Q4 2020 Brown & Brown Inc Earnings Call
Okay.
Good morning, and welcome to the Brown <unk> 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 and 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 and nature.
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 law.
Actual results or events and the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated store desired or referenced and any forward looking statements made as a result of a number of factors such factors include the companys determination of its finalized fits financial results for the fourth quarter, but it's fine.
Actual results to differ from the current and preliminary unaudited numbers set forth and 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 and the Companys reports filed with the Securities and Exchange Commission.
Additional discussion of these and other factors affecting the company's businesses and prospects as well as additional information regarding forward looking statements is contained in the slide presentation posted and connection with this cool and and 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 and the company's earnings press release or in the Investor presentation for this call on the Companys website at Www Dot BB insurance dotcom.
And 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.
Thank you Holly and good morning, everyone and thank you for joining us for our fourth quarter 'twenty and 'twenty earnings call I'd like to take a few minutes to make some high level comments about our business and how we performed last year.
We can't even into 'twenty, and 'twenty with great momentum and discontinued and the first quarter delivering 6% organic growth good and COVID-19 hit the U S economy and things change dramatically. While there was significant uncertainty we knew we had a great team that is resilient and responsive and innovative with.
With a focus on providing solutions to our customers.
And we were able to move and we were able to quickly transition over and.
And who are working environment and less than a week.
So they could pay that and effectively serve our customers.
You May remember, we didn't grow as quickly and the second quarter due to the impact of the pandemic on our new debt.
And the recording of revenue adjustments for general liability policies, but we still expanded our margin.
And then and the third quarter, we delivered outstanding results with strong organic growth and margin expansion and the results of the for quarter were similar to the third quarter average.
Finished the year strong and with good momentum going into 'twenty one.
Based on what we were seeing if you asked them.
If it was likely that we would deliver full year results.
And with good organic growth and meaningful margin expansion.
And I would've said it was possible but.
Unlikely.
If you would ask me that and let's say April.
We are very pleased with our results for 2020, we were able to deliver these results through the hard work of our team and their dedication to our customers.
'twenty was attached for that to our laser focus on delivering innovative solutions.
We also thought the M&A landscape and cool off for several quarters until there was some sort of economic stability.
The slowdown and reoccurring for about one quarter and why.
And that activity has now rebounded to pre COVID-19 and levels.
And even with the uncertainty this year, we're very pleased to have completed twenty-five acquisition and one.
$197 million of acquired annual revenue.
I'd like to highlight two strategic acquisitions and cover town and we completed and the fourth quarter and mirroring insurances, and we announced and the fourth quarter and closed on the 14th of January right and cover how this acquisition will help us in many ways first day will help us further our investment and technology draw.
Our innovation agenda and improve our carrier connectivity.
And it enables us to more effectively and efficiently provide quotes and bond coverage for our national programs segment.
And enables us to better serve smaller customers within our retail segment and ultimately.
Ultimately these items are focused on enhancing the customer buying experience by delivering curated quotes that best meet the needs of our customers. We believe these new capabilities are unique in the marketplace.
We started 2020 with the acquisition special risk and British Columbia and finished the year with our acquisition of Alere Insurances, and Ireland and Leery was the largest independent earned.
Retail broker serving the Irish and marketplace. This acquisition strengthens our European operations, which we look forward to further developing and the years ahead.
New teammates and capability to deliver many opportunities over the coming years.
And we're extremely proud of our results and 2020 and the delivery.
Total shareholder returns in excess of 20%.
And thank all of our teammates for everything they did and make it a great year.
And you've seen in the press release, Tony's try and needs is taking on the role of chairman of our wholesale segment and Steve Boyd will become our president of wholesale feed background and national programs as an operator and and technology brings critical skill leadership team at wholesale and we can.
And they need to grow this important business through innovative solutions and excited that Tony and Steve will be working together to further drive this growth and the future.
Now, let's transition to the results for the quarter and the full year I'm on slide number three.
And we delivered strong results again this quarter total revenue was 642 million growing 10, 9% in total and four 7% organically.
And into more detail and a few minutes about the performance of our segments. Our EBITDA margin was 27, 1%, which is up 10 basis points from the fourth quarter of 2019. Please remember that the fourth quarter at 19 and included a gain on sale of a business that benefited the prior year margin by approximately one.
100 basis points, our net income per share for the fourth quarter was 34 cents, increasing 25, 9% on and as reported basis on an adjusted basis, which excludes and change and estimated acquisition earn out payable.
Net income per share was <unk> 32 cents, an increase of 14, 3% over the prior year.
Our team did an outstanding job of continuing to profitably grow our revenue as well manage our expenses expenses and response to the dynamics associated with COVID-19.
During the quarter, we completed another nine acquisitions with annual revenues of approximately $80 million, we'd like this and a warm welcome to all of our new teammates that joined during the quarter.
For the year, we grew total revenues at nine 2% and delivered organic revenue growth of three 8%. This is an outstanding performance given the economic headwinds experienced for most of the year, we improved our EBITDA margin for <unk> by 110 basis points for <unk>.
31.1 per cent compared to 2019, as we leverage the growth and organic revenue and managed our expenses and response to the pandemic.
Our net income per share for the full year of 'twenty increased 27% dollar and 69 cents and a dog.
And 40 cents.
And 2019 on an adjusted basis, which excludes and change of acquisition earn outs.
Net income per share increased 19, 3%.
Lastly, we had another strong year of M&A activity as I said earlier closing 25 acquisition with approximately $197 million of annual revenue, adding many excellent businesses and teammates later in the presentation and Andy will discuss our financial results in more detail now on slide five and.
And prior calls and talked about factors that would impact for the economic recovery, which included the elections for.
And all of the vaccine and the timing of the rollout as well as how much additional stimulus will be approved the timing of the vaccine rollout and the approval of additional spend and that's why the largest impact upon and recovery the economy and important.
