Brown & Brown, Inc. (BRO) Earnings Call Transcript & Summary

[Audio Gap] Daniel Sherritt. As you can see by their titles alone, this is an impressive bunch. Each of these leaders bring deep benefits, knowledge and experience to today's survey results review. Here's the agenda for our time together. We'll work through each of these topics. And if time allows, we'll get to as many of your questions as possible. Please use the Q&A button at the top of your screen to submit questions, not the chat. And now I would like to ask Eric Templin, Brown & Brown's Executive Managing Director for Employee Benefits in North America to kick things off. Eric, over to you.

Thank you, Bruce, and welcome, everyone. As Bruce noted, I'm serving as the Executive Managing Director for Employee Benefits in North America at Brown & Brown where I have the awesome opportunity to lead benefits business across the country. I recently just stepped into this role a few months ago, and I'm really energized by what we're building to better serve our customers. So as you saw today's agenda is rich with a lot of insights from some very respected great thought leaders that Brown & Brown you're going to hear from today. And to those of you who completed the survey early this year, thank you. Thank you for doing that and just accept our sincere gratitude. We recognize how demanding this season is for you and your teams and we deeply appreciate you taking the time to share your perspectives with us. I think we also have to acknowledge that the marketplace offers quite a few other valuable health benefit surveys from our competitors and third parties. And really what distinguishes the Brown & Brown survey is its focus on the why and the how behind your most pressing health challenges, priorities and opportunities. And so I would say other surveys tend to center on the what. We see premium increases, average copay deductible, similar benchmark. So that data is important, but it has its place. So really today, is not intended to be just a presentation of survey results. But instead, we really wanted to challenge some of the conventional thinking and introduce different perspectives, create some dialogue about where sophisticated employers like yourself should go from here. So ultimately, and I'll end with this, and we'll get over to China, but we should be asking these questions, how do we build benefit strategies that are not really responsive to today's pressures but resilient enough to meet what comes next and what should we be doing differently? I think those are the questions you're probably asking yourself. So with that, let's jump right in. [indiscernible], I'll turn it over to you.

Fantastic. Thank you, Eric. Hi, everyone. [indiscernible], I'm national spokesperson for the Brown & Brown Employer Health and Benefit Strategy Survey. As many of us have shared so far, you'll continue to hear that, especially with Brown & Brown. I'm fortunate to collaborate with incredible thought leaders across our entire organization who make this survey what it is. So thank you so much for our Brown & Brown teammates as well. I'm also a customer services and solutions leader in our Brown & Brown strategic consulting practice. So I am fortunate to not to stay curious and work directly with employers on managing the risk for their benefit portfolios. And I'm really excited to share with you today what we found in our survey. So let's start with where it all comes from. Before we dive into the findings, a quick word who we procured in our survey. Every participating employer has at least 200 employees based in the U.S., so what you'll see today reflects midsize to large employers. This was responses from nearly 1,000 employers you participated and covers a wide range of strategic issues and opportunities facing employers who are plan sponsors and managed benefit programs. We build it from July 21 through August 28, 2026, and we include a margin of error plus or minus 3%. So with that context, let's get into what employers told us. Here's the overall theme of what we are learning from this year's survey. Employers have moved from worrying about rising cost to acting on them. what they're looking for in innovation and guidance to create a better benefits experience along the way and financially sustain their operations and their programs to share here cost pressure, key takeaways is turning into action, as Eric shared, the challenge for many of you attending today. More employers are pursuing aggressive reviews on core benefits like audits, their core medical program, their PBM partners and carrier point solutions of delivery, along with modifying their plan designs and refocusing on their well-being programs and more intentional ways. Long-term health care cost reduction is climbing as employers primary reason for offering benefits as they work to protect the value for employees. Digital health and AI are opening up the door across care access and information and intentional use of data and analytics to help curate a more personalized benefits communication and support ecosystem. And we also heard AI comes with a trust requirement. We're all experiencing that from governance, security, accuracy and the fairness concerns that are shaping how fast employers are adopting it and guided advisers like ourselves, implementing it into our strategic guidance. Well-being remains a top investment priority with not necessarily higher budgets, but more intentional budgets. So excited for my teammates to go through that