Brown & Brown, Inc.

Good morning and welcome to the Brown and Brown Inc. first quarter earnings call. Today's call is being recorded. Please note that certain information discussed during today's call, including information contained in the slide presentation posted in connection with this call and including answers given in response to your questions, may relate to future results and events or otherwise be forward-looking in nature. Such statements reflect our current views with respect to future events. including those relating to the company's anticipated financial results for the first quarter and are intended to fall within the same power provisions of the securities laws. Actual results or events in the future are subject to matter of risk and opportunities and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors. Such factors include the company's determination as it finalises its financial results for the first quarter that its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday. Other factors that the company may not have currently identified or quantified and those risks and uncertainties identified from time to time in the company's reports filed with the Securities and Exchange Commission. additional additional discussion of these and other factors affecting the company's business and prospects as well as additional information regarding forward-looking statements is contained in the in the slide presentation posted in connection with this call and in the company's filings with the securities and exchange commission we disclaim any intention or obligation to update orifies any forward-looking statements whether as a result of new information future events or otherwise in addition there are certain non-gap financial measures used in this conference call. A reconciliation of any non-GAAP financial measures to the most comparable GAAP financial measure can be found in the company's earnings press release or in the investor presentation for this call on the company's website at www.ebinsurance.com by clicking on Investor Relations and then Calendar of Events. With that said, I would now turn the call over to Powell Brown, President and Chief Executive Officer. You may begin.

Thank you, Lisa. Good morning, everyone, and thank you for joining us for our first quarter 2020 earnings call. Before we talk about our first quarter results, we at Brown and Brown would like to say our thoughts and prayers are with all of those people directly or indirectly affected by COVID-19. We also want to thank all of those people on the front lines for everything they're doing during these challenging times. And finally, I'd like to thank all of our 10,000 plus teammates for everything they're doing for our customers and for successfully transitioning to a work from home environment. Today we'll discuss our Q1 results and give you our thoughts on the next few quarters. Here are a couple key points for you to keep in mind. First, we had a very good quarter. In addition, we have a strong balance sheet, the highest cash conversion among our publicly traded peers, and have access to approximately a billion dollars of liquidity. Our conservative operating philosophy has and will continue to be indicative of how we run our business. We're focused on the long term and are a capital life business that's focused on providing unique solutions to our customers every day. The first quarter was a tale of two cities. January and February were growing nicely and then we hit early March. when we started seeing the impact on our customers in the Pacific Northwest. As we've said before, we believe we are a proxy for the economy with an emphasis on the middle and upper middle market. We began seeing the impact on our customers around the country in mid-March. One of the many difficult things to assess today is what will the mitigation efforts from the U.S. government do for our customers through government support systems. During these very unusual times, we're focused on the safety and security of our teammates and their families. Many of our previous investments in technology have helped us transition 10,000 plus teammates to a work-from-home environment in a very short period of time. Our customers have been and continue to search for solutions on everything from the CARES Act, SBA loans, insights on furloughs and layoffs, to how you can use your personal vehicle to deliver meals from a restaurant, or how to get certain supplies. We opened our B&B Relief Center to customers and others alike to take advantage of discounts on certain supplies. These actions, combined with the weekly updates for customers and prospects, have been well received by our intended audience. In addition, I'm humbled by the determination, dedication, and commitment of our teammates what they have for our customers. Now, let's transition to the results for the quarter. I'm on slide four. For the first quarter, we delivered $698.5 million of revenue, growing 12.8% in total and 5.6% organically. We're very pleased with this strong organic revenue growth, and I'll get into more detail in a few minutes about the performance of each of our segments. Our EBITDA margin was 34.6, which is up 280 basis points versus the first quarter of 19. Our net income per share for the first quarter is 54 cents, increasing 35% as compared to the same period in the prior year. On an adjusted basis, excluding the change in acquisition amount payables, we delivered 51 cents of net income per share, growing 24.4%. over the adjusted net income per share for 2019 Q1. During the quarter, we acquired another five businesses with annual revenues of approximately $39 million. In summary, we're very pleased how we grew the top line and bottom line this quarter. It was a great quarter after delivering a really strong 2019. Later in the presentation, Andy will discuss our financial results in more detail. I'm now on slide five. The first quarter was an interesting one. Until early March, we saw the U.S. economy continue to grow and most companies continue to hire employees and invest in their businesses, ultimately driving