Leaders' confidence about rehiring and investing in their businesses.
And the fourth quarter, and we continue to see companies doing well and other struggling mightily.
And we've seen and improving new business and our retention remains good. However, we continue to believe it will be choppy a choppy recovery through at least the end of 'twenty 'twenty, one and maybe into early 'twenty two from.
From a rate standpoint, the fourth quarter was very similar to the third quarter. Most standard rates were up 7% with E&S rates up 10% to 25% as compared to the prior year.
As we've talked about before the main driver of rate increases continued to be loss experience commercial auto rates remain at 10% or more and workers' compensation rates are not declining as fast as they were in previous quarters, but they're still negative.
And there has been a lot of talk over the past few quarters that workers' compensation rates are turning positive. However, we're still not seeing this across the board yet.
For any of that perspective coastal property, both wind and quake or up 15% to 25% professional liability and generally have 10% to 25% depending on the coverage and the industry.
We continue to see outliers for these lines of coverage personal lines, and California, Florida, and the Gulf Coast States remain under intense pressure as carriers are seeking to reduce their exposure due to fires tropical activity. During 2020, we expect a reduction and personal lines capacity and continue throughout 'twenty one.
Placing coverage for many lines certain industries, where customers are significant losses and continues to be challenging. This includes excess and umbrella coverage where carrier of carriers will seek a combination of lower limit and <unk>.
And premium rates, we don't expect this trend and materially change and 21.
Now on slide number six let's discuss the performance of our force segment, our retail segments organic revenue growth grew by one five per cent for the fourth quarter as we mentioned in our third quarter earnings call. We had about 100 basis points of timing items that benefited the growth and the third quarter and negatively impacted the growth and the fourth.
Quarter, our fourth quarter performance was driven by new business better customer retention and premium rate increases, but was impacted by lower exposure units, resulting from the pandemic. We view their performance for the fourth quarter. Good considering we delivered 7% organic growth and the fourth quarter of <unk>.
Last year and taking into consideration the timing headwind mentioned earlier organic revenue growth for the full year of two 4%, which we consider a good performance in light of the tough economic environment.
Our national programs segment grew 14, 1% organically delivering another stellar quarter, our growth was driven by strong new business retention and rate increases some of the top performing programs for our lender placed and commercial and residential earthquake wind and personal property just to name a few for.
For the full year, our national programs segment grew organically and impressive 12, 3% a huge thanks to Chris Walker and all of the team and national programs for delivering a great quarter and you know the group.
Eight year.
Our wholesale brokerage segment grew five 8% organically for the quarter, we realized strong new business and continued rate increases for most lines of coverage.
Brokerage was the fastest growing again this quarter and while we continue to experience headwinds and our binding authority and personal lines businesses due to the economy and carrier appetite and you mentioned previously for the full year, our wholesale brokerage segment grew five 5% organically delivering another good year.
The organic revenue for our services segment decreased 50 basis points for the fourth quarter, representing good improvement from the last few quarters. The main drivers depressing growth continued to be lower claims volume for social security and Medicare satisfied advocacy businesses. The decline was substantially offset by <unk>.
Revenue generated by processing claims for weather related events that occurred and third and fourth quarters for.
For the full year organic revenue decreased by 10, 9% driven by lower claims for our social security advocacy business and certain terminated customer contracts and the impact for the pandemic.
And while not back in positive territory, and we believe the fourth quarter was a turning point and we anticipate delivering modest organic growth for 2021 now let me turn it over to Andy and discuss our financial performance in more detail. Thank you Brad good morning, everyone.
Moving on to slide number seven and what previous quarters, when we discuss our GAAP results and certain non-GAAP financial highlights as well as our adjusted results excluding the impact of a change and acquisition earn out payables.
For the fourth quarter, we delivered total revenue growth of 61, six and $3 1 million or 10, 9% and organic revenue growth of four 7%.
Our EBITDAX increased by 11, 3% growth.
Slightly faster than revenues as we were able to leverage our expense base and further and manage our expenses in response to COVID-19.
And as both offset the headwinds associated with the gain on disposal recorded in the fourth quarter of 2019 and.
Increased noncash stock based compensation.
Our income before income taxes increased by 28, 3% outpacing EBITDA growth. This was primarily driven by the $15 million year over year decrease and the change and estimated acquisition earn out payables.
And the next slide will discuss our results excluding this adjustment.
Net income increased by $28 million or 22, 2% and also.
And with net income per share increased by $25 90 per cent for 34 cents.
Our effective tax rate for the fourth quarter was 25, 7% substantially in line with the 25%, we realized and the fourth quarter of 2019.
Our weighted average number of shares increased slightly compared to the prior year and our dividends per share increased to nine <unk> for $9 four per cent compared to the fourth quarter of 2000 and went to.
Over on slide number eight this slide presents our results after removing the change and estimated acquisition earn out payables for both years.
We believe this presentation provides a more comparable year on year basis.
During the fourth quarter of 2020, the change in estimated acquisition earn out payables was a credit of $9 $5 million as compared to a $5 $5 million charge in the fourth quarter of 2019.
The credit was primarily driven by the reduction and the estimated earn out payables for and acquisitions within the national programs segment.
Excluding the change and acquisition earn outs and the fourth quarter of both years, our income before income tax grew $13 $9 million or 12, 9%.
Our net income on an adjusted basis increased by $9 $7 million or 12 per cent.
And our adjusted diluted net income per share was 32 cents an increase of 14, 3% overall it was a great quarter.
We go to slide number nine this slide presents the key components of our revenue performance for the quarter, our total commissions and fees increased by 10, 9% and our contingent commissions and G. S fees were slightly down for the quarter.
Organic revenues will exclude the net impact of M&A activity increased by $4 seven per cent for the fourth quarter.
