Q3 2021 Brown & Brown Inc Earnings Call

October 26, 2021

Good morning, and welcome to the Brown in Brown, Inc. Third 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 before were 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 third quarter and are intended to fall within the safe Harbor provisions of 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 companys determination as it finalizes its finance.

Our results for the third kosher and gosh 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 discussions 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 further 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, and the Investor presentation for this call on the company's website at Www PB insurance dotcom.

By clicking on the Investor Relations and then calendar of events.

With that said I would now like to turn the call over to Powell Brown, President and Chief Executive Officer, you may begin.

Thank you Cecilia good morning, everyone and thank you for joining us for our third quarter 2021 earnings call.

Q3 was another very good quarter for Brown <unk> Brown. This was a result of our nearly 12000 teammates delivering creative risk management solutions for our customers.

We delivered strong top line growth driven by a combination by the combination of robust new business, good retention rate increases and some expansion of exposure units.

At the same time, our team continued to drive profitable growth, resulting in impressive margin improvement adjusted earnings per share expansion.

We're also very proud that last week, our board of directors authorized an increase of 10, 8% in our quarterly dividend note. We've now increased our dividend for the 28th year in a row now lets transition to the results for the quarter I'm on slide three.

We delivered $770 million of revenue growing 14, 3% in total and eight 5% organically I'll get into more detail in a few minutes about the performance of our segments. Our EBITDA margin grew by 280 basis points to 35, 6% versus the third quarter of 2020.

Our net income per share for the third quarter was 52 on an as reported basis and 58 cents. Excluding the change in estimated acquisition earn out payables during.

During the quarter, we completed another seven acquisitions and we'd like to extend a warm welcome to all of our new teammates that joined during the quarter.

In summary, we're really pleased with our strong performance for the third quarter and the first nine months.

As the year to date results are the best in our history.

10.8% internal growth year to date.

Later in the presentation, Andy will discuss our financial results in more detail I'm now on slide four we have customers that have done well throughout the pandemic and others that are struggling to fully reopen mainly due to the inability to hire employees. We're seeing this challenge in a number of industries and geographies and as a consequence.

Restricting how fast companies can become fully operational in addition to shortages of workers supply chain issues and inflation are putting pressure on costs.

From a placement standpoint, the themes are pretty consistent customers with good loss experience are getting the best rates and coverage, while those with tough loss experience are seeing material rate increases or reductions in available limits or both.

As a result customers continue.

To consider program modifications to manage their premium increases.

Rate increases remain relatively consistent with prior quarters admitted market rates continue to be up 3% to 8% across most lines. The outliers of workers' compensation rates, which are down 1% to 3% and commercial auto rates, which were up 5% to 10%.

From an E&S perspective, most rates were up 10% to 20% with some outliers coastal property, both wind and quake or up 10% to 30% with this being a slightly broader range than we saw in the previous quarter.

Professional liability for most accounts remained very challenging with rates up 10 to 15 plus percent.

Cyber rates in some instances could increase dramatically depending on the security in place with the customer security protocols that were viewed as nice to have in the past are now viewed as a minimum expectations to obtain coverage.

Also excess umbrella coverage remains very difficult to place.

Professional liability cyber and umbrella, we're seeing carriers reduce limits, while seeking significant rate increases.

Florida, and California placements in E&S for personal lines remained the most challenging due to losses or aggregate concentrations. We expect the appetite for personal lines in cat areas to continue to be constrained in 2022, which will likely put pressure on state sponsored programs and the cost of it.

<unk> for the consumer from an M&A perspective, we were successful in closing seven transactions during the quarter with annual revenues of approximately $21 million. We've closed a total of 11 deals year to date with annual revenues of $65 million of already announced a couple of additional acquisitions in October our pipeline remains full.

All in we feel good about our level of activity and engagement with prospective sellers on slide number five lets discuss the performance of our four segments retail delivered great results with organic revenue growth of eight 3% for the third quarter there.

The performance was driven by growth from all lines of business through a combination of strong new business. Good retention rate increases and exposure unit expansion, we're leveraging our broad capabilities that benefit our customers and prospects.

National programs delivered another outstanding quarter growing 13, 2% organically our growth was driven by the strong performance from most programs due to new business, good retention and rate increases.

The wholesale brokerage segment delivered five 1% organic growth with commercial brokerage and binding performing well driven by new business and continued rate increases for most lines of coverage.

Personal lines in coastal states continues to be a headwind as I mentioned earlier.

The services segment delivered organic revenue growth of half a percent the performance for the quarter was driven by claims processing revenue associated with recent weather events, which was substantially offset by external factors continuing to impact our advocacy businesses.

Overall was a great quarter across the board now, let me turn it over to Andy to discuss our farm financial performance in more detail great. Thank you Pat good morning, everybody.

Over on slide number six like previous quarters, we will discuss our GAAP results and certain non-GAAP financial highlights for.

For the third quarter, we delivered total revenue growth of $96 3 million or 14, 3% and organic revenue growth of eight 5%.

Income before income taxes, and EBITDAX, both increased by approximately 24%.

EBITDA margins expanded 280 basis points, driven by strong organic revenue growth and managing our expenses.

