Brown & Brown, Inc. (NYSE:BRO) Q1 2023 Earnings Call Transcript

Brown & Brown, Inc. (NYSE:BRO) Q1 2023 Earnings Call Transcript April 25, 2023

Brown & Brown, Inc. beats earnings expectations. Reported EPS is $0.84, expectations were $0.82.

Operator: Good morning and welcome to the Brown & Brown Incorporated First 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 first 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. 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 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 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 Investor Relations and then Calendar of Events. With that said, I will now turn the call over to Mr. Powell Brown, President and Chief Executive Officer. You may begin.

Powell Brown: Good morning, everybody, and welcome to our Q1 2023 earnings call. Before we get into any detail, Q1 was an outstanding quarter and we’re very pleased with our results. I’ll provide some high-level comments around our performance for the quarter, along with some updates on the insurance market and M&A landscape; then Andy will discuss our financial results in more detail. And lastly, I’ll wrap up with some closing thoughts before we open it up to Q&A. I’m now on slide number four. We delivered over $1.1 billion of revenue, growing 23% in total and 12.6% organically. To put this in perspective, 11 years ago our total annual revenues were $1.1 billion. Our adjusted EBITDAC margin remained strong for the quarter at 35.7%.

We delivered earnings per share of $0.83, growing 7.8% over the first quarter of 2022. On the M&A front, we completed seven acquisitions with estimated annual revenues of $11 million. We’re very pleased to have delivered another outstanding quarter of good profitable growth. I’m on slide five. From an economic standpoint, most businesses continue to grow and companies are still looking to hire employees. Overall, business leaders are generally cautious about the future while managing the impacts of inflation and higher interest rates. We would say there’s not been a material change for what we heard from our customers in the fourth quarter of 2022. The insurance marketplace is very challenging for customers in the first quarter. Across most lines of coverage, rate increases were similar to prior quarters with admitted markets up 5% to 7% and excess and surplus markets up 10% to 20%.

However, there are exceptions. Workers’ compensation rates continue to decline. E&S professional liability rates, primarily public company D&O continued to moderate with rates down 10% or more and in some cases they’re up slightly. The areas that remain the most challenging are E&S property and excess liability due to losses and increased insured values. Carriers continue to elevate their coastal — evaluate their coastal property portfolios. These actions result in more participants generally on a property placement. We continue to see underwriters increase insured values per square foot, thus customers are seeing premiums rise based on rates and higher values. As a result, buyers are feeling exhausted with the premium increases and more customers are purchasing loss limits, increased deductibles and decreasing overall limits.

Pertaining to the Florida insurance market everyone’s watching to see the impact of the legal reforms late last year. Long-term we believe the changes will be positive. However, we think it will take some time to see improvement related to the legal changes. In the interim, more policies will continue to move into Citizens. Please remember, Citizens was created to be the market of last resort for residential homes, condominiums and apartments. Right now it’s one of the most competitive and at times one of the only solutions for insureds. As it relates to the overall M&A market the level of deals primarily from financial backers has slowed. That does not mean high-quality businesses don’t trade at similar multiples to what we’ve seen over the past year.

But from our perspective, we remain active and GRP had another solid quarter of M&A transactions. We’re very pleased with their success and the quality of the businesses they’re adding to the Brown & Brown team. Our disciplined approach remains centered on identifying high-quality companies that fit culturally and make sense financially. I’m now on slide number 6. Our Retail segment delivered impressive organic growth of 8.8%. The growth across all lines of business, were driven by strong new business, good retention and continued rate increases. In addition our employee benefits businesses performed really well in Q1. Our Program Segment delivered another outstanding quarter of double-digit organic growth of nearly 34% fueled by new business rate increases, good retention and claims processing revenue from Hurricane Ian.

This growth was driven primarily by strong performance from our lender-placed business, our diverse group of wind and quake programs and our captives. Wholesale Brokerage delivered another solid quarter with organic growth of 7% driven by good new business and retention along with continued rate increases. The rate of growth for open brokerage slowed somewhat while the growth of our delegated authority business improved. Organic growth for the Services segment was 1.6% for the quarter, driven by claims processing revenue primarily related to the winter storms. I’d like to thank our 15,000-plus teammates throughout the world for delivering these strong results. Now I’d like to turn it over to Andy to discuss our financial results in more detail.

Andy Watts: Great. Thanks Powell and good morning everyone. Since Powell discussed our GAAP results earlier in the presentation, I’ll review our consolidated financial results on an adjusted basis. We’re over on slide number 7. As a reminder our adjusted measures exclude the change in estimated earn-out payables, one-time acquisition costs associated with our acquisition of GRP, Orchid and BdB last year and gains or losses on business divestitures. This quarter it also excludes $11 million related to resolving a business matter which is considered one-time in nature. The charge relates to a pre-acquisition event from a business we bought over 10 years ago. We believe isolating the above items gives a better reflection of the performance of the business and provides enhanced comparability.

