Brown & Brown, Inc.

Good morning and welcome to the Brown and Brown, Inc. Third Quarter earnings call. Today's call is being recorded. Please note that certain information discussed during this call, including information contained in the slide presentation posted in connection with this call and including answers given in response to your questions may relate to future results and events or otherwise before looking in nature. Such statement reflects our current views with respect to the 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 risk and uncertainties. It 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 in the company's determination as it finalizes its financial results for the third quarter, that is financial results differ from the current preliminary unaudited numbers set forth and 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 file 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 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 .bbinsurance.com by clicking on investor relations and then calendar of events. With that said, I'll now turn the call over to Powell Brown, President, Chief Executive Officer, you may begin.

Thanks, Kevin. Good morning, everybody, and welcome to our Q3 earnings call. First, we'd like to state that our hearts go out to all those impacted by hurricanes Helene and Milton. These -to-back storms were unprecedented in many ways and resulted in significant death and destruction throughout the Southeastern United States. We're committed to helping communities impacted by these events recover and return to normalcy over the coming weeks, months and years. With that, let's transition to our performance for the quarter. We had an outstanding top and bottom line results. Our team continues to deliver for our customers, resulting in strong net new business, organic growth and margin expansion. I'll provide some high-level comments regarding our performance along with the updates on the insurance market and the M&A landscape. Andy will then discuss our financial performance in more detail. And lastly, I'll wrap up with some closing thoughts before we go to Q&A. Now let's discuss our results. I'm on slide four. We delivered nearly $1.2 billion of revenue, growing 11% in total and .5% organically over the third quarter of 2023. Our adjusted EBITDAQ margin improved by 30 basis points to 34.9 and our adjusted earnings for share grew .3% to 91 cents. On the M&A front, we completed four acquisitions with estimated annual revenues of 8 million. Overall, it was another great quarter as our team is focused on delivering the best solutions for our customers and strong results. I'm on slide number five. In the countries where we primarily operate, there were no major changes in the economic conditions versus the first half of this year. Consumers are still spending and driving demand. As a result, businesses are continuing to hire and invest, albeit at a more moderate pace as compared to the last few years. Here in the US, we're seeing a bit more caution due to the uncertainty around the presidential election. From an insurance pricing standpoint, rates for many lines continue to increase, but at a slightly slower pace versus what we experienced in the first half of this year and the third quarter of last year. The line that had the largest change for the quarter was ENS property, which we'll talk about in more detail in just a moment. Pricing for employee benefits was similar to prior quarters with medical and primary costs trends up 7% and 9% for commission-based accounts. The continual upward rate pressure and the complexity of healthcare are driving strong demand for our employee benefits consulting businesses. Based on our historical and ongoing investments to expand our capabilities, we are well positioned to help companies of any size navigate this challenging market. Rates in the admitted PMC markets were up 2% to 7% for most lines. The downward trend for workers' compensation remained, but there was moderation as we realized decreases of down 1% to 5% in most states. With the high level of employment, we expect this range to continue over the coming quarters. For the third quarter, rate increases for non-CAT property moderated and we're in the range of flat to up five. For properties in convective storm zones, we did not see the same rate increases that we experienced in the first half of the year. For casualty, we continue to see rate increases for primary layers due to ongoing size of legal judgments in the US and to a lesser extent, higher levels inflation. Consistent with the last few quarters, rates for excess casually continue to increase between one and 10% or even more in some instances. Professional liability, we saw rates flat to up five. Shifting to the ENS markets, as you know, this year some carriers and facilities have been willing to put up incremental limits on existing insurers and new business. While CAT property rates continue to increase, excuse me, slightly in the first quarter of this year, we started to see decreases later in the second quarter and into the third quarter. On average, rates decreased between 10 and 20% as compared to the third quarter of last year. As a result, some customers increased their limits or modified deductibles and some just captured the savings. As we've mentioned before, moderate rate increases or decreases for one line of business will generally not have a material impact on the results of our company in total. In order to deliver consistently strong and industry-leading financial performance, we focus on diversification across lines of coverage, geography, industry, and customer segment. On the M&A front, competition for high quality businesses remain consistent with the first half of the year. While the number of acquisitions by private equity backers decreased as interest rates rose, we're now starting to see higher levels of activity as interest rates are beginning to decrease. For the quarter, we continue to build relationships with many companies and remain focused on our disciplined M&A approach to identify great organizations which align culturally and make sense financially. I'm on slide six. Let's transition to the performance of our three segments. Retail delivered .9% organic growth for the quarter with most lines of business performing well. We had another strong quarter for net new business but realized the impact of moderating rates for most lines as well as slightly lower growth in exposure units. In addition, our organic growth was negatively impacted by over 100 BIPs resulting from the -to-date true-up of certain incentive commissions as well as quarterly volatility and bond or non-recurring revenue. Our team is performing really well and had good momentum going into Q4. Programs delivered an outstanding results with organic growth of 22.8%. This growth was driven by a number of programs resulting from new business and expansion of existing customers. Our lender-placed business and CAPTIS performed very well and our CAP programs continue to grow. It was another great quarter due to the diversity of our programs. Wholesale Brokers delivered another good quarter with organic revenue growth of 8.4%. This performance was driven by a combination of net new business and rate increases. Our open brokerage business continued to grow nicely but at a slower pace due to the decline in CAP property rates. Our delegated authority business performed well again this quarter. Personal lines grew nicely driven by California and Texas. We're very pleased that our balanced mix between brokerage and delegated authority continues to drive strong and stable performance. Now I'll turn it over to Andy to get in more results, our financial results.

