Brown & Brown Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2023

There are 11 speakers on the call.

Operator

Good morning, and welcome to the Brown and Brown Incorporated's First Quarter Earnings Call. Today's call is being recorded. Please note that certain information discussed during this call, including information contained in the slide presentation posted in connection with this call and including answers given in response to your questions may relate to future results and events or otherwise be forward looking in nature. Such statements reflect our current views with respect to future events, including those relating to the company's anticipated financial results for the Q1 and are intended to fall within the Safe Harbor provisions of the security laws. Actual results or events in the future are subject to a number of risks And uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward looking statements made as a result of a number of factors.

Operator

Such factors include the company's determination as it finalizes its financial results for the Q1 that its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday. Other factors that the company may not have currently identified or quantified and those risks and uncertainties identified from time to time in the company's reports filed with the Securities and Exchange Commission. Additional discussion of these and other factors affecting the company's business and prospects As well as additional information regarding forward looking statements is contained in the slide presentation posted in connection with this call and in the company's filings with the Securities and Exchange Commission. We disclaim any intention or obligation to update or revise any forward looking statements whether as a result of new information, future events or otherwise. In addition, there are certain non GAAP financial measures used in this conference call.

Operator

A reconciliation of any non GAAP financial measures to the most comparable GAAP financial measure can be found in the company's earnings press release or in the investor presentation for this call on the company's website at www.bbinsurance.com By clicking on Investor Relations and then Calendar of Events. With that said, I will now turn the call over to Mr. Powell Brown, President and Chief Executive Officer, you may begin.

Speaker 1

Good morning, everybody, and welcome to our Q1 2023 earnings call. Before we get into any detail, Q1 was an outstanding quarter and we're very pleased with our results. I'll provide some high level comments around our performance for the quarter, along with some updates on the insurance market and M and A Landscape, then Andy will discuss our financial results in more detail. And lastly, I'll wrap up with some closing thoughts before we open it up to Q and A. I'm now on Slide number 4.

Speaker 1

Effective 11 years ago, our total annual revenues were $1,100,000,000 Our adjusted EBITDAC margin remained Strong for the quarter at 35.7 percent. We delivered earnings per share at $0.83 growing 7.8% over the Q1 of 2022. On the M and A front, we completed 7 acquisitions with estimated annual revenues of $11,000,000 We're very pleased to have delivered another outstanding quarter of good profitable growth. I'm on Slide 5. From an economic standpoint, most businesses continue to grow and companies are still looking to hire employees.

Speaker 1

Overall, business leaders are generally cautious about the future, while managing the impacts of inflation and higher interest rates. We would say there's not been a material change for what we heard from our customers in the Q4 of 2022. The insurance marketplace was very challenging for customers in the Q1. Across most lines of coverage, rate increases were similar to prior quarters With admitted markets up 5% to 7% and excess and surplus markets up 10% to 20%. However, there are exceptions.

Speaker 1

Workers' compensation rates continue to decline. E and S professional liability rates, primarily public company D and O, continued to moderate With rates down 10% or more and in some cases they're up slightly. The areas that remain the most challenging are E and S Property and excess liability due to losses and increased insured values. Carriers continue to elevate their coastal evaluate their coastal property portfolios. These actions result in more participants generally on a property placement.

Speaker 1

We continue to see underwriters increase insured values per square foot. Thus, customers are seeing premiums rise based on rates And higher values. As a result, buyers are feeling exhausted with the premium increases and more customers are purchasing loss limits, Increased deductibles and decreasing overall limits. Pertaining to the Florida insurance market, everyone is watching to see the impact The legal reforms late last year. Long term, we believe the changes will be positive.

Speaker 1

However, we think it will take some time to see improvement related to the legal changes. In the interim, more policies will continue to move into Citizens. Please remember, Citizens was created to be the market of last resort for residential homes, Condominiums and apartments. Right now, it's one of the most competitive and at times one of the only solutions for insureds. As it relates to the overall M and A market, the level of deals primarily from financial backers has slowed.

Speaker 1

That does not mean high quality business Don't trade at similar multiples to what we've seen over the past year, but from our perspective, we remain active and GRP had another Solid quarter of M and A transactions. We're very pleased with their success and the quality of the businesses they're adding to the Brown and Brown team. Our disciplined approach remains centered on identifying high quality companies that fit culturally and make sense financially. I'm now on Slide number 6. Our Retail segment delivered impressive organic growth of 8.8%.

