Brown & Brown - Q2 2023
July 25, 2023
Transcript
Operator (participant)
Good morning. Welcome to the Brown & Brown, Inc. Q2 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. As a reminder, today's call is being recorded. 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 Q2, and are intended to fall within the safe harbor provisions of the securities laws. 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 Q2, 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 reports filed with the Securities and Exchange Commission.
Additional discussion of these 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 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 measures 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.
Powell Brown (President and CEO)
Thank you. Good day, everyone, welcome to our Q2 2023 earnings call. We had an outstanding Q2 and the first half of the year. We're very pleased with our strong top and bottom line results with robust total revenue, organic revenue, and earnings per share growth. Today, Andy and I are in the London headquarters of GRP, where we've wrapped up our quarterly board meeting and have had the opportunity to engage with our European businesses and review strategic plans for the coming years. After our discussions, we feel even better about our leaders and the growth opportunities for our businesses here. Now let's get into the results for the quarter. I'm on slide number four. We delivered over $1 billion of revenue, growing 24.7% in total and 11.2% organically as compared to the Q2 of 2022.
As a reminder, our calculation of organic revenue does not include contingent commissions, investment income, other income, or gains and losses on business sales. Our adjusted EBITAC margin expanded 150 basis points to 34.2%, and our adjusted earnings per share grew 55% to $0.68. On the M&A front, we completed six acquisitions with estimated annual revenues of $24 million. This outstanding performance is a direct result of the relentless daily commitment by our 15,000-plus teammates to create innovative solutions for our customers. Now on slide five. The insurance marketplace continued to be very challenging for customers. They remain focused on the overall spend for insurance and how to best manage their costs.
Across most lines of coverage, rate increases were similar to recent quarters, with admitted markets up 4%-10% and excess and surplus markets up 10%-20%. However, there are exceptions. Workers' compensation rates continue to decrease at a consistent rate. E&S professional liability rates, including public company D&O and cyber, continue to moderate downward, with flat rates being flat to down 10% or more. The area that remains the most challenging is cat-exposed property. Carriers continue to evaluate their coastal property portfolios, and we're seeing more admitted carriers exiting the California and Florida personal lines space. As a result, these placements are becoming even more difficult. Consequently, more properties are moving to state-sponsored plans, and into the E&S space that might have otherwise been written by an admitted carrier.
At the same time, we continue to see underwriters seeking to increase insured values per square foot due to inflation and higher replacement costs. Thus, customers are seeing premiums rise significantly due to inflation and higher values. These factors are causing buyers to purchase loss limits, increase deductibles, decrease overall limits, or even self-insure certain layers within a placement. Regarding the Florida insurance market, it has not materially improved. We have more admitted carriers either reducing their appetite or stepping away from the market entirely. This is pushing more policies to citizens and the E&S market. From a customer perspective, many businesses grew and hired employees during the quarter at levels similar to the Q1.
While the overall rate of inflation continued to slow, business leaders remained cautious regarding the level of investment in their business in the Q2, but incrementally are feeling better than they did in Q1 and Q4 of last year. As it relates to overall M&A, the level of deals, primarily from financial backers, continued to slow during the Q2. As a result, we're seeing fewer bidders for businesses, and valuations have come down slightly from their peak, but that doesn't mean that a good business won't trade at high multiples. From our perspective, we remained active during the quarter, acquiring 6 great companies. We completed the acquisition of Highcourt Breckles, a retail agency based in Canada, 2 acquisitions in the United States, and 3 here in the United Kingdom.
We announced in May the pending acquisition of Kentro Capital Limited, which we anticipate closing in the Q4. Kentro is an MGA and retail agency headquartered in London, with a team of over 350. Annual revenue is approximately $90 million and with locations primarily in the U.K., the U.S., and continental Europe. Kentro's MGA, Nexus, underwrites across a diversified portfolio of 20 risk classes, including trade credit, financial lines, and aviation. Xenia, its retail agency, is one of the largest trade credit brokers in the United Kingdom. We're excited to have Colin Thompson and his team join Brown & Brown. Overall, we're very pleased with the success of our M&A efforts and are in a strong position to leverage our disciplined approach that remains centered on identifying high-quality companies that fit culturally and make sense financially.
I'm on slide number six. Our retail segment had a good quarter, delivering organic growth of 6.3%. Growth was driven by solid new business, continued rate increases, and modest exposure unit expansion. Most lines of business performed well, while our dealer services business continued to face headwinds due to vehicle inventory levels and higher interest rates. To give some context around that, the impact to our organic growth was approximately 200 basis points for the quarter. Our program segment delivered a spectacular quarter, with organic growth over 23%, driven by strong new business, good retention, and continued rate increases, especially around cat property. The majority of our programs grew nicely during the quarter. Wholesale brokerage delivered an excellent quarter, with organic growth of 13%, driven by new business and retention, as well as rate increases for most lines of business.
Our open brokerage and delegated authority businesses had a great quarter. Organic revenue for the services segment declined about 2% for the quarter due to external factors that continue to impact our advocacy businesses. This decline was partially offset by higher claims processing revenue for certain businesses. In summary, we're very pleased with our first half results, delivering organic growth of nearly 12%, adjusted EBITDA margin expansion of 70 basis points, and adjusted earnings per share growth of nearly 19%. I'll turn it over to Andy to discuss our financial results in more detail.
