Brown & Brown, Inc.

Good morning and welcome to Brown and Brown, Inc.'s second 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 and respect of future events, including those relating to the company's anticipated financial results for the second 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 the number of factors. Such factors include the company's determination as it finalizes its financial results for the second 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 Security and Exchange Commission. Additional discussion of these and other factors affecting the company's business or prospects as well as additional information regarding forward-looking statements is contained in the slide presentation posted in connection with the call and in the company's filings with the Security 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, we 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 earning 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 would now like to turn the call over to Powell Brown,

Thank you, Michelle, and good morning, everybody, and welcome to our second quarter earnings call. Before we get into our performance of the quarter, which we're pleased with, I'd like to touch on several topics that many investors are asking about our business and about the industry. First, we're very focused on our organic growth with and without contingents. Please keep in mind our organic growth with contingents is a closer comparison to the other brokers as most do not break out their contingent commissions. This is why we added the additional performance metric starting in 2026. You'll want to evaluate organic on both a quarterly and a year-to-date basis as contingents will fluctuate when compared to prior quarters or prior years. Second, capital allocation. We remain focused on hiring talented people to help us grow our business organically to $8 billion and beyond. Next, we're focused on buying back our stock. We continue to view share repurchases as an attractive use of capital at the present time. Finally, we're looking at acquisitions that are strategic in nature, not solely for scale. Third, you probably saw our announcements regarding our new partnerships with McKinsey, Accenture, and Anthropic. These partners are helping us accelerate the work we've already done with AI and helping us think more broadly pertaining to the holistic application of these solutions. We believe new technologies and AI will enable our teammates. We're focused on better customer outcomes and assisting our teammates with the ability to go to market faster, be more efficient, and be better prepared. We'll get into more detail about AI later in the conversation. Now let's pivot to our results. We're pleased with our financial performance for the quarter, which came in modestly ahead of our expectations, even with continued pressure from declining cap property rates. This performance reflects the efforts of our exceptional team of professionals and their passion to deliver risk management solutions for our customers. I'll provide some comments regarding our performance. The insurance markets and our customers. Then Andy will discuss our financial performance in more detail. Lastly, I'll wrap up with some closing thoughts regarding the second half, as well as technology, before we open up the call for Q&A. I'm on slide four. For the second quarter, we delivered revenues of $1.7 billion, growing 30.4% in total. Organic revenue decreased 70 basis points from the prior year and increased 70 basis points when including organic contingents. We view this as a good result given the second quarter is the largest quarter of the year for cap property placements. Our adjusted EBITDA margin decreased 100 basis points to 35.7, and our adjusted earnings per share grew nearly 4% to $1.07. Through the first six months of 2026, we generated good cash flow from operations and repurchased additional shares during the quarter. Lastly, we acquired six small agencies. I'm on slide five. From an economic standpoint, conditions during the second quarter remained relatively consistent with previous quarters. Customer spending patterns were stable overall, and most customers continue to take a fairly neutral position towards hiring and investment. We're seeing a relatively stable labor environment with capital investment decisions remaining modest across most of the economy. Depending on the industry, some customers are growing substantially and others are contracting. At the same time, we're seeing some positive audit premium activity, which suggests many businesses continue to grow. Based on conversations with our customers during the quarter, the primary areas they continue to monitor are inflation, oil prices, and the broader geopolitical matters. Those issues are influencing sentiment, but at this point, we've not seen a material change in overall activity levels. From a commercial insurance pricing standpoint, rate changes in the second quarter were broadly consistent with the first quarter, with some additional moderation in certain lines. In the admitted market, rates were substantially in line with the first quarter of 26. Workers' comp and non-cap property were generally flat to down five. For casualty, the market is different for primary versus excess. Primary casualty and professional liability are generally up 5% while excess layers in casualty experience more rate pressure. In property, cat rates continue to decrease 15% to 35%, which is similar to the first quarter. As we've said before, there's always exception to the ranges, but overall market conditions for cat property remain favorable for our customers. There continues to be a significant amount of capital seeking to underwrite risk with supply exceeding demand. Certain customers are benefiting from lower pricing environment and capturing the savings, while others are redirecting the savings to change their structures, limits, or deductibles. For employee benefits, pricing trends were similar to the first quarter. Medical costs remained up 8% to 10%, and pharmacy costs were up again over 10%. Those cost pressures continue to create demand for our advisory and consulting capabilities as customers look for strategies to better manage healthcare and primary costs. Overall, when we step back and look at both the economy and the insurance market, customers are still operating with discipline and they're growing modestly. The insurance market remains competitive for many lines while casualty pressures persist. In these market conditions, we believe our capabilities position well to help customers navigate the market. I'm on slide six. Let's transition to the performance of our two segments for the second quarter. Retail delivered organic growth, including contingents of 2.5% and 1.5% excluding contingents. These growth rates were slightly above our expectations as the net new business was better and contingent commissions were particularly strong. Our enhanced go-to-market sales model is building momentum with newly aligned teams collaborating, developing opportunities, and generating incremental new business wins that leverage our collective capabilities. While the organic growth for retail is improving, it's not where we want it to be yet. Our team has been working hard to combine two large organizations, and we're making good progress to deliver improving organic growth over the coming quarters. I have confidence in our tuning. Turning to specialty distribution, for the quarter, organic revenue was negative 1.6 with contingents and negative 3.5 without. These organic revenue metrics were negatively impacted by nearly 200 basis points due to approximately $10 million of delayed new business revenue for one of our programs. This revenue is expected to be recorded substantially in the third quarter. Taking this timing into consideration and the downward pressure on cap property rates, the results for the quarter were in line with our expectations. Similar to the last quarter, we received a large volume of submissions, expanded our underlying policies and force, and it was another great quarter for contingents. We view this as a reflection of the quality of our capabilities and underwriting discipline. as we're growing our base customers. Now I'd like to turn it over to Andy to discuss our financial results in more detail. Thank you, Phil. Good morning, everybody.