Moving to slide number 10, and our retail segment for the total revenue growth of seven 2% driven by acquisition activity and organic revenue growth of one five per cent.
The timing and discussed above and negatively impacted our organic revenue by 100 basis points for the quarter.
EBITDA grew by 3% due to leveraging organic revenue and cost savings achieved in response to depend and it.
This growth was slower than the growth and total revenue is primarily due to a prior year gain on disposal and represented a negative year over year impact of approximately 150 basis points.
Our income before income tax margin increased 130 basis points and grew faster than EBITDA due primarily to a change and estimated acquisition earn outs.
And as long as slide number 11, our national programs segment increased total revenues by $25 $3 million or $18 90 per cent and organic revenue by 14, 1% and <unk>.
Increase in total revenue was driven by recent acquisitions and strong organic growth across many programs.
EBITDA growth of 19% with along with total revenue growth.
The leveraging of strong organic revenue and the management of variable cost and was offset by higher intercompany charges and lower contingent commissions.
Income before income taxes increased by $20 3 million for 54% growing faster than EBITDA due to decreased acquisition earn out payables, but was partially offset by higher intercompany interest expense.
And we're slugging to 12.
Our wholesale brokerage segment delivered total revenue growth of 19, 2% and organic revenue growth of $5 eight per cent.
Total revenues grew faster than organic revenue due to recent acquisitions with contingent commissions substantially flat year over year.
And with that grew by 17, 1% with a margin decline and a 40 basis points as compared to the prior year, while we delivered good organic growth and reduced variable expenses and response to COVID-19, and these were more than offset due to changes and foreign exchange rates and to a lesser extent higher intercompany charges.
Our income before income taxes grew by six 2%, which was lower than total revenue growth, primarily due to higher intercompany interest expense.
Over to slide 13.
Total revenues and organic revenues for the services segment, both declined by about 50 basis points and driven by the items mentioned earlier for.
The quarter EBITDAX increased by nine 7% due to increased and weather related claims and was partially offset by higher figure compared to <unk> expenses.
Income before income taxes decreased 23, 6% due to a credit for $2 5 million recorded in the fourth quarter of 2019 for the change and estimated acquisition earn out payables that did not recur or occur in 2020.
Over to slide number 14, and slide presents our GAAP results for the full year of 2022 hours a.
And 19.
For 2020, and we delivered revenues of $2 6 billion growing nine 2% and earnings per share of $1 69, growing 27 per cent, our EBITDAX increased by 13, 5% and.
Our EBITDA margin grew by 110 basis points for the year, our share count increased slightly as compared to the prior year and our dividends paid during 2020 as compared to 2000 and mix and increased by seven 1%.
For the slide number 15, this slide presents our results excluding the change and estimated acquisition earn out payable for both years for the.
Full year 2021, and adjusted basis, our income before income taxes grew 18, 1%, which outpaced EBITDA growth due to lower interest expense and our adjusted net income per share grew by $19 three per cent.
And they're just really strong income performance metrics. We also had another strong year for cash conversion due to the strength of our operating model and diversity of our businesses.
And we delivered 721 $6 million of cash flow from operations, representing a continued strong conversion rate of 27, 6% as a percentage of revenue.
We also finished the year and a strong liquidity position with $817 million of cash and cash equivalents as well as $800 million of accessible capital on our revolver with this capital and the cash we will generate in 2021, we were in a good position to fund continued investment and our company.
We got a few other comments regarding our outlook for 2021.
During the third quarter were asked the question about a potential margins for 2021 and in relation to the COVID-19 savings. We had in 2020 now with a year completed and a bit more visibility in 2021, we expect EBITDA margins could be flat.
So up slightly and considering our variable cost will more than likely to increase as we're able to travel and see customers and face to face.
And as we've done in the past our leaders will be focused on growing profitably.
Regarding continues and we are anticipating them to be relatively flat or maybe down slightly from 2021.
As it pertains to taxes, we expect our effective tax rate for 2021 to be and their range of 23% to 24% growth.
And did not take into consideration and any potential changes and the federal tax rates that are being discussed by the new administration for.
For interest expense, we are anticipating a seven and $9 million increase as compared to 2020, driven by the new bonds. We issued in September of 2020 from a capital perspective, we are expecting our capex to decrease in 2021 to approximately $40 million to $45 million.
As we have substantially completed the development of our new Daytona Beach campus with that and let me turn it back over to profitability comments. Thanks, Andy for a good report.
And my opening comments I mentioned, there are still a few items that need to be resolved over the coming quarters. We will watch closely the successful rollout of the vaccine and additional stimulus to help those in need and both of these items will influence the pace of economic recovery and over the coming quarters for.
From a rate perspective, we expect increases for the first six months of 'twenty, one to be similar to those seen and wanting ultimately the rate and the rate of increases will be driven by losses sustained in 2020 from the record setting number of tropical storms and the millions of acres that were burned the question.
I mean for how much longer and at what pace and rates need to achieve their targeted returns. We think the market is getting near an inflection point over the coming year for certain lines that will drive some rate moderation.
The acquisition pace seems to be as active as ever and competition between private equity and long term strategic remains we continue to believe the aggressive pricing for deals by PD will not abate anytime soon however were well positioned with our low leverage and the capital on our balance sheet as well as access.
For additional capital to fund our M&A activity, our pipeline remains good and we'll keep our disciplined approach to M&A has approached proven to be very successful, but as you know we don't count anything until it's closed.
Finally technology and innovation continues to be at the forefront regarding creation of new products and enhancing the experience of our customers. We will continue to digitize, our data automate and prioritize technology investments around the following <unk>.
Optimizing and enhancing our data and analytics program, expanding our digital delivery capabilities around products and services and engaging and initiatives designed to drive greater efficiency and velocity through our underlying processes as.
