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spk01: Good morning and welcome to the Brown and Brown Incorporated's 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 harbor provisions of the security laws. Actual results or events in the future are subject to a number of risks and uncertainties, and they 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 and audited 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 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 Mr. Powell-Browne President and Chief Executive Officer, you may begin.
spk08: Good morning, everybody, and welcome to our Q1 2023 earnings call. Before we get into any detail, Q1 was an outstanding quarter, and we're very pleased with our results. I'll provide some high-level comments around our performance for the quarter, along with some updates on the insurance market and M&A. landscape. Then Andy will discuss our financial results in more detail. And lastly, I'll wrap up with some closing thoughts before we open it up to Q&A. I'm now on slide number four. We delivered over $1.1 billion of revenue, growing 23% in total and 12.6% organically. To put this in perspective, 11 years ago, our total annual revenues were $1.1 billion. Our adjusted EBITDA margin remains strong for the quarter at 35.7%. We delivered earnings per share at 83 cents, growing 7.8% over the first quarter of 22. On the M&A front, we completed seven acquisitions with estimated annual revenues of 11 million. We're very pleased to have delivered another outstanding quarter of good, profitable growth. I'm on slide five. From an economic standpoint, most businesses continue to grow and companies are still looking to hire employees. Overall, business leaders are generally cautious about the future while managing the impacts of inflation and higher interest rates. We would say there's not been a material change for what we heard from our customers in the fourth quarter of 2022. The insurance marketplace was very challenging for customers in the first quarter. Across most lines of coverage, rate increases were similar to prior quarters, with admitted markets up 5% to 7%. and excess and surplus markets up 10% to 20%. However, there are exceptions. Workers' compensation rates continue to decline. E&S professional liability rates, primarily public company D&O, continue to moderate with rates down 10% or more, and in some cases they're up slightly. The areas that remain the most challenging are E&S property and excess liability due to losses and increased insured values. Carriers continue to elevate their coastal, evaluate their coastal property portfolios. These actions result in more participants generally on a property placement. We continue to see underwriters increase insured values per square foot. Thus, customers are seeing premiums rise based on rates and higher values. As a result, buyers are feeling exhausted with the premium increases and more customers are purchasing loss limits increased deductibles, and decreasing overall limits. Pertaining to the Florida insurance market, everyone's watching to see the impact of the legal reforms late last year. Long-term, we believe the changes will be positive. However, we think it'll take some time to see improvement related to the legal changes. In the interim, more policies will continue to move into citizens. Please remember, citizens was created to be the market of last resort for residential homes, condominiums, and apartments. Right now, it's one of the most competitive and at times one of the only solutions for insureds. As it relates to the overall M&A market, the level of deals, primarily from financial backers, has slowed. That does not mean high-quality businesses don't trade at similar multiples to what we've seen over the past year. But from our perspective, we remain active, and GRP had another solid quarter of M&A transactions. We're very pleased with their success and the quality of the businesses they're adding to the Brown and Brown team. Our disciplined approach remains centered on identifying high-quality companies that fit culturally and make sense financially. I'm now on slide number six. Our retail segment delivered impressive organic growth of 8.8%. The growth across all lines of business was driven by strong new business, good retention, and continued rate increases. In addition, our employee benefits businesses performed really well in Q1. Our program segment delivered another outstanding quarter of double-digit organic growth of nearly 34% fueled by new business rate increases, good retention, and claims processing revenue from Hurricane Ian. This growth was driven primarily by strong performance from our lender place business, our diverse group of wind and quake programs, and our captives. Wholesale brokerage delivered another solid quarter with organic growth of 7%, driven by good new business and retention along with continued rate increases. The rate of growth for open brokerage slowed somewhat while the growth of our delegated authority business improved. Organic growth for the services segment was 1.6% for the quarter, driven by claims processing revenue primarily related to the winter storms. I'd like to thank our 15,000 plus teammates throughout the world for delivering these strong results. Now I'd like to turn it over to Andy to discuss our financial results in more detail. Great.
