Brown & Brown, Inc.

Good morning and welcome to the Brown and Brown Inc. Second Quarter Earnings Call. Today's call is being recorded. Please note that certain information discussed during this call, including information contained in the slide presentation, posted in connection with this call, and including answers given in response to your questions, may relate to future results and events, or otherwise be forward-looking in nature. Such statements reflect our current views with respect to future events, including those relating to the company's anticipated financial results for the second quarter, and are intended to fall within the safe 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 reference 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 second quarter, that its financial results differ from the current preliminary unaudited numbers set forward 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 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 forwarding 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 gap 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 the calendar of events. With that said, I will now hand the call off to Powell Brown, President and Chief Executive Officer. You may begin.

Thank you, Marianne. Good morning, everyone, and thank you for joining us on our second quarter 21 earnings call. Q2 was a very strong quarter and it's the best in the history of Brown and Brown. Our performance for the first six months of 2021 is due to the tremendous effort of our talented 11,000 plus teammates that deliver creative risk management solutions for our customers. Each of our segments delivered impressive results with strong top and bottom line growth due to more new business, good customer retention, increased premium rates across most lines of coverage, and higher exposure units driven by continued economic expansion. These results reflect the strength and diversity of our operating model as well as the power of our performance-based culture. Now let's transition to the results for the quarter. I'm on slide number three. We delivered $727 million of revenue, growing 21.5% in total and 14.7% organically. This is the strongest organic growth that we've ever delivered. I'll get into more detail in a few minutes about the performance of our segments. Our EBITDA margin was 32.9, which is up 340 basis points from the second quarter of 2020. Our net income per share for the second quarter was 49 cents, increasing 44% on an as-reported and adjusted basis, with the latter excluding the change in estimated acquisition earn-out payables. During the quarter, we completed two acquisitions and would 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 and believe we're well positioned to continue delivering best-in-class solutions for our customers. Later in the presentation, Andy will discuss our financial results in more detail. I'm on slide four. Let's start with the economy and what we saw during the quarter. As companies continue to reopen and strengthen, business confidence is improving. However, not all companies are back at 100%. and we continue to hear about struggles with certain customer segments in hiring workers. We think this will work itself out over the coming months and quarters, but these open roles are serving as a bit of a governor on the speed of recovery. Due to this uncertainty, customers remain very focused on their insurance spend and therefore managing their deductibles and aggregate limits. Rates were generally in line with what we experienced in the first quarter. However, we started to see some moderation to the level of increases in certain admitted and non-admitted lines. Certain customers and industries with high losses remain a placement challenge. However, we continue to see carriers seeking higher rate increases on renewal business while quoting at or below expiring rates for new business of a similar risk profile. Admitted rates continue to be up 3% to 7% across most lines. The outliers are workers' compensation rates, which remain down 1% to 3%, and commercial auto rates, which are up 5% to 10%. From an E&S perspective, most rates are up 10% to 20%. Coastal property, both wind and quake, are up 15% to 25%. However, near the end of the quarter, we started to see less upward rate pressure on renewals Professional liability for most accounts remains challenging, the SPAC market in particular. Professional liability rates are generally up 10 to 25 plus percent. Cyber rates are generally up 10 to 20 plus percent, with increased underwriting questions and some reduction in coverage availability. Also, excess umbrella coverage remains very difficult to place. For both of these lines, we're seeing carriers reduce overall limits while seeking significant rate increases. In the ENS space, California and Florida personal lines continues to be the most challenging. The appetite for personal lines in CAT areas will continue to be constrained through at least the end of 21. From an M&A perspective, we closed two transactions during the quarter with the annual revenues of approximately $11 million. Our pipeline remains full, and we feel good about the level of activity engagement with prospective sellers. Slide 5. Let's discuss the performance of our four segments. Retail delivered an outstanding organic growth of 17.6% for the second quarter. The performance was driven by growth across all lines of business and most customer segments. Through a combination of strong new business, good retention, rate increases, and higher exposure units as a result of the economic recovery. National programs grew 13.3% organically, delivering another great quarter. Our growth was driven by strong performance from most programs due to robust new business, good retention, and rate increases. The wholesale brokerage segment delivered a solid quarter with 12.3% organic growth. Brokerage continues to perform very well, delivering strong growth in new business and realizing continued rate increases for most lines of coverage. Binding Authority had a good quarter, driven by new business and continued economic recovery, and personal lines in California and Florida remained very difficult. and we don't expect carrier appetite to change in the second half of the year. The services segment had a good quarter and delivered organic revenue growth of 4.6%, primarily driven by claims processing revenue. The growth for the quarter was partially offset by continued headwinds within the advocacy businesses, primarily the Social Security space. Overall, it was a very strong quarter across the board. Now, let me turn it over to Andy to discuss our financial performance in more detail. Great.

