Good morning, and welcome to the Brown & Brown, Inc. Third Quarter Earnings Call. Today's call is being recorded, and for the duration of the call, your lines will be on listen-only. However, you will have the opportunity to ask questions at the end of the call.

[Operator Instructions] 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 third quarter and are intended to fall within the safe harbor provisions of the securities law.

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

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

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

Additional discussion of this and other factors affecting the company's business and prospects, as well as additional information regarding forward-looking statements is contained in the slide presentation posted in connection with this call and in the company's filings, with the Securities and Exchange Commission.

We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, there are certain non-GAAP financial measures used in this conference call.

A reconciliation of any non-GAAP financial measures to the most comparable GAAP financial measure can be found in the company's earnings press release or in the investor presentation for this call on the company's website at www.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, Laura. Before we begin, I wanted to say we apologize for any mix up. There was a transition from one calling or coordinating company to another, I think, is how I would describe that, and we were just made aware of that about 15 minutes ago. So we apologize for any inconvenience.

So good morning, everybody, and thank you for joining us for our third quarter 2022 earnings call. Before we get into our results, I wanted to make a few comments regarding Hurricane Ian. First, our thoughts and prayers go out to everyone in Florida and South Carolina that have been impacted by this massive storm.

We have a number of teammates and their family members that suffered wind and flood damage to their homes. Thankfully, none of them were hurt. All the people in Florida and South Carolina were -- that were impacted are in a recovery phase and will need a lot of help during the rebuilding process.

So we encourage everyone to support in any way you find appropriate. I'm extremely proud of how our team prepared for the storm by enacting our catastrophic events plan across our offices. So we were ready no matter where the storm hit. This enabled us to respond quickly and support our customers, as well as others in the impacted communities.

Florida will recover and rebuild as it has after other storms. It's just going to be a long road. Regarding our financial performance, we had another good quarter and delivered strong total and organic revenue growth for most of our businesses.

Additionally, our margins and bottom line results include estimated losses in our two captive facilities, as well as reduced contingent commissions in certain programs, both as a direct result of Hurricane Ian. We'll talk more about our quarterly results and the impact of the storm a bit later.

We continue to anticipate good and profitable growth through the remainder of 2022. During the quarter, we completed the acquisitions of GRP in July and BdB in August. Both businesses have performed well and are in line with our expectations for their first few months.

We're very pleased with the strong cultural alignment, the quality of the team, their strong operating results and the prospects for the future. Now let's transition to the results for the quarter. I'm on Slide number 4. We delivered $928 million of revenue, growing 20.4% [Technical Difficulty] in total and 6.7% organically.

Our adjusted EBITDAC margin was 31.2% for the quarter. Our net income per share was $0.57, and our adjusted net income per share was $0.50. Later in the presentation, Andy will discuss our financial results in more detail as we have a number of items impacting the results for the quarter.

We also completed 11 acquisitions during the quarter with annual revenues of approximately $340 million. I'm on Slide 5. Let's talk about the potential impacts of Hurricane Ian. Based on what we're seeing with current claims, there's a lot of damage from wind, but the great majority appears to be flood related.

As a result, we're going to see material claims in our right flood business. We're estimating somewhere in the range of 11,000 to 12,000 claims and anticipate this will drive about $11 million to $14 million of revenue. However, it's still too early to fully assess the total number of claims and the severity of each claim.

Regarding 1/1 reinsurance treaties, they will be under significant pricing pressure. This will drive commercial and residential CAT exposed property rates up and will lead to increases in wind deductibles.

This will present further financial challenges for businesses and consumers after four years of significant premium increases and the reductions in capacity. We're well positioned to help our customers navigate these challenging times.

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

Some business owners are becoming more cautious about the level of investment they're making or the number of employees that are seeking to hire. Most employers are still trying to find workers, but some are reducing their hiring needs as revenue growth is slowing or the outlook is not as robust as it was six months to 12 months ago.

The carrier landscape remained relatively consistent with previous quarters with rate increases being fairly similar. The main themes were availability of capacity or appetite for certain classes of coverage and enhanced underwriting rigor. Customers continue to modify their deductibles and limits to best manage premium increases.

It does appear the market is getting to a level where customers cannot reduce their limits much more for certain lines like excess liability without either substantially dropping coverage or bearing the higher premiums. Admitted market rate increases were similar to prior quarters.

We're up 3% to 7% across most lines with the outlier being workers' compensation, which remained down 1% to 3%. From an employee benefits perspective, rates were up 7% to 10%. From an E&S perspective, premium rate increases -- premium rates increased in the range of 10% to 20%.

CAT win rates were up 15% to 35%, obviously, that's pre-storm, while earthquake rates were up 7% to 10%. The impact of Hurricane Ian losses will put additional upward pressure on property rates in the fourth quarter. Rate increases for the first half of 2023 will then be influenced by the outcome of 1/1 reinsurance treaties.

Early indications would suggest material upward pricing on CAT property. The placement of professional liability and excess liability for many accounts remains challenging and were up 5% to 10%. However, public company D&O rates were down 5% to 20%.