As we deliver on these goals and you'll see new opportunities for growth that will serve our customers even better we had a great 2020 on many fronts and have good momentum heading into 'twenty one.
I am extremely proud of how our team has served our customers through extremely challenging times, we have a great team and a highly diversified business and both the performed very well and the path and we expect they will and the future.
Ultimately our financial performance is only possible.
Through the combined efforts of our nearly 11000 teammates.
And their commitment to serve our customers.
With that let me turn it back over to Holly for Q&A session.
Thank you.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again Thats star one to ask a question and I'll now take our first question from Elyse Greenspan from Wells Fargo.
Please go ahead your line is open.
Hi, Thanks, Good morning, first and why.
And just start and.
Some of the comments you gave on your margin right.
And just kind of where you see the market today it sounds like Wow.
You know maybe like some slight improvement in margin.
Can you just is there a way to give us a sense on what kind of range do you assume for organic and we think about weather margin might be flat or improve or like the variables that will determine and <unk>.
A potential margin improved and they can see in 'twenty and 'twenty one.
Good morning, Elyse. Thank you for your question and I know that you've.
And you've heard us say before that we don't give growth guidance as we know that we've said we think our business is a low to mid single digit organic growth organic growth business and a steady state economy.
But we wanted to clarify that because theres a lot of talk out there around variable expenses and.
And how you capture or don't capture or whatever and we.
The I think the results. This year are a testament to how our system works, which is at every office the leader that run those offices, she or he is responsible for that P&L and.
And by doing so they control the expenses that were controllable or variable at the office level and then as those individuals are able to go back and travel or serve our customers and a different capacity, we will incur those expenses again and.
And so it's not as though we're going to be able to give you you, meaning new elite or any other analyst a specific number because that's not the way. It works. It works at the very local office level and we didn't have any extra stuff that we were paying before we thought.
So I'm sorry, I can't answer your first question, because we don't give specifics on organic growth guidance, but I just wanted to give you that kind of feedback on the variable cost.
Okay. That's helpful.
I'm, a little bit of a different way and I can tell you look at you know retail right.
And one 5% organic and the fourth quarter right. So that was one point of timing, which lies and told US I don't want and a half per se are getting jobs for the gain on sale right.
I think he said 90 basis points of margin improvement and that segment in the quarter. So you know what.
Kind of what's.
Was there something one off and the segment I mean, maybe it comes back with some of the variable comp.
Just think about retail and potential economic bounce back and what that means that segment's margin with other than just suddenly go perhaps while our travel was there anything else that might have been one off and that doesn't even in the corner.
Good morning, and Elyse, it's Eddie just for clarity is your question. You're are you asking you expect for it to be higher or it's higher than you anticipated.
Well I'm just trying to get a sense as we think about forward was there anything kind of one off within those numbers and the quarter other than soft for us.
And I think you know wall and travel retail.
Sure Yeah no no.
No no material one off items other than that.
Pieces that we had called out inside of there.
So primarily around the variable cost and then the gain year over year. So we'll continue to manage those as we go into 2001, just as we did during 2020 and we're always focused as an organization is how do we grow our top line and grow the bottom line profitably.
And balance that and so we did really well during 2000 and 'twenty and we have confidence that all of our leaders will be able to do that in 2021.
Okay great.
And Paul you started off your prepared remarks by talking about.
Some of your recent transactions over here and I just.
And and I didn't get your point this is developing their international presence and here at the head on.
Well present value.
And he has more than doubled.
Like for like.
The U K area.
Can you give us a sense of what does that mean and I guess.
And size and how you think about potential international expansion.
Sure. So we're we're very pleased that.
The team and Ireland.
He's joined and I would tell you that our Leary insurances.
And is very similar to our organization, maybe 20 years ago. It reminds me a greatly of us and how they are involved and their communities and they serve their customers and their relationships with other carriers.
So.
As a general statement and.
This is a very general statement.
And we number one.
And obviously like the Irish marketplace to we like the fact that someplace, like Ireland, or England or Canada.
As a rule of law.
And so and you think about that and we think about places where people have built and grow good businesses and.
And we will continue to look and those areas now.
Please don't take that comment out of context, the leaf that says we're now on international spending and bench that is not the case.
We.
Evaluate every transaction.
And a very similar way and it starts with cultural fit and does it make sense financially.
And if those two things if there's a cultural fit we usually think there's a way to make something work.
And so vetting.
And getting the right ones and doing all of that it's just like doing it here in the United States is just 7000 miles away or farther and so we will continue to look at businesses.
And in areas like that we have looked over the years.
And for whatever reason we haven't.
And you know we bought the business at the beginning of the year and Vancouver, Canada.
We look at businesses in Canada before and for whatever reason.
And I just didnt work in the past and they were good firms and just didn't work out and so.
I think that is another.
For 280 for us, but I do not want anybody on this call to think that this is.
New flavor and a month or something it's absolutely not that and we will continue to look for firms that fit our criteria and continue to tell the brown <unk> Brown story, because we're forever company and.
That's appealing to some people and so we're really excited about it.
Hum Pal I appreciate the color.
Yeah and runs dailies.
Okay.
And we'll now move to our next question from sales to final from Deutsche Bank. Please go ahead. Your line is open.
Yeah.
Maybe just a follow up to the the international brokerage and acquisition market and I know there was a small part of the disorient feels like at this point, but just.
And just given that was the leases last question.
And Paul is there anything that changed and so.
And two acquisitions and we're not to make a big deal of it but you had said that you're looking for from the past and and for whatever reason they didn't come through is there anything that changed that kind of it feels like you've been able to click off a couple of wins here.
And competition and U S higher and it.
And it allows you to maybe look more seriously at the international or you know and.
Anything from that perspective.
First of all good morning, Phil and no. There's nothing that's changed the competitive landscape is equally as competitive overseas as it is and the United States.
Be it in North America, or and the British Isles.
