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    Brown & Brown Inc (BRO)

    Brown & Brown, Inc. is a diversified insurance agency, wholesale brokerage, insurance programs, and service organization that primarily operates in the property, casualty, and employee benefits areas . The company offers a wide range of insurance products and services to various entities, including commercial, public, and individual customers . Their offerings include professional liability, flood coverage, and excess and surplus insurance lines .

    1. Retail - Provides a broad range of insurance products and services to commercial, public, and quasi-public entities, as well as professional and individual customers .
    2. Programs - Acts as a managing general underwriter (MGU) offering professional liability, flood coverage, and other targeted products .
    3. Wholesale Brokerage - Markets and sells excess and surplus commercial and personal lines insurance .
    4. Services - Previously contributed to the company by facilitating additional underwriting capacity and generating incremental revenues through capitalized captive insurance facilities .
    Initial Price$60.21April 20, 2023
    Final Price$71.03July 20, 2023
    Price Change$10.82
    % Change+17.97%

    What went well

    • Brown & Brown has significantly expanded its capabilities over the past decade, now successfully serving upper-middle market and large accounts, especially in employee benefits. This expansion has enabled them to win more market share and write new business. ,
    • The company is executing well, delivering strong net new business across all segments by leveraging their collective capabilities, resulting in three quarters of double-digit organic growth out of the last six quarters. ,
    • Brown & Brown is well-positioned for future growth, with a robust M&A pipeline and strong capital position, and sees positive prospects ahead.

    What went wrong

    • The company is experiencing declining rates in property and professional liability within the wholesale brokerage segment, resulting in a shift from tailwinds to headwinds in two out of three areas, which may negatively impact revenue growth. ,
    • Increased loss activity is impacting profit sharing and contingencies, particularly in auto, which has been under pressure for a while and is not expected to abate soon, potentially leading to lower earnings in the Retail segment.
    • The company's recent elevated organic growth rates may not be sustainable, as they acknowledge potential pressure on larger accounts and do not expect to modify their long-term mid-single-digit growth expectations, indicating a possible slowdown in growth momentum. ,

    Q&A Summary

    1. Casualty Pricing Discipline
      Q: Is casualty pricing pressure now worse than before?
      A: Powell Brown stated that in his career since 1990, this is the broadest impact of pricing discipline in casualty he recalls. The industry is showing unprecedented discipline in maintaining pricing, especially in challenging classes like habitational properties, establishments with high liquor consumption, and residential construction. This discipline has made it harder to obtain significant umbrella limits from single carriers, requiring clients to build desired limits with multiple carriers. ** **

    2. Property Pricing Trends
      Q: How did property pricing affect your business this quarter?
      A: Property rates have begun to decrease for most accounts, except those with significant losses. Even poorly constructed properties are seeing rate reductions. This trend was anticipated after several years of high rates, which reached some of the highest levels ever. Future pricing will depend on the impact of the storm season.

    3. Margin Expansion Factors
      Q: What influences your margin expansion guidance?
      A: The projected 50 to 100 basis points of margin expansion depends on several factors: the outlook for contingents, the mix and growth of different business lines, and storm activity affecting the flood business and captives. They budget for storms each year; if storms do not occur, it results in upside to margins. ** **

    4. Impact of Storm Season on Margins
      Q: Does your margin guidance account for potential storms?
      A: Yes, even in best-case scenarios, they model some storms into margin guidance. Storm activity impacts the captives and flood business, particularly in the third quarter. If storms do not occur, it provides upside potential to margins. ** **

    5. Sustainability of Organic Growth
      Q: Is your current organic growth rate sustainable?
      A: The company feels confident about the amount of new business and attributes success to strong execution and a unique culture. While acknowledging market pressures in certain regions and lines, they emphasize long-term thinking and believe their ownership culture, with 22% owned by teammates, contributes to consistent performance.

    6. Commissions on Property Business
      Q: Are you seeing changes in property commission percentages?
      A: While they may adjust commissions to secure accounts, the company believes it is being compensated fairly. Pricing is paramount, and there isn't significant compression from downward pressure on rates. The focus remains on offering the best price to customers rather than on commission levels.

