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.

Thanks, Andy, for a good report. In my opening comments, I mentioned there are still a few items that need to be resolved over the coming quarters. We will watch closely the successful rollout of the vaccine and additional stimulus to help those in need. Both of these items will influence the pace of economic recovery over the coming quarters. From a rate perspective, we expect increases for the first six months of 21 to be similar to those seen in 20. Ultimately, the rate of increases will be driven by losses sustained in 2020 from the record-setting number of tropical storms and the millions of acres that were burned. The question remains, for how much longer and at what pace do rates need to achieve their targeted returns? We think the market is getting near an inflection point over the coming year for certain lines that will drive some rate moderation. The acquisition pace seems to be as active as ever, and competition between private equity and long-term strategics remains. We continue to believe the aggressive pricing for deals by PE will not abate anytime soon, However, we're well positioned with our low leverage and the capital on our balance sheet, as well as access to additional capital to fund our M&A activity. Our pipeline remains good, and we will keep our disciplined approach to M&A as it's proven to be very successful. But as you know, we don't count anything until it's closed. Finally, technology and innovation continue to be at the forefront regarding creation of new products and enhancing the experience of our customers. We will continue to digitize our data, automate, and prioritize technology investments around the following, optimizing and enhancing our data and analytics program, expanding our digital delivery capabilities around products and services, and engaging in initiatives designed to drive greater efficiency and velocity through our underlying processes. As we deliver on these goals, we will see new opportunities for growth that will serve our customers even better. We had a great 2020 on many fronts and have good momentum heading into 21. I am extremely proud of how our team has served our customers through extremely challenging times. We have a great team and a highly diversified business. Both have performed very well in the past and we expect they will in the future. Ultimately, our financial performance is only possible because through the combined efforts of our nearly 11,000 teammates and their commitment to serve our customers. With that, let me turn it back over to Holly for the Q&A session.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one to ask a question. We'll now take our first question from Elise Greenspan from Wells Fargo. Please go ahead. Your line is open. Hi, thanks. Good morning.

First, I wanted to start on some of the comments you gave on your margins, right? So you said just kind of where you see the market today, it sounds like flat to, you know, maybe some slight improvement in margins. Can you just – is there a way to give us a sense on, you know, what kind of range do you assume for organic as we think about whether margins might be flat or improved or, like, the variables, I guess, that will determine, you know, the level of potential margin improvement you see in 2021?

Good morning, Elise. Thank you for your question. I know that you've heard us say before that we don't give growth guidance to As we know that we've said, we think our business is a low to mid-single-digit organic growth business in a steady-state economy. But we wanted to clarify that because there's a lot of talk out there around variable expenses and how you capture or don't capture or whatever. And I think the results this year are a testament to to how our system works which is at every office, the leader that runs those offices, she or he is responsible for that P&L. And by doing so, they control the expenses that were controllable or variable at the office level. And then as those individuals are able to go back and travel or serve our customers in a different capacity, we will incur those expenses again. And so it's not as though we're going to be able to give you, you meaning you at least or any other analyst, a specific number because that's not the way it works. It works at the very local office level and we didn't have any extra stuff that we were paying before we thought. So I'm sorry I can't answer your first question because we don't give specifics on organic growth guidance, but I just wanted to give you that kind of feedback on the variable cost.

Okay, that's helpful. Maybe I'll ask it a little bit of a different way. Like, if we look at, you know, retail, right, you guys saw 1.5% organic in the fourth quarter, right? So that was one point of timing, which, as I told us, right, but still 1.5% organic. And if we adjust for the gain on sale, right, there was I think you said like 90 basis points of margin improvement in that segment in the quarter. So, you know, it's kind of that. Was there something one-off in the segment? I mean, maybe it comes back to some of this variable comp as we just think about retail and, you know, potential economic bounce back and what that could mean to that segment's margin. Other than just thinking through perhaps lower travel, was there anything else that might have been one-off in that segment in the quarter?

Good morning, Alyssa. It's Andy. Just for clarity, is your question, are you asking you expect forward to be higher or it's higher than you anticipated?

Well, I'm just trying to get a sense as we think about forward. Was there anything kind of one-off within those numbers in the quarter other than just perhaps, you know, the continuation of just, you know, lower travel reviews and stuff?

