Brown & Brown, Inc.

Good morning and welcome to the Brown and Brown Inc. Fourth 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 related to the company's anticipated financial results for the fourth quarter and are intended to fall within the safe harbor provisions of the security 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 first quarter that its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday. The fact is that the company may not have currently identified or quantified in 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 contained in the slide presentation posted in connection with this call and in the company's filing 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 bbrown.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 now begin.

Thank you, Tanya. Good morning, everyone, and welcome to our fourth quarter earnings conference. Before we get into the results, I wanted to share that we lost a key member of our leadership team, an incredible individual and great friend. Last week, Rob Mathis, our chief legal officer, passed away. Our thoughts and prayers go out to Rob's family. We'll miss his friendship, his leadership, and his wit. Now, let's transition back. to our results. The fourth quarter capped off another year of strong top and bottom line financial performance. For the full year, we grew our revenue by 23% through a combination of M&A, organic revenue growth, and strong growth in our contingent commissions. We expanded our margins materially and grew our cash flow from operations by nearly 24%. This strong performance was in spite of softening cap property rates and economies returning to more normal growth levels. Our performance was driven by our culture, teammates, diversification, and disciplined leadership. In addition to the good financial results, we also completed the largest acquisition in our history, welcoming over 5,000 incredible teammates from a session. We're very pleased with the integration efforts to date. We'll touch on that more later. Lastly, we invested in talent and technology to help us deliver even better solutions for our customers. Indeed, it was a very eventful year that we're very proud of. Before we get started, we wanted to share some comments related to Brown and Brown and also involve our industry in general. First and foremost, we believe in competition. That's what makes great companies, great leaders, and great individuals. We also believe in integrity, honesty, loyalty, and trust. However, When a startup U.S. broker conducts what appears to be a highly coordinated plan to lift entire teams from its competitors, taking information and customers in the process, it must be addressed. As of today, approximately 275 of our former teammates have joined this startup, taking with them customers currently representing known annual revenues of $23 million. As we've done in the past, we will defend our rights in court and already have obtained an injunction. We stand behind our values and will continue to stay customer focused with the goal of achieving the best possible outcomes for our customers and our trading partners. Now, back to our 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 and forward-looking thoughts before we open it up to Q&A. On slide four. For the fourth quarter, we delivered revenues of $1.6 billion, growing 35.7% in total, with organic revenue decreasing 2.8%. driven substantially by flood claims processing revenue we recognized in the fourth quarter of last year. Our adjusted EBITDA margin remained flat at 32.9% and our adjusted earnings per share grew over 8% to 93 cents. Both are very strong considering last year's flood claims processing revenue. On the M&A front, we remained active and completed six acquisitions with estimated annual revenue of 29 million on slide five. For the full year of 25, we delivered revenues of $5.9 billion, growing 23% in total and 2.8% organically. Our adjusted EBITDA margin was approximately 36%, increasing 70 basis points. On an adjusted basis, our diluted net income per share grew over 10% to $4.26, and we generated nearly $1.5 billion of cash from operations. Lastly, we had a record year for M&A, adding approximately $1.8 billion of annual revenue from 43 acquisitions, with the largest being a session. I'm on slide six. From an economic standpoint, growth was relatively consistent compared to the last few quarters. We view this stability as positive. Our customers, for the most part, continue to hire at a modest pace and invest in their businesses as they see steady demand for their products and services. Not all industries are equal, as some companies are hiring while others are holding steady, and we're not seeing any major workforce reductions impacting our diversified customer base. In general, our customers have a cautiously optimistic outlook. From a commercial insurance pricing standpoint, rates for most lines were fairly similar to the third quarter. but we did see some moderation across some lines. Casualty and cap property remain the outliers on both ends of the spectrum. Pricing for employee benefits increased slightly as compared to prior quarters, with medical costs up 7% to 9% and pharmacy costs up over 10%. As we've mentioned in the past, we do not see any signs that this trend will slow. Our customers continue to be challenged to balance rising health care costs and the impact of their employees and their P&Ls. During strategic planning sessions with our customers, management of high-cost claimants, specialty pharmacy, and population health remain the key areas of focus. Raising the admitted P&C market moderated slightly as compared to last quarter and continue to be in the range of flat to up five. Workers' compensation rates remain flat to down three, but we're seeing a few states increasing rate. For non-cap property, overall rates were down five to up five, depending on loss experience, with the