Brown & Brown, Inc.

Good morning and welcome to the Brown and Brown Incorporated Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. As a reminder, today's call is being recorded. Please note that certain information discussed during this call, including information contained in the slide presentation posted in connection with this call and including answers given in response to your questions, may relate to future results and events or otherwise be forward-looking in nature. Such statements reflect our current views with respect to future events, including those relating to the company's anticipated financial results for the second quarter and are intended to fall within the safe 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 second 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 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 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 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 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. Good day, everyone, and welcome to our Q2 2023 earnings call. We had an outstanding second quarter and the first half of the year. We're very pleased with our strong top and bottom line results with robust total revenue, organic revenue, and earnings per share growth. Today, Andy and I are in the London headquarters of GRP, where we've wrapped up our quarterly board meeting and have had the opportunity to engage with our European businesses and review strategic plans for the coming years. After our discussions, we feel even better about our leaders and the growth opportunities for our businesses here. Now, let's get into the results for the quarter. I'm on slide number four. We delivered over a billion dollars of revenue, growing 24.7% in total. and 11.2% organically as compared to the second quarter of 2022. As a reminder, our calculation of organic revenue does not include contingent commissions, investment income, other income, or gains and losses on business sales. Our adjusted EBITDA margin expanded 150 basis points to 34.2%, and our adjusted earnings per share grew 55% to 68 cents. On the M&A front, we completed six acquisitions with estimated annual revenues of $24 million. This outstanding performance is a direct result of the relentless daily commitment by our 15,000-plus teammates to create innovative solutions for our customers. Now on slide five. The insurance marketplace continues to be very challenging for customers. They remain focused on the overall spend for insurance and how to best manage their costs. Across most lines of coverage, rate increases were similar to recent quarters, with admitted markets up 4 to 10 percent and excess and surplus markets up 10 to 20 percent. However, there are exceptions. Workers' compensation rates continue to decrease at a consistent rate. E&S professional liability rates, including public company D&O and cyber, continue to moderate downward with flat rates being flat to down 10 percent or more. The area that remains the most challenging is cat exposed property carriers continue to evaluate their coastal property portfolios and we're seeing more admitted carriers exiting the California and Florida personal line space. As a result of these placements are becoming even more difficult. Constantly more properties are moving in state sponsored plans. And in the space that might have otherwise been written by an admitted carrier. At the same time, we continue to see underwriters seeking to increase insured values per square foot due to inflation and higher replacement costs. Thus, customers are seeing premiums rise significantly due to inflation and higher values. These factors are causing buyers to purchase loss limits, increase deductibles, decrease overall limits, or even self-insure certain layers within a placement. Regarding the Florida insurance market, it has not materially improved. We have more admitted carriers either reducing their appetite or stepping away from the market entirely. This is pushing more policies to citizens and the E&S market. From a customer perspective, many businesses grew and hired employees during the quarter at levels similar to the first quarter. While the overall rate of inflation continued to slow, business leaders remained cautious regarding the level of investment business in the second quarter, but incrementally are feeling better than they did in Q1 and Q4 of last year. As it relates to overall M&A, the level of deals primarily from financial backers continued slow during the second quarter. As a result, we're seeing fewer bidders for businesses, and valuations have come down slightly from their peak. But that doesn't mean that a good business won't trade at high multiples. From our perspective, we remained active during the quarter, acquiring six great companies. We completed the acquisition of Highport Breckels, a retail agency based in Canada, two acquisitions in the United States, and three here in the United Kingdom. We announced in May the pending acquisition of Kentro Capital Limited, which we announced, which we anticipate closing in the fourth quarter. Kentro is an MGA retail agency headquartered in London with a team of over 350. Annual revenue is approximately of $90 million and with locations primarily in the UK, US, and continental Europe. Kentro's MGA nexus underwrites across a diversified portfolio of 20 risk classes, including trade credit, financial lines, and aviation. Its retail agency is one of the largest trade credit brokers in the United Kingdom. We're excited to have Colin Thompson and his team join Brown and Brown. Overall, we're very pleased with the success of our M&A efforts and are in a strong position to leverage our disciplined approach that remains centered on identifying high-quality companies that fit culturally and make sense financially. I'm on slide number six. Our retail segment had a good quarter, delivering organic growth of 6.3%. This growth was driven by solid new business, continued rate increases, and modest exposure unit expansion. Most lines of business performed well, while our dealer services business continued to face headwinds due to vehicle inventory levels and higher interest rates. To give some context around that, the impact to our organic growth was approximately 200 basis points. for the quarter. Our program segment delivered a spectacular quarter with organic growth over 23% driven by strong new business, good retention, and continued rate increases, especially around cap property. The majority of our programs grew nicely during the quarter. Wholesale brokerage delivered an excellent quarter with organic growth of 13% driven by new business and retention, as well as rate increases for most lines of business. Our open brokerage and delegated authority businesses had a great quarter. Organic revenue for service, the services segment declined about 2% for the quarter due to external factors that continue to impact our advocacy businesses. This decline was partially offset by higher claims processing revenue for certain businesses. In summary, we're very pleased with our first half results, delivering organic growth of nearly 12%, adjusted EBITDA margin expansion of 70 basis points, and adjusted earnings per share growth of nearly 19%. Now, I'll turn it over to Andy to discuss our financial results in more detail.

