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Operator: Good morning, and welcome to the Brown & Brown Incorporated Fourth Quarter Earnings Conference 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 the connection with this call and including answers given in response to your questions may relate to future results and events or otherwise be forward-looking in nature. Such statements reflect our current views with respect to future events, including those relating to the company’s anticipated financial results for the fourth quarter, and are intended to fall within the safe harbor provisions of the securities laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors.

Such factors include the company’s determination as it finalizes its financial results for the fourth quarter, and its financial results differ from the current preliminary unaudited numbers set forth in the press release issued today — yesterday. Other factors that the company may 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 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 non-GAAP financial measures used in this conference call. A reconciliation of any non-GAAP financial measures to the most comparable GAAP financial measures can be found in the company’s earnings press release or in the investor presentation for the call on the company’s website at www.bbinsurance.com by clicking on the Investor Relations and then Calendar of Events. With that said, I will now turn the call over to Powell Brown, President, and Chief Executive Officer. You may begin sir.

Powell Brown: Thank you, Norma. Good morning, everyone, and thank you for joining us for our fourth quarter 2022 earnings call. Before we get into the details, I wanted to make a few comments regarding our performance in 2022. The fourth quarter capped off another exceptional year as we delivered strong organic growth while substantially maintaining our margins even with increased variable operating expenses and the financial impact of Hurricane Ian. 2022 was also a milestone for acquisition activity as we significantly increased our international capabilities with the additions of GRP and BdB in the U.K. Our consistently strong results are only made possible through the hard work and dedication of our nearly 15,000 teammates.

Now let’s transition to the results for the quarter, I’m on Slide number 4. We delivered $900 million of revenue growing 22% in total and 7.8% organically. Our adjusted EBITDAC margin increased by nearly 300 basis points to 31.4% for the quarter. Adjusted net income per share was $0.50, growing by 28%. We also completed nine acquisitions during the quarter with annual revenues of approximately $17 million. Overall, we’re pleased with the results for the quarter. I’m on Slide 5. We achieved another milestone this year by delivering over $3.5 billion of revenue, growing 17% in total and 8% organically. Our adjusted EBITDAC margin remained strong for the year at 32.8%. On an adjusted basis, our net income per share increased nearly 7% to $2.28.

Lastly, we had a record year for M&A activity completing 30 acquisitions with approximately $435 million of annual revenue. Our acquisitions both large and small are performing well. As a result of our disciplined strategy to acquire top-quality businesses that fit culturally and make sense financially. We have a proven track record of being able to successfully acquire, integrate, and grow companies of all sizes to join the Brown & Brown team. Later in the presentation, Andy will discuss our financial results in more detail. I’m on Slide 6. Let’s start with the economy. We continue to see the expansion of many businesses that are still hiring albeit at a slower pace than in previous quarters. There’s been a general reduction in the number of open positions that companies are looking to fill.

While interest rates have increased materially over the past year we’re not seeing a broad-based impact on our customers in the economy yet. From an insurance standpoint, certain markets have been and remain in significant turmoil. Pricing for CAT property both commercial and residential was under pressure through the third quarter. Then Ian slammed into Florida. This caused 1/1 reinsurance treaties to be bound at higher attachment points and materially higher rates. As a result, we saw incremental price increases and lower limits being offered for placements in late Q4 of last year and early this year. The placement of CAT property in Q4 last year and January of this year with some of the most difficult placements we’ve experienced in decades with rates increasing 20% to 40% or more.

However, properties of lesser construction quality or that have experienced losses could be much higher and I mean much higher than this range. As a result, we had customers unable to buy or afford full limits and therefore ended up increasing their deductibles or purchasing loss limit in order to manage our cost of insurance. In certain cases, this was not possible as lending institutions or condo associations would not allow lower limits or significantly higher deductibles. Admitted market rate increases were similar to prior quarters and were up 3% to 7% across most lines with the outlier being workers’ compensation rates which remained down 1% to 3%. The placement of professional liability and excess liability remain competitive with rates down 5% to up 5%, with public company D&O rates down 5% to down 20% or more.

Regarding cyber, the story is similar to the last few quarters with rates and deductibles continuing to increase but we did see some slight moderation during the quarter. Late in Q4, there were reforms impacting the legal and regulatory environment for insurance in the State of Florida, which included the elimination of one-way attorney’s fees and assignment of benefits. The establishment of a reinsurance backstop for certain carriers and the requirement of arbitration prior to litigation. These changes should be positive for buyers of insurance, but it will take time. From an M&A standpoint, we’re pleased with the nine transactions we completed. We continue to acquire companies that fit culturally and make sense financially. Specifically, the integration of GRP is going very well and we’re acquiring a number of businesses and the financial performance is in line with our expectations.

From an overall industry perspective, the number of transactions slowed materially compared to previous quarters. Like last quarter, if a business is considered to be a platform or a must-have, the market is still aggressive on pricing. Now I’m on Slide 5. Let’s transition — I’m sorry, Slide 7. Let’s transition and discuss our performance of the four segments. For the quarter, our Retail segment delivered organic growth of 2.7% with good growth experienced in most lines of business. Our organic growth was impacted by the slowdown in specialty lines due to lower auto and RV sales as well as slower growth in a couple of our employee benefits businesses due to an extremely tough comparable versus the fourth quarter in the prior year. Our Retail segment delivered another strong year of organic revenue growth of 6.5%.

