Brown & Brown, Inc.

Good morning and welcome to the Brown and Brown Inc. fourth 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 fourth quarter and are intended to fall within the safe harbour provisions of the securities law. 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 finalised its financial results for the fourth 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 discussion of these and other factors affecting the company's businesses 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, Holly. Good morning, everyone, and thank you for joining us for our fourth quarter 2020 earnings call. I'd like to take a few minutes to make some high-level comments about our business and how we performed last year. We came into 2020 with great momentum and discontinued into the first quarter, delivering 5.6% organic growth. Then COVID-19 hit the U.S. economy and things changed dramatically. While there was significant uncertainty, we knew we had a great team that is resilient, responsive, and innovative with a focus on providing solutions to our customers. In addition, we were able to quickly transition over 10,000 teammates to a remote working environment in less than a week so they could pivot and effectively serve our customers. As you may remember, we didn't grow as quickly in the second quarter due to the impact of the pandemic on our new business and the recording of revenue adjustments for general liability policies, but we still expanded our margins. Then in the third quarter, we delivered outstanding results with strong organic growth and margin expansion. The results of the fourth quarter were similar to the third quarter as we finished the year strong and with good momentum going into 21. Based on what we were seeing, If you'd asked me if it was likely that we would deliver full-year results with good organic growth and meaningful margin expansion, I would have said it was possible but unlikely. That's if you would ask me that in, let's say, April. We are very pleased with our results for 2020. We were able to deliver these results through the hard work of our teammates and their dedication to our customers. 2020 was a testament to our laser focus on delivering innovative risk solutions. We also thought the M&A landscape would cool off for several quarters until there was some sort of economic stability. The slowdown only occurred for about one quarter, and the industry-wide activity has now rebounded to pre-COVID-19 levels. Even with the uncertainty this year, we're very pleased to have completed 25 acquisitions and $197 million of acquired annual revenue. I'd like to highlight two strategic acquisitions, CoverHound, that we completed in the fourth quarter, and O'Leary Insurances that we announced in the fourth quarter and closed on the 14th of January. Regarding CoverHound, this acquisition will help us in many ways. First, it will help us further our investment in technology, drive our innovation agenda, and improve our carrier connectivity. Second, it enables us to more effectively and efficiently provide quotes and bond coverage to for our national program segment. Third, it enables us to better serve smaller customers within our retail segment. Ultimately, these items are focused on enhancing the customer buying experience by delivering curated quotes that best meet the needs of our customers. We believe these new capabilities are unique in the marketplace. We started 2020 with the acquisition of Special Risk in British Columbia and finished the year with our acquisition of O'Leary Insurances in Ireland. O'Leary was the largest independently-owned retail broker serving the Irish marketplace. This acquisition strengthens our European operations, which we look forward to further developing in the years ahead. Our new teammates and capabilities will deliver many opportunities over the coming years. We're extremely proud of our results in 2020 and the delivery of total shareholder returns in excess of 20%. I'd like to thank all of our teammates for everything they did to make it a great year. As you've seen in the press release, Tony Strines is taking on the role of chairman of our wholesale segment, and Steve Boyd will become our president of wholesale. Steve's background in national programs as an operator and in technology brings critical skills to the leadership team in wholesale as we continue to grow this important business through innovative solutions. I'm excited that Tony and Steve will be working together to further drive this growth in the future. Now let's transition to the results of the quarter and the full year. I'm on slide number three. We delivered strong results again this quarter, total revenue of $642 million, growing 10.9% in total and 4.7% organically. I'll get into more detail in a few minutes about the performance of our segments. Our EBITDA margin was 27.1%, which is up 10 basis points from the fourth quarter of 2019. Please remember that the fourth quarter of 2019 included a gain on sale of business that benefited the prior year margin by approximately 100 basis points. Our net income per share for the fourth quarter was 34 cents, increasing 25.9% on an as-reported basis. On an adjusted basis, which excludes the change in estimated acquisition earn-out payables, our net income per share was 32 cents, an increase of 14.3% over the prior year. Our team did an outstanding job of continuing to profitably grow our revenue as well as manage our expenses in response to the dynamics associated with COVID-19. During the quarter, we completed another nine acquisitions with annual revenues of approximately $80 million. We'd like to extend a warm welcome to all of our new teammates that joined during the quarter. For the year, we grew