Thank you, pal. Good morning, everyone. I'm gonna review our financial results in some additional detail. When we refer to EBITDAQ, EBITDAQ margin income before income taxes or diluted net income per share, we're referring to those measures on an adjusted basis. The reconciliation of our gap to non-gap financial measures can be found either in the appendix of this presentation or in the press release we issued yesterday. We're over on slide number seven. We deliver total revenues of 1,186 million, growing 11% as compared to the third quarter of 2023. Income for income taxes increased by .1% and EBITDAQ grew by 11.9%. Our EBITDAQ margin was 34.9%, expanding by 30 basis points over the third quarter of the prior year. Effective tax rate for the quarter decreased to .6% versus the third quarter of the prior year, which was 25.6%. The decrease was driven primarily by certain one-time items in the prior year and the impact of changes in the market value or our company-owned life insurance. Diluted net income per share increased to 91 cents or 12.3%. Our weighted average shares outstanding increased slightly as compared to last year as we continue to prioritize paying down our floating rate debt. Our dividends paid per share increased by 13% as compared to the third quarter of 2023. Last week, our board of directors approved a 15% increase to our projected dividend payments for the fourth quarter of 2024. This represents our 31st consecutive annual increase. Overall, we are very pleased with our performance for the quarter and the strong results our team delivered. We're over on slide number eight. The retail segment grew total revenues by .5% with organic growth at 3.9%. The difference between total revenues and organic revenue was driven substantially by acquisition activity over the past year. EBITDAQ decreased due to lower contingent and incentive commissions, higher non-cash stock-based compensation, as well as investments in teammates to drive and support our current and future growth. We're on slide number nine. Programs had another excellent quarter with total revenues increasing .7% and organic growth of 22.8%. Our organic growth was benefited by approximately 15 million associated with onboarding of new customers within our lender place business. This revenue will be recognized more evenly throughout 2025. Growth in total revenues was lower than organic due to net acquisition and disposition activity as well as lower contingent commissions. Our EBITDAQ margin expanded by 360 basis points to 48.2%, driven by leveraging of our expense base and the sale of certain claims administration and adjusting services businesses in the fourth quarter of 2023. Regarding the impact of the hurricanes, there are still a lot of unknowns primarily associated with Hurricane Milton. Our best estimate is that we anticipate recording flood claims processing revenue associated with the recent hurricanes of approximately 12 to 15 million in the fourth quarter and then 18 to 22 million in the first half of 2025 with the majority of that revenue being recorded in the first quarter. As of now, we're anticipating claims cost of five to $10 million within our CAPTAs associated with Hurricane Milton. We're over on the slide number 10. Our wholesale brokerage segment delivered another great quarter with total revenues increasing 14% and organic growth of 8.4%. The incremental expansion in total revenues and excess of organic was driven by acquisitions completed over the last 12 months and higher contingent commissions associated with finalizing estimates recorded in the prior year. Our EBITDAQ margin increased by 130 basis points to 38.6%, primarily due to higher contingent commissions and leveraging our expense base. We have a few comments regarding our capital structure, cash generation and outlook. In the third quarter, we paid off 500 million of our inaugural 10 year bonds with the proceeds from our issuance completed in the second quarter of this year. With our continued deleveraging, our balance sheet is in a great position as our gross debt to EBITDAQ ratio on a trailing 12 month basis is in line with our 10 year average. For the first nine months of this year, we had strong cash generation of over $810 million, increasing our ratio of cash flow from operations as a percentage of revenue to 22.4%. As it pertains to four year cash generation, we feel really good. We wanna highlight that there is US federal tax relief associated with the recent hurricanes. As a result, payments for the third and fourth quarters of this year are permissible to be deferred until the second quarter of next year. Therefore, our full year ratio of cash flow from operations as percentage of total revenue for 2024 should be in the range of 24 to 26%. Based on our strong year to date performance and taking into consideration the potential impacts from Hurricane Helena Milton, we anticipate our full year EBITDAQ margin will be up at least 100 basis points for 2024 as compared to 2023. With that, let me turn it back over to Powell for closing comments.