Regarding cyber, the story is substantially the same as with the last three or four or five quarters, with rates and deductibles continuing to increase in carriers requiring effective security protocols. Personal lines for property in California, Florida and Louisiana continue to be challenging due to losses in aggregate concentrations.

During the third quarter, we started to see increased underwriting rigor and reductions in capacity for Texas property. We expect carrier appetite in these markets will remain constrained. As a result, some additional accounts will move into state plans. Each state program will be under significant pressure due to the influx of policies and losses.

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

The slowdown for the rest of the industry was mainly driven by private equity reducing their activity as the increased cost of debt and the potential for the economic slowdown appears to be driving them to be more selective. However, if a business is considered to be a platform, private equity is still very aggressive on pricing. I'm now on Slide 6.

Let's transition and discuss the performance of our four segments. Our Retail segment delivered organic growth of 5.1% as a result of good new business, solid retention rate increases and modest exposure unit expansion, but was partially offset by downward pressure within specialty lines.

We delivered strong organic growth in our employee benefits business, solid growth in our commercial business, and we had some headwinds in our dealer services business due to the slowdown in auto and RV sales. National Programs had another very strong quarter with organic growth of 14.5%.

This growth was driven by an increase in lender placed coverage as well as strong new business, good retention exposure unit expansion across many of the other programs. The Wholesale Brokerage segment delivered organic growth of 4.5% led by another quarter of strong growth in our open brokerage business.

This organic growth was driven by solid new business and rate increases, but was partially offset by continued headwinds within personal lines. In addition, we had a specialty business that negatively affected our organic growth by about 200 basis points, which we sold on October 1.

The organic revenue of our Services segment declined 4.6%, with the main driver being the higher prior year weather related claims. Now with that, let me turn it over to Andy to discuss our financial performance in more detail..

Thanks, Powell. Good morning, everybody. We're over on Slide number 7. Like previous quarters, we'll discuss our GAAP results and then certain non-GAAP financial highlights. For the third quarter, we delivered 20.4% total revenue growth and organic revenue growth of 6.7%.

Our EBITDAC margin decreased by 460 basis points, primarily driven by estimated losses from Hurricane Ian that resulted in adjustments to our accrued contingent commissions and estimated losses within our captive programs, as well as higher year-over-year variable and healthcare costs and one-time integration costs.

For the quarter, salaries and related and other operating expenses were impacted by the changes in the liabilities and assets associated with our deferred compensation plan. As we mentioned before, when the market changes year-over-year, we realized offsetting movements within these expenses.

As a percentage of revenue, the year-over-year benefit to salaries and related was approximately 60 basis points and there was a corresponding offset in other operating expenses.

Our net income grew 10% or $14.7 million due to approximately $27 million of adjustments we recorded for earn-out liabilities and our diluted net income per share increased by 9.6% to $0.57. The effective tax rate increased to 26.1% for the third quarter of this year as compared to 25.5% in the third quarter of last year.

Our weighted average number of shares was substantially flat compared to the prior year, and our dividends per share for the quarter increased to $10.3 or 10.8% compared to the third quarter of 2021. We're on Slide number 8.

This slide presents our results on an adjusted basis, which excludes the impacts of movements in foreign currencies on both revenues and expenses, the net gain or loss on disposals, the one-time acquisition and integration costs associated with GRP, Orchid and BdB and the changes in earn-out payables.

Please refer to Slides 15 and 16 for a reconciliation of these amounts to our most comparable GAAP measures. On an adjusted basis, income before income taxes decreased 11.8%, while EBITDAC increased by 5.8% and adjusted EBITDAC margin declined by 440 basis points from the prior year, which was impacted by the previously mentioned drivers.

The incremental decline in adjusted income before income taxes as compared to adjusted EBITDAC was driven by higher year-over-year quarterly interest cost of $25 million and higher amortization of $14 million with both largely driven by the GRP, Orchid and BdB acquisitions.

Net income for the quarter decreased by 12.5% and adjusted diluted net income per share was $0.50. We're on Slide number 9. Our Retail segment delivered adjusted total revenue growth of 25.1%, driven by acquisition activity over the last 12 months and organic revenue growth of 5.1%.

Adjusted EBITDAC grew 12.7%, with EBITDAC margin decreasing by 310 basis points for the quarter substantially due to higher variable operating expenses, the seasonality of profit associated with the recent acquisitions, timing of incentive compensation and certain one-time cost.

We view the margin decline for the third quarter to be isolated and are expecting good profitable growth for the fourth quarter and full year. We're on Slide number 10. Our National Program segment delivered adjusted total revenue growth of 21.2% and organic revenue growth of 14.5%.

For the quarter, contingent commissions were negatively impacted by approximately $15 million due to the estimated insured losses associated with Hurricane Ian. We will also reduce our accrual for contingent commissions for the fourth quarter by approximately $4 million for the same reason.

Depending on the severity of claims, it may impact our ability to earn contingent commissions for certain of our programs in 2023. Powell mentioned earlier that we expect to realize $11 million to $14 million of revenues for flood claims processing associated with Hurricane Ian.

