the employee benefits. Remember, employee benefits has a unique dynamic relative to revenue recognition in Q1 and sometimes that also impact - it can impact into Q2. So I don't I don't look at it on a quarter-by-quarter basis, although I have, I think about it over an extended period of time. So it could be either Q1. I mean, I'm sorry the first half or on a yearly basis. And so, we're very pleased with how the commercial business and the employee benefits business is performing there. Yes.

Thank you.

Thank you.

Please stand by for the next question. The next question comes from Mike Ward with Citi. Your line is open.

Thanks guys. Good morning. Maybe just back on Florida, you mentioned, it's not getting any better. Just curious is that something that we just have to wait to get their wind season? Or there is more need to be done around interpreting the law or do carriers see the need, do they need to see more from lawmakers, I guess?

No, I don't – Mike, I don't think that, I mean, that could always potentially help. But I don't think that's the case. I think what it is, is, remember the players that have participated in CAT prone areas not just Florida have been really popped in terms of losses in the last five or six years. And so, what we really need is, I don’t know this will sound kind of interesting, but we need a little time and distance. So we got to give them catch up. Let them catch a break. And so, as I said, we went through a period of time, in the late 90s and early 2000s where we had some storms in the early 2000s, but then we went through a period where the property market was good. And so, you made money there and the risk there is over five or six years then the market is very competitive. It's just hasn't panned out like a risk bearers think and that's partially being driven by their loss experience and also being driven by the reinsurance cost. So, what I want you to think about is, watch the storm season. And in the event that we don't have a big event, which we think we won't. But if we don't have a big event then, do we see some stabilizing of rates? Do we see rates going up a little bit but not nearly as much as they are now? Or do we see slight decreases? That's how I would phrase it.

Super helpful. So, and so it sounds like you're very happy with GRP and your other European acquisitions from last year. Just wondering if you can sort of comment on how you see those impacting organic now that they'll be part of the calculation going forward.

Yes. So remember GRP lapped on 7/1 and BdB laps on 8/1, okay? And so, we don't we don't break out specific performance by business, but the way I would address that is, I - we believe that GRP and BdB for that matter is performing in line with the overall division, but be it retail or wholesale from both a organic growth basis and a margin basis and we're very pleased with both.

Okay. Super helpful. And then, maybe just last one on interest income. You've already exceeded your guide for the full year. I'm just curious any comments on the back half. Thank you.

Hey, good morning, Mike. The - I guess, one kind of depends upon what happens with interest rates and some of this - the central banks primarily here in the UK and in the US. But if you look at the second quarter on what we recorded, that’s probably a decent run rate for right now, it may move around a little bit based upon what our cash balance is and interest rates, but probably we don’t anticipate any major movements there.

Okay.

Thank you.

Please stand by for the next question. The next question comes from Yaron Kinar with Jefferies. Your line is open.

Thanks. Good morning, everybody. I just wanted to go back to the last question if I could on GRP and BdB. I thought earlier, you had said that they are actually performing better than you expected. And in your last comment you said that they are in line with the division’s performance. I thought at the time of the acquisition that you said that you expect that those businesses to perform in line with the division for – maybe I misremember it.

Well, wait a minute, I just want to make here, yeah so we might be talking about two things. Are we – we are very pleased with the performance and part of the performance that we're talking about is, remember they acquired over 20 different unique businesses, which we think are very good going forward. So let's - but on the core basis, I believe when we announced that that we talked about we believe that it would perform in line, they would perform in line, possibly better. But in line with the divisional performance and what I'm reiterating is, they are performing in line with the divisional performance more a little bit better but we're pleased with that.

Yeah. And Yaron, when we announced the deals, the guidance or the commentary we gave at the time was really around the margin not on organic growth and so, didn't want to see maybe those two topics kind of intertwined on this. We're very, very pleased with the business and how they're performing versus our expectations on the top line and the bottom-line. And the margins for the businesses related to the divisions that that they're reported inside of are right in line with our expectations from a margin perspective. So, we're really, really pleased with how the team is performing and in both the businesses over here.

I appreciate that. The clarification that’s helpful. Thank you.

Thank you.

And then on, Kentro, can you maybe talk about, is there any revenue seasonality you expect there or what margins expected to be relatively in line with the division in which passed in and how well it be out?

Perfect. Yes. So, overall, the business is, is relatively evenly weighted through the year. A meaningful portion of that businesses around trade credit. So it sounds like you kind of see it go well in something to one quarter or anything. So relatively even. And then the margins for the overall business and again you have to kind of look at it the two pieces between Programs and Retail, which is the nexus and this linear portion of it. The margins there were comparative for similar businesses in there.

And do you have any idea of how kind of the revenues will be distributed in the retail and the programs business?

Oh sure. Yeah, it's about 75%, 80% programs, Yaron with a residual on the retail side.

Thanks so much.

No. Thank you.

Please stand by for the next question. The next question comes from Meyer Shields with Keefe, Bruyette & Woods. Your line is open.

Great. Thanks. So, two I think really quick questions. First in the presentation, you talked about wholesale casualty rate up ten to down ten. And it seems like a pretty significant shift. Is that down ten just like the professional liability or are there other lines that are moving to competitive pricing?

I think it could be - it's a more broadly than just some of that. So, yes it is, it's competitive.

Okay. It’s all together. Bigger picture question I guess, bad debt too tremendous heavy weights to the Board. I was wondering what we should expect from them.

Well, first of all, we're very pleased that Bronek Masojada and Paul Krump has joined the Brown & Brown Board. They have both very deep industry expertise. They also have not only underwriting, but understanding about the exposures, not just in the United States but overseas and things like that. And I think that, I would want you to go consider them just like any other board member that joined Brown & Brown we think very highly of them. We are very pleased to have their industry expertise. But I don't want you to take something out of context. These are people that we have known and worked with and think very highly of and they've already added to our board in the first board meeting, which was last week. So, we're really, really with both of them joining the Board and look forward to many years of really great contributions from both of them.

Okay, that's helpful. I can throw in one quick last question. I know in Florida, pricing is technically file and use but I think people treated as prior approval. Just they don't have to go back and change things. Is there any receptivity on the part of either the insurance department or the legislature to actually make it more disciplined by competition and actually be sort of a truer file and use state to attract bigger insurance company impact to the market?

Meyer, I'm not, we're not aware of that. Right now, I will tell you that the Insurance Commissioner and that in the State of Florida is underneath the CFO. I know that the CFO of the State of Florida and Insurance Commissioner and then ultimately into the governor's office, they are all thinking about ways to retain existing carriers and attract new carriers because they're very conscious of the exploding growth in citizens. And so, the answer to the question is, no, we're not aware of it. However, I can assure you that they're thinking about it in terms of ways not, not that question specifically, but ways to actually get carriers to stay and bring more carriers to the State of Florida to create a more competitive environment.

Okay. That’s very helpful. Thank you so much.

Absolutely.

Thank you.

Now, I would like to turn the call back to Powell Brown for closing remarks.

That's great. All right. Thank you all very much. We are very pleased as we said with the quarter and look forward to an exciting third and fourth quarter of the year. We got a lot of cool things going at Brown & Brown and we appreciate your time. And we look forward to talking to you next quarter. Good day.