Thanks Andy, a great report. From an economic standpoint, we do not anticipate material changes from what we experienced for the first nine months of this year. The biggest questions that seem to be on the minds of business leaders here in the States, which may impact their level of investment are the outcome of the US presidential election, geopolitical matters and the timing and magnitude of future interest rate reductions and inflation. From an admitted lines rate perspective, we anticipate rates in the fourth quarter and early 25 to be relatively similar or moderate downward slightly versus the third quarter of this year. For the ENS market, casualty and professional liability should be similar to what was experienced during the third quarter of 2024. For cat property, it'll come down to ultimate paid losses associated with Helene and Milton. We anticipate rate decreases from flat to down 10% going into the fourth quarter. On the M&A front, we continue to feel good about our pipeline, both domestically and internationally. We're always building relationships with a lot of companies and we have a strong capital position. We'll continue our disciplined approach as it's worked very well to help us acquire great companies that enhance our capabilities and drive profitable growth. Lastly, we're excited to have the Quinn test team join Brown and Brown and anticipate a closing in the fourth quarter. As we head into the fourth quarter, our team continues to be well positioned and is leveraging the power of we to win more net new business. We have great momentum across the company and feel good about our prospects for the fourth quarter and finishing the year strong. With that, we'll turn it back over to Kevin and open up for Q&A.

Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered, you wish to move yourself from the queue, please press star one one again. And we ask that you limit yourself to one question. If you have other questions, feel free to jump back in the queue. We'll pause for a moment while we compile our Q&A roster.

Our first question

comes from Gregory Peters with Raymond James. Your line is open.

Well, good morning, everyone. I guess the instructions said I'm supposed to only ask one question. So I guess I'm gonna focus my only question on the retail segment. Paul and Andy ran through the retail segment some variables that affected the organic in the third quarter. I'm wondering if you could provide some more detail on that. And if there's any read through we should be thinking about as we look forward.

Greg, good morning. And we appreciate your one question. Actually, we're not gonna break it down into specific details, but what I would say is, as we said in the organic growth, there is really incentives, the incentive commissions that are down. And we talked a little bit about non-recurring one time revenue that didn't occur like bonds and other related matters. So from a standpoint of we feel good about our retail business, I think that's the important thing. I do not believe that one quarter creates a trend. And so I think you should take from that what you want, but we feel really good about our retail business.