expansion of exposure units. Then in the middle of March, everything changed. Due to many stay-at-home or shelter-in-place mandates, we're now seeing companies either terminating employees or putting them on furlough and driving the GDP lower for the first quarter and beyond. We've said in the past that one of the primary drivers of our organic growth is exposure units, so we do expect an impact over the coming quarters. More on that later when we get to outlook. From a rate perspective, we continue to see modest rate increases on most lines of coverage as carriers continue to tighten underwriting standards. The increases were substantially in line with what we had expected for the first quarter and were similar to the last few quarters. Ultimately, the amount of rate increase was primarily driven by the loss experience for a given account. Premium rates for low-loss accounts in the admitted market generally increased 1 to 5 percent, excluding auto, which is up 5 to 10. From an ENF perspective, coastal property rates increased 5 to 15 versus the prior year. General property rates were 5 to 10. Professional liability increased 5 to 10, and cyber was up about 10 to 15. The impact of the pandemic on rates now and in the future is unknown. Regarding the M&A landscape, it remained very competitive during the first quarter. We closed another five transactions with $39 million in estimated annual revenue. We continue to talk with lots of companies, but since a slowdown as sellers are trying to get a handle on on how the pandemic will affect their businesses and therefore impact the valuation they receive. I'm on slide six. Now let's talk about the performance of our four segments. Our retail segment delivered another strong quarter with organic revenue growing 5.7% in Q1. Our organic revenue growth for retail would have been approximately 300 basis points higher if not for a $10.5 million change in estimates related to future revenues resulting from the economic disruption associated with COVID-19. Andy will describe this in more detail later. Our growth for the first quarter was driven by improved retention, exposure unit expansion for existing customers, new business and rate improvement. We'd like to congratulate all of our teammates in the retail segment for delivering another great quarter. National programs grew 11.8% organically, delivering another great quarter. The organic revenue growth this quarter was one of the highest we've ever delivered when you exclude the impact of flood claims. Our growth was driven by continued strong performance from a number of our programs, including our lender replacement, our earthquake, our personal and commercial property, as well as many of our other programs. In early January, we completed our first acquisition in Canada, Special Risk Insurance Managers. We're really pleased with this acquisition and the opportunities we believe it will present to us over the coming quarters and years. Overall, it was a great quarter for national programs, and I wanted to say thank you to all of our teammates in that division. Our wholesale brokerage segment delivered another solid quarter with organic revenue growing 8.2%, driven by strong performance from both our brokerage and binding authority businesses. This is even while we experienced some pullback from carriers riding California personal lines due to losses from wildfires last year. Thank you to all of our team for delivering another good quarter. The organic revenue for our services segment decreased 13.1% for the quarter. We originally expected organic revenue to decline by 5% for the services segment in the first half of the year, being driven by our social security advocacy business and a terminated customer contract in one of our claims processing businesses. During the quarter, however, our organic revenue growth for the services segment was further impacted due to lower weather-related and Social Security advocacy claims. As we've seen in the past, our services segment can have more volatility in its revenues based on the volume and timing of claims activity. Now, let me turn it over to Andy to discuss our financial performance in more detail. Thank you, Powell. Good morning, everyone. Consistent with previous quarters, we're going to discuss our GAAP results, certain non-GAAP financial highlights, and then our adjusted results excluding the impact of the change in acquisition earnouts. I'm over on slide number seven. For the first quarter we delivered total revenue growth of $79.2 million or 12.8% and organic revenue growth of 5.6%. Our EBITDA increased by 22.8% growing faster than revenues due to leveraging our expense base with higher organic revenue growth higher contingent commissions and the results from one of our acquisitions in the past year that recognizes substantially all its revenue in the first quarter of each year. Our income before income tax increased by 38.2% going faster than EBITDA due to the change in acquisition earn out payables which decreased by 12.2 million year over year based on our most recent projections. Our net income increased by 38.5 million or 33.8% and our diluted net income per share increased by 14 cents or 35% to 54 cents. Our effective tax rate for the first quarter was 25.7% compared to 23.3% in the first quarter of 2019. The higher effective tax rate was driven by lower state tax rates and adjustments in the prior year as well as the change in the market valuation of our company-owned life insurance related to our deferred compensation plan. Our weighted average number of shares were substantially flat compared to the prior year and our dividends per share increased to 8.5 cents or 6.3% compared to the first quarter of 2019. Moving over to slide number eight. This slide presents our results after removing the change in estimated acquisition earnouts payables for both years. We believe this presentation provides a more comparable year-on-year basis. During the first quarter, we revised our estimated future financial performance and the corresponding estimated earn-out payables by $11 million for certain