Number one number two.
And I think that.
You know there are lots of people fill that we talked to over the years that are not ready to do something when we start to get to know them, which we believe is a great time to get to know them because they get to know us and we get to know them and then over the years.
They see how we act as a company and we see how they act as a company and then there might be and sit down the road. So I.
And I would tell you we always think that good people attract other good people and people don't work for companies they work with and for people and.
And so having said that that is absolutely the case and those two acquisition and.
And we will continue to work and areas that present.
Exciting growth opportunities and expanding our capabilities and there's all kinds of things that come out of it.
For the positive and so.
But there is nothing that like just all of a sudden and said we're going to pay more or we're going to we were going and we're going to accept this already nothing has changed in that regard.
Okay, perfect, Thank you and and.
And I think Paul and in the initial remarks, you had talked about expecting a sharper recovery through.
Through 'twenty and 'twenty, one and maybe into 2022, when we think about new business has improved from third quarter to fourth quarter.
It is the trend line for that Choppiness.
Continued improvement or Choppiness, just you know around day, it's flattish timeline and how we think about new business momentum.
Yeah, I think it's choppy like up and down and up and down here's the thing that.
Phil you can't.
Fully put your finger on and so there.
There are businesses that have as.
And as an example, they have furloughed people book.
And by Furloughing people, they're still on their employee benefits plan as an example.
And now, let's say that company has brought back half for the people that were furloughed they terminated the other half.
All of a sudden you actually have a reduction in exposure units in that example.
And so it is not as though we have clear line of sight on.
Every customer is going to do in that regard.
So you remember I think of new business, as new new business and new customer to us.
And and a new line and new news and new customer to us as new business, but you can have an existing customer where you're right. The P. M C.
And then pick up the benefits or right for benefits and pick up the P&C and I don't consider that a new customer with a new line.
But I think the important thing is remember we have always talked about our business is a reflection of the middle and upper and middle market economy.
And so if you think about all the customers that we touch and had the good and fortunate to work with and earn their business every day. Some of those customers are looking at their business differently today than they have and the path that could be positive or negative they get out and they.
It could be adding 15 people or they could be releasing 50.
So the reason we say the choppy part is there's all kinds of variables outstanding first question are people going to mandate.
Debt there their employees get.
And you know vaccines and come back to work well based on the studies that I've seen so far about 75 per cent of the companies out there that I'm aware of has said no to that.
Okay. So how does that impact work going forward, what about people that have been hanging on.
And by other fingernails, and then all of a sudden like day, where we're just going to be done and we're going to hang it up.
And I don't we don't see something Phil that indicates that but I can tell you where we are paid to think and advance.
Around the corner and we're trying to anticipate what could happen and the next three or four quarters.
And then hey, so there isn't one.
You also realistically, probably see choppiness and the businesses thinking about through the lens of a business owner.
And their level of confidence knowing what could happen over the next quarter or for quarters, and then how they invest in their business and that can be anything from kicking off a new capital project for a building.
Quiring another organization, making some sort of and expansion what are the kids there'd be well, depending upon that level of confidence. They may decide just to delay that by 90 days and that's just not uncommon and and we saw some of that from the second quarter into the third quarter and the vertical where things just move around back and forth and and that's really why we.
What surprises if there's choppiness because we just don't think that there is a consistent level of confidence yet in the marketplace and we just think that there. It takes some time to work out during 'twenty one.
Okay I appreciate the color and congrats on the quarter.
Thanks, Okay. Thank you.
And we'll now move to our next question from Mike Zaremski from Credit Suisse. Please go ahead. Your line is open.
Hey, good morning.
A follow up to up to the last question from Phil and appreciates.
Appreciate it and how will you explain kind of the dynamics around you know.
Some of the potential organic growth uncertainty and choppiness.
And the national programs.
Segments and strong for for a while now.
The dynamics and you explained is that pertain for national programs as well or are we should we be thinking or is there some more kind of a tail.
Tail winds.
But remain strong and that's.
Specific segment.
I think national programs.
Is is a little different than retail and regards to they may have a limitation or run into a limitation based on their ability to provide capacity.
They are because of the demand outstrips the supply that is not the case today, but I'm, saying that could be a that would be a different kind of my term governor for organic growth for them going forward in a wind programmer quite program or something type of program and so.
So I say that because remember.
We're underwriting on behalf of the carrier, we've been delegated underwriting authority, but there's one carrier or in some instances multiple carriers.
In the case of retail you have we have access to the entire marketplace for virtually every carrier we have access to so one carrier and carrier he doesn't want to do it carrier B and C still may consider it.
So we.
We are very pleased with the growth of our NAV.
National programs, we do things debt there there were and continue to be some interesting dynamics in terms of significant rate increases on cat exposed business that would drive.
Some of that growth and you know one other things that we've said Mike.
And we haven't seen it yet, but we've talked for the people and some of these people that there are other providers of capital that are either coming into the marketplace or are in the marketplace debt.
If in fact, everything else stayed constant which probably won't be the case, but if they did and that new capacity, that's either going to moderate the rate increases.
Or in some instances and might even reduce the rates and it just slightly.
So I'm just thinking about you know if you have a condo and Miami and the things gone up 15%, let's just make this up or more for the last three years and then all of a sudden somebody comes in and they get a flat renewal to get it for.
Or even slightly down maybe.
You you could see that and you have this very unique time.
We think it's obviously.
And presents a lot of opportunities and challenges all wrap up and the one but what I would just tell you that the growth that national programs has enjoyed and delivered and <unk>.
And our opinion is number one spectacular but too.
We don't give growth guidance as you know, but I would say that their performance.
And was even higher than we anticipated for 'twenty and 'twenty.
So I say that just to kind of give you a sense of it because it's a great business and.
And you know the market will turn one day and that growth rate will slow down some and things like that but yeah.
