Brown & Brown's Q3 2025: Contradictions Emerge on Retail Growth, Employee Benefits, and Non-Recurring Items Impact

Date of Call: None provided

Financials Results

• Revenue: $1,606M, up 35.4% YOY
• EPS: $1.05 per diluted share, up 15.4% YOY
• Operating Margin: Adjusted EBITDA margin 36.6%, improved 170 basis points YOY

Guidance:

• AssuredPartners Q4 revenue expected $430–$450M and slightly below its full-year margin due to seasonality.
• Contingent commissions Q4 expected $30–$40M (excludes AssuredPartners contingent commissions).
• Q4 amortization $110–$115M; interest expense $95–$100M; investment/other income $20–$25M.
• Retail Q4 organic growth expected similar to Q3 (as-reported ~2.7%).
• Specialty distribution Q4 organic may decline mid-single digits (loss of $28M non-recurring flood revenue, CAT rate pressure, slower lender-placed).
• Full-year adjusted EBITDA margin expected to be up modestly vs 2024.

Business Commentary:

* Revenue and Organic Growth: - Brown & Brown, Inc. reported revenues of $1.6 billion for the third quarter, with an overall growth of 35.4%, including 3.5% organic growth. - The growth was driven by acquisitions, which contributed $1.7 billion in annual revenues, and strong performance in specialty distribution and retail segments.

• Earnings and Cash Flow:
• Adjusted earnings per share increased to $1.05, representing a 15% growth, and cash flow from operations reached $1 billion for the first nine months of 2025, up 24% year-on-year.

• The cash flow increase is due to strong cash conversion discipline and expanded margins attributed to underlying margin expansion and investment income.

• Insurance Market and Pricing Trends:

• For admitted insurance, rates were substantially similar to the last quarter, with property and casualty lines remaining outliers.

• In the E&S market, rate changes were generally down 15% to 30%, influenced by placement patterns and continued rate pressure on commercial CAT properties.

• Segment Performance and Synergies:

• The specialty distribution segment achieved good organic revenue growth of 4.6%, with wholesale growing at high single digits and programs at low to mid-single digits.
• Retail segment experienced organic growth of 2.7%, impacted by adjustments related to employee benefits incentives, but showed strong net new business performance.

Sentiment Analysis:

Overall Tone: Positive

• Management reported strong Q3 results: total revenues $1.606B (+35.4% YOY), adjusted EBITDA margin 36.6% (+170 bps YOY), and adjusted EPS $1.05 (+15.4% YOY). They highlighted $1B cash from operations YTD, successful integration activity, and a 10% dividend increase plus $1.5B buyback authorization, describing the company as "in a great place."

Q&A:

• Question from Mike Zurimski (BMO): Over time, should we directly correlate organic growth to EBITDA margins, or is the relationship different today?
  Response: Management: Do not directly correlate organic to margins — contingent commissions and other components materially affect margins; expect margin range around 30%–35% over time.

• Question from Mike Zurimski (BMO): Are there implications from the government shutdown for Q4, particularly in specialty?
  Response: Management: Some businesses (Medicare/Social Security processing and NFIP/write-your-own flood new policies) are impacted; revenue will likely be backlogged and could affect Q4 and into Q1 until government reopens.

• Question from Alex Scott/Justin (Barclays): Please provide more color on the ~1% retail organic impact you called out.
  Response: Management: The ~1% drag is from employee-benefits incentive commission adjustments — 2024 had a positive adjustment, 2025 a negative one due to targets and accrual timing.

• Question from Alex Scott/Justin (Barclays): As you plan for next year, is the business reverting toward low-single-digit organic growth?
  Response: Management: Yes — retail is viewed as a low- to mid-single-digit organic growth business in steady state; Q3 was 2.7% and that long-term view remains.

• Question from Meyer Shields/Dean (Keefe, Bruyette & Woods): Will the retail incentive commission headwind continue into 2026?
  Response: Management: Based on current visibility, the incentive adjustment appears isolated to Q4 and is not expected to carry into 2026.

• Question from Meyer Shields/Dean (Keefe, Bruyette & Woods): Are you seeing movement from E&S back to admitted markets?
  Response: Management: Some admitted carriers are pursuing growth, but the expanding E&S market likely outpaces any movement back; limited net shift expected.

• Question from Mark Hughes (Truist): If carriers get aggressive after a clean CAT season, what does that mean for rates?
  Response: Management: Reinsurance could decline 5%–15%, translating to downward pressure on primary/admitted and E&S pricing; pockets of aggressive year-end pricing are possible.

• Question from Bob Gianquitti/Sid (Morgan Stanley): Were property renewal rates in Q3 similar into Q4 or worsening?
  Response: Management: Q4 looks similar to Q3 overall, but there is potential for select markets to become more aggressive in December; E&S property has stronger rate pressure.

• Question from Matthew Heimerman (Citi): How is uptake of private flood (vs Wright/NFIP) and is it a substitute while Write Your Own is shut?
  Response: Management: Private flood is additive and the recent Poulton addition expands capability, but private flood cannot replace all NFIP policies — some risks aren’t appropriate for private markets.