Andy Watts (Executive VP, CFO and Treasurer)
Great. Thanks, Pal. Good day, everybody. I'll review our consolidated financial results on an adjusted basis in more detail. As a reminder, our adjusted measures for the Q2 exclude the change in estimated earn-out payables, one-time acquisition and integration costs associated with GRP, Orchid, and BdB, and gains and losses on business divestitures. We believe isolating the above items provides a better reflection of the performance of the business and enhanced comparability. The reconciliations of our non-GAAP financial measures, including these adjusted amounts to the most closely comparable GAAP amounts, can be found either in the appendix to the presentation or in the press release issued yesterday. On an adjusted basis, total revenues were over $1 billion for the Q2, growing 24.7% as compared to the Q2 of the prior year.
Income before income taxes increased by 32.1%, and EBITDA grew by 30.5%. Our EBITDA margin was 34.2%, increasing 150 basis points as compared to the Q2 of 2022. The effective tax rate for the quarter was 25%, which is in line with our expectations and compares to 27% in the Q2 of last year. The lower tax rate was impacted by the change in the market value of assets associated with our deferred compensation plan in the current year as compared to the prior year. Our adjusted diluted net income per share increased by 33.3% from last year to $0.68.
Due to the changes in market value, our deferred compensation plan negatively impacted the ratio of salaries and related expenses to revenue by approximately 250 basis points year-over-year. Keep in mind, there's an offsetting benefit within other operating expenses. Lastly, our weighted average share count remained relatively flat, and dividends paid increased by nearly 12%, both as compared to the Q2 of 2022. Overall, the performance by our team for the quarter was outstanding. We're on slide number 8. The retail segment grew significantly, delivering adjusted total revenue growth of 25.5%, driven by acquisitions completed in the last year, higher profit sharing, contingent commissions, and organic growth of 6.3%. Adjusted EBITDA grew slightly faster than revenues, and our adjusted EBITDA margin expanded to 28.4%.
This expansion was primarily driven by increased profit sharing contingent commissions, which were substantially offset by higher non-cash stock-based compensation, and, to a lesser extent, the hiring of incremental teammates to support our current and future growth. We're moving over to slide number 9. National Programs had another outstanding quarter, with adjusted total revenue growing of 25.7% and organic growth of 23.3%. Through the combination of revenue growth and leveraging our expense base, our adjusted EBITDA margin expanded 510 basis points. We're over on slide number 10. Our wholesale segment delivered an excellent quarter, with adjusted total revenue growth of 23.8% and organic growth of 13.1%. Our adjusted EBITDA margin contracted slightly due to some non-recurring costs in the Q2 that impacted by approximately 200 basis points. We're on slide number 11.
The services segment's organic revenue contracted by 1.8% for the quarter, and the adjusted EBITDA margin decreased by 220 basis points. The primary driver of the margin decline was lower organic revenues and the impacts of inflation. We've got a few comments regarding cash generation and capital allocation. We generated approximately $390 million of cash flow from operations for the first six months of this year, growing over $40 million or 12%. Our ratio of cash flow from operations as a percentage of total revenues was approximately 18% for the first six months of this year, as compared to 20% in the first six months of last year.
We discussed last quarter, the lower year-to-date ratio has been impacted by higher interest expense and paying taxes in the Q1 of this year related to the Q4 of last year that were deferred as a result of Hurricane Ian. That being said, the Q2 was very strong for cash generation, and we ended the quarter with approximately $630 million of operating cash. We mentioned previously, post the acquisitions of GRP, BdB, and Orchid last year, we are committed to delevering to our more traditional levels. In the Q2, we reduced our outstanding debt by making incremental payments of approximately $130 million. We are in a strong capital position to continue to invest in our company, acquire great businesses, and delever.
With that, let me turn it back over to Pal for closing comments.
Powell Brown (President and CEO)
Thanks, Andy. Great report. We continue to monitor the impact of inflation and increases in interest rates on our customers and the economies in which we operate. We expect business leaders will remain cautious regarding the pace of their hiring and how much they will invest over the coming quarters. With that said, consumers are still spending money, and most of our customers are prospering. We believe this trend will continue for at least the next few quarters. From an insurance standpoint, buyers remain fatigued due to the continued increases in insurance rates, especially for cat property, which we expect similar increases through the end of the year. With these market conditions, buyers will continue to either decrease limits, increase deductibles, and in certain cases, opt for loss limits. In regard to our carrier partners, they remain focused on capacity as well as the flight quality and diversification.
Historically, we've delivered good underwriting results and are uniquely positioned with the breadth of our MGAs and MGUs to provide an opportunity for carriers to allocate capacity across multiple programs. The combination of our diversification and strong underwriting results positions us well to retain and possibly increase our capacity, which will support incremental organic growth from our programs. A few comments regarding our recent international acquisitions of GRP and BdB. We're extremely pleased with the performance of these businesses as they're ahead of our expectations for the first year. The leadership teams are focused on driving continued growth over the coming quarters and years, both organically and through M&A. GRP has been active over the past year, acquiring over 20 high-quality businesses. We'd like to welcome all teammates that have joined us over the past few months.
