Brown and Brown 2Q16 Earnings Call Notes

Brown & Brown’s (BRO) CEO Powell Brown on Q2 2016 Results

We continue to see a tremendous amount of capital in the market and risk bearers want to put it to work

” we would characterize the second quarter as another quarter that is moderating upward, but inconsistency in the middle market does remain. These inconsistencies can be seen in certain geographies or industries or a combination of both. During the quarter, our customers continue with modest hiring and exposure units are increasing. As a general comment, we continue to see a tremendous amount of capital in the market and risk bearers want to put it to work with some being more aggressive than others either with their pricing or terms and conditions or both.”

Small employer healthcare costs have increased at 8-12%

“Similar to previous quarters management of healthcare cost remains front and center for our customers, as small employers are generally experiencing rate increases of 8% to 12% while larger employers are seeing rates, rates that are generally flat up slightly. While these rate increases in small employer groups do not have a direct impact on our revenues as many of those carriers have moved to a per employee, per month, compensation model it does drive planned design. Companies are focused on how to best manage health and pharmacy cost and have their employees proactively share in managing these costs.”

You see carriers do unusual things in an environment like this

” there is a lot of reasons why you lose business but most of the time it’s loss of relationship with the buyer both the economic buyer and/or the user buyer. Having said that there in a market like this where you can see carriers do some really squirrely things in terms of pricing sometimes you just see crazy things, they just — right they do pricing that just doesn’t make sense where they blow something out of the water and we don’t know how long that’s going to last or if its real or whatever the case may be but sometimes you lose a little bit of business like that.”

We’re seeing rates on hurricane coverage come down to head-scratching levels

“what I would tell you is we’re starting to see rates in the pre-Hurricane Andrew levels. That would be 1992 for those that may not remember the exact year. But remember you’ve had enormous and I wouldn’t — I don’t want to say Ryan that we’re surprised like all of a sudden we’re just surprised. That’s I think it has been we’ve continued to sort of scratch our head at the continued rate decrease or pressure. So it’s not like second quarter we woke up one day and said well we’re surprised wasn’t that kind of deal. It has been, if you look at it for the last three years and I’m just using Southeast Florida because I live here in Florida and know that areas well and you look at these very nice high rise condominiums and Dade, Broward, Palm Beach County and all of a sudden, the rates have come down let’s just say 20%, 20%, 25% those are big cuts.”

It’s tough to compare what could happen in a big loss event because Hurricane Andrew was a different time

” So let me back up I actually joined Brown & Brown in July of 1995. I worked for an insurance company then. And so I saw rates go up in admitted markets as much as were permissible by rate filings however here is what I would say remember in Hurricane Andrew it was much different because the modeling for insurance companies was not nearly as sophisticated, it was more like a map and there would be people in Kansas City riding hotels and in Miami Beach and the people in Florida with the same insurance company didn’t even know that they were riding the hotel in Miami Beach. So there was the aggregation of exposure units that was substantial which most insurance standard carriers realize that had it been a direct hit in Hurricane Andrew on Miami Beach that we might had some very significantly impaired insurance company because they didn’t realize how much they had.”

A Florida storm will create upward pressure on rate

“I think a better example would be to go to 2001 and 2002 and 2003. So you had a constricting in the property market. You had post 09/11 event, you had lots of other things and rates started going up and up and up and up. The amount that, I don’t think you can say, this is how much they are going up in the event of a loss because the loss, the size of the loss is going to be a significant impact. The number and the losses by individual carrier will impacted and it depends on if how opportunistic certain carriers will feel on the way in, if the market places bearing on making this up 25% increase and all of a sudden you have a capital provider which is not taken a bunch of losses and may be didn’t participate in that segment and says that this level we might do that. They might come in and right at 15% so there is not going to be a linear relationship. I can just tell you when you have a big event that goes into Florida which is not a question of if, it’s a question of when we have another storm hit Florida, there will be upward pressure on rate.”