Brown & Brown, Inc.

Good morning and welcome to the Brown and Brown 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 harbor provisions of the security 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, including the company's determination as it finalizes its financial results for the fourth quarter, that its financial results differ from the current preliminary anodized 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 the time to time in the company's reports filed with the Securities and Exchange Commission. Additional discussion of these reports and other factors affecting the company's business and prospects, as well as additional information regarding forward-looking statements, is contained in the side presentation posted in connection with this call and in the company's filing 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. Reconciliation of any non-GAAP financial measures to the most comparable GAAP financial measures can be found in the company's earnings press release or in the investor relation 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, Sergey. Good morning, everyone, and thank you for joining us for our fourth quarter 2021 earnings call. I wanted to begin with some overarching comments regarding our outstanding performance for the fourth quarter and the full year. 2021 was a year of milestones for Brown & Brown, with revenue surpassing $3 billion. double-digit organic growth of 10.4%, EBITDA exceeding $1 billion, and cash flow from operations of approximately $950 million. Even with all the challenges that faced the economy during 2021, our team performed at a very high level. We are extremely pleased with our results, which are only possible through the incredible efforts of our nearly 12,000 teammates. the confidence that our customers entrust with us each day, and the deep relationships with our carriers. Now let's transition to the results for the quarter and the full year. I'm on slide three. We delivered total revenue of $739 million, growing 15% in total and 9% organically. Our EBITDA margin was 29.2%, which is an increase of 210 basis points from the fourth quarter of 2020. Net income per share for the fourth quarter was $0.36 on an as-reported basis and on an adjusted basis, which excludes the change in estimated acquisition earn-out payables, which was $0.42, an increase of 31.3% over the prior quarter. During the quarter, we completed another eight acquisitions with annual revenues of approximately $67 million. We welcome all of our new teammates that joined during the quarter and throughout 2021 and thank them for their contributions to our results. I'm on slide four. For the year, we delivered over $3 billion in revenue, growing 16.8% in total and 10.4% organically. This was the highest level of organic growth we've achieved since the early 2000s when we were a much smaller and less diversified Today we're a highly diversified retail and wholesale broker, one of the largest operators of MGAs, and operate a number of great claims businesses. Our geographical footprint is also expanding as we operate throughout the United States, Bermuda, Canada, the Cayman Islands, Ireland, and the United Kingdom. We plan to grow and enhance our capabilities over the coming years and continue to deliver our industry-leading results. We improved our EBITDA margin by 240 basis points to 33.5% compared to 2020 as we leveraged the growth in organic revenue and managed our expenses while we continued to make investments in our business to support long-term profitable growth. Our net income per share for the full year of 2021 increased 22.5% to $2.07. On an adjusted basis, which excludes a change in estimated acquisition and out payables, our net income per share increased 31.1% to $2.19. Lastly, we had another good year of M&A activity, completing 19 acquisitions with approximately $132 million of annualized revenue, continuing our disciplined strategy to acquire top quality businesses that fit culturally and make sense financially. Later in the presentation, Andy will discuss our financial results in more detail. I'm on slide number five. From a customer and market perspective, business confidence continues to improve slowly. Business leaders are cautious due to the emergence of the Omicron variant, which represents another hurdle in the overall growth of the economy. For many industries, challenges continue to be the ability to find and retain employees, supply chain constraints, and inflationary pressures. Ultimately, these factors are impacting how quickly companies can grow. From a placement standpoint, the themes were pretty consistent as compared to previous quarters, which included heightened pricing sensitivity and coverage availability for cyber liability or customers with high losses. As a result, customers continue to modify their risk management programs to best control premium increases. Admitted market rates increased consistently with prior quarters and were up 3% to 8% across most lines, with the outlier being workers' compensation rates, which continue to be down 1% to 3%. From an E&S perspective, most rates continue to be up 10% to 20%. Cat