blended rates relatively flat for the quarter. For casualty lines, rates increased three to six percent for primary layers, with excess layers increasing even more. For professional liability, rates remained similar to the last couple of quarters and were down five to up five. Shifting to the ENS property market. Rate changes for the fourth quarter were similar to the third quarter and were generally down 15% to 30%. We did see some incremental drop-off at the end of the year, but not as much as we did in June. With the availability of capital and lower insured storm losses, you have a lot of firms looking to put capital to work. Therefore, the pricing environment and approach by carriers did not surprise us. From a customer perspective, they continue to manage their total insurance spend, both commercial as well as employee benefits. As a result, we're seeing some customers leverage the lower rates, enabling them to decrease their deductibles or increase their limits. In some cases, they're utilizing the savings to purchase incremental limits on other lines, or they're just capturing the savings. On slide seven. Now, let's transition to the performance of our two segments for the fourth quarter. Retail delivered organic growth of 1.1%. As a reminder, during our third quarter earnings call, we anticipated Q4 organic growth to be negatively impacted by multi-year policies written in the fourth quarter of 24. In addition, we had certain one-time adjustments to incentive commissions that were larger than anticipated. Lastly, we had certain project work that was delayed into 2026. These items negatively impacted organic growth by 100 to 150 basis points. For the full year, our team delivered 2.8% organic revenue growth, a good performance given the headwinds we have discussed related to incentive commissions and multi-year policies. We feel good about our capabilities and how our team is positioned, and therefore, we're expecting improved organic performance in 2026. For the quarter, organic revenue for specialty distribution segments decreased by 7.8%. As we discussed, the decline was primarily impacted by 28 million of flood claims processing revenue recognized in the fourth quarter of last year. In addition, the decrease in cap property rates was slightly more than expected, and we saw some binding authority business move back into the admitted market. For the full year, we grew 2.8% organically, A good result considering a tough comparison for 24 and the continued declines in cap property rates. Now I'll turn it over to Andy to get into more details about our financial results.

Thank you, Paul. Good morning, everyone. Before we get into the financial details, we want to talk about the impact on our earnings related to the acquisition of a session. For the quarter, a session's total revenue was approximately $405 million. This is below the guidance of $430 to $450 million. As a result of refining our revenue recognition estimates by quarter, revenue margins and adjusted earnings per share were impacted for the quarter. However, these revisions do not change our annual expectations for the business. From an adjusted earnings per share perspective, the impact of lower revenues versus our guidance was approximately five cents for the quarter. As it relates to the margin for the quarter, Due to the phasing of revenue and profit, the session's results decreased our margins by approximately 200 basis points for the total company. Transitioning now to our consolidated results. As a reminder, when we refer to EBITDAG, EBITDAG 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 and the year. On a consolidated basis, we delivered total revenues of $1,607,000,000, growing 35.7% as compared to the fourth quarter of 2024. Contingent commissions grew by an impressive 37 million, with 21 million coming from a session. The underlying increase was driven by minimal storm claim activity and higher underwriting profitability. Income before income taxes increased by 23.1%, and EBITDA grew by 35.6%. Our EBITDA margin was 32.9%, remaining flat versus the fourth quarter of the prior year. This was a good result considering the negative 200 basis point impact of the session mentioned earlier and the prior year floods claimed blood claim processing revenue. The strong underlying margin expansion was driven by significant higher contingent commissions and lower claims within our captives, both due to the quiet storm season, along with our continued disciplined management of our expenses. Our effective tax rate for the quarter was 21%, a decrease over the prior year rate of 24.9%. The lower tax rate was driven by the benefit from our international operations and certain end-of-the-year adjustments. Diluted net income per share increased 8.1% to 93 cents. Our weighted average shares outstanding increased by approximately 55 million to 339 million, primarily due to shares issued in connection with the acquisition of the session. Lastly, our dividends paid per share increased by 10% as compared to the fourth quarter of 2024. We're moving over to slide number nine. The retail segment grew total revenues by 44.4%. This growth was driven primarily by acquisition activity over the past year. Our EBITDAQ margin decreased by 120 basis points to 26.6%, resulting from the quarterly phasing of revenue and profit associated with accession. The accession impact more than offset good underlying margin expansion driven by the leveraging of our expense base and certain one-time items. We're on slide number 10. Specialty distribution grew total revenues by 27% driven by the acquisition of a session and a substantial increase in contingent commissions. The higher contingents were driven by acquisition activity, certain end of the year adjustments, and growth due to our favorable underwriting performance. Generally, our contingent commissions will increase when there are low loss ratios and strong