We’re very pleased with how our business is positioned and the capabilities we have to serve our customers of any size and believe 2023 should be another good year. Once again, our National Programs segment delivered excellent results, growing 22% organically for the quarter. This performance was driven by good new business and retention across most of our programs, as well as exposure unit expansion and rate increases. The National Programs team is performing at a high level by offering a diverse range of products and delivering best-in-class solutions for our customers driving nearly 16% organic growth for the full year. Our Wholesale Brokerage segment delivered another good quarter, growing 8% organically driven by rate increases and new business even with personal lines, which has been a challenge for most of the year.

Our Wholesale Brokerage segment grew 7.6% organically for 2022 and is well positioned to continue their success into ’23. For the quarter, our Services segment delivered modest organic revenue growth as a result of winning new customers and increased storms claims with this expansion, substantially offset by lower claims for certain businesses. Overall, we feel good about our capabilities and the value we deliver for our customers. Now let me turn it over to Andy to discuss our financial performance in more detail.

Andy Watts: Great. Thank you Powell. Good morning, everybody. We’re over on Slide number 8. Like previous quarters we’ll discuss our GAAP results and then certain non-GAAP financial highlights. For the fourth quarter, we delivered 22.1% total revenue growth, organic revenue growth of 7.8%, and our EBITDAC margin increased by 220 basis points. Our net income grew 43% and diluted net income per share increased by 42% to $0.51. Both were impacted by the change in estimated acquisition earn-out payables, which was a credit of $5.8 million in 2022, and the charge of $19.8 million in the prior year. The effective tax rate decreased to 25.2% for the fourth quarter of this year as compared to 27.8% in the fourth quarter of last year, primarily driven by lower statutory rates for our international businesses and the impact of deductibility for acquisition earn-out payable adjustments.

Our weighted average number of shares was substantially flat compared to the prior year, and our dividends per share for the quarter increased to $11.5 or 11.7% compared to the fourth quarter of 2021. We’re over on Slide number 9. This slide presents our results on an adjusted basis, which excludes the impact of movements in foreign currencies on both revenues and expenses. The net gain or loss on disposals, the one-time acquisition integration costs associated with GRP, Orchid, and BdB, and the change in earn-out payables. We’ve included on Slides 18 through 26, reconciliations to the most comparable GAAP measures. On an adjusted basis, our EBITDAC margin grew by 290 basis points versus the prior year. EBITDAC increased by 34.9% and income before income taxes increased by 22.6%.

This margin expansion was due to another solid quarter of revenue growth, increased contingent incentive commissions, and leveraging our expense base even while having a higher year-over-year variable operating cost. The incremental growth rate of adjusted EBITDAC as compared to adjusted income before income taxes was driven by a higher year-over-year interest cost of $29 million and higher amortization of $7 million with both largely driven by the GRP, Orchid, and BdB acquisitions. Our adjusted net income for the quarter increased by 26.9% and adjusted diluted net income per share was $0.50, increasing 28.2%. We’re on Slide number 10. Our Retail segment delivered adjusted total revenue growth of 19.8% driven primarily by acquisition activity and organic revenue growth of 2.7% for the quarter.

Adjusted EBITDAC grew 25.1%, with our adjusted EBITDAC margin increasing by 120 basis points for the quarter, primarily driven by lower year-over-year performance incentives, but was partially offset by higher variable operating cost. We’re on Slide number 11. Our National Programs segment delivered adjusted total revenue growth of 34.1% driven by organic revenue growth of 21.9%, acquisition activity, and higher contingent commissions. Organic growth was positively impacted by approximately $7 million due to the finalization of a growth bonus for one of our programs, which we do not anticipate recurring in 2023. As it relates to flood claims processing revenues associated with Hurricane Ian, we still expect revenues in the range of $12 million to $15 million.

In the fourth quarter, we recognized approximately $8 million. Our contingent commissions were higher due to premium growth and profitable underwriting in our CAT programs, as well as the loss development for Hurricane Ian being lower than originally expected. Adjusted EBITDAC grew by 53% over the prior year and our adjusted margin increased by 540 basis points to 44.1% primarily due to total revenue growth and leveraging our expense base as well as higher contingent commissions and the previously mentioned growth bonus. We’re on Slide number 12. Our Wholesale Brokerage segment delivered adjusted total revenue growth of 17.1% driven by recent acquisitions, good organic revenue growth of 8.1%, and an increase in contingent commissions. Adjusted EBITDAC increased by 19.9%, with the associated margin growing by 70 basis points, which is primarily impacted by increased contingent commissions and good organic growth, but was partially offset by higher variable operating expenses.

We’re on Slide number 13. Adjusted total revenues and organic revenue growth in our Services segment were substantially in line with the prior year. For the quarter, adjusted EBITDAC increased $1.6 million or 23.9% driven by continued management of our expenses. We’re on Slide number 14. This slide represents our GAAP results for both years. In 2022, we delivered revenues of over $3.5 billion growing 17.1%, and earnings per share of $2.37 growing 14.5%. EBITDAC increased by 14% to approximately $1.2 billion. For the year, our share count was substantially flat and our dividends paid during 2022 increased by 11.3%. We’re on Slide number 15. This slide presents our results for both years on an adjusted basis. Our income before income taxes grew 6.6%, and net income per share was $2.28 growing by 6.5% as compared to total revenue growth of 17.3%.

