Brown & Brown, Inc.

Good morning and welcome to the Brown and Browning second quarter earnings call. Today's call is being recorded. Please note that certain information discussed during this 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 second quarter and are intended to fall within the safe harbor provisions of the securities laws. Actual results or events in the future are subject to a number of risks and uncertainties 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 finalizes its financial results for the second quarter that its financial results differ from the current preliminary unaudited numbers set forth in the test release issued yesterday. Other factors that the company may not have currently identified or qualified and those risks and uncertainties identified from time to time in the company's reports filed with the Securities and Exchange Commission. 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 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 or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. In addition, there are certain non-GAAP financial measures used in this conference call. 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.bbinsurance.com by clicking on Investor Relations and then Calendar of Events. With that said, I will now turn the call over to Powell Brown, President and Chief Executive Officer. You may begin.

Thank you, Anita, and good morning, everyone, and thank you for joining us for our second quarter 2020 earnings call. Over the last four months, we've successfully transitioned over 10,000 teammates to a remote work environment and have commenced a staged return to the workplace for our business's we will remain focused on the safety of our teammates, their families, our customers, and trading partners. I wanted to mention that I did contract COVID-19 a number of weeks ago. While I felt a little sluggish at times, it did not prevent me from making phone calls and engaging with people virtually. I'm feeling fine now and have received my negative test results yesterday. As it relates to the economy, We believe a full return of the economy to pre-COVID-19 levels is going to be slow and sporadic. Therefore, we as a society cannot lose our focus and determination to do our best to contain the coronavirus. This is possible through the efforts of all our frontline workers and each of us taking our own personal responsibility to help contain further spread. Our teammates continue to do an outstanding job of focusing on our customers and providing them with creative and innovative risk management solutions. During the quarter, we continue to host regular COVID-19 response calls for customers and prospects with the goal of helping other companies share best practices and successfully manage through these difficult times. In addition, our COVID-19 Relief Center has been well received and we and we will continue to find creative ways to help everyone get back to the new normal. Like last quarter, I continue to be humbled by the determination, dedication, and the commitment of our teammates to our customers. Now let's transition to the results of the quarter. I'm on slide three. For the second quarter, we delivered $599 million of revenue, growing 4.1% in total and 50 basis points organically. I will get into more detail in a few minutes about the performance of each of our segments. Our EBITDA margin was 29.5%, which is up 20 basis points over the second quarter of 2019. Our net income per share for the second quarter was $0.34, increasing 3%. on an as reported basis and 6.3 on an adjusted basis as compared to the prior year when excluding the change in acquisition earn out payables. During the quarter, we completed another three acquisitions with annual revenues of approximately 46 million in revenue with the largest being loan protector insurance services. We'd like to extend a warm welcome to all of our new teammates that joined during the quarter. In summary, we're pleased with our performance for the quarter, given the headwinds. I'd like to thank all of our teammates for doing their best to retain our customers and win new business. They're all doing an excellent job. Later in the presentation, Andy will further discuss our financial results in more detail. I'm now on slide four. During the second quarter, we started to see the financial effects of the pandemic, with certain industries significantly slowing down, including hospitality, restaurants, and entertainment. resulting in corresponding reductions in exposure units. Conversely, other industries such as 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. On the other hand, our workers' compensation lines of business declined faster than we anticipated. As a solutions provider, we worked with many customers during the quarter to manage their costs. This included collaborating with carriers to provide mid-term premium adjustments for certain coverages that are impacted by changes in sales or payrolls. While there has already been a significant impact on many businesses, it's unknown what the full effect will be over the coming quarters. A lot depends on how much additional funding is provided at the federal or state level for businesses and individuals. We'll talk more about our views on outlook later in the presentation. From a rate perspective, we continue to see upward movement from most lines of coverage as carriers further tightened underwriting standards and reduced their participation in certain lines of coverage, geographies, industries, or limits. These increases were generally above what we experienced for the first quarter and continued the trend from the past few quarters. Ultimately, the amount of rate increase was driven by the loss experience for a given account or the class of business for the carrier. During the quarter, we did see a slowing in the rate of decline for workers' compensation rates being down 1% to 5%. Premium rates for accounts in the admitted markets generally increased 2% to 7%, excluding commercial auto, which continued to increase 5% to 10% or more. From an ENF perspective, coastal property rates increased 