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 details in the slide presentation and answers to your questions, may relate to future results or be forward-looking. These statements reflect our current views regarding future events, particularly concerning the company's expected financial results for the fourth quarter, and are meant to comply with safe harbor provisions of the securities laws. Actual future results may be subject to various risks and uncertainties, potentially differing significantly from our current expectations and any forward-looking statements made due to numerous factors. These factors include the company's final determination of its financial results for the fourth quarter, which may vary from the preliminary unaudited numbers in the press release issued yesterday. Other identified risks and uncertainties are documented in the company's reports filed with the Securities and Exchange Commission. Further discussion of these and other factors impacting the company's business and outlook, along with more information on forward-looking statements, can be found in the slide presentation associated with this call and in the company's SEC filings. We do not intend to update or revise any forward-looking statements based on new information, future events, or otherwise. Additionally, non-GAAP financial measures are used in this call, and a reconciliation of any non-GAAP financial measures to the most comparable GAAP measures can be found in the company's earnings press release or in the investor presentation available on our website. With that said, I will now turn the call over to Powell Brown, President, and Chief Executive Officer. You may begin, sir.

Thank you, Norma. Good morning, everyone, and thank you for joining us for our fourth quarter 2022 earnings call. Before delving into the specifics, I would like to make a few remarks about our performance in 2022. The fourth quarter wrapped up another outstanding year as we achieved strong organic growth while effectively maintaining our margins despite increased variable operating expenses and the financial repercussions of Hurricane Ian. 2022 also marked a significant year for our acquisition activity as we enhanced our international capabilities through the additions of GRP and BdB in the U.K. Our strong results are primarily attributed to the hard work and commitment of our nearly 15,000 employees. Now, let’s move on to the quarterly results. We reported $900 million in revenue, a total growth of 22% and an organic growth of 7.8%. Our adjusted EBITDAC margin rose by nearly 300 basis points to 31.4% for the quarter. Our adjusted net income per share was $0.50, reflecting a growth of 28%. We also completed nine acquisitions during the quarter, generating annual revenues of about $17 million. Overall, we are satisfied with the quarterly results. This year, we achieved a new milestone by surpassing $3.5 billion in revenue, which represents a total growth of 17% and an organic growth of 8%. Our adjusted EBITDAC margin for the year remained robust at 32.8%. On an adjusted basis, our net income per share increased nearly 7% to $2.28. Additionally, we reached a record year for M&A activity, completing 30 acquisitions that contributed approximately $435 million in annual revenue. Our acquisitions, whether large or small, are performing well due to our disciplined strategy of acquiring high-quality businesses that align culturally and make sense financially. We have a proven ability to successfully acquire, integrate, and grow companies of all sizes within the Brown & Brown team. Later, Andy will provide a more detailed discussion on our financial results. Now, let’s shift our focus to the economy. We are observing the continuation of business expansion, with companies still hiring, though at a slower pace than in prior quarters. There has been a general decline in the number of open positions that companies are looking to fill. Although interest rates have significantly increased over the past year, we aren’t yet seeing widespread impacts on our customers or the economy. From an insurance perspective, certain markets have been in considerable turmoil. Pricing for catastrophe property, both commercial and residential, was under pressure through the third quarter. The situation worsened when Hurricane Ian hit Florida, leading to 1/1 reinsurance treaties being bound at higher attachment points with significantly higher rates. Consequently, we observed incremental price increases and lower limits being offered for placements in late Q4 last year and early this year. The placement of catastrophe property in Q4 last year and January of this year has been among the most challenging we’ve seen in decades, with rates surging by 20% to 40% or more. Properties of lower construction quality or those with previous losses could see even steeper increases. This led some customers to be unable to purchase or afford full limits, thus opting to raise their deductibles or buy lower limits to manage insurance costs. In certain cases, this was not feasible as lending institutions or condo associations would not permit lower limits or significantly higher deductibles. Admitted market rate increases were similar to those in previous quarters, rising between 3% and 7% across most lines, while workers' compensation rates remained down by 1% to 3%. The placement of professional and excess liability continued to be competitive, with rates varying from down 5% to up 5%, while public company D&O rates dropped by 5% to more than 20%. In terms of cyber insurance, the situation mirrors recent quarters, with rates and deductibles still on the rise, although we did notice slight moderation during the quarter. Towards the end of Q4, legal and regulatory changes in Florida regarding insurance included the removal of one-way attorney's fees and assignment of benefits, the establishment of a reinsurance backstop for certain carriers, and mandatory arbitration prior to litigation. These reforms should benefit insurance buyers, but their impact will take time to materialize. Regarding M&A, we are pleased with the nine transactions completed. We continue to acquire companies that align culturally and financially. The integration of GRP is progressing well, and we are acquiring several businesses whose financial performance aligns with our expectations. From an industry perspective, the number of transactions has decreased significantly compared to previous quarters. As was the case last quarter, businesses deemed essential or platform companies remain aggressively priced. Now, let’s discuss our performance across the four business segments. For the quarter, our Retail segment achieved organic growth of 2.7%, with solid growth across most lines of business. However, our organic growth was affected by a slowdown in specialty lines due to declining auto and RV sales as well as slower growth in some of our employee benefits businesses, which faced a tough comparison to the previous year's fourth quarter. Overall, our Retail segment delivered a strong year of organic revenue growth at 6.5%. We believe our business is well-positioned, and we have the capabilities to serve customers of all sizes, giving us confidence that 2023 will be another successful year. Again, our National Programs segment reported excellent results, achieving 22% organic growth for the quarter. This growth was fueled by new business and high retention levels across most programs, along with exposure unit expansion and rate increases. The National Programs team is performing excellently by providing a diverse array of products and offering top-tier solutions for our customers, resulting in nearly 16% organic growth for the entire year. Our Wholesale Brokerage segment also had a strong quarter, growing 8% organically, driven by rate increases and new business, despite challenges in personal lines throughout much of the year. The Wholesale Brokerage segment achieved a 7.6% organic growth rate for 2022 and is well-positioned to continue this success into 2023. For the quarter, our Services segment reported modest organic revenue growth, primarily from winning new customers and handling increased storm claims, which was balanced out by lower claims in certain areas. Overall, we are confident in our capabilities and the value we bring to our customers. Now, I will hand it over to Andy to delve deeper into our financial performance.