Okay that Michael talked about it goes off and got it yeah and like we've talked about this on the third quarter earnings call is we're extremely extremely pleased with the organic and the fourth quarter.
Definitely overall all of our expectations.
We'd love to see National programs posted another 12, 14, and 15% every quarter in 2021.
We don't know if that is realistic. So we wouldn't want you to set your expectation and the double digits that would be great. If it happens, but theres a lot of different dynamics and the marketplace. So just want to.
Midstream kind of moderate as to how you think about the growth and we're very very excited about.
Our capabilities in that space and how we can deliver.
That's helpful.
Moving to the and the past.
Two strategic.
Deals recently cover hunting O'leary.
I'm, assuming there's not a major margin impact and in the past it's been very helpful to you and you've broken it out and.
And the depth of our supplement.
Yeah, we micro normally break out larger acquisitions, we would fall into that category.
Both of them do have margins below the average for the organization, but we've taken that into consideration. When we gave the guidance of flat to up slightly for 2021.
Okay, Okay got it.
I guess lastly, you know.
You've done a good job and kind of talking and investing in technology and innovation and visualization.
Recently, and you're still talking about it.
Is that you know I guess when you talk.
And about Capex decrease and with Capex and it's kind of like the old old School World World, but should we be thinking about kind of the technique.
Technology, and Digitization of investment being a more material percentage.
Other expenses and that's from one of the one of the levers and they should be.
And I'm thinking about which you know if you do decide to invest more on it and the coming years I can kind of been somewhat of a.
Our governor on on on margins.
Given how the market for a given organic growth, it's very healthy and then you take some of that that helps that kind of growth and invest a little bit more and and digitization efforts.
So Mike I'd like to address that and and what I would say is this.
We are.
Are going to make the right investment in the business and you raised the issue of technology. So we're going to use that specifically as we see fit going for now and in the future.
I don't want it.
You know give you the impression that okay for growing more than we're going to invest more or if we're growing lab for them and invest less that that isn't really the way we think about it the way we think about it is is where do we want to go.
How do we want to get there and then what do we need to do buy build partner to get there and then along the journey, we're going to reassess and say was our original hypothesis correct is it validated or or do we need to course correct midstream.
Green and.
And so.
Once again I I would tell you this I think debt.
And this is a hard one because I know what you have and analysts are trying to do in terms of margin movement and things like this and we've been very consistent and saying where are we thought the margin would be where the organic growth would be and steady state economy.
And even and kind of variable economies, which is what we're in today, but you know again and I said bids and and I think it's important for everybody just to pause and think about it.
You would ask Andy and myself in April.
If we would have delivered three 8% organic growth and 110 basis points of improved margin.
Andy and I, if we could have said it.
Publicly we would've said, it's possible, but the probability is very small based on what we were seeing then.
So I would take you back for how you thought and April.
And so it's not about just how we thought it's how you thought and.
And some people thought the world was coming to them and.
And so what what I would tell you is we are couldn't be more proud of the way our team responded.
Because it isn't easy as you know.
And so the thing that gets all of this doesn't reflect.
Is the numbers are a result.
Almost 11000 teammates busting their butts for their customers every day and I know you know that but I will tell you. There's a lot that goes into it to deliver these numbers.
And so I'm I couldn't be happier under the circumstances and.
And we're going to continue to invest in technology and I think there are lots of opportunities and some other things that we're doing already and there'll be some that we haven't yet invested in.
And yeah, he might as well just see if we can just hit this head on and so there's no misconception out there. So if there's a concern that with us talking about the innovation and technology that we're gonna make the big investment and take the margin backwards.
And <unk>.
And you can go ahead and Oh.
But we knew that that concern.
And 2016, and the first quarter, we talked about our investment program and we laid out a very clear path as to what are we going to do our margins on the way down and on the way up and I think hopefully we've been really really clear on that it's also and our industrial deck.
And if we'd have a situation like that and the future. We will talk to all of our investors and all of our analysts and what we're really saying is we think we've got appropriate spend inside the business, we would balance between we'll call. It the new stuff and innovation through the organization, but we do believe that innovation is very important and how we can serve and engage with.
Customer order and carrier partners, we will continue to do that as an organization not all of it would be capex not all of it is gonna be opex like theres going be balances back and forth because sometimes as part of that that leasing or partnering that Paul talked about that's going to flow to opex. Some things we'll build ourselves.
We can walk through all of those and again, we've incorporated that into all the guidance at least that we've given for 2021 and if other opportunities pop up during 'twenty, one that we need to change our view because we think it's something really good for our business long term and delivers appropriate shareholder values.
Absolutely talk to everybody about it but there's no looming and big investment out there. So again, we just want to hit that one head on.
Yeah, and I wasn't it wasn't passengers and the context of Conservatives and some companies have talked about probably.
Covid opening their eyes to being able to do business slightly differently using much as per se and so very helpful. Other sponsors.
And well.
And thank you.
And we'll now move to our next question from Yaron <unk> from Goldman Sachs. Please go ahead. Your line is open.
Thank you very much and good morning, everybody.
I guess my first question for you because it was a follow on to Mike's last question.
And if I were to cover how and I think one of the strategic rationale of the victim quite it was and it does give you.
Another leg up on the technology and innovation side, so with that and mind should we also expect to see the independent.
Organic high teens spend that we saw throughout 2020 considered and 21 or do we should we see that maybe slowed down a bit because of that and more of that through this acquisition.
Lauren first of all good morning, and and this would be a comment for everybody. It if you could either make sure you put the microphone closer to your now for the speaker and we're getting kind of a muffled.
And a thing coming through sorry, if I could just asking you to repeat like the last three sentences, there, which was I heard about the cover around and the investment, but I couldn't get the very end of that which was really the crux of your question. If you could repeat that please sure.
And hopefully this is better.