section today as it remains a growing focus and better access to complete support of a person. So simply put, employers are putting cost pressure into action with their eyes wide open on the technology front. All right. Let's start with what's driving employers to offer health and benefit programs. Employee well-being and productivity remain a top reason but noticed that there is a shift towards the long-term health care cost reduction as we just shared. And here's how this breaks down. Well, being in productivity, still at #1 around attention and thoughtfulness around our talent -- this did have a little drop from last year, but it's not necessarily that they're exiting the attention to the talent game and productivity. We also see compliance and with legal requirements holding steady, not much movement there but very important, fostering loyalty and positive culture, we were really happy to see this go up from 14% last year to 17%. So a common theme you're going to hear throughout these survey results is going to be that employers are still invested and they still care. What this tells us is that while benefits are still about well-being in productivity, that has led a narrow to lens and the cost getting sharper. Employers aren't just asking what their people need. They're also asking what can we sustain long term. And that sets the stage, everyone for everything else we'll cover today. All right. We asked a simple question to our employers who participated. What do you see as your biggest challenge in developing and benefits program today. And what we heard was both insightful and it's consistent for us from what we're all experiencing and whether you're an employer joining today or a fellow point solution peer. Three key themes rose to the top. On this slide, you'll see highlighted along with direct quotes from employers, giving us a first-hand look into the realities they're navigating every day. Column one, managing risk benefit costs while preserving employee value. The quotes are candid, they capture the tension. GLP-1s for weight loss, specifically specialty drugs, and the inflation around medical on one side, affordability for employees on the other. One employer talked about not passing excessive premiums increases on to their lower wage employees and a non-for-profit talks about balancing both meaningful coverage with long-term financial sustainability. Colin [indiscernible] reconciling varied employee needs through a flexible benefit design program. Employers are really being thoughtful about trying to build one program for many life stages. Younger workers want flexibility, while most experienced employees are focusing on retirement and the sandwich generation and health care inclusivity, all of this being a core of this challenge. Rounding out #3, responding to shifting expectations on trends and technology. Employers tell us that what worked yesterday simply does not fit today and that expectation around behavioral health, mental health flexibilities and wellness keep moving up as a focus. And next, we'll talk about some of the strategic priorities. [indiscernible] continued high trend environment we are all hearing and experiencing. Employers are continuing to hold their focus on cost containment for the organization followed by the cost for employees. We began to see this shift last year to give some perspective and a bigger story than a single year-over-year data point. Just 5 years ago, the benefits environment and news outlets and everything we were seeing that was really important was heavily dominated about traction and retention. But that had a gradual shift we started to see towards a shared concern around the organizational and employee affordability a few years ago. And today, everyone, we are seeing that pendulum move much more decisively towards the organizational cost and financial sustainability. The challenge for employers is no longer simply how they can offer more to compete for talent, but how they continue offering meaningful competitive benefits and a stubborn trend environment. We want to point out that it's not employers willingness to shift cost to employees. That's not it. Employers are being forced to in many of these circumstances. How benefit are one of the 5 largest line items and an operating budget. So what happens to that line shows up in their EBITDA. That matters because as an organization that can't sustain its own cost can't keep paying its people or invest in improvements in the organization that drive growth and talent in the workforce. The cost sharing baseline many started from isn't sustainable when they're absorbing the claims and plan cost at the rate they have in the past with this stubbornly high trend. The survey shows employers and pointing out these priorities together keep these continuous reflect on a dual focus: balancing affordability and sustainability, while keeping benefits a lever for workforce engagement. The key point here is cost is crowding out employers' other goals. And while cost containment dominates effective communications and improving the culture of health are rising as tactical levers to drive value and experience. So we reviewed employers why, the challenges they're facing and their top priorities. So here are those 3 key takeaways as we head into the key themes of the conversation. Number one, cost take center stage. Employers have moved away from worrying about the rising costs to acting on them as we've shared. They're pursuing audits, transparent pharmacy models and