Andy Watts: Thank you.
Operator: Your next question comes from the line of Robert Cox from Goldman Sachs. Your line is now open.
Robert Cox: Hey. Thanks for taking my question. So broadly across the business and maybe specifically to employee benefits, I was curious on your expectations for exposure growth for the duration of the year just considering your outlook for the economy to continue to moderate.
Powell Brown: Yes. So I think the way we look at it is we still have a positive outlook on exposure growth, not so much inside of existing clients but the growth in number of clients. So we do believe that our customer base on a net basis will actually expand in terms of adding new people to their plans but the biggest part of the growth will be new benefits plans where we’re helping people manage their costs and the delivery of what they want to their employee base.
Robert Cox: Great. Thank you. And just as a follow-up the pressure in professional lines, did the D&O pressure, which I think is most acute in the E&S market accelerate this quarter? And do you see any signs of stabilization in D&O rates?
Powell Brown: Yes. The short answer is did we see an acceleration in the decline? And yes we saw a little bit. That’s correct. And remember I would — and I don’t have this right off the tip of my tongue but remember D&O rates were going up more quickly and sooner than this property trend. So, they had gotten to a level that the marketplace felt as though it was appropriate or high and then people started piling back in. Now, one, Robert could make the argument, I am not making this argument, but I’m pointing it out, that if someone on the risk-bearing side is trying to manage volatility in their earnings and doing that by looking closely at their CAT property portfolio, they have to redeploy that — those assets and they’re redeploying those assets in a place like professional liability.
Thus, we’re having price decreases or continued price decreases in professional liability. So some people have taken that position. I’m not necessarily trying to imply that. I’m just trying to give that to you so you can kind of chew on it.
Robert Cox: Got it. Thank you. That’s helpful.
Operator: Your next question is from the line of Yaron Kinar from Jefferies. Your line is now open.
Yaron Kinar: Thank you. Good morning. My first question goes to the Retail segment and employee benefits. I think the last couple of quarters you’d called out the potential for some pressure on growth from employee benefits and yet, I think, numbers actually came in quite strong. Can you maybe talk about what changed or what actually happened this quarter relative to your expectations there? And would that then create a headwind for 1Q 2024?
Powell Brown: So, do we think it’s a headwind for 1Q, 2024? No, not really as we sit here today. That’s the first part. But you’re on it. If you go back to what we said, there was one particular business that had an impact in Q4 in terms of a headwind. And that business — that individual business still actually was encouraging headwinds in Q1. But the other businesses performed really, really well. And as Andy has said before, remember we have a front-end loaded, from a 606 revenue recognition standpoint, in Q1, because of employee benefits, but that’s a function of us writing a lot of new employee benefits business and all the other businesses performing that much better relative to — and offsetting of that little bit of a headwind in that one particular business.
So we feel good about — I mean, I don’t want to give you the impression that we only feel good about employee benefits. Please don’t take that out of my — our comments. We feel really good about our P&C and we feel really good about our personal lines businesses too in Retail. But I just mentioned it, because there were people on the call in Q4 that felt like the organic growth was a trend, which is not and we said that. But we just wanted to kind of clarify that. And we also clarified it, because we did talk about a business that had a significant impact on the revenues in Q4 and there’s still a bit of a headwind there but we’ve overcome that.
Andy Watts: Yaron, I think we also — we made mention in the fourth quarter, one of our specialty aligned businesses also had headwinds in the fourth quarter. And we anticipated some headwinds in the first quarter. We did see those. So that came through. But I think our commentary back at the time on the earnings, as we said we thought it would be modest in the first quarter. That’s pretty much kind of what we saw through. So we were very, very pleased with 8.8 organic still with those modest headwinds. And we don’t see those headwinds as a material issue on those businesses on the future quarters.
Yaron Kinar: Got it. Thanks. And then, my second question is with regards to the captive revenues. Is it fair to think of them as, kind of, full margin revenues, at least in kind of the first half of the year until we hit storm season barring an earthquake?
Andy Watts: Yes, I wouldn’t call it full margin, because we do have some operating expenses in there, but they are much higher margin in non-storm periods when we have claim cost, yes.
Powell Brown: And that’s wind and quake you’re on, make sure — I want to make sure you knew it. Yes. Okay. Thank you very much.
Andy Watts: Thank you.
Operator: Your next question is from the line of Michael Ward from Citigroup. Your line is open.
Michael Ward: Thanks, guys. Good morning. Maybe just following up on that last one. I think you mentioned you had $10 million of earned premium for the captives in the quarter, but the – I think the guidance was $30 million to $35 million. So I was just wondering what’s in that guide for the year, assume some level of losses?
Andy Watts: Yeah, I think we’re just trying to estimate right now it will — we’re anticipating to move back and forth a little bit. The other thing is in the third quarter of last year when we recognized the claim cost on Ian’s we also had some accelerated premiums during that time period. So it will move a little around a little bit by the quarter. That’s how we took that into consideration. So you won’t probably see it be exactly perfect by each of the quarters on an earned basis. It will be down a little bit in the third quarter.
Michael Ward: Okay. That’s helpful. Thank you. And then thinking about capital deployment how much — or management how much debt paydown do you anticipate doing from here? And do you have a targeted leverage ratio that you’re looking to get to?
Andy Watts: Why don’t we tackle the last one first. So what we have said publicly is on a gross basis 0 to 3. We’re very comfortable with that range and 0 to 2.5 on a net basis. Michael, if you look back over time, we traditionally will move on the higher end of that range around acquisitions, and then we trend back down. And we normally kind of operate in kind of that middle part of the range in both net and gross, if you look at it over a longer period of time. And that’s probably not unreasonable for our business. That will kind of continue to go down. One is, we repay debt normal maturities that are coming along on a quarterly basis and then as we just continue to grow the organization. If you look back we normally will delever about 0.25 to 0.5 turn per year is a pretty decent amount.
Powell Brown: And that’s also assuming, if we’re going to continue to invest in the business and we have to continue to weigh and measure M&A opportunities as they come along. But yeah.
Michael Ward: Thanks, guys.
Operator: Your next question is from the line of Meyer Shields from Keefe, Bruyette & Woods. Your line is now open.
Meyer Shields: Thanks, and good morning. One, I guess small question. When we look at the international acquisitions do they have a different fiduciary investment income profile than the legacy domestic business? Is there more investment income associated with their placements than the direct build test we have in the US?
Andy Watts: Hey, good morning, Meyer. No, we don’t earn as much on a fiduciary income internationally as what we do in the US. And again keep in mind in the US that, there’s still limitations even here where you have trust restricted states that only allow you to earn interest up to your bank fees and then where we have relationships also with our carrier partners. Some of those also will only allow us on banks. So you don’t see everything move on a linear basis.
Meyer Shields: Okay. But this — like the year-over-year improvement that seems like you’re saying it’s just a function of interest rates as opposed to mix.
Andy Watts: Correct. Yes, yeah. Don’t read that that was all benefit of GRP and/or anything of that nature now.
Meyer Shields: Okay. And then I just wanted to confirm something. I think you mentioned this in your recent comments, but one of the LPI insurers has significant catastrophe losses in the quarter and you’re saying that that — there were no losses in the captive reinsurance component?
Andy Watts: Can you — repeat that one more time please?