Sure. Yeah. No material one-off items other than the pieces that we had called out inside of there. So primarily around the variable cost and then the gain year over year. So we'll continue to manage those as we go into 2021 just as we did during 2020. We're always focused as an organization is how do we grow our top line and grow the bottom line profitably. and balance that. And so we did really well during 2020, and we have confidence that all of our leaders will be able to do that in 2021.

Okay, great. And then, Powell, you started off your prepared remarks by talking about some of your recent transactions, O'Leary, right, which you guys just closed this month. And I think that you pointed to developing your international presence in years ahead. You know, what Your presence obviously has more been specific, like the UK area, but can you give us a sense of what does that mean, and I guess M&A and size, and how you think about potential international expansion?

Sure. So we're very pleased that the team in Ireland has joined, and I would tell you that O'Leary Insurance is – is very similar to our organization maybe 20 years ago. It reminds me greatly of us and how they are involved in their communities and they serve their customers and their relationships with their carriers. So as a general statement, and this is a very general statement, we, number one, obviously like the Irish Marketplace. Two, we like the fact that someplace like Ireland or England or Canada has a rule of law. And so you think about that, and we think about places where people have built and grow good businesses, and we will continue to look in those areas. Now, please don't take that comment out of context, Elise, that says, we're now on international spending binge. That is not the case. We evaluate every transaction in a very similar way, and it starts with cultural fit and does it make sense financially. And if those two things, if there's a cultural fit, we usually think there's a way to make something work. And so vetting... and getting the right ones and doing all that, it's just like doing it here in the United States. It's just 7,000 miles away or farther. And so we will continue to look at businesses in areas like that. We have looked over the years, and for whatever reason, we haven't. You know, we bought the business at the beginning of the year in Vancouver, Canada. We've looked at businesses in Canada before, and for whatever reason, it just didn't work in the past. And they were good firms. It just didn't work out. And so I think that it's another opportunity for us, but I do not want anybody on this call to think that this is some new flavor of the month or something. It's absolutely not that. And we will continue to look for firms that fit our criteria and continue to tell the brown and brown story because we're a forever company. And that's appealing to some people. And so we're really excited about it.

Thanks, Powell. I appreciate the call.

Yeah. Have a nice day, Elise. Thank you.

We will now move to our next question from Phil Stefano from Deutsche Bank. Please go ahead. Your line is open.

Yeah, thanks. Maybe just a follow-up to the international brokerage acquisition market. And I know that it's a small part of the story, it feels like, at this point. But just given that was Elise's last question, is there anything that changed? And so, you know, two acquisitions, not to make a big deal of this, but you said that, you know, you've looked at this in the past, and for whatever reason, they didn't come through. Is there anything that changed that kind of feels like you've been able to click off a couple of wings here? Is the competition in the U.S. higher, and it allows you to maybe look more seriously at the international or anything from that perspective?

First of all, good morning, Phil, and no, there's nothing that's changed. The competitive landscape is equally as competitive overseas as it is in the United States, be it in North America or in the British Isles. number one. Number two, I think that there are lots of people, Phil, that we talk to over the years that are not ready to do something when we start to get to know them, which we believe is a great time to get to know them because they get to know us and we get to know them and and then over the years they see how we act as a company and we see how they act as a company, and then there might be a fit down the road. So I would tell you we always think that good people attract other good people. People don't work for companies. They work with and for people. And so having said that, that is absolutely the case in those two acquisitions. And we will continue to look in areas that present exciting growth opportunities and expanding our capabilities. And there's all kinds of things that come out of it to the positive. But there's nothing that, like, just all of a sudden said, we're going to pay more or we're going to accept this. Nothing has changed in that regard. Okay, perfect.

Thank you. And then I think, Paul, in the initial remarks, you had talked about expecting a chopper recovery through 2021, maybe into 2022. When we think about new business has improved from third quarter to fourth quarter, is the trend line for that choppiness continued improvement? Or, you know, is there choppiness just, you know, around a slavish trend line in how we think about new business momentum?

