Yaron Kinar: Thank you. That’s helpful color. If I could switch gears to M&A for a second. So, I think you had said that the pipeline remains robust. That said, you are seeing M&A activity slowing. Is that just a function of a bid-ask spread that is too wide? Or are there other drivers there?
Powell Brown: No, no. I think when you say the M&A activity is slowing, remember, we’re talking about the industry. So, as you know, private equity has been a very big participant, and the number of private equity announced transactions in Q4 was down substantially over the prior quarter, and or Q4 of the prior year. I think that there is an interesting sort of — we’re kind of at this unusual clash point if you want to call it that, which is the market with increased interest rates and buyers would like to see a slight decrease in multiples paid. And yes, there are businesses, some of which are owned by private equity that we’d like to monetize their businesses at what were historic levels or multiples in anticipation of other opportunities for them.
Or maybe better said, maybe they think there’ll be pressure on multiples going forward. So they want to get out at a higher multiple, if possible, then they might think of in a year from now. I’m just using that as an example. So, I think we’re going to see a lot of activity in the next 12 months. The good part about our business is we’re focused on the long-term and long term to us is not one year or three years, it’s a very long-time. And so, we’re looking for businesses that fit culturally make sense financially, and we believe there will be those businesses out there, but in the interim period, as Andy said, we’re aggressively paying down our debt. We’re investing in teammates and focusing on growing our business organically.
Yaron Kinar: Thank you very much.
Powell Brown: Thank you.
Operator: Thank you. One moment for our next question. And our next question comes from Mark Hughes with Truist. Your line is now open.
Mark Hughes: Yes. Thank you, good morning.
Powell Brown: Good morning.
Mark Hughes: Powell, you had talked a good amount about your quest for capacity. Did you find any restrictions? Have you seen any with the harder reinsurance markets, any cut-back on your programs and you’re thinking about a flood or a quake for instance? Anything that is noteworthy could perhaps impact organic growth.
Powell Brown: Yes. So, thanks for the question. That is somewhat of a moving target, but at the present time, we think a good outcome is flat in terms of no reduction in capacity. We may have certain of entities or businesses where they would maybe be trading some capacity or debt — net down on a net basis, just slightly, but right now, we think it’s pretty neutral. And from our vantage point, we view that as a win. So, I’m not aware of something and you specifically asked about a flood or a quake, but that could involve our wind facilities as well. But the thing that we talked about last year, and we’ve talked about in prior years, but it’s even more magnified this year. Our growth opportunities and National Programs will be directly — not exclusively, but directly linked to the amount of new capacity that we’re able to secure.
And so, if in fact, we are not able to procure any new capacity that’s going to be a slight limitation on the organic growth that does not mean that we can’t grow organically, it just means that we will grow more organically if we are able to secure more capacity, which we’re looking at globally.
Mark Hughes: Understood. And then on the captive. You mentioned some of the economics there, $30 million to $35 million in revenue, but you’ve got loss retention of $13 million per event. One would think you would need a pretty high margin on that revenue in order to feel good about generating a return over multiple years if you’ve got the kind of retention. Am I thinking about that properly?
Powell Brown: Well, I’m going to answer your question two-fold. Number one, I want you to think about what a captive is. There’s really three parts to the captive. There is the loss, the retention amount that you retain on any one loss that’s just losses. There’s number two, which is the reinstatement premium, which means you put the program back in place for a subsequent event. And the third would be if you had any profit in that period of time in that captive prior to them being distributed. And so, what I would tell you is that we are very mindful of the way we invest our capital, and we are looking for returns that help us grow the business. So, what I would tell you is, if we did not think that those were reasonable long-term investments, we would not make them. And in the event that the economics turn against us, meaning cost, inputs, or things make them not viable then we just won’t do them.
Andy Watts: Hi, Mark, just a question for you, if you can expand on — when you said — you talked about providing adequate returns, how do you — walk us through how you mean that because I guess I think we’re maybe not seeing it the same way you are, but if you seeing….
Mark Hughes: I think…
Andy Watts: We’re retaining —
Mark Hughes: Yes. If you’re generating $30 million in revenue. And so you have a 50% margin, and $15 million. But if your retention per event is just $13 million. And maybe a Hurricane hit Florida one out of three years then that influences the view of the economics. That was a — just real simple math I was thinking about.
Andy Watts: Okay. So, that there — and probably lies the opportunity to clarify on these some more. Here’s the way we want everybody to trying to think about these, is what we’re doing is we’re participating in the underwriting profits on these captives. What do we do on contingent commissions, we participate in the underwriting profits. So, this is not where they’re coming in and we’re paying commissions and everything else on the business. So, I think that’s part of just the piece that maybe you’re thinking about it’s a traditional call it operating profit, it’s coming through as — assume it’s normal operating profit versus underwriting profit in there. So, we’re very, very pleased with the performance this year and to Powell’s point, we want to put our capital into these if we didn’t think that we can get an appropriate return.
Powell Brown: And the $13 million, Mark, is up to — that doesn’t mean it would be $13 million. And so, there is a very important distinction, it can be less than that or substantially less than that.
Mark Hughes: I appreciate the clarity. Thank you.
Powell Brown: No. Thank you.
Operator: Thank you. One moment for our next question. Our next question comes from Michael Ward with Citi. Your line is now open.
Michael Ward: Thank you, guys, good morning. One last one, maybe I was wondering if you could share any color on the profit commissions in programs and if any of that was related to maybe hurt Hurricane Ian true-ups.
Andy Watts: Good morning, Mike. Andy here. It’s the — wouldn’t say anything that was related to Hurricane Ian true-ups, right? What we did at the end of the third quarter is we had backed off to $15 million as we’ve mentioned earlier, and we had also, at that point said based upon what we thought the losses were going to be, we would not record $3 million to $4 million in one of our programs that development did not come in at the anticipated level, which is, again, that’s a positive thing. Therefore, we did go ahead and record that $3 million or $4 million in the fourth quarter. All over the other contingents that we recorded in the fourth quarter, that was all based upon the profitable growth that we delivered for our carrier partners, and just we do year-end calculations and sometimes — you make it sometimes you don’t — that’s where we see generally the most volatility in our National Programs, they just — they move back in force.
Michael Ward: Super helpful. Thank you. Maybe one last quick one, just on the pressure and specialty. Is that — I think you called out, auto — lower auto and RV sales. Is there anything else there that we should be thinking about?