This is based on what we know at this stage regarding the number of claims and estimated severity. As we know more during the fourth quarter, our estimates may need to be refined. We're expecting to recognize about 60% to 65% of the revenues in the fourth quarter of this year with the remainder in the first half of 2023.

Adjusted EBITDAC grew by 1.1% over the prior year and our adjusted margin decreased 740 basis points to 36.8%. The decline was due to the decrease in contingent commissions and estimated losses of approximately $11.5 million in our captive facilities. These items were both driven by Hurricane Ian.

In order to provide additional capacity to incrementally grow our CAP programs, we started our first captive facility in January and then acquired another in connection with Orchid. On an annual basis, the losses on these captives are limited, and we are projecting good organic growth in margin.

To date, both captives are performing in line with our expectations. On Slide number 11. Our Wholesale Brokerage segment delivered adjusted total revenue growth of 12.3%, driven by recent acquisitions and organic revenue growth of 4.5%.

Adjusted EBITDAC increased by 8.1% with the associated margin declining by 140 basis points, which is impacted primarily by higher broker commissions related to increased performance for our open brokerage business, increased higher variable operating expenses and the seasonality of recent acquisitions. We're on Slide number 12.

Adjusted total revenue on our Services segment decreased 5.9% and organic revenue declined by 4.6% due to lower claims from weather-related events. For the quarter, adjusted EBITDAC decreased approximately $2.5 million or 25.5% due to lower revenues. Few comments regarding liquidity and cash conversion.

For the first-nine months of 2022, we delivered cash flow from operations of $600 million. Our ratio of cash flow from operations as a percentage of total revenues was 22.4% for the first-nine months of this year as compared to 27.1% in the first-nine months of last year.

This lower ratio was due to the payment of earn-outs as certain acquisitions have overperformed our original expectations, incremental interest expense and paying higher incentive bonuses to our teammates for their outstanding performance in 2021.

Overall, we are in a strong cash generation and capital position, finishing the quarter with $580 million of available cash. During the third quarter, we repaid $100 million on a revolving line of credit and plan to continue to delever over the coming quarters as we've done in the past post larger acquisitions.

As a result of increasing interest rates, we are projecting interest expense for the fourth quarter to be in the range of $44 million to $46 million. Lastly, we still expect our full year adjusted EBITDAC margin to be down slightly to up slightly as compared to 2021.

This would represent a very strong performance for the year given the increase in variable costs as compared to 2021, and the impact of Hurricane Ian on our captives and contingent commissions. With that, let me turn it back over to Powell for closing comments..

Thanks, Andy for a great report. Overall, it was a good quarter even with a number of moving parts relating to Hurricane Ian. We're very pleased with how our team is performing and have good momentum as we continue to win more new business and retain our existing customers.

Regarding Hurricane Ian, there's still a number of unknowns that will play out over the coming months. The first will be the ultimate losses incurred by carriers and how these will impact the reinsurance programs. Second, there's uncertainty around how state plans will react.

Based on the severity of losses, it will influence the 1/1 reinsurance treaties and pricing for all CAT exposed property. Capacity for commercial and residential property is going to become even more constrained driving rates and deductibles even higher.

For all other rates, we're expecting increases to be relatively consistent for the next couple of quarters. From an economic standpoint, we expect the Fed will continue to increase interest rates in order to cool the economy and reduce inflation. We will see how this plays out and what the ultimate impact on economic growth will be.

We are well positioned to help our customers manage their risks and cost of insurance as a result of our broad capabilities. We wanted to reiterate how pleased we are with our international expansion. Our MGA in Canada is performing very well.

Our retail business in Ireland is firing on all cylinders, and our recently completed acquisitions of BdB and GRP are well positioned for future growth. While still in the early days for GRP and BdB, we feel very good about this cultural alignment and along with their leadership teams and how we are all working together.

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

As usual, we're well positioned with a good pipeline and are talking with lots of companies. We will maintain our disciplined approach as it's worked well for many decades. In closing, we feel good regarding how well our team is positioned and executing.

We're attracting and developing talent and are investing in our capabilities for good long-term profitable growth. Based on our momentum over the first-nine months, we anticipate delivering a good fourth quarter and strong top and bottom line results for 2022. With that, let me turn it back over to Laura for Q&A..

Thank you. [Operator Instructions] We'll now take our first question from Michael Phillips of Morgan Stanley. Your line is open. Please go ahead..

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

And are they buying less now than what you thought last quarter and what do you think about that going forward?.

Okay. Thanks, Michael. So let's talk about -- remember, if you think about some of this could be in CAT prone areas versus all other. So let's make sure we're clear on that in terms of a property or might casualty could be affected similarly in these areas as well.

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

So if they bought a $25 million umbrella before, they might have bought a $15 million or $10 million. That same lower limit might cost the same amount as they paid last year. Okay, that's the first thing.

The second thing is -- and we haven't gotten there yet, but we're proposing or speculating that there are going to be places, particularly in the near term, near term defined as three, six, nine months where property rates will go up substantially due to the storm impact.

And so as you may know, the governor in the state of Florida has called a special session in early December to talk about the property environment among other things, and how companies can, one, get off policies here if they can, or they may be given more direction on pricing and terms and conditions.