Yeah, I think it's choppy, like up and down and up and down. Here's the thing that, Phil, you can't fully put your finger on. And so there are businesses that have, as an example, they have furloughed people. But by furloughing people, they're still on their employee benefits plan, as an example. And now let's say that company has brought back half of the people that were furloughed, but they terminated the other half. All of a sudden, you actually have a reduction in exposure units in that example. And so it is not as though we have clear line of sight on what every customer is going to do in that regard. So remember, I think of new business as new, new business, a new customer to us and a new line, just a new customer to us is new business. But you can have an existing customer where you write the PNC and then pick up the benefits or write the benefits and pick up the PNC. And I don't consider that a new customer. It's a new line there. But I think the important thing is, remember, we have always talked about our business is a reflection of the middle and upper middle market economy. And so if you think about all the customers that we touch and have the good fortune to work with and earn their business every day, some of those customers are are looking at their business differently today than they have in the past. That could be positive or negative. They could be adding 15 people or they could be releasing 50. So the reason we say the choppy part is there's all kinds of variables outstanding. First question, are people going to mandate that their employees get vaccines? and come back to work? Well, based on the studies that I've seen so far, about 75% of the companies out there that I'm aware of have said no to that. Okay? So how does that impact work going forward? What about people that have been hanging on by their fingernails and then all of a sudden they say, we're just going to be done, we're going to hang it up? We don't see something, Phil, that indicates that, but I can tell you we are paid to think in advance, you know, around the corner, and we're trying to anticipate what could happen in the next three or four quarters.

And, hey, Phil, the reason why, you know, you also realistically probably see choppiness in the businesses, think about through the lens of a business owner, right? and their level of confidence knowing what could happen over the next quarter or four quarters and then how they invest in their business. And that could be anything from kicking off a new capital project for a building, acquiring another organization, making some sort of an expansion, whatever the case may be. Well, depending upon that level of confidence, they may decide just to delay that by 90 days. And that's just not uncommon, and we saw some of that. from the second quarter into the third quarter and the fourth quarter, where things just move around back and forth. And that's really why we say it won't surprise us if there's choppiness, because we just don't think that there's a consistent level of confidence yet in the marketplace. And we just think that's going to take some time to work out during 2021. Okay.

I appreciate the follow-up, and congrats on the quarter.

Thank you. Thank you.

We will now move to our next question from Mike Zaremski from Credit Suisse. Please go ahead. Your line is open.

Hey, good morning. A follow-up to the last question from Phil, and I appreciate how you explained the dynamics around some of the potential organic growth uncertainty and choppiness. The national programs segments been strong for a while now. The dynamics you explained, does that pertain to national programs as well, or should we be thinking there's some more kind of tailwinds that remain strong in that specific segment?

I think national programs is a little different than retail in regards to they may have a limitation or run into a limitation based on their ability to provide capacity because the demand outstrips the supply. That is not the case today, but I'm saying that would be a different kind of, my term, governor for organic growth for them going forward in a wind program or a quake program or a something type of program. And so I say that because, remember, we're underwriting on behalf of the carrier. We've been delegated the underwriting authority. But there's one carrier, or in some instances, multiple carriers. But in the case of retail, we have access to the entire marketplace. So virtually every carrier we have access to. So if one carrier, carrier A, doesn't want to do it, carrier B and C still may consider it. So we are very pleased with the growth of national programs. We do think that there were and continue to be some interesting dynamics in terms of significant rate increases on cat-exposed business that would drive some of that growth. And one of the things that we've said, Mike, and we haven't seen it yet, but we've talked to these people and some of these people that there are other providers of capital that are either coming into the marketplace or are in the marketplace that if in fact everything else stayed constant, which probably won't be the case, but if they did in a new capacity, that's either going to moderate the rate increases or Or in some instances, it might even reduce the rates just slightly. So I'm just thinking about, you know, if you have a condo in Miami and the thing's gone up 15%, let's just make this up, or more for the last three years, and then all of a sudden somebody comes in and they get a flat renewal to get it, or even slightly down maybe, you could see that. So you have this very unique time We think it's obviously, it presents a lot of opportunities and challenges all wrapped up into one, but I would just tell you that the growth that national programs has enjoyed and delivered, in our opinion, is number one, spectacular, but two, we don't give growth guidance, as you know, but I would say that the performance of was even higher than we anticipated for 2020. So I say that just to kind of give you a sense of it because it's a great business and the market will turn one day and that growth rate will slow down some and things like that, but yeah.