Speaker 1

The growth across all lines of business was driven by strong new business, good retention and continued rate increases. In addition, our employee benefits businesses performed really well in Q1. Our program segment delivered another Quarter of double digit organic growth of nearly 34%, fueled by new business, rate increases, good retention and claims processing revenue from Hurricane Ian. This growth was driven primarily by strong performance from our lender placed business, our diverse group of wind and quake programs and our captives. Wholesale Brokerage delivered another solid quarter with organic growth of 7%, driven by good new business and retention along with continued rate increases.

Speaker 1

The rated growth for open brokerage slowed somewhat while the growth of our delegated authority business improved. Organic growth for the Services segment was 1.6% for the quarter, driven by claims processing revenue, primarily related to the winter storms. I'd like to thank our 15,000 plus teammates throughout the world for delivering these strong results. Now I'd like to turn it over to Andy

Speaker 2

Thanks, Powell, and good morning, everyone. Since Powell discussed our GAAP results earlier in the presentation, I'll review our consolidated financial results on an adjusted basis. We're over on Slide 7. As a reminder, our adjusted measures exclude the Change in estimated earn out payables, one time acquisition costs associated with our acquisition of GRP, Orchid and B2B last year And gains or losses on business divestitures. This quarter, it also excludes $11,000,000 related to resolving a business matter, Which is considered one time in nature.

Speaker 2

The charge relates to a pre acquisition event from a business we bought over 10 years ago. We believe isolating the above items gives a better reflection of the performance of the business and provides enhanced comparability. The reconciliation of these amounts, adjusted amounts to the most closely comparable GAAP amounts can be found in the appendix to this presentation. Total revenues were $1,100,000,000 for the Q1, a new record for us, growing 23.5% as compared to the prior year. Income before income taxes increased by 13.2% and EBITDA grew by 23.2%.

Speaker 2

We had good leverage across the business even with a few moving parts this quarter that included some additional one time costs That substantially offset the benefit of incremental investment income. In addition, the margins for GRP, as we mentioned before, Are more evenly weighted throughout the year versus our seasonally higher margin in the Q1 for the company. This means it negatively impacted the Q1 margin by approximately 40 basis points. As a result, GRP will benefit Our margin in future quarters. Income before income taxes grew at a slower rate than total revenues Due to the incremental interest and amortization expense associated with acquisitions we completed last year, The effective tax rate came in at 20%, which is in line with our expectations and compares to 16.8% in the Q1 of last year.

Speaker 2

The higher tax rate is due to a lower benefit from the vesting of incentive stock shares that traditionally occur in the Q1 of the year. Our diluted net income per share increased by 7.7% from last year to $0.84 Due to the changes in the liabilities and assets associated with our deferred compensation plan, salaries and related expenses As a percentage of revenue, we're negatively impacted year over year by 150 basis points. There's an offsetting benefit within other operating expenses. Lastly, our weighted average share count increased slightly and dividends paid increased About 12% both as compared to the Q1 of last year. We're on Slide number 8.

Speaker 2

The Retail segment had an outstanding quarter delivering organic growth of 8.8%. The adjusted EBITDAC margin contracted Slightly to 37% for the quarter. While the margin remains strong, it was impacted about 100 basis points by the level phasing of revenue and profit from GRP as compared to our higher Q1 margin in the United States Driven by our employee benefits business. We expect this will reverse and provide a positive impact to our margins in future quarters. We also realized some year over year headwinds associated with higher travel and related expenses, which we expect these headwinds to lessen as the year continues.

Speaker 2

We're on Slide number 9. National Programs had another very strong quarter with organic growth of 33.8% And adjusted EBITDAQ margin expansion was 610 basis points. The margin improvement was driven by leveraging our expense base along with Keep in mind that revenue for the quarter includes approximately $8,000,000 of claims processing revenue associated with Hurricane Ian. In addition, our captive facilities that we started last year are expected to deliver $30,000,000 to $35,000,000 of revenue this year. We recognized approximately $10,000,000 of revenue in the Q1 of this year as compared to approximately $1,000,000 of revenue in the Q1 of last year.

Speaker 2

The positive impact to organic growth from these captives will diminish in each subsequent quarter and will be negligible by the Q4 as we will be on a more comparative basis. While we anticipate National Programs will have a good 2023, We do expect lower organic growth in the second half of this year as compared to the second half of last year. This is due to the fact that the captives will be on a more comparative basis. We had a one time non recurring growth bonus $7,000,000 in the Q4 of last year and we realized approximately $8,000,000 of revenue associated with Hurricane Ian in the Q4 of last We'll move now to Slide number 10. Our wholesale segment delivered another good quarter with organic growth of 7% And the adjusted EBITDAQ margin contracted slightly.

