Brown & Brown, Inc.

Good morning and welcome to the Brown and Brown Inc. First Quarter Earnings Call. Today's call is being recorded. Please note that certain information discussed during 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 first 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 finalises its financial results for the first quarter that its financial results differ from the current preliminary unaudited numbers set forth in the press releases 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 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, Holly. Good morning, everyone, and thank you for joining us for our first quarter 2021 earnings call. We had an outstanding quarter, probably one of the best in Brown and Brown's 82-year history. The results of the quarter are the outcome of the incredible efforts from our team, not only during the quarter, but over the last several years. Each of our segments had great performance, growing significantly on an organic basis and expanding margins due to more new business, good customer retention, and increased premium rates across most lines of coverage. These results demonstrate how we are focused on enhancing our capabilities, improving the experience for our customers, and delivering creative risk management solutions. From a customer segment standpoint, our large and middle market customers, which represent a significant portion of our revenue, recovered much quicker. However, smaller businesses are generally recovering at a slower pace. During the quarter, we released our first ESG report and are pleased to provide a view into our values as a company. We believe this report provides a comprehensive assessment of where we are in our evolution, but also lays out how we're thinking about the future. Hopefully, our current and future teammates, customers, carrier partners, and investors will find the report demonstrates our commitment to these important topics. Now let's transition to the results for the quarter. I'm on slide three. As I mentioned, we had an excellent quarter and are very pleased with our results. We delivered $815 million of revenue, growing 16.7% in total and 9.8% organically. This quarter represented one of the strongest quarters of organic growth since we began reporting this measure in the early 2000s. I'll get into more detail in a few minutes about the performance of our segments. Our EBITDA margin was 35.8%, which is up 120 basis points from the first quarter of 2020. Our net income per share for the first quarter was 70 cents, increasing 29.6% on an as-reported basis and 37.3% on an adjusted basis, which excludes the change in estimated acquisition earn-out payables. During the quarter, we completed two acquisitions with annual revenue of approximately $33 million. We're excited that O'Leary Insurances, which was the largest independently-owned retail broker serving the Irish marketplace, has joined the Brown & Brown team. We'd like to extend a warm welcome to all of our new teammates that joined during the quarter. In summary, we're very pleased with our strong performance as the team continues to fire on all cylinders and is focused on executing every day. Later in the presentation, Andy will discuss our financial results in more detail. I'm on slide number four. The economy continues to recover with the vaccine rollout, and we're seeing improving business confidence. However, not all geographies or industries grew at the same pace. Premium rate increases in Q1 were similar to the last few quarters, with some growing faster while others grew slower. Admitted market rates continue to be up 3% to 7% across most lines. Commercial auto rates are the exception as they remain up 10% or more. We're still not seeing positive workers' compensation rates, but they're getting closer to flat. Overall, the market is becoming more competitive. in sections or areas, and we're starting to see carriers willing to bind coverage at the expiring rate for new business, but that same carrier would like to get an increase if it was their renewal. From an ENF 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 these lines of coverage, there are definitely outliers. One area where we continue to see the most challenge right now is the E&S personal lines in Florida, California, and the Gulf states due to the continued reduction in carrier appetite caused by fire, weather events, and the increases in litigated claims over the past few years. We believe the reduction in personal lines capacity in CAT areas will continue to decrease through at least 2021. The placement of coverage for many lines, certain industries or customers with losses continues to be challenging. We do not expect this trend to change for this year. We also believe that rate increases experienced in the first quarter will more than likely continue for most of 2021, but there may be some moderation in the second half of this year. We closed two transactions during the quarter with annual revenue of approximately $33 million. As we've said in the past, Our acquisition activity can vary by quarter as we're focused on ensuring a good cultural fit that makes sense financially. This disciplined approach has worked well for us over many years to deliver value from the companies that join the Brown and Brown team. I'm now on slide five. Let's discuss the performance of our four segments. Retail delivered a record organic growth of 9.8 for the first quarter. The performance was driven by growth from all lines of business through a combination of improving new business, good retention, and continued rate increases. These results were only possible through the incredible efforts of our team to creatively engage with our customers, build our new business pipeline, and our broad diversification across customer size, line of business, and geography. We continue to be very pleased with how our team is prospecting new opportunities and and leveraging our capabilities in both the traditional face-to-face model as well as virtually. National program segment grew 13% organically, delivering another outstanding quarter. Our growth was driven by strong performance from most programs due to new business, as well as we realized continued rate increases for our wind and quake programs. Wholesale brokerage segment delivered good organic growth of 6.8%, For the quarter, brokerage continues to grow faster as we realize improving new business and continue rate increases for most lines of coverage across property, general liability, and professional liability. However, we continue to experience headwinds in our binding authority and personalized businesses. Overall, binding authority grew, but at a slower pace than we experienced in the past, primarily impacted by the pullback in CAT capacity for property and and the economic impact of COVID on small businesses. The services segment had a good quarter and delivered organic revenue growth of 5.7%, primarily driven by claims associated with recent winter weather events. Overall, it was a strong quarter, and we'd like to thank all of our teammates who continue to deliver innovative solutions for our customers. Now let me turn it over to Andy to discuss our financial performance in more detail.