spk03: Thanks, Pal. And good morning, everyone. Since Pal discussed our GAAP results earlier in the presentation, I'll review our consolidated financial results on an adjusted basis. We're over on slide number seven. As a reminder, our adjusted measures exclude the change in estimated earn-out payables one-time acquisition costs associated with our acquisition of GRP, ORCID, and BDB last year, and gains or losses on business divestitures. This quarter, it also excludes $11 million related to resolving a business matter which is considered one-time in nature. The charge relates to a pre-acquisition event from a business we bought over 10 years ago. We believe isolating the above items gives a better reflection of the performance of the business and provides enhanced comparability. The reconciliation of these amounts, adjusted amounts, to the most closely comparable gap amounts can be found in the appendix to this presentation. Total revenues were $1.1 billion for the first quarter, a new record for us, growing 23.5% as compared to the prior year. Income before income taxes increased by 13.2%, and EBITDA grew by 23.2%. We had good leverage across the business, even with a few moving parts this quarter that included some additional one-time costs that substantially offset the benefit of incremental investment income. In addition, the margins for GRP, as we've mentioned before, are more evenly weighted throughout the year versus our seasonally higher margin in the first quarter for the company. This means it negatively impacted the first quarter margin by approximately 40 basis points. As a result, GRP will benefit or margin in future quarters. Income before income taxes grew at a slower rate than total revenues due to the incremental interest and amortization expense associated with acquisitions we completed last year. The effective tax rate came in at 20%, which is in line with our expectations and compares to 16.8% in the first quarter of last year. The higher tax rate is due to a lower benefit from the vesting of incentive stock shares that traditionally occur in the first quarter of the year. Our diluted net income per share increased by 7.7% from last year to 84 cents. Due to the changes in the liabilities and assets associated with our deferred compensation plan, salaries and related expenses as a percentage of revenue were negatively impacted year over year by 150 basis points. there's an offsetting benefit within other operating expenses. Lastly, our weighted average share count increased slightly and dividends paid increased about 12%, both as compared to the first quarter of last year. We're on slide number eight. The retail segment had an outstanding quarter, delivering organic growth of 8.8%. The adjusted EBITDA margin contracted slightly to 37% for the quarter, While the margin remained strong, it was impacted about 100 basis points by the level phasing of revenue and profit from GRP as compared to our higher Q1 margin in the United States driven by our employee benefits business. We expect this will reverse and provide a positive impact to our margins in future quarters. We also realized some year-over-year headwinds associated with higher travel and related expenses. which we expect these headwinds to lessen as the year continues. We're over on slide number nine. National programs had another very strong quarter with organic growth 33.8% and adjusted EBITDA margin expansion of 610 basis points. The margin improvement was driven by leveraging our expense base along with strong organic growth. Keep in mind that revenue for the quarter includes approximately $8 million of claims processing revenue associated with Hurricane Ian. In addition, our captive facilities that we started last year are expected to deliver $30 to $35 million of revenue this year. We recognized approximately $10 million of revenue in the first quarter of this year as compared to approximately $1 million of revenue in the first quarter of last year. The positive impact to organic growth from these captives will diminish in each subsequent quarter and will be negligible by the fourth quarter as we will be on a more comparative basis. While we anticipate national programs will have a good 2023, we do expect lower organic growth in the second half of this year as compared to the second half of last year. This is due to the fact that the captives will be on a more comparative basis We had a one-time non-recurring growth bonus of $7 million in the fourth quarter of last year, and we realized approximately $8 million of revenue associated with Hurricane Ian in the fourth quarter of last year. We're moving over to slide number 10. Our wholesale segment delivered another good quarter with organic growth of 7%, and the adjusted EBITDA margin contracted slightly. The driver of the margin decrease was higher salaries and related costs due to incremental hiring, as well as salary inflation. We're on slide number 11. The services segment grew by 1.6% organically for the quarter, and the adjusted EBITDA margin decreased by 390 basis points. The primary drivers of the margin decrease were the volume of claims revenues for certain businesses, higher salary and related costs, as well as some one-time expense items. A few comments regarding cash generation and capital allocation. We generated approximately $60 million of cash flow from operations in the first quarter of this year, which was impacted by higher interest and paying taxes for last year that were deferred as a result of Hurricane Ian relief. We are continuing to expect another strong year of cash generation and discipline deployment. We ended the quarter with approximately $564 million of operating cash. We are planning further debt repayments during the year as we've done following larger deployments of capital. We are very proud of our industry leading ratio of cash flow from operations to total revenues and believe we are in a strong capital position to invest in the business and help drive further growth in the future. Lastly, we wanted to update our full year guidance regarding margins. Based on the good results for the first quarter and what we can see over the coming quarters, We are raising our outlook, and as a result, our margin should be up slightly for the full year versus our previous guidance of flat. With that, let me turn it back over to Powell for closing comments.