Overall, we feel great about our business and how our team continues to execute and deliver. Our focus is on hiring and retaining the best teammates and leveraging the total capabilities of Brown & Brown to retain our existing customers and win more new business. In summary, we had a great first half of the year and had great momentum heading into the second half of the year. With that, we'll turn it back over to Michelle and open it up for Q&A.
Operator (participant)
To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Weston Bloomer with UBS. Your line is open.
Weston Bloomer (Equity Research Analyst)
Hi. Thanks. Good morning. My first question is on the retail segment, organic growth. You had highlighted a 200 basis point headwind from dealer services in the quarter. I'm curious if you can disclose what that impact was in 1Q, or how you're thinking about that headwind for the remainder of the year? You know, given those headwinds there, is it fair to say retail organic may be lower in the second half, just given the property uplift that you typically see in the Q2?
Powell Brown (President and CEO)
Yeah. Hey, good morning, Weston. Simply add a little bit of call and some context around this is, we had mentioned this back during the Q1 as well as Q4 of last year, that we did anticipate some headwinds for dealer services in the Q1, and we did see that. It was probably in the range of about 50 to 100 basis points in that range. If you recall, when we released earnings for Q3 of last year, we had talked about the fact that we were starting to see the headwinds on the dealer services business in late two Q of last year. We saw those through the Q3 and Q4 and kind of now continuing through.
The impact in the kind of the back end of last year was about 1% by the quarters. It kind of gives you an idea when you look at the organic and what the impact is. As we now head into the second half of the year and similar or consistent with the commentary that we had in Q1, as we get onto a more comparable basis now in the second half of the year, we don't see the same level of headwinds for the dealer services business. We're very, very proud of those businesses. They perform really well, just going through a little bit of a cycle right now, but they're great businesses, and we've made significant investments in there over time through our capabilities.
Weston Bloomer (Equity Research Analyst)
Got it. Thank you. I guess sticking on retail, can you maybe quantify the uplift you saw from property in the Q2? Just remind us how much of that business is 2Q weighted, maybe relative to the Q3 or Q4?
Powell Brown (President and CEO)
We don't disclose that level of granularity, Weston. I think what we've talked about in the past is, we do place significantly more cat property in the Q2 than we do in the Q3. You know, the Q3 is probably potentially almost a third less than what we see in the Q2. That's pretty consistent with what we talked about, you know, last year. It's why when we've said that normally our organic is generally a little bit lower in the second half of the year versus the first half of the year, because of the amount of cat property as well as employee benefits that we see in the Q1.
Weston Bloomer (Equity Research Analyst)
Great. Thank you. Then just last one, on professional lines, are we close to the point where we're starting to lap the headwinds, just given the lower pricing within that market? Just maybe you could just expand on that and what you're seeing in professional lines more broadly as we move into the second half?
Powell Brown (President and CEO)
Yeah. Weston, what I would say is, we continue to see downward pressure on public D&O. That's really where it's pronounced. In other places, it's not nearly as pronounced. Do we still see pressure? Yes. Will that continue for an extended period of time? Don't know. That's the, that's the one place where we really see, you know, soft, real softening in the market. My instinct would tell me in the near to intermediate term, we're going to continue to see that kind of pressure in that part of the space.
Yeah, Weston, you see it probably in the commentary on our deck. It's the one that we did call out that actually softened a little bit more the Q2 versus the Q1. Could it go a little bit more? Potentially.
Weston Bloomer (Equity Research Analyst)
Great. Thank you. Appreciate the call.
Powell Brown (President and CEO)
Yep. Thank you.
Operator (participant)
Please stand by for the next question. The next question comes from Michael Zaremski with BMO. Your line is now open.
Michael Zaremski (MD and Senior Equity Research Analyst)
Hey, great. Good morning. Wanted to touch on a topic that, you know, you guys have brought up, and it was in the deck as well, about, you know, challenging placements in certain parts of the marketplace. I know, you know, net-net, you know, now that we're in July, is there any should we be thinking that there's the potential for some lack of capacity that could impact your revenue growth rate or net-net between just much higher pricing and maybe there isn't a lack of capacity? You know, Brown is a big beneficiary. Just kind of curious if there's any nuances we should be thinking about in the back half of the year on the challenging marketplace.
Powell Brown (President and CEO)
Right. Michael, the way I would look at it is this, let's set the stage for what the market is right now. What's happening is insurers in many instances are getting back to us on renewal business and even new business with very limited time or very close to the expiration date. There's a lot of activity around analyzing limits and quotations and things like that before we give it to a customer. We've also said that you have, you know, this fatigue inside of the marketplace with buyers, which have had, in particularly cat-prone property, increases for five and six years in a row. What I would tell you is, do we think that capacity is gonna be dramatically constrained in Q3?
There is the hypothetical scenario: that depends if there's a storm. If we don't have a hurricane hit Florida, that's a different answer than if we do have a hurricane hit Florida. We can't answer that question right now. Number two, there is also the uncertainty that any broker, not just Brown & Brown, faces, which is, at what point does a buyer of insurance basically say, "I can't take any more increase"? What might happen is they may be buying a lower limit, or self-insuring certain layers in their property placement, but they've gotten to a point where they can't take any more increased costs. Our growth would be driven more by new business at that point than just increased growth on the renewal book.