contracts, unique stock loss evaluations and provisions and contractual reviews, RFP's network uniqueness and changes and stronger data analytics and visibility, not just simply accepting the costs are rising and accepting a renewal. Number two, experience gets personal. Employee experience is shifting toward access, personalization and physical well-being, a growing emphasis on digital health access, financial wellness, weight management, mental health and benefits communication of value shows that employers are broadening how they support their employees' health and productivity. And rounding us out at number three, the big AI conversation. AI comes with a trust test. Employers expect AI to play a role in benefits as we do. And to that influence both strategy and employee communication personalization for them to know what they are offered and what they are valued, but they remain cautious. Again, data security, accuracy, and governance are still barriers to some of those that are attempted to adopt. All right. So let's look over what employers were telling us around controlling costs. Next slide, Fantastic. What they told us about the level of change that they are planning for key programs heading into 2027, '28 and beyond, here's what stands out. Employers continue to prioritize changes to medical contributions. Medical plan design and well-being programs. And this year, the first 2 are up significantly. 82% of employers expect to change medical contributions, up from 20 -- from 77% before. 79% of employers expect medical plan design changes. And on the pharmacy side, while we are experiencing still modest increases to co-pays and some uniqueness with formulary modification and some cost sharing opportunities. These are still among the top solutions that employers are considering, which is not surprising for many of us on this call. well-being programs, 76% expect change. Many of them were significant changes and around 44%, expecting moderate changes. And later, Kristin and Danielle will go through when employers are repurposing. They are not retreating from well-being programs. They're just not adding more complexity. They're going to review later about how they're being intentional around their well-being programs. And talent did not fall off the [ agenda ] everyone. It got folded into the cost conversation, 79% in our surveys still want benefits that are better than their competitors or industry leading, as we'll see later in the presentation. So the question again is shifting from how much more we offer to how do we say distinctive with every single dollar being scrutinized. The takeaway is the cost levers contributions and plan design and building a rounded out program is pulling harder than it ever has in years past. So employers don't want to trim out they just want to be intentional about what they're doing. All right. Let's look at initiatives. As we looked at what employers approach was in planned management and strategic initiatives, One theme stands out the most. Employers are reviewing benefit cost and performance through audits more than ever and more transparency around their pharmacy models, stronger data analytics and not just talking about them. This chart shows the top 5 initiatives split into what employers have already have in place and what they plan to do in 2027 and 2028. 44% of employer already performed claims and pharmacy or clinical audits and another 39% plan to do that in the upcoming year. That audit gives you a holistic view of your medical, clinical and pharmacy programs and answers these critical baseline questions. Do you have the right TPA administering your medical program? Do you have the right PBM, one that manages the program with rigor and accuracy and integrity that are affordable for the organization and for the member, both at time of care of need and prescription fill. When the audits typically trigger evaluations of request for proposals, whether it's around the metal program or the pharmacy program. So we'll see that those 2 happen within a year or so with each other and evaluating a transparent PBM or a vendor pricing model that's unique and more transparent in their POS provisions is already in place with almost 49% of employers. And next, we will talk leave. Well, this headline is simple. Employers are dealing with a lot. The top 3 that landed low to mid-30s, coordination and communication stakeholders leads at 35%. Keeping up with these challenging regulatory changes is right behind that at 39%. And ensuring consistency with processes and accommodation, very close to that at 30%. You'll notice what these 3 have in common. Lead touches HR, managers, employees, carriers and the right third-party administrators, all while the rules keep shifting. So even when the rules are clear, applying them consistently across people and locations is incredibly challenging and difficult. Just below the top 3, we see documentation from employees and medical providers and compliance with applicable law at 27%. The data and technology integration is following and I think we're going to start seeing a bigger higher shift happening in this section as we keep seeing technology advances and AI. And while there were only 7% of employers who told us they don't have current challenges with leave administration, this feels familiar you're in a very good company, but it needs to be thought through very thoughtfully heading into the new year. All right. And with like that, I'm going to hand it over to Ben, who's going to talk pharmacy.

