Highlights from the BRO earnings release and analyst call
Brown and Brown, Inc. (BRO) reported second quarter results this morning, the first of the public insurance brokers to do so. The company posted results which beat analyst estimates for both Earnings Per Share (EPS) and revenue, but noted the outlook continues to be difficult to project. Below are some key takeaways from the earnings call that management conducted this morning with the investment community.
- Revenue grew 0.5% organically in 2Q across the company (4% total growth). The Retail business was down 2.6% organically, with better retention offset by slower than expected new business generation and an accounting adjustment related to reduced future revenue expectations due to the COVID-19 pandemic. Without this accounting related adjustment to revenue, the Retail segment would have been relatively flat on an organic basis in 2Q. Retail segment declines were offset by mid-teens organic growth in National Programs, relatively flat organic growth in the Wholesale division and mid-teens level declines in BRO’s Service segment (lower claims processing activity).
- The company noted that its expectations heading into 2Q that its Employee Benefits division would be the hardest hit due to headcount reductions did not materialize as expected. With employers furloughing, rather than laying off staff plus new business wins, BRO’s Employee Benefits division actually grew organically in 2Q compared to last year. One offset to this was a more rapid decline in workers’ compensation revenue. This was related to midterm premium adjustments, and other coverage changes, to help clients manage their costs. This is expected to continue to impact the business over the coming months/quarters.
- Management indicated that rates continue to move upward in many areas of the business due to tightening underwriting standards and reduced carrier appetite for some markets/coverages. The company noted generally that rate increases accelerated from 1Q and it expects these increases to remain consistent through the remainder of the year. Notably, workers’ compensation rate declines slowed while coastal property rate increases were the most significant.
- BRO completed three acquisitions in 2Q, at a total annual run rate of $46M combined, with another few acquisitions having closed in July. BRO noted a shift in valuations to less up-front consideration and more contingent payments related to uncertainty in business projections. However, BRO commented that overall valuations do not appear to be “materially” changed from 1Q or 4Q19 and that the market remains “highly competitive.” Management indicated that private equity-backed buyers that took their “foot off the gas” in early 2Q appear to be back to pre-pandemic activity levels.
- From a liquidity perspective, BRO borrowed $250M from its credit revolver at the beginning of 2Q to pay for a large acquisition and bolster its cash position in the case of delayed customer receipts. By the end of 2Q, the company had already paid down $150M of this borrowing.
- While the outlook remains uncertain, the company revised the low end of its previous expectations. They indicated that 2020 organic growth is now expected to be “slightly positive to slightly negative” vs. prior guidance of “up slightly to down low to mid-single digits.” BRO had previously said 3Q could be its worst organic growth quarter. This may be due to a lag between delayed premium payments from customers and/or the effects of reduced headcount. The company noted a number of positive and negative factors that could play out over the next several months, declining to take a position on whether 3Q could still be the softest quarter of the year.
Overall, BRO was pleased with 2Q performance but cautious on making any predictions about the outlook and the coming quarters, noting that there continues to be unknowns and offsetting positive and negative influences in the marketplace. BRO’s CEO did suggest that full recovery may not be realized until 2022 and the interim will likely be “sporadic” periods of recovery in certain segments.
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This earnings summary has been prepared by Marsh, Berry & Co., Inc. and is not intended to provide investment recommendations on any company. It is not a research report, as such term is defined by applicable laws and regulations, and it does not contain sufficient information upon which to make an investment decision. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any securities, financial instruments or to participate in any particular trading strategy. These materials are based solely on information contained in publicly available documents and Marsh, Berry & Co., Inc. has not independently attempted to investigate or to verify such information.
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