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 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 a 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 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 businesses 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 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.bbrown.com by clicking on Investor Relations and then Calendar Events. With that, Said, I will now turn the call over to Powell Brown, President and Chief Executive Officer. You may begin.

Thanks, Gigi. Good morning, everyone, and welcome to our third quarter earnings call. We'd like to first welcome our 5,000-plus new teammates from a session that joined us on August 1st. We're excited to be working together to grow our company as these talented teammates bring new capabilities for our customers. I also wanted to talk about leadership changes we announced last Monday. Based on the evolving global breadth of our retail segment and the importance of continuing our forward momentum, I've appointed Steve Hearn as the new retail president on a go-forward basis. I've known Steve for over 20 years and have admired his leadership style. He brings more than 35 years of deep industry experience, acquisition, integration, and a proven record of driving growth and innovation, both in the U.S. and internationally. With his leadership, we will further enhance our world-class solutions and value to our customers, carrier partners, shareholders, and teammates. Regarding my brother Barrett, I have a ton of respect for him as a leader, and also I love him dearly. He's taking a personal leave of absence. I ask that everyone respect his privacy. When he's ready to return to the company, I look forward to welcoming him back. Last week, our board of directors raised our dividend by 10%, which represents an increase to the 32nd year in a row. In addition, our board expanded our authorization to repurchase shares up to $1.5 billion. As we've done in the past, we will purchase shares when we believe the company is undervalued and to help manage dilution associated with our equity plans. Our goal is to help drive earnings per share growth and meaningful shareholder value. Now let's transition to the results. I'll provide some high-level comments regarding our performance, along with updates on the insurance market and the M&A landscape. Then Andy will discuss our financial performance in more detail. Lastly, I'll wrap up with some closing thoughts before we open it up for Q&A. Here's slide number four. As you know, we focus on growth, both overall and organic, margins, earnings per share, and cash flow as key metrics that should drive shareholder value creation. For the third quarter, we delivered revenues of $1.6 billion, growing 35.4% in total and 3.5% organically as compared to the same period in the prior year. Our adjusted EBITDA margin improved by 170 basis points to 36.6%, and our adjusted earnings per share grew over 15% to $1.05. On the M&A front, we completed seven acquisitions with estimated annual revenues of $1.7 billion, with the largest being a session. I'm on slide five. From an economic standpoint, growth remained relatively stable with the second quarter. We view this as positive since we continue to see businesses growing as consumers are still spending. From a hiring and capital investment perspective, it remained relatively modest for most companies. Depending on the industry, some companies are looking to hire while others are relatively flat. This concept applies to capital investments as well. Generally, concerns over the impacts from tariffs seems to have dissipated for many industries, while business leaders continue to have a cautious bias. From a commercial insurance pricing standpoint, rates for most lines were similar to the second quarter. We continue to see CAT property, and casualty as the outliers on both ends of the spectrum. Pricing for employee benefits was similar to prior quarters with medical costs up 6% to 8% and pharmacy costs generally up over 10%. We do not see any signs that this trend will slow over the coming quarters. Almost all companies are challenged to balance rising healthcare costs and the impact of their employees and their P&Ls. Management of high-cost claimants specialty pharmacy, and population health continue to be key areas of our focus, which are driving more demand for our healthcare consulting businesses. Rates in the admitted P&C markets were substantially similar to last quarter and were flat to up 5% versus the prior year. Workers' compensation rates remained similar to prior quarters in most states and were flat to down 3%. For non-CAT property, overall rates were down 5% to up 5% depending on the loss experience. For casualty, we're seeing rate increases of 5% to 10% for primary layers and excess layers increasing even more. We believe this trend will continue over the coming quarters. For professional liability, rates remain similar to Q2 and were down 5% to up 5%. Shifting to the ENF property market, rate changes for the third quarter were similar to the second quarter and were generally down 15% to 30%. Keep in mind that we placed the largest amount of capped property in the second quarter and the least amount in the third quarter of each year. From a customer perspective, they're managing their total insurance spend, both commercial as well as employee benefits. As rates move up and down for certain lines, this will influence customers' buying behavior and corresponding premiums paid. On slide six. Let's transition to the performance of our two segments for the quarter. Retail delivered organic growth of 2.7%, which was impacted by approximately 1% due to the adjustments related to certain employee benefits incentives. Isolating this impact, the organic growth was generally in line with our expectations as a result of good net new business performance. As a reminder, beginning this quarter, our previously reported programs and wholesale segments were combined into one segment, which is now referred to as specialty distribution. The go-to-market brand is Arrowhead Intermediaries, which is comprised of three distinct divisions, programs, wholesale, and specialty. This segment also includes the 180 division of Session. We believe that on a combined basis, Arrowhead Intermediaries is the largest global operator of over 100 MGA MGUs and places approximately $20 billion of written premium. For the quarter, the specialty distribution team delivered good organic revenue growth of 4.6%. Organically, wholesale grew high single digits driven by strong brokerage performance. Programs grew low to mid-single digits, driven by good net new business, while being partially offset by our wind and quake programs due to the continued downward rate pressure for commercial cap properties. Now I'll turn it over to Andy to get into more details of our financial results.

