Surging organic growth in Brown & Brown’s programs business of 15.5 percent for the second quarter helped keep it just about in positive territory overall, but new start-up capital coming into the segment could temper that performance later this year, according to the intermediary’s CEO.

Brown & Brown Q2 results

Investors sent the firm’s share price down 3.8 percent in New York this morning in response to Q2 earnings and an outlook that included a forecast for “slightly positive to slightly negative” organic growth for the full year. The stock regained ground by early afternoon and was trading down just over 2 percent at 2.15pm ET.

Speaking on a call with analysts, Powell Brown said that the strong growth in the unit – up from 11.8 percent in Q1 – was in part fueled by the “unique dynamic” of rates going up at the same time as the economy is going down, as well as seasonality across its portfolio.

Programs providing wind cover were being impacted by coastal property rate increases of 15-25 percent, he said.

Organic growth across Brown & Brown’s segments has a degree of seasonality depending on renewal dates.

But Brown also highlighted the “important nuance” of additional capacity coming into the marketplace.

“Is that a good thing or a bad thing for us? We believe it’s good because it gives us more capacity to serve our customer base,” he said.

Brown & Brown share price

But he added that new capacity could also temper rate increases if it comes in and competes against incumbent carriers that are pushing hard for higher prices.

“That capacity could be plugged into our programs businesses in certain areas… and that may moderate the rate increases,” Brown suggested.

The impact is nuanced, however, because if that capacity doesn’t come in and tightening continues it could lead to a situation where a program administrator or MGU could only continue to write its renewals.

In that case, premium volumes and related revenues would go up on rate alone, but there wouldn’t be additional capacity to write new business, which would impact organic growth.

“We’re very pleased with the organic growth of national programs. We do not want you to think that the growth this quarter is what we think it is going to be next quarter. We have a moderated view on that.

“We think the outlook is very good for the business, and we’re very pleased with how it’s going – and a lot of it will be impacted by the actions or inactions of existing capital providers and the entrance of new capital providers,” he said.

Full year organic growth “slightly positive to slightly negative”

Overall organic growth at Brown & Brown slowed from 5.6 percent in Q1 to just 0.5 percent in the second quarter – albeit that the boost from its programs business helped it book positive underlying expansion when some analysts had predicted a reduction in organic revenues.

The firm’s largest unit, retail, saw organic revenue decline by 2.6 percent, including a reduction of $8mn for general liability under ASC 606 accounting standards for revenue recognition based on the projected impact of Covid-19.

On the call Brown noted that the Daytona Beach, Florida-based company had previously guided that its revenues could be up slightly to down low to mid-single digits for the year.

He added that now, factoring in the continued uncertainty of the recovery, Brown & Brown believes full-year organic growth could be “slightly positive to slightly negative”.

BRO Q2 organic growth

Source: Brown & Brown

*Includes an $8 million negative adjustment to current year Organic Revenue related to COVID-19, which represents an impact of more than 250bps

“However, there are still a lot of questions regarding how and when the economy will recover. We believe it’s going to be slow and sporadic, and we might not see a recovery to pre-pandemic levels until 2022,” the executive said.

Brown said that in the second quarter the firm had started to see the financial effects of the pandemic with certain industries slowing down significantly, including hospitality, restaurants and entertainment, leading to reductions in exposure units.

Other industries, like healthcare and construction were resilient and in some cases continued to expand.

“For the quarter, we expected there would be significant decline in payrolls, and consequently our employee benefits and workers compensation lines of business would be the most impacted.

“However, what occurred is that our employee benefits business grew during the quarter due to new business and many employers furloughed employees rather than reducing their workforce,” he reported.

Lower excess purchased

On the call, the Brown & Brown CEO was also asked about the impact on buyers and whether they would take action to cut insurance costs in the face of rising rates and pressures on their own businesses.

The executive said the situation varies by the type and size of client.

At one end of the spectrum there may be small business clients whose operations have been so badly impacted by the economic slowdown that they are shutting up shop.

Larger accounts faced by substantial rate increases may buy less coverage, but will not stop buying coverage altogether, Brown suggested.

He used as an example a long-haul trucking company who has 1,000 trucks and whose excess liability premium has gone through the roof.

“So if you bought $80mn of limits before, you might only be able to buy $40mn now because the price is so high. In the small accounts area we see people going out of business, in the middle market accounts area we see people mostly renewing, but there’s some gnashing of teeth.

“In the large accounts, particularly in tougher classes of business, we may see a lower excess limit purchased because the rate increases are so substantial,” Brown reported.