underwriting profitability. Traditionally, when there is a strong underwriting profitability, it has the long-term effect of decreasing rates over time. This inverse correlation for contingent commissions helps put stability in our long-term revenue growth, margins, and cash flow generation as contingent or part of our business model. Our EVDAC margin decreased by 60 basis points to 41.3% due to the lower flood claims processing revenue and the impact of a session having a lower overall margin as compared to our existing specialty distribution segment. These impacts more than offset the increase in margins driven by higher contingent commissions, lower claims on our captives, and the disciplined management of our expenses. We're on slide number 11. This slide presents our results for both years. Our EBITDA grew by 25.6% and our margin increased 70 basis points to 35.9%. We view this as a very strong result given that coming into the year, we are anticipating margins to be flat due to lower contingent commissions. The difficult comparison in 2024 driven by the flood claims revenue, and the seasonality of a session's profitability, which negatively impacted the full year margin by approximately 80 basis points. We're very pleased with the strong underlying performance. This performance was driven by significant growth in our contingent commissions, higher profitability in our captives, increased interest income, and the disciplined management of our expenses, while still investing in our teammates and capabilities. Net income before income taxes increased 21.8%, and net income per share was $4.26, growing 10.9%. Overall, it was another good year of strong top and bottom line performance. We have a few other comments. From a cash perspective, we generated $1,450,000,000 of cash flow from operations, growing 23.5% over the prior year. This is in comparison to 23% revenue growth. Our full-year ratio of cash flow from operations as a percentage of total revenues remains strong, an increase to 24.6%, a reflection of our margins and disciplined working capital management. In addition, during the quarter, we paid $100 million on our revolving credit facility and bought back $100 million of shares of our common stock as we continue to deploy our capital in a balanced manner. Before we wrap up, we want to provide guidance on a few items. Now that we have a better view on the seasonality of revenues and profit for a session, both are substantially equally weighted between the first and second half of the year. For the second half, revenue and profit are more heavily weighted towards the third quarter. Lastly, due to the high margins in the first quarter for the legacy Brown & Brown business, we anticipate the session will have a modest negative impact on our adjusted margins in Q1. From a synergy perspective, as Powell described earlier, we're very pleased with the progress made on our integration activities over the last few months. We continue to anticipate integration efforts will be completed by the end of 2028, so we have only just begun our journey. The team has made great progress in a short period of time, and we expect EBITDA synergies of approximately $30 to $40 million in 2026. Regarding contingents, as we mentioned, they are a core part of our business and have a recurring nature and represented over $250 million of revenue last year. They will fluctuate quarterly with changes in our organic growth and underwriting profitability, so it's better to assess them on an annual basis. For next year, we anticipate contingents for specialty distribution will be down approximately $15 million due to certain one-time adjustments in 2025 and ultimately subject to storm claim activity. For specialty distribution, we anticipate organic growth to be somewhat flat in the first quarter due to flood claims processing revenue in the first quarter of last year and continued cap property rate decreases. As it relates to 2026 organic revenue outlook for the retail segment, we anticipate modest improvement over the 2.8% we delivered in 2025. As a reminder, we think about our retail business as a mid to low single-digit organic growth business in a normal pricing environment and a stable economy. Our team continues to work hard to grow net new business, As it relates to organic revenue growth, depending on the materiality of revenues taken by the startup broker, we will quantify the impact in our commentary and may adjust our organic growth calculation in order to give a better representation of our underlying performance of the business. From a margin perspective, as we look into 2026, we're projecting lower investment income due to the income generated in 2025 by the cash held for the acquisition of a session, as well as lower interest rates. This will have a downward impact on our total margins in 2026. While the underlying business is projected to achieve relatively flat margins, we view this projection as a great outcome and a reflection of the strength of our operating model, our teammates, and our performance-based culture. As we've discussed in the past, our long-term adjusted EBITDA margin target range is between 30% and 35%. As a result of our changing business mix over the years, the addition of a session, along with our combined synergies, increased contingents, utilization of technology, and our continued focus on our balanced profitable growth, which is enabled by our unique decentralized sales and service model, we are increasing our long-term margin target range to 32% to 37%. As we always have, we'll continue to invest in our teammates and our businesses, which may result in the margins increasing or decreasing. But over time, the ultimate goal is to drive long-term growth and value. Lastly, from a tax perspective, we anticipate our effective tax rate will be in the range of 24% to 25% in 2026. With that, let me turn it back over to Powell for closing comments.