This difference was driven by higher interest and amortization associated with GRP, Orchid, and BdB. Our adjusted EBITDAC margin remained strong at 32.8% but declined slightly by 40 basis points from the prior year due to higher variable cost. Overall, we are very pleased with the results for 2022. We’re on Slide number 16. It’s part of evaluating the performance for the year and the fact that are captives are newer, we wanted to provide some additional color. We participate in two CAT property captives with the goals to increase capacity, drive additional organic growth, participate in strong underwriting results, like we do with contingent commissions, and deliver good returns on our invested capital. One captive participates on a quota-share basis for certain of our wind and quake programs, and the second participates on an excess of loss or reinsurance layer for a personal lines wind program.

Overall, we are very pleased with the top and bottom-line performance, knowing that certain quarters can have volatility when they’re CAT events. It’s important to keep in mind that performance cannot be evaluated on one quarter but it’s better viewed on a full-year basis. In 2022, we recognized approximately $25 million of incremental revenue with about $5 million driven by the acquisition of Orchid. For 2023, we anticipate revenues of approximately $30 million to $35 million. From a risk standpoint for both captives, we can have up to $13 million of exposure in any one occurrence and $25 million in the aggregate. As we always do, we’ve used a disciplined approach to balance upside potential and downside risk versus deployed capital and believe we have structured the programs well to deliver on our objectives.

Few comments regarding liquidity and cash conversion. For 2022, we delivered cash flow from operations of $881 million. Our ratio of cash flow from operations as a percentage of total revenues was 24.7% as compared to 26.5% last year. This lower ratio is due to the payment of earn-outs as certain acquisitions have overperformed our original expectations, incremental interest expense, and paying higher incentive bonuses to our teammates for their outstanding performance in 2021. Overall we are in a strong cash generation and capital position, finishing the year with $650 million of available cash. We also repaid the remaining outstanding balance of $150 million on our revolver that was drawn in connection with our acquisition of GRP, BdB, and Orchid.

We expect to continue to delever over the coming quarters as we have done in the past post larger deployments of capital. We finished the year in a strong liquidity position. With this capital, the cash we will generate in 2023 as well as capacity on our revolver we are well-positioned to fund continued investments in our company. We have a few comments regarding the outlook for 2023. First, for contingent commissions, we anticipate them to be relatively flat year-over-year, but this will be ultimately driven by loss experience. As it pertains to taxes, we expect our effective tax rate to be in the range of 24% to 25%, a slight increase compared to 2022 due to a higher estimated tax rate in the U.K., the lower year-over-year tax benefit from the vesting of stock grants and limitations on the deductibility of certain compensation benefits.

We anticipate our interest expense will be in the range of $185 million to $195 million. Regarding interest income, we’re seeing some nice improvement and are projecting income of approximately $14 million to $17 million subject to how the Fed changes interest rates. As it relates to amortization expense, we’re projecting approximately $162 million to $166 million. This does not include amortization associated with acquisitions that we may complete during 2023. As it relates to margins, we do not see any major headwinds or tailwinds heading into 2023, that shouldn’t materially impact our margins. With that, let me turn it back over to Powell for closing comments.

Powell Brown: Thanks, Andy, for a great report. As we close out ’22 and look forward to ’23, we have a couple of observations. First, last year was another very successful year for Brown & Brown. We delivered over $3.5 billion of revenues growing 17% had our largest year of acquisitions while expanding our footprint and capabilities in the U.K. market. We invested in technology to help improve the experience for our customers and teammates, grew organically at over 8%, delivered strong margins, again, even with higher variable costs and the impacts of Hurricane Ian, as well as generated over $880 million of cash flow from operations. We’re also in a strong position from a capital standpoint and we’ll continue to invest in our capabilities in order to best serve the needs of our customers.

Regarding the economic outlook of 2023, well, there’s a lot of uncertainty regarding inflation and labor shortages, we expect further economic moderation as the impact of higher interest rates take effect. From an insurance standpoint, we’re anticipating admitted market rate increases to be relatively consistent with last year, we expect CAT property rates to be up 10% to 40% or more for at least the first half of the year, as well as capacity to potentially be constrained. It’s not potentially, it will be constrained as the market needs to fully digest an impact. The impact of Hurricane Ian, as well as other insured losses. In addition, professional liability rates should continue to moderate downward. Regarding recent acquisitions they’re performing well and we are expecting good profitable growth in the coming year.

On an M&A front, we have a good pipeline and we’ll continue our disciplined approach to finding great companies that fit culturally and makes sense financially. In summary, we feel great about our business, the diversity of our capabilities and our ability to help customers with risk management solutions that best fit their needs. Our team of almost 15,000 has good momentum, and we’re looking forward to another strong year. With that let me turn it back over to Norma for the Q&A session.

Operator: And our first question comes from Greg Peters with Raymond James. Your line is now open sir.

Greg Peters: Great. Good morning, everyone. I know you don’t like to forecast organic revenue growth, but there are two items, one you called out in your commentary about catastrophe pricing. And secondly, in your retail segment, you talked about some employee benefit headwinds or a difficult comparisons. So, when I think about ’23, Powell and Andy, how will those variables — like the June first renewals on property CAT and what’s going on employee benefits, how will that affect your organic results for this year — this upcoming year?

