Brown & Brown, Earnings Call NUGGETS: Exposures in an Uncertain Economy, Retail Space

On Tuesday, Brown & Brown, Inc. (NYSE:BRO) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

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Exposures in an Uncertain Economy

Keith Walsh – Citi: Good morning everybody and it’s great to have you back Powell. First question for Powell just on the economy I guess we keep seeing mix signals in the news, but what would have to happen in the macro economy for exposures to really retrench from current levels in retail? I’ve got a couple of follow-ups.

J. Powell Brown – President and CEO: Well, that’s a good question. I think that our business as we’ve always said is a proxy at a middle market economy. So, what we’re seeing Keith is our clients are cautious about increasing exposures on renewals even if they know that they are going to be up. So, we’ve talked about that in prior calls. So I think that there is a lots of uncertainty particularly as it revolves around in election year. I think certainty is better than uncertainty. I have basically said that I think there are two things that overhang the economy I have said this for the last 18 months that our unusual and different one is here in America one’s not. I’ve always said that the environment in Europe is worse than it seems in terms of the banking situation and that could have a blow back on to our economy in the United States and impact our business. The second thing is I still think that there is a propping up of the real estate market I don’t know the solution but in terms of Fannie, Freddie Sally in terms of mortgage environment. So there is a lot of work being done there as well. We still see pockets in our business which are very tough operating environment, places like Naples Florida which you probably wouldn’t think of and yet you would think of Las Vegas or Detroit and so I wish I had a crystal ball Keith on the economy but we watch very closely and we’re trying to obviously do what’s in the best interest of our customers and sell a lot of new business.

Keith Walsh – Citi: Then for Cory, maybe if you could just give us an update on Arrowhead are you still on-track for your accretion targets?

Cory Walker – SVP, Treasurer and CFO: We are, they are proceeding on their goal as we’ve mentioned that we expect for the whole year they will be at the $40 million of EBITDA. So they are doing very, very well.

Keith Walsh – Citi: Then just lastly for Powell. You’ve been mentioning RMS 11 in the last few calls and it seems like there is more runway here, can you just comment on that and where specifically are you seeing this regionally? Thanks a lot.

J. Powell Brown – President and CEO: Sure Keith, let me give you an example, just to kind of give you some color around it, certain carriers are being driven by their reinsurance carriers to adopt at carte blanche. Certain carriers are adopting it, partially because they are looking at a blended model with (NYSE:AIR) the other model that’s used frequently. So if you have a carrier, a standard carrier that have to adopt at carte blanche across the board and all of a sudden as an example when they model things let’s just say in Orlando, Florida. So it is 60 miles to the coast east, maybe 45 at the closest point and its 70 miles to Tampa. So if the model all of a sudden shows that their rates go up in that particular instance, 40% to 400% one carrier. So what that means is all their business in Central Florida is going to go away that is not indicative of every carrier. Please don’t take that out of context. What it is though is indicative of a carrier or one or two carriers and so there’s a movement in this marketplace and so I think that a model is probably never actually perfectly correct. You could run 10,000 Monte Carlo simulations, and you’re going to come up with all kinds of different scenarios based on very few variables. I think what it is, is there are some companies that are being driven by their reinsurance carriers to act and adopt it more strictly than others. That’s how I would view it.

Retail Space

Yaron Kinar – Deutsche Bank: Question on the retail space. Congratulations on turning into positive organic growth first time in several years. At the same time, I guess 30 basis points with the competition going on to grow your organic base by at least 5%. Maybe it seems like a little bit light, but maybe you could give a little more color on why we should expect those kinds of numbers or maybe what that trajectory would be from here?

J. Powell Brown – President and CEO: Yaron, can you – I want to make sure I understand that about the others. I heard your question, but did you talk about somebody else trying to grow towards 5%, is that what you’re saying?

Yaron Kinar – Deutsche Bank: No, but if I remember correctly you put up in place competition or I think you call it a competition, between your retail producers to grow at least 5% organically. Then it seems like you’ve had some expenses coming from that, so why wouldn’t we see more organic growth to go along with that?

J. Powell Brown – President and CEO: So, basically, depending on where you are in the country, what offices. We are seeing more growth in certain offices. Some offices, it’s just like anything else in a larger organization you can have offices that have really good quarters and or be down a quarter or revenue can shift from one quarter to another. What I would tell you Yaron that we are pleased about is the trend assuming that the middle-market economy continued to improve is moving in the right direction and that is the growth engine of our business, because you know 60% of the revenue last year. So I would say that we continue to look for incremental improvement in the retail space and we are working towards that for the next, in the future.

Cory Walker – SVP, Treasurer and CFO: I think you got to kind of reflect on where retail was, if you go all the way back to ’08, ’09 we are a negative 8.7 and we were negative 4.8 and then in 2011 we are a negative 4.2 and now we are just basically back to flat with the retail division. So its trending in the right direction and as you know we are very tied to the middle-market economy and even though the middle-market economy it just seems like its founded its feet it’s not necessarily going to move up quickly. But we think it will be a gradual comeback and I think that’s positive, because that is the largest division and I think there is real potential there.

Yaron Kinar – Deutsche Bank: Couple of follow-ups on that point, so would it be fair to assume that roughly 50% of the eligible producers were able to achieve growth similar to last quarter, just because the number seemed similar?

J. Powell Brown – President and CEO: Well Yaron, I would think you might have seen our schedule and it really is very close to 50%.

Yaron Kinar – Deutsche Bank: Could you give us some estimate as to what portion of the 50% that actually made that 5% target, what portion of their growth came from new business?

J. Powell Brown – President and CEO: Well we track new business and we set up (accrual) on a quarterly basis and we can’t answer that right now because we’ll look back on it at the end of the year, but a lot of it.

Cory Walker – SVP, Treasurer and CFO: Yeah, and don’t forget retail in total is just marginally up, which is a little bit of exposure in rate. So just naturally those 50% that did exceeded generally are still playing in the same realm and they are getting the same kind of price increases. So the majority of it is new business.

Yaron Kinar – Deutsche Bank: So when I think about next year then that extra 5% bonus goes away and then the compensation metric moves down from 40% to 20% as it becomes renewal business?

J. Powell Brown – President and CEO: That is theoretically correct, the way you’re thinking about it.

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