Okay. Great. Good afternoon. I'm Ben Barner, I'm the Vice President of Clinical Pharmacy, part of the National Pharmacy team here at Brown & Brown. Our team works closely with clients to evaluate current pharmacy trends, predict future trends and customize clinical strategies to meet the unique needs. I'm excited today to update you on the latest survey data for pharmacy, and it's especially been consistently a top discussion point with employers like we as the cost pressures continue to build year after year. So we will dive right into the first slide, looking at pharmacy concerns and solutions. I'll first direct your attention to the graph on the right side. So starting with the overall pharmacy landscape, managing pharmacy cost trend is the leading concern at 46%. Affordability for both the plan and members fall closely at 43%. And about 1/3 are focused on specialty, rare disease, orphan drug, high-cost type therapy strategies. Now these concerns overlap in a lot of ways. As mentioned, GLP-1 certainly have been a focus and rightfully so, covering -- potentially covering these medications for weight loss and balancing the combination of both the high unit cost but also skyrocketing utilization. And when we get more into that in the next slide. But another major factor is the double-digit annual specialty sand growth, which can now represent more than half in annual pharmacy spend when we look at our overall book of business. I think what's top of mind for many employers set the strategies to address these cost trends can be very different between employers and often those strategies to address it are not one single strategy alone. So employers are looking at benefit of formulary design, utilization management, leveraging new biosimilars and generic strategies, different network strategies, site of care and then also the unit cost procurement. At the same time, employers are focused on ensuring that these medications are affordable to members, and they received treatment that makes them healthier leads to positive outcomes, but also can lower overall total cost of care. Now directing to the upper left of the slide, we list out the top 3 strategies employers have in place today. Site care management of medical benefit drugs led responses at 39% and that was closely followed by PBM transparency and exclusive specialty pharmacy. Site of care in particular, is interesting because it can provide meaningful savings to employers. Employers have been able to shift care from higher-cost hospital outpatient settings to lower cost settings as well as leveraging specialty pharmacy sourcing instead of standard provider buy and bill payment methods. And we're working with employers to take advantage of recent advancements in different therapeutic categories, such as oncology, where IV therapies such as KEYTRUDA offers subcutaneous options as well as other precision medications that are in tablet form that can provide meaningful improvement in net costs. A large portion of employers are also leveraging specialty pharmacy network strategies and narrow networks. And these can provide a valuable opportunity to reduce net cost while not impacting access to the members. Now directing to the bottom left, the top 3 solutions employers are considering include increasing co-pay cost share transparency and new pricing models. As mentioned earlier, to address the continuing increase in unit costs, the utilization of high-cost drugs, employers are willing to accept more targeted disruption to address these cost pressures. Number 2 and number three, actually overlaps significantly. PBM transparency is currently in place. A lot of employers who have pass-through agreements, but it's also something that's being considered. And I think that's -- the good news is that it's not just a desire by employers, but it's going to be required with new regulations such as the CAA and the latest FTC rulings these type of transparency rules will need to be part of the strategies and offerings that the PBMs provide their clients. That includes things like PMPM guarantees, tying pricing away from spread pricing or PBM negotiated rates and going towards standard pricing such as NADA, which looks at surveys of invoicing across pharmacies that voluntarily provide that information. It also will be moving away from potentially retrospective rebates paid to employers and providing those as upfront point-of-sale rebates. I think we can agree that transparency is going to be meaningful in evaluating the cost, but it doesn't mean that it will translate in lower costs, at least not immediately. It's going to be critical for employers to understand each of these offerings and what the impact will be on net cost to them as well as shared with the members. And next, we can take a look into GLP-1s. So now diving to that. First, just directing you to the left side of the slide, 45% of employers surveyed stated they cover GLP-1s for weight loss. That's actually down modestly from last year's survey. That was at 48%, also to note, coverage is higher among large employers at 58% compared to 38% in mid-market. It's important to note that 96% of employers providing coverage told us they plan to continue it in '27 and '28. I think that's a good reflection of the sentiment at the time in this survey. But since then, we continue to see significant growth, especially with the expanded options with oral therapies such as with Gobi and [ Fondeo ] and greater visibility into the pipeline that is coming in 2027. And a lot of our discussions in the past couple of quarters has revisited the scope of that strategy. The majority of survey respondents have restrictions in place at 77% again, higher percent being large groups, and then 45% require clinical criteria beyond FDA lap. 43% of respondents restrict coverage to selected products. So currently, Novo and Eli Lilly dominate the market. And so employers may restrict which products to cover based on rebates, based on net costs and then also looking at coverage of oral tablet options. And finally, in this survey, 1/3 of the respondents require participation of lifestyle or weight management program. I think these programs will be a key consideration for employers going forward especially as more data comes out about its impact with adherence and discontinuation rates and also recycling of folks starting therapy, stopping the therapy and restarting therapy. We're also seeing expanded access of these lifestyle programs within PBM offerings as well as more awareness in the market of direct-to-employer programs that can integrate the cost of the drugs with those support programs and be customized. So to wrap up, the pharmacy cost trend is now a top focus. It's still is driven largely by GLP-1s and rising specialty spend. There's no single strategy but what's different now is I think employers are more willing to make disruptive decisions such as adjusting cost share, adjusting networks to make sure that they're keeping the spend sustainable. And with that, I'll hand it off to Kristen to review the employee experience.