Powell Brown: Okay. Let’s start with the second part first. Let’s talk about employee benefits. Employee benefits overall performed really well for the year and we’re very pleased with those businesses. And as we said in our prepared remarks, that was actually really only in one or two businesses that had a setback. Having said that, I think that EV will continue to perform well in the system. We don’t give organic guidance on that and we don’t break out lines of business, but from an employee benefits standpoint, feel really good. As it relates to the CAT property pricing, the variable there, Greg, as you know is not as much our — I mean, it is there are certain limitations on ability to present limits in some instances. But it’s more of — in my opinion, it’s more of an affordability issue.

And so, if you think about if you’ve been giving rate increases, let’s just say to yourself on your own personal lines homeowners, if you’ve got an increase of let’s say 10% a year for four or five years in a row and then all of a sudden we came on the fifth year and gave you a 25% increase, there is a — the buyers are tiring of that. And so, having said that, availability of capacity in this market is unlike anything I’ve ever seen, I’ve only been in the insurance industry for 33 years now. So, there’s a lot more to go, but I’ve not ever seen anything like this and we will continue to provide solutions to our customers. But sometimes the example I think we used last time and I would use it again is, if you have an entity, and they’re paying $800,000 for their property and the renewal is a $1.8 million, and they say, what can we buy for $1 million, which can’t buy anymore insurance, we can’t afford it.

So, we’re seeing that more and more, Greg. So, the CAT pricing that is going to — is it more of a wildcard. The other thing that we’re seeing is in the CAT capacity and accessing it in some instances, there is commission pressure downward on some of those placements now. So, a lot of people just think, well, as the rate goes up X, then you’re going to — your commission goes up X if you’re on commission as opposed to a fee and that is true sometimes, but in this case, they might cut your commission one or two points, and so we’re seeing that as well. So that’s a harder one to answer, Greg.

Greg Peters: Okay. I understand that. It’s a moving target, especially in the Southeast. I guess for my second question just pivot, Andy, in your comments you talked about — you gave some guidance, and then on adjusted EBITDAC margins you said no tailwinds or headwinds for ’23. So, maybe you can provide some context about — is that — in terms of laying out expectations for Street, is it one where we just expect margins to be flat year-over-year, or maybe give us some color to help us frame what your comments really mean.

Andy Watts: Sure. Well, I think what we’re trying to say on that one, Greg, is we don’t see any major headwinds or tailwinds going into the year. We do have like most everybody else unknowns around what will happen with inflation and T&E, but we’ll work our way through those pieces. I don’t see any major incremental investments that we’re making in the business that we need to call out externally, we’re always making investments in our business, but we do that each year through everything. We do anticipate that T&E will be up year-over-year, just not to the extent that what we saw ’22 versus 2021 right now. So, and that was really why we gave guidance going into 2022 because that was a big variable, but right now, we’re not seeing anything specifically that would impact the margins in 2023 versus 2022.

Greg Peters: And just a point follow-up on that. When you think about organic for ’23, is there some sort of rule-of-thumb I know some of your peers offer rules from that, if the organic, a certain amount we can expand margins, if organic not, I mean, do you have any sort of metrics that you’re thinking about in terms of organic as its impact on margins?

Powell Brown: No.

Greg Peters: Fair enough. Thanks for your answers.

Andy Watts: All right. Thanks, Greg.

Operator: Thank you. One moment for our next question. And our next question comes from Rob Cox with Goldman Sachs. Your line is now open.

Robert Cox: Hi, thanks for taking my question. Just with respect to Retail, you called out a couple of headwinds. I was wondering, specifically on group benefits if the toughest comp was created by a true-up of exposure expectations in the prior year quarter or more so by a deceleration in growth this quarter.

Andy Watts: No, Robert, maybe the way to think about it, is we had a few businesses last year that just had absolutely outsized performance in the fourth quarter. One of them was a newer business that was starting. So, it was in growth mode. So, that’s what makes the year-over-year comparison in the fourth quarter difficult. But as Powell mentioned in his comments, we feel really good about how our businesses are positioned and how they performed for 2022, don’t read more into that in the fourth quarter there’s no reason to.

Robert Cox: Got it. Thank you. That’s helpful. And maybe just moving onto some of the Florida legislative changes. Any comments on what you think the impact of those might be for Brown & Brown in the near term and then perhaps longer term?

Powell Brown: So, Rob, first of all, we think that based upon everything we see they are positive for the operating environment for risk bearers and for insurance in the State of Florida. I’d like to point out that we anticipate that the trial bar will challenge those. So, I don’t think those go in place easily. So, I don’t know what that means relative to timing and adoption, relative to the marketplace what our governor and the State of Florida is trying to do fundamentally is create; one, viable; two, competitive; three, sustainable marketplace. And the State of Florida is not really want to be so-called in the insurance business. But with this disruption, they will have to be bigger in the insurance business for the next several years.

So, I believe — we believe that this is a multi-year transition to bring the Florida marketplace specifically personal lines in Florida back to that kind of environment. So, it will probably take three to five years to have some additional participation by the State of Florida, i.e., what they’re proposing in this and it may need more going forward. But it is not the intent of the Governor to expand their participation, i.e., as being a state risk bearer. So, it’s hard to tell because you got challenges ahead, you got other things. But what we really want and need in the State of Florida is relatively affordable homeowners’ prices for all-sized homes. With the coverage A home of $200,000 versus one that’s over $1 million, and everything in between.