Net income increased by $12 4 million or nine 3% and our diluted net income per share increased by 10, 6%.

52.

The effective tax rate increased to 25, 5% for the third quarter of this year as compared to 15, 5% in the third quarter of last year the tax rate for the current quarter is in line with previous guidance, while the prior year was driven by the tax benefit associated with the vesting of restricted stock Awards.

We continue to anticipate our full year effective tax rate for 2021 will be in the 23% to 24% range.

Our weighted average number of shares increased slightly compared to the prior year and our dividends per share increased to $9 <unk>.

Or nine 4% compared to the third quarter 2020.

We're over on slide number seven.

This slide presents our results after removing the change in estimated acquisition earn out payables for both years, which we believe presents a more meaningful year over year comparison.

The change in estimated acquisition earn out payables was a charge of $23 1 million in the third quarter of this year compared to $15 3 million for the same period last year.

Excluding these noncash items.

Come before income taxes on an adjusted basis.

Increased by 26, 4%.

Our net income on an adjusted basis increased by $16 7 million or 11, 4% and our adjusted diluted net income per share was 58.

Increasing 11, 5%.

The lower growth of earnings per share and net income for the quarter as compared to the growth of income before income taxes was driven by the change in the effective tax rate overall, it was a very strong quarter on the top and bottom line.

We're going to move over to slide number eight this slide presents the key components of our revenue performance for the quarter, our total commissions and fees increased by 14, 6% and our contingent commissions in GSC increased by 27, 1% as we qualify for certain additional contingents in GSC.

This year orgs.

Organic revenue, which excludes the net impact of M&A activity and changes in foreign exchange rates increased by eight 5%.

Over to slide number nine the retail segment delivered total revenue growth of 17, 8% driven by acquisition activity over the past 12 months and organic revenue growth of eight 3% with solid growth across all lines of business.

EBIT margin for the quarter increased by 180 basis points in EBIT deck grew 24, 6% due to higher organic revenue growth.

Increased contingent commissions in GSC and managing our expenses, even with slightly higher variable cost.

The growth in income before income tax as compared to EBITDAX for all segments is impacted by changes in intercompany interest.

Amortization depreciation and estimated acquisition earn out payables.

Over to slide number 10, our national programs segment increased total revenue by 13, 7% and organic revenue by 13, 2%.

In conjunction with the Onboarding of a new customer we recognized approximately $5 million.

Incremental revenue this quarter that represents timing.

We expect the incremental revenue from this customer to more than likely be recognized within the first half of 2022.

EBITDAX increased by $18 $7 million or 28, 5% with the margin improving 510 basis points as a result of strong organic revenue growth.

Managing our expenses and the positive impact of the nonrecurring write off of certain receivables that occurred in the third quarter of last year.

Over to slide number 11.

The wholesale brokerage segment delivered total revenue growth of 11, 2% driven by acquisitions in the past 12 months and organic revenue growth of five 1%.

EBITDA grew four 7%, but the growth was impacted by incremental broker compensation.

Driven by higher levels of performance.

Slightly higher variable cost and certain nonrecurring intercompany charges.

On slide Slide 12.

Our services segment increased total revenue and organic revenue by five 2% with EBITDA growing six 8% driven by continued management of our expenses.

A few comments regarding cash conversion and liquidity, we experienced another strong quarter of cash flow generation and have delivered $628 million of cash flow from operations through the first nine months of this year growing $88 million or 16% as compared to the first nine months of last year.

Our ratio of cash flow from operations as a percentage of total revenue remained strong at 27% for the first nine months of this year with the combination of our cash generation and capital availability, we are well positioned to fund continued investments in our business with that let me turn it back over to Powell for closing.

<unk> comments, thanks, Andy for a great report.

Had an outstanding first nine months of the year and believe we are well positioned to continue profitable growth as we look towards the remainder of the year and into 'twenty. Two we expect business confidence to improve in exposure units to expand the main influencers of increased comp.

<unk> and business expansion will be one the availability of employees across all industries to the resolution of supply chain constraints three inflation is it transitory or is it sustained and for the continued management of Covid.

How and when these play out over the coming quarters will influence the trajectory of the economy from an underwriting perspective, we anticipate premium increases will continue to moderate for many lines with the exception of cyber professional.

Excess and automobile.

The M&A market will continue to be very active in valuations will remain at a heightened levels as a result of many buyers with a lot of available capital we.

We feel that we're well positioned with a good pipeline to attract great companies to join the Brown <unk> Brown team, we will continue with our disciplined approach of focusing on culture and financial alignment as these have been key to our long term success of delivering shareholder value.

From an innovation standpoint, our focus is to constantly and consistently consistently deliver creative solutions for the benefit of our customers prospects and teammates.

We're making good progress and are continuing to align on common operating platforms for each division enhancing our customer facing applications to make it easier to do business with Brown, <unk> Brown and leveraging our data to the benefit of our customers.

In summary, the results were outstanding for the third quarter and the first nine months of the year and we are uniquely positioned to succeed in this ever changing marketplace.

With that let me turn it back over to Cecilia for the Q&A session.

<unk>.