And then Greg, the other thing, just I guess for everybody else keep in mind, remember we've said in the past that normally our business will grow faster, the retail business will grow faster in the first half of the year than the second half of the year. Last year was a little bit different just because of the timing of bonds and some surety work inside there. If you look kind of back over historically, it normally grows faster in the first half than second, primarily due to the amount of employee benefits business that is recorded in the first quarter.

Got it, thanks for the answer.

Great, thanks Greg.

One moment for our next question. Our next question comes from Rob Cox with Goldman Sachs. Your line is open.

Hey, thanks. Appreciate the flat to down 10 guide for property cat rates. I was just curious if the products mix in wholesale is built to sustain nice growth in that type of environment or are we gonna start seeing that show up a little bit more in the organic?

All right, so good morning Rob. And let me make one other clarifying comment on what I said. I believe that there is a great interest by the risk bearers, particularly domestically, to hold rates more closer to flat. Having said that, there are new participants, there are other markets, specifically London, which is very aggressive, and that's gonna put additional pressure on that. So having said that, interestingly enough, our Q3 is not an inordinately heavy property quarter. The property is typically in Q1 and Q2 out of hurricane season. So again, it depends on the mix, but we have quite balanced brokerage and binding authority businesses. And what we're talking about is in brokerage, not necessarily in binding. So what I would say is anytime you have rate decreases, it can, but from a standpoint of we're gonna see what kind of discipline the markets will adhere to in Q4 and what I'm about to say is purely speculative. Remember, prior to the storms, we were seeing down 20 and 30%. And so we don't anticipate that, but anything is possible. I think it's a much higher probability is zero to 10.

Thank you.

Thank you.

One moment for our next question. Our next question comes from Elise Greenspan with Wells Fargo, your line is open.

Hi, thanks, good morning. My question is going back to the retail segment. So I guess that incentive comp, it sounds like a supplemental commission, which I think you guys started leaving in organic like a couple of years ago. So I just wanna confirm that. And then given that the one-off was 100 basis points, I know you guys don't typically like to guide, but Powell, you did say, right, one quarter doesn't make a trend. Is the right way to think about it that some growth of around 5% is kind of like the baseline for the Q4 and beyond?

Andy,

you wanna take that? Yeah, good morning, Elise. So let me hit the first one, because that's pretty easy. Yeah, it's on the, so GSC, so the Guaranteed Supplemental Commissions and then incentive commissions are inside of organic growth. And as you know, those can move up and down by quarters, just like the contingent commissions can adjust themselves inside of there. As you know, we don't give guidance for organic growth for the business. I think as we look into at least the fourth quarter is, we would at least think that, one, we feel really good about our business and the net performance and how we're bringing in new business. A lot of it's gonna come down to what happens to rates and then exposure units for the economy. So unless something goes unusual there, we would expect those two would be fairly similar to the third quarter.

Thank you, one moment for our next question. Our next question comes from Yaron Canar with Jefferies. Your line is open.

Thank you,

good morning, everybody.

So my question is in the programs business. So I think you sold a portion of the captives to a third party and it's now coming back and consolidated through non-controlling through NCI. Can you maybe walk us through the impact to the programs segment itself, where that NCI in the programs business, namely what would the adjusted margin be and what would the organic growth be for that segment?

Well, morning, Yaron. It has no impact on the organic growth or the margins. Remember, the non-controlling interest is only on a pre-tax basis allocation over. So we record all of the gross up above and then back up minority interest below.

Right, so my question would be, what would the impact of the segment be had we adjusted that NCI at the segment level?

I guess I would say it's kind of irrelevant because the accounting rules don't allow you to do it anyway. We're following what the rules are. You have to bring it in on a gross basis.

Okay, thank

you.

One moment for our next question. Our next question comes from Michael Zaremski with BMO. Your line is open.