Speaker 2

The driver of the margin decrease was higher salaries and related costs due to incremental hiring as well as salary inflation. We're on Slide number 11. The services segment grew by 1.6% organically for Quarter and the adjusted EBITDAQ margin decreased by 3.90 basis points. The primary drivers of the margin decrease With the volume of claims revenues for certain businesses, higher salary and related costs as well as some one time expense items. Few comments regarding cash generation and capital allocation.

Speaker 2

We generated approximately $60,000,000 Cash flow from operations in the Q1 of this year, which was impacted by higher interest and paying taxes for last that were deferred as a result of Hurricane Ian relief. We are continuing to expect another strong year of cash generation and disciplined deployment. We ended the quarter with approximately $564,000,000 of operating cash. We are planning further debt repayments during the year as we've done Following larger deployments of capital, we are very proud of our industry leading ratio of cash flow from operations to total revenues and believe we are in a strong capital position to invest in the business and help drive further growth in the future. Lastly, we want to update our full year guidance regarding margins.

Speaker 2

Based on the good results for the Q1 And what we can see over the coming quarters, we are raising our outlook and as a result, our margin should be up Slightly for the full year versus our previous guidance of flat. With that, let me turn it back over to Powell for closing comments.

Speaker 1

Thanks, Andy, for a great report. We continue to watch the impact of inflation and increases in interest rates on the economies in which we operate. As a result, we expect business leaders will continue to Cautious regarding the pace of their hiring and investing over the coming quarters. With that said, most of our customers are prospering. In the marketplace, buyers have pricing fatigue due to increases delivered over the last several years.

Speaker 1

We anticipate similar rate increases In the near to intermediate term. As a result, we're seeing buyers either decrease limits, increase deductibles or possibly opt for loss limits. In some instances, we're seeing personal lines customers paying off their mortgage and going without wind coverage in their personal policies. We continue to talk with our carrier partners about capacity, the flight to quality and diversification. Our MGAs and MGUs Have delivered good underwriting results over many years due to our disciplined approach.

Speaker 1

As a result, this positions us well to retain and or increase our capacity that will help deliver incremental organic growth from our programs. We are pleased with the performance of our recent international acquisitions of GRP Many of you have seen that we completed our first Canadian retail acquisition of Hicourt Breckles on April 1. We're located in Toronto with approximately 110 teammates and will add to our capabilities in the Canadian marketplace. We'd like to welcome all teammates that have joined us over the past few months. And lastly, we're in a strong position with a good M and A pipeline.

Speaker 1

Overall, we feel really positive about our business and how our team is executing. We're winning more new business and doing a good job of retaining our customers. Our focus is on leveraging the total capabilities of Brown and Brown for the benefit of our customers, both domestically and internationally. We're looking forward to having a good 2023 and have a lot of momentum coming out of the Q1. With that, we'll turn it back over to Mikey and open the lines for Q and A.

Operator

Thank you. Please stand by while we compile the Q and A roster. Your first question comes from the line of Weston Blumer

Speaker 3

I was hoping you could break out maybe by segment where you're expecting to see margin expansion. I'm more focused On retail there, where in the 1Q the margin was still down ex GRP. So if you could maybe break out the pluses and minuses there, that would be great.

Speaker 2

Yes. Good morning, Wes. Andy here. So we don't provide that level of granularity on outlook by the segments and everything, but just a But just a couple of things maybe to take into consideration. Our comments earlier is we had about 100 basis points of headwinds For GRP in retail for the quarter, that will reverse itself over the coming quarters and will be a benefit.

Speaker 2

And as we mentioned, the costs around travel and entertainment, some of the inflation inside of that will continue to lessen As the year comes along and we're on a more comparative basis, so hopefully it kind of gives you an idea of what it should look like.

Speaker 3

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

Speaker 2

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

Speaker 3

And then last one, I know you haven't guided to FX in the past, but is there an FX headwind that's kind of built into that margin guide as well for maybe the Q2?

Speaker 2

No, sir.

Speaker 3

Great. Thank you for taking the questions.

Speaker 4

Thank you.

Operator

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

Speaker 5

Hi, thanks. Good morning. My first question was also on the margin side. So first of all, I just want to understand, I guess, the only thing you're calling out, I guess, Having a significant impact on margins in the quarter, is that 40 basis points overall from GRP? And then as we think about that Reversing over the course of the year, does that get better in all other quarters?