spk08: Thanks, Andy, for a great report. We continue to watch the impact of inflation and increases in interest rates on the economies in which we operate. As a result, we expect business leaders will continue to be cautious regarding the pace of their hiring and investing over the coming quarters. With that said, most of our customers are prospering. In the marketplace, buyers have pricing fatigue due to increases delivered over the last several years. We anticipate similar rate increases in coastal property in the near to intermediate term. As a result, we're seeing buyers either decrease limits, increase deductibles, or possibly opt for loss limits. In some instances, we're seeing personal lines customers paying off their mortgage and and going without wind coverage in their personal policies. We continue to talk with our carrier partners about capacity, the flight quality, and diversification. Our MGAs and MGUs have delivered good underwriting results over many years due to our disciplined approach. As a result, this positions us well to retain and or increase our capacity that will help deliver incremental organic growth from our programs. We are pleased with the performance of our recent international acquisitions of GRP and BDB. They're growing nicely, winning new business, and retaining customers. In the case of GRP, they're also completing high-quality acquisitions and adding to our capabilities and geographic footprint. Many of you have seen that we completed our first Canadian retail acquisition of High Court Breckles on April 1st. They're located in Toronto with approximately 110 teammates and will add to our capabilities in the Canadian marketplace. We'd like to welcome all teammates that have joined us over the past few months. And lastly, we're in a strong position with a good M&A pipeline. Overall, we feel really positive about our business and how our team is executing. We're winning more new business and doing a good job of retaining our customers. Our focus is on leveraging the total capabilities of Brown & Brown for the benefit of our customers, both domestically and internationally. We're looking forward to having a good 2023 and have a lot of momentum coming out of the first quarter. With that, we'll turn it back over to Mikey and open the lines for Q&A.
spk01: Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. Your first question comes from the line of Weston Bloomer from UBS. Your line is open.
spk04: All right, good morning. My first question is on the outlook for now margin expansion for the full year. I was hoping you could break out maybe by segment where you're expecting to see margin expansion. I'm more focused on retail there where, you know, in the 1Q, the margin was still down XGRP. So if you could maybe break out the pluses and minuses there, that'd be great.
spk03: Good morning, Wes. Andy here. So we don't provide that level of granularity on Outlook by the segments and everything, but just a couple things maybe to take into consideration. Our comments earlier is we had about 100 basis points of headwinds for GRP in retail for the quarter. That will reverse itself over the coming quarters and will be a benefit. And as we mentioned, the costs around travel and entertainment, some of the inflation inside of it, that will continue to lessen as the year comes along and we're on a more comparative basis. So hopefully it kind of gives you an idea of what it should look like.
spk04: Got it. And was there any impact in retail from wage inflation and hiring as well? I know you called that out in a couple other segments.
spk03: Yeah, we had some of it. We didn't call it out specifically, but I mean, we've got it in all, I mean, We have it in a number of our segments because we're always investing in the business, so you can always have some up and downs by the quarters based upon timing of hiring and growth.
spk04: Last one. I know you haven't guided to FX in the past, but is there an FX headwind that's kind of built into that margin guide as well for maybe the second quarter?
spk03: No, sir.
spk04: Great. Thank you for taking the questions.
spk03: Thank you.
spk01: Your next question is from the line of Elise Greenspan from Wells Fargo. Your line is open.
spk00: Hi, thanks. Good morning. My first question was also on the margin side. So, first of all, I just want to understand, I guess, the only thing you're calling out, I guess, from having a significant impact on margins in the quarter is that 40 basis points overall from GRP. And then as we think about that, you know, reversing over the course of the year, does that get better in all other quarters? I just want to think about the seasonality of that. And then also, would you expect in that updated guidance that your margins will expand in the other three quarters of the year?