Morning. Morning. Okay, I guess for my one question, I want to focus on the program segment. Growth has been exceptional for years now in the segment and I think you gave some color too that maybe this quarter's outsized growth was coming from catastrophe programs. But maybe just curious, is there, when we think of the wholesale marketplace, we think about that marketplace over long periods of time typically growing a bit faster than the standard market due to some underlying kind of secular factors. Just curious in your programs business, is there anything structural or secular that you think this is just a, should grow at a multiple of the standard markets over time? All right, so

good morning, Mike. So let's think about that. Most of our programs, many, I shouldn't say most, are admitted, okay? So think of that as an extension of the specialty admitted market as opposed to the traditional wholesale or non-admitted market. I think that's an important distinction up front. That's number one. Number two, I believe there will continue to be interest and emphasis on the program's business going forward, depending on what you read and what you believe. The program's space is somewhere between 85 and $100 billion of premium in the United States. And so we do continue to see that growing nicely into the future. And there are a number of very talented underwriters that want to join us either from a risk bearer or sometimes from other programs because there is a dynamic environment here where we have fostered great relationships with our carrier partners. And remember, we are underwriting on behalf of, we are, as we understand it, the largest delegated underwriting authority entity in the United States. And so they place, carriers, place enormous authority in our hands of which we take very seriously. So is the growth gonna continue in the 20% range? That's over a long period of time, that's quite high. All right, let's call it what it is. But what I would say is we believe that the program space is a very nice, consistent grower over a long period of time and our results would indicate as such.

And

it's interesting because, and I know this isn't the case with you, Mike, but there are some people out there that really don't, I don't think, fully understand or give us credit for the other than retail part of our business, which is 40% of the revenue. And as you know, it is performing very nicely. So if you wanna look at it on a slightly different perspective, and I know you've already thought about this, but if you look at the performance of wholesale and programs together, that 40% grew at .7% in Q3. Hmm, pretty impressive. I mean,

I do think people, when they look at programs and wholesale, they do look at Orion as a comp. But can I, since I'll stick to my one question, but a follow-up on your answer on the same topic, would it be a fair assumption to say that underwriters that come to Brown or just a broker-owned programs business can be compensated more highly than what a carrier can pay given valuation dynamics?

You mean to the individual? Correct, correct. Well, I think the compensation is typically different because it can be cash, a base plus a bonus, in many instances, plus equity. So generally, I think that as a broad statement, you could probably say yes.

Thank you.

One moment for our next question. Our next question comes from Mark Hughes with Trua Securities, your line is open.

Yeah, thanks, good morning. Morning. Andy, you had mentioned that you generated 15 million in revenue from onboarding new customers and programs, and that would be spread more evenly throughout 2025. Was any of that 15 million non-recurring, and can you give us a sense of when you say spread more evenly, are there any kind of bumps or tough comps as we think about 2025 in that lender place business?

Yeah, good morning, Mark. So how that works is when we pick up a new account or we have a customer that buys a portfolio, normally there is a lag of anywhere from 90 to 180 days, from the previous servicer of actually sending out notifications and everything. So what happens is you generally will get two to three quarters of revenue in kind of the first quarter that we onboard them. Then when it comes around to renewal or the exit date, then that revenue will fall accordingly. And that's really what we're saying is next year in the third quarter, we would not anticipate seeing that 15 million, but that'll be spread out during 25 with most of it in kind of the first half of the year. Does that help kind of explain how that works?

It does. The second half of my one question is anything on the advocacy business? Have you seen the Social Security Administration be a little more active on adjudicating claims?

No, everything's pretty similar to what we've been seeing over the last few years. We've got good inflow into our business, but only so much comes out of the back of the funnel.

Thank you.

Yeah.

One moment for our next question. Our next question comes from Alex Scott with Barclays. Your line is open.

Hi, I wanted to ask you to provide more color on the M&A pipeline, in particular the comments around interest rates beginning to come down and more interest from private equity players. And could you talk about the potential size of those opportunities and where you're focused on growing in organically?