What I would tell you is this: it's a challenging market. We're writing a lot of new business. I'm very pleased with how retail is performing. I would say that the question really hinges upon things that are a little bit outside of our control, specifically, weather. We don't think that something is gonna happen relative to the state of Florida, or hopefully not any other coastal areas between now and the end of hurricane season. If we did have that scenario, you're gonna have a much different discussion around business flowing into state pools, i.e., Florida, with citizens and other places, because the market will have to sort itself out.
Michael Zaremski (MD and Senior Equity Research Analyst)
That's a helpful commentary. I know it's not an easy question to parse out. My follow-up is on, I guess, contingents and ultimately margins. You know, in the national program segment, we can see there was, you know, a higher share of contingents, which I'm assuming helped drive the margin higher. Any commentary on the sustainability? Maybe just stepping back on the contingent commissions, you know, for the overall company, are the contingents more weighted towards property or any specific business lines?
I guess I was just thinking, you know, when we're looking at kind of outer year forecasts for the insurance carriers, we're all saying, hey, this is year five or six of, you know, a lot of meaningful rate increases, which you mentioned, and, you know, ROEs are expected to be much higher on a go-forward basis on the property side of the business than they have been historically. I'm just curious, maybe that could give Brown and other brokers a kind of a lift in contingents as well in future years.
Powell Brown (President and CEO)
Okay. All right. Mike, you got a bunch in there. Let's see if we can unpack some of those. Let's start first with contingent, because there's kind of there's maybe two pieces to this. Let's first take, the retail, and, you know, you'll see that it's up about $5 million year-over-year. That is primarily driven by acquisition activity, and most of that out of GRP. As we've now kind of made the one-year anniversary, we would expect to see that level of growth year-over-year in contingents should drop off quite a bit in the back end of the year. So that also gives you a little call on the Q2 on retail. As it relates to national programs, there are a couple of things going on.
If you recall, in the Q3 of last year, remember we called out about a $15 million adjustment in one of our programs associated with estimated claim costs or losses for Hurricane Ian, right? If you recall, at that stage, we had said we didn't think we would record any contingents for the Q4 for that program. When we released Q4 earnings, we actually, we did earn some contingents there, which is a good thing. Now, as we're getting through the year and we're seeing development on those claims, it is not as high as what was estimated at the time.
When you take the $5 million or so that we picked up in the 2Q in national programs, that's split about in half related to adjustment to last year's amount, and then we are accruing about the other half for higher estimated commissions this year.
Michael Zaremski (MD and Senior Equity Research Analyst)
... Okay? Would not anticipate that you would see, you know, $5 million increases in contingents in the third and Q4 for national programs, okay? That was really primarily isolated to the Q2. Again, keep in mind, when we get to the Q3, you are going to have comparability for the adjustment that we made last year, okay?
Powell Brown (President and CEO)
I'd like to also make a comment there, around property in general. This is kind of our view on this. The rates in property today are at what I would call all-time high levels. If you spoke to a risk bearer, and they would talk to you honestly about their view on property rates, I think that you might hear that if we don't have an event this season, that there would be a leveling or even possibly a slight moderation in pricing next year. I just want you to kind of keep that in the back of your mind, and not every program or not every placement has qualifies for contingents, but the contingents are driven on loss experience.
You've got a higher rate, obviously, you can sustain higher losses before you know, X out the qualification. Just keep that in mind on the property thing, because it is a thing that we talk to our clients about all the time. If there is one thing that comes up time after time after time, it's what's going to happen to property rates? When are we going to see some relief? How? You know, that type of thought process.
Andy Watts (Executive VP, CFO and Treasurer)
Yeah. Hey, Mike, the other question you ask is around kind of which lines that you earn on it? As a general rule, this is not hard and fast, but just kind of give you direction on it. Normally, you'll see that in the employee benefits business, we earn incentives, so the industry does, not just us, normally, incentives, and then kind of all other lines are contingents and then guaranteed supplemental commissions, and it depends upon the individual lines that are inside there. That's at least a reasonable rule of thumb to work by.
Powell Brown (President and CEO)
Thank you for the call.
Mike Ward (MD)
Yeah, thank you.
Operator (participant)
Please stand by for the next question. The next question comes from Gregory Peters with Raymond James. Your line is open.
Gregory Peter (MD and Senior Equity Research Analyst)
Great. Good afternoon, Paul and Andy. I guess, you've been spending a fair amount of time so far talking about, you know, what's going on in the property market. Paul, on slide five, you called out the personal lines business in Florida, Texas, and California being challenging. Maybe you could step back and give us some perspective, because I think Brown & Brown's a much bigger organization, just personal lines in Florida, Texas, and California. Can you give us some perspective to size up how that business fits inside the bigger Brown & Brown footprint?
Powell Brown (President and CEO)
Yeah, sure. Just to give you a context on that, personal lines inside of our organization, about $130 million of revenue.
Gregory Peter (MD and Senior Equity Research Analyst)
In retail?
Powell Brown (President and CEO)
In retail, sorry. Yeah, yeah. When we're talking about that, we do also have a program, I mean, personal line business in wholesale, and we have it in programs.