Great. Thank you, pal. Good morning, everybody. We're over on to slide six. Like previous quarters, we'll discuss our gap results and certain non-gap financial highlights. For the first quarter, we delivered total revenue growth of $116.8 million, or 16.7%, and organic revenue growth of 9.8%, or $65.4 million. Our EBITDA increased by 20.5%, growing faster than revenue as we were able to leverage our expense base and further manage our costs in response to COVID-19. Both of these factors were able to offset increased non-cash stock-based compensation and lower margins associated with certain acquisitions completed in the past few quarters. Quick comment regarding our employee compensation and benefits and other operating expenses as a percentage of revenue. The ratio of employee compensation and benefits to total revenue increased as compared to the prior year driven by approximately $10 million of higher non-cash stock-based compensation costs. As a reminder, in the first quarter of 2016, we started issuing annual equity grants, which have a five-year vesting period. For the full year, we are expecting non-cash stock-based compensation expense to be similar to 2020. In addition, with the continued market recovery during the first quarter of 2021, there was an increase in the value of deferred compensation liabilities as compared to a decrease in the first quarter of 2020. This represents a negative year-over-year impact to the compensation margin of nearly 200 basis points. The ratio of other operating expenses to total revenue decreased due to the continued management of our variable expenses in response to COVID, along with the benefits from the aforementioned change in deferred compensation costs. Please remember the impact on the EBITDAQ margin associated with deferred compensation costs is substantially zero. Our income before income taxes increased by 16.5%, growing at a slightly slower pace than EBITDAQ. This was driven primarily by the $10 million year-over-year increase in the change in estimated acquisition earn-out payables. Our net income increased by $47.3 million, or 31%, and our diluted net income per share increased by 29.6% to $0.70. Our effective tax rate for the first quarter was 16.5% compared to 25.8% in the first quarter of 2020. The lower effective tax rate was driven by the benefit associated with the vesting of restricted stock awards. Please note the vesting of our stock awards will generally occur in the first quarter of each year. We continue to anticipate our full-year effective tax rate for 2020 will be in the 23% to 24% range. Our weighted average number of shares increased slightly compared to the prior year, and our dividends per share increased to $0.93 or 9.4% compared to the first quarter of 2020. We're over 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 meaningful year-over-year comparison. During the first quarter of 2021, the change in estimated acquisition earn-out payables was a credit of $900,000 as compared to a credit of $11 million in the first quarter of 2020. Our net income on an adjusted basis increased by $54.7 million, or 37.9%, and our adjusted diluted net income per share was $0.70, increasing 37.3%. Both measures grew faster than total revenue due to margin expansion and the lower effective tax rate for the quarter. Overall, it was a very strong quarter. Over to slide number eight. This slide presents the key components of our revenue performance. For the quarter, our total commissions and fees increased by 16.9%, and our contingent commissions and GSEs increased by 12.2%. Our organic revenue, which excludes the net impact of M&A activity and changes in foreign exchange rates, increased by 9.8% for the first quarter. We're over on to slide number nine. Our retail segment delivered total revenue growth of 16.8%, driven by acquisition activity over the past 12 months, and organic revenue growth of 9.8%, which was driven by growth across all lines of business. Our EBITDA margin for the quarter increased by 80 basis points, and EBITDA grew 19.5% due to the leveraging of higher organic revenue and managing our expenses in response to COVID-19. The growth was partially offset by recent acquisitions that have margins lower than the average for the segment. Our income before income tax margin increased 10 basis points and grew slower than EBITDA due primarily to the year-over-year change in estimated acquisition earnouts and increased amortization expenses associated with recent acquisitions. Over to slide 10. Our national programs segment increased total revenue by 20.6% and organic revenue by 13%. The increase in total revenue was driven by strong organic growth across many programs, acquisitions over the past 12 months, and increased GFCs and contingent commissions. EBITDA increased by $12.7 million or 30.8%, growing faster than total revenue. due to leveraging our total revenue growth and lower variable costs in response to COVID-19. Income before income taxes increased by $11.5 million, or 38.9%, growing faster than EBITDA due to slower growth in amortization and depreciation and lower intercompany interest expense. On slide 11, our wholesale brokerage segment delivered total revenue growth of 17%, and organic revenue growth of 6.8%. Total revenue grew faster than organic revenue due to recent acquisitions with contingent commissions and GFCs down slightly year over year. EBITDA grew by 20.6% with a margin increase of 80 basis points as compared to the prior year driven by leveraging of organic growth and lower variable expenses in response to COVID-19. This expansion was partially offset by the impact of lower contingents and GFCs. Our income before income taxes grew by 6.2%, which was slower than total revenue growth, primarily due to higher intercompany interest expense and the change in estimated acquisition earn-out payables. Slide number 12. Our services segment increased total revenue and organic revenue by 5.7%. primarily due to increased claims associated with recent winter weather events. For the quarter, EBITDA grew by 21.4%, driven by the leveraging of revenue growth and managing our expense base in response to COVID-19. Income before income taxes decreased 7.9% due to a credit recorded for estimated acquisition earn-out payables in the prior year. A few comments regarding liquidity and cash conversion. We experienced another strong quarter of cash flow generation as we delivered $125 million of cash flow from operations as compared to $34 million in the first quarter of 2020. Our ratio of cash flow from operations as a percentage of total revenue increased to 15.3% this quarter, which is more in line with historic performance. Keep in mind that this ratio is generally the lowest in the first quarter due to the payment of year-end bonuses, and then is much higher in the other quarters. With that, let me turn it back over to Powell for closing comments.