total revenues at 9.2% and delivered organic revenue growth of 3.8%. This was an outstanding performance given the economic headwinds experienced for most of the year. We improved our EBITDA margin by 110 basis points to 31.1% compared to 2019 revenues. as we leveraged the growth in organic revenue and managed our expenses in response to the pandemic. Our net income per share for the full year of 20 increased 20.7% to $1.69 from $1.40 in 2019. On an adjusted basis, which excludes the change in acquisition earnouts, net income per share increased 19.3%. Lastly, we had another strong year of M&A activity, as I said earlier, closing 25 acquisitions with approximately $197 million of annual revenue, adding many excellent businesses and teammates. Later in the presentation, Andy will discuss our financial results in more detail. Now on slide five. In prior calls, we talked about factors that would impact the economic recovery, which included the elections, the approval of the vaccine, and the timing of the rollout. as well as how much additional stimulus would be approved. The timing of the vaccine rollout and the approval of additional stimulus will have the largest impact upon the recovery of the economy and will influence business leaders' confidence about rehiring and investing in their businesses. During the fourth quarter, we continue to see companies doing well and others struggling mightily. We've seen improving new business, and our retention remains good. However, we continue to believe it will be a choppy recovery through at least the end of 2021 and maybe into early 2022. From a rate standpoint, the fourth quarter was very similar to the third quarter. Most standard rates were up 3% to 7%, with EMS rates up 10% to 25% as compared to the prior year. As we've talked about before, the main driver of rate increases continues to be loss experience. Commercial auto rates remain up 10% or more, and workers' compensation rates are not declining as fast as they were in previous quarters, but they're still negative. There has been a lot of talk over the past few quarters that workers' compensation rates are turning positive. However, we're still not seeing this across the board yet. From an E&S perspective, coastal property, both wind and quake, are up 15% to 25%. Professional liability is generally up 10% to 25% depending on the coverage and the industry. We continue to see outliers to these lines of coverage. Personal lines in California, Florida, and the Gulf Coast states remain under intense pressure as carriers are seeking to reduce their exposure due to fires and tropical activity during 2020. We expect a reduction in personal line capacity to continue throughout 2021. Placing coverage for many lines, certain industries, or customers with significant losses continues to be challenging. This includes excess or umbrella coverage where a carrier or carriers will seek a combination of lower limits and higher premium rates. We don't expect this trend to materially change in 21. Now on slide number six. Let's discuss the performance of our four segments. Our retail segment's organic revenue growth grew by 1.5% for the fourth quarter. As we mentioned in our third quarter earnings call, we had about 100 basis points of timing items that benefited the growth in the third quarter and negatively impacted the growth in the fourth quarter. Our fourth quarter performance was driven by new business, better customer retention, and premium rate increases, but was impacted by lower exposure units resulting from the pandemic. We view the performance for the fourth quarter as good, considering we delivered 7% organic growth in the fourth quarter of last year, and taking into consideration the timing headwinds mentioned earlier. Organic revenue growth for the full year was 2.4%, which we consider a good performance in light of a tough economic environment. Our national program segment grew 14.1% organically, delivering another stellar quarter. Our growth is driven by strong new business, retention, and rate increases. Some of the top-performing programs were our lender of place, commercial and residential earthquake, wind, and personal property, just to name a few. For the full year, our national program segment grew organically an impressive 12.3%. A huge thanks to Chris Walker and all of the team in national programs for delivering a great quarter and a great year. Our wholesale brokerage segment grew 5.8% organically for the quarter. We realized strong new business and continued rate increases from most lines of coverage. Brokerage was the fastest growing again this quarter, while we continued to experience headwinds in our binding authority and personalized businesses due to the economy and carrier appetite we mentioned previously. For the full year, our wholesale brokerage segment grew 5.5% organically, delivering another good year. The organic revenue for our services segment decreased 50 basis points for the fourth quarter, representing good improvement from the last few quarters. The main drivers to pressing growth continue to be lower claims volume for our Social Security and Medicare-certified advocacy businesses. The decline was substantially offset by revenue generated by processing claims for weather-related events that occurred in the third and fourth quarters. For the full year, organic revenue decreased by 10.9%, driven by lower claims for our Social Security advocacy business. Certain terminated customer contracts and the impact of the pandemic. While not back in positive territory, we believe the fourth quarter was a turning point, and we anticipate delivering modest organic growth for 2021. Now let me turn it over to Andy to discuss our financial performance in more detail.

