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 before 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 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 include the company's determination as it finalizes its financial results for the first 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 business and prospects, as well as additional information regarding forward-looking statements is contained in the slide presentation posted in the connection with this call and in the company's filings with the Securities 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. All 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 presentation for this call on the company's website at www.bbinsurance.com by clicking on the investor relations and then calendar events. With that said, I will now turn the call over to Pal Brown, President and Chief Executive Officer. You may begin.

Thank you, Jake. Good morning, everybody, and thanks for joining us for our first quarter 2022 earnings call. We delivered another good quarter and are very pleased with our top and bottom line performance. Our consistently high level of performance is driven by our unique culture, whereby approximately 22% of our company is owned by teammates. Since our call on March 8th, we've made good progress and are very excited about GRP, BDB, and ORCID becoming part of the Brown and Brown team. Their additional capabilities and talented teammates will enhance the solutions we deliver to our customers globally. After that call on the 8th, Barrett Brown, Scott Penny, and I spent two weeks traveling around the UK and Ireland and met with over 1,000 of our soon-to-be new teammates and visited over 20 locations. After two weeks of engaging with the GRP and BDB teams, we are even more confident about the cultural alignment and are more optimistic about the future. As an update on closing the deals, we're very excited about the closing of ORCID at the end of March. For GRP and BDB, we continue to anticipate closing these acquisitions during the third quarter. Lastly, we completed the financing for these transactions in March. In addition, we published our annual report, ESG report, and proxy statement. We encourage everyone to review these documents as each report highlights our key aspects of our strategy, our commitment to our ESG initiatives, and our philosophies around executive compensation. Now let's transition to the results for the quarter. I'm on slide four. We delivered $905 million in revenue, growing 11% in total and 7.8% organically with good new business and solid retention. Our adjusted EBITDA margin was strong and remained consistent with the first quarter of 2021. Our net income per share for the first quarter was 77 cents on an as-reported basis and 78 cents on an adjusted basis. Later in the presentation, Andy will discuss our financial results in more detail. We completed two acquisitions during the quarter with annual revenues of approximately $65 million, with ORCID being the majority of that amount. In summary, we're very pleased with our strong performance for the first quarter. I'm now on slide five. From a customer and market perspective, businesses continue to expand and the economy grew, albeit at a slower rate than last year. We're seeing some customers beginning to realize initial relief in supply chain issues experienced over the last two years. The main challenges business leaders are managing today are the ability to find enough workers inflation, and rising interest rates. These are putting pressure on margins for many companies across multiple industries and are influencing how leaders invest in their company. From a carrier standpoint, the themes remain fairly consistent as compared to Q1 of 21 and previous quarters, which includes the availability of limits for certain classes, heightened pricing sensitivity, and increased underwriting rigor for cyber liability and customers with high losses. Consequently, customers continue to modify their deductibles and limits to best manage their premium increases. Admitted market rate increases were similar to prior quarters and were up 3% to 7% across most lines, with the outlier being workers' compensation rates, which continue to be down 1% to 3%. From an ENS perspective, rate increases continue to be in the range of 10% to 20%. Cat property, both Wind and Quake, were up 10% to 30%. with some year-over-year moderation experienced in earthquake rates, a topic that's on the minds of many carriers as insurable values as property prices and replacement costs have increased materially over the past couple of years. Professional liability for most accounts remain very challenging with rates up 10 to 20%. Regarding cyber, rates and deductibles continue to increase with carriers requiring effective security protocols in order to obtain coverage. For professional liability and excess umbrella, the themes are consistent with previous quarters. California and Florida personal property placements are becoming even more challenging due to past losses and aggregate concentrations, and we expect the appetite for personal lines in those cap-prone areas will continue to be constrained this year. With that said, we're well-positioned to help our customers find creative solutions. I'm now on page six. Let's transition to discuss the performance of our four segments. Our retail, national programs, and wholesale segments delivered another strong quarter with organic revenue growth of 8.9, 6.1, and 11.6, respectively. The performance of these segments was fueled by a combination of new business, good retention, rate increases, and modest exposure unit improvement. The organic revenue for our services segment decreased 6.2% for the quarter, with the main driver being fewer weather-related claims this year. 