Brown & Brown, Inc.

Good morning and welcome to the Brown and Brown Inc. third 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 third quarter and are intended to fall within the safe harbour 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 third 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 are quantified 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 statements, 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. 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.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, Kevin. Good morning everyone and thank you for joining us for our third quarter 2020 earnings call. Before we get into the results for the quarter, I wanted to make some high level comments. First, I'd like to say thank you to all of our teammates and express how pleased I am with our performance for this quarter. They continue to be laser focused on delivering innovative solutions for our customers. Operating in the current environment is not easy. but our team finds creative ways to serve and support our existing customers and engage with new prospects. I'm very impressed with how our teammates are leveraging the investments we've made in technology over the past few years to enhance our capabilities and customer interactions. These include everyone from producers, service, marketing, brokers, and underwriting teammates. At this stage, we do not see face-to-face interactions returning to the pre-pandemic levels for quite some time, And more than likely, the new normal will be different than in the past. As we navigate our way through the pandemic, I'm confident that we will continue to leverage innovation in our sales and service model to help further our growth and support our customers. We've talked a lot in the past about how we're built for the long term and think about delivering shareholder value. On Tuesday of last week, our board of directors increased our quarterly dividend by 9%. With this increase, we are now in our 27th year of consecutive increases, something we're very proud of. Now let's transition to the results of the quarter. I'm on slide number three. We had a great quarter and are very pleased with our results. We delivered $674 million of revenue, growing 8.9% in total and 4.3% organically. I'll get into more detail in a few minutes about the performance of our segments. Our EBITDA margin was 32.8%, which is up 130 basis points from the third quarter of 2019. Our net income per share for the third quarter was 47 cents, increasing 14.6% on an as-reported basis. On an adjusted basis, which excludes the change in acquisition earn-out payables, our net income per share was 52 cents, an increase of 33.3% over the prior year. Our team has done an outstanding job of growing our revenue while managing our expense base in response to the dynamics associated with COVID-19. During the quarter, we completed another six acquisitions with annual revenues of approximately $31 million. We'd like to extend a warm welcome to all of our new teammates that joined during the quarter. From a capital perspective, we issued $700 million of 10 and a half year bonds in September. We're very pleased with the coupon of 2.375%, particularly considering that we issued bonds in March of 19 with a coupon of 4.5%. Our issuance was very well received by the debt markets, which we believe is a true reflection of Brown and Brown's credit quality. With this capital and our cash flow generation, we're well positioned to further invest in a disciplined manner in our business and deliver future results. In summary, we're very pleased with the strong performance of the quarter as the strength of our operating model continues to perform well through these unprecedented economic times. Later in the presentation, Andy will discuss our financial results in more detail on slide number four. As you may remember, in April, we thought our third quarter would be the most challenging due to the expected decrease in exposure units for our customers. Then we performed slightly better than anticipated in the second quarter, and during our second quarter earnings call, we indicated the third quarter would not be as low as originally anticipated. As a result of good new business, higher retention, and rate increases, we had a really good third quarter. We saw companies doing their best to restart their businesses, which included some rehiring of employees or taking them off furlough. We thought individuals would start to lose employee benefits coverage through layoffs or reductions in force, which would also drive a decline in workers' compensation coverage. We saw this in certain industries. However, there are many industries that have been quite resilient or have even grown over the past six months. As a result of our diversification across geography, customer size, industry, line of coverage and capabilities, we've continued to grow. Please don't take my comments out of context. We have customers that are struggling, and we're doing our best to help them. We believe that there's going to be challenges over the coming quarters and consequently expect there will be ups and downs in this path to recovery. During the quarter, we saw rate increases similar to the last few quarters, and in some cases, they've increased slightly. For the most part, admitted market rates are up 3% to 7% across most lines. Commercial auto rates are the exception as they remain up 10% or more. There's a lot of talk about workers' compensation rates starting to turn positive during the quarter. We're not seeing this across the board. Generally, workers' compensation rates are not declining as fast as they were in previous quarters. From an ENS perspective, most rates are up 10% to 20%. Coastal property, both wind and quake, are up 15% to 25%. Professional liability is generally up 10% to 25%, depending on the coverage in the industry. For both of these lines, there can be outliers. One area where we're seeing the most pressure right now is personal lines in California, Florida, and the Gulf Coast states. The continued reduction in carrier appetite has been caused by fires and tropical activity, resulting in a reevaluation of all cat exposed property. We believe the reduction in personalized capacity in CAT areas will continue to decrease in the near term. In connection with the increasing rates, the placement of coverage for many lines, certain industries, or customers with significant losses continues to be challenging. This would include excess or umbrella coverage, where a carrier or carriers might want to reduce their limit by half, but keep the premium constant, just to give