Sure. So as it relates to the first part of the comment, as interest rates, prior to interest rates going up, there were typically lots of private equity firms that expressed interest. And obviously they think of it in a little different manner in terms of the way they account for it and look at those investments. Then that, and so there might've been 10 firms that were involved initially, just as an example. And then as the interest rates ticked up, that number being involved might've slowed to three firms. These are very hypothetical situations. And then today there might be six or seven firms. So what I'm trying to give you a sense of is that as interest rates go down, there are more interested parties that are short-term in nature in terms of the way they view it, i.e. private equity. As it relates to us, we continue to look both here domestically, which we think there are some very good opportunities for us here in the future, and in the international markets that we currently operate in, and as evidenced by the fact that we anticipate closing quintess in the Netherlands this quarter, that's another market that we're excited about participating in on a go-forward basis. So there's not one over another. We stress the importance of cultural fit. We think about capabilities. We think about either enhancing existing capabilities, adding new capabilities, or maybe a new geography. As long as it's consistent with the core, which is one, we want it to fit culturally and make sense financially, and two, we like to operate in countries that we understand their governments. There's typically a rule of law. There's generally a stable economy. And we're very pleased with the environments that we're currently operating in.

Got it. Thanks for the clarification on the private equity piece.

Sure,

thank you.

One moment for our next question. Our next question comes from Meier-Schiehl's with KBW. Your line is open.

Great, thanks so much. I just wanted to go back to the lender place insurance in programs. Should we think of that 15 million? I think you said there was a 90 to 120 day lag. So is the 15 million the equivalent of like three quarters of revenue, or is that a full year? And did that impact margins in the segment?

So let's see. It represents over about six months of revenue, just a little bit more on that, Meier. Again, primarily in the first half of 2025. Some of it will reach into the fourth quarter as it kind of comes around, just normal lag in processing, taking it over from the previous processor. And then from a full year margin, no, it doesn't impact full year margins. It's just between the quarters.

Okay, perfect, thank you so much.

Yeah, thanks.

One moment for our next question. Our next question comes from Grace Carter with Bank of America, your line is open.

Hi, everyone, good morning. Morning. 10Q mentioned some pressure on contingents in retail from higher loss ratios at carrier partners. I think that this is the second quarter in a row that we've seen that. Could you elaborate on which lines caused the pressure in 3Q and how this compares to 2Q? And just kind of any thoughts on whether you think that this will be an issue that recurs moving forward for the next few quarters?

Good morning, Grace. Yeah, we've been talking about this over probably the last few quarters at least. We saw this starting back in 23. It's primarily on the auto side, both on personal as well as on commercial, I think, as you know well. Carriers have been pushing for rate in that space just because of frequency and severity of the claims that are out there, which is putting pressure on overall profitability. So that's the main driver. I guess we would say right now, we don't see anything in the marketplace yet that is changing that trend at this stage. So we would continue to expect some pressure on those.

Thank

you.

Thank you.

One moment for our next question. Our next question comes from Scott Hellenack with RBC Capital Markets. Your line is open.

Yeah, thanks. Good morning. Just wondering if you could expand on the employee benefits business and you gave some commentary on that. It sounds like you're seeing some positive trends on healthcare. So just wondering if you can just talk about the trends in Q3 versus the first half and just the opportunity for 2025 just organically and through M&A and what you're seeing in that business.

So Scott, what I would say is remember in the last, I'm taking you back a little while, but in the last 10 years, we have consciously invested in additional capabilities which has enabled us as an organization to basically handle any size customer and employee benefits. And so what that means is we can write a startup and if they grow one day to 100,000 employees, we can actually handle them at 100,000 employees. And so remember our core business is middle market and upper middle market. And the capabilities that we bring to the table, we see lots of opportunities today and in the future and are very excited about the growth opportunities for us. And so it's something that healthcare, every CFO wants to talk about their cost of healthcare. And there are lots of things that we are able to bring to our customers and prospects that will enable them to think differently and potentially realize different and in some instances outsized positive performance versus what they have been experiencing. So we are actively looking for additional firms to join the team, but even in light of if we did not do an acquisition with employee benefits capabilities in them in the next 12 months, I don't think that in any way, shape or form changes our opinion on existing business and employee benefits. Andy and I and the entire operating team are very, very pleased and quite honestly, very excited about our ability to write and service customers of all

sizes. Great, appreciate the detail.