But as you know, in the non-admitted market, it's freedom of rate and form. And so a lot of things in Tier 1 counties are in that category. So it's a little bit more of we're in a wait and see. We want you to be aware of it. We have seen it already on casualty. We think that it could also play out in property.

There are also potentially scenarios in the property market where they will not be able to buy the entire limit. And we haven't gotten that yet, but I mean we're seeing indications of that where a market that provided a full tower, the entire total TIV we'll now say that we only want to provide $10 million or $25 million.

And so that means the rest of the market either has to come in and support it or they may not decide to support it, and they may have to buy something less than the total limit. So it's early days, Michael, on that..

Okay. Yeah. It make sense. Thank you for those details. Second question separately is the National Program, the contingent commission hit there, I mean, that obviously makes sense with Ian.

What's the -- I guess, how do you think about the risk of that continuing at the same level in 4Q?.

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

You'll see as much headwind in contingent that you saw in third quarter.

Could that still be in the fourth quarter?.

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

Keep in mind, that's for the nine months, that's the year-to-date impact. So somewhere in the range of about $12 million or so was for kind of the first-six months of the year..

Yeah. Okay..

Yeah..

Okay. Thank you, Andy..

Thank you..

Thank you. We'll now move on to our next question from Greg Peters of Raymond James. Your line is open. Please go ahead..

Yeah. Good morning, everyone. The first question, I'd like to focus on just on the revenue side, and there's a lot of moving parts in your comments. And just trying to understand where we are in the balance between rate and exposure. I feel like that's changing and its impact on organic.

And then, I know you just commented about profit -- the contingent commission for the fourth quarter, but you also previewed in your comments, Andy, that there could be some risk to fiscal year '23. And I was wondering if you could give us some more color on that..

Okay. So why don't I start with rates and exposures. Greg, as you know, we've historically said that our business is kind of a reflection of the middle and upper middle market economy. And historically, it's been two-thirds exposure units, one-third rate. That's a very kind of good model.

And what I would say to you is, I'm not going to say that it's vastly different than that now with certain exceptions.

When you get into offices that write a lot of CAT prone property, that could be in Texas, that could be in Louisiana, that could be in Florida, that could be up the coast in the Carolinas, those offices particularly and there's some seasonality in terms of the amount of property that are written in certain quarters, as you know, you don't have a lot of property written in wind season.

They try to move it out of it. But you could have a bigger impact of rate in those offices. But you could compare Fort Lauderdale, Florida with Nashville, Tennessee, and Nashville, Tennessee would be the opposite direction. So it would be less than a third in rate. So there's a little bit of a balance.

So again, I can't tell you exactly the amount, Greg, but it's a little more than a third now, but it's not as much as you might think..

You mean a little more than a third rate at the moment versus the closure (ph).

Yes. That's correct. So rate, I don't think is -- what I'm trying to say ism I don't think rate is half, but I'm saying in certain offices, it could be half..

Got it.

You were going to comment on the contingents?.

Yeah. So on the contingents, we made this comment earlier. I think one of the items that we don't know right now is depending upon the severity of and the total losses on some of the programs that we have. They've got -- they have a carryover calculation inside of them. That may, as a result, lock us out of earning contingents in '23. We don't know yet.

I just want to get that out on everybody's radar. We'll know more over the kind of the next quarter, potentially into the next two quarters once they do calculations, we let some of the dust settle on this thing. But at least have an idea as to what the impact was for '22. So if it all got knocked out for '23, it would be in a similar range..

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

And so one of the things that we're seeing in the impacted areas is we're seeing a number of homes, as an example, that are damaged by flood where they weren't technically in a flood zone and many of those people don't have flood insurance.

So I just mentioned that because when Andy and I are saying we aren't clear on the impact, I don't think anyone is clear on the impact because of what losses are actually insured losses yet. So we're in that process..

Got it. And there's a lot of information coming out of Tallahassee. So I totally get it's a fluid situation.

Can I pivot to the margin for my second question? Because I was trying to go through -- and I recognize your guidance for the full year, Andy, but I was trying to reconcile the -- some of the items that you called out in your press release, and I'm still coming up short on a year-over-year basis.

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

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

And as we mentioned in previous calls, we'd anticipated the revenues and profit would be relatively even across all the quarters, but again, didn't know exactly how that will fall. We still feel really good on a full year basis for all the acquisitions. They're going to have little bit of movement, so that had some impact during the quarter.

So again, we took that into consideration when making our comment about the full year and the fourth quarter. We did have some timing just on when some expenses got recorded during the year. And those can always just kind of move around by quarters based upon performance and when people are hitting individual tiers inside of there.

Again, it doesn't really change the full year perspective, but it would be around the quarters for us. And then we just had a number of kind of miscellaneous one-time items out there. Again, we normally don't break one-time items out unless they're really big in nature.

But when we kind of look at those we felt good with the underlying performance on the business for the quarter and what it looks like for the fourth quarter and for the full year..

Got it. Thanks for the answers..

Yeah. Thank you..