And so, there’s a lot of disruption across those — all those sizes.

Robert Cox: Got it. Thanks. And maybe just lastly could you quantify the annual growth bonus in National Programs and maybe specifically to programs, where you see contingents going in 2023?

Andy Watts: So, I think — I think, Rob there’s two pieces inside there. So, one of the things we talked about on the growth bonus that was about $7 million, and as of right now, we don’t see that recurring into 2023. And again that is inside of the organic calculation, not in contingent commissions. And then, we didn’t give guidance on contingents by the individual segments. My comment was just overall for the company that at least as of right now we see relatively flat in 2023, but again all depends upon loss experienced during the year and overall growth and profitability.

Robert Cox: Thank you.

Operator: Thank you. One moment for our next question. Our next question comes from Weston Bloomer with UBS. Your line is now open.

Weston Bloomer: Thanks for taking my questions. First, one is just a follow-up on the employee benefits comment. Can you just remind us of the seasonality of that business? And do you expect there to be any material headwinds in the first quarter as well?

Andy Watts: Hi, good morning, Weston. Yes. The EB business does have some seasonality to it, and it’s generally a little bit — if you look across the quarters first, normally it’s a little bit more weighted to Q1 and that’s just because of the way in which revenue is recognized in that business. And then you normally see it, the fourth quarter is normally one of the lower that your kind of just naturally how that business participates. From at least the — some of the headwinds and what we’ve talked about in the fourth quarter, some of those may carry over into Q1, but don’t see any issues on a full-year basis similar to our comments about how we thought about the business for 2022.

Weston Bloomer: Got it. Thank you. And then kind of a similar type of question within professional lines. I know you highlighted the slowdown in D&O pricing. Is there any seasonality or how should we think about the impact of lower rates in that business both in retail and then in wholesale?

Powell Brown: So, the way I would just look at it is if you think about an environment which has had rate pressure up for the last several years, and in some cases dramatically more in the public markets, they’re coming down substantially because it’s a very competitive environment and one might speculate, Weston, that people that are reducing their catastrophic property exposure would want to write business elsewhere and where might they do it and they might say in casualty or professional lines. So, I think it’s important to think of that as a headwind, slight, but a headwind on that segment of our businesses, because I think it will be down. And in some instances down a good bit.

Weston Bloomer: Great. Thank you. And then last one, just on the margin I know you highlighted no material headwinds or tailwinds, and maybe you don’t gain too granular here, but it is the March ’22 M&A that came in at a higher overall margin. Is that business still running higher overall relative to kind of the core Brown & Brown?

Powell Brown: When you say the March, do you mean —

Weston Bloomer: Yes. The margin guidance that you gave —

Powell Brown: For the three — combined. Yes. All the businesses are performing in line with our expectations. We talked a little bit about some of the seasonality during the earnings call last quarter, but no, they’re all kind of right in line with what we expected.

Weston Bloomer: Great. Thanks for taking my questions.

Powell Brown: Thank you.

Operator: Thank you. One moment for our next question. And our next question comes from Elyse Greenspan with Wells Fargo. Your line is now open.

Elyse Greenspan: Hi, thanks. Good morning. My first question, on the contingent commissions, Andy, I know you guys had those lender-placed contingents that you didn’t — you weren’t sure that they would recur next year. Does that assume that they come back or what are you assuming for the lender-placed program?

Andy Watts: So, one of the items that we saw in the third — during the fourth quarter, is we did recognize about $3 million or $4 million that we had anticipated we would not recognize in the fourth quarter. If you remember back to the call, we said we had backed out to the third quarter call. We had backed up $15 million year-to-date and said, we probably would — therefore, not record in the fourth quarter. Development was not at the extent that we anticipated at that stage, which is that positive. And so we recognize those three to four, and then as we look to 2023, we would anticipate earnings some in ’23, not back to kind of normal levels because there is some still carry-over in the calculation. But we’ve taken that into consideration when we have given guidance at a total level for the company, substantially flat.

Elyse Greenspan: Okay. And then the interest income, right? I know in the past you guys had said maybe fiduciary income wouldn’t be that big, but it sounds like you’re seeing a little bit of a pickup there. Right? You guys said $14 million to $17 million, wouldn’t that be accretive to your margins in ’23?

Andy Watts: Yes. If you look at it by itself that would be a true statement it would be accretive to margins.

Elyse Greenspan: So, I guess theoretically, maybe the interest income is a tailwind. And that’s getting offset by something else because it sounds like you’re saying no headwinds, tailwinds, may be flat margins overall. But it does feel like that number in isolation would be a tailwind to the coming year.

Andy Watts: Yes. I think isolation, I think that’s probably fair at least. But there’s — within our business, like most businesses, but at least we’ll talk to ours specifically, there’s always a lot of moving parts, and you’ve always got things kind of moving back and forth. And that was really why we’re trying to give guidance about any major tailwinds or headwinds that are out there.

Elyse Greenspan: And then one last one, the employee benefit you guys said is concentrated in the first part of the year, but it does sound like what happened in the fourth quarter was maybe just — and just a really tough comp with last year, so when we think about retail and I know you don’t like to give guidance, but is there anything that stands out to start the year that would make the first part of ’23 have tougher comps in the back part of the year.

