Brown & Brown, Inc. (NYSE:BRO) Q4 2023 Earnings Call Transcript

Brown & Brown, Inc. (NYSE:BRO) Q4 2023 Earnings Call Transcript January 23, 2024

Brown & Brown, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the Brown & Brown, Incorporated 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 relating to the company’s anticipated financial results for the fourth 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 fourth 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 measures 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 Powell Brown, President and Chief Executive Officer. You may begin.

Powell Brown: Thank you, Michelle. Good morning, everyone, and welcome to our earnings call. We delivered another outstanding performance in the fourth quarter, capping off an incredible year. We delivered over $4 billion of revenues, double-digit organic growth, strong margin expansion, and generated operating cash in excess of $1 billion. 2023 was a great year for the Brown & Brown team as we continue to focus on how best to leverage the Power of We. This topic was discussed at our September Investor Day and our goal is to leverage our collective capabilities in order to create and deliver the best solutions for our customers. Our 2023 results were a reflection of these efforts as we meaningfully increased our new business and had strong retention.

We continue to enhance existing capabilities and add new capabilities both domestically and internationally. On the M&A front, we were quite active acquiring over 30 companies across our largest three divisions, expanding our footprint in North America and Europe. From a capital allocation perspective, we continued our disciplined approach with the goal of optimizing shareholder returns with a balanced mix of M&A and internal investments, while also continuing to pay down our debt and maintain a conservative balance sheet. We also increased our dividends for the 30th consecutive year. At the end of the day, these results are only possible due to the hard work and dedication of our 16,000 plus teammates throughout the world. We thank all of them for their incredible efforts in 2023.

Now let’s get into our results for the quarter. I’m on slide five. We delivered another quarter of revenues exceeding $1 billion, growing 13.8% in total and 7.7% organically over the fourth quarter of ’22. Our adjusted EBITDAC margin remained strong at 31% and our adjusted earnings per share grew 16% to $0.58. On the M&A front, we were active and completed 13 acquisitions with estimated annual revenues of $109 million. On slide six. In ’23, we achieved our interim goal of exceeding $4 billion of revenue. We delivered nearly $4.3 billion, growing 19% in total and over 10% organically. Our adjusted EBITDAC margin was 33.9%, increasing 120 basis points. Over the past four years, we’ve grown total revenues by over 75% and have increased our industry-leading margins in excess of 400 basis points.

On an adjusted basis, our net income per share grew over 23% to $2.81. Lastly, we had a good year of M&A, completing acquisitions with approximately $162 million of annual revenue. We are very pleased with the quality of the organization, the new capabilities and the teammates that were added during the year, with the largest being Kentro. I’m on slide seven. Transitioning the insurance marketplace overall is relatively similar to last quarter. Rates in the admitted market were up 5% to 10% for most lines and we continue to see rate decreases and workers compensation in most states. Placement for CAT property and excess liability continued to be difficult with rates for property up 10% to 30% and liability flat to up 10%. In addition to rate increases, it’s also challenging to find desired limits.

Buyers are exhausted with the level of premium increases. Customers continue to either reduce limits or participate in certain layers in order to manage their premium increases. In December, we did see some moderation in the rate of increase for CAT property, primarily in the London markets. We believe this was driven by low hurricane activity in 2023 and carriers holding capacity for the end of the year. Do not take this comment that we believe rates are going to start decreasing in the first half of 2024. Professional liability and cyber coverage continued to soften as compared to last year. Rate changes for professional liability were up slightly, maybe five to down 20. The insurance marketplaces in California, Florida, Louisiana and Texas for personal lines remain challenging with policies continuing to move in the state-sponsored plans or the E&S market.

Even with these challenges, we are well-positioned to help our customers navigate these difficult markets. Our customers continue to invest in the business — their businesses and hire employees, although the level of investment is not as high as a year ago. We would summarize the overall economic sentiment for our customers as cautiously optimistic. We’re very pleased with our M&A activity in the fourth quarter and the year, although volumes across the industry were down materially as compared to 2022. We had a number of great businesses joined the Brown & Brown team. From our standpoint, we continue to be active and disciplined during the quarter. We’re extremely pleased with our full year results, delivering 10.2% organic revenue growth, over $4 billion in revenues and nearly $1.5 billion of adjusted EBITDAC.