Speaker 5

I just want to think about the seasonality of that. And then also would you expect In that updated guidance that your margins will expand in the other three quarters of the year?

Speaker 2

Good morning, Elyse. See if we can take a few of those pieces there. Let's see. So on the first one on The GRP and the 40 basis points is yes, that will reverse in the back end of the year and it's relatively evenly spread, not Perfect. So it's not 25% each quarter, but pretty even through the year, consistent with what we've communicated in the past In there, other thing to keep in mind and we had mentioned it is, we did have some one time items in the quarter that are in our numbers That offset the benefit from our investment income.

Speaker 2

So again, we would not envision that those would Recurring in future quarters that are out there.

Speaker 5

And then is the Q1 investment income, right? I think it's Trending better than what you guys had provided last quarter. I think you had said $14,000,000 to $17,000,000 for the full year. Is the Q1 a good run rate level for investment income?

Speaker 2

Yes, probably somewhere in that range. It all depends upon what the balances are on cash, which can move up and down, but that's probably a reasonable Number, when you think about it from an absolute, what you would want to do is put that on incremental year over year. Remember, because rates were going up last year as the year was coming along. So think about it on a run rate basis when you model it, okay?

Speaker 5

Yes, great. And then last one, retail, you guys both highlighted, it seems like a good environment there, both on the Core Brokerage in the Benefits business, I guess, good growth in both in the Q1. Anything one off or anything you guys want to highlight as we think about just The go forward organic growth of that segment?

Speaker 1

No, I wouldn't say anything that we haven't said, Elyse. We're really pleased with how retail is performing. And as I like to say, We continue to hire talented teammates to help us service market and produce The business that we're bringing on and that those customers that we already have, our existing customer base, So nothing out of the ordinary about growth itself, but I would just tell you We are very pleased with where the retail business is positioned both domestically and With our new acquisitions, not just new like last year in GRP, but in Ireland and excited about Canada as well.

Speaker 5

Thank you.

Speaker 4

Thank you.

Operator

Your next question is from the line of Gregory Peters from Raymond James. Please ask your question.

Speaker 6

Yes. Good morning, Powell and Andy. I guess I'm going to go back, Powell, to your comments about the impact of all the challenges in Florida. It's my impression that if there's a migration to Citizens, that might be some pressure on commission rates for the company. And so maybe you could spend a minute and just talk to us about the economic conditions in Florida, Considering what's going on in the property insurance market, are you seeing any other pressures economically with any of the business developments, etcetera?

Speaker 6

And then talk about The migration to Citizens and its impact on your business.

Speaker 1

Sure. So first of all, I'd like to clarify that In a business that's $2,000,000,000 plus of revenue, the impact of Florida today Versus the impact of Florida 15 years ago is much different. So I think it's important to start there. The second thing that I would tell you is that From an economic standpoint, generally speaking, in our with our customer base in Florida, they seem to be doing quite well. And what I mean by that is the construction is booming, people are growing.

Speaker 1

That does not mean that their margins are Certainly growing because they different industries are having different levels of inflation and impact of cost into their P and Ls, but I would tell you that, and if you go to dinner, if you go out to dinner, it's packed. So it's still The economy is doing well in Florida. As it relates to Citizens, I'd like to talk about kind of 2 scenarios, Because this is there are some similarities and some differences for those of you that have been around Since 2007, I'd like to talk about that. So here's basically the parallels. In 2007, and today, Citizens is deemed as the market of last resort, Okay.

Speaker 1

So let's start there and we're going to start in retail And that's where the sort of similarities end. So in 2,007, If in fact and these are just examples, this is not it is a hypothetical example, so just bear with me. If the market was bearing an $0.85 rate on a condominium And Citizens being the market of last resort was quoting a dollar rate And the then governor implemented wind mitigation credits that took that rate From a dollar in Citizens down to $0.50 So effectively, the The buyer was going from $0.85 to $0.50 per in terms of insured values. That action in and of itself took us to negative organic growth In 2,007 as an organization, much different concentration in Florida, all that stuff. The final thing is Citizens was the market of last resort.

Speaker 1

They would write anything, anything, Okay. So now fast forward to 2023 and Citizens has underwriting guidelines And there's not a rate cut. So if in fact, I'm just going to use the same scenario that we just had there. If they were at $0.85 and Citizens was at a buck or a buck 0.25 And the general market is at $1.75 or $1.50 then There are underwriting criteria, roof, construction, all kinds of things where Citizens is actually trying to qualify accounts. So remember, it's much different.

