Brown & Brown, Inc.

Good morning and welcome to the Brown and Brown Incorporated fourth quarter earnings conference 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 the 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 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 finalizes its financial results for the fourth quarter and its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday. Other factors that the company may have currently identified or quantified are those risks and uncertainties identified from time to time and 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 the company's filing with its Securities and Exchange Commission. We disclaim any intentional obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. In addition, there are non-GAAP financial measures used in this conference call. A reconciliation of any non-GAAP financial measure to most comparable GAAP financial measures can be found in the company's earnings press release or investor presentation for the call on the company's website at www.bbinsurance.com by clicking on the Investors 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, sir.

Thank you, Norma. Good morning, everyone, and thank you for joining us for our fourth quarter 2022 earnings call. Before we get into the details, I wanted to make a few comments regarding our performance in 2022. The fourth quarter capped off another exceptional year as we delivered strong organic growth while substantially maintaining our margins, even with increased variable operating expenses and the financial impact of Hurricane Ian. 2022 is also a milestone for acquisition activity as we significantly increased our international capabilities with the additions of GRP and BDB in the UK. Our consistently strong results are only made possible through the hard work and dedication of our nearly 15,000 teammates. Now, let's transition to results for the quarter. I'm on slide number four. We delivered $900 million of revenue, growing 22% in total and 7.8% organically. Our adjusted EBITDAQ margin increased by nearly 300 basis points to 31.4% for the quarter. Adjusted net income per share was 50 cents, growing by 28%. We also completed nine acquisitions during the quarter with annual revenues of approximately $17 million. Overall, we're pleased with the results for the quarter. I'm on slide five. We achieved another milestone this year by delivering over $3.5 billion of revenue, growing 17% in total and 8% organically. Excuse me. Our adjusted EBITDAG margin remained strong for the year at 32.8%. On an adjusted basis, our net income per share increased nearly 7% to $2.28. Lastly, we had a record year for M&A activity, completing 30 acquisitions with approximately $435 million of annual revenue. Our acquisitions, both large and small, are performing well as a result of our disciplined strategy to acquire top-quality businesses that fit culturally and make sense financially. We have a proven track record of being able to successfully acquire, integrate, and grow companies of all sizes that join the Brown and Brown team. Later in the presentation, Andy will discuss our financial results in more detail. I'm on slide six. Let's start with the economy. We continue to see expansion of many businesses that are still hiring, albeit at a slower pace than previous quarters. There's been a general reduction in the number of open positions that companies are looking to fill. While interest rates have increased materially over the past year, we're not seeing broad-based impacts on our customers of the economy yet. From an insurance standpoint, certain markets have been and remain in significant turmoil. Pricing for cat property, both commercial and residential, was under pressure through the third quarter. Then Ian slammed into Florida. This caused 1-1 reinsurance treaties to be bound at higher attachment points and materially higher rates. As a result, we saw incremental price increases and lower limits being offered for placements in late Q4 of last year and early this year. The placement of CAT property in Q4 last year and January of this year was some of the most difficult placements we've experienced in decades, with rates increasing 20% to 40% or more. However, properties of lesser construction quality or that have experienced losses could be much higher, and I mean much higher than this range. As a result, we had customers unable to buy or afford full limits and therefore ended up increasing their deductibles or purchasing loss limits in order to manage their cost of insurance. In certain cases, this was not possible as lending institutions or condo associations would not allow lower limits or significantly higher deductibles. 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 remain down 1% to 3%. The placement of professional liability and excess liability remain competitive, with rates down 5% to up 5%, with public company D&O rates down 5% to down 20% or more. Regarding cyber, the story is similar to the last few quarters, with rates and deductibles continuing to increase, but we did see some slight moderation during the quarter. Late in Q4, there were reforms impacting the legal and regulatory environment for insurance in the state of Florida, which included the elimination of one-way attorney's fees and assignment of benefit, establishment of a reinsurance backstop for certain carriers, and the requirement of arbitration prior to litigation. These changes should be positive for buyers of insurance, but it will take time. From an M&A standpoint, we're pleased with the nine transactions we completed. We continue to acquire companies that