Gregory Peter (MD and Senior Equity Research Analyst)
It's $130 million in retail for personal lines across the country. Wholesale and programs, what's the mix? I guess, coming at it a different way, because you talk about you're speculating about what may happen if there's an event or not an event in Florida or Texas. I'm just trying to understand the magnitude is what's the impact, you know, as I think about Brown & Brown? Maybe you could use that as an entree to talk about the captives. I think those were an issue for you in the second half of last year related to Ian. Maybe you could give us an update on that.
Yeah, great. Let's see if we can maybe add a little context to the personal lines. If you recall, you know, this was, you know, a good 18 months ago or so, it when we had all of the fires on the West Coast, and that was kind of the start of that process. We've been facing the headwinds of declines in personal lines for a while, right? That bled over from California, then into Florida, Louisiana, north part of Texas, and so that's been inside of our numbers for a while. Don't read anything into this that we're actually saying we think that there are incrementally larger headwinds now in our business. We've been working our way through those.
The one where you'd probably see it, or we would see it percentage-wise, the biggest impact is actually in our wholesale business. That's, you know, back to Pal's comment about, you know, properties, you know, in the past moving over into the state-sponsored plans. You know, back to our earlier discussion about, you know, the admitted carriers pulling out of certain markets, that is forcing some policies back into the E&S space, we are actually seeing some uptick in our submissions and our bind rate in our wholesale business. That's there. Don't know how long that continues on. You know, carriers change appetites, they decide to readjust their portfolios, it definitely was for once, at least not a headwind in the wholesale business, which is a really good thing.
Powell Brown (President and CEO)
Can I make a comment on that, Andy, before you talk about the captives? I also want you to understand that, we have personal line business all over the country. That could be in the Northeast, it could be in Long Island, it could be in, you know, Illinois, it can be in Colorado, it can be in California, it can be in Florida. What we're trying to say there, Greg, is to give you kind of some call around the dynamics in the marketplace. Not so much to say that all of our personal line is based in those two or three states. That's not what we're saying.
What we're basically trying to say is the impact of the state-sponsored markets or the potential impact when you see big admitted carriers like State Farm and Farmers and Allstate pulling out of a, of a state like California, that creates a lot of challenges for people that are writing, you know, homeowners there and getting homeowners. Do you want to talk about the captive and the captive impact?
Andy Watts (Executive VP, CFO and Treasurer)
Yes, and Greg, just add one other piece, and we've talked about this on our calls before. We think diversification is extremely powerful. Just as, you know, the discussion here about, you know, potential headwinds, California, Florida, et cetera. Keep in mind, we bought an outstanding business at the end of the Q1 of last year called Orchid, and they primarily focus on high net worth personal lines in the Southeast, all the way up the Eastern Seaboard. That business is growing really well. Just while there's headwinds, we also have things that are going well. That's what diversification is about inside of our business, and that's how we wanna make sure that hopefully, we continue to grow the organization, because everything doesn't work perfect every day.
If we have a lot of businesses that can move back and forth, it balances everything out. Just a little bit of perspective for you. On the captives, another good quarter for us. This was really kind of our last quarter of meaningful organic growth. Recall, we started writing policies in the Q1 of last year. We got up to basically full written premium at the end of the Q4. As we said before, that'll be, we'll have minimal organic impact in the Q4. We had about $6.5 million of organic benefit this quarter. We still think we're gonna be in the upper range of the previous guidance that we gave, but we said somewhere around $30 million-$35 million, we think we'll be on the high end of that.
Gregory Peter (MD and Senior Equity Research Analyst)
It'll come down to what happens with, you know, storm activity in the back end of this year, or if there happens to be an earthquake on the West Coast. They're performing right in line with what we expected, which is a good thing. Just keep in mind, when we get to the Q3 in national programs, is we did accelerate the recognition of premiums last year, with the claim cost that we had. That'll actually be about a $5 million-$7 million headwind on organic in the Q3 of this year, okay, as we get on to comparatives. Okay?
Thank you. Just to close the loop on your captive commentary, is there any change, you know, with the way the reinsurance structure, that's structured and what, you know, what the loss profile of that business looks for the remainder of the year?
Andy Watts (Executive VP, CFO and Treasurer)
No, not substantially. I think a couple pieces on that. One is, we were pleased to see that the reinsurance market was a little bit more orderly this year than it was last year. We actually got all of our reinsurance treaties put in place, you know, back in kind of the May timeframe, which is good. With that, we were able to slightly reduce our maximum exposure. We feel really good about kind of how the captives are performing, the organic growth that they've delivered, as well as the profitability.
Gregory Peter (MD and Senior Equity Research Analyst)
Got it. Thanks for the answers.
Andy Watts (Executive VP, CFO and Treasurer)
Thank you.
Operator (participant)
Please stand by for the next question. The next question comes from Rob Cox with Goldman Sachs. Your line is open.
Rob Cox (VP Equity Research)
Hey, thanks. Some of the comments in the presentation were for the economy to continue moderating in the back half. Curious what you're seeing in your data that informs that view, aside from the headwind in dealer services, and if you're seeing the economy moderate from two key levels so far in July?
Powell Brown (President and CEO)
Yeah, I, Rob, it's Powell. I would tell you this, it's interesting because when you go out in Florida or you're here in London or whatever, restaurants are packed and people are spending money. What we're saying and, you know, lots of economists are dropping the probability of a recession in the second half of the year. I would just tell you that a lot of the customers that I've talked to and I hear about they just are approaching it kind of cautiously. That doesn't mean that everything they're dead set, we're going into a recession or anything. It's a little bit of a wait and see. Do I have any data, real-time data, in July that would tell me? No, I don't.