One moment for our next question. Our next question comes from Brian Meredith of UBS. Your line is open.

Yeah, thanks. Just a quick one for me. Do you anticipate any impact on contingent commissions from Milton and Helene in the fourth quarter?

Hi, morning, Brian. I think still kind of to be determined. In our earlier comments, we said there's still a lot of moving parts on Milton. We did have some adjustments in the third quarter for Helene, not dissimilar to we're back in 22 with EN. We take the best extent that we can based on what we know at the time. So would we expect some adjustments in the fourth quarter? Yeah, that probably will occur. Now, again, keep in mind that we did have adjustments positively in Q4 of last year because of low claim activity. So that's primarily in the program space. So you will see probably some meaningful year over year change in there. I don't know the magnitude of it right now. Just we need some claims development to occur.

Hey, Brian, I'd like to just point out two things that might not be as immediately comes to mind. Number one, we saw and I continue to see a lot of auto losses in the storms, particularly Helene, but Milton as well. So you've got a car in a garage and flood waters come up and the car dies. Okay, so it doesn't work anymore. And I'm not even talking about electric vehicles. I'm just saying that. That's number one. Number two, depending on where you are, there is a very, very distinct correlation between structures, commercial and residential that are built after 2005 and the amount of loss. So there are new codes, as you know, that were put in place. Quite honestly, if you go back to 1992 with Hurricane Andrew, and then every couple years, it seems that they kind of upped them. But if you talk to people in the market about losses on properties, those losses are typically on structures that are, you know, they're in the 90s and the 80s and the 70s and the 60s. You get into older homes, you know, in the 30s and the 40s, they're not the ones having losses. They're actually very, you know, they're very solid structures. But it's that kind of middle stuff where the building codes maybe weren't as stringent. So just a little aside, just to kind of give you a little color around your question. Thank you.

Thank you.

One moment for our next question. Our next question comes from Gregory Peters with Remi James. Your line is open.

Okay, I get my follow-up question. In your commentary on free cash flow, you talked about some deferred tax payments that will help the free cash flow result for 2024. Should we anticipate that because you're gonna have additional tax payments from 24 and 25 on top of just the 25, that the conversion rate on the 25 free cash flow will be lower?

Yeah, yes, Greg, that would be correct. And as of right now, the rules by the IRS is those need to be paid in the second quarter. So when you're working on your projections, and you can get a pretty good idea of our taxes, they run somewhere between 90 to 100 million per quarter in there. So just make sure you put those in the second quarter. So that'll pull down our conversion for 25. That is why we made the comment that we raised the conversion ratio for 24 up because of that deferral.

And the conversion ratio for 24 is raised from two, can you just remind me?

Yeah, we said 22 to 24 previously. So this will take it up by a percentage points. But I think when we look at the business, and if you recall a while back, when we were talking about conversion ratio, and we talked about 2025, is we said we saw kind of a very clear path back to the 24 to 26 range. That was prior to this storm coming through. But when we look at the overall business itself, and how we're growing the business, the margins that we generate in our free cash flow conversion, we feel really, really good about the business. And the trajectory, it's just, you have this timing of items back and forth sometimes between years, but underlying business, it continues to be very, very strong.

Great, thanks for answering the question.

Yeah, thanks. One moment for our next question. Our next question comes from Elise Greenspan with Wells Fargo, your line is open.

Hi, thanks. My follow-up is actually on investment income. That went up by a good amount in the quarter. What drove that, and then is that level, as rates move, how should we think about, I guess, the level of NII that you're expecting in the Q4 and going forward?

Sure. So one thing to keep in mind, remember the 600 million of bonds that we issued back in the second quarter. So we were holding that money until we had paid off the September bonds. So that drove somewhere an incremental six to $7 million of interest income for the quarter. So don't use the 31 million or so that we had in the quarter as a run rate. It'll definitely come back down in the second quarter. And then, or excuse me, in the fourth quarter, of course. I'd like to clarify something.