fit culturally and make sense financially. Specifically, the integration of GRP is going very well and we're acquiring a number of businesses and the financial performance is in line with our expectations. From an overall industry perspective, the number of transactions slowed materially compared to previous quarters. Like last quarter, if a business is considered to be a platform or a must-have, the market is still aggressive on pricing. Now I'm on slide five. I'm sorry, slide seven. Let's transition and discuss our performance of the four segments. For the quarter, our retail segment delivered organic growth of 2.7% with good growth experienced in most lines of business. Our organic growth was impacted by the slowdown in specialty lines due to lower auto and RV sales as well as slower growth in a couple of our employee benefits businesses due to an extremely tough comparable versus the fourth quarter in the prior year. Our retail segment delivered another strong year of organic revenue growth of 6.5%. We're very pleased with how our business is positioned and the capabilities we have to serve our customers of any size and believe 2023 should be another good year. Once again, our national program segment delivered excellent results, growing 22% organically for the quarter. This performance was driven by good new business and retention across most of our programs, as well as exposure unit expansion and rate increases. The national programs team is performing at a high level by offering a diverse range of products and delivering best-in-class solutions for our customers, driving nearly 16% organic growth for the full year. Our wholesale brokerage segment delivered another good quarter, growing 8% organically, driven by rate increases and new business, even with personal lines, which has been a challenge for most of the year. Our wholesale brokerage segment grew 7.6% organically for 2022 and is well-positioned to continue their success into 23. For the quarter, our services segment delivered modest organic revenue growth as a result of winning new customers and increased storms claims. with this expansion substantially offset by lower claims for certain businesses. Overall, we feel good about our capabilities and the value we deliver 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 are over on slide number eight. Like previous quarters, we'll discuss our gap results and then certain non-gap financial highlights. For the fourth quarter, we delivered 22.1% total revenue growth, Organic revenue growth was 7.8% and our EBITDAQ margin increased by 220 basis points. Our net income grew 43% and diluted net income per share increased by 42% to 51 cents. Both were impacted by the change in estimated acquisition earn out payables, which was a credit of 5.8 million in 2022 and a charge of 19.8 million in the prior year. The effective tax rate decreased to 25.2% for the fourth quarter of this year as compared to 27.8% in the fourth quarter of last year, primarily driven by lower statutory rates for our international businesses and the impact of deductibility for acquisition earn-out payable adjustments. Our weighted average number of shares was substantially flat compared to the prior year, and our dividends per share for the quarter increased to 11.5 cents or 11.7% compared to the fourth quarter of 2021. We're over on slide number nine. This slide presents our results on an adjusted basis, which excludes the impact of movements in foreign currencies on both revenues and expenses, the net gain or loss on disposals, the one-time acquisition and integration costs associated with GRP, ORCID and BDB, and the change in earn-out payables. We've included on slides 18 through 26 reconciliations to the most comparable gap measures. On an adjusted basis, our EBITDAQ margin grew by 290 basis points versus the prior year. EBITDAQ increased by 34.9%, and income before income taxes increased by 22.6%. This margin expansion was due to another solid quarter of revenue growth, increased contingent incentive commissions, and leveraging our expense base, even while having higher year-over-year variable operating costs. The incremental growth rate of adjusted EBITDA as compared to adjusted income for income taxes was driven by higher year-over-year interest costs of $29 million and higher amortization of $7 million, with both largely driven by the GRP, ORCID, and BDB acquisitions. Our adjusted net income for the quarter increased by 26.9% and adjusted to the net income per share was 50 cents, increasing 28.2%. We're on slide number 10. Our retail segment delivered adjusted total revenue growth of 19.8%, driven primarily by acquisition activity and organic revenue growth of 2.7% for the quarter. Adjusted EBITDA grew 25.1%, with our adjusted EBITDA margin increasing by 120 basis points for the quarter, primarily driven by lower year-over-year performance incentives, but was partially offset by higher variable operating costs. We're on slide number 11. Our national program segment delivered adjusted total revenue growth of 34.1%, driven by organic revenue growth of 21.9%, acquisition activity, and higher contingent commissions. Organic growth was positively impacted by approximately $7 million, due to the finalization of a growth bonus for one of our programs, which we do not anticipate recurring in 2023. As it relates to flood claims processing revenues associated with Hurricane Ian, we still expect revenues in the range of $12 to $15 million. In the fourth quarter, we recognized approximately $8 million. Our contingent commissions were higher due to premium growth and profitable underwriting in our