Brown & Brown, Inc.

Good morning and welcome to the Brown and Brown, Inc. first 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 question may relate to future results or end events or otherwise before looking at 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 securities laws. Actual results or events in the future are subject to a number of risk and uncertainties and may differ materially from those currently anticipated or desired or references 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 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 those and other factors affecting the company's business 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 funds for 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 the investor relations and then calendar of events. With that set out, now I'll turn the call over to Powell Brown, President and Chief Executive Officer. You may begin.

Powell Brown Thanks, Kevin. Good morning, everyone, and welcome to our first quarter earnings call. Once again, our team delivered strong top and bottom line results. I'll provide some high-level comments regarding this performance, along with updates in 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 open up to Q&A. So now let's get into the results. I'm on slide four. For the first quarter, we delivered revenues of $1.4 billion, growing 11.6% in total and 6.5% organically as compared to the same period in the prior year. Our adjusted EBITDA margin improved over 100 basis points to 38.1%. and our adjusted earnings per share grew over 13% to $1.29. On the M&A front, we completed 13 acquisitions with estimated annual revenues of $36 million. This consistently strong performance is a direct result of the dedication of our team of nearly 18,000 teammates. I'm on slide five. Main topic for the quarter was uncertainty related to tariffs, inflation, and interest rates and how they might impact economic expansion. Overall, we did not see buyers of insurance materially change their outlook, but we did see some business leaders shift to being more cautious. Generally, companies are still hiring and investing in their businesses. However, in certain cases, you're seeing some new projects put on hold for a few months due to these uncertainties. Presently, we would say the levels of investment in people and assets are fairly consistent with the past few quarters. We view this as a positive. Overall, the economies in which we operate are relatively stable, and business owners remain optimistic but have a tempered view regarding the level of growth over the coming quarters. From an insurance pricing standpoint, rate increases for most lines continued and were fairly consistent with the prior few quarters. However, they're moderating downward slightly as compared to last year. The outliers continue to be auto and casualty that are increasing. and CAAT property continues to soften during the quarter. We'll get into more detail about the CAAT property in a couple minutes. Pricing for U.S. employee benefits in the first quarter was similar to prior quarters, as medical and pharmacy costs remain up seven to nine percent. The outlier continues to be pharmacy, which is growing faster than medical. This ongoing upward pressure and the complexity of healthcare continue to drive strong demand for our employee benefits consulting businesses. Rates in the admitted P&C market moderated slightly as compared to last quarter and were up 2% to 7% for most lines versus the prior year. The downward trend for workers' compensation remained in most states, and they were flat to down 5%. For the first quarter, rate increases for non-CAT property were in the range of flat to up 5%, which is similar to the prior few quarters. For casualty, we continue to see rate increases for primary and excess layers. Consistent with the last few quarters, rates for excess casualty increased in the range of 5% to 10%. Placing higher limits or layers continues to be very challenging, both from a pricing perspective and the availability of limits. For professional liability, rates were flat to up 5% as compared to last year. Shifting to the ENS property market, as we entered the first quarter, we anticipated rates for cap property would decline 10% to 20%. With availability of capital, rates during the quarter declined a bit faster and were down 10% to 25%, and we saw outliers based on the quality of construction, claims experience, and new versus renewal business. In some cases, rates were down in excess of 25%. With the decline in rates, some buyers chose to increase their limits or modify deductibles, while others realized the savings. These savings also enabled some companies to increase their limits on other lines of coverage. As we've mentioned in the past, buyers will manage their overall insurance spend and focus on the combination of rates, limits, and deductibles. On the M&A front, we had another good quarter and acquired 13 great companies with $36 million of annual revenue. From an overall market perspective, competition for high-quality businesses remain. Let's go to slide six and transition to the performance of our three segments. Retail delivered 4.1% organic growth, which was in line with our expectations and was driven by good performance in all lines of business. As a reminder, we expected the first quarter to be lower than the others this year due to the shifting of renewal dates and timing of certain non-recurring businesses. Programs delivered another good quarter with organic growth of 13.6 percent. This performance was driven by a number of our programs with good new business retention and exposure unit expansion, as well as claims revenue associated with the 24 hurricanes. Our CAT programs, or CAT property programs, grew for the quarter slightly, even with the impact from rate decreases. Wholesale brokerage had a strong quarter with organic revenue growth of 6.7%. This performance was driven by growth across all lines through a combination of net new business and exposure unit increases, with the growth partially offset by the continued downward pressure on open brokerage cap property rates. Now I'll turn it over to Andy to get in more detail regarding our financial results.