Thank you. We'll move on to our next question from Robert Cox of Goldman Sachs. Your line is open. Please go ahead..

Hey. Thanks for taking my question. So Florida property pricing increases will be a benefit in Florida in the coming quarters or years, but there are some associated headwinds with the reduced capacity and business going to state funds. So I'm wondering if there's a scenario where Florida growth actually becomes a headwind at some point.

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

Okay. So Robert, I think that the probability is low, but it is a possibility. So you're tapping on something that is possible.

What I would tell you is in 2007, our then Governor, Charlie Crist, who is running for reelection right now against currently Ron DeSantis, our existing or sitting Governor, he took the market of last resort in Florida, the Citizens Property Insurance Company and made it the most competitive market in the state of Florida.

That, in turn, had a -- it was a headwind for us in 2007. That said, there are more policies in Citizens today. Citizens is backstopping some of the Florida takeout companies today. We don't know what the loss picture of Citizens is today in terms of surplus that will be exposed. And so the answer is, is it possible? Yes. I think it's a low probability.

What -- knowing that you don't live -- I don't think you live here in Florida, but there's a unique dynamic going on in Florida right now, which is we have a gubernatorial election that will happen on the 8th of November. You have a president -- a governor who has aspirations beyond the state of Florida.

And he is going to try to continue to manage the property market for the benefit of the customers in Florida in a difficult scenario. So there will be lots to watch in probably the coming short weeks and months. But we're not -- like I said, I think it's a low probability.

The other thing that I want to make sure that everybody knows is in 2007, the percentage of Florida business overall for Brown & Brown was substantially higher than it is today. We've talked a lot about being a very diversified now more international company. 12% of our revenues going forward will be international.

And I would say around 15% of our business is in Florida. And so -- and not all of that is property. So I want to make sure that the impact then was different than the impact today. Also, not only are we more diversified, but our capabilities are much more enhanced today than they were 15 years ago.

So our ability to work with complex property schedules and bring even more effective solutions to our customers and our prospects, I think that we're very well positioned. So thanks for the question..

That’s very helpful. Thank you. And then just on group benefits, the 7% to 10% increases in pricing is higher than I would have expected.

Can you just talk about what's driving that and if the commission structure there is similar in terms of weighting to revenues as P&C brokerage?.

Yes, so let's start with saying that I think if you're going to make a broad statement, you -- we are seeing increased medical claims post-COVID in all sizes of accounts. It could be a group of 12 people, it could be a group of 120 people or it could be a 12,000 life group.

You're seeing more -- so there were delayed medical services that are being -- there's like a catch-up. That's the first thing. The second thing is, no, it's not as easy as, let's say, P&C.

So remember, in small group, let's call it, broadly defined as under 100 lives on an insured plan that's fully insured, those are many times paid on a per employee per month. So if you add another employee, you would get new -- you would get additional commission. But the increase in the price of the overall plan does not impact our revenue growth.

That's number one. Number two, there are lower commissions because the premiums are higher as a percentage on fully insured and in some instances, a self-insured business, from 100 lives and up. And then there are certain segments of our business where it's a fee-based above in the really large accounts.

Typically, it's a fee-based for services rendered. So that's how I would see it. And the health plans that we see, which we see a lot of them all around the country, there's regional nuances about how people consume health care. They think about health care, they think about the plans they want in health care and so all of that drives expense..

Yeah, Rob. Keep in mind when we make the comment and they're also that includes pharmacy cost and pharmacy costs are probably not in all cases, but in many cases. They're actually outpacing health care costs today because of specialty drugs that are in there.

So it would not be uncommon to see pharmacy costs running in the double-digits on increases year-over-year. So you have to kind of take that into consideration when looking at the overall structure of the plan and the pricing of the plans..

Great. Thanks..

Thank you. [Operator Instructions] We'll now move on to our next question from Elyse Greenspan of Wells Fargo. Your line is open. Please go ahead..

Hi. Thanks. Good morning. I was hoping to go back to the margin discussion. I know you reaffirmed the guidance, right, for the year, which implies that the good side, right, potential flat to some margin improvement which seems to imply that things should go pretty well in the fourth quarter.

So is that just some of the seasonality that went against you in the third quarter, reversing itself in the fourth quarter with some of the deals, et cetera.? Can you just help us think through what should help your margin in the fourth quarter relative to the full year guide?.

Yeah. Good morning, Elyse. Yeah. It would a few of those items inside there. So part of it would be the seasonality of the business on some of the recent acquisitions. There's also just a seasonality of the amount of property that we place in the fourth quarter. So you saw that coming through in retail.

And Powell mentioned that earlier, just significantly less in the third quarter, which would make sense with hurricane season that's out there. And then we just have kind of normal timing of expenses throughout the year, some of them we had in the fourth quarter last year, some of them this year.

So when we put all that together, we feel really good about the outlook for the fourth quarter on the organic and profitability. That's where it got us back to reaffirming the guidance..

Okay. And then in terms of your captive since you guys took a loss there this quarter.

Can you just provide some more color on the -- is there underwriting risk that you guys are taking there, the retention? And then do we assume premiums go through your organic and revenues from the captive?.