Andy Watts: Nothing at a top-level until Weston’s earlier question is, will there be potentially a little bit of headwind in the first quarter from what we saw in the fourth quarter a little bit, but we feel really good about our business and how it’s positioned and the capabilities that we have served customers of all sizes in that business and feel like we will perform well during 2023.

Elyse Greenspan: Okay. Thanks for the color.

Andy Watts: Great. Thank you.

Powell Brown: Thanks, Elyse.

Operator: Thank you. One moment for our next question. And our next question comes from Michael Zaremski with BMO Capital Markets. Your line is now open.

Michael Zaremski: Hi, good morning. Maybe focusing back on the dislocation in the parts of the property market. I’m just curious at a high level if your view has changed and whether this is — whether the environment is kind of net benefit or to growth or margins or net neutral or maybe even that negative because there’s a lot of moving parts clearly you came out and talk a little bit about commission pressures, but rates are moving materially higher, so just kind of curious if you see that all the moving parts net-net, as a wash potentially or if your view has changed.

Powell Brown: Yes. No. I would say, Michael, it’s probably a net positive but slight net-net positive, and the reason I say a hedge with a slight is because of changes that we can’t see in the market yet i.e., limits for — limits being reduced by carriers or some potential for any commission pressures or anything of that nature, but — and basically also clients just basically raising their hand and saying look uncalled. And I know that’s tough, but it’s true because we are the deliverer of bad news when it comes like this. So, it will be — I think it will be slightly positive that is how I would want you to think about that.

Michael Zaremski: Okay. That’s helpful. Maybe switching gears to inflationary impacts on the income statement of Brown. I think there was a comment made about some unknowns on inflation and T&E. When I think about the Brown’s commission model I think of it kind of being somewhat more insulated from wage pressures due to the kind of how the front-line salespeople are paid. But maybe I’m wrong and maybe you can just kind of elaborate on what do you mean by kind of where the T&E and inflation are.

Powell Brown: So, let’s talk about your comment around wage pressure. We’re not immune to wage pressure and I think that’s a very important thing. And one of the things that we find just like anybody else out there in our space is the war on talent is very competitive and people are looking for people not just salespeople, but there could be service people, or marketing people, or administrative people that administer claims or things like that. So, it’s a very competitive marketplace. So I don’t want you to think that we’re immune to that because we are far from that. That’s number one. Number two, when we say T&E pressure, it’s not as though we think there’s going to be so much — that much more travel and entertainment. We think that the — if you do the same, there’s just significant pressure on, let’s just say an airplane ticket or a hotel depending on where you’re going.

And so, that’s where we’re seeing that pressure. And so, our business is not unlike many of the other businesses that you know, or follow, or all of the above, it isn’t an inflationary environment. The pressure here although it is high is not as high as it is in England,, and in Ireland that wage pressure seems to be higher there. But we’re working through that as well. So, that’s kind of what we mean by that, Michael.

Michael Zaremski: That’s helpful. And just maybe sneak in one quick one. Any impact from the flooding in California to — that the flood program that you administer, that could be material.

Powell Brown: No. We haven’t seen anything interestingly enough in California. As you know, they don’t get a lot of rain to begin with. And so, when they do get a lot of rain, they get significant flooding, and there are not a lot of people that buy flood insurance in the State of California. So, it’s no. We don’t see that.

Michael Zaremski: Thank you.

Powell Brown: Thank you.

Operator: Thank you. One moment for our next question. And our next question comes from Yaron Kinar with Jefferies. Your line is now open.

Yaron Kinar: Hi, good morning, everybody, and thanks for my questions. I guess my first question and I think it may be tied back to a couple of other questions you have already received. As you think about the property CAT rate environment, where do you see maybe the — which segments do you think would benefit most and which ones would you see maybe facing greater pressure from the various components you talked about kind of reduced commissions, maybe more difficult placing business.

Powell Brown: I want to make sure I understand that, Yaron, can you just repeat the question or elaborate a little bit? You’re saying what do you think becomes more difficult, and then what becomes easier? Did I hear that correctly?

Yaron Kinar: I’m asking of the four segments that you have or I guess really three Retail National Programs and Wholesale which do you think would benefit more and which would maybe face greater pressure?

Powell Brown: Okay. So, first off, I would say the — I look at it a little differently than benefit more or not. You didn’t use this term or suffer more maybe the and things for that. Let’s look at retail for a moment. Retail has the good fortune. We deal directly with the customer. So, you’re going to have a lot of heavy lifting relative to delivering those particular increases and you may have, as I said, you might have commissioned reductions in some instances. But rates going to go up, and I’d say that it’s mildly positive relative to organic growth in that business. In wholesale, it makes their jobs, property brokers significantly more difficult, and trying to fill out lines of business. So, if you had a $100 million line and it was handled by one or two markets, and then now that market, it took 80% of it is pulling back or cutting their participation you got to put six or seven markets in to get your $100 million.

That said, there will continue to be pressure there as well. And I think that there is more — the most conflict if you want to call it that in placements will be in retail and wholesale. In National Programs, it’s a matter of capacity availability. So, as you know, there are a number of carriers out there who have allowed their capacity underwritten by a number of different type of MGAs and MGUs, and a number of those were not profitable, not just last year, but over many years before. And so, there is — what we consider a flight to quality. And in the sense of our underwriting facilities, we’re very pleased with the results that we’ve delivered prior to — excuse me — last year and including last year with the losses and Ian and Nicole.