15% to 25%. General property rates increased 5% to 10%. Professional liability rates increased 10% to 20%. And cyber rates were up 10% to 20%. Based on what we experienced in the second quarter, we expect rate increases will remain fairly consistent for the remainder of the year. Regarding the M&A landscape, I thought things would slow down a bit for a while. However, we were still able to close three transactions with an estimated annual revenues of $46 million. and have already completed a few deals in July. The biggest questions for buyers and sellers remains how to project the financial implications of the pandemic and therefore how to appropriately value businesses. With this uncertainty, the percentage of money paid at closing might decrease somewhat, but it does not appear valuations will materially change at this point. I'm now on slide five. Let's talk about the performance of our four segments. Our retail segment's organic revenue declined 2.6% for the second quarter. This quarter, we recorded a reduction in organic revenues of approximately $8 million for general liability policies resulting from the economic disruption associated with COVID-19. This adjustment represents an impact to organic revenue growth of over 250 basis points for the quarter. We also experienced rate increases for most lines and good retention. While we experienced a decline in new business, as it was harder to engage with prospects, we still had a number of great wins and are pleased with our results for Q2. Our national program segment grew an impressive 15.5% organically, delivering another strong quarter. Once again, the organic revenue growth was one of the highest we've ever delivered. Our growth was driven by continued strong performance from many of our programs, including our lender place, our commercial and residential earthquake, and wind programs, just to name a few. This growth was driven by new business, good retention, and rate increases. Some of our programs did experience headwinds during the quarter, such as our sports and entertainment and workers' compensation programs. In early May, we completed the acquisition of Loan Protector, as I said earlier. We're pleased with this acquisition and the solutions we'll be able to deliver to our customers over the coming months and into the future. Overall, it was a great quarter for national programs. Our wholesale brokerage segment organic revenue growth was slightly positive for the quarter. Our performance was impacted by lower new business and retention driven by the impact of the pandemic and the continued reduction in appetite for carriers for certain lines of coverage. industries, and geographies, primarily in the binding authority space. The organic revenue for our services segment decreased 15.4% for the quarter. The main drivers of our decline were Social Security advocacy businesses driven by lower claims volume, a terminated customer contract in one of our claims processing businesses, lower claims for many of our businesses related to the pandemic, and related weather related claims as compared to the prior year. As we've seen in the past, our services segment can have more volatility in its revenues depending on the volume and timing of claims activity. Based on what we're seeing now, we expect organic revenues for the services segment to decline 5 to 10 percent in the second half of the year as compared to the second half of the prior year. Overall, it was a good quarter, and we'd like to thank all of our teammates who delivered innovative solutions in this very challenging environment. Now let me turn it over to Andy to discuss our financial performance in more detail.

Thank you, pal. Good morning, everybody. I'm over on slide number six. Consistent with previous quarters, we'll discuss our gap results, certain non-gap financial highlights, and then our adjusted results, excluding the impact of the change in acquisitions and outpayables. For the second quarter, we delivered total revenue growth $23.6 million or 4.1% and organic revenue growth of 50 basis points. Our EBITDA increased by 4.8% growing faster than revenues as we were able to manage our expenses in relation to lower organic revenues and offset the headwinds associated with increased non-cash stock based compensation cost of approximately $10 million. lower guaranteed supplemental commissions or GFCs and the results from one of our acquisitions from the third quarter of 2019 that recognizes substantially all its revenue in the first quarter of each year. We're pleased with the expansion of the EBITDA margin as it demonstrates the power of our operating model and the focus of our leaders to manage their costs. A quick comment regarding our employee compensation and benefits and other operating expenses. as a percentage of revenue. The employee compensation and benefit ratio increased as compared to the prior year driven by higher non-cash stock-based compensation cost and an increase in the value of deferred compensation liabilities driven by changes in market values with this increase offset within other operating expenses. The ratio of other operating expenses decreased due to proactively managing our variable expenses and to a lesser extent the benefit from the aforementioned change in deferred compensation costs. Our income before income tax increased by 4.8%, growing in line with EBITDA. While we had incremental amortization and depreciation from recent acquisitions, our interest expense declined due to lower rates. Our net income increased by $4.2 million, or 4.5%, and our diluted net income per share increased by 3% to 34 cents. Our effective tax rate for the second quarter was 25.2% compared to 25% in the second quarter of 2019. The effective tax rate for the quarter was impacted by a one-time state tax refund 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 eight and a half cents or 6.3% compared to the second quarter of 2019. We're over on slide number seven. This slide presents our results after removing the change in estimated acquisition earn out payables for both years. We believe this presentation provides a more comparable