Yeah. So let me try to hit those multiple questions there. So we have a very limited exposure in terms of our captive risk.

And that amount, we have pretty much exhausted in this and the losses, isn't that right, Andy?.

It is. So see if we can -- the way you want to think about those leases, it's difficult to look at them on a quarterly basis. Because what we're doing is -- and you're right, we are participating in the underwriting risk to an extent. It's very limited in nature, and it does help us drive organic growth across our wind and property programs.

So when there are events, you're going to see kind of the ups and downs in the business. So it could be if we had a quake in Q1, we record losses and nothing else during the year, then we would have higher margins in the business.

So we try -- we need to look at those or we look at those on a 12-month basis and feel really good with the programs and the growth coming off of them, as well as projected profit. But we're not in a situation where we're actually losing money. So I just want to clarify. We're not losing money.

It's just -- we recorded losses in the quarter for the captives, but they're right in line with what we expected..

And the other thing that you said, Elyse, about organic growth, any additional capacity that we get can translate into organic growth in our programs.

So whether that's our captive provided capacity or additional capacity from a risk bearer, either one of those translates into organic growth for the program and the -- and it would be reflected in National Programs..

Okay. And one last -- sorry, go ahead, Andy..

Yeah. I was just going to say, Elyse, when you look at the program's growth for this year that is part of what's giving us the incremental organic growth.

We would not expect to get as much incremental growth off of the captives next year just because it's a first year start-up and then we get into next year, we'll have a little bit of additional premium and probably some rate inside of there. So that will moderate some of the growth in National Programs going into next year..

Okay. Thanks. And then one last one, I know you guys have provided updates on the revenue that you expect from those large deals. I didn't see any disclosure this quarter.

Does that mean it's in line with what you guys had told us with second quarter earnings?.

Yeah. It's down a little bit because of where FX has moved. So from the previous numbers that we had talked about and again, the FX rates are moving around quite a bit, they are down I think, about 8% from where we were before. We'll see what it plays out in the fourth quarter for us, and they may go back up into that range.

So one of that -- I guess, a little bit of the challenge is why we're trying to break these out, because we haven't made a lap all the way around. It's hard to call out what the actual FX year-on-year is because there is no year-on-year FX right now. It's just based upon what we estimated.

So if you want to use some 8%, that probably seem fair for right now. More likely it's going to move in the fourth quarter, and we'll try to give color on that at the end of the quarter..

Okay. Thanks for the color..

Thank you..

Hello, Laura?.

Laura, do we have the next person up?.

Hello, Laura?.

Well, we may take a pause for just a moment..

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

Hello. We can’t hear anyone here..

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

Hey, Mike.

How are you doing?.

All right. We got you Mike..

Okay. Great. I just [indiscernible] Thanks for taking the question. Quick follow-up on the contingent discussion and appreciating that its early days in terms of sizing up ultimate insured losses.

But is there, I don't know, a number out there like insured losses that you guys are using, $30 billion or $50 billion? Something we can kind of think about in terms of sizing up where the contingents discussion could go in future quarters..

Sorry, Mike, we don't. It's too hard to estimate. What we're just trying to do is we're trying to be very mindful of the insured losses that are impacting one, our customers, and two, as we hear of other large losses, how that may play into the mix in the market. But no, we don't have an estimate there..

Yeah. And Mike, just keep in mind, when we do these many of the programs there or relationship with one carrier or maybe a couple of carriers. So it's not like these are spread across 50 carriers, so you could take a broad-based industry approach. This is very focused.

That's why so we just need to see how this plays out over the next 90 days to 180 days and then we'll have a much better view. It's just -- it's so hard to tell right now..

Okay. Got it. I thought I would try and then make sense.

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

Yeah. It's probably at least a reasonable start. More than likely, you want to probably put some sort of an adjustment for inflation in there just because of what the cost of field adjusters are today versus what they were a couple of years ago. So probably want to haircut that a little bit..

Okay. Got it. And I guess just stepping back, -- sorry go ahead if you….

No. Go ahead, Mike..

I guess just stepping back, I feel like the captive, I guess, the impact this quarter caught some folks by surprise. Just want to maybe learn a little bit more about it.

Is this an impact we should be thinking about kind of on a forward basis, whenever there's a large catastrophe? And is this kind of nationwide E&S? I know you mentioned earthquake or is it kind of more Florida? Any geographic kind of color or anything you could provide to so we can think about this in the future?.

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

And having said that, we have an enormous amount of data on those two programs. And so the answer to your question is, yes, national, currently restricted to two facilities, quake and wind. We have a lot of data on them and feel really good about the participation and how they are operating.

And as Andy said, in light of the losses that we've called out in this quarter, we still don't believe that we will lose money on our captives this year. So again, it's a very limited amount of risk that we're taking, and it has helped us build additional capacity to grow and support those two programs, which has performed really well..

Thank you very much..

Yeah, Mike, because of the potential volatility by quarter, that's why we want to call out the $11.5 million. Let's just -- if you play forward a scenario, let's say there's no weather-related events in the third quarter of next year, then you're going to see the profitability margin jump up from what we saw this year.