property, both wind and quake, were up 10% to 30%, with some moderation experienced in earthquake rates. Professional liability for most accounts remain very challenging with rates up 10 to 15 plus percent or more. Regarding cyber, rates and deductibles in many instances have increased dramatically with carriers requiring enhanced security protocols to obtain coverage. For professional liability, cyber and excess umbrella, we continue to see carriers reduce limits while seeking significant rate increases. Similar to previous quarters, California and Florida placements for personal lines remain challenging due to losses or aggregate concentrations. We expect the appetite for personal lines in CAT areas to continue to be constrained into 2022, which will likely put pressure on state-sponsored programs and the cost of insurance for the customer. I'm now on slide six. Let's discuss the performance of our four segments. Our retail segment had another very good quarter, delivering organic growth of 9.5%. The performance was fueled primarily by growth from most lines of business through a combination of new business, good retention, rate increases, and modest exposure unit improvement. Retail organic revenue growth for the full year was a very stout 11%, which is the first time we've delivered double-digit full-year organic growth in over 20 years. These outstanding results are reflective of the benefits from the multi-year investments we've made, our powerful decentralized sales and service model, and our high performance-based culture that leverages our capabilities to provide innovative solutions to win and retain more customers. For the fifth consecutive quarter, our national program segment grew double digits, delivering excellent results and growing 10.4% organically in the fourth quarter. This performance was driven by strong new business, good retention, rate increases, and increasing exposure units across many of our programs. For the full year, national programs grew organically 12.4%. The team continues to fire on all cylinders, creating new capabilities and delivering best-in-class solutions for our customers. Our wholesale brokerage segment grew 8.3% organically for the quarter. due to strong new business, good retention, and continued rate increases, despite ongoing headwinds in our personal lines business. For the full year, our wholesale brokerage segment grew 8.1% organically, delivering another good year. Our services segment grew 1.2% organically for the quarter, with growth in property, auto, and workers' compensation claims, which was partially offset by continued headwinds in our advocacy businesses. For the full year, organic revenue increased by 3%. 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 slide number seven. Like previous quarters, we're going to begin with our gap results and then discuss certain non-gap financial highlights, which present additional meaningful year-over-year comparisons. For the fourth quarter, we delivered 15% total revenue growth and organic revenue growth of 9%. Our EBITDA increased by 24%, which was driven by leveraging our revenues and the continued management of our expenses. During the quarter, we recognized gains on sales of certain businesses or parts of business that benefited the growth in EBITDA margins by approximately 50 basis points. Our income before income taxes increased by 7.6%, growing at a slower pace than EBITDA due to the change in estimated acquisition earn-out payables. While these adjustments had a negative impact on income-before-income taxes and earnings per share, they highlight how recent acquisitions are performing better than our expectations. On an as-reported basis, our net income increased 4.5%, and diluted net income per share increased by 5.9% to 36 cents. Our effective tax rate for the fourth quarter was 27.8%, which was negatively impacted by the non-deductibility of a change in estimated acquisition earn-out payables associated with an acquisition where we purchased the shares of a business. Our weighted average number of shares were substantially flat compared to the prior year, and our dividends per share increased to 10.3 cents, or 10.8%, compared to the fourth quarter of 2020. We're over on slide number eight. This slide presents our results after removing the impact of the estimated acquisition earn-out payables for both years. The charge was $19.8 million in the fourth quarter of this year, compared to a credit of $9.5 million for the same period in 2020. Excluding these amounts, which are substantially non-cash in nature, income before income taxes and net income increased by 32.3% versus total revenues growing 15%. Our adjusted diluted net income per share was 42 cents, which grew by 31.3%. In summary, it was another very strong quarter on the top and bottom line. We're over on slide number nine. This slide presents the key components of our revenue performance. For the quarter, our total commissions and fees increased by 15.3%, and our contingent commissions and GSCs were up $5.3 million as we qualified for certain additional contingents and GSCs primarily in the national program segment. Our organic revenue, which