Thank you if you wish to ask a question at this time. Please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off July youre sticking out of retail equipment again. Please press star one to ask a question. We will now take our first question from Greg Peters from Raymond James. Please go ahead.

Good morning team brought in Brown.

Good morning.

<unk>.

I guess.

Paul and Andy you talked about.

The outlook for.

The economy, principally and obviously that and pricing, which which will lead to.

How the organic.

So solid over the course of the next year or two and I guess the biggest one of the bigger issues that we get questions about is just.

What should we be thinking about organic next year and I know you don't project or comment on organic so when you talk about the supply chain constraints and then at the same time, you talked about improved business confidence, it's kind of it seems like they're moving in opposite directions. So.

Any other guidepost you can give us for organic as we think about next year would be helpful.

Yes, Greg.

First of all thanks for the comments as you know, we don't give organic guidance and.

It is interesting because you what youre referencing is true there is a little bit of kind of.

Yeah.

Differences of opinions and things that are occurring out there in the economy, where you could have.

Let's just take construction is off the hook in many parts of the country.

And yet in those same parts of the country, we have customers that are in the.

Restaurant business that can't hire enough servers.

And so.

I'm, sorry, we're not going to be able to give you an answer to your question specifically.

But I can tell you. It is interesting because most of the people. We talk to you have a pretty positive outlook on the future. It's just that their cost of goods sold.

Or services sold or whatever is going up and they don't know to how much. So it is conceivable they will sell more of their product whatever that is but have a slightly lower margin next year.

Right.

That debt.

As the.

The effects of inflation.

I guess.

In conjunction with your strong organic revenue results I guess.

One of the other areas it would be.

For you.

Compensation.

If you look at the margin improvement substantial margin improvement and Theres, a lot to unpack, there, whether its <unk> or lower comp.

<unk>.

It seems like you might have some pressure as we look forward just because of the org.

Organic revenue results, producing and the possibility of higher <unk>. So maybe you can cover that as well.

Sure. So so let's talk about first of all.

We are in a very competitive environment for talent and we have been so this is not new thats number one number two.

As you know we're a pay for performance company and we think we have great teammates and we want to do everything to retain the teammates that are currently on the team and then we want to.

Optimistically and Opportunistically acquire new talent to enhance growth opportunities in segments of our business and so I would I would say that we will constantly and consistently whether it's now or three years ago or three years from now.

Are evaluating how we compensate our teammates how we reward people what that means in terms of long term alignment with what we're trying to build and I think the other thing that people.

Some times.

<unk>.

Confuse the issue is.

It is not linear hiring necessarily and so it's not like you can say well, we're going to hire three people and one person retired we're going to hire three people. It's not like that it's one of these things where we want the best athletes on the field. So it's conceivable that next year, we hire a lot more.

People in certain segments of our business either to service, our customers or to produce new business or some combination thereof. So I look at it as our investment in salary and related is not yet increase in cost on existing teammates, it's actually building in and compensating for.

For new hires that are not in our current budget that are so talented that we can't.

Afford not to hire them.

Hey, Greg Andy here.

Hey, Greg just a couple of things I think on the question about.

TNT.

There are at least thinking about it in the right direction I think we've tried to be really consistent on this topic, which is we don't know exactly where the new levels of spend will end up for <unk>.

They will realistically go up over time don't know if they'll get all the way back to where they were probably pre COVID-19.

Potentially we'll see what that looks like.

But as you saw that we did last year and what we've done. This year is we're trying to focus the best we can on how do we deliver profitable growth that will move up and down over time based upon how our cost move back and forth.

Inside of the organization, but.

We probably at least manage is everybody's expectation, we've had a great 2021 already <unk>.

The likelihood of that level of further expansion next year could be challenging with some of that.

Items that you mentioned.

Great just a point of clarification around hiring because I know one of your competitors was out talking and promoting all of the new hiring success they've had.

Paul can you talk about your recruiting program and maybe a stat give us a status update on your retention versus new hires.

Sure.

One of the things that.

I'm always interested in us.

The big print give us in the small print taken the way and so when somebody comes out and says we've hired X. Many people I don't know if they counter that by saying how many people retired or did they have any turnover affiliated with that I don't I don't know, but what I would say relative to US is as you know.

We're actively recruiting in all cycles of the business.

And our retention today is at our historic levels that does not mean that we don't have people trying to call our people and <unk>.

Trying to spirit them away, but our retention levels are at a historic levels, that's number one and number two.

Our hiring I think is good we're not going to give you a number like that other firm because thats not the way we operate.

I'd just tell you that we feel really good about how we bring people into the organization, how we continue to train and enhance our capabilities to deliver for our customers.

And how we launch people taking on more responsibility whether it be in a leadership role in an existing office or in a different office.

So.

I think of this as it is.

A busy time in terms of talent any.

For any business anybody and we're no different but I feel really good about where we are in the recruiting process the development process and the retention process.

Got it thank you for your answers.

Thanks, Greg Thank you Greg.

We will now take our next question from Mike <unk> from Wolfe Research. Please go ahead.

Hey, good morning, everybody.

Good morning, Amit.

Maybe piggybacking off some of.

The color about what has been just excellent margin improvement.