Speaker 1

It doesn't mean it's not complex. It is complex. So it takes a lot of time to get through a government entity To get the but that's the difference. Now in retail, if you take an account that's from the E and S market And you bring it over into Citizens, the commission level would be, let's say, flat To down slightly to up slightly, but let's just call it flattish, but it has a lot more work. That said, in the wholesale segment, it has the potential to 1, An account can move, so you could go in the E and S market and they lose the entire account because it goes to Citizens with the retailer Or you can have a scenario where Citizens quotes the wind only And we quote an ex wind quote and remember the example is it was $0.85 And it's Superior Construction, the wind only rate, I mean, the ex wind rate might be $0.07 or $0.10 So all of a sudden, the premium has gone down substantially and we get paid commission on that much lower rate.

Speaker 1

So that's how it manifests itself, Greg, and maybe a little more than you wanted, but I think it's important for people to understand the difference Today between 2,007 because it's a big difference and it's important you understand that.

Speaker 6

Yes, that's great color. Just a point of clarification, is it fair to sort of I'm guessing right now, but is it When I look at your Florida residential book of property, is it fair to say that Citizens is about 20% of that book? Or do you think it is a lower or higher percentage?

Speaker 1

I think now I want to make sure that you When you say residential, are you talking about residential homes or are you talking about condos and apartments as well?

Speaker 6

Yes. Todd, residential homes, condos and apartments.

Speaker 1

Okay. So, short answer is no, I don't think it's 20 And what you find is there's a lot of activity in the residential, Specifically condos and apartments in the first half of the year. So there's a lot of activity right now going on. And as I said, there are properties not only where you live, but up and down the West Coast and the East Coast That are currently in the E and S market that have been submitted to Citizens, but we don't know yet if they're going to qualify. So how that ultimately plays out this year is yet to be determined?

Speaker 2

Yes, Greg, keep in mind the limitation that Powell It talks about on the homeowners side, if you go down into Tri County, I think the limit I might be off on this By a little bit, I think the limit is 999,000 I believe is the number. So if you think about how many homes are below 900,000 999,000 in Tri County, not a lot of them. It's a very expensive real estate market down there. And then the rest of the state, I believe it's $700,000 is the limit. So not everything can actually go into Citizens.

Speaker 2

So there's a lot of press around all of it, but Only certain things go into that box and then there's a lot of limitations as to what they will take in the way of quality. So, the reason why we added all that color is the market is very different today than what it was in 2007. So there's been a lot of speculation regarding what this does to our numbers. And we've talked a lot about diversification of our organization And that we're not a Florida based organization the way we were or at least weighted 15, 20 years ago. But our Florida businesses performed really well in the Q1.

Speaker 2

We're very, very pleased both in retail as well as wholesale and programs.

Speaker 6

Got it. That's excellent detail. And I feel like we could probably have an hour long conversation just on this topic alone. But I'm going to pivot. And my last question just will focus on inside your commentary around GRP, You commented about how they're making acquisitions.

Speaker 6

And I guess I haven't really seen any Press releases come out from Brown. So how are how is that coming through on the reported numbers? Or Where are we where do we see the acquisition activity inside GRP as is reported through Brian Brown's consolidated statements?

Speaker 2

Yes, Greg, you should see those on our IR website. We tag them inside there. They come out underneath of a GRP press release that's got Brown and Brown in the footer, but we pull all those over into our normal IR website. So they should all be there.

Speaker 6

Got it. And then just on that point, your approach to organic has been Pretty well, you've sent a benchmark on trying to not include acquisitions as part of organic. I assume You're taking the same conservative approach and applying it to how you count in GRP organic. Is that correct?

Speaker 1

Correct.

Speaker 4

Yes.

Speaker 6

Got it. Thanks for your answers.

Speaker 4

Yes. Thank you.

Operator

Your next question comes from the line of Robert Cox from Goldman Sachs. Your line is now open.

Speaker 7

Hey, thanks for taking my question. So broadly across the business and maybe specifically to employee benefits, I was curious on your expectations for exposure growth for the duration of the year, Just considering your outlook for the economy to continue to moderate.

Speaker 1

Yes. So I think The way we look at it is, we still have a positive outlook on exposure growth, not so much inside of existing clients, but the growth in number of clients. So we do believe that our customer base On a net basis, we'll actually expand, in terms of adding new people to their plans, But the biggest part of the growth will be new benefits plans where we're helping people manage their costs And the delivery of what they want to their employee base.