Thank you, pal. Good morning, everyone. I'm over on to slide number seven. Like previous quarters, we're going to discuss our gap results, certain non-gap financial highlights, as well as our adjusted results, excluding the impact of the change in acquisition and outpayables. For the fourth quarter, we delivered total revenue growth of $63.1 million, or 10.9%, and organic revenue growth of 4.7%. Our EBITDA increased by 11.3%, growing slightly faster than revenues as we're able to leverage our expense base and further manage our expenses in response to COVID-19. These both offset the headwinds associated with the gain on disposal recorded in the fourth quarter of 2019 and increased non-cash stock-based compensation. Our income before income taxes increased by 28.3%, outpacing EBITDAF growth, This is primarily driven by the $15 million year-over-year decrease in the change in estimated acquisition earn-out payables. On the next slide, we'll discuss our results excluding this adjustment. Our net income increased by $20.8 million, or 27.2%, and our permitted net income per share increased by 25.9% to 34 cents. Our effective tax rate for the fourth quarter was 25.7%, substantially in line with the 25% we realized in the fourth quarter of 2019. Our daily average number of shares increased slightly compared to the prior year and our dividends per share increased to 9.3 cents or 9.4% compared to the fourth quarter of 2019. Over on slide number eight, 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 fourth quarter of 2020, the change in estimated acquisition earn-out payables was a credit of $9.5 million as compared to a $5.5 million charge in the fourth quarter of 2019. The credit was primarily driven by the reduction in estimated earn-out payables for an acquisition within the national program segment. Screwing the change in acquisition earnouts in the fourth quarter of both years, our income before income tax grew $13.9 million, or 12.9%. Our net income on an adjusted basis increased by $9.7 million, or 12%, and our adjusted deleted net income per share was $0.32, an increase of 14.3%. Overall, it was a great quarter. Moving over to slide number nine. This slide presents the key components of our revenue performance. For the quarter, our total commissions and fees increased by 10.9%, and our contingent commissions and GFCs were slightly down for the quarter. Our organic revenues were to exclude the net impact of M&A activity, increased by 4.7% for the fourth quarter. Over to slide number 10. Our retail segment delivered total revenue growth of 7.2%, driven by acquisition activity and organic revenue growth of 1.5%. The timing discussed above negatively impacted our organic revenue by 100 basis points for the quarter. EBITDA grew 5.3% due to leveraging organic revenue and cost savings achieved in response to the pandemic. This growth was slower than the growth in total revenues primarily due to a prior year gain on disposal that represented a negative year-over-year impact of approximately 150 basis points. Our income for income tax margin increased 130 basis points and grew faster than EBITDA due primarily to the change in estimated acquisition earnouts. Moving on to slide number 11, our national program segment increased total revenues by $25.3 million, or 18.9%, and organic revenue by 14.1%. The increase in total revenue was driven by recent acquisitions and strong organic growth across many programs. EBITDA growth of 19% was in line with total revenue growth. The leveraging of strong organic revenue and the management of variable cost was offset by higher intercompany IT charges and lower contingent commissions. Income before income taxes increased by $20.3 million, or 54% growing faster than either back due to decreased acquisition earn-out payables that was partially offset by higher intercompany interest expense. Over to slide number 12. Our wholesale brokerage segment delivered total revenue growth of 19.2% and organic revenue growth of 5.8%. Total revenues were faster than organic revenue due to recent acquisitions with contingent commissions substantially flattened year over year. EBAC grew by 17.1% with a margin decline of 40 basis points as compared to the prior year. While we delivered good organic growth and reduced variable expenses in response to COVID-19, these were more than offset due to changes in foreign exchange rates and to a lesser extent, higher intercompany IT charges. Our income before income taxes grew by 6.2%, which was lower than total revenue growth, primarily due to higher intercompany interest expense. Over to slide number 13. Total revenues and organic revenues for the services segment both declined by about 50 basis points, driven by the items Powell mentioned earlier. For the quarter, EBITDAX increased by 9.7%, due to increased weather-related claims and was partially offset by higher intercompete IT expenses. Income before income taxes decreased 23.6% due to a credit of $2.5 million recorded in the fourth quarter of 2019 for the change in estimated acquisition earn-out payables that did not occur in 2020. Over to slide number 14, this slide presents our gap results for the full year of 2020 and 2019. For 2020, we delivered revenues of $2.6 billion, growing 9.2%, and earnings per share of $1.69, growing 20.7%. Our EBITDA increased by 13.5%, and our EBITDA margin grew by 110 basis points. For the year, our share count increased slightly, as compared to the prior year, and our dividends paid during 2020 as compared to 2019 increased by 7.1%. Over to slide number 15. This slide presents our results excluding the change in estimated acquisition and earn-out payables for both years. For the full year of 2020, on an adjusted basis, our income before income taxes grew 18.1%, which outpaced EBITDA growth due to lower interest expense, and our adjusted net income per share grew by 19.3%. In addition to strong income performance metrics, we also had another strong year for cash conversion due to the strength of our operating model and diversity of our businesses. We delivered $721.6 million of cash welcome operations, representing a continued strong conversion rate of 27.6% as a percentage of revenue. We also finished the year in a strong liquidity position with $817 million of cash and cash equivalents, as well as $800 million of accessible capital on our revolver. With this capital and the cash we will generate in 2021, we are in a good position to fund continued investments in our company. We got a few other comments regarding Outlook for 2021. During the third quarter, we were asked a question about our potential margins for 2021 in relation to the COVID-19 savings we had in 2020. Now, with the year completed and a bit more visibility in 2021, we expect EBITDA margins could be flat to up slightly, considering our variable cost will more than likely increase as we're able to travel and see customers face-to-face. As we've done in the past, our leaders will be focused on growing profitably. Regarding contingents, we are anticipating them to be relatively flat or maybe down slightly in 2021. As it pertains to taxes, we expect our effective tax rate for 2021 to be in the range of 23% to 24%. This does not take into consideration any potential changes in the federal tax rate that are being discussed by the new administration. For interest expense, we're anticipating a $7 and $9 million increase as compared to 2020 driven by the new bonds we issued in September of 2020. From the capital perspective, we are expecting our capex to decrease in 2021 to approximately $40 to $45 million as we have substantially completed the development of our new Daytona Beach campus. With that, let me turn it back over to Paul for closing comments.