Obviously organic growth so.

If I hear the commentary.

Correctly from Andy It sounds like.

Not not to expect you're kind of alluding to tougher comps, but it sounds like you are saying you can maybe maintain.

The current margin base. When you said kind of not to expect that this level improvement next year. So just want to make sure.

Directionally thinking about it correctly, there werent some kind of maybe some onetime items, we should be or just tougher comps, we should be thinking about that.

Moving the margins around a little bit within our models.

Sure. So Mike remember first of all we don't give organic growth guidance and we don't give margin guidance, we said.

Over and over and over that we think we're amid the thing Amir.

Mid single digit organic growth business in a steady state economy, and our margin profile is 30% to 35%.

Having said that we're going to I'm going to reiterate what Andy said, which is we're going to invest in the business as we see fit to grow and.

Service, our existing customer base and to write a lot of new business going forward.

So having said that we don't believe one quarter is a trend that's important to note we had a very good quarter.

And we feel really good about our year to date organic growth and our margin, but again once again.

We're not going to be able to say anything to anybody here today that is going to be able to get you to lock in on a number for your margin profile next year, because we can't tell you nor would we but we can't tell you how many people we're going to hire and how many.

Opportunities were going to have to build out.

Capabilities or enhance current capabilities on our team so I'm not trying to be frustrating to you Mike but the answer is we're kind of consistent I know that boring, but were consistent and.

We continue to do what we say and say what we do.

Not at all for borrowing.

Good in this business a lot of times.

Well I guess, just as a follow up to that question a couple of peers I guess as the pandemic.

As played out have kind of laid out some specific kind of efficiency measures.

That they think will persist.

Beyond.

The pandemic that kind of lead to greater efficiencies.

As brown.

Undergoing any of those kind of exercises that could be kind of permeating down and helping out the income statement.

Yes so.

Let me, let me address that.

We are not.

Doing something that says, we're going to eliminate 40% or 30% of our real.

Our real estate footprint and all that we're not doing that you got to understand that we were very efficient before.

So.

I said earlier, we're kind of boring and we're kind of consistent well we are boring and consistent the answer is we will continue to evaluate our real estate in the manner that we've always evaluated it based upon the needs of specific offices and in doing so.

Is there a potential scenario, where there could be some reduction in some cases and expansion in other places the answer is absolutely.

But we believe that the.

The work or return to the office environment is going to continue to modify in the future that doesn't mean that we can't have work from anywhere, which I think were at work from anywhere company, but I don't want to give you. There is nothing that I'm aware of and I'm looking at Andy now to see.

See that there is I'm not aware of any permanent changes the only thing that and we don't have visibility intuitive how TNA responds back.

Yes, Mike I guess.

I think if you go back to our comments last year and there were there were a lot of questions that everybody had of us.

Why.

Why we werent, putting mandates in place in order to drive all the cost out.

And we said at that stage, because we've got complete confidence in all of our leaders that they will know how to navigate through the process.

That's part of the reason why we have industry, leading margins that we've had for decades as an organization. So we run a very profitable business, we're very proud of that.

So we don't have a lot of just excess cost just sitting around that we just cut out one day, just because we think we can or not we're constantly looking at where we invest in our business, where we need to put our chips, where do we need to pull them back et cetera in order to make sure that we invest for the long term, but also deliver good shareholder.

I think also Mike it's important and I know you know this that the industry leading margins also go hand in hand with industry, leading cash conversion.

So that's that's real in terms of our ability to invest.

Dollars that we earn back into our business that that's equally as important and very we're really proud of that.

That's helpful. If I can sneak one last one real quick.

I noticed the press release about unifying.

In the retail segment the brand name Brown <unk> Brown.

Among all the I think the branches any significance to that or any thought process behind that decision.

Yes no.

We've had the opportunity to acquire a number of really talented business teams and businesses over the last five to 10 years and unifying goes to in terms of going to market.

It eliminates any potential.

Confusion that a competitor could try to spin on us when we're talking to them about our large account medium accounts small account capabilities. So don't read too much into it we're really pleased and we're all round and round anyway.

Just call on everybody in retail Brown in Brown going forward, So don't don't read too much into it.

Thank you.

We will now take our next question from Aleksey Greenspan from Wells Fargo. Please go ahead.

Hi, Thanks.

Good morning, My first question on retail.

Hey, guys its John strong relative out this year, obviously slowed a little bit in the third quarter, but I think a bunch of that was just because of the benefits business is very half year one heavy.

And that performed really well can you give us a sense of the components of retail benefit.

Your traditional brokerage business and what you saw it in organic growth in the third quarter relative to the first half of the year.

Okay. So let me.

Unpack that lease so number one.

We were pleased with the eight 3% organic growth in retail, which we call out we don't give growth.

By line of business as you know.

And.

As it relates to benefits what we have said is our benefits are about a third of our retail business.

So I think that answered what you said, but did I did I hit what you wanted.

Yes, I was just curious if like which it sounds like youre not going to provide the detail, which makes sense, but to tell benefited.

The rest of the business in the third quarter relative to the growth that you saw us start the year, but it sounds like you are just not in that level and you know my answer at least it's good.

There was good in the first half and it's good now.