excludes the net impact of M&A activity and foreign exchange, increased by 9% for the quarter. We're over on to slide number 10. Our retail segment delivered total revenue growth of 19.1%, driven by acquisition activity over the last 12 months and organic revenue growth of 9.5%, with strong growth across most lines of business. EBITDA grew 25%, with the margin increasing by 120 basis points for the quarter. which was driven by leveraging organic revenue growth and managing our expenses, even with increased variable operating costs. The change in income before income tax, as compared to the change in EBITDA, is impacted by fluctuations in intercompany interest, amortization, depreciation, and estimated acquisition earn-out payables, which is applicable for all segments. We're over onto slide number 11. Our national program segment increased total revenues by 12.6% and organic revenue by 10.4%. The increase in total revenue was driven by strong organic growth across many programs and increased contingent commissions. EBITDA increased by 25.4% with the margin improving 420 basis points as a result of strong organic revenue growth, managing our expenses, higher contingent commissions, and a gain on the sale of one of our businesses. The gain on the sale benefited margin improvement by approximately 250 basis points. Over to slide number 12. Our wholesale brokerage segment delivered total revenue growth of 12.4%, driven by acquisitions in the past 12 months and organic revenue growth of 8.3%. EBITDA increased by 14%, with the margin improving by 40 basis points, As a result of good organic revenue growth, the impact of the foreign exchange charge recording the prior year, managing our expenses despite higher variable cost. Over to slide number 13. Our services segment increased total revenues by half a percent and organic revenue by 1.2%. For the quarter, EBITDA decreased by 18.3%. due to the mix of revenue growth in the businesses, along with certain investments to support future growth. We're over on to slide number 14. This slide represents our GAAP results for both years. In 2021, we delivered revenues of over $3 billion, growing 16.8%, and earnings per share of $2.07, growing 22.5%. EBITDA increased by 25.5%, and the margin increased by 240 basis points. For the year, our share count increased slightly and our dividends paid during 2021 increased by 9.2%. The results for 2021 were just simply outstanding. Over to slide number 15. This slide presents our results excluding the impact of the change in estimated acquisition earn out payables for both years. For the full year of 2021, on an adjusted basis, our income before income taxes grew 29.6%, and net income per share was $2.19, growing 31.1% as compared to total revenue growth of 16.8%. A few comments regarding liquidity and cash conversion. In addition to our strong revenue and income performance metrics, we also had another great year for cash generation, delivering $948 million of cash flow from operations. Among publicly traded brokers, Brown and Brown continues to deliver the highest cash flow conversion, which we define as cash flow from operations divided by total revenues. We also finished the year in a strong liquidity position. With this capital, the cash we will generate in 2022, as well as the capacity on our revolver, we're well positioned to fund continued investments in our company. We've got a few comments regarding outlook for 2022. First, regarding contingent commissions, we anticipate them to be relatively flat year over year. As it pertains to taxes, we expect our effective tax rate for 2022 to be in the range of 24% to 25%. This does not take into consideration any potential changes in federal or state tax rates. We anticipate interest expense may increase slightly depending upon the frequency and magnitude of Fed rate increases this year. For reference, our floating rate debt is less than $500 million. In the first quarter of 2022, we'll be transitioning to a fiduciary reporting model for cash, accounts receivable, and payables held or owed in a fiduciary capacity. This change is to reflect the nature of the accounts more appropriately on our balance sheet and reduce volatility in the cash flow from operations. On the balance sheet, we'll label them fiduciary assets and fiduciary liabilities. In the cash flow statement, changes in fiduciary cash will be presented within financing activities. For 2021, our conversion ratio of revenues to cash flow from operations was 31%. Taking into consideration the upcoming change, it would have been approximately 27% to 28%. Starting in the first quarter of 22, we'll present the prior periods on the same basis. And then lastly, regarding EBITDA margins, we've communicated in the past that we believe our margins should be in the 30% to 35% range. We feel good about our current profile after increasing margins by 350 basis points over the past two years. For 2022, while we'll have some headwinds from increasing variable cost, we are targeting margins to be relatively flat year over year, barring something unusual happening. With that, let me turn it back over to Powell for closing comments.