CAT programs as well as the lost development for Hurricane Ian being lower than originally expected. Adjusted EBITDA grew by 53% over the prior year, and our adjusted margin increased by 540 basis points to 44.1%, primarily due to total revenue growth and leveraging our expense base, as well as higher contingent commissions and the previously mentioned growth bonus. We're on slide number 12. Our wholesale brokerage segment delivered adjusted total revenue growth of 17.1%, driven by recent acquisitions, good organic revenue growth of 8.1%, and an increase in contingent commissions. Adjusted EBITDA increased by 19.9%, with the associated margin growing by 70 basis points, which is primarily impacted by increased contingent commissions and good organic growth, but was partially offset by higher variable operating expenses. We're on slide number 13. Adjusted total revenues and organic revenue growth in our services segment were substantially in line with the prior year. For the quarter, adjusted EBITDA increased $1.6 million, or 23.9%, driven by continued management of our expenses. We're on slide number 14. This slide represents our gap results for both years. In 2022, we delivered revenues of over $3.5 billion. growing 17.1%, and earnings per share of $2.37, growing 14.5%. EBITDA increased by 14% to approximately $1.2 billion. For the year, our share count was substantially flat, and our dividends paid during 2022 increased by 11.3%. We're on slide number 15. This slide presents our results for both years on an adjusted basis. Our income before income taxes grew 6.6%, and net income per share was $2.28, growing by 6.5% as compared to total revenue growth of 17.3%. This difference was driven by higher interest and amortization associated with GRP, ORCID, and BDB. Our adjusted EBITDA margin remained strong at 32.8%, but declined slightly by 40 basis points from the prior year due to higher variable costs. Overall, we are very pleased with the results for 2022. We're on slide number 16. As part of evaluating the performance for the year and the fact that our captives are newer, we wanted to provide some additional cover. We participate in two CAT property captives with the goals to increase capacity, drive additional organic growth, participate in strong underwriting results like we do with contingent commissions, and deliver good returns in our invested capital. One captive participates on a quota share basis for certain of our wind and quake programs, and the second participates on an excess of loss or reinsurance layer for a personal lines wind program. Overall, we are very pleased with the top and bottom line performance, knowing that certain quarters can have volatility when there are cat events. It's important to keep in mind that performance cannot be evaluated on one quarter but is better viewed on a full year basis. In 2022, we recognized approximately $25 million of incremental revenue with about $5 million driven by the acquisition of ORCID. For 2023, we anticipate revenues of approximately $30 to $35 million. From a risk standpoint, for both captives, we can have up to $13 million of exposure in any one occurrence and $25 million in the aggregate. As we always do, we've used a disciplined approach to balance upside potential and downside risk versus deployed capital and believe we have structured the programs well to deliver on our objectives. A few comments regarding liquidity and cash conversion. For 2022, we delivered cash flow from operations of $881 million. Our ratio of cash flow from operations as a percentage of total revenues was 24.7% as compared to 26.5% last year. This lower ratio was due to the payment of earnouts as certain acquisitions have overperformed our original expectations, incremental interest expense, and paying higher incentive bonuses to our teammates for their outstanding performance in 2021. Overall, we are in a strong cash generation and capital position, finishing the year with $650 million of available cash. We also repaid the remaining outstanding balance of $150 million on our revolver that was drawn in connection with our acquisition of GRP, BDB, and ORCID. We expect to continue to delever over the coming quarters, as we have done in the past, post larger deployments of capital. We finished the year in a strong liquidity position. With this capital, the cash we will generate in 2023, as well as capacity on our revolver, we are well positioned to fund continued investments in our company. We have a few comments regarding outlook for 2023. First, for contingent commissions, we anticipate them to be relatively flat year over year, but this will be ultimately driven by loss experience. As it pertains to taxes, we expect our effective tax rate to be in the range of 24% to 25%, a slight increase compared to 2022 due to a higher estimated tax rate in the U.K., the lower year-over-year tax benefit from the investing of stock grants and limitations on the deductibility of certain compensation benefits. We anticipate our interest expense will be in the range of $185 to $195 million. Regarding interest income, we're seeing some nice improvement and are projecting income of approximately $14 to $17 million, subject to how the Fed changes interest rates. As it relates to amortization expense, we're projecting approximately $162 to $166 million. This does not include amortization associated with acquisitions that we may complete during 2023. As it relates to margins, we do not see any major headwinds or tailwinds heading into 2023 that should materially impact our margins. With that, let me turn it back over to Powell for closing comments.