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 discuss our gap results and then certain non-gap financial highlights. For the first quarter, we delivered 11% total revenue growth and organic revenue growth of 7.8%. Our net income grew 10.3% for $20.6 million, and our diluted net income per share increased by 10% to 77%. The effective tax rate increased to 16.9% for the first quarter of this year as compared to 16.5% in the first quarter of last year. The higher rate was primarily impacted by the change in the tax benefit associated with shares vesting from our stock incentive plans. We continue to anticipate our full year effective tax rate will be in the 24 to 25% range. Our weighted average number of shares increased slightly compared to the prior year. and our dividends per share increased to 10.3 cents or 10.8% compared to the first quarter of 2021. We're over on slide number eight. This slide presents our results on an adjusted basis. Previously, our adjusted measures only excluded the change in earn-out payables. Beginning this quarter, we refined our adjusted measures to isolate the impact of movements in foreign currencies on both revenues and operating costs, as well as to remove the net gain or loss on disposals. In addition, we're removing the non-recurring acquisition and integration costs associated with GRP, BDB, and ORCID due to the materiality of these costs. We anticipate excluding the costs for these acquisitions for the next 18 to 24 months. Please refer back to slides 15 and 16 for the reconciliation of these amounts to our most comparable gap measures. On an adjusted basis, Income before income taxes increased by 11.7%. EBITDA grew by 11.1% with consistently strong year-over-year margins, even with higher variable costs over the prior year. And our net income increased by 11.3%. From an expense standpoint, our first and second quarters are probably our toughest year-over-year comparisons as travel and entertainment were increasing in the second half of last year. Our adjusted diluted net income per share was 78 cents, which grew by 11.4%. In summary, it was another great quarter on the top and bottom line. We're over on slide number nine. Our retail segment delivered adjusted total revenue growth of 14.2%, driven by acquisition activity over the last 12 months, and organic revenue growth of 8.9%, with solid growth across all lines of business. Adjusted EBITDA grew 18.4%, with the associated margin increasing by 130 basis points for the quarter, which was driven by leveraging organic revenue growth and managing our expenses, even with increased variable operating costs. Moving over to slide number 10, our national program segment delivered adjusted total revenue growth of 4.7% and organic revenue growth of 6.1%, with strong growth across many programs. The difference between adjusted total revenues and organic revenues was driven by slightly lower contingent commissions and the sale of a program in the prior year. Adjusted EBITDA was substantially in line with the prior year, with the associated margin declining by 170 basis points to 33.2% as a result of increased variable expenses, higher non-cash stock-based compensation, and the timing associated with recognizing revenues and costs related to new customers. We're over on slide number 11. Our wholesale brokerage segment delivered adjusted total revenue growth of 13.2% driven by acquisitions in the past 12 months and organic revenue growth of 11.6%. Adjusted EBITDA increased by 23.2% with the associated margin improving by 260 basis points as a result of strong organic revenue growth and higher contingent commissions despite increased variable cost. Over onto slide number 12, adjusted total revenues in our services segment decreased by 7.2% and organic revenue declined by 6.2% due to fewer weather-related claims as compared to the prior year. For the quarter, adjusted EBITDA decreased by $3 million or 25.2% due to variability in the volume of weather-related claims. A few comments regarding liquidity and cash conversion. As discussed during our Q4 earnings call last year, we've transitioned to a fiduciary reporting model for cash, accounts receivable, and payables held or owed in a fiduciary capacity. The change is to more appropriately reflect the cash flow from operations and the nature of the accounts on our balance sheet. On the cash flow statement, changes in fiduciary receivables and liabilities are presented within financing activities. On the balance sheet, these accounts are labeled as fiduciary assets and liabilities. After delivering another year of strong cash flow in 2021, we started 2022 with a solid performance and delivered cash flow from operations of $104 million. Our ratio of cash flow from operations as a percentage of total revenues was 11.5% for the first quarter of this year as compared to 16.9% in the prior year. The ratio of cash flow from operations at percentage of total revenues was lower than the prior year due to paying higher incentive bonuses to our teammates for their outstanding performance in 2021 and the payment of acquisition earnouts as certain acquisitions have overperformed our original expectations. As a reminder, the first quarter is normally our lowest conversion ratio of the year due to payments of prior year bonuses. Consistent with our comments at year end, post our transition to the fiduciary model, a good estimate of full year cash flow from operations as percentage of total revenues should be in the range of 27 to 28%, barring anything unusual. As Pell mentioned earlier, we completed the financing for the acquisitions of GRP, BDB, and ORCID. The total deployed capital for these acquisitions will be approximately $2.5 billion. $2 billion of the purchase price will come from the $1.2 billion of new 10- and 30-year bonds we issued in mid-March, which carry interest rates of 4.2% and 4.95%, respectively. Then $800 million will be sourced for a new bank facility we finalized at the end of March. The remainder of the purchase price will come from cash on hand, as well as cash generated during the first half of this year. Incremental interest expense for the first quarter was approximately $2 million and we expect interest expense to increase approximately $17 million per quarter going forward as a result of the bonds and bank facility. Our excellent capital position and strong cash flow support our strategy to acquire great companies and also enables us to deliver, to de-lever over the coming quarters as we've done in the past after larger acquisitions. With that, let me turn it back over to Powell for closing comments.