year on year basis. During the second quarter of 2020, we had minimal changes in our earn-out liabilities. Isolating the change in acquisition and earn-outs in both years, our income before income taxes grew $9.3 million, or 7.7%. Our net income on an adjusted basis increased by $6.8 million, or 7.5%. And our adjusted diluted net income per share was 34 cents, increasing 6.3%. All of these increased faster than total revenue growth of 4.1%. Overall, it was a really good quarter. Over to slide number eight. This slide presents the key components of our revenue performance. For the quarter, our total commissions and fees increased by 4.4%. Our contingent commissions and GFCs decreased by $1.7 million as compared to the second quarter of last year. This decrease was driven by a one-time GSC in the second quarter of 2019, but was partially offset by qualifying for incremental contingent commissions within our national program segment and a positive adjustment related to finalization of the estimates we recorded in 2019. Organic revenue, which isolate the net impact of M&A activity, increased by 50 basis points for the second quarter. Over to slide number nine. Our retail segment delivered total revenue growth of 60 basis points, primarily driven by acquisition activity and higher profit sharing contingent commissions, which were substantially offset by declining organic revenue growth at 2.6%, driven primarily by the impact of COVID-19. In accordance with ASC 606, we lowered our estimates for the revenues we expect to earn from existing general liability and other policies where the premiums are subject to modification based on changes in exposure units, such as the revenue of the insured. Our revenue estimates were revised after assessing the projected impact of the pandemic, which resulted in a reduction of organic revenue by approximately $8 million and organic revenue growth by over 250 basis points for the quarter. Our EBITDAQ margin for the quarter decreased by 150 basis points and EBITDAQ declined 5.1% due to the profit impact of the $8 million negative revenue adjustment, the impact of the aforementioned prior year acquisition, decreased organic revenue, higher non-cash stock-based compensation, and intercompany IT costs. All of these items offset material cost savings achieved in response to the pandemic. Our income before income tax margin decreased 240 basis points and grew slower than total revenues due to higher acquisition amortization expense and an increase in acquisition earnouts. We're over on to slide number 10. Our national program segment increased total revenues by $22.9 million, or 17.4%, and organic revenue by 15.5. The increase in total revenue was driven by strong organic growth, new acquisitions, and an increase in profit sharing contingent commissions, which were partially offset by decreased GFCs. The organic growth was driven by many programs due to good retention, new business, and rate increases, and was partially offset by certain programs impacted by COVID-19. EBITDA increased by 22.7% and our margin increased by 180 basis points due to strong organic growth and increased contingent commissions. The continued leveraging of our expense base as well as decreased variable cost but was partially offset by lower GFCs. It was another great quarter for our national program segment growing EBITDA substantially faster than total revenues. Income before income taxes increased $8.1 million, or 20.1%, increasing the margin by 70 basis points. This was driven by EBITDA margin expansion, which was partially offset by higher acquisition earnouts and intercompany interest expense. Over to slide number 11, our wholesale brokerage segment delivered total revenue growth of 9.5% and organic growth of 10 basis points. Total revenues grew faster than organic revenue due to new acquisitions and higher contingent commissions. EBITDA grew by 9.1% and the margin was substantially flat as compared to the prior year due to lower organic growth, higher intercompany IT expenses, and increased non-cash stock-based compensation. We were able to offset these headwinds with higher contingent commissions and the delivery of reduced variable expenses. Our income before income taxes grew by 7.9%, and the margin decreased by 40 basis points, due primarily to higher intercompany interest expense. Over to slide number 12. Total revenues and organic revenues for our services segment declined 15.4%, driven by the items that Al mentioned earlier. For the quarter, income before income taxes decreased 31.2%, and our margin decreased by 340 basis points. EBITDA declined by 25.2% and the margin declined by 280 basis points, driven by the mix of profitability associated with lower organic revenue and higher intercompany IT expenses. These were partially offset by reducing certain variable expenses. Your comments regarding outlook and liquidity and cash conversion for the quarter. First on outlook. We mentioned earlier that contingent and non-cash stock compensation for the second quarter increased as compared to the prior year. As of now, we are not expecting material differences for either of these items for the second half of the year versus the same period last year. As it relates to liquidity and cash conversion, early in the second quarter, we borrowed $250 million on a revolving line of credit to pay for the loan protector acquisition and to have additional liquidity in case the premium payment moratoriums impacted our cash receipts. Based on our financial performance, we repaid $150 million on the revolver before the end of the quarter. You'll also see our cash flow from operations as the percentage of revenue increased to levels higher than normal. This was primarily due to the CARES Act allowing companies to pay their first quarter federal taxes in July. We expect our cash flow from operations as a percentage of revenues for the third quarter will decrease from historical conversion levels due to making this payment of approximately $50 million. At the end of the quarter, we remain in a strong financial and liquidity position. With that, let me turn it back over to Powell.