an example. We do not expect this trend to change for the next few quarters. We've been active in the M&A space, closing six transactions during the quarter with annual revenues of approximately $31 million. During the first three quarters, we closed 16 transactions with annualized revenues of approximately $117 million. And in addition, we've already closed a few deals for the fourth quarter. I'm now on slide number five. Let's discuss the performance of our four segments, our retail segment, Organic revenue grew by 4.1% in the third quarter. It's a really strong performance recognized across substantially all lines of business, driven by a combination of good retention, improving new business wins, and continued rate increases. We're very pleased with how our team is prospecting new accounts in both the traditional face-to-face model as well as virtually. Our national program segment grew 8.4% organically, delivering another impressive quarter. Our growth was driven by continued strong performance and rate increases for many programs, including our lender place, our commercial and residential earthquake, and our wind programs, just to name a few. Our wholesale brokerage segment grew 8.2% organically for the quarter. We realized improving new business and continued rate increases for most lines of coverage. Brokerage was the fastest growing, while our binding authority business delivered modest growth as many main street businesses are not back to full operation and we experience continued headwinds in the personal line space. We expect this rate pressure to continue for at least the next few quarters until carriers reevaluate their risk appetite or allocate more capacity to this challenged area. The organic revenue for our services segment decreased 13.1% for the quarter. The main drivers of the decline were lower claims volume for our social security advocacy businesses, a prior year terminated customer contract, and lower claims for many of our other businesses related to COVID-19. We expect organic revenue in the services segment will be down in the low to mid single digit range for the fourth quarter. Overall, it was a strong quarter and we'd like to say thank you for all of our teammates to continue to deliver for our customers in this challenging environment. Now let me turn it over to Andy to discuss our financials in more detail. Thank you, pal. Good morning, everybody. Like previous quarters, we'll discuss our GAAP results and certain non-GAAP financial highlights, including our adjusted results, excluding the impact of the change in acquisition earn-out payables. We're over on slide number six. For the third quarter, we delivered total revenue growth of $55.3 million, or 8.9%, and organic revenue growth of 4.3%. Our EBITDA increased by 13.2%, growing faster than revenues as we were able to leverage our expense base and further manage our expenses in response to COVID-19. Both of these factors were able to offset the headwinds associated with certain non-recurring items related to legal costs, the write-off of uncollectible receivables for one of our programs, increased non-cash stock-based compensation and a gain on the disposal of businesses recognized in the prior year. A quick comment regarding our employee compensation and benefits and other operating expenses as a percentage of revenues. The employee compensation and benefits ratio increased slightly as compared to the prior year, driven by higher non-cash stock-based compensation cost as we were performing above the targets for our long-term stock incentive plans. In addition, with the market recovery during the quarter, there was an increase in the value of deferred compensation liabilities. Please remember, the impact on EBITDA margin is substantially zero as this increases offset within other operating expenses. The ratio of other operating expenses decreased due to the continued management of our variable expenses in response to COVID-19, and to a lesser extent, the benefit of the aforementioned change in deferred compensation costs. Our income-before-income taxes increased by 4.8%, growing at a slower pace than EBITDA. This was driven primarily by the $21 million year-over-year increase in the change in estimated acquisition and route payables. On the next slide, we'll discuss our results excluding this adjustment. Our net income increased by 18.4 million or 15.9% and our diluted net income per share increased by 14.6% to 47 cents. Our effective tax rate from the third quarter was 15.5% compared to 23.9% in the third quarter of 2019. The lower effective tax rate, which was in line with previous guidance, was driven by the tax benefit associated with the vesting of restricted stock awards. Our weighted average number of shares increased slightly compared to the prior year and our dividends per share increased to 8.5 cents or 6.3% compared to the third quarter of 2019. We'll move on to 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 third quarter of 2020 the change in estimated acquisition earn out payables was about 15 million representing an increase of approximately 21 million dollars as compared to the third quarter of 2019. remember that we adjusted certain earn out liabilities down in the first quarter of this year at the onset of the pandemic based on our estimates at the time since then certain businesses have rebounded faster than anticipating causing us to increase the estimated earn out liabilities in the third quarter of this year. On a year-to-date basis, the net impact of the change in estimated earn out payables is a charge of about $5 million as compared to a credit of approximately $7 million for the same period last year. Excluding the change in acquisition earn out payables in the third quarter of both years, our income before income taxes grew $27.2 million or 18.6%, growing faster than EBITDA due primarily to lower interest expense. Our net income on adjusted basis increased by $35.3 million, or 31.6%, and our adjusted diluted net income per share was 52 cents, increasing 33.3%. These grew faster than income before income taxes due to the lower effective tax rate for the quarter. Overall, it was a strong quarter. Moving to slide number eight. This slide presents the key components of our revenue performance. For the quarter, our total commissions and fees increased by 8.7%, and our contingent commissions and GSCs were substantially flat. Our organic revenues, which exclude the net impact of M&A activity, increased by 4.3% for the third quarter. Over to slide number nine. Our retail segment delivered total revenue growth of 6.5%, driven by acquisition activity over the past 