Great. Thanks, Val. Good day, everybody. I'll review our consolidated financial results on an adjusted basis in more detail. As a reminder, our adjusted measures for the second quarter exclude the change in estimated earn-out payables. one-time acquisition and integration costs associated with GRP, ORCID, and VDB, and gains and losses on business divestitures. We believe isolating the above items provides a better reflection of the performance of the business and enhanced comparability. The reconciliations of our non-GAAP financial measures, including these adjusted amounts to the most closely comparable GAAP amounts, can be found either in the appendix to the presentation or in the press release issued yesterday. On an adjusted basis, total revenues were over $1 billion for the second quarter, growing 24.7% as compared to the second quarter of the prior year. Income before income taxes increased by 32.1%, and EBITDA grew by 30.5%. Our EBITDA margin was 34.2%, increasing 150 basis points as compared to the second quarter of 2022. The effective tax rate for the quarter was 25%, which is in line with our expectations and compares to 27% in the second quarter of last year. The lower tax rate was impacted by the change in the market value of assets associated with our deferred compensation plan in the current year as compared to the prior year. Our adjusted diluted net income per share increased by 33.3% from last year to 68 cents. Due to the changes in market value, our deferred compensation plan negatively impacted the ratio of salaries and related expenses to revenue by approximately 250 basis points year-over-year. Keep in mind, there's an offsetting benefit within other operating expenses. Lastly, our weighted average share count remained relatively flat and dividends paid increased by nearly 12%, both as compared to the second quarter of 2022. Overall, the performance by our team for the quarter was outstanding. We're on slide number eight. The retail segment grew significantly, delivering adjusted total revenue growth at 25.5%, driven by acquisitions completed in the last year, higher profit-sharing contingent commissions, and organic growth at 6.3%. Adjusted EBITDA grew slightly faster than revenues, and our adjusted EBITDA margin expanded to 28.4%. This expansion was primarily driven by increased profit-sharing contingent commissions, which were substantially offset by higher non-cash stock-based compensation, and to a lesser extent, the hiring of incremental teammates to support our current and future growth. We're moving over to slide number nine. National programs had another outstanding quarter with adjusted total revenue growing 25.7% in organic growth of 23.3%. Through the combination of revenue growth and leveraging our expense base, our adjusted EBITDA margin expanded 510 basis points. We're over on slide number 10. Our wholesale segment delivered an excellent quarter with adjusted total revenue growth of 23.8% and organic growth of 13.1%. Our adjusted EBITDA margin contracted slightly due to some non-recurring costs in the second quarter that impacted by approximately 200 basis points. We're on slide number 11. The service to segments organic revenue contracted by 1.8% for the quarter, and the adjusted EBITDA margin decreased by 220 basis points. The primary driver of the margin decline was lower organic revenues and the impacts of inflation. We've got a few comments regarding cash generation and capital allocation. We generated approximately $390 million of cash flow from operations for the first six months of this year, growing over $40 million or 12%. Our ratio of cash flow from operations as a percentage of total revenues was approximately 18% for the first six months of this year as compared to 20% in the first six months of last year. As we discussed last quarter, the lower year-to-date ratio has been impacted by higher interest expense and paying taxes in the first quarter of this year related to the fourth quarter of last year that were deferred as a result of Hurricane Ian relief. With that being said, the second quarter was very strong for cash generation, and we ended the quarter with approximately $630 million of operating cash. As we mentioned previously, post the acquisitions of GRP, BDB, and Orkin last year, we are committed to delevering to our more traditional levels. In the second quarter, we reduced our outstanding debt by making incremental payments of approximately $130 million. We are in a strong capital position to continue to invest in our company, acquire great businesses, and delever. With that, let me turn it back over to Powell for closing comments. Thanks, Andy.