A little bit better. Yes go ahead. Okay. So my question was what does he cover around acquisition and the strategic value of it one of the strategic value as being the technology angle and the innovation and ankle.
Should we still expect to see the.
Organic spend that we saw in 'twenty and 'twenty continue into 'twenty, one or does that love for maybe get dialed back a bit because you now have the inorganic digitalization and technology coming into the acquisition.
Yeah.
Thank you very much for the clarification, you and I think that you have to expect that spend to be similar going forward.
And because we are very pleased with the cover Hound acquisition and the team and the technology that comes with that acquisition and we believe that there are multiple places that we will be able to use that in our different divisions. However, we have.
Contemplated that the tech spend across the other platforms will continue as stated and tell them at which time or I should say, if we determined that the technology and cover Hound is transferable or expandable maybe is better into.
Capacity and one other divisions that we're not aware of just yet and that's how we would answer that.
Okay and.
And does it cover him and give you.
And the ability to access markets that were not available to you and the past or is it just a matter of accessing the markets that you've already played in but and then more efficiently.
Yeah Yeah.
The markets that they do business with our markets, we already do business with your own.
And but it's.
It is and it can feasibly and some areas, where we may not have worked with them before.
Okay.
Okay understood and then final quick one.
Free cash flow I think and grew mid single digits. This year.
Where EPS and earnings growth was well and in the double digits. So was just curious if you could talk about what maybe from B b.
Headwind towards this here and specifically.
Hi, good morning.
And one other thing to keep in mind on the cash flow as we do get and movements up and down.
Based upon what happens with the fiduciary assets.
And so.
And as those kind of.
As our fiduciary asset and again keep in mind on those that's the.
The premiums that flows through the organization for the for all the buildings, so that can move up and down.
And you look at last year, we grew free cash flow significantly faster and I think the DAC as well as.
Net earnings per share. So I think last year, we were at all and a free cash flow of close to about 15% and others. This year, where a lot of seven and six so you will see some movement up and down inside of there.
It's the reason why we focus a lot on the cash.
Cash flow from operations on the conversion ratio, we were just shy of 28%. This year, we're just a little over 28% last year. So it's going to kind of hover in that range, but we're really really pleased with the cash and the way that we were able to convert our revenues again in 2020.
Got it thanks, so much.
Yeah. Thank you.
And we'll now move to our next question from Greg Peters from Raymond James. Please go ahead. Your line is open.
Good morning can you guys hear me okay.
Yep Yep.
Excellent.
Throughout your prepared comments, you talked about changes in earn out payables.
Free of the four segments and called out I think.
You know a chunk and the national programs.
But it seemed to really affect our reported results and all three segments and for on a consolidated basis and a way that maybe hasn't happened before so can you give us some color on what's going on there.
And you know maybe segment by segment you know is there something that you're missing on you know these payouts that day.
And to think about going forward.
Yeah.
Yeah, Hi, good morning, Greg So just to go back.
We had quite a few movements this year, both up and down for you remember back at the end of the first quarter.
Had taken down and number of the earn outs because when we were looking at the potential projections based upon what we are all staring down at the end of March on the economy, and said well, we're clearly not going to make those numbers and so we reduced those then we get to the end of the second quarter and the outlook looks.
<unk> are different.
And then by the third quarter it looks different again and it took them all back up and so you are going to see unusual swings on a full year.
Actually we didn't really have a lot of movement and you can see around and that's part of this.
Unknown about this economies because what we have to be able to do is.
Corporate debt.
Best information that we have at the time of doing the calculations as to what we think is going to occur over the remaining earn out period.
And that's what we tried to do this year, let's say if you go back and you look over time, our actual adjustments on a full year basis are actually pretty minimal.
Considering the size of the earn outs that we have as well as the purchase price. So we think overall, we do a pretty good job. This year is probably a little bit of a different one just because of the economy that we're in right now.
Yeah.
It can you just you know on the as a follow up to the earn out can you give us some some updated perspective about how you earn outs are performing some of your other larger deals that you've closed and this appears like the Hayes acquisition for example.
We would say there.
And all performed pretty well, Greg and I guess, maybe the way to look through that is what has been the net charge or credit and back into the P&L.
And to our earlier comment, it's really not been material over the years as a percentage of the overall and so what we try to do is establish that initial earn out.
And to a level that we believe is reasonable and for everything that we know at the time of doing the transaction.
Currently we would love to see all of our.
Sellers and our new teammates completely Max out their earn outs, we would love to see that.
And the reason why is because that means that the business is performing well many of them do.
Some of them don't get all the way there.
But we're very very pleased with.
Our success rate on our acquisitions, how well they performed versus your original expectations and ultimately over the years after they become part of the team.
Great got it.
And the comments on the wholesale you've called out for personal lines business having headwinds.
Trying to understand exactly.
What were the headwinds and the personal lines business.
Considering that.
Seems like many of the personal lines companies have done at least from the auto side and done pretty well.
Oh, yeah, yeah. So some of them have done well and certain areas and a lot of them are taking gas and what I mean by that is if you write business and California.
They've been burning for the last three years as you know.
And if you are and some other coastal areas. There are some losses that occurred Greg as you know here and our fine state.
One and two and three years ago that are developing further developing with the involvement of public adjusters and things like that.
I would tell you that.
Particularly in certain segments of the personal lines market.
And if there had been tough and so that's the area that typically would come to the E&S market and then the E&S carriers.
Experience it could be and our book or it could be and the overall experience leads them to potentially pull back and certain areas or the reinsurance and costs have gone up or both.
This is not something that is unique to brown in brown <unk> Brown in brown wholesale and kind of unique and industry across the board.
Got it and and then the final question or two questions are around the balance sheet.
And so I looked at the cash and cash equivalents at year end.
Portable and <unk>.
Substantial increase.
Compared to where you were at year end 2019.