12 months, and organic revenue growth of 4.1%, which was driven by growth across most lines of business and slightly lower continued commissions and GFCs. For the quarter, retail realized about 100 basis points of incremental organic revenue growth from the timing of new business and certain renewals we expected to recognize in the fourth quarter of this year. Our EBITDA margin for the quarter increased by 250 basis points, and EBITDA grew 16.2% due to higher organic revenue growth and cost savings achieved in response to the pandemic, both of which were partially offset by a prior year gain on disposals, higher non-cash stock compensation costs, and higher intercompany IT costs. Our income-before-income tax margin increased 50 basis points and grew slower than EBITDA due primarily to a change in estimated acquisition earnouts. Over to slide number 10, our national program segment increased total revenues by 25.1 million, or 17.6%, and organic revenue by 8.4%. The increase in total revenue was driven by strong organic growth, recent acquisitions, and an increase in profit-sharing contingent commissions. EBITDA growth of 12.7% was slower than total revenue growth, due to the write-offs of certain receivables in one of our programs. Combined with higher intercompany IT charges, these items more than offset margin expansion from strong organic growth as well as variable cost savings in response to COVID-19. Income before income taxes increased by $600,000, or 1.3%, with the growth primarily impacted by increased acquisition earn-out payables and higher intercompany interest expenses. Over to slide number 11. Our wholesale brokerage segment delivered total revenue growth of 16.2% and organic revenue growth of 8.2%. Total revenues grew faster than organic revenue due to recent acquisitions. EBITDA grew by 21.1% and the margin improved by 160 basis points as compared to the prior year due to strong organic growth and the delivery of reduced variable expenses in response to COVID-19. which more than offset higher intercompany IT charges and higher non-cash stock-based compensation costs. Our income before income taxes grew by 21.1%, substantially in line with EBITDA growth. Over to slide number 12, total revenues and organic revenues for our services segment declined by 13.1%, driven by the items Powell mentioned earlier. For the quarter, EBITDA declined by 22.8%, driven by lower organic revenue and higher intercompany IT expenses. These were partially offset by reducing certain variable expenses in response to the pandemic. Income before income taxes decreased 59.5% due to a credit of $6.3 million recorded in the third quarter of 2019 for the change in estimated acquisition or not payables, and there was no adjustment in the third quarter of this year. A few comments regarding cash conversion and outlook for certain items. Regarding cash flow from operations as a percentage of revenues, it decreased as expected for the third quarter due primarily to about $50 million of second quarter taxes that were paid in the third quarter as permitted by the CARES Act. For the first nine months of 2020, our cash flow from operations as a percentage of revenue was approximately 27% as compared to 25% realized for the same period of the prior year. The increase is driven by our expanded margins, lower cash taxes, and continuing to manage our working capital. Regarding liquidity and interest expense, Pat mentioned earlier that we issued $700 million of 10.5-year senior notes in late September. With spread decreasing materially and the receptivity of the debt markets, we thought it was prudent to access the additional capital at long-term rates materially below our prior issuances. Our incremental debt is $500 million as we repay $200 million on the revolving line of credit. With the additional debt, our interest expense will increase by approximately $3 million per quarter. With this additional capital, our revolving line of credit, and strong generation of cash, we are well positioned from a capital perspective to fund in a disciplined manner additional investments to help further grow our business. With that, let me turn it back over to Paul. Thanks, Andy, for a great report. Through 10 months, we've seen 6.4 million acres burn in California, Oregon, Washington, and Colorado, with 4.3 million of those acres in California alone. There have been 27 tropical storms and 10 hurricanes, with five of these hurricanes hitting the Gulf Coast region, and one may hit this week. Rates are also increasing in most instances and interest rates are at historic lows. All of this is in addition to COVID-19 and the related choppy economic environment. We have customers laying off large numbers of employees and others are the busiest they've ever been. Even under these extraordinary circumstances, our diversified business has performed very well. For the first nine months, we grew our business 3.5% organically. Delivered improving EBITDA margins of 32.4% and adjusted EPS was up 21.4%. Overall, we'd say our performance and financial results have been strong. With rates continuing to rise, you'll see new capital come into the marketplace opportunistically. This will be in certain lines of coverage but not universally across the board. In addition, very few senior leaders at insurance companies will discuss if rates are exceeding lost costs. When that happens, that usually points to rates moderating or flattening. We're not sure if we've reached this point yet. The acquisition space continues to be hot. There's a lot of competition between private equity and long-term strategics. We don't see this competition slowing down anytime soon. Our ability to continue investing in our business was further bolstered by our recent bond offering. Quite honestly, I didn't think our cost of borrowing for 10-year money would ever be 2.375%. Our pipeline is good, but as you know, we don't count anything until it's signed. Finally, we continue to drive our technology agenda across the company through digitization, data, and automation. and prioritize technology investments around the following. One, continually optimizing and enhancing our data and analytics program. Two, expanding our digital delivery capabilities around products and services. And three, engaging in initiatives designed to drive greater efficiency and velocity through our underlying processes. We are constantly thinking about how we can serve our customers better and faster. In closing, we thought it was a really good quarter. With that, let me turn it back over to Kevin to open it up for the Q&A session.

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