spk03: Morning, Elise. See if we can take a few of those pieces there. Let's see. So on the first one on the – The GRP and the 40 basis points is, yes, that will reverse in the back end of the year, and it's relatively evenly spread. Not perfect, so it's not 25% each quarter, but pretty even through the year, consistent with what we've communicated in the past in there. Other thing to keep in mind, and we had mentioned it, is we did have some one-time items in the quarter that are in our numbers list. that offset the benefit from our investment income. So, again, would not envision that those would recur in future quarters that are out there.
spk00: And then is the Q1 investment income, right? I think it's trending better than what you guys had provided last quarter. I think you had said $14 to $17 million for the full year. Is the Q1 a good run rate level for investment income?
spk03: Yeah, probably somewhere in that range, all depends upon what the balances are on cash, which can move up and down, but that's probably a reasonable number. When you think about it from an absolute, what you wouldn't want to do is put that on incremental year over year. Remember, because rates were going up last year as the year was coming along. So think about it on a run rate basis when you model it. Okay.
spk00: Yeah, great. And then last one, retail, you know, you guys both highlighted it seems like a good environment there, both on the core brokerage and the benefits business. I guess good growth in both in the Q1. Anything you want to offer, anything you guys want to highlight as we think about just the go-forward organic growth of that segment?
spk08: No, I wouldn't say anything that we haven't said, Elise. We're really pleased with how retail is performing. As I like to say, we continue to hire talented teammates to help us service, market, and produce the business that we're bringing on and those customers that we already have, our existing customer base. So nothing out of the ordinary about growth itself, but I would just tell you we are very pleased with where the retail business is positioned, both domestically and with our new acquisitions, you know, not just new like last year in GRP, but in Ireland and excited about Canada as well.
spk00: Thank you.
spk08: Thank you.
spk01: Your next question is from the line of Gregory Peters from Raymond James. Please ask your question.
spk10: Yeah, good morning, Paul and Andy. I guess I'm going to go back, Paul, to your comments about the impact of all of the challenges in Florida. It's my impression that, you know, if there's a migration to citizens, that might be some pressure on commission rates for the company. And so maybe you could spend a minute and just talk to us about the economic conditions in Florida, you know, considering what's going on in the property insurance market. Are you seeing any other pressures economically with any of the business developments, et cetera, and then talk about, you know, the migration to citizens and its impact on your business?
spk08: Sure. So first of all, I'd like to clarify that in a business that's two plus billion dollars of revenue, the impact of Florida today versus the impact of Florida 15 years ago is much different. So I think it's important to start there. The second thing that I would tell you is that from an economic standpoint, generally speaking with our customer base in Florida, they seem to be doing quite well. And what I mean by that is the construction is booming. People are growing. That does not mean that their margins are necessarily growing because different industries are having different levels of inflation and impact on costs into their P&Ls. But I would tell you that, and if you go to dinner, if you go out to dinner, it's packed. So, it's still, the economy is doing well in Florida. As it relates to citizens, I'd like to talk about kind of two scenarios because this is, there are some similarities and some differences for those of you that have been around since 2007. I'd like to talk about that. So, here's basically the parallels. and today, citizens is deemed as the market of last resort, okay? So let's start there, and we're going to start in retail, and that's where the sort of similarities end. So in 2007, if in fact, and these are just This is a hypothetical example, so just bear with me. If the market was bearing an 85-cent rate on a condominium and citizens, being the market of last resort, was quoting a dollar rate and the then-governor implemented wind mitigation credits that took that rate from a dollar in citizens down to 50 cents. So effectively, the buyer was going from 85 cents to 50 cents in terms of insured values. That action in and of itself took us to negative organic growth in 2007 as an organization, much different concentration in Florida, all that stuff. The final thing is citizens was the market of last resort. They would write anything, anything. Okay. So now fast forward to 2023 and citizens has underwriting guidelines and there's not a rate cut. So if, in fact, I'm just going to use the same scenario that we just had there. If they were at $0.85 and Citizens was at $1 or $1.25 and the general market is at $1.75 or $1.50, then there are underwriting criteria, roof construction all kinds of things where citizens is actually trying to qualify accounts so remember it's much different it doesn't mean it's not complex it is complex so it takes a lot of time to get through a government entity to get the but that's the difference now in retail If you take an account that's from the ENS market and you bring it over into Citizens, the commission level would be, let's say, flat to down slightly to up slightly. But let's just call it flattish. But it has a lot more work. That said, in the wholesale segment, it has the potential to, one, an account can move. So you could go in the ENS market, and they lose the entire account because it goes to citizens with the retailer. Or you can have a scenario where citizens quotes the wind only, and we quote an X wind quote. And remember, the example is it was $0.85 on – and it's Superior Construction – The wind only rate, I mean, the X wind rate might be $0.07 or $0.10. So all of a sudden, the premium's gone down, you know, substantially, and we get paid commission on that much lower rate. So that's how it manifests itself, Greg, and maybe a little more than you wanted, but I think it's important for people to understand the difference today between 2007 because it's a big difference. And it's important you understand that. Yeah, that's that's great color.