Mike, we talked about this on the third quarter earnings call. There's one where we're extremely, extremely pleased with the organic in the fourth quarter. Definitely over all expectations. We'd love to see national programs post another 12%, 14%, 15% every quarter in 2021. We don't know if that is realistic, so we wouldn't want you to set your expectation in the double digits. That would be great if it happens, but there's a lot of different dynamics in the marketplace, so just want to make sure you kind of moderate how you think about the growth, and we're very, very excited about our capabilities in that space and how we can deliver. That's helpful. Moving to the... In the past, you did two strategic deals recently, Cover Hunt and O'Leary. I'm assuming there's not a major margin impact. In the past, it's been very helpful that you've broken it out in the DACA supplement. Yeah, Mike, we normally break out larger acquisitions. We didn't fall into that category. Both of them do have margins below the average for the organization, but we've taken that into consideration when we gave the guidance of flat to up slightly for 2021. Okay. Okay, got it. I guess lastly, you know, you've done a good job in kind of talking and investing in technology and innovation, digitization. Recently, you're still talking about it. Is that, you know, I guess, You know, you talk about CapEx decreasing, but CapEx seems kind of like an old-school world. Should we be thinking about kind of the technology visualization investment being a more material percentage of expenses? And that's kind of one of the levers we should be kind of thinking about, which, you know, if you do decide to invest more in it in the coming years, I can kind of be somewhat of a governor on on margins given how the market for given organic growth is very healthy and maybe you take some of that healthy organic growth and invest a little bit more in digitization efforts?

So Mike, I'd like to address that and what I would say is this. are going to make the right investment in the business and erase the issue of technology. So we're going to use that specifically as we see fit going forward now and in the future. I don't want to give you the impression that, okay, if we're growing more, then we're going to invest more, or if we're growing less, we're going to invest less. That isn't really the way we think about it. The way we think about it is, is, Where do we want to go? How do we want to get there? And then what do we need to do by build partner to get there? And then along the journey, we're going to reassess and say, was our original hypothesis correct? Is it validated? Or do we need to course correct midstream? Once again, I would tell you this. I think that this is a hard one because I know what you as an analyst are trying to do in terms of margin movement and things like this. And we've been very consistent in saying where we thought the margin would be, where the organic growth would be in steady state economies and even in kind of variable economies, which is what we're in today. But, you know, again, and I said this, and I think it's important for everybody just to pause and think about it. If you had asked Andy and myself in April if we would have delivered 3.8% organic growth and 110 basis points of improved margin, Andy and I, if we could have said it, publicly, we would have said it's possible, but the probability is very small based on what we were seeing then. So I would take you back to how you thought in April. And so it's not about just how we thought, it's how you thought. And some people thought the world was coming to an end. And so what I would tell you is we are... couldn't be more proud of the way our team responded because it isn't easy, as you know. And so the thing that all this doesn't reflect is the numbers are a result of almost 11,000 teammates busting their butts for their customers every day. And I know you know that. but I will tell you there's a lot that goes into it to deliver these numbers. And so I couldn't be happier under the circumstances. And we're going to continue to invest in technology, and I think there are lots of opportunities in some of the things that we're doing already, and there will be some that we haven't yet invested in.

Yeah, hey, Mike, let's see if we can just hit this head on so there's no misconception out there. So if there's a concern that with us talking about innovation and technology that we're going to make this big investment and take the margin backwards, you can go ahead and, you know, alleviate that concern. In 2016, in the first quarter, we talked about our investment program, and we laid out a very clear path as to what are we going to do with our margins on the way down and on the way up, and I think hopefully we've been really, really clear on that. It's also in our investor deck. If we have a situation like that in the future, we will talk to all of our investors and all of our analysts, What we're really saying is we think we've got appropriate spend inside the business. We will balance between, we'll call it the BAU stuff, and innovation through the organization. But we do believe that innovation is very important in how we can serve and engage with our customers and our carrier partners. We will continue to do that as an organization. Not all of it will be CapEx. Not all of it's going to be OpEx. There's going to be balances back and forth because sometimes it's part of that that leasing or partnering that Kyle talked about, that's going to flow to OPEX. Some things we'll build ourselves. We can work through all those. And, again, we've incorporated that into all the guidance at least that we've given for 2021. If other opportunities pop up during 21 that we need to change our view because we think it's something really good for our business long-term and delivers appropriate shareholder values, then we will absolutely talk to everybody about it. There's no looming big investment out there, so we just want to hit that one head on. Okay, yeah, I wasn't asking this in the context of concern. I guess some companies have talked about COVID opening their eyes to being able to do business slightly differently using more digitization, so very helpful response. Thank you. Okay, well, thank you.

