Brown & Brown, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Brown and Brown fourth quarter earnings conference call. Today's call is being recorded. Please note that certain information discussed during this call, including information contained in the slide presentation posted in connection with this call and including answers given in response to your questions, may relate to future results and events or otherwise be forward-looking in nature. Such statements reflect our current views with respect to future events, including those relating to the company's anticipated financial results for the fourth quarter and are intended to fall within the safe harbor provisions of the securities laws. Actual results or events in the future are subject to a number of risks and uncertainties, and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors. Such factors include the company's determination as it finalizes its financial results for the fourth quarter 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 report 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 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, Michelle. Good morning everyone and welcome to our fourth quarter earnings call. First, we'd like to express our deepest condolences to the many individuals impacted by the California wildfires. The magnitude of the devastation caused by these events is horrific. We're committed to assisting those impacted by these terrible fires. Now, transitioning to our results. Our fourth quarter performance was just outstanding and capped off another incredible year where our team delivered nearly $5 billion of revenue, which included double-digit organic and double-digit earnings per share growth, as well as strong margin expansion. These results are only possible through the dedication of our 17,000 plus teammates delivering for our customers every day. Over the years, we've worked diligently to build a highly diversified business that consistently generates best-in-class financial results. The reason we can deliver these results is due to our unique operating culture. Now let's get into the results for the fourth quarter. I'm on slide number four. For the fourth quarter, we delivered revenues of $1.4 billion, growing 15% in total and 14% organically over Q4 of 2023. Our adjusted EBITDA margin improved by almost 200 basis points to 33%, and our adjusted earnings per share grew 24.5% to 86 cents. On the M&A front, we completed 10 acquisitions with estimated annual revenues of $137 million. Across the board, it was a very strong quarter. I'm on slide five. For the full year of 2024, we delivered revenues of $4.8 billion, growing 13% in total, and over 10% organically. Our adjusted EBITDA margin was over 35%, increasing more than 100 basis points. On an adjusted basis, our diluted net income per share grew over 18% to $3.84, and we generated nearly $1.2 billion of cash from operations. We had another good year of M&A, completing acquisitions with approximately $174 million of annual revenue with the largest being Quintess in the Netherlands. We'd like to extend a warm welcome to all the new teammates that joined us during 2024 and we're pleased with the quality of the organizations and our new capabilities. I'm on slide six. From an economic standpoint, there were no major changes for the markets in which we operate as compared to the last few quarters. Many business leaders have shifted from being cautious to cautiously optimistic. In addition, we did not see companies materially change their levels of investment as they're still hiring and growing their revenues generally at levels similar to the second and third quarters of 2024. Overall, the economies in which we operate are relatively stable, which we view as a good backdrop for our growth opportunities in 2025 and beyond. From an insurance pricing standpoint, rate increases for most lines continued. However, they're moderating downward as compared to last quarter and last year, except for ongoing upward pressure on auto and casualty. The line that had the largest change for the quarter as compared to last year was cat property, which we'll discuss in more detail. Pricing for employee benefits was similar to prior quarters, as medical and pharmacy costs continued to be up 7% to 9%. This ongoing upward pressure and the complexity of healthcare are driving strong demand for our employee benefits consulting businesses. With the investments we've made and continue to make, we are well positioned to help companies of any size navigate these market challenges. Rates in the admitted P&C market moderated slightly as compared to last quarter and were up two to seven percent for most lines versus the prior year. The downward trend for workers' compensation rates remained, and they were flat to down 5% in most states. For the fourth quarter, rate increases for non-CAT property were still in the range of flat to up 5%. For casualty, we continue to see rate increases for primary layers, mainly due to the ongoing size of legal judgments in the U.S. Consistent with the last few quarters, rates for excess casualty increased in the range of 1% to 10%. For professional liability, we saw rates flat to up 5% as compared to last year. Now, shifting to the E&S markets. First, in reference to cat property, at the beginning of the fourth quarter, there was speculation that the impact of Hurricane Eileen and Milton would slow the recent decline of cat property rates or even reverse the trend entirely. Based on insured losses and the fact that both storms were heavy flooding events versus wind, cat property rates continued to decrease throughout the fourth quarter. On average, rates were down 10% to 20%, similar to the end of the third quarter, with more customers seeing decreases closer to or in excess of 20%. From a buyer's perspective, some leverage the lower rates to increase their limits or modify deductibles, while others realize the savings. As a result of our broad diversification, rate changes for individual lines of business generally will not materially impact the total results for our company. The major drivers of our organic growth are the economy and our ability to win net new business. This quarter was another good example. We had some lines that were up and some lines that were down, while still delivering strong results. On the M&A front, we had a good quarter. We acquired 10 great companies and $137 million of annual revenue, and our largest acquisition was Quintess. We're very excited about our Dutch market position and our ability to grow over the coming years. From an overall market perspective, competition remains fierce for high-quality businesses and we're starting to see more activity from financial sponsors for the smaller and mid-sized deals as interest rates are beginning to decrease. I'm now on slide seven. Let's transition to the performance of our three segments for the fourth quarter. Retail delivered 4.4% organic growth driven by good performance in most lines of business. We're pleased with the level of net new business as it was consistent with our strong performance over the last few quarters. Organic growth was partially impacted by the timing of our new business and certain non-recurring revenue. For the full year, we delivered strong organic growth of 5.8% as our team is performing well and we feel good about our prospects for 2025. Programs delivered another outstanding quarter with organic growth of 38.6%. This performance was driven by a number of our programs with strong new business and exposure unit expansion as well as claims revenue associated with the Q3 and Q4 hurricanes. Our lender-placed business and captives performed very well and our cat property business continued to grow even with cat property rates decreasing. For the full year, we grew 22.4% organically, an amazing result. As one of the largest, if not the largest, global operator of MGAs and MGUs, we've made thoughtful and strategic investments creating meaningful differentiation and resiliency in the marketplace. Wholesale brokerage delivered another good quarter with organic revenue growth of 7.1%. This performance was driven by growth across all lines through a combination of net new business and exposure unit increases. That was somewhat muted by the downward pressure of cat property. For the full year, wholesale delivered strong organic growth of 9.1%, and we have good momentum heading into 2025. Now I'll turn it over to Andy to get into more details regarding our financial results.