I think it's more of a, an instinct rather than something that they're seeing every day in their businesses. That's how we, that's how we interpret that.
Rob Cox (VP Equity Research)
Okay, got it. Thanks. Maybe just a follow-up on wholesale. You know, there's really a step change in the organic growth there, accelerating, I think you commented on it a little bit. I'm just curious if you could give us a little more call on what drove that substantial growth quarter-over-quarter. Was it submission growth, market share gains, business mix?
Powell Brown (President and CEO)
I think it's a little bit of everything, actually. Remember, there's a lot of property business that comes up in Q2, whether that's in our retail business but also in our wholesale business, and that doesn't necessarily mean it's with Brown & Brown retailers, it could be with independent retailers. There's just a lot of property. That's number 1. Number 2, I think that from a standpoint of submission count is very good, so we're getting a lot of opportunities. In some of those opportunities, we're having some higher hit ratios, I think. It's not something so pronounced, but it's just a little uptick, I think, in certain areas. By doing that, you put all that together with increase in rates, and you get a 13% organic growth, which is a great quarter for wholesale.
Andy Watts (Executive VP, CFO and Treasurer)
Rob, we'd also, you know, our comment earlier about personal lines, it was a headwind in the Q2 of last year. We actually had a tailwind in Q2 of this year, which is, which is good. That also helped contribute to the strong 13%+ organic growth.
Rob Cox (VP Equity Research)
Great. Thank you.
Powell Brown (President and CEO)
Thank you.
Operator (participant)
Please stand by for the next question. The next question comes from Mark Hughes with Truist Securities. Your line is open.
Mark Hughes (Equity Analyst)
Yeah, thanks. Good morning. Pal, the higher submission count, higher hit rate, is that broad within wholesale, or is that influenced mostly by property?
Powell Brown (President and CEO)
I think it's sort of across the entire platform, but I don't want you to read too much into that. I mean, the point is that you can have an incremental uptick in your, you know, quoted to bound ratio, and that has a positive impact, but you got rate in there, you have lots of new submissions. Remember, one of the things in terms of providing call on the marketplace, let's just use, Andy made the comment about personal lines. If you're in a state where, you know, all of a sudden your admitted carrier non-renews you may be going, 1, to the state plan. 2, The state plan, depending on what state you're in, may not even provide enough coverage for your coverage, A, on your homeowners, and therefore, you may be going into the E&S market.
A lot of those things, there's just unique dynamics because of the market, being in sort of turmoil or disrupted, that create more opportunity in E&S, just plain and simple.
Mark Hughes (Equity Analyst)
Understood. Andy, you mentioned the six and a half million dollar benefit from this quarter from the captives, and that is still going to have a positive impact on the Q3. Can you quantify that, perhaps?
Andy Watts (Executive VP, CFO and Treasurer)
This morning, Mark. The $6.5 million was the benefit year-over-year to organic from the captives in the Q2.
Mark Hughes (Equity Analyst)
Mm-hmm.
Okay?
Yeah.
When we get to the Q3, we'll actually have a $5 million-$7 million headwind. That's because we accelerated the recognition of the revenue on the premiums in connection with the projected claims cost in the Q3 of last year. Have no idea what will happen if we have any sort of storm in the Q3. We're just telling you kind of what we know right now. Then There'll be minimal organic benefit in the Q4 because we're writing a specific amount of premium, which is what we're going to write in the Q4 of this year, which is the same amount that we wrote in the Q4 of last year.
Okay. Then any updated thoughts on margin for this year, Andy, for the full year, with the good 2-quarter results?
Andy Watts (Executive VP, CFO and Treasurer)
We're not, at this stage, changing our overall outlook. You know, we adjusted that at the end of the Q1 and said we would be, you know, up slightly for the whole year. Very pleased with the Q2 results, and things can always move around, but we feel real good about the business and the outlook for the year and everything. We're not going to have any major changes on that front right now, but feel very good about the business and potential for profitable growth.
Mark Hughes (Equity Analyst)
Thank you.
Operator (participant)
Please stand by for the next question. The next question comes from Elyse Greenspan with Wells Fargo. Your line is open.
Elyse Greenspan (MD and Senior Equity Research Analyst)
Hi, thanks. Good morning. My first question is on the captive. Appreciate the disclosure on the expected revenue, Andy, by quarter. I just want to understand the loss dynamics, and I know you guys had provided some call with the Q4 deck in terms of the underwriting risk. Am I thinking about it correctly, if there's no losses this year, that's 100% margin business, or are you guys assuming some losses? You know, I know you gave us $13 million per occurrence or $25 million per year as your exposure?
Powell Brown (President and CEO)
Yeah. A couple of things on that front, Elyse, is one, is no, it would not be 100% margin. We do have a running cost of the actual captive inside of there. Obviously, it will be higher margin if there's no storms that are there. What we said is we retain $13 million on a per occurrence and up to a maximum of $25 million. We're capped at $25 million on this year, either through combination of a wind event or a quake event that's out there. It gives you a, at least gives you an idea if we're on the higher end of our revenue range, you get an idea of things really go completely sideways, the potential profit that we can still participate in on these captives. That's why we created them.