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 costs. 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 by $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 costs. 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. A 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.

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 takes 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 make 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.

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

Good morning, everyone. I understand you typically avoid forecasting organic revenue growth, but I wanted to address two points you mentioned. One is related to catastrophe pricing and the other concerns some employee benefit challenges in your retail segment. Considering these factors, Powell and Andy, how do you anticipate the June first renewals on property catastrophe and the employee benefits situation will impact your organic results for the upcoming year?

Let's start with employee benefits. Overall, these performed really well this year, and we're quite satisfied with those businesses. As mentioned in our prepared remarks, there were only one or two businesses that faced challenges. However, we expect employee benefits to continue to perform well in the system. While we don't provide organic guidance or break out lines of business, we feel positive about our employee benefits outlook. Regarding CAT property pricing, the variable isn't just about our limitations on presenting certain limits; it's more an affordability issue. For instance, if you've been facing rate increases of about 10% a year on your personal homeowners insurance for several years, a sudden 25% increase in the fifth year could be overwhelming for buyers. The availability of capacity in this market is unprecedented; I've been in the insurance industry for 33 years, and I've never seen anything like this. We will continue providing solutions to our customers, but as an example, consider an entity paying $800,000 for their property needing to renew at $1.8 million. If they ask what they can buy for $1 million, they find they can’t afford any insurance anymore. We're observing this trend more frequently. The CAT pricing is somewhat unpredictable. Additionally, we're noticing downward pressure on commissions for accessing CAT capacity in some situations. People often assume that if the rate increases, commissions will too, but in this case, commissions might be cut by one or two points, which we're also experiencing. Thus, this is a complex issue to address.

I understand that it's a moving target, especially in the Southeast. For my second question, Andy, you mentioned in your comments that you provided some guidance, and regarding adjusted EBITDAC margins, you stated there are no tailwinds or headwinds for '23. Can you provide some context on whether we should expect margins to remain flat year-over-year, or could you offer more details to clarify what your comments really mean?

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.

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 of thumb 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?

No.

Fair enough. Thanks for your answers.

All right. Thanks, Greg.

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

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.

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.

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?