The reconciliation of these amounts — adjusted amounts to the most closely comparable GAAP amounts can be found in the appendix to this presentation. Total revenues were $1.1 billion for the first quarter, a new record for us growing 23.5% as compared to the prior year. Income before income taxes increased by 13.2% and EBITDAC grew by 23.2%. We had good leverage across the business even with a few moving parts this quarter that included some additional one-time costs that substantially offset the benefit of incremental investment income. In addition the margins for GRP, as we’ve mentioned before, are more evenly weighted throughout the year versus our seasonally higher margin in the first quarter for the company. This means, it negatively impacted the first quarter margin by approximately 40 basis points.

As a result, GRP will benefit our margins in future quarters. Income before income taxes grew at a slower rate than total revenues, due to the incremental interest and amortization expense associated with acquisitions we completed last year. The effective tax rate came in at 20% which is in line with our expectations and compares to 16.8% in the first quarter of last year. The higher tax rate is due to a lower benefit from the vesting of incentive stock shares that traditionally occur in the first quarter of the year. Our diluted net income per share increased by, 7.7% from last year to $0.84. Due to the changes in the liabilities and assets associated with our deferred compensation plan, salaries and related expenses as a percentage of revenue were negatively impacted year-over-year by 150 basis points.

There’s an offsetting benefit within other operating expenses. Lastly, our weighted average share count increased slightly and dividends paid increased about 12% both as compared to the first quarter of last year. We’re on Slide number 8. The Retail segment had an outstanding quarter delivering organic growth of 8.8%. The adjusted EBITDAC margin contracted slightly to 37% for the quarter. While the margin remained strong, it was impacted about 100 basis points by the level phasing of revenue and profit from GRP as compared to our higher Q1 margin in the United States, driven by our employee benefits business. We expect this will reverse and provide a positive impact to our margins in future quarters. We also realized some year-over-year headwinds associated with higher travel and related expenses, which we expect these headwinds to lessen as the year continues.

We’re over on Slide number 9. National Programs had another very strong quarter, with organic growth of 33.8% and adjusted EBITDAC margin expansion of 610 basis points. The margin improvement was driven by leveraging our expense base along with the strong organic growth. Keep in mind that, revenue for the quarter includes approximately $8 million of claims processing revenue associated with Hurricane Ian. In addition, our captive facilities that we started last year are expected to deliver $30 million to $35 million of revenue this year. We recognized approximately $10 million of revenue in the first quarter of this year as compared to approximately $1 million of revenue in the first quarter of last year. The positive impact to organic growth from these captives will diminish in each subsequent quarter and will be negligible by the fourth quarter as we will be on a more comparative basis.

While we anticipate National Programs will have a good 2023, we do expect lower organic growth in the second half of this year as compared to the second half of last year. This is due to the fact that, the captives will be on a more comparative basis. We had a onetime non-recurring growth bonus of $7 million in the fourth quarter of last year, and we realized approximately $8 million of revenue associated with Hurricane Ian in the fourth quarter of last year. We’re moving over to slide number 10. Our wholesale segment delivered another good quarter with organic growth of 7% and the adjusted EBITDAC margin contracted slightly. The driver of the margin decrease was higher salaries and related costs due to incremental hiring as well as salary inflation.

We’re on slide number 11. The Services segment grew by 1.6% organically for the quarter and the adjusted EBITDAC margin decreased by 390 basis points. The primary drivers of the margin decrease with the volume of claims revenues for certain businesses higher salary and related costs as well as some onetime expense items. A few comments regarding cash generation and capital allocation. We generated approximately $60 million of cash flow from operations in the first quarter of this year, which was impacted by higher interest and paying taxes for last year that were deferred as a result of Hurricane Ian relief. We are continuing to expect another strong year of cash generation and disciplined deployment. We ended the quarter with approximately $564 million of operating cash.

We are planning further debt repayments during the year as we’ve done following larger deployments of capital. We are very proud of our industry-leading ratio of cash flow from operations to total revenues, and believe we are in a strong capital position to invest in the business and help drive further growth in the future. Lastly, we want to update our full year guidance regarding margins. Based on the good results for the first quarter and what we can see over the coming quarters, we are raising our outlook. And as a result our margin should be up slightly for the full year versus our previous guidance of flat. With that, let me turn it back over to Powell for closing comments.