acquisitions we completed in the last three years with $6 million of this adjustment related to the potential impact from COVID-19. Isolating the change in acquisition earn-outs in both years our income for income taxes grew 44.6 million or 29.8 percent net income on an adjusted basis increased by 29.5 million dollars or 25.7 percent and our adjusted diluted net income per share was 51 cents increasing 10 cents or 24.4 percent overall it was a really good quarter over to slide number nine This slide presents the key components of our revenue performance. For the quarter, our total commissions and fees increased 12.8%. Our contingent commission and guaranteed supplemental commissions, or GFCs, increased by 8.9 million as compared to the first quarter of 2019. As the cash received during the first quarter of 2020 for contingents accrued as of December 31st, 2019 was higher than anticipated, as we qualify for certain contingents that we did not qualify for in the past. Our organic revenues, which isolate the net impact of M&A activity, increased by 5.6% for the quarter. Over to slide number 10. Our retail segment delivered total revenue growth of 15% driven by acquisition activity over the past 12 months and organic revenue growth of 5.7% driven by growth across all lines of business. In accordance with ASC 606, we lowered our estimates for the revenues we expect to earn from existing employee benefits and workers' compensation policies, resulting in a reduction to revenue of $10.5 million. These estimates were revised after assessing the projected impact of COVID-19 on future levels of employment and payrolls at our customers during the remainder of their current policy periods. The adjustment lowered organic growth for retail for the quarter by almost 300 basis points. Our EBITDAQ margin for the quarter increased by 220 basis points, and EBITDAQ grew 22.3% due to the phasing of profit from an acquisition we completed in the third quarter of last year, higher contingent commissions, and leveraging our expense base with higher organic growth. The margin expansion was partially offset by higher non-cash stock-based compensation cost, intercompany IT cost, and the margin flow through on the $10.5 million revenue adjustment we mentioned earlier. We grew our EBITDA faster than total revenues, even when excluding the impact of the acquisition that records substantially all of its revenue in the first quarter of the year. Our income before income tax margin increased 470 basis points, primarily due to higher EBITDA margin adjustments to our earn-out liabilities of 7.1 million year-over-year, and the lower percentage growth of intercompany interest charges. The adjustments to our earn-out liabilities were primarily driven by the potential impact of COVID-19 upon the future performance of acquisitions we completed in the last three years. Moving over to slide number 11, our national program segment increased total revenues by 18.8 million, or 17.2%, and organic revenue by 11.8% due to strong performance from a number of our programs. EBITDA increased 25.2% and our margin increased by 210 basis points due to higher revenues, increased contingent commissions, and the continued leveraging of our expense base. The margin expansion was partially offset by higher intercompany IT charges. It was another really good quarter for our national program segment. growing EBITDA substantially faster than total revenues. Income before income taxes increased by $10.3 million for 53.4%, expanding 550 basis points due to EBITDA margin expansion, lower intercompany interest expense, and decreased estimated earn out payables that were impacted by the potential for lower future performance associated with COVID-19. Over to slide number 12. Our wholesale brokerage segment delivered total revenue growth of 10.2% and organic growth of 8.2%. Total revenues grew faster than organic due to acquisitions we completed in the past 12 months, which was partially offset by lower contingent commissions. EBITDA grew 8.5% and the margin decreased by 40 basis points due to higher intercompany IT charges and lower contingent commissions. that offset underlying margin expansion. Our income before income taxes grew 13.5% and the margin increased by 70 basis points due to lower amortization and a change in acquisition on out payables. Over to slide number 13. Total revenues for our services segment declined 10.1% and organic revenue decreased by 13.1% with total revenues benefiting from a previous acquisition Since organic revenue declined more than anticipated in the first quarter, we anticipate our organic growth for the first half of the year could be closer to a negative 10%, excluding any potential impact of COVID-19. For the quarter, EBITDA declined by 16.9% and the margin declined by 180 basis points, driven by lower organic revenues and higher intercompany IT charges. Income before income taxes increased 9.8% and our income before income taxes margin increased by 410 basis points. This increase was driven by lowering our estimated acquisition earn out payables. Over to slide number 14. We want to make some comments regarding capital and liquidity. Our goal has been and will continue to be disciplined in our approach to allocating our capital. with the goal of optimizing returns for our shareholders and maintaining a conservative leverage position. We've mentioned in the past the importance of having low leverage and a balanced debt maturity ladder in order to provide strength during times of economic uncertainty. We believe having the lowest leverage of the major public or PE-backed insurance brokers provides us with strong financial security and flexibility. Having a very strong balance sheet and liquidity position will allow us to manage through the uncertainties of this pandemic, but also allows us to continue to invest. At the end of March, we had over $385 million of cash and cash equivalents and $700 million of available capacity on our revolver. We anticipate borrowing approximately $250 million under our revolving line of credit before May 1st. A portion of these proceeds are expected