I'll dive deeper into our consolidated results and certain non-GAAP measures. As a reminder, when we refer to EBITDA, EBITDA margin income for income taxes and diluted debt income share, we're referring to those measures on an adjusted basis. We're over on slide number seven. On a consolidated basis, we deliver total revenues of $1,700,000,000, growing 30.4% as compared to the second quarter of 2025. Contingent commissions grew by an impressive $40 million, with $24 million coming from a session. The underlying organic increase was driven by minimal storm claim activity and higher underwriting profitability, primarily within our specialty distribution segments. Additionally, retail had a good quarter for contingents due to our enhanced carrier engagement model. Income for income taxes increased by 17.4%, and EBITDA grew by 27%. Our EBITDA margin was 35.7%, a 100 basis point decrease from the second quarter of the prior year. This was driven substantially by lower interest income as compared to the second quarter of last year when we were holding cash. Regarding recession, we recognized total revenues of approximately $410 million for the quarter and margins were in line with our expectations. During the quarter, we also disposed of a non-core retail business with non-recurring annual revenues of approximately $30 to $35 million. Our expected tax rate for the quarter was 24.6%, slightly below the second quarter of 2025. The limited net income per share increased 3.9% to $1.07. Our weighted average shares outstanding increased by approximately $41 million to $334 million, primarily due to shares issued in connection with the acquisition of a session. This increase was partially offset by approximately 9 million shares we repurchased over the last nine months. Lastly, our dividends paid per share increased by 10% as compared to the second quarter of 2025. Moving over to slide number eight, the retail segment grew total revenues by 35.9%. This expansion was driven primarily by acquisition activity over the past year and organic growth, including a contingence of 2.5%. Regarding our previously discussed pharmacy consulting business, the negative impact on organic growth was approximately 60 basis points for this quarter. Regarding the litigation impact associated with individuals who left and joined the startup broker, the current period adjustment to organic revenue was $18 million. The increase from the first quarter was primarily driven by the impact of earning lower incentive commissions, which we adjusted on a year-to-date basis. Based on currently available information, we intend are all related to new and lost business, as well as incentives to be in the range of $50 to $60 million. Our EBITDAG margin was strong, expanding 230 basis points from the second quarter of last year. The increase was driven by higher contingents, disciplined expense management, and the impact of synergies. During the quarter, we realized an expense benefit of approximately 110 basis points for certain one-time accrual adjustments. Lastly, there was a net benefit to our margins of approximately 30 to 50 basis points due to individuals that departed to the startup broker. We continue to expect this benefit will moderate for the coming quarters as we hire new teammates. We'll move over to slide number nine. Specialty distribution grew total revenues by 28.1%, driven by the acquisition of a session and increased contingent commissions. The higher contingents of $21 million were driven by $12 million of acquisition activity and $9 million from favorable underwriting performance. Our EBITDA margin decreased 400 basis points to 42.7%, primarily due to lower organic growth and investments in our European capabilities to support incremental growth opportunities, which more than offset higher contingent conditions. We have a few other comments. regarding cash flow and our balance sheet. We generated approximately $610 million of cash flow from operations, increasing $70 million for 13% compared to the first half of 2025. Our ratio of cash flow from operations to total revenues was 17% for the first six months of this year as compared to 20% in the first half of last year. The current year's cash flow conversion ratio was negatively impacted by two items related to a session. The first was for non-recurring related items with the largest component being higher than anticipated final earn-out payments. The second item was the timing of working capital during the first and second half of the year. Isolating these items, our underlying cash flow was strong. Lastly, during the past six months, we deployed $500 million to repurchase approximately $8 billion of our shares. We continue to anticipate strong cash generation for the remainder of the year and will balance our deployment of capital between hiring people to help us grow organically, sharing purchases, deleveraging, and M&A. regarding the outlook for the second half of the year, we continue to believe organic growth will improve in both divisions. We are anticipating retail's organic growth, excluding contingents, to be in the range of 1.5% to 2.5%, and organic growth for specialty distribution to be in the range of two to four percent, excluding contingent commissions. With that, let me turn it back over to Powell for closing comments.