spk10: Just just a point of clarification. Is it fair to sort of I'm guessing right now, but is it when I look at your Florida residential book of property, is it fair to say that citizens is about 20 percent of that book? Or do you think it is a lower or higher percentage?
spk08: I think now I want to make sure that you understand. When you say residential, are you talking about residential homes or are you talking about condos and apartments as well? Yes. Residential homes, condos, and apartments. Okay. So, the short answer is no, I don't think it's 20% presently. And what you find is there's a lot of activity in the residential, specifically condos and apartments, in the first half of the year so there's a lot of activity right now going on and as i said there are properties not only where you live but up and down the west coast and the east coast that are currently in the ens market that have been submitted to citizens but we don't know yet if they're going to qualify so how that ultimately plays out this year is yet to be determined
spk03: Yeah, Greg, keep in mind the limitation that Powell talks about. On the homeowner's side, if you go down into Tri-County, I think the limit, I might be off on this just by a little bit, I think the limit is $999,000, I believe is the number. So if you think about how many homes are below $999,000 in Tri-County, not a lot of them. It's a very expensive real estate market down there. And then the rest of the state, I believe it's 700,000 is the limit. So not everything can actually go into citizens. So there's a lot of press around all of it, but only certain things go into that box. And then there's a lot of limitations as to what they will take in the way of quality. So the reason why we added all that color is the market's very different today than what it was in 07. So there's been a lot of speculation regarding what this does to our numbers. And we've talked a lot about diversification of our organization and that we're not a Florida-based organization the way we were at least weighted 15, 20 years ago. But our Florida businesses performed really well in the first quarter. We're very, very pleased both in retail as well as wholesale and programs.
spk10: Got it. That's excellent detail. And I feel like we could probably have an hour-long conversation just on this topic alone. But I'm going to pivot. And my last question just will focus on inside your commentary around GRP, you commented about how they're making acquisitions. And I guess I haven't really seen any press releases come out from Brown. So How is that coming through in the reported numbers, or where do we see the acquisition activity inside GRP as is reported through Brian Brown's consolidated statements?
spk03: Yeah, Greg, you should see those on our IR website. We tag them inside there. They come out underneath of a GRP press release. It's got Brian Brown in the footer, but We pull all those over into our normal IR website.
spk10: So they should all be there. Got it. And then just on that point, your approach to organic has been pretty – well, you've set a benchmark on trying to not include acquisitions as part of organic. I assume you're taking the same conservative approach and applying it to how you account in GRP organic. Is that correct?
spk09: Correct. Yes.
spk10: Got it. Thanks for your answers. Yep, thank you.
spk01: Your next question comes from the line of Robert Cox from Goldman Sachs. Your line is now open.
spk06: Hey, thanks for taking my question. So broadly across the business and maybe specifically to employee benefits, I was curious on your expectations for exposure growth for the duration of the year, just considering your outlook for the economy to continue to moderate.
spk08: Yeah, so I think the way we look at it is we still have a positive outlook on exposure growth, not so much inside of existing clients, but the growth in number of clients. So we do believe that our customer base on a net basis will actually expand in terms of adding new people to their plans, but the biggest part of the growth will be new benefits, plans, where we're helping people manage their costs and the delivery of what they want to their employee base.
spk06: Great. Thank you. And this is a follow-up. The pressure in professional lines... Did the D&O pressure, which I think is most acute in the E&S market, accelerate this quarter? And do you see any signs of stabilization in D&O rates?