Same thing could happen in Q1, if there's a quake. So that's why we thought it's helpful to break it out by the quarter. So you'll have an idea kind of from a quality standpoint on how to adjust those. We figured that there's going to be some sort of events throughout a year. So that's why we say it's working almost exactly the way that it's modeled.

We did a tremendous amount of work on this one..

Thank you..

Thank you, Mike. We can't hear you, Laura.

Can you just put the next question in?.

Yeah..

Hey, Weston.

Are you on the line, sir?.

Hey. Yes.

Can you hear me?.

Yeah. And go ahead..

Go ahead, Weston..

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

Just wondering if you could also just expand on the growth that you're seeing in that market, given the recessionary headwinds..

Yeah. So again, as you know, we don't track the -- we don't disclose organic growth in the first year of an acquisition. However, it is performing in line with what we anticipated, number one. I would be remiss, if I didn't say that they've got 10% inflation in the UK.

So we're very mindful of that and how that's impacting salaries and related for insureds or even our teammates and related. But as you know, they have had a lot of excitement in the last 6 weeks to 8 weeks there relative to the Prime Minister, and now they have a new Prime Minister.

So there's a lot of speculation on what will be done to help curb the impact on small and medium-sized businesses. in the UK, and we're waiting to hear what the new Prime Minister will obviously say about that. But yes, we're starting to see an impact, but the growth and the performance of the business is in line with what we've thought..

Great. Thank you. And then just a follow-up on the growth that you saw in retail in the quarter. I know you called out some headwinds with dealer services in auto, but did decelerate somewhat meaningfully just year-over-year.

Is there anyways that we can think about growth in the 4Q? Was there any seasonality to the business that we should be thinking about or anything else one-off for the fourth quarter?.

Yeah. Hey. Good morning, Weston. Andy here. Maybe give a -- maybe just a little bit of perspective on the organic growth by the quarter. So if we look back to last year, on retail, we were 9.8, 17.6, 8.3 and then a 9.5. So it does move around between the quarters. And some of that is the seasonality in the business.

Looking at it year-over-year, at least from the quarter is that's probably more impacted by the dealer services versus the consecutive quarter, Q3 versus Q2. That was much more the seasonality of the property..

Great. Thanks for the color..

Thank you..

We will move on to our next question from Meyer Shields from KBW. Your line is open. Please go ahead..

Great. Thanks. Good morning..

Good morning..

Two quick questions. Hi. I think, Powell, you mentioned a 2-point negative impact in wholesale or 2-point negative organic growth impact in wholesale from a business that was sold.

Is it because of the sale, or is it just that this business was an offset to organic growth?.

Yeah. It was -- let me restate it the way I would state it. In light of that not being part of our results, we would have grown 6.5% in Q3.

Does that answer your question?.

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

Okay. So remember, we do not own a reinsurance brokerage operation, okay? So there might be some other firms that you follow that have reinsurance brokers. But I'd like to kind of give sort of a 101 on the process. So there is reinsurance for reinsurers. That's called retrocessional, the retro market.

And there is a lot of speculation that there's 20 billion plus of shortfall in the retrocessional market for reinsurers. That's the first part.

Then reinsurance is sold typically through reinsurance brokers to primary carriers, and the reinsurance carriers are currently saying, as you probably already know, that they're looking to -- their rates may go up to 50% and their attachments or their retentions could double.

So if you have a 1/1 reinsurance renewal, and you're a primary carrier, which you can pick anyone you want, I would guess that the reinsurance renewal would go deep into December before they finalize everything because of the disruption in the marketplace. That's how I -- that's how we would want you to think about it..

Okay. That’s helpful.

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

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

Thank you..

Thank you. [Operator Instructions] We'll take our next question from Mark Hughes of Truist. Your line is open. Please go ahead..

Thank you.

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

So we didn't break out the amount of the accretion from them. They were positive on EPS, which we anticipated that they would be. And so that was in our comments that we made, Mark, that they're kind of right in line with what we thought for their first, I'll call it, 90 days, quite exactly 90 days but pretty close for both of those.

And then we've obviously got the cost of the debt and the amortization. But the businesses are doing well for us..

And Powell, just reflecting on where you've seen environments in the past where there's been a lot of dislocation in coastal property in Florida, has that generally been accretive for growth for Brown & Brown? Understanding there's a lot of moving parts, you said it's a low probability. It would be a negative.

Just generally speaking, is this a environment that one might not hope for clients to have to pay more for insurance, but your services are valuable and therefore, positively impacts growth or otherwise?.

Right. I mean, first, Mark, this is why we're in the insurance business, which is to serve our customers after a loss, particularly a covered cause of loss. And so there's a lot of working through complex claims issues on their behalf to get their claims settled not only fairly but as quickly as possible. That's the first thing.

The second thing is, in an environment, which you might describe a little bit as chaotic, there creates great challenges and great opportunities. And I put that kind of in one big bucket. So what do I mean by that? You're going to have existing customers that are going to be impacted by rate increases and deductible increases.

