Brown and Brown 2Q15 Earnings Call Notes

posted in: Notes | 0

Seeing a soft market for insurance prices

“we, like the entire industry, continued to experience headwinds related to the rate declines. The downward pressure on rates continued to be driven by good overall loss experience, minimal weather related events and a significant amount of excess capital in the market chasing returns. We expect this trend to continue unless there is a material change in one or all of these factors.”

See slow but inconsistent hiring in middle market

“We continue to see slow economic improvement in some markets and certain areas in the country, but this is not consistent. We see exposure of unit growth in certain regions, but don’t see consistent hiring across the board in the middle market. We believe this is partially driven by a lack of qualified – possibly of lack of qualified candidates, but more specifically the implications of ACA adoption that many employers are facing.”

Declining property rates, higher auto, flat professional liability

“”We continue to see declining rates for our coastal properties and also seeing admitted property rates trending flat, down 5% in some cases. However, we are seeing commercial auto rates generally trending up, but it really depends on the specific loss experience, and professional liability rates are flat to up 5%.”

Employers are all over the map relative to ACA implementation

“relative to ACA, is I believe that many small employers are all over the board in terms of their preparation, some are behind and being – getting ready for next year, some are on their way and some are already there.’

Public exchanges will probably see rate increases because of unfavorable loss experiences

“a number of those exchanges are experiencing rate increases and they will continue to experience rate increases, we believe, because of the unfavorable loss experience many of them have had over the last year due to the number of people in those pools.”

Private exchange is an option for smaller businesses

” I would reiterate that the private exchange is an option, not the option. And so we believe that it is, one, a technology play; two, a coverage play; three, a compliance play. And you wrap all that up and that is appealing to some smaller businesses.”

INvesting in people rather than acquisitions with acquisition prices up

“There are a lot of acquirers out there, some of whom are paying what we might consider ridiculous prices in certain transactions. We are considering making investments in people, where there isn’t any so-called acquisition, but bringing those capabilities and talents on to our team that is a short-term margin hit until the revenue comes with them. And so, you are correct in saying that there will continue to be an ongoing expense. But I can assure you that there are components to these investments, which are opportunistic and we will continue to explore those when we’re in an environment, where acquisition pricing is up and we want to get more talent on our team in certain areas to serve our client base.”

Private equity has been a big buyer of insurance agencies

“I would say that the biggest participant in this is private equity. And so, Ken, if you go back to 2006, as an example, 29% of all transactions announced were done by financial institutions, banks. And only 4% were done by private equity firms. In there, you have a big group of the public buyers and you have some private buyers. But in 2013 and 2014, private equity was 44% and 43% of the announced transactions. And in that same period, banks were only 8% and 5% of the transactions, while the publicly-traded brokers, the percentage in the 20%s which has remained fairly confident over the entire period of time.”

“So we’re starting to see private equity buy private equity, which I think is many times an indication of a frothy environment. And so – but there are other publicly-traded firms that you know that are announcing transactions and there are some private firms, but it’s predominantly private equity. We are always talking to people out there always. And as I’ve said before, how and when or why and when they sell is different and unique to each one.”

“We would tell you and quite honestly, the reason that we did not make that comment at this time is because the pricing continues to be very competitive. It’s not that there aren’t a number of transactions out there. There are actually a lot of transactions and there’s a lot of activity because of the speculation of these high or higher multiples. But we are going to continue to stick to our knitting, which is we are trying to execute better every day. We want to sell more accounts and we want to retain the existing clients that we have. We want to work really closely with our carrier partners, which enable us to have additional success, investing in our teammates all along the way and driving long-term shareholder returns for our stockholders.”

People buy emotionally and justify intellectually

“I’ve had several people asked me that some people may be saying, they’re paying 7 times. And I say is that 7 times revenue, is that 7 times a pro forma of 2018 earnings, is it 7 times of what? So, I don’t think it’s so much the multiple number it is, what is – what are the earnings that they’re calculating and that’s where I think sometimes there is a divergence in that discussion.

So it’s very interesting, it sometimes is challenging, sometimes comical, but we keep going and different people are going to make – typically people buy emotionally and justify it intellectually, so they will go where they think that they will be best served unless the number is so unusual and if nobody else can get to it.””

At some point the PEs need to exit

“when we look at this space, lot of the really high multiples are – appears to be the really high multiples being paid by the private equity side, as Powell mentioned. There – their strategy is there is an exit to it, right, that means there is a liquidity event at some point in the future”