spk08: Yeah. The short answer is, did we see an acceleration in the decline? And yes, we saw a little bit. That's correct. And remember, I would, and I don't have this right off the tip of my tongue, but Remember, D&O rates were going up more quickly and sooner than this property trend. So they had gotten to a level that the marketplace felt as though it was appropriate or high, and then people started piling back in. Now, one, Robert, could make the argument. I am not making this argument, but I'm pointing it out. that if someone on the risk-bearing side is trying to manage volatility in their earnings and doing that by looking closely at their cat property portfolio, they have to redeploy those assets, and they're redeploying those assets in a place like professional liability. Thus, we're having prices. decreases or continued price decreases in professional liability. So some people have taken that position. I'm not necessarily trying to imply that. I'm just trying to give that to you so you can kind of chew on it.
spk06: Got it. Thank you. That's helpful.
spk01: Once again, to ask a question, please press star 11 on your telephone. Your next question is from the line of Yaron Kinner from Jefferies. Your line is open.
spk07: Thank you. Good morning. Excuse me. My first question goes to the retail segment and employee benefits. I think the last couple of quarters you'd called out the potential for some pressure on organic growth from employee benefits, and yet I think numbers actually came in quite strong. Can you maybe talk about what changed or what actually happened this quarter relative to your expectations there? And would that then create a headwind for 1Q24? So do we think it's a headwind for 1Q24?
spk08: No, not really as we sit here today. That's the first part. But Euron, if you go back to what we said, there was one particular business that had an impact in Q4 in terms of a headwind. And that business, that individual business still actually was encouraging headwinds in Q1. But the other businesses performed really, really well. And as Andy has said before, Remember, we have a front end loaded from a 606 revenue recognition standpoint in Q1 because of employee benefits, but that's a function of us writing a lot of new employee benefits business and all the other businesses performing that much better relative to an offsetting of that little bit of a headwind in that one particular business. So we feel good about I mean, I don't want to give you the impression that we only feel good about employee benefits. Please don't take that out of our comments. We feel really good about, you know, our PNC, and we feel really good about our personalized businesses, too, in retail. But I just mention it because, you know, there were people on the call in Q4 that felt like the organic growth was a trend, which it's not. And we said that, but we just wanted to kind of clarify that and We also clarified it because we did talk about a business that had a significant impact on the revenues in Q4, and there's still a bit of a headwind there, but we've overcome that.
spk03: Yeah, and I think we also – we may have mentioned in the fourth quarter one of our specially aligned businesses also had headwinds in the fourth quarter, and we anticipated some headwinds in the first quarter. We did see those, so they came through. But I think our commentary back at the time – On the earnings, as we said, we thought it would be modest in the first quarter. That's pretty much kind of what we saw through. So we were very, very pleased with 8.8 organic still with those modest headwinds. And we don't see those headwinds as a material issue on those businesses on the future quarters.
spk07: Got it. Thanks. And then my second question is with regards to the captive revenues. Is it fair to think of them as kind of full margin revenues, at least in kind of the first half of the year until we hit storm season, barring an earthquake?
spk03: Yeah, I wouldn't call it full margin because we do have some operating expenses in there, but they are a much higher margin in non-storm periods when we have claim cost.
spk08: Yes.
spk02: and that's wind and quake you're on make sure i want to make sure you know yeah okay thank you very much thank you your next question is from the line of michael ward from city group your line is open thanks guys good morning um maybe just following up on that last one um i think you mentioned you had 10 million of earned premium for the captives in the quarter But I think the guidance was $30 to $35 million. So just wondering what's in that guide for the year. Does it assume some level of losses?
spk03: Yeah, I think we're just trying to estimate right now. We're anticipating it will move back and forth a little bit. The other thing is in the third quarter of last year when we recognized the claim cost on Ian, we also had some accelerated claims. premiums during that time period so it'll move a little around a little bit by the quarter that's how we took that in consideration so you won't probably see it be exactly perfect by each of the quarters on an earned basis it'll be down a little bit in the third quarter okay that's helpful thank you um and then thinking about capital deployment um how much or management how much debt pay down
spk02: Do you anticipate doing from here, and do you have a targeted leverage ratio that you're looking to get to?