So we're pleased but we're not going to disclose that.

Like I said that.

Part of the deal.

But we go back to.

Our prepared comments one of the things we said in there is that all lines of business grew during the quarter.

And we're pleased with the performance all the way across.

And then in terms of wholesale.

You guys thought.

Down in growth in that business that.

But you did point to personal lines being a headwind so is that really what drove this.

Within wholesale can you just give us a sense of.

Without giving us numbers within the businesses.

The core trend going on wholesale business.

So let me let me make one observation I think is important.

As I said earlier, we don't believe one quarter. It makes a trend so remember the business year to date is growing 8%.

And we're very pleased with how wholesale is doing year to date number one number two.

And I know you know this but remember our business is slightly more ending authority than brokerage and some of the other firms that you would have transparency into our usually the reverse.

So they're more brokerage and binding and then on top of that.

As I said, we have a component of that binding authority business, which is personal lines, which is being dramatically impacted in California, and Florida and California. As you can tell it's not just losses, but it's actually people trying.

To get off of policies and the insurance commissioner not letting them in certain areas and in Florida. It's a.

People being nonrenewed in some instances by standard markets and having to flow into citizens.

What you've got is you've got to environments, where.

It's.

I don't even know if I'd say transitory because thats not the right term.

There are two personal lines markets that are huge that are in flux.

And so that has created a headwind for us.

So that's what I can tell you about it but that that is what I would pretty much.

Put that on.

That's helpful and then one last one.

Andy you guys had spoken with the noncash stock based comp I think the expectation was flat for the year that trended up this quarter, probably reflected the strong growth that you guys have seen this year, so I'm assuming.

We'll probably end up seeing that up further here just given that this one quarter roster any kind of any commentary there about the noncash stock based comp.

Yes.

That's correct, we're up about 3 million year to date versus the prior year and that is all based upon incremental performance.

That we've been seeing now both topline as well as on earnings per share.

So we'd expect that to probably continue into the back end of the year lease.

Okay perfect. Thanks for the color.

Thanks Elyse.

We will now take our next question from Mark Hughes from Trust. Please go ahead.

We're seeing a lot of.

Your comment about the mall.

<unk> margins I think you said.

Hey, Mark you might have the area you might be on a speaker phone or something can you pick up because youre breaking up.

Okay, how about that.

Our better is better.

How about the sorry, Mark can you hear me.

Yes, Yes go ahead now.

Okay. Yes go ahead.

Okay very good.

Andy.

And talking about margin just to clarify I think you said you don't expect the magnitude of the margin improvement that you've seen this year to happen next year that doesn't mean, you won't get margin improvement or there isn't the potential for margin improvement next year is that a fair reading.

Yes, there is.

Probably just as much likelihood that we would have some upside as we would have some downside next year.

In the business just based upon we're investing we're trying to manage everybody's expectations.

Yes, exactly okay, and then when we think about inflation.

Is there a reason not to think that that'll be a tailwind if you've got customers with higher revenue higher asset value.

Carriers are seeing maybe some loss inflation wouldn't that be a net benefit.

Fit for you.

Maybe offset by some of your customers.

Seeing some impact from.

On their businesses from inflation should we think about it as a net positive.

Well I think it I think it depends on the industry.

And that's I'm speculating when I say that a little bit because as you know.

Inflation is a function of two things, it's a function of money supply, which there's a lot of money in the consumers' hands.

And number two velocity of that money and there are consumers that are spending a lot of that money in certain areas. So.

Many customers cases, if we just stay with our customers for a moment there revenues may go up but their cost of goods sold or cost of services sold may go up more quickly.

So.

It could have a potential positive impact in the short term, but then there are other businesses that could be negatively impacted so I think.

My position right now is more of a neutral.

Andy how would you respond to that.

Mark the other piece to that is if you looked at it in isolation, that's probably a very fair comment. The one thing that is a variable that happens.

Is how does the buyer of insurance modify how they think about their total cost of insurance because if their costs are going up et cetera, and they're trying to manage your way through they may evaluate their deductibles or aggregates et cetera inside of there. So.

There's just there's always a lot of moving factors just to kind of keep in mind is just not one that is kind of linear that drives the organic.

Okay and then the final question, Andy You mentioned National programs you got.

$5 million in incremental revenue from timing and then I think you suggested there would be more incremental revenue from that program in the first half.

Say anything about <unk> and can you say anything about the magnitude of the.

Incremental revenue in the first half.

So simply put.

All that apart a little bit so in the case of the $5 million that was a new customer that we onboard and it just we on boarded a quicker than anticipated we would've thought it would've been over the third and fourth quarter.

And what normally happens on some of those accounts is youre going to and if there's a kind of a lag when you transition from a previous provider out there. That's what represents a $5 million that will show up over the first half of next year.

And then we haven't changed any of our commentary on the fourth quarter versus what we said last quarter. If you recall, we said there would be potentially $4 million to $6 million of revenue moving from the third quarter the fourth quarter.

We still stand behind that comment.

Thank you very much.

You bet. Thank you.

Our next question comes from Meyer Shields from Kb Japanese. Please go ahead.

Great. Thanks, if I can just.