Thanks, pal. Good morning, everybody. Like previous quarters, we'll discuss our gap results and certain non-gap financial highlights. We're on slide number six. For the second quarter, we delivered total revenue growth of $128.5 million, or 21.5%, and organic revenue growth of 14.7%. EBITDAX increased by 35.4%, which expanded EBITDAX margin by 340 basis points, despite lower margin associated with certain acquisitions completed in the past few quarters and slightly higher travel costs. The EBITDAX growth was driven by the continued leveraging of our expense base and lower non-cash stock-based compensation. Income before income taxes, increased by 44%, growing faster than EBITDA due to a lower growth rate in amortization and interest expense, as well as a decrease in acquisition earn-out payables. Net income increased by $42.5 million, or 43.9%, and our diluted net income per share increased by 44.1% to 49 cents. The effective tax rate for the second quarter of this year and last year was 25.2%. We continue to anticipate our full-year effective tax rate for 2021 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 9.3 cents, or 9.4%, compared to the second quarter of 2020. We're over on slide number seven, This slide presents our results after the adjustment to remove the change in estimated acquisition earn out payables for both years. For the second quarter of this year and last year, the impact was minimal with the adjusted and as reported diluted net income per share of 49 cents growing 44.1% over the prior year. Moving 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 21.3%, and our contingent commissions and GSCs increased by 2.2%. Organic revenue, which excludes the net impact of M&A activity and changes in foreign exchange rates, increased by 14.7%. Over to slide number nine. The retail segment delivered total revenue growth of 28.3%, driven by acquisition activity over the past 12 months, and organic revenue growth of 17.6%, which was driven by growth across all lines of business. Organic growth for the quarter was positively impacted by approximately 300 basis points due to the $8 million adjustment recorded in the second quarter of last year for the economic disruption associated with the pandemic. EBITDAQ margin for the quarter increased by 510 basis points, and EBITDAQ grew 55.1%. due to the leveraging of higher organic revenue along with a gain on disposal associated with the sale of certain books of business. The growth was partially offset by recent acquisitions that have margins lower than the average, higher non-cash stock-based compensation, and slightly higher travel costs. Income for income tax margin increased 580 basis points, growing faster than EBITDA driven primarily by amortization and intercompany interest expense growing at a slower rate than EBITDA. We're over on slide number 10. Our national program segment increased total revenue by 14% and organic revenue by 13.3%. Regarding outlook for the last two quarters of 2021, we wanted to highlight that we anticipate approximately $4 to $6 million of revenue shifting from the third quarter to the fourth quarter due to renewal timing for certain accounts. EBITDA increased by $7.9 million, or 12.6%, growing slightly slower than total revenue due to incremental costs associated with onboarding new customers, increased non-cash stock-based compensation, and slightly higher variable costs. Income before income taxes increased by $18.4 million, or 38%, growing faster than EBITDA primarily due to lower estimated acquisition earnouts payable and lower intercompany interest expense. Over to slide number 11. The wholesale brokerage segment delivered total revenue growth of 17.7% driven by acquisitions in the past 12 months and organic revenue growth of 12.3%. EBITDA grew by 19.1% with a margin increase of 40 basis points even with lower guaranteed supplemental commissions, slightly higher variable operating expenses, and incremental non-cash stock-based compensation. Income before income taxes grew by 6.9%, which was slower than total revenue growth, primarily due to higher intercompany interest expense and a change in estimated acquisition earn-out payables. Over on slide 12, our services segment increased total revenue and organic revenue by 4.6%, Regarding outlook, we anticipate organic revenue growth to be flat or down slightly for the second half of the year due to continued headwinds in processing claims by the Social Security Administration. For the quarter, EBITDA grew by 9.8%, driven primarily by leveraging organic revenue growth. Income before income taxes increased by 19.8%, growing faster than EBITDA due to lower intercompany interest expense and amortization. Few comments regarding liquidity and cash conversion for the quarter. We experienced another strong quarter of cash flow generation and have delivered $466 million of cash flow from operations through the first six months of 2021, growing $50 million or 12% as compared to the first six months of 2020. Our ratio of cash flow from operations as percentage of total revenue remains strong at 30.2% for this quarter. for the first six months of 2021. With the combination of our cash generation and capital availability, we are well positioned to fund continued growth. With that, let me turn it back over to Powell for closing comments.