Thanks, pal. Good morning, everybody. I'm going to review our financial results in 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 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 seven. We deliver total revenues of $1,404,000,000. growing 11.6% as compared to the first quarter of 2024. Income before income taxes increased by 17.4%, and EBITDA grew by 14.8%. Our EBITDA margin was 38.1%, expanding by 110 basis points over the first quarter of the prior year. The higher growth in income before income taxes was due to lower interest expense associated with debt repayments. Our effective tax rate for the quarter increased slightly to 21.8% versus 19.5% in the first quarter of the prior year. The increased tax rate was driven by having less benefit associated with vesting of restricted stock awards as compared to the first quarter of last year. As a reminder, most of our restricted shares vest in the first quarter, so we can have variations and our quarterly tax rate, depending on the number of shares that vest and the change in share price. Diluted net income per share increased 13.2% to $1.29. Our weighted average shares outstanding increased slightly compared to last year, and we continue to prioritize paying down our floating rate debt as this has a higher impact on the growth of earnings per share. Lastly, our dividends paid per share increased by 15.4% as compared to the first quarter of 2024. Overall, we are very pleased with the performance for the first quarter. We're going to move over to slide number eight. The retail segment grew total revenues 12.5% with organic growth of 4.1%. The difference between total revenues and organic revenue was driven substantially by acquisition activity over the past year. Our EBITDAQ margin expanded by 120 basis points to 37.3% due to managing our expenses and the positive impact of the seasonality of revenue and profit for the Quintest acquisition. Both were partially offset by higher non-cash stock-based compensation. As we mentioned previously, approximately 60% of the revenues for Quintest are recognized in the first quarter. Therefore, we have higher margins in the first quarter and lower margins in the others. This is very similar to the profile for employee benefits in the United States. From a full-year perspective, we continue to anticipate quintests to perform within the revenue and EBITDA ranges that we previously communicated. We're on slide number nine. Programs had another strong quarter with total revenues increasing. 10.1%, and organic growth of 13.6%. In comparison to the prior year, our profit-sharing contingent commissions decreased about 6 million due to positive adjustments recorded in Q1 of 24. Lastly, we recognized approximately 12 million of hurricane claims processing revenue, which is in line with our expectations. Our EBITDA margin expanded by 220 basis points to 44.5%. primarily driven by strong organic revenue growth and managing our expenses. We're moving over to slide number 10. Our wholesale brokerage segment had another strong quarter with total revenues increasing 12% and organic growth of 6.7%. The incremental expansion in total revenues in excess of organic was driven by acquisitions completed in the last 12 months and higher contingent commissions. Our EBITDA margin decreased by 30 basis points to 32.1% due to higher non-cash stock-based compensation and the impact of foreign exchange. Isolating these changes, the underlying margin increased year over year due to managing our expenses and higher profit sharing contingent commissions. Lastly, from a cash perspective, we generated approximately 215 million of cash flow from operations. which was an increase of 200 million over the first quarter of 2024. This improvement was due to incremental taxes of approximately 120 million paid in the first quarter of 2024, which were deferred from 2023. In addition, we continue to manage our working capital and expand our margins during the quarter. As previously noted, We deferred the payment of approximately $90 million of federal income taxes for the third and fourth quarters of 24 related to IRS tax relief associated with the prior year hurricanes. These taxes will be paid in the second quarter of this year and will impact our cash flow conversion. With that, let me turn it back over to Powell for closing comments.