We will now move to our next question from Yaron Kinnar from Goldman Sachs. Please go ahead. Your line is open.

Thank you very much. Good morning, everybody. I think my first question probably is a follow-on to Mike's last question. If I look at CoverHound, I think one of the strategic questions out there that you cited was that it does give you another leg up on the technology and innovation side. So with that in mind, should we also think expect to see the independent or organic IT spend that we kind of saw throughout 2020 continuing 21? Or should we see that maybe slow down a bit because they're getting more of that through this acquisition?

Lauren, first of all, good morning. And this would be a comment for everybody. If you could either make sure you put the microphone closer to your mouth or the speaker, we're getting kind of a muffled kind of thing coming through. So if I could just ask you to repeat like the last three sentences there, which was, I heard about the cover hound and the investment, but I couldn't get the very end of that, which was really the crux of your question. If you could repeat that, please.

Sure. Hopefully this is better.

A little bit better. Yes. Go ahead.

Okay. So my question was, with the CoverHound acquisition and the strategic value of it, one of the strategic values being the technology angle and the innovation angle, should we still expect to see the organic IT spend that we saw in 2020 continuing to 21, or does that lever maybe get dialed back a bit because you now have the inorganic market? digitalization in that technology coming in through the acquisition.

Yeah. Thank you very much for the clarification, Yaron. I think that you have to expect the spend to be similar going forward because we are very pleased with the CoverHound acquisition and the team and the technology that comes with that acquisition. And we believe that there are multiple places that we will be able to use that in our different divisions. However, we have contemplated that the tech spend across the other platforms will continue as stated and tell them at which time, or I should say if, we determine that the technology in CoverHound is transferable or expandable maybe is better into a capacity in one of the divisions that we're not aware of just yet. That's how we'd answer that. Okay.

And does Coverham give you an ability to access markets that were not available to you in the past, or is it just a matter of accessing the markets that you've already played in but in a more efficient way?

Yeah. The markets that they do business with are markets we already do business with, Jaron, but it's – It is conceivably in some areas where we may not have worked with them before.

Okay, understood. And then final quick one, free cash flow, I think, grew mid-single digits this year, where EPS and earnings growth was well in the double digits. So I was just curious if you could talk about what maybe some of the headwinds were this year specifically. Hi, good morning, Aaron. Hey, one of the things to keep in mind on the cash flow is we do get movements up and down based upon what happens with the fiduciary assets. And so as those kind of, as our fiduciary assets, again, keep in mind on those, that's the premium that flows through the organization. for all the buildings. So that can move up and down. If you look at last year, we grew free cash flow significantly faster than EBITDA as well as the earnings per share. So I think last year we were at on a free cash flow close to about 15%. I think this year we're about a 7.6%. So you will see some movement up and down inside of there. It's the reason why we focus a lot on the cash flow from operations on the conversion ratio. We were just shy of 28% this year. We were just a little over 28% last year. So it's going to kind of hover in that range. We're really, really pleased with the cash and the way that we were able to convert our revenues again in 2020. Got it. Thanks so much. Yeah, thank you.

We will now move to our next question from Greg Peters from Raymond James. Please go ahead. Your line is open.