Speaker 7

Great. Thank you. And just as a follow-up, the pressure in professional lines, Did the D and O pressure, which I think is most acute in the E and S market accelerate this quarter? And do you see any signs of Stabilization in D and O Rates.

Speaker 1

Yes. The short answer is did we see an Acceleration in the decline and yes, we saw a little bit. That's correct. And remember, I would And I don't have this right off the tip of my tongue, but remember D and O rates were going up more quickly And sooner than this property trend, so they had gotten to a level that the marketplace felt as though it was Appropriate or high and then people started piling back in. Now, one, Robert, Could make the argument, I am not making this argument, but I'm pointing it out that if someone on the risk bearing side is trying to manage volatility in their earnings and doing that by looking closely at their cat Property portfolio, they have to redeploy those assets and they're redeploying those assets in a place like Professional liability, thus we're having price decreases or continued price decreases in professional liability.

Speaker 1

So Some people have taken that position. I'm not necessarily trying to imply that. I'm just trying to give that to you so you can kind of chew on it.

Speaker 7

Got it. Thank you. That's helpful.

Operator

Your next question is from the line of Yaron Kinar from Jefferies. Your line is open.

Speaker 8

Thank you. Good morning.

Speaker 4

Good morning.

Speaker 8

Excuse me. My first question goes to the retail segment and employee benefits. I think the last couple of quarters you'd called out the potential for some pressure on organic growth from employee benefits and yet I think Numbers actually came in quite strong. Can you maybe talk about what changed or what actually happened this quarter relative to your expectations there? And would that then create A headwind for 1Q 2024.

Speaker 1

So, do we think it's a headwind for 1Q 24, no, not really as we sit here today. That's the first part. But Yaron, if you go back to what we said, there was one particular business that had an impact in Q4 In terms of a headwind, and that business, that individual business Still actually was encouraging headwinds in Q1, but the other businesses Performed really, really well. And as Andy has said before, remember, we have a front end loaded From a 606 revenue recognition standpoint in Q1 because of employee benefits, but That's a function of us writing a lot of new employee benefits business and all the other businesses Performing that much better relative to an offsetting of that little bit of a headwind in that one particular business. So we feel good about I mean, I don't want to give you the impression that we only feel good about employee benefits.

Speaker 1

Please don't take that out of my comments. We feel really good about Our P and C and we feel really good about our personal lines businesses too in retail, but I just mentioned it because There were people on the call in Q4 that felt like the organic growth was a trend, Which it's not and we said that, but we just wanted to kind of clarify that and we also clarified it because we did talk about a business that had a Significant impact on the revenues in Q4 and there's still a bit of a headwind there, but we've overcome that.

Speaker 2

Yes, I think we also we may have mentioned in the 4th quarter, one of our specialty aligned businesses also Had headwinds in the Q4 and we anticipated some headwinds in the Q1. We did see those. So, they came through, but I think our commentary back at the time On the earnings, as we said, we thought it would be modest in the Q1. That's pretty much kind of what we saw through. So we were very, very pleased with 8.8 Organic still with those modest headwinds and we don't see those headwinds as a material issue On those businesses on the future quarters.

Speaker 8

Got it. Thanks. And then my second question is with Regards to the captive revenues, is it fair to think of them as kind of full margin revenues at least in

Speaker 1

kind of the first half

Speaker 8

of the year until we hit storm season barring An earthquake?

Speaker 2

Yes, I wouldn't call it full margin because we do have some operating expenses in there, but they are Much higher margin in non storm periods when we have claim cost. Yes.

Speaker 1

And that's Wind and Quake you're on, make sure I want to make sure you know. Yes.

Speaker 8

Okay. Thank you very much.

Speaker 4

Thank you.

Operator

Your next question is from the line of Michael Ward from Citigroup. Your line is open.

Speaker 9

Thanks guys. Good morning. Maybe just following up on that last one. I think you mentioned you had $10,000,000 of earned premium for the captives in the quarter, But

Speaker 2

the I

Speaker 9

think the guidance was $30,000,000 to $35,000,000 So I was just wondering what's in that guide for the year, does it assume some level of losses?

Speaker 2

Yes, I think we're just trying to estimate right now. We're anticipating it will move back and forth a little bit. The other thing is in the Q3 of last year when we recognized the claim cost on Ian Yes, we also had some accelerated premiums during that time period. So it will move a little around a little bit by the quarter. That's We took that into consideration.