Elise, I would like to clarify something that you asked earlier. And you're correct in saying that we do not give organic growth guidance, as you know. However, what we said was, you had asked about a number in Q4. And what

Andy

and I were implying, or trying to say, was if you look at the performance in Q3 and you note the adjustments that we made, we believe that that is a good starting place for Q4. I wanted to make sure that was clear for you. Does that make sense?

Yes, so the 3.9 plus the 100 basis points, or around five, is the Q4 starting point for retail.

I was going to allow you to do the math, and we don't give guidance, but I just wanted to clarify.

Okay, got it. Thank you, Powell.

And then, hey, Elise, just kind of rounding out on the net investment income, because I think it's probably also important when we talk about kind of the other side of that. And again, you can kind of get a feel for, in modeling, if rates drop by 1%, an idea as to what it could mean on the net investment income. Now again, keep in mind that as we continue to grow as an organization, there's more fiduciary cash, so you're not going to see it on an exact ratio if you do that, right, because you've got to assume that fiduciary assets will continue to grow. But then also, keep in mind on the other side of that is our floating rate debt. So as an organization, we build our capital structure to have somewhere around 25% of our debt to be floating rate. It's been extremely, extremely beneficial for creating shareholder value over many years. And so when we, at the end of 930, we had just under 800 million on floating rate debt. So just make sure you grab that on the other side of the equation if you're doing your ups and downs on interest, okay?

Okay, thank you both.

Oh, thank you.

One moment for our next question. Our next question comes from Mark Hughes with Truer Securities, your line is open.

Yeah, thank you. You mentioned a margin impact from the investment in teammates given that the M&A market has been, at least in Q3, your activity was a little bit lower. Is that a deliberate plan to spend more money on teammates or was that more opportunistic?

I look at it as more opportunistic, Mark, and the reason I say that is, when we find the right people, we're going to invest in them. And so that's why I always try to say that one quarter or doesn't make a trend, and when we make those investments, we fully anticipate that we will grow into those investments in the coming quarters and years ahead. And so if it were something very significant in terms of a number, we would call it out and talk to you about it. But from this standpoint, we, you know, this is what I call normal opportunistic investing. We're not going to beat some drum and say we got some program, it's not like that. We're always looking for good people. We believe that culturally we will attract a certain group of people that would like to work for a competitive, collaborative, high-performing sales and service organization. But there's not something, you know, there's not some secret initiative going on. I don't want to give you that impression. Appreciate

that, thank you. One moment for our next question. Our last question comes from Michael Zyrowski with BMO. Your line is open. Hi,

great. Just a follow-up on kind of teasing out what you all are seeing or projecting on the casualty side in terms of pricing power trends. I know that I think last quarter, you all, and maybe many other stuff, pricing would move up a bit. Has that changed at all? And I don't know if you want to vibrate between, you know, E&S or admitted versus not admitted. Thanks.

Sure, all right. So Mike, number one, if you remember in the past, I have sort of said in my career, which is only back to 1990 in the insurance business, there's always been an underlying tone that casualty has been underpriced, but I don't think there's been a discipline around pricing it by the carriers. Today, that seems to be different. So there seems to be a discipline around that. And so I believe it's both in the primary and the excess. I believe it's also in admitted and not admitted. So it's not something that we are bifurcating that you're seeing more so in one versus the other. That's not the case. And so I think that we're going to continue to see a rate pressure on casualty, so general liability, excess liability, and as Andy said earlier, in automobile, both commercial and personal auto. For the time being, I don't see that changing. You know, depending on the carrier, they're going to tell you different trends they're seeing in their books. But yes, there continues to be pressure on all of those segments. Thank

you. Ladies and gentlemen, this has concluded the Q&A portion of today's call. I'd like to turn the conference back over to Powell for any closing remarks. Sure, thanks, Kevin.

We really appreciate everybody's time today. We are very pleased with the performance in Q3. We're excited about Q4 ending the year strong and going into 2025. You all have a wonderful day. Thank you for your time.

Ladies and gentlemen, this has concluded today's presentation. You may now disconnect and have a wonderful day.