Good morning. Can you guys hear me okay? Yep. Excellent. Throughout your prepared comments, you talked about changes in earn-out payables. It hit three of your four segments and called out, I think, you know, a chunk in the national programs. But it seemed to really affect your report of results in all three segments on a consolidated basis in a way that maybe hasn't happened before. So can you give us some color of what's going on there? And maybe segment by segment, is there something that you're missing on these payouts that we need to think about going forward? Hi, good morning, Greg. So just to go back, we had quite a few movements this year, both up and down. If you remember back at the end of the first quarter, we had taken down a number of the earnouts because when we were looking at the potential projections based upon what we were all staring down at the end of March on the economy, we said, well, we're clearly not going to make those numbers, and so we reduced those. Then we get to the end of the second quarter, and the outlook looks completely different. And then by the third quarter, it looks different again. We took them all back up. And so you are going to see unusual swings on a full year. Actually, we didn't really have a lot of movement. We can see it around. And that's part of this, the unknown about this economy, because what we have to be able to do is incorporate the best information that we have at the time of doing the calculations as to what we think is going to occur over the remaining burnout period, and that's what we tried to do this year, we'd say if you go back and look over time, our actual adjustments on a full year basis are actually pretty minimal. Considering the size of the earnouts that we have, as well as the purchase price. So we think overall we do a pretty good job. This year is probably a little bit of a different one just because of the economy that we're in right now. Yeah. Can you just, you know, as a follow-up to the earn-out, can you give us some updated perspective about how the earn-outs are performing with some of your other larger deals that you've closed in recent years, like the Hades acquisition, for example? We would say they're, They've all performed pretty well, Greg. I guess maybe a way to look through that is what has been the net charge or credit back into the P&L? And to our earlier comment, it's really not been material over the years as a percentage of the overall. And so what we try to do is establish that initial earn out to a level that we believe is reasonable. again, for everything that we know at the time of doing the transaction. Ultimately, we would love to see all of our sellers and our new teammates completely max out their earn-out. We would love to see that. And the reason why is because that means that the business is performing well. Many of them do. Some of them don't get all the way there. But we're very, very pleased with our success rate on our acquisitions, how well they perform versus the original expectations and ultimately over the years after they become part of a team. Great, got it. In the comments on the wholesale, you called out the purse lines business having headwinds. I'm trying to understand exactly what were the headwinds in the first line business considering that, you know, it seems like many of the first lines companies have done at least on the auto side and done pretty well.

Yeah. Yeah. So some of them have done well in certain areas and a lot of them are taking gas. And what I mean by that is if you write business in California, they've been burning for the last three years, as you know, And if you are in some of the coastal areas, there are some losses that occurred, Greg, as you know, here in our fine state, you know, one and two and three years ago that are developing, further developing with the involvement of public adjusters and things like that. So I would tell you that particularly in certain segments of the personalized market, it's been tough. And so that's the area that typically would come to the ENF market. And then the ENF carrier's experience, it could be in our book or it could be in the overall experience, leads them to potentially pull back in certain areas or their reinsurance costs have gone up or both. So this is not something that is unique to Brown and Brown or Brown and Brown Wholesale. It's kind of unique in industry across the board.

Got it. And then the final question or two questions are around the balance sheet. You know, if I look at the cash and cash equivalents at year end 20, substantial increase. compared to where you were at year-end 2019. That would clearly beg the question around capital allocation. It certainly seems to be holding more cash at this point than you need. So at this point in time, is this ASR share repurchase on the table? And then embedded in the balance sheet, I did notice that there was a nice jump up in accounts payable. I assume that flowed through and helped your cash flow. But maybe you can walk us what's going on with those two items in your view on capital management. That's my last question. Okay, perfect. Thank you. Let's tackle cash first. So, Greg, if we go back to our earlier comments, the $700 million issuance of a 10-and-a-half-year bond in September – That was the primary driver of the cash growing up. As we talked about during the previous call, the reason why we accessed the market back at that point is we thought it was a very, very opportune time to go get very low cost of capital as an organization. As you know well, when you need it, it's expensive. When you don't, it generally isn't. We thought we were just in a great position as an organization the markets were extremely, extremely receptive for us to issue bonds at just a little over two and a quarter percent. So we're very, very pleased with that. That doesn't mean that we issued that because we've got big pending acquisitions or we're going to do a big buyback as an organization. Not at all. It's there. We talked about the fact that With that capital, the access, what we'll generate, we feel really good about how we can invest in our business. So we may have, quote, some negative carry on interest, but we think that's definitely worth that potential slight negative carry to have the access to that capital that's out there. So that's just a thought on that front. The other piece on the cash and cash equivalents is keep in mind that not all of that is brown and brown cash. So historically, it's generally been about a 50-50 split between our money and the fiduciary funds rolling through. That is much more weighted towards Brown and Brown at the end of the year. Andy, can you just – I just want to – I can't pivot to you. I thought the money that wasn't yours showed up in the restricted cash and investments. category, not in the cash and cash equivalent category. Yeah, so it shows up in two places, Greg. In states or carriers that require that we need to put customer funds in specific accounts, then that money sits inside of the restricted cash and investments. In those states that do not require it, or carriers, that just sits within brown and brown cash and cash equivalents. So I just wanted to follow up. Is there a minimum sort of threshold when you think about cash and cash equivalents that you want the company to have on an any given year basis? So we don't have significant working capital requirements inside the organization grid, but We normally think keeping a couple hundred million dollars of real brown cash is sufficient for the organization based upon how much we deliver on a quarterly basis. And we're looking at cash flow projections every month, every quarter for the business. We know what capital allocations that are out there. So we can work our way through all those actually pretty easily. And then if we ever have a situation where We need capital in a quarter. That's why we have a revolver so that we can draw on that in the past and then we can pay it back down. But we're very, very in tune with our cash. And then the accounts payable questions. Thank you. Yeah, the accounts payable. Look at that. That's the shift in the – from if you look down on our other liabilities – You can see that they actually went up, but one of the items we've been in there, we've got some burnouts that are coming due in the next 12 months. That's what's shifted up into accounts payable. Got it. All right. So, thank you for the answer. It's not a source of working capital.