Our team did an incredible job of delivering for our customers and winning a bunch of new business along the way in a very difficult market. I’m on slide eight. Let’s transition to discuss about the performance of our four segments. Our Retail segment had another great quarter, delivering organic growth of 8.2%. This performance was delivered by continued strong net-new business and rate increases. It was also a very good year for retail, delivering nearly 8% organic growth. The Program segment grew 5.4% organically in Q4, even with materially higher flood claims revenue and incentives in the prior year. During the quarter, we recorded a one-time $19 million charge related to the changing of the reinsurance for one of our captives. This decreased our organic growth by approximately nine percentage points in Programs.

For the full year, the team delivered outstanding results with organic growth over 17%. This strong performance was driven by good new business, solid retention and rate increases across most of our programs. Wholesale Brokerage had an outstanding quarter and year growing organically 14.5% in the quarter and 12% for the year. We’re seeing good growth in delegated authority personal lines and open brokerage. Organic revenue in our Services segment declined 5.9% for the quarter, primarily due to continued external factors impacting our advocacy businesses and our organic growth for the full year was substantially flat. During the quarter, we announced the completion — the completed sale of certain assets in the Services business. Now, I’ll turn it over to Andy to get on more details regarding our financial results.

Andrew Watts: Right. Thank you, Powell. Good morning, everyone. I’m going to review our consolidated financial results on an adjusted basis, which exclude the change in estimated earn-out payables, one-time acquisition integration costs associated with GRP, BdB, and Orchid, gains and losses on business divestitures, the non-recurring costs recorded in the first quarter of this year and the impact of foreign currency translation. The reconciliations of our non-GAAP financial measures, including these adjusted amounts to the most closely comparable GAAP amounts can be found either in the appendix of this presentation or in the press release we issued yesterday. In conjunction with the sale of the Services businesses mentioned earlier, we recorded a gain on disposal of approximately $135 million in the fourth quarter, which equates to approximately $0.35 of as-reported earnings per share.

On an adjusted basis, total revenues were over $1 billion for the quarter, growing 13.1%, as compared to the fourth quarter in the prior year. Income before income taxes increased by 15% and EBITDAC grew by 11.7%. EBITDAC margin was 31%, a slight decrease as compared to the fourth quarter of 2022 due to the previously mentioned one-time change in a reinsurance policy. The adjusted effective tax rate for the quarter was 23.9%, a decrease from the fourth quarter of last year, primarily driven by the change in market value for our company-owned life insurance. Our adjusted diluted net income per share increased by 16% from last year of $0.58. Lastly, our dividends paid increased by 13% as compared to the fourth quarter of 2022. Overall, it was an excellent quarter.

We’re on slide number 10. The Retail segment grew adjusted total revenues by almost 12% with organic growth of 8.2%. The difference between total revenues and organic revenue was driven by acquisition activity over the past year. EBITDAC grew slightly faster than revenues, and our EBITDAC margin expanded to 27%. This expansion was driven by leveraging our expense base but was partially offset by the impact of higher non-cash stock-based compensation. We’re over on slide number 11. National Programs had another outstanding quarter with adjusted total revenues growing 18.7% and organic growth of 5.4%. The incremental growth in total revenues in excess of organic was driven by acquisition activity completed over the last 12 months, increased profit-sharing contingent commissions, and higher interest income.

The growth in contingent commissions was primarily driven by lower storm claim activity in 2023, as compared to the prior year and favorable loss development related to 2022. Let’s talk about the change in re-insurance for one of our captives. This change allows us to reduce our P&L exposure from a maximum of $25 million, down to approximately $15 million to $20 million. In addition, we anticipate that this change to drive incremental organic growth of $15 million to $20 million in 2024 as compared to 2023. Overall, the captives have been a huge success for our company as they’ve driven incremental organic growth, aligned us even better with our carrier partners, and delivered great returns on our invested capital. Adjusted EBITDAC grew slightly slower than revenues, and our EBITDAC margin was 43.4%.

The decrease in the EBITDAC margin was due to the one-time reinsurance change along with lower flood claim revenues and incentives. These items more than offset higher contingent commissions and leveraging our expense base. For the full year, we had strong margin expansion in Programs. We’re over on slide number 12. Our Wholesale segment delivered another strong quarter with adjusted total revenue growth of 14.7% and organic growth of 14.5%. Our EBITDAC margin decreased by 60 basis points to 27.3% due to lower contingent commissions, as well as the impact of higher non-cash stock-based compensation. We’re over on slide number 13. For the quarter the decline in adjusted total revenues in the Services segment was primarily associated with the sale of certain businesses that we mentioned earlier.