spk03: Why don't we tackle the last one first? So what we have said publicly is on a gross basis, zero to three, we're very comfortable with that range, and zero to two and a half on a net basis. Michael, if you look back over time, we traditionally will move on the higher end of that range around acquisitions, and then we trend back down. And we normally kind of operate in kind of that middle part of the range in both net and gross. If you look at over cover a longer period of time, and that probably not unreasonable for our business, um, that'll kind of continue to go down. One is we repay debt, normal maturities that are coming along on a quarterly basis. And then as we just continue to grow the organization, if you look back, we normally will deliver about a quarter to half a turn per year.
spk08: is a pretty decent amount. That's also assuming if we're going to continue to invest in the business and we have to continue to weigh and measure M&A opportunities as they come along. But yeah. Thanks, guys.
spk09: Thank you.
spk01: Your next question is from the line of Meyer Shields from Keith Britt and Woods. Your line is now open.
spk11: Thanks. and good morning. One, I guess, small question. When we look at the international acquisitions, do they have a different fiduciary investment income profile than legacy domestic businesses? Is there more investment income associated with their placements than the direct bill stuff we have in the U.S.?
spk03: Hey, good morning, Mayor. No, we don't earn as much on a fiduciary income internationally as what we do in in the u.s and again keep in keep in mind in the u.s that there's still limitations even here um we have trust restricted states that only allow you to earn interest up to your bank fees and then where we have um relationships also with our carrier partners some of those also will only allow us on banks so you don't see everything move on a linear basis
spk11: Okay, but this, like the year-over-year improvement, that seems like your thing. It's just a function of interest rates as opposed to mix.
spk03: Correct, yes. Yeah, don't read that that was all benefit of GRP and O'Leary or anything of that nature, no.
spk11: Okay, and I just wanted to confirm something. I think you mentioned this in your recent comments, but one of the LPI insurers, I think, is getting catastrophe losses in the quarter, and you're saying that there were no losses in the captive reinsurance component.
spk09: Yeah, repeat that one more time.
spk08: Yeah, you repeat the first part of that question. You were breaking up, or I didn't hear it exactly. Oh, sorry.
spk11: I just want to confirm that there were no losses in the layer of reinsurance that you funded for the captives. I'm asking this because we did see some significant storm losses that impacted the lender-placed market.
spk03: Oh, no. No, there isn't, but Keep in mind the captives that we have are not, you know, they're not linked with our lender place business. They're on, you know, large condominiums as well as on the quake side. So wind and quake in there. And no, we did not have any storm related claim cost in the first quarter. Perfect. Thanks so much for the clarification.
spk01: Your next question is from the line of Mark Huge from Truist Companies. Your line is open.
spk09: Yeah, thank you. Good morning. Good morning. I'll be a little more optimistic around capacity, the capacity for our programs. And I wonder, I think last quarter you had suggested that might be something you'd be keeping an eye on, and that would be potentially a gating factor for organic. Have you seen that change over the last three months?
spk08: No, I don't want to give you the impression that there's some found new capacity. I wish we could say that. But I think the issue is this. Every carrier or market participant is evaluating how they want to deploy their capacity. As I said earlier, carriers are looking for more you know, protection against earnings volatility, nothing new. They're looking for balance of risk to the extent possible where we have a very large, you know, group of programs that are not just CAT. So we're able to balance those with people. And so that's a very positive. And we've had really good results over a long period of time. So we feel like, you know, You know, as I've said before, that we are effectively an outsourced insurance company. We can do everything other than bear the risk. And as a result of that and the results that we have delivered, if in fact someone is considering expanding or repositioning, which is a better thing, I don't think of it as expanding, but repositioning capacity, then we typically like to think that we're going to be near the top of that list. because they've seen our results and they've seen the growth that we've had, you know, in the past. So there's no, you know, found, you know, a bucket of gold under the rainbow. It's not that kind of deal. But I do feel like there's some really good discussions around us being able to keep capacity, which is equally as important. I view that as a win, Mark. not just cutting capacity, because a lot of people have had a lot of capacity cut. And if we can keep our capacity to win, and then we might get cut a little bit somewhere, but we get a little new. And so on a net basis, we're about even or maybe up just slightly.
spk09: Thank you for that. And then you mentioned that Florida construction sounds like it's good. How about nationally?