Did I forget, Mandy?

It is not a source of working capital in your question, Greg. It was just a movement between other lives. Okay. Perfect. Thank you. And then, Holly, why don't we go to 9-11. We'll take one more question today. And then if anybody else has other follow-ups, we can always touch base after the call.

Certainly. We'll now take our last question from Mark Hughes from Truist. Please go ahead. Your line is open.

Yep. Thank you. Good morning. Just one quick one. Brian Powell, how much do you think the market may have changed permanently in terms of the way insurance is sold? Do you think it will go back to the former method, the same spending on P&E, or is this going to be more durable? And if so, what impact on margin, perhaps?

Right. Good morning, Mark. And I think that's a really interesting question, and I think it will be dictated – significantly by our customers, which is, you know, we will see that and how that works in the future. Here's the way I describe it. If you have a larger customer, as an example, and you typically had three people that went to see that customer and they go to see that customer twice a year and then there's interaction throughout the year, The scenario that I say is do the three people go back in 21 or does one person go back and two or three or even four people join in via video conference so we leverage the collective capabilities of everybody? I tend to think towards the latter instead of the former, but that is not my decision. It's ultimately the customer's decision. That's number one. Number two, I think that buying on the Internet, so that's what I call it, where you see them on the video screen and all that other stuff, that might work for like one year. But particularly in a rising rate environment, customers need to see you because people buy from people they like and they trust. And at the end of the day, you don't get the full impact on a video screen. That's number two. Now, interestingly enough, that would lead me into the third point, which is more about acquisitions. And so I want to make sure that everybody on the call knows that we meet with people to determine if their culture and our culture is fit. So we're not buying businesses on the Internet, right? That means we are not buying businesses from people that we have never met except over a video conference. So I think all this video conferencing stuff is great, but I'm tired of some of it because I think you miss so much. So having said that, as it relates to the expenses, Remember, I know what you're trying to do, and some of the other larger public brokers are talking about amounts that they're going to save and permanently save and capture. I don't know what they were doing before, but we already know that we were efficient before. I think that we're focused on how do we retain the business that we have and, quite honestly, write a bunch of new business. So that may mean that we do some things a little differently in terms of solicitation or prospecting or pre-qualifying using technology, which in turn makes us a little more efficient in closing. That's yet to be determined. But I don't want to give you the impression that the margins are going to go dramatically one way or the other because you know, one of our customers only needs to see one of us twice a year as opposed to three of us. I think it's too early to tell. I would just say this. Our teammates are anxious to be able to go back and see their customers. They want to see them, and customers want to see us. Did you have another question, Mark? I don't. That's very helpful. Thank you. Appreciate it. All right. Thank you all very much. Have a wonderful day, and we look forward to talking to you after the first quarter. Goodbye. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.