Organic revenue declined by approximately 6%, driven mainly by continued external factors impacting our advocacy businesses. Adjusted EBITDAC margin for the quarter was primarily driven by the decline in organic revenue as well as certain one-time items. We’ll talk more about future reporting for the Services segment in a few moments. We’re over on slide number 14. This slide presents our results for both years on an adjusted basis. Our income before income taxes grew 24.3% and net income per share was $2.81, growing by 23.2% as compared to total revenue growth of 18.7%. EBITDAC margin remained strong at 33.9%, an increase of 120 basis points over the prior year. Overall, we are very pleased with the results for 2023. Few comments regarding cash generation and capital allocation.

From a cash perspective, we hit another major milestone, generating over $1 billion of cash flow from operations, growing 14.5% over the prior year. Our full-year ratio of cash flow from operations as a percentage of total revenues remained strong at approximately 24%. Few other comments regarding outlook for 2024 and some enhancements to our reporting. For contingent commissions, we anticipate them to be relatively flat-to-down year-over-year but this will ultimately be driven by loss experience. For Programs, we would expect for them to be down as the higher-level contingent commissions were driven by lower CAT event losses in 2023 and favorable loss development related to 2022. Keep in mind, this outlook is excluding the impact of future acquisitions.

As it pertains to taxes, we expect our effective tax rate to be relatively consistent with 2023 and should be in the range of 24% to 25%. For adjusted EBITDAC margins in 2024, we anticipate them to be up slightly. Finally, in conjunction with our earnings release for the first quarter of 2024, we’ll be making a few changes to our reporting. First, with the expansion of our global MGA and MGU platforms, we will refer to the National Programs segment as Programs. Second, in conjunction with the divestiture of certain businesses within our Services segment late in the fourth quarter of 2023, we will not report the remaining businesses as a standalone segment, moving from four to three segments. Those being Retail, Programs, and Wholesale Brokerage.

Almost all of the remaining revenue and profit in the Services segment will now be reported in the Retail segment. For the prior periods, we’ll move to sold businesses into Programs and the remaining businesses into Retail. Third, we will be modifying the definition of our non-GAAP adjusted measures to exclude the impact of non-cash intangible asset amortization. With this adjustment, we will be on a more consistent presentation with the majority of other public brokers. And lastly, for simplicity, we’ll only be excluding the impact of changes in foreign exchange on the calculation of organic growth. For all other non-GAAP metrics, we may identify the impact of FX when it’s meaningful to do so, but we will not restate the prior year to be on a constant-currency basis.

With that, let me turn it back over to Powell for closing comments.

Powell Brown: Thanks, Andy. Great report. As we look at the economy and outlook for 2024, we anticipate that inflation will continue to moderate downwards in the markets in which we operate. As a result, we’re expecting the consumer to further drive demand for products and services and we anticipate most companies will continue to hire and invest, although at a potentially slower rate. Regarding the admitted markets, we believe rate changes will be similar to 2023. We think CAT property rates are nearing their peak. Therefore, we would expect CAT property rate increases for the first half of ’24 to be in the range of flat-to-up 10%, obviously, subject to loss experience in construction type. On an M&A front, the overall market will remain competitive and we don’t expect any material changes in multiples.

We have a very good pipeline and are talking with many companies. As we’ve mentioned, cultural alignment is the key to our long-term success. Lastly and most importantly is our team. Our consistently strong industry-leading results are only possible through the dedication and determination of our team to deliver for our customers. As we head into 2024 and on our way to our next intermediate goal of $8 billion in annual revenues, we have great momentum across the entire company and feel really good about our position. With that, I’ll turn it back over to Michelle, and open the lines for Q&A.

Operator: Thank you. [Operator Instructions] Our first question comes from Michael Zaremski with BMO. Your line is now open.

