Brown & Brown, Inc.

Good morning, and welcome to Brown and Brown Incorporated's third 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 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 third 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 the number of factors. Such factors include the company's determination as it finalizes its financial results for the third 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 are 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 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 non-GAAP financial measures to the most comparable GAAP financial measure can be found in the company's earnings press release or in the company's investor presentation for the call on the company's website at www.bbinsurance.com by clicking on investor relations and then calendar of events. With that said, I would now turn the call over to Powell Brown, President and Chief Executive Officer. You may begin.

Thank you very much. Good morning, everyone, and welcome to our Q3 2023 earnings call. We delivered an outstanding performance in the third quarter. Our organic growth was just shy of 10%. We expanded our EBITDA margins by 350 basis points and grew adjusted net income per share by 42%. In addition, we closed the acquisition of Kentro earlier this month. As a reminder, the company operates MGUs in the UK, US, Europe, and other locations, and has a retail broker operation in both the UK and Europe. Kentro has great capabilities with a significant focus on financial lines, aviation, and trade credit, in addition to a number of other lines of coverage. We'd like to welcome Colin Thompson and their team to Brown and Brown and look forward to seeing the business continue to grow over the coming quarters and years. Now let's get into our results for the quarter. I'm on slide number four. Our revenues exceeded $1 billion, growing 15.1% in total and 9.6% organically as compared to the third quarter of 2022. Our adjusted EBITDA margin expanded 350 basis points to 34.7% and our adjusted earnings per share grew 42% to 72 cents. On the M&A front, we completed seven acquisitions with estimated annual revenues of 14 million. Also, I'd like to highlight that last week our board of directors approved a 13% increase in our dividend. We're extremely proud as this is the 30th consecutive year of dividend increases. We were able to deliver these outstanding results through the relentless dedication of our 16,000 plus teammates that create and deliver innovative solutions for our customers. I'm now on slide number five. From an economic standpoint, it was similar to the second quarter and consumers are continuing to spend and drive demand. As a result, the economy remained rather resilient even with materially higher interest rates while growth and inflation continue to moderate and return to more normal levels. Many business leaders continue to hire, but remain cautious regarding large investments in their business. While the revenue side of the P&L is generally healthy for many companies, inflation remains the main challenge, as certain costs are still outpacing revenue growth. Specifically, as it relates to the purchasing of insurance, a lot of buyers are exhausted due to the level of rate increases, mainly for property that have occurred for multiple years. Shifting to the insurance marketplace, it remained very challenging for customers with their focus on overall spend. Many customers have already increased their deductibles and reduced their limits. We're also seeing lenders being more flexible in certain cap-prone areas regarding total purchased limits. Across most lines of coverage, rate increases were fairly consistent with the first half of the year, with admitted markets up 5-10% and excess and surplus lines markets up 10% to 25%. Like previous quarters, there were exceptions outside of these ranges. Two lines of coverage that continue to decline are workers' compensation and professional liability for larger customers. Workers' comp rates declined less than we've seen in previous quarters and were in the range of flat to down 5%. Professional liability rates, including public company, DNO, and cyber, were flat to down 15% or, in some instances, down even further. Regarding cat exposed property, it remained the most challenging line of business as carriers are generally not increasing their capacity. We're also seeing underwriters continue to push for higher insured values due to inflation and increased replacement costs. During the quarter, the placements for personal lines in California, Florida, and Texas remained very difficult, with policies continuing to move into state-sponsored plans or the ENS space. We are well positioned to help our customers do the breadth of our carrier relationships and the multiple solutions we're able to deliver. This doesn't mean we can solve all issues, but it has helped drive additional growth for our personal line businesses. Regarding the M&A market for the quarter, the level of deals primarily from financial backers continue to slow and we generally saw fewer bidders for businesses. From a valuation standpoint, they have come down slightly. However, good businesses still trade at premium multiples. We remained active and acquired seven great companies for the quarter, which brings us to the total of 20 year-to-date. Overall, we're extremely pleased with the success of our M&A efforts in North America and Europe. We're in a strong position to identify and acquire high-quality companies that fit culturally and make sense financially. I'm now on slide number six. Our retail segment had another great quarter and delivered organic growth of 8%. This growth, both domestically and internationally, was driven by strong new business, good retention, and continued rate increases. We were winning a lot of new business by leveraging our collective capabilities and creating innovative solutions for our customers that are searching for ways to manage their cost of insurance. Our program segment delivered another outstanding quarter with organic growth of 12%, driven by strong new business, good retention, and continued rate increases, especially cat property. Almost all of the programs grew nicely again this quarter. Wholesale brokerage delivered a great quarter with organic growth over 13%, driven by domestic and international strong new business, good retention, as well as rate increases for most lines. Our brokerage, delegated authority, and personalized businesses all performed well during the quarter, while professional liability continued to be under pressure due to the decline in rates mentioned earlier. Organic revenue in our services segment was approximately 3% with the growth driven by an increase in claims processing revenue for certain businesses. Now with that, I'll turn it back over to Andy for more details regarding our financial results.