to be used in connection with the payment for our previously announced acquisition of loan protector insurance services that we anticipate will close in early May. The remainder of this borrowing will be used to further strengthen our financial position in order to mitigate the potential effects of the COVID-19 pandemic that may result from delays in payments from customers or carriers. Moving over to slide number 15. One of the metrics we are proud of is our ability to convert revenues into free cash flow. We consistently convert 22 to 26% of our revenues into available capital due to our strong margins and rigorous management of working capital. Our industry-leading free cash flow conversion ratio is about 100% higher than the average of the other public brokers. That means we generate about the same amount of cash as compared to a company twice our size. That means we have a lot of capital to invest in our business. Depending upon the level of M&A activity, we generate significant capital in excess of our committed expenditures that include dividends, CapEx, and debt service. We believe we are in a really strong position right now. As a reminder, Q1 normally has a lower free cash flow conversion ratio due to ASC 606 as we accrue revenue primarily related to employee benefits policies with associated cash collected throughout the year. We also pay the majority of our annual performance bonuses earned in the prior year in the first quarter. Our free cash flow conversion ratio was about 2.5% for the first quarter of 2020 compared with a negative 2.9% for the first quarter of 2019. One thing that may affect free cash flow conversion would be customers delaying payments either offered by carriers or mandated by states. We believe this scenario would delay our cash receipts and this is why we anticipate drawing an additional capital on our revolver later this month. With that, let me turn it back over to Powell for closing comments. Thanks, Andy. Great report. Let's talk about how we're thinking about the outlook for the coming quarters. We expect the economy and employment are going to decline for at least the next two quarters and then potentially increase slightly into the fourth quarter. This assumption is based on reports from many economists within our banking partners that are projecting a 15% to 20% unemployment rate in the second quarter. Keep in mind that per the CARES Act, self-employed and gig workers are now eligible to file for unemployment. As these individuals are generally not covered by sponsored plans, they will be more than likely not impacting our employee benefits or workers' compensation lines of business. Also keep in mind there are many employees being furloughed that are filing for unemployment but are still benefit eligible. These are good examples of the complexities when comparing current unemployment figures to prior years and in estimating the potential impact on our business. These same economists are projecting GDP to decline 20 to 30% in the second quarter, with growth starting to rebound in the third quarter, but they're not expecting a recovery until mid to late 2021. Based on these assumptions, we believe the biggest impact on our financial performance will be in the third quarter, but anticipate our organic growth could be negative in the second quarter. This is due to the fact that higher unemployment will take about 60 days before we see it impact our numbers. We believe the largest impact will be to our employee benefits and workers' compensation lines of coverage. as they are primarily driven by employment and payrolls. In addition, we expect our overall P&C business to be impacted when companies reduce their exposure units. Another dynamic of the work-from-home mandate is that we're expecting our new business to slow but retention to increase. We do not know if these will offset each other. The unknown right now is how deep and for how long the impact of COVID will last. We hope that the CARES Act and the action by the Fed will start to take effect in the coming months or two. Regarding rates, we think most rates will increase slightly in the second quarter, but it's unknown what will happen to rates in the second half of the year until more is known about the impact of COVID-19. Taking all these factors into consideration, our best estimate is that the full year organic growth could be slightly positive or down low to mid single digits. This range is really unknown as we've made assumptions based on limited actual data. We'll have better view over the coming quarter as to the depth and duration. Here's what we do know. We're a solutions provider. Therefore, we'll continue to stay focused on providing risk management solutions for our customers and prospects and developing new and creative ways of generating new business remotely. We continue to talk with acquisition candidates and may close a few deals in the second quarter. For the next few months at least, we expect there will be a slowdown in M&A activity due to the uncertainty around the future performance of businesses and what this might mean for sellers' valuation. I mentioned earlier that we are continuing to innovate and serve our customers during these uncertain times. Out of necessity comes great creativity. We always try at Brown and Brown to deliver as many new solutions as possible for the benefits of our customers, our teammates, our carrier partners, and our shareholders. Lastly, as I started with comments about our teammates and their families, I want to close with the same focus. We are a company of dedicated and hardworking teammates focused on serving our customers. Therefore, it's our goal to always ensure they are safe and healthy. When we do this, it helps them to be great spouses, parents, and teammates that focus on delivering innovative risk management solutions. With that, let me turn it back over to Lisa for the Q&A.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We will pause for a moment to allow everyone. We will now take the first question. Please go ahead. It's from Greg Peters from Raymond Jeans. Your line is