And then you're going to have lots of new business opportunities because there will be other firms that are not able to think about the -- or provide the most creative solutions or that might translate into, in some instances, the most affordable solutions.

So I'm not trying to avoid your question, but what I'm trying to say is, in this environment, I would describe it as a potential positive overall, yet it comes with an enormous amount of work.

And so that's additional stress on our teammates, stress on our customers, stress on the carrier partners we're dealing with in order to kind of deliver for them. But yes, I think you're thinking about it the correct way. And it's not a -- this is not a Florida-only thing. I want you to keep that in mind. This is a coastal thing.

This is a CAT property thing. This is things that people think about differently. How do losses and win impact the way carriers think about quake? And you might say, well, they're totally unrelated. And the answer is, technically, they're unrelated, but they're still in a portfolio of risk that people assume.

And if you haven't had a quake loss in a long time, then one day, there will be a quake. So I want you to please remember, first of all, we feel really good about our capabilities as a company, where we're positioned, the way we've invested in the business and our alignment with our entire leadership team. That said, it's not a Florida-only challenge.

This is -- we're going to see this in lots of different places. So thanks for the question, Mark..

Thank you. Appreciate it..

Thanks..

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

Sure. We'll now take our last question from Yaron Kinar of Jefferies. Your line is open. Please go ahead..

Good morning and thanks for fitting me in. I want to start with going back to the seasonality of the acquired revenues.

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

Good morning, Yaron. Probably get spread over kind of the fourth quarter of this year and then first and second of next year? So it does get kind of spread over the three quarters. And again, it's not anything that is super material, as we talked about before, it does move around a little bit.

So it's not like we're going to lump it all into the fourth quarter, all into Q1 if it kind of spread out..

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

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

Okay. And then I hesitate ending a call with this. But considering that you're not only an insurance broker, but you're also an employer that is based in Florida and you live in Florida.

With all that, how are you thinking -- or what would -- like if you're talking to politicians in Florida, like what is your recommendation? How are you thinking about the potential insurance brewing concerns problem in Florida?.

Okay. So to start, and I want to reiterate something that I said earlier, the first thing we think about is were any of our teammates and their family members affected in terms of injured by the storm, and we said, no, okay? That is not the case in the entire state of Florida. There were a number of deaths in the storm. That's the first thing.

And so to answer your question, the way we think about it is how do you have a viable residential and commercial property market in the state of Florida, knowing that those -- there can be two competing interest there. So if you look at it from a consumer advocacy standpoint, that may not make financial sense. So there's got to be a balance there.

Now I also think that there is going to be a lot of speculation around flood in Florida. And what that means going forward, we don't know. But there are numbers of people that their homes were flooded and they're not in flood zones and they're uninsured. So we don't know if FEMA will respond in some way to those individuals, but it's a big number.

So I think it's a very, very, very delicate balance between wanting to have a viable competitive property market in Florida, which it can happen.

But with having said that with consumer protection and giving them, because remember, we have an election here on the 8, and it's not just about the election on the 8, it's about what do people think about and aspire to down the road, and lots of people are moving to Florida and so affordability of insurance is top of mind.

So I think that it's going to have to be -- there's going to have to be some real -- they're going to have to give it some real significant thought about how you craft something that would be deemed a win-win as opposed to one side winning and the other side, whatever the other side is, whether that's the consumer or the carrier because that is a very fine line right now.

And so remember, carriers were already evaluating capacity and potentially restricting capacity in CAT prone areas prior to the storm. So this wasn't just storm related. This was an accentuation of something that was already happening.

Did that answer your question?.

Right. Yes. It does, and I appreciate the thoughts. Maybe if I could sneak just one last one in. So I think you're reiterating the margin guidance for full year 2022 slightly up to slightly down. I think first three quarters, you're down a bit.

Are you seeing -- is that guidance in absolute guidance, or are you saying, but for some adjustments?.

No. What we were saying is, if we -- on a full year basis, we think down slightly to up slightly, which is the same guidance that we provided at the beginning of the year, Yaron, that includes the losses that we recorded on the captives as well as adjusting the contingent commissions.

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

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

Yaron, I'd like to add one final thing as we wrap up. I know that was your last question, but I think it's important that we're very consistent in what we said over long periods of time. Number one, we don't believe one quarter starts to trend. So that's number one.

Number two, we don't focus on although we report quarter-to-quarter results, we focus on performance over more of an extended period of time, like years. And so as Andy said, and I've alluded to in my remarks, we're positive. We are finishing.

We believe we will finish in a very good place at the end of the year, particularly under the circumstances, both from a growth standpoint and a margin standpoint. We acknowledge that the economy is going to continue to have pressure and headwinds because the Fed will increase rates.

But we're very optimistic about our business, and most importantly we have great capabilities and better yet great teammates. And so our teammates are doing their very best to deliver for our customers and those that were affected in particular but all over the country and overseas. And so we appreciate everybody's time.

We apologize for the slight delay or mix up in the beginning, and we look forward to talking to you all in January. So Laura, thank you very much, and have a wonderful day..

Thank you very much. Ladies and gentlemen, this concludes today's call. Thank you for joining. Stay safe. You may now disconnect..