And that that would clearly.
Beg the question around capital allocation, certainly seems to be holding for cash at this point and they need. So you know at this point and time is this ASR share repurchase on the table and then embedded and the balance sheet.
And I did notice that there was a nice jump up and accounts payable I assume that flow through and helped your cash flow, but maybe you can walk us what's going on and with those two items and your view on capital management and that's why.
Last question.
Okay perfect. Thank you.
Cash flow so Greg if we go back to our earlier comments, the 700 million dollar issuance overtime and have your bonds in September that was the that was the primary driver of the cash growing up and.
And as we've talked about during the previous call. The reason why we access the market back at that point is we thought it was very very opportune time to go get very low cost of capital.
As an organization and and as you know well.
And we needed that expensive when you don't generally isn't and we thought we were just in a great position. Other organization. The markets were extremely extremely receptive for us to issue bonds.
Just a little over two and a half or 2.25%. So we're very very pleased with that.
It doesn't mean that and.
Issued debt because we've got big pending acquisition and so we're going to do a big buyback.
And as an organization is not at all.
It's there when you talk about the fact that.
With that capital access what will generate and feel really good about how we can invest and of our business. So we may have some negative carry on interest, but we think that's definitely was debt potential slight negative carry to have the access to that capital that's out there.
And so that's just a thought on that from the other piece on the cash and cash equivalents is let's keep in mind that not all of that is brown in brown cash so historically.
It's generally been about a 50 50 split between our money and the fiduciary things rolling through there.
That is much more weighted towards brown in brown at the at the end of the year.
The other I'll, let me ask Andy Andy.
And can you just I just want to I don't want and I can't pivot and just I thought the money that wasn't yours.
Showed up and the restricted cash and investment cash.
And not in the cash and cash equivalent and category.
Yes, so it shows up in two places Greg.
States or carriers debt required that we need to put custer.
Customer funds and specific accounts.
And that money that sits inside of the restricted cash and investments.
And those states that do not require it or carriers that just sits within brown in brown cash and cash equivalents.
And I just one follow up is there a minimum sort of threshold. When you think about cash and cash equivalents that you want the company to have.
And in any given year basis.
So we don't have significant working capital requirements and savvy organization grid.
But we normally say keeping and a 100 couple hundred million dollars of real Brown in Brown cash is.
Is sufficient for the organization based upon how much we deliver on a quarterly basis and.
And we're looking at cash flow projections every month every quarter for the business. We know what capital allocations that are out there. So we can work our way through all those actually pretty easily and then if we ever have a situation, where we need capital and a quarter. That's why we have a revolver.
So that we can draw and that we'd rather and the past and that we can pay it back down.
But we're very very in tune with our cash.
And then the accounts payable and questions. So thank you yeah the accounts payable.
That's the shift in.
And from if you look down on all.
Other liabilities you can see that they actually went up but one of the items, we've been and where we've got some.
And earn outs that are coming due and the next 12 months, that's what shifted up and new accounts payable.
Got it right so and thank you for the answers not age other source of working capital and liquidity.
So they're getting their day.
It is not a source of working capital your question Greg.
It would get from movement, which would otherwise okay.
Perfect. Thank you.
And then Holly why don't we were at nine and I didn't want to we will take one more question today and then if it.
Anybody else has other follow ups. They can and we can always took place after the close.
Certainly well now take our last question from Mark Hughes from Truest. Please go ahead. Your line is open.
Yes, and good morning, just one quick one for power how much do you think the market may have changed permanently in terms of the way insurance is sold to pick up and go back to.
The older methods the sales spending on peony or is this going to be more durable and if so what impact on the margin perhaps.
Right and good morning, Marc and I think that's a really interesting question and I think it will be dictated.
Significantly by our customers.
Which is you know, we will see that and how that works and the future here's the here's the way I describe it if you have a larger customer as an example, and you typically had three people that went to see that customer and they go to see that customer twice a year and then.
Interaction throughout the year the ARIA that I'd say is due to three people go back and 'twenty, one or there's one person go back and two or three or even for people join and via video conference. So we leverage the collective capabilities of everybody.
I tend to think towards the latter and instead of the former but that's not my decision. It's ultimately the customers decision and that's number one number two I think that buying on the internet and so that's what I call out where you see them on the video screen and all that other stuff.
And that that might work for like one year.
But particularly in a rising rate environment customers need to see you because people buy from people, they like and they trust and.
And at the end of the day, you don't get the full impact on a video screen.
That's number two now interestingly enough that would lead me into the third point.
Which is more about acquisitions and.
So I want to make sure that everybody on the call knows that we meet with people.
To determine if their culture and our cultures fit so.
So we're not buying businesses on the internet.
That means we are not buying businesses from people that we have never met except over a video conference.
So I think all the video conferencing stuff is great.
But I'm tired of some of it because I think if you Miss so much so having said that as it relates to the expenses.
Remember I know, what you're trying to do and some of the other larger public brokers are talking about amounts that theyre going to save and permanently save and capture and I don't know what they were doing before but we already know that we were efficient before.
I think that we're focused on how do we retain the business that we have and quite honestly right and a bunch from new business.
So.
That may mean that we do some things a little differently in terms of solicitation or prospecting for pre qualifying using technology, which in turn makes us a little more efficient.
In closing.
That's yet to be determined but I don't want to give you the impression that the margins are going to go dramatically one way or the other because one of our customers only need to see one of US twice a year as opposed to three of US I think it's too early to tell.
I would just say this our teammates are anxious to be able to go back and see their customers.
They want to see them and customers want to see us.
Did you have another question Mark.
That's very helpful. Thank you I appreciate it.
Alright. Thank you all very much have a wonderful day and we look forward to talking to you after the first quarter Goodbye and thank you.
Ladies and gentlemen, this concludes today's call. Thank you for your participation you may now disconnect.
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