That's why we're participating, because we have put these over top of, two very, very well-performing programs for a long period of time. As we mentioned before, the captives, while they go underneath of that name, the actual outcome is identical to a contingent. We're participating in the underwriting profit. It's, you'll see some, you know, you'll see some volatility back and forth, but no, they're working right as we designed.
Elyse Greenspan (MD and Senior Equity Research Analyst)
Thanks. You went through right in the segments, what drove the stronger contingency year-over-year. My question related to the contingents was, if contingents had been flat, would you guys have still seen margin expansion in the quarter? I believe the answer is yes. I just wanted to confirm that.
Powell Brown (President and CEO)
That would be an absolutely yes, we would have seen margin expansion in the quarter. If you were to back out the incremental net investment income, because that might be your other question, the answer would be, yes, we still expanded margins in the quarter. We feel really good about the performance.
Elyse Greenspan (MD and Senior Equity Research Analyst)
Great. Last one, within the retail segment, you guys did call out the dealer services, right? The headwind there in the Q2. Related to the rest of the segment, so just core retail and benefits, can you give us a sense of the growth between the two pieces in the Q2?
Powell Brown (President and CEO)
Can you repeat that, please, Elyse?
Elyse Greenspan (MD and Senior Equity Research Analyst)
Sorry. I was saying, away from dealer services, how did, like, the rest of retail versus benefits perform in the Q2 organically? Were they both pretty close to each other? Was, you know, benefits greater than retail?
Powell Brown (President and CEO)
Yeah, no, the answer, just so you know, is, first of all, we're very pleased with both the commercial and the employee benefits. Remember, employee benefits has a unique dynamic relative to revenue recognition in Q1, and sometimes that also it can impact into Q2. I don't look at it on a quarter-by-quarter basis, although I have. I think about it over an extended period of time, so it could be either the first half or on a yearly basis. We're very pleased with how the commercial business and the employee benefits business is performing them. Yes.
Elyse Greenspan (MD and Senior Equity Research Analyst)
Thank you.
Powell Brown (President and CEO)
Thank you.
Operator (participant)
Please stand by for the next question. The next question comes from Mike Ward with Citigroup. Your line is open.
Mike Ward (MD)
Thanks, guys. Good morning. maybe just back on Florida. you know, you mentioned it's not getting any better. Just curious, is that something that, you know, we just have to wait to get through wind season, or does more need to be done around interpreting the law? Do carriers see, the need, you know, do they need to see more from lawmakers, I guess?
Powell Brown (President and CEO)
No, I don't, Mike, I don't think that, I mean, that could always potentially help, but I don't think that's the case. I think what it is, remember, the carriers that have participated in cat-prone areas, not just Florida, have been really popped in terms of losses in the last five or six years. What we really need is, and I know this will sound kind of interesting, but we need a little time and distance, so we got to give them, let them catch a break. As I said, you know, we went through a period of time, you know, in the late 1990s and early 2000s, where we had, you know, we had some storms in the early 2000s, we went through a period where the property market was good.
If you make money, you know, the risk bearers over five or six years, then the market, you know, is very competitive. It just hasn't panned out like the risk bearers think, and that's partially being driven by their loss experience and also being driven by their reinsurance costs. What I want you to think about is, watch the storm season. And in the event that we don't have a big event, which we think we won't, but if we don't have a big event, then do we see some stabilizing of rates? Do we see rates going up a little bit, but not nearly as much as they are now? Or do we see slight decreases? That's how I would phrase it.
Mike Ward (MD)
Super helpful. It sounds like you're very happy with GRP and your other European acquisitions from last year. Just wondering if you can sort of comment on how you see those impacting organic now that they'll be part of the calculation going forward?
Powell Brown (President and CEO)
Yeah. Remember, GRP lapsed on 7/1, and BdB lapsed on 8/1, okay? So we don't break out specific performance by business, but the way I would address that is, we believe that GRP and BdB, for that matter, is performing in line with the overall division, whether it be a retail or wholesale, from both a organic growth basis and a margin basis. We're very pleased with both.
Mike Ward (MD)
Okay. Super helpful. Then maybe just last one on interest income. You've already exceeded your guide for the full year. I'm just curious, any comments on the back half? Thank you.
Andy Watts (Executive VP, CFO and Treasurer)
Yeah. Good morning, Mike. I guess one kind of depends upon, you know, what happens with interest rates from some of the the central banks, you know, primarily here in the UK and then in the, in the US. If you look at the Q2 on what we recorded, that's probably a decent run rate for right now. It, it may move around a little bit based upon what our cash balance is and interest rates, but probably wouldn't anticipate any major movements there.
Mike Ward (MD)
Thanks, guys.
Andy Watts (Executive VP, CFO and Treasurer)
Thank you.
Operator (participant)
Please stand by for the next question. The next question comes from Yaron Kinar with Jefferies. Your line is open.
Yaron Kinar (Equity Research Analyst)
Thanks. Good morning, everybody. Just wanna go back to the last question, if I could, on GRP and BdB. I thought earlier you had said that they're actually performing better than you expected, and yet in your last comments, you said that they're in line with the division's performance. I thought at the time of the acquisitions that you said that you expected those businesses to perform in line with the divisions, or maybe I'm misremembering.