So, I’d say that in programs it’s a different thing, their growth potential is limited by availability. It’s not a conflict of, in the other two, there is the hand-to-hand combat of getting people to actually put limits up and do it in the underwriting facilities, we have that authority and we can do what we can do, but we’re limited by the capacity. So if in fact, a market or markets decides to cut back on their capacity they give to us that will impact our ability to grow. And conversely, if they decide to change their commission level and that would impact our ability to grow. The one thing that I do want to mention, I think it’s important for everybody to think about this. Things are never as good as they seem or as bad as they seem. And what I mean by that is, even though the CAT market is very challenged right now, there will be a time in the future where it improves.

Now I’m not foreshadowing something, because we don’t have a crystal ball. That doesn’t mean 12 months from now, we’re going to have X or Y or Z, that’s not what I’m saying. But there are certain markets that are approaching it in a way that they are looking very opportunistically at it. And then there are other markets that are looking at it like a long-term partnership. Obviously, we would prefer the latter as opposed to the former. But we’re out looking for capacity globally. So, I just want everybody to kind of know that this pressure too will pass at some point.

Yaron Kinar: Thank you. That’s helpful color. If I could switch gears to M&A for a second. So, I think you had said that the pipeline remains robust. That said, you are seeing M&A activity slowing. Is that just a function of a bid-ask spread that is too wide? Or are there other drivers there?

Powell Brown: No, no. I think when you say the M&A activity is slowing, remember, we’re talking about the industry. So, as you know, private equity has been a very big participant, and the number of private equity announced transactions in Q4 was down substantially over the prior quarter, and or Q4 of the prior year. I think that there is an interesting sort of — we’re kind of at this unusual clash point if you want to call it that, which is the market with increased interest rates and buyers would like to see a slight decrease in multiples paid. And yes, there are businesses, some of which are owned by private equity that we’d like to monetize their businesses at what were historic levels or multiples in anticipation of other opportunities for them.

Or maybe better said, maybe they think there’ll be pressure on multiples going forward. So they want to get out at a higher multiple, if possible, then they might think of in a year from now. I’m just using that as an example. So, I think we’re going to see a lot of activity in the next 12 months. The good part about our business is we’re focused on the long-term and long term to us is not one year or three years, it’s a very long-time. And so, we’re looking for businesses that fit culturally make sense financially, and we believe there will be those businesses out there, but in the interim period, as Andy said, we’re aggressively paying down our debt. We’re investing in teammates and focusing on growing our business organically.

Yaron Kinar: Thank you very much.

Powell Brown: Thank you.

Operator: Thank you. One moment for our next question. And our next question comes from Mark Hughes with Truist. Your line is now open.

Mark Hughes: Yes. Thank you, good morning.

Powell Brown: Good morning.

Mark Hughes: Powell, you had talked a good amount about your quest for capacity. Did you find any restrictions? Have you seen any with the harder reinsurance markets, any cut-back on your programs and you’re thinking about a flood or a quake for instance? Anything that is noteworthy could perhaps impact organic growth.

Powell Brown: Yes. So, thanks for the question. That is somewhat of a moving target, but at the present time, we think a good outcome is flat in terms of no reduction in capacity. We may have certain of entities or businesses where they would maybe be trading some capacity or debt — net down on a net basis, just slightly, but right now, we think it’s pretty neutral. And from our vantage point, we view that as a win. So, I’m not aware of something and you specifically asked about a flood or a quake, but that could involve our wind facilities as well. But the thing that we talked about last year, and we’ve talked about in prior years, but it’s even more magnified this year. Our growth opportunities and National Programs will be directly — not exclusively, but directly linked to the amount of new capacity that we’re able to secure.

And so, if in fact, we are not able to procure any new capacity that’s going to be a slight limitation on the organic growth that does not mean that we can’t grow organically, it just means that we will grow more organically if we are able to secure more capacity, which we’re looking at globally.

Mark Hughes: Understood. And then on the captive. You mentioned some of the economics there, $30 million to $35 million in revenue, but you’ve got loss retention of $13 million per event. One would think you would need a pretty high margin on that revenue in order to feel good about generating a return over multiple years if you’ve got the kind of retention. Am I thinking about that properly?

Powell Brown: Well, I’m going to answer your question two-fold. Number one, I want you to think about what a captive is. There’s really three parts to the captive. There is the loss, the retention amount that you retain on any one loss that’s just losses. There’s number two, which is the reinstatement premium, which means you put the program back in place for a subsequent event. And the third would be if you had any profit in that period of time in that captive prior to them being distributed. And so, what I would tell you is that we are very mindful of the way we invest our capital, and we are looking for returns that help us grow the business. So, what I would tell you is, if we did not think that those were reasonable long-term investments, we would not make them. And in the event that the economics turn against us, meaning cost, inputs, or things make them not viable then we just won’t do them.

Andy Watts: Hi, Mark, just a question for you, if you can expand on — when you said — you talked about providing adequate returns, how do you — walk us through how you mean that because I guess I think we’re maybe not seeing it the same way you are, but if you seeing….

Mark Hughes: I think…

Andy Watts: We’re retaining —

Mark Hughes: Yes. If you’re generating $30 million in revenue. And so you have a 50% margin, and $15 million. But if your retention per event is just $13 million. And maybe a Hurricane hit Florida one out of three years then that influences the view of the economics. That was a — just real simple math I was thinking about.