spk08: Yeah, what I would tell you, Mark, is if we go around the system and you look in places, it's remarkable. I mean, places that come to mind, I'll give you an example. Nashville, Tennessee. Atlanta. You know, you get up in the northeast in several areas. Boston. You get in Colorado. I mean, Phoenix. You get in all these places all around. And you just got a lot going. And so, you know, if you think about it, the industry, the one industry that we're in that has got a headwind as a higher level and especially lines business is auto dealers. You know, we do some auto dealer work and auto dealer units are down. So think about it. Their pricing is coming back down to MSRP levels or below. You know, there's an impact on used cars. And so that's a direct relation to our interest rate increases. So, you know, having said that, you know, at some point that's going to turn as well. So that's a slight headwind. But if you think about other industries, you know, there's a lot of businesses that are looking for people. I think the restaurant business is tough, particularly anything that is not defined as It doesn't have to be fine dining, but like a nicer restaurant. They're having a hard time in terms of getting people to work because, you know, if it's fast food, it's just tough.
spk09: Yeah, yeah. And then one final question. Andy, I don't know if you gave the revenue impact from the winter storm claims.
spk03: No, we didn't break it out, but we did mention it, Mark, in the commentary on services. And, yeah, we did pick up some claims from the winter storms. Again, nothing, you know, really, really material in there, but a few. Okay, great. And just for clarity, those sit in services, okay?
spk09: Yeah, understood. Okay.
spk03: All right.
spk01: Your next question is from the line of Elise Grinspan from Wells Fargo. Your line is open.
spk08: Hello, Elise.
spk00: Hi. Sorry, I was on mute. Thanks for taking me back. I just had a follow-up question. So, just thinking through some of the stuff that came up early on the call in terms of just the captive and the and revenue and the margin. So, I know you said the captive is in 100% margin. So if I assume, you know, Ian and the captive, right, which I think was $18 million of revenue is 75% margin, and I adjust the overall margin for that and I add back the 40 basis point headwind from GRP, I still get that you're, you know, about a 35.4% margin for the quarter. So it still would have been down a little bit year over year, right, and you did have the NII tailwind. What am I missing, I guess, in thinking about this math and then tying it back to your guide for margin improvement over the balance of the year?
spk03: I think maybe a couple things to think about, and we mentioned in the comments, is there are some moving parts in there. We thought it was easier just to give everybody guidance on the full year, because otherwise There's always puts and takes. There's business mix inside everything else. It's not as easy as just adding up a couple items. So what we're trying to do is just keep it relatively simple for everybody and give an idea as to what the full year would look like for the organization.
spk00: Okay. And then when thinking from here, I guess the only, I guess, one-off items embedded within the updated full year guide is just, right, programs will see, you know, some stronger revenue from the captive, right, until we kind of annualize that later in the year. So that could help margins, I guess, in the second quarter. And then also just the higher investment income. Are there any other like headwinds or tailwinds in that, you know, updated full year guide for the rest of the three quarters?
spk03: Well, so I think in the second quarter, yeah, I think your comment would be fair. Now keep in mind that the revenue from the captives is Right. We'll start to level out. So we're not going to get the benefit of organic lift each quarter going forward like what we saw in the first quarter. OK, because we'll be we're writing basically a specific amount of premium. Right. Is what we committed to do inside of the captive. So that's limited in in nature. That's why you get basically to a level amount of revenue by the back end of of the year. Keep in mind also we mentioned the one-time bonus in programs that we had in the fourth quarter of last year and also the $8 million of EN claims. Just take those into consideration when you're thinking about organic in the back end of the year and what that might mean on margins.
spk00: Okay, and then one last one. The $30 to $35 million of captive revenue this year, what was that last year in your full year? We said it was.
spk03: Yeah, we said it was about $25 million last year.
spk00: Okay, thank you.
spk03: Thank you. Appreciate it.
spk01: There are no further questions at this time. I'd turn the call over back to our speakers for closing remarks.
spk08: Thank you very much, Mikey. We appreciate everybody's time and look forward to talking to you next quarter. Very pleased with the outcome and look forward to talking to you then. Thank you.
spk01: this concludes today's conference call thank you all for participating you may now disconnect
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