• Question from Matthew Heimerman (Citi): How are crosscurrents (healthcare cost inflation, slower labor growth) affecting employee benefits premium dynamics?
  Response: Management: Employers are modifying plans to control costs (e.g., restricting GLP-1 coverage), focusing on multi-year strategic cost management; Brown & Brown has invested to serve customers across all sizes.

• Question from Elise Greenspan (Wells Fargo): Since closing the deal ("risk dissection"), are revenues, synergies and accretion tracking to plan and when will synergies ramp?
  Response: Management (Andy): Performance is in line with expectations; margins and revenues track plan and synergies will be realized over a three-year program, targeted completion by end of 2028.

• Question from Gregory Peters/Mitch (Raymond James): What are the technology investment priorities and expected run-rate direction into 2026?
  Response: Management: Focus on data analytics, underwriting automation, admin efficiency and customer/teammate experience; investments are ongoing, early benefits visible but work continues.

• Question from Gregory Peters/Mitch (Raymond James): Post-AssuredPartners, what is the leverage target and timeline to return to it?
  Response: Management: Gross leverage target 0–3x, net 0–2.5x; expect to return to target range within ~12–18 months via scheduled paydowns and cash generation.

• Question from Brian Meredith/Leandro (UBS): Have new-business levels in Retail normalized after weaker Q2, or is there upside?
  Response: Management: No new Q3 new-business issues observed; Q4 will reflect less multi-year policy carryover versus last year but underlying activity is healthy.

• Question from Rob Cox (Goldman Sachs): Did seasonality of the AssuredPartners acquisition benefit retail margins this quarter?
  Response: Management: Yes — retail saw a positive cession benefit from AssuredPartners, a Quintus seasonality headwind, and underlying expense management; net effect positive.

• Question from Mike Zurimski (BMO): Is lender-placed growth permanently slowing or just a near-term tough comp?
  Response: Management: Still growing but at a slower pace versus prior strong years; sales cycles are long (12–36 months) so growth patterns can lump when large accounts convert.

• Question from Josh Schenker (Bank of America): With a $1.5B buyback authorization, how do you decide between buybacks and M&A?
  Response: Management: Maintain disciplined, case-by-case capital allocation assessing intrinsic value; board authorized flexibility — will pursue buybacks or M&A when each is most accretive.

Contradiction Point 1

Retail Organic Growth Expectations

It reflects differing expectations and performance projections for the company's retail organic growth, which is a key metric for investors and stakeholders.

Are recent quarters showing mean reversion in organic growth to low single digits? - Alex Scott (Barclays)

2025Q3: We've consistently stated that retail is a low to mid-single digit organic growth business. Current performance reflects this, with adjustments for certain factors. - [Powell Brown](CEO)

Given slower new business and rate pressure, how will Retail growth for the full year compare to prior guidance? - Elyse Beth Greenspan (Wells Fargo)

2025Q2: I think our expectations are that this is a mid-single-digit business. And we've been very clear that we expect it to be a mid-single-digit business and that it should be a mid-single-digit business for a long time. - [Powell Brown](CEO)

Contradiction Point 2

Employee Benefits and Incentives Impact

It demonstrates differing explanations for the impact of employee benefits incentives on organic growth, which could affect investor perceptions of the company's financial performance.

How does organic growth relate to EBITDA margins over time, especially without 2026 guidance, and is the relationship different now? - Mike Zurimski (BMO)

2025Q3: An adjustment was made for employee benefits incentives, which was a negative adjustment this year due to not reaching targets. This impact will continue into the fourth quarter. - [Powell Brown](CEO)

Regarding retail organic growth in the quarter, there were fluctuations in new business. Can you explain these fluctuations and their impact on Q3? - Mark Douglas Hughes (Truist Securities)

2025Q2: This quarter, we experienced some additional downward pressure on rates in our retail business. Put another way, what we expected to occur over a two-year period happened in 6 months in this one quarter. - [Powell Brown](CEO)

Contradiction Point 3

Organic Growth in Retail

It involves differing expectations and explanations for the organic growth in the retail segment, which is crucial for understanding the company's revenue trajectory and strategic focus.

Has organic growth reverted to low single digits? - Alex Scott (Barclays)

2025Q3: We've consistently stated that retail is a low to mid-single digit organic growth business. - [Powell Brown](CEO)

Can you discuss Quintes' impact on retail margins and timing shifts in organic growth? - Mark Hughes (Truist Securities)

2025Q1: The organic growth for Q1 was as expected, influenced by some shifting of renewals and non-recurring business. - [Andrew Watts](CFO)

Contradiction Point 4

Impact of Non-Recurring Items on Organic Growth

It highlights inconsistencies in how the company accounts for and discusses the impact of non-recurring items on organic growth, which affects the comparability of financial performance.

Can you clarify how organic growth impacts EBITDA margins over time, especially without 2026 guidance, and whether this relationship has evolved? - Mike Zurimski (BMO)

2025Q3: We would expect organic growth, we're not providing guidance but we would expect organic growth to be slightly down year-over-year. - [Andy C. Bryd](CFO)

What is the current run rate for Retail and the organic growth impact from non-recurring items in Q4? What does the typical run rate for contingent commissions look like in Programs? - Robert Cox (Goldman Sachs)

2024Q4: Retail's run rate is impacted by timing of net new business and certain non-recurring revenue, estimated to affect Q4's organic growth by 40-60 basis points. - [Andy Watts](CFO)