Tag onto Mark's question is that $4 million to $6 million moving to the fourth quarter that also onetime it will correct next year or is that now in the fourth quarter now with new home.

Yes, that'll be the new home for may or so.

Almost a similar to the $5 million that's kind of win.

When we onboard accounts, we'll see that will pick up incremental revenue and then when it comes around to renewal cycle ends up in the appropriate period.

No and keep on the $4 6 million.

Just keep in mind on that one of the ways that we were suggesting to everybody is once you had your estimate for the third and fourth quarter than you probably wanted to move $4 million to $6 million.

You don't want to do now is now take $4 million to $6 million out of the third quarter and move into the fourth so that would be incorrect.

Alright, Thats already moved out of the third quarter, if I understand correctly.

Exactly so.

You guys all have those in your models anyway.

Do it again youll double count.

Got it okay.

Can you give us an update in terms of when the advocacy businesses within services.

<unk> life.

Okay.

We wish we could tell you that but if you could give us some insight about whats going on in Washington, We could answer that and I'm not trying to be flippant, there I'm, just saying that.

The processing of that type of business is greatly impacted as you know by.

The government working at full steam or whatever you want to call that and that Hasnt really been going on for a while so you have backlog and we don't we don't have any answer to not like we can say six months from now we don't know yet so it's going to kind of plot along yes.

I mean, the only thing we know on those there is it does work itself out over time. If you just go back historically and look at that business. It goes through these cycles.

We just don't know how long this cycle is going to last.

Okay.

Sure.

Final question, if I can.

You guys seeing any increase in compensation expenses for non client facing folks.

We're seeing.

As I said earlier.

It's a competitive.

Environment, all the time.

So in our business.

We think of that at all teammates.

No we.

We wouldnt isolate it to one group of teammates to all teammates.

Okay perfect.

Okay.

Yes to <unk> comment earlier.

Because we are in a competitive environment salaries went up in 2019 versus 2018. They went up in 'twenty versus <unk>. So we see that in the marketplace all the time.

Right.

Because we hear more rumblings of I don't know called the great resignation or things that seem unusual relative to past years, instead of maybe the normal upward drift in.

And compensation.

So let's answer that that is absolutely happening across lots of businesses, but what I've said is that our retention ratio is in line with what it has been historically so.

I think that the.

The magnitude of.

The last 18 months has created lots of changes in many people's minds and some people are deciding to leave industries they've been in for long periods of time or make work life balance changes and things like that and so.

Having said that.

We see that affecting our customers all over the place. So it's real we're going to we're here.

To tell you it's real.

Okay. Thank you very much that's very helpful.

Thanks.

We will now take our next question from Michael Phillips from Morgan Stanley. Please go ahead.

Thanks, Good morning, everybody.

Paul in your opening comments, you talked about cost pressures for clients and they went through a whole host of reasons why there is pressures there one of which obviously the insurance I don't know the extent to which clients pay attention to the profitability levels of insurance companies are not no idea.

Maybe they do.

I guess to what extent is that conversation coming into play more than ever before.

Be impacting.

Kind of how much they're willing to accept rate levels from from carriers.

So generally speaking.

Clients are not focused on profitability of insurance companies.

So that's the first that's the first thing the second thing.

That is important.

Is.

Depending on the conversation there are sometimes discussions around.

Loss cost increases where your losses are going up 567%, meaning the cost of the same loss year over year would be higher by let's say, 7%.

And what's what's happening now if you listen to the carriers as they are talking about these very significant verdicts, sometimes it would seem that would be outside the normal.

I don't like the term, but it's a nuclear verdict or something like that and you start to see some of these.

Where the settlement might be X and then all of a sudden it's 15 X you would expect and so the short answer to the question.

Is the customer is not generally focused on or dialed into the performance of the insurance company, what she or he is focused on is one controlling their cost.

Two making sure they have the best Cup not not in this order.

Coverage.

Is the best coverage they can get.

And three to the extent possible flexibility and options.

Flexibility and options might be.

Program design.

So when you put all those together that's that kind of the course of the conversation.

And certain segments of the marketplace. As you May know there are limited options and so therefore, there might be more pricing pressure there than it would be on something that every insurance company really wants to write.

So.

Therein lies the conundrum, when we talk with our customers.

But the key to that is making sure there is to the extent possible. There is no real surprises.

Talking to our customers early and often about what we see in the marketplace.

And how we come up with ideas to manage the process and their cost and coverage going forward.

Okay. Thanks, that's helpful.

Totally separate question.

Another quarter of.

Pretty severe weather again, and again and again and includes.

Includes lots of flood losses, which are even occurring today, so I guess.

And your service segment are you seeing any change in.

I guess the competitive environment, there for others that want to kind of do what you do in that space given the kind of the onslaught of continuation of frequency of flooding.

The answer to the question is there are lots of people that are trying different things in the flood space as a broad statement I'm not aware of anything that is.

So new and different that it earth shattering, however, youre starting to hear more and more Michael about.

The interest of people to write more private flood and that's great, but the private flood they don't want to really right in the worst flood zones.

So it's sort of like writing wind on a AAA construction building.

Where you have a low low probability of loss.