Andy Watts: Okay. So, that there — and probably lies the opportunity to clarify on these some more. Here’s the way we want everybody to trying to think about these, is what we’re doing is we’re participating in the underwriting profits on these captives. What do we do on contingent commissions, we participate in the underwriting profits. So, this is not where they’re coming in and we’re paying commissions and everything else on the business. So, I think that’s part of just the piece that maybe you’re thinking about it’s a traditional call it operating profit, it’s coming through as — assume it’s normal operating profit versus underwriting profit in there. So, we’re very, very pleased with the performance this year and to Powell’s point, we want to put our capital into these if we didn’t think that we can get an appropriate return.

Powell Brown: And the $13 million, Mark, is up to — that doesn’t mean it would be $13 million. And so, there is a very important distinction, it can be less than that or substantially less than that.

Mark Hughes: I appreciate the clarity. Thank you.

Powell Brown: No. Thank you.

Operator: Thank you. One moment for our next question. Our next question comes from Michael Ward with Citi. Your line is now open.

Michael Ward: Thank you, guys, good morning. One last one, maybe I was wondering if you could share any color on the profit commissions in programs and if any of that was related to maybe hurt Hurricane Ian true-ups.

Andy Watts: Good morning, Mike. Andy here. It’s the — wouldn’t say anything that was related to Hurricane Ian true-ups, right? What we did at the end of the third quarter is we had backed off to $15 million as we’ve mentioned earlier, and we had also, at that point said based upon what we thought the losses were going to be, we would not record $3 million to $4 million in one of our programs that development did not come in at the anticipated level, which is, again, that’s a positive thing. Therefore, we did go ahead and record that $3 million or $4 million in the fourth quarter. All over the other contingents that we recorded in the fourth quarter, that was all based upon the profitable growth that we delivered for our carrier partners, and just we do year-end calculations and sometimes — you make it sometimes you don’t — that’s where we see generally the most volatility in our National Programs, they just — they move back in force.

Michael Ward: Super helpful. Thank you. Maybe one last quick one, just on the pressure and specialty. Is that — I think you called out, auto — lower auto and RV sales. Is there anything else there that we should be thinking about?

Powell Brown: No, I don’t think so. I mean, remember, if you think out a little bit sort of speculate on that the outlook on that industry, I think probably inventory levels will probably lift a little in the third quarter and beyond in the year. Also in light of the economic environment that will probably be some more incentives, I don’t know that, but incentives put-in-place to move units. So, if the inventory is there, and I use the most important thing, is we can’t fully predict that. We think you’re going to see some uptick in that, but slight.

Michael Ward: Okay. Thanks very much guys.

Powell Brown: We’ll take one more question, Norma, that would be great.

Operator: Thank you. Our next question comes from the line of Derek Han with KBW. Your line is now open.

Derek Han: Good morning, thank you. I just had a question on the Programs business. Andy, I think you previously talked about your expectation for the Program’s organic growth to kind of moderate, but even excluding that $7 million that you called out organic growth was really strong and actually accelerated sequentially. So, can you just give us some more color on what kind of drove that outperformance relative to your internal expectations?

Andy Watts: Yes. So, one of the other items in there we talked about it was we said we delivered $25 million of revenue from the captives and about $5 million of that came through the Orchid acquisition. So, the remainder of that being on the organic side. We’re going to see continued growth in ’23, but not at that same level, Derek.

Derek Han: Got it. Okay, that’s helpful. And then just one quick one. I know that the GRP and BdB integration is going well. Can you just give us some color on your European economic outlook and the anticipated impact on the organic growth for those businesses?

Powell Brown: Sure. So, remember GRP is England and Ireland, both Republic of Ireland and we have businesses already in the Republic of Ireland and Northern Ireland. And BdB, we do business in — excuse me, Italy, meaning we are the largest producer of Italian business into Lloyd’s. That’s over 50% of that business and then we do business in France and in Belgium. And we also do business obviously in England into the London marketplace. So, what I would tell you is that in England it’s not dissimilar to hear, which you see a lot of pressure on wages and cost of living, i.e., fuel oil and things like that. And so but from a comp — from a customer standpoint, we have not yet seen a significant down draft on their buying habits.

So, what I would tell you is, we think that the economy seems to be moving along in a fine way there as it relates to our exposure although it would be — it’s much smaller in Western Europe, we’re not seeing any other unusual trends either remember Lloyd’s is a big market globally. I think about 50% of their premium writings are in the United States. But the other 50 are worldwide. And so, we are continuing to have nice growth inside of our business — our Lloyd’s brokers, which we have now three. And so, we’re very pleased that decades-long Meyer and BBB.

Derek Han: Okay, thank you.

Operator: Thank you. I’m showing no further questions, I’d like to hand the conference back to Mr Powell for any closing remarks.

Powell Brown: Thanks, Norma. Thank you all very much. We appreciate your time and energy. We thought last year was a really good year and we’re excited about the future. I think my final comment would be this. As it relates to trends we don’t think that trend is one quarter and we don’t measure the outcomes of business over a quarter. We look at years and multiple years and so as it relates to each of our three largest segments, we feel good about going into next year. There are some limitations, i.e. because of market constraints and economic constraints, but we’re going to work our way through those. So we look forward to talking to you next quarter. And have a nice day. Thank you.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.