Great. Thank you, Powell. Good morning, everybody. Before we get into the details, we wanted to talk about the impact on our earnings related to the acquisition of a session and our related debt and equity issuances. As previously discussed, transaction and integration costs related to our acquisition of a session are excluded from our calculation of adjusted EBITDA and adjusted earnings per share. For this quarter, acquisition and integration costs were approximately $50 million. Additionally, beginning this quarter, we have a new line on the income statement called mark-to-market of escrow liability related to the acquisition of a session. This account is also excluded from our calculation of adjusted EBITDA and adjusted EPS. For the third quarter, we recorded approximately $8 million of a non-cash charge related to the change in the fair value of our common stock held in escrow. As our stock price changes over the coming quarters, we will have additional non-cash movements. For the stub period of August and September, a session's total revenue was approximately $285 million. The margins were in line with our expectations and were slightly below the four-year margin discussed during our announcement call. Due to the seasonality of revenue and profit for certain businesses, the margin will fluctuate by quarter. In addition, we recorded approximately $29 million of incremental investment income for the quarter as a result of the proceeds of our follow-on common stock offering and senior notes issued in June. Now, transitioning to our consolidated results. As a reminder, when we refer to EBITDAQ, EBITDAQ margin, income before income taxes, or diluted net income per share, we are 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. Now, let's get into more detail regarding our financial performance for the quarter. On a consolidated basis, we delivered total revenues of $1,606 million, growing 35.4% as compared to the third quarter of 2020. Contingent commissions grew by an impressive $46 million in total, with $12 million coming from a session. Income before income taxes increased by 34%, and EBITDA grew by 41.8%. Our EBITDA margin was 36.6%, expanding by 170 basis points over the third quarter of the prior year, driven by good underlying margin expansion, together with increased contingents and investment income. For the quarter, our margin expansion was partially offset by the seasonality of revenue and profit associated with the acquisitions of Assession and Quintess. Our effective tax rate for the quarter was 24.7%, substantially flat versus the prior year. Diluted net income per share increased 15.4% to $1.05. Our weighted average shares outstanding increased by approximately $48 million to $332 million, primarily due to the shares issued to Assessions equity holders. Lastly, our dividends paid per share increased by 15.4% as compared to the third quarter of 2020. Overall, we are very pleased with our performance for the quarter as well as our year-to-date results. Over on slide number eight, the retail segment grew total revenues by 37.8% with organic growth at 2.7%. The difference between total revenues and organic revenue was driven substantially by acquisition activity over the past year. As it relates to the fourth quarter, we anticipate our organic growth will be similar to the third quarter. This is due to the previously mentioned employee benefits incentive adjustments and the relative impact of multi-year policies written in 2020 in the fourth quarter. At this point, we do not see the same potential revenue associated with multi-year policies in the fourth quarter of this year. Our EBITDA margin increased by 150 basis points to 28%, driven by the management of our expense base, along with positive impact of a session. This was partially offset by revenue seasonality for Quintess, which we acquired in the fourth quarter of 2020. We're over on slide number nine. Specialty distribution grew total revenues by 30%, driven by the acquisition of a session, contingent commissions, and organic revenue growth. Our organic growth was 4.6%, which was a strong performance considering the very tough comparison to the prior year. Our EBITDA margin decreased by 110 basis points for 43.9% due to the impact of the session, having a lower overall margin as compared to our This impact more than offsets the increase driven by higher continued commissions, organic growth, and managing our expenses. Regarding the Q4 organic revenue growth outlook, recall that we reported approximately $28 million of non-recurring flood claims processing revenue in the fourth quarter of last year. Presuming there are no hurricanes through the end of this year, as well as the continued rate pressure on CAPROP, and we're expecting slower growth in our lender-placed business, we anticipate the organic growth rate for our specialty distribution segment could decline in the range of mid-segment digits. Taking this organic growth into consideration, it will also impact the margin for the fourth quarter this year. As it relates to the fourth quarter outlook for contingents, we anticipate them to be in the range 30 to 40 million, depending on the outcome of storm season. any contingents that may be recognized by a session. We got a few other comments. First, from a cash perspective, in the first nine months of 2025, we generated $1 billion of cash flow from operations. This was an increase of over $190 million, or 24% growth for the first nine months of 2025 versus the same period in 2024. From a cash flow conversion perspective, our discipline remains strong, and the ratio of cash flows from operations to total revenues was approximately 23.5%, or 100 basis points higher than the prior year. For the full year, we estimate our ratio of cash flow from operations to total revenues will be in the range of 23 to 25%. Before we wrap up, we wanted to provide guidance on a few items. As it relates to a session, we anticipate Q4 revenues to be in the range of $430 to $450 million, and the adjusted EBITDAG margin to be slightly below the four-year margin discussed in our announcement call due to the seasonality of revenue and profit for certain businesses. Regarding amortization expense, we anticipate this to be in the range of $110 to $115 million for the fourth quarter. Interest expense, we anticipated to be in the range of $95 to $100 million, and investment and other income to be in the range of $20 to $25 million for the fourth quarter. As it relates to our full-year outlook for adjusted EBITDA margin, you may remember during our earnings call in January of this year that we anticipated our margins to be flat compared to 2024. Based on our strong year-to-date performance and incorporating the slightly lower margins due to the seasonality of a session, we're increasing our full-year margin expectations to be up modestly. With that, let me turn it back over to Kyle for closing comments.