Lots of carriers would like that but sometimes they aren't willing to price it that way what what we seeing is we're not seeing or we're not I'm not aware of a program that can model flood with any great statistical relevance and therein lies the challenge so you.

Know that we're going to.

Our risk rating 2.0 with IP you have discussions around looking at flood maps and are they appropriate you have all kinds of things going on and Theres a lot of discussion around hey, this is a growth opportunity and yet.

The private flood market is not writing an enormous amount of the segments that <unk> serves.

No.

Long winded answer, but I'm not aware of anything thats dramatically impacting the industry, but we're always trying to one be creative and two plugged in to what's going on in Washington, as it impacts our business and our ability to service a broader customer base.

And keep in mind in our in our services Division.

We do substantially no adjudication of flood claims if you recall, we sold that business a number of years ago, we still work with.

With that business that's out there, but if we're going to see claim activity, it's normally going to show up in our national programs Division.

Okay perfect. Thanks, guys for the comments.

Sure. Thank you.

We will now take our next question from Greg Peters from Raymond James. Please go ahead.

Thank you for allowing me to ask a follow up.

In your comments and I know you've talked about the M&A market.

Can you can you give us an update.

On the multiples being paid.

And your appetite for.

Expanding the broad umbrella footprint beyond North America into Europe, and other areas.

Sure so.

Greg I would tell you that I think that.

It's always a an interesting comment on a multiple of what.

People, our definition of EBITDA or EBIT DAC is different than other people and so what we might believe as a recurring expense they might try to take out and so I would just I've kind of change the way I referred to it which basically says.

Evaluations continue to be high and it's what I've said in the remarks, which is it continues to be at.

The very high end of the range and I don't see that.

Changing in the near to intermediate term that's number one.

Number two as we've talked about before.

We bought a business in January as you know of 2020 called special risk it's in Vancouver.

British Columbia, and we do business across Canada.

Wholesale operation with a bunch of great teammates and we're very pleased about that and then we also bought in the beginning of this year O'leary insurances and.

Ireland based in Cork.

Which were equally as pleased about and so if you think about those two areas.

And our business in London, those are areas, where there is a rule of law.

There is something that.

We typically do business or have done and can do business. There currently.

We're always looking for opportunities that fit culturally and makes sense financially so.

Lots of not you, Greg, but lots of an investment people think that sounds sexy.

And I don't think that international expansion is sexy I think it is.

I don't sleep on airplanes, and it's not about me, but it is hard to do that when I fly to London.

<unk> got three hours of sleep I'm going to a meeting.

So I say all of that trying to be a little tongue in cheek.

But we.

We look to partner with people that.

We think fit culturally make sense financially and where we're really.

We think that there are some opportunities, but the question ultimately will be can we make those work.

Financially as well.

Got it and the other the other area I just was looking for some additional comments on would be the free cash flow conversion.

I know Andy you've commented about that.

Your previous prepared remarks.

It seems like the free cash flow conversion rate is running at a slightly elevated rate.

<unk> to say the last five years.

Is there any reason why we should expect that conversion rate to come down or are we in a new normal type of environment in terms of what it looks like youre going to get this year.

Yes, thanks for the question Greg.

<unk>.

We've talked about this in the past, we we manage our working capital very closely and have for years Thats part of what drives our high conversion ratio.

There is the margins that we deliver as an organization those two in combination and if you look back to how our margins have moved over the last few years, that's what's pulls up in kind of at least 27% on a year to date range.

It will probably maybe move by a few points back and forth up and down a little bit but.

Wouldn't anticipate anything going down in the low twenty's or anything of that nature, where we are very very focused on making sure that we convert our revenues into cash so that ultimately we can take that cash and invest it back into our business and.

And obviously, we encourage you to evaluate that and other firms.

Because if you have an expense that is incurred.

That impacts cash.

So as I like to say if you if you look at the cash that you earn.

Not really adjusted other than noncash items like.

The change in acquisition earn out payables.

When you look at that as a comparator or to those that you have access to it might be enlightening.

We will take one more question, we're going to wrap up at the top of the hour and I had a couple of do we have any other questions.

There are no further questions over the phone at this time.

Perfect Cecilia. Thank you very much for your help and thank you all very much. We appreciate your time, we're very pleased with what's going on with the business I'll stress again, 10, 8% organic growth year to date.

We're at 11, 5% and retail 13.2 for programs, 8% in wholesale and three 6% and services. So we're very pleased with what's going on and we look forward to talking to you next quarter have a great day. Thank you.

Thank you that will conclude today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.

[music].

Your results and events or otherwise before were looking in nature.

Our results for the third kosher and 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 discussions of these and other factors affecting the companys business and prospects as well as additional information regarding forward looking statements is contained in the slide presentation posted in connection.

Investor presentation for this call on the company's website at Www BB insurance Dot com by clicking on the Investor Relations and then calendar of events.

With that said I would now like to turn the call over to Paul Powell Brown, President and Chief Executive Officer, you may begin.

Thank you Cecilia and good morning, everyone and thank you for joining us for our third quarter 2021 earnings call.