All right. Thank you, pal. Good morning, everyone. I'll review our consolidated financial results on an adjusted basis, which for the third quarter exclude the change in estimated earn-out payables, one-time acquisition integration costs associated with GRP, BDB, and ORCID, gains and losses on business investitures, and the impact of foreign currency translation. We believe isolating these 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 gap amounts, can be found either in the appendix of this presentation or in the press release issued yesterday. We're over on slide number seven. On an adjusted basis, total revenues were nearly $1.1 billion for the quarter, growing 14.2% as compared to the third quarter of the prior year. Income before income taxes increased by 40.7%, and EBITDA grew by 27%. Our EBIDAC margin was 34.7%, increasing 350 basis points as compared to the third quarter of 2022. The margin increase was driven primarily by leveraging our cost base in connection with strong organic growth, as well as higher contingent commissions, increased interest income, and minimal claims costs for our captives. The higher growth in income before income taxes was driven by depreciation, amortization, and interest expense growing slower than total revenues. The effective tax rate for the quarter was 25.5%, which is in line with our expectations and compares to 26.1% in the third quarter of last year. Our adjusted diluted net income per share increased by 42% from last year to 71 cents. Our weighted average share count increased approximately 1%, as we are directing more of our capital towards reducing our debt. Lastly, our dividends paid increased nearly 12% as compared to the third quarter of 2022. Overall, the performance by our team for the quarter was outstanding. We're over on slide number eight. The retail segment grew almost 10%, driven primarily by strong organic growth of 8% and acquisitions completed in the last year. Adjusted EBITDA grew slightly faster than revenues, and our adjusted EBITDA margin expanded to 28.6%. This expansion was driven by leveraging our expense base along with strong organic revenue growth, but it was partially offset by the impact of higher non-cash stock-based compensation and slightly lower profit-sharing contingent commissions. We're over on slide number nine. National programs had another outstanding quarter with adjusted total revenues growing 20.1% and organic growth at 12.1%. The incremental growth in excess of organic growth was driven almost entirely by an increase in our contingent commissions that were impacted negatively in the prior year related to Hurricane Ian. Our adjusted EBITDA margin expanded over 11% due to the level of organic growth and leveraging our expense base higher profit sharing contingent commissions, and lower claims cost in the current year within our captives due to a quieter storm season as compared to the third quarter of 2022. As it relates to organic growth for the fourth quarter of this year, please keep in mind that in the fourth quarter of 2022, we highlighted a non-recurring incentive bonus of $7 million and also recorded 8 million of claims processing revenue associated with Hurricane Ian. Moving over to slide number 10, Our wholesale segment delivered another strong quarter with adjusted total revenue growth of 17.7% and organic growth at 13.4%. The incremental growth and excess organic growth were driven by higher profit-sharing contingent commissions and acquisitions completed in the past 12 months. Our adjusted EBITDA margin expanded 110 basis points at 37%, due to a combination of leveraging our expense base with good organic growth and higher profit-sharing contingent commissions, but was partially offset by the impact of higher non-cash stock-based compensation. On slide 11, the services segment delivered organic growth at 3.2% with a slight decline in adjusted EBITDA margin due to one-time expenses for certain businesses, as well as the impact of inflation. A few other comments concerning cash generation, capital allocation, and outlook for the remainder of the year. From a cash perspective, we generated $704 million of cash flow from operations for the first nine months of this year and had another strong third quarter, growing our year-to-date cash flow from operations by $104 million, or 17%. Our year-to-date ratio of cash flow from operations as percentage of total revenues remained strong year over year at approximately 22%. As we mentioned previously, post the acquisitions of GRP, BDB, and ORCID, we remain committed to de-levering. In the third quarter, we further reduced our outstanding debt by approximately $100 million. At the end of the third quarter, we are already within our stated target gross debt to EBITDA ratio of zero to three times. Based on current interest rates, we would expect our investment income and interest expense in the fourth quarter to be similar to what we recognized in the third quarter. Regarding profitability, we had previously provided guidance that our full year expectations for adjusted EBITDA margins would be up slightly compared to 2022. Based on our strong financial performance for the first nine months, as well as higher investment income and profit sharing contingent commissions, we now expect our margins for the full year will be up at least 100 basis points. In summary, we continue to be in a strong position and generate industry-leading cash conversion ratios, which enable us to invest in our company, e-lever and acquired businesses. With that, let me turn it back over to Powell for closing comments.