Powell Brown (President and CEO)
Wait a minute. I just wanna make sure. Yeah. We might be talking about two things. We are very pleased with the performance, and part of the performance that we're talking about is, remember, they acquired over 20 different unique businesses, which we think are very good going forward. On the core basis, I believe when we announced that, we talked about, we believed that they would perform in line, possibly better, but in line with the divisional performance. What I'm reiterating is they are performing in line with the divisional performance or a little bit better, but we're pleased with that.
Andy Watts (Executive VP, CFO and Treasurer)
Yaron, when we announced the deals, the guidance or the commentary we gave at the time was really around the margin, not on organic growth, didn't want to see maybe those two topics kind of intertwined on this. We're very pleased with the business and how they're performing versus our expectations on the top line and the bottom line. The margins for the businesses related to the divisions that they're reported inside of are right in line with our expectations from a margin perspective. No, we're really pleased with how the team is performing in both the businesses over here.
Yaron Kinar (Equity Research Analyst)
I appreciate the clarification. That's helpful.
Andy Watts (Executive VP, CFO and Treasurer)
Yeah.
Yaron Kinar (Equity Research Analyst)
Thank you.
Andy Watts (Executive VP, CFO and Treasurer)
Yeah. Thank you.
Yaron Kinar (Equity Research Analyst)
on Kentro, can you maybe talk about, is there any revenue seasonality you expect there, or what margins expected to be relatively in line with the division in which it has, and where will it be held?
Andy Watts (Executive VP, CFO and Treasurer)
Perfect. Yeah, overall, the business is relatively evenly weighted through the year. You know, a meaningful portion of that business is around trade credit, so it's not like you kind of see it all lumps up into one quarter or anything, so relatively even. The margins for the overall business, and again, you have to kind of look at it in two pieces between programs and retail, which is the Nexus and the Xenia portion of it. The margins there look comparative for similar businesses in there.
Yaron Kinar (Equity Research Analyst)
Do you have any idea of how kind of the revenues will be distributed between the retail and the programs business?
Andy Watts (Executive VP, CFO and Treasurer)
Oh, sure. Yeah, it's about 75-80% programs, Yaron, with a residual on the retail side.
Yaron Kinar (Equity Research Analyst)
Thanks so much.
Andy Watts (Executive VP, CFO and Treasurer)
No, thank you.
Operator (participant)
Please stand by for the next question. The next question comes from Meyer Shields with Keefe, Bruyette & Woods. Your line is open.
Meyer Shield (MD)
Great, thanks. , I think, really quick questions. First, in the presentation, you talk about wholesale casualty rates up 10 to down 10. That seems like a pretty significant shift. Is that down 10 just like the professional liability, or are there other lines that are moving to competitive pricing?
Powell Brown (President and CEO)
I think it could be, it's more broadly than just some of that. Yes, it's competitive.
Meyer Shield (MD)
Okay. Sorry to hear that, but there you go. Bigger picture question, I guess. You've added two tremendous heavyweights to the board. I was wondering what we should expect from them.
Powell Brown (President and CEO)
Well, we're very pleased that Veronica Headley-Masoja and Paul Krump have joined the Brown & Brown board. They have both very deep industry expertise. They also have, you know, not only underwriting but understanding about exposures, not just in the United States, but overseas and things like that. I think that I would want you to consider them just like any other board member that joins Brown & Brown. We think very highly of them. We are very pleased to have their industry expertise. I don't want you to take something out of context. These are people that we have known and worked with and think very highly of, and they've already added to our board in the first board meeting, which was last week.
We're really pleased with both of them joining the board and look forward to many years of really great contributions from both of them.
Meyer Shield (MD)
Okay, that's helpful. If I can throw in one quick last question. I know in Florida, pricing is technically file and use, but I think people treat it as prior approval, just so they don't have to go back and change things. Is there any receptivity on the part of either the insurance department or the legislature, to actually just make it more disciplined by competition and actually be sort of a truer file and use state to attract bigger insurance companies back to the market?
Powell Brown (President and CEO)
Meyer, we're not aware of that right now. I will tell you that the insurance commissioner and that in the state of Florida is underneath the CFO. I know that the CFO of the state of Florida and the insurance commissioner, and then ultimately into the governor's office, they are all thinking about ways to retain existing carriers and attract new carriers because they're very conscious of the exploding growth in citizens. The answer to the question is no, we're not aware of it. However, I can assure you that they are thinking about it in terms of ways, not that question specifically, but ways to actually get carriers to stay and bring more carriers to the state of Florida to create a more competitive environment.
Meyer Shield (MD)
Okay. That's very helpful. Thank you so much.
Powell Brown (President and CEO)
Absolutely. Thank you.
Operator (participant)
Now, I would like to turn the call back to Powell Brown for closing remarks.
Powell Brown (President and CEO)
That's great. All right. Thank you all very much. We are very pleased, as we said, with the quarter and look forward to an exciting third and Q4 of the year. We got a lot of cool things going at Brown & Brown, and we appreciate your time, and we look forward to talking to you next quarter. Good day.
Operator (participant)
This concludes today's conference call. Thank You for participating. You may now disconnect.