    7. Programs Segment Growth Drivers
      Q: What's driving growth in the Programs segment?
      A: Growth is primarily driven by a handful of programs that have been expanding consistently over a long period. These long-standing programs continue to be significant contributors to growth, a common trend within the industry.

    NamePositionStart DateShort Bio
    J. Hyatt BrownChairman of the Board1993J. Hyatt Brown has been serving as the Chairman of the Board of Brown & Brown, Inc. since 1993. He was the company's CEO from 1993 to 2009 and its President from 1993 to December 2002 .
    J. Powell BrownPresident, Chief Executive OfficerJanuary 2007J. Powell Brown has been the President since January 2007 and was named CEO in July 2009. He joined the company in 1995 and has held various roles, including Regional Executive Vice President .
    P. Barrett BrownExecutive Vice President; President - Retail SegmentJanuary 2020P. Barrett Brown was appointed as Executive Vice President and President of the Retail Segment in January 2020. He joined the company in 2000 and has held various roles, including Senior Vice President .
    Stephen M. BoydExecutive Vice President; President - Wholesale Brokerage SegmentJanuary 2021Stephen M. Boyd was appointed as Executive Vice President and President of the Wholesale Brokerage segment in January 2021. He joined Arrowhead in 1995 and has held various roles, including president of Arrowhead's Commercial division .
    Julie L. TurpinExecutive Vice President, Chief People OfficerMarch 2020Julie L. Turpin became the Chief People Officer in March 2020 and was appointed as an Executive Vice President in May 2021. She has served in various capacities at Brown & Brown Absence Service Group since 2012 .
    K. Gray Nester IIExecutive Vice President, Chief Information OfficerFebruary 2021K. Gray Nester II became the Chief Information Officer in February 2021 and was appointed as an Executive Vice President in October 2021. He previously held IT roles at BB&T Insurance Services .
    J. Scott PennyExecutive Vice President, Chief Acquisitions Officer2011J. Scott Penny has been the Chief Acquisitions Officer since 2011. He joined the company in 1989 and has held various roles, including regional president and regional executive vice president .
    Chris L. WalkerExecutive Vice President; President - National Programs Segment2014Chris L. Walker was appointed as President of the National Programs segment in 2014. He joined the organization in 2003 and has been involved in business development strategies and product expansion .
    R. Andrew WattsExecutive Vice President, Chief Financial Officer and TreasurerMarch 4, 2014R. Andrew Watts joined as Executive Vice President and Treasurer in February 2014 and became the Chief Financial Officer effective March 4, 2014. He previously worked at Thomson Reuters and PricewaterhouseCoopers .
    Stephen P. HearnDirectorAugust 9, 2024Stephen P. Hearn was appointed as a director on August 9, 2024. He has held various leadership roles in the insurance industry, including positions with The Ardonagh Group and BGC Partners, Inc. .
    1. Given that your guidance for 50 to 100 basis points of adjusted EBITDAC margin improvement is highly dependent on storm activity, can you elaborate on the specific factors that could cause you to fall at the lower end of this range and how you plan to mitigate the potential impact of a severe storm season?

    2. Considering the continued pressure on casualty pricing and the challenges in obtaining significant umbrella limits from single carriers, especially for tougher classes like habitational, liquor-heavy establishments, and residential construction, how are you adapting your strategies to manage these risks and maintain profitability in these segments?

    3. As you expand your capabilities to serve larger accounts, such as 5,000 to 10,000 life groups in employee benefits, what are the main obstacles you face against larger competitors, and how are you ensuring that your investment in these capabilities leads to sustainable market share gains?

    4. With some property accounts beginning to move from the E&S market back to the standard market when conditions allow, how significant is this trend for your business, and what measures are you taking to retain clients who might be considering a switch back to admitted markets?

    5. Given that your investment income was positively impacted by higher cash balances due to holding $500 million for upcoming debt repayment, how do you expect your investment income to trend post-repayment, and what steps are you taking to optimize returns in a changing interest rate environment?

    Program DetailsProgram 1Program 2Program 3
    Approval DateJuly 18, 2014 July 20, 2015 May 1, 2019
    End Date/DurationN/AN/AN/A
    Total Additional Amount$200.0 million $400.0 million $372.5 million
    Remaining AuthorizationN/AN/A$249.5 million
    DetailsN/AN/AN/A