Speaker 2

So you won't probably see it be exactly perfect by each of the quarters on an earned basis. It will be down a little bit in

Speaker 4

the 3rd quarter.

Speaker 9

Okay. That's helpful. Thank you. And then thinking about capital deployment, how much Or management, how much debt pay down do you anticipate doing from here and do you have a targeted leverage ratio that you're looking to get to?

Speaker 2

Well, we tackle the last one first. So what we have said publicly is on a gross basis, 0 to 3. We're very comfortable with that range And 0 to 2.5 on a net basis. Michael, if you look back over time, we traditionally will move on the higher end of that range Around acquisitions and then we trend back down and we normally kind of operate in kind of that middle part of the range in both net and gross. If you look at over kind of a longer period of time, and that probably not unreasonable for our business.

Speaker 2

That will kind of continue to go down. 1, as we repay Debt normal maturities that are coming along on a quarterly basis and then as we just continue to grow the organization. If you look back, we normally will delever about a quarter to half a turn per year is a pretty decent amount.

Speaker 1

That's also assuming if we we're going to continue to invest in the business and we have to continue to weigh and measure M and A opportunities as they come along.

Speaker 4

Yes. Thanks guys. Thank you.

Operator

Your next question is from the line of Meyer Shields from Keith, Reit and Woods. Your line is now open.

Speaker 10

Thanks and good morning. One, I guess, small question. When we look at the international acquisitions, Do they have a different fiduciary investment income profile than the legacy domestic business? Is there more investment income associated with their Placements than the direct build stuff we have in the U. S?

Speaker 2

Hey, good morning, Maher. No, we don't earn as much on a fiduciary income internationally as What we do in the U. S, and again, keep in mind in the U. S. That there's still limitations even here.

Speaker 2

We have trust restricted states that only allow you to earn interest up to your bank fees And then where we have relationships also with our carrier partners, some of those also only allow us on banks. So you don't see everything move on a linear basis.

Speaker 10

Okay. But this is like the year over year improvement that seems like you're saying it's just a function of interest rates as opposed to mix?

Speaker 2

Correct. Yes. Yes. Don't read that, that was all benefit of GRP and O'Leary or anything of that nature, no.

Speaker 10

Okay. And I just wanted to confirm something. I think you mentioned this in your recent comments, but one of the LPI insurers As you've seen catastrophe losses in the quarter and you're saying that that there were no losses in the capital reinsurance component?

Speaker 2

Yes, repeat that one more time.

Speaker 1

Repeat the first part of that question. You were breaking up or I didn't hear it exactly.

Speaker 10

I just want to confirm that there were no losses in the layer of reinsurance that you funded for the captives. The The reason I'm asking is because we did see some significant storm losses that impacted the lender placed market.

Speaker 2

No, there isn't. But Keep in mind, the captives that we have They're not linked with our lender placed business. They're on large condominiums As well as on the quake side, so wind and quake in there. And no, we did not have any Storm related claim cost in the Q1.

Speaker 10

Perfect. Thanks so much for the clarification.

Operator

Your next question is from the line of Mark Hughes from Truist Companies. Your line is open.

Speaker 4

Yes. Thank you. Good morning. Good morning. Al, you need to be a little more optimistic around Capacity, the capacity for our programs, and I wonder, I think last quarter you had suggested that might be Something you'd be keeping an eye on and that would be potentially a gating factor for organic.

Speaker 4

Have you seen that change over the last 3 months?

Speaker 1

No, I don't want to give you the impression that there's some like found new capacity. I wish we could say that. But I think the issue is this, every carrier or market Participants is evaluating how they want to deploy their capacity. As I said earlier, carriers are looking for more protection against earnings volatility, nothing new. They're looking for balance of risk to the extent possible where we have a very large Group of programs that are not just cat, so we're able to balance those with people and so that's a very And we've had really good results over a long period of time.

Speaker 1

So we feel like, as I've said before that we are effectively an sourced insurance company, we can do everything other than bear the risk. And as a result of that And the results that we have delivered, if in fact someone is considering Expanding or repositioning, which is a better thing. I don't think of it as expanding, but repositioning capacity, then we typically Like to think that we're going to be near the top of that list because they've seen our results and, they've seen the growth that we've had In the past, so there's no found The bucket of gold under the rainbow, it's not that kind of deal, but I do feel like there's some really good discussions around Us being able to keep capacity, which is equally as important, I view that as a win, Mark, Not just cutting capacity because a lot of people have had a lot of capacity cut. And if we can keep our capacity that's a win and then We might get cut a little bit somewhere, but we get a little new. And so on a net basis, we're about even or maybe up just slightly.