Great. Thank you, pal. Good morning, everyone. I'll review our financial results in additional detail. When we refer to EBITDA, EBITDA margin, income before income taxes, or diluted net income per share, we're referring to those measures on an adjusted basis. The reconciliations of our GAAP to non-GAAP 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 eight. We delivered total revenues of $1,184,000,000, growing 15.4% as compared to the fourth quarter of 2023. Income before income taxes increased by 27.2% and EBITDA grew by 22.6%. Our EBITDA margin was 32.9%, expanding by 190 basis points over the fourth quarter of the prior year. Our effective tax rate for the quarter increased slightly to 24.7% versus 24.1% in the fourth quarter of the prior year. Diluted net income per share increased 24.6% to 86 cents. Our weighted average shares outstanding increased slightly compared to last year as we continued to prioritize paying down our floating rate debt. Lastly, our dividends paid per share increased by 15.4% as compared to the fourth quarter of 2023. Overall, it was a very strong quarter. We're on slide number nine. The retail segment grew total revenues by 9.5% with organic growth of 4.4%. The difference between total revenues and organic revenue was driven substantially by acquisition activity over the past year and higher contingent commissions. EBITDA margin expanded by 100 basis points to 27.8%, driven by higher contingent commissions, finalization of four-year performance incentives, and leveraging of our expense base. This growth was partially offset by higher non-cash stock-based compensation. We're on slide number 10. Programs had an excellent quarter with total revenues increasing 28.7% and organic growth of 38.6%. Keep in mind that a portion of this growth was associated with the $19 million charge recorded in 2023 for the change in reinsurance related to one of our captains. Growth in total revenues benefited from higher contingent commissions but was lower than organic due to net disposition activity in the prior year. Our EBITDA margin expanded by 660 basis points to 47.9%, primarily driven by leveraging our expense base and to a lesser extent the sale of certain businesses in the fourth quarter of 2023. As we discussed in our third quarter earnings call, We anticipated recording $12 to $15 million of flood claims processing revenue in the fourth quarter associated with hurricanes Helene and Milton. As a result of faster than anticipated adjudication and increased average severity, we recorded approximately $28 million. With increased visibility into the timing of adjudicating claims and severity, We now anticipate recognizing revenues of approximately $14 to $18 million in the first half of 2025 with the majority being recorded in the first quarter of this year. We're over on slide number 11. Our wholesale brokerage segment had another good quarter with total revenues increasing 11.6% and organic growth of 7.1%. The incremental expansion in total revenues in excess of organic was driven substantially by higher contingent commissions. Our EBIDAC margin decreased by 140 basis points to 25.7% due to the finalization of full-year performance incentives along with certain one-time costs. We're over on slide number 12. This slide presents our results for both years. Our EBIDAC grew by 17% with the margin increasing 130 basis points to 35.2%. with net income before income taxes growing 19.6% and net income per share was $3.84, growing by 18.2%. These compare to total revenue growth of 12.9%. Overall, we are extremely pleased with the results for 2024. We have a few other comments regarding our capital structure, cash generation, and outlook. From a cash perspective, we generated $1,174,000,000 of cash flow from operations, growing 16.2% over the prior year. Our full year ratio of cash flow from operations as a percentage of total revenues remains strong at 24.4%. As a reminder, we have also deferred the payment of approximately $90 million of federal income taxes for the third and fourth quarters of 2024 related to the IRS tax relief associated with the 2024 hurricanes. These taxes are due to be paid in the second quarter of 2025. During the quarter, we also drew down $250 million on our revolving credit facility in connection with the closing of the Quintess acquisition. For the full year, we continue to delever and finish 2024 in a conservative position as our gross debt to EBITDA ratio is in line with our 10-year average. We have a few comments regarding outlook for 2025. As it relates to contingent commissions, based on what we know now, we anticipate contingents for the full year of 2025 will be down slightly compared to 2024. The unknown variables are the potential impact of the California wildfires and the outcome of the 2025 Atlantic hurricane season. For the retail division, we have two items. The first relates to the phasing of revenues between quarters. Based on the forecasted timing of net new business, organic revenue growth for the first quarter is anticipated to be approximately 100 basis points lower than the organic growth for the other three quarters. The second item relates to our recent acquisition of Quintess and the phasing of its revenues and profit. In the Netherlands, a substantial number of policies are placed in the first quarter of the year. As a result, we will record approximately 60% of Quintessa's annual revenues in the first quarter with the remaining revenues recognized fairly evenly over the following three quarters. From a margin perspective, this will improve Q1 margins and will unfavorably impact the margins in the other quarters. From a full year perspective, we anticipate revenue and EBITDA to be within the ranges outlined during our August 2024 call. As it pertains to taxes, we expect our effective tax rate to be relatively consistent with 2024 and should be in the range of 24 to 25%. Based on the current outlook regarding interest rate cuts in 2025, we anticipate interest expense to be in the range of $170 to $180 million for the full year. In regard to interest income, we anticipate this to be in the range of $65 to $70 million, given recent reductions in the benchmark rate in certain territories. Finally, taking into consideration that net income and contingents will more than likely be down in 2025, we're expecting our adjusted EBITDAG margins for 2025 to be relatively flat. With that, let me turn it back over to Powell for closing comments.