Q3 was another very good quarter for Brown <unk> Brown. This was a result of our nearly 12000 teammates delivering creative risk management solutions for our customers. We delivered strong top line growth driven by a combination by the combination of robust new business, good retention rate increases and some expansion of exposure.

At the same time, our team continued to drive profitable growth, resulting in impressive margin improvement adjusted earnings per share expansion.

14, 3% in total and eight 5% organically.

Ill get into more detail in a few minutes about the performance of our segments. Our EBITDA margin grew by 280 basis points to 35, 6% versus the third quarter of 2020.

Our net income per share for the third quarter was 52 on an as reported basis and 58 cents. Excluding the change in estimated acquisition earn out payables during.

During the quarter, we completed another seven acquisitions and we'd like to extend a warm welcome to all of our new teammates that joined during the quarter.

In summary, we're really pleased with our strong performance for the third quarter and the first nine months.

As the year to date results are the best in our history.

10.8% internal growth year to date.

Restricting how fast companies can become fully operational in addition to shortages of workers supply chain issues and inflation are putting pressure on costs.

As a result customers continue.

To consider program modifications to manage their premium increases.

Rate increases remained relatively consistent with prior quarters. The admitted market rates continue to be up 3% to 8% across most lines. The outliers of workers' compensation rates, which are down 1% to 3% and commercial auto rates, which were up 5% to 10%.

Professional liability for most accounts remained very challenging with rates up 10 to 15 plus percent.

Cyber rates in some instances could increase dramatically depending on the security in place with the customer security protocols that we reviewed it nice to have in the past are now viewed as a minimum expectations to obtain coverage.

Also excess umbrella coverage remains very difficult to place.

Professional liability cyber and umbrella, we're seeing carriers reduce limits, while seeking significant rate increases.

Florida, and California placements and E&S for personal lines remained the most challenging due to losses or aggregate concentrations. We expect the appetite for personal lines in cat areas to continue to be constrained in 2022, which will likely put pressure on state sponsored programs and the cost of <unk>.

Our wholesale brokerage segment delivered five 1% organic growth with commercial brokerage and binding performing well driven by new business and continued rate increases for most lines of coverage.

Personal lines in coastal states continues to be a headwind as I mentioned earlier.

Overall, a great quarter across the board now, let me turn it over to Andy to discuss our financial performance in more detail great. Thank you Paul good morning, everybody.

We're over on slide number six like previous quarters will discuss our GAAP results and certain non-GAAP financial highlights.

For the third quarter, we delivered total revenue growth of $96 3 million or 14, 3% and organic revenue growth of eight 5%.

Income before income taxes, and EBITDAX, both increased by approximately 24%.

EBITDA margins expanded 280 basis points, driven by strong organic revenue growth and managing our expenses.

Net income increased by $12 4 million or nine 3% and our diluted net income per share increased by 10, 6%.

To 52.

We continue to anticipate our full year effective tax rate for 2021 will be in the 23% to 24% range.

Our weighted average number of shares increased slightly compared to the prior year and our dividends per share increased to $9 <unk>.

Or nine 4% compared to the third quarter 2020.

We're over on slide number seven.

This slide presents our results after removing the change in estimated acquisition earn out payables for both years, which we believe presents a more meaningful year over year comparison.

The change in estimated acquisition earn out payables was a charge of $23 1 million in the third quarter of this year compared to $15 3 million for the same period last year.

Excluding these noncash items income before income taxes on an adjusted basis.

Increased by 26, 4%.

Our net income on an adjusted basis increased by $16 7 million or 11, 4% and our adjusted diluted net income per share was 58.

Increasing 11, 5%.

This year orgs.

Organic revenue, which excludes the net impact of M&A activity and changes in foreign exchange rates increased by eight 5%.

EBITDA margin for the quarter increased by 180 basis points in EBIT deck grew 24, 6% due to higher organic revenue growth.

Increased contingent commissions in GSC and managing our expenses, even with slightly higher variable cost.

The growth in income before income tax as compared to EBITDA for all segments is impacted by changes in intercompany interest.

Amortization depreciation and estimated acquisition earn out payables.

Over to slide number 10, our national programs segment increased total revenue by 13, 7% and organic revenue by 13, 2%.

In conjunction with the Onboarding of a new customer we recognized approximately $5 million.

Incremental revenue this quarter that represents timing.

We expect the incremental revenue from this customer to more than likely be recognized within the first half of 2022.

EBITDA increased by $18 $7 million or 28, 5% with the margin improving 510 basis points as a result of strong organic revenue growth.

Managing our expenses and the positive impact of the nonrecurring write off of certain receivables that occurred in the third quarter of last year.

Over to slide number 11, the wholesale brokerage segment delivered total revenue growth of 11, 2% driven by acquisitions in the past 12 months and organic revenue growth of five 1%.

EBITDA grew four 7%, but the growth was impacted by incremental broker compensation.

Given by higher levels of performance.

Slightly higher variable cost and certain nonrecurring intercompany charges.

On slide Slide 12.

Our services segment increased total revenue and organic revenue by half a percent with EBITDA growing six 8% driven by continued management of our expenses.

Our ratio of cash flow from operations.

Q3 2021 Brown & Brown Inc Earnings Call

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