Speaker 4

Thank you for that. And then you mentioned that Florida construction sounds like it's good. How about nationally?

Speaker 1

Yes. What I would tell you, Mark, is if we go around the system and you look in places, It's remarkable. I mean, places that come to mind, I'll give you an example. Nashville, Tennessee, Atlanta, you get up in the Northeast in several areas, Boston, you get in Colorado, I mean Phoenix, you get in all these places all around and you just got a lot going. And so if you think about it, The industry, the one industry that we're in that has got a headwind at a higher level in the specialty lines business is Auto dealers.

Speaker 1

We do some auto dealer work and auto dealer units are down. So think about it, their pricing It is coming back down to MSRP levels or below. There's an impact on used cars. And so that's in direct relation to our interest rate increases. So having said that, At some point, that's going to turn as well.

Speaker 1

So that's a slight headwind in our but if you think about other industries, There's a lot of businesses that are looking for people. I think the restaurant business is tough, particularly anything That is not defined as seated, it doesn't have to be fine dining, but like a nicer Restaurant, they're having a hard time in terms of getting people to work because if it's fast food, it's just tough.

Speaker 4

Yes. And then one final question. Andy, I don't know if you gave the Revenue impact from the winter storm claims?

Speaker 2

No, we didn't break it out, but we didn't mention it, Mark, in Commentary on services. And yes, we did pick up some claims from the winter storms. Again, nothing Really, really material in there, but a few.

Speaker 4

Okay, great.

Speaker 2

Thank you very much. And just Yes. And just for clarity, those sit in services, okay?

Speaker 4

Yes. Understood.

Speaker 2

All right.

Operator

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

Speaker 1

Hello, Elyse.

Speaker 5

Hi, sorry, I was on mute. Thanks for taking me back. I just had a follow-up question. So Just thinking through some of the stuff that came up early on the call in terms of just the captive and the Ian revenue and the margin. So I know you said, the captive isn't 100% margin.

Speaker 5

So if I assume, Ian and the captive, right, which I think was $80,000,000 of revenue is 75% margin, and I adjust the overall margin for that and I add back The 40 basis point headwind from GRP, I still get that you're about a 35.4% margin for the quarter. So, well, it still would have been down a little bit year over year, right? And you did have the NII tailwind. What am I missing, I guess, in thinking about this math and then tying it back to Your guide for margin improvement over the balance of the year.

Speaker 2

Hi, Elyse. So I think maybe a couple of things to think about and we mentioned in the comments is there are some moving parts in there. We thought it was easier just to give everybody guidance on the full year, right, because otherwise there's always puts and takes, there's business mix Inside everything else, it's just it's not as easy as just adding up a couple of items. So we're trying to do is just keep it relatively simple for everybody And give an idea as to what the full year would look like for the organization.

Speaker 5

Okay. And then, when thinking from here, I guess, the only, I guess, one off items in That is within the updated full year guide is just right. Programs will see some stronger revenue from the captive, right, until we kind of annualize that later in the year. So that could help margins, I guess, in the second quarter. And then also just the higher investment income, are there any other like headwinds or tailwinds Is that updated full year guide for the rest of the 3 quarters?

Speaker 2

Well, So I think in the Q2, yes, I think your comment would be fair. Now keep in mind that, the revenue from the captives, Right. We'll start to level out. So we're not going to get the benefit of organic lift each Quarter going forward like what we saw in the Q1, okay? Because we'll be we're writing basically a specific amount of premium, right, It's what we committed to do inside of the captive.

Speaker 2

So that's limited in nature. That's why you get basically to A level amount of revenue by the back end of the year. Keep in mind also, we mentioned the one time bonus In programs that we had in the Q4 of last year and also the $8,000,000 of Ian claims, just take those

Speaker 5

Okay. Thank you.

Speaker 4

Yes. Thank you. Appreciate it.

Operator

There are no further questions at this At this time, I'd turn the call over back to our speakers for closing remarks.

Speaker 1

Thank you very much, Mikey. We appreciate everybody's time and look forward to talking to you next Very pleased with the outcome and look forward to talking to you then. Thank you.

Operator

This concludes today's conference call. Thank you all for participating. You may now disconnect.

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Earnings Conference Call
Brown & Brown Q1 2023
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