Powell Brown: Thanks, Andy for a great report. We continue to watch the impact of inflation and increases in interest rates on the economies in which we operate. As a result, we expect business leaders will continue to be cautious regarding the pace of their hiring and investing over the coming quarters. With that said, most of our customers are prospering. In the marketplace, buyers have pricing fatigue due to increases delivered over the last several years. We anticipate similar rate increases in coastal property in the near to intermediate term. As a result, we’re seeing buyers either decrease limits increase deductibles or possibly opt for loss limits. In some instances, we’re seeing personal lines customers paying off their mortgage and going without wind coverage in their personal policies.

We continue to talk with our carrier partners about capacity, the flight equality and diversification. Our MGAs and MGUs have delivered good underwriting results over many years due to our disciplined approach. As a result, this positions us well to retain and/or increase our capacity that will help deliver incremental organic growth from our programs. We are pleased with the performance of our recent international acquisitions of GRP and BdB. They’re growing nicely winning new business and retaining customers. In the case of GRP, they’re also completing high-quality acquisitions and adding to our capabilities and geographic footprint. Many of you have seen that we completed our first Canadian retail acquisition of Highcourt Breckles on April 1.

They’re located in Toronto with approximately 110 teammates and will add to our capabilities in the Canadian marketplace. We’d like to welcome all teammates that have joined us over the past few months. And lastly, we’re in a strong position with a good M&A pipeline. Overall, we feel really positive about our business and how our team is executing. We’re winning more new business and doing a good job of retaining our customers. Our focus is on leveraging the total capabilities of Brown & Brown for the benefit of our customers both domestically and internationally. We’re looking forward to having a good 2023, and have a lot of momentum coming out of the first quarter. With that, we’ll turn it back over to Mikee and open the lines for Q&A.

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Q&A Session

Operator: Thank you. Your first question comes from the line of Weston Bloomer from UBS. Your line is open.

Weston Bloomer: Hi. Good morning. My first question is on the outlook for now margin expansion for the full year. I was hoping you could break out maybe by segment where you’re expecting to see margin expansion. I’m more focused on Retail there where in the 1Q the margin was still down ex-GRP. So if you could maybe break out the pluses and minuses there that’d be great.

Andy Watts : Yes. Good morning, Wes, Andy here. So we don’t provide that level of granularity on outlook by the segments and everything, but just a couple of things maybe to take into consideration. Our comments earlier is we had about 100 basis points of headwinds for GRP in Retail for the quarter. That will reverse itself over the coming quarters and will be a benefit. And as we mentioned the cost around travel and entertainment some of the inflation side of it that will continue to lessen as the year comes along and we’re on a more comparative basis. So hopefully that kind of gives you an idea of what it should look like.

Weston Bloomer : Got it. And was there any impact in Retail from wage inflation and hiring as well? I know you called that out in a couple of other segments.

Andy Watts : Yes. We had some of it. We didn’t call it out specifically, but I mean, we’ve got it in all — I mean, we have in a number of our segments, because we’re always investing in the business. So you can always have some up and downs by the quarters based upon time hiring and growth.

Weston Bloomer : And last one I know you haven’t guided to FX in the past, but is there an FX headwind that’s kind of built into that margin guide as well for maybe the second quarter?

Andy Watts : No, sir.

Weston Bloomer : Great. Thanks for taking the questions.

Andy Watts : Thank you.

Operator: Your next question is from the line of Elyse Greenspan from Wells Fargo. Your line is open.

Elyse Greenspan : Hi. Thanks. Good morning. My first question was also on the margin side. So, first of all, I just want to understand, I guess, the only thing you’re calling out, I guess, from having a significant impact on margins in the quarter is that 40 basis points all from GRP. And then as we think about that reversing over the course of the year, does that get better in all other quarters? I just want to think about the seasonality of that. And then also would you expect in that updated guidance that your margins will expand in the other three quarters of the year?

Andy Watts : Let’s see if we can take a few of those pieces there. Let’s see so on the first one on the GRP and the 40 basis points is yes, that will reverse in the back end of the year and it’s relatively evenly spread not perfect. So it’s not 25% each quarter, but pretty even through the year consistent with what we’ve communicated in the past in there. Other thing to keep in mind and we had mentioned it is, we did have some one-time items in the quarter that are in our numbers that offset the benefit from our investment income. So, again, we’d not envision that those would recur in future quarters that are out there.

Elyse Greenspan: And then is the Q1 investment income, right, I think it’s trending better than what you guys had provided last quarter. I think you had said $14 million to $17 million for the full year. Is the Q1 a good run rate level for investment income?

Andy Watts: Yeah, probably somewhere in that range all depends upon what the balances are on cash, which can move up and down but that’s probably a reasonable number. When you think about it from an absolute, what you wouldn’t want to do is put that on incremental year-over-year remember because rates were going up last year as the year was coming along. So think about it on a run rate basis when you model it, okay?