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Q&A Session

Jack Kindregan: Hey, good morning. This is Jack on for Mike. My question is about any intra-segment business mix shift changes and whether they’re having an incremental impact on Brown & Brown’s profit margin profile. And have there been any mix changes within the major segments we should keep in mind such as more employee benefits or something else? And we’re just asking in the context of Brown’s profit margins being above historical average levels, and so we get asked if we should expect a downward mean reversion if and when, organic growth, eventually decelerates.

Powell Brown: Okay, Jack. I think you’ve got a bunch of things inside there. Your first part of the question broke up a little bit, but I think you said is, with the divestiture of the businesses, would we expect the margins to go up? Was that your question?

Andrew Watts: No. He said something —

Jack Kindregan: I’m not asking about divestitures. I’m just asking if any intra-segment business mix shifts changes.

Powell Brown: You got to get closer to your phone or something. You’re cracking up quite a bit coming through on the phone.

Jack Kindregan: I’m sorry. That’s correct. Just any intra-segment business mix shift changes.

Powell Brown: No. Just the ones that we mentioned. So if you look, our commentary was that the remaining businesses and services will shift over into Retail. And then the historical will also restate for the businesses that move to Retail as well as sold moves into Programs. So margin profile is not radically different on — between all the sold and the retained businesses.

Jack Kindregan: Got it. Okay, thank you. And then second question is on Brown’s exposure to different flavors of personal lines insurance. We appreciate the personal lines comes in different textures across the three main segments. The question are, are Brown’s personal lines exposed business is having a positive impact on organic growth levels as compared to the non-personal exposures which comprise most of Brown’s revenues?

Powell Brown: So the answer, Jack is, yes, they are having a positive impact. Remember, we have personal lines in all three of the major segments. And as you may remember, in many years past that was a headwind in the wholesale. And we’ve said that that is now a growing segment, which we’re positive about is growing in Retail, and it’s also growing in Programs. So we think it’s a positive.

Jack Kindregan: Thank you.

Powell Brown: Thank you.

Operator: Please standby for the next question. The next question comes from Elyse Greenspan with Wells Fargo. Your line is open.

Elyse Greenspan: Hi. Thanks. Good morning. My first question is, you guys, Andy, I think said that the change in reinsurance cost you guys $19 million, but then it seems like your expected loss is going from $25 million to $15 million to $20 million. I am just trying to tie together those figures. That seems like a large cost that I might have expected for — now — the expected loss to go down by $5 million to $10 million.

Andrew Watts: Well, you got to remember — so there’s two pieces to it, Elyse, is it does limit our P&L exposure. So we said in 2023, it was about $25 million. So going into ’24, it’ll be somewhere between $15 million and $20 million, but — and then it will also drive an incremental organic growth of $15 million to $20 million. So you got to put both of those pieces together, okay.

Elyse Greenspan: Okay. Thank you. And then my second question, I was hoping you can give us a sense of how those international deals that you guys completed in ’22, how did — how impactful were those to retail, just — growth and margins for the full year 2023 versus expectations.

Powell Brown: So, Elyse, good morning, and thank you for the question. We, one, are very pleased with the businesses that have joined in England since the middle of 2022. And the businesses are performing at or above our expectations. And we have also said that just — as we don’t give guidance, but I would tell you that they perform in a very similar way to our domestic retail business. So we’re very pleased and continue to do acquisitions there. So, Mike Bruce, who’s the Head of our European Operations, and his team have continued to do small and medium acquisitions over there. And we’re very pleased with the capabilities and the people that have joined. So, very pleased.

Elyse Greenspan: Okay. And then on the margin, Andy, is there any seasonality that we need to think about out, I guess maybe a little weaker in the third quarter given at a cap — potential for a captive loss. But how should we think about the guide for improvement in margins in ’24 and just quarterly seasonality?

Andrew Watts: I think, yeah, if you go back, good catch on the third quarter. As we’ve talked about, we normally model in kind of 1.5 storms. You never know when — what it’s going to actually look like and I guess higher likelihood of it being in the third quarter. But that’s probably a reasonable approach. So if you do that, you would expect for the margins to be down a little bit in the third quarter, and then just keep in mind the — making the lap into the fourth quarter on the $19 million. But otherwise, those are kind of the bigger items. We did call out some adjustments to the contingents in second quarter on part of the lost development during the year. So those kind of be the — I think, the big ones to keep in mind. Otherwise, no major changes in the seasonality of the margins.

Elyse Greenspan: Thank you.