So, Rob, we believe that the operating environment for risk bearers and insurance in Florida looks positive based on our observations. However, we expect the trial bar to contest these changes, so their implementation may not be straightforward. The timeline and adoption in the marketplace are uncertain, but our governor and the State of Florida aim to create a viable, competitive, and sustainable marketplace. The State is not inclined to be heavily involved in the insurance business, but due to recent disruptions, it will need to play a more significant role in the coming years. We think this is a multi-year transition to restore the Florida marketplace, particularly in personal lines. It may take three to five years for the State of Florida to increase its involvement as proposed, and further measures may be necessary. However, the Governor does not intend to expand the State's role as a risk bearer. Given the challenges ahead, it's difficult to predict the impact, but we need relatively affordable homeowners' insurance for all types of homes—ranging from those valued at $200,000 to over $1 million—amidst the ongoing disruptions across all segments.

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?

I think there are two aspects to consider here. One is the growth bonus of about $7 million that we mentioned, which we currently do not expect to recur in 2023. This amount is included in the organic calculation, not in contingent commissions. We did not provide specific guidance on contingents for individual segments. My overall comment for the company is that, at this moment, we anticipate relatively flat performance in 2023, but this is contingent upon the losses experienced during the year and overall growth and profitability.

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

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?

Hi, good morning, Weston. Yes, the employee benefits business does exhibit some seasonality, generally being more weighted towards the first quarter due to how revenue is recognized. Typically, the fourth quarter tends to be one of the lower periods for that business. Some of the headwinds we mentioned for the fourth quarter may carry over into the first quarter, but we don't anticipate any issues for the full year, similar to our previous outlook for 2022.

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?

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.

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 get too granular here, but 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?

When you mention March, do you mean

Yes. The margin guidance you provided.

For the three combined, yes. All the businesses are performing in line with our expectations. We discussed some of the seasonality during the earnings call last quarter, but they are all aligning with what we expected.

Great. Thanks for taking my questions.

Thank you.

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

Hi, thanks. Good morning. My first question is about the contingent commissions, Andy. I know you mentioned the lender-placed contingents, and you weren't certain if they would come back next year. Are you assuming they will return, or what is your expectation for the lender-placed program?

During the fourth quarter, we recognized about $3 million to $4 million that we previously expected not to recognize. Earlier, we mentioned that we had adjusted our year-to-date figure by $15 million, indicating that we likely would not record this in the fourth quarter. The development was not as extensive as we anticipated, which is a positive sign. Looking ahead to 2023, we expect some earnings but not at normal levels due to residual effects on the calculations. We have considered this when providing our overall guidance for the company, which remains largely flat.

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?

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

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; maybe flat margins overall. But it does feel like that number in isolation would be a tailwind to the coming year.

Yes, I think isolation is probably a fair assessment. Within our business, like many others, there are always multiple factors at play, constantly shifting. That’s why we aim to provide guidance on any significant tailwinds or headwinds affecting our performance.

And then one last question, you mentioned that employee benefits are concentrated in the first part of the year, but it seems like what happened in the fourth quarter was a really tough comparison with last year. So when we consider retail, and I know you prefer not to provide guidance, is there anything noticeable that would indicate the first part of 2023 might have more challenging comparisons later in the year?

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.

Okay. Thanks for the color.

Great. Thank you.

Thanks, Elyse.

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.

Hi, good morning. I would like to revisit the disruptions in certain areas of the property market. I'm curious if your perspective has changed regarding whether the current environment is beneficial for growth or margins, neutral, or potentially negative. There are many factors at play, including the pressure on commissions and the significant increase in rates, and I'm interested in your view on whether all these factors balance out or if your outlook has shifted.

Yes, I would say it's probably a slight net positive. The reason I mention a slight positive is due to changes in the market that we can't yet see, such as limits being reduced by carriers or potential commission pressures. Additionally, clients are acknowledging these issues, which can be challenging for us as we often have to deliver bad news. Overall, I think it will be slightly positive, and that is how I would like you to view it.

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 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.

Let's address your point regarding wage pressure. We are certainly affected by wage pressures, which is crucial to acknowledge. Like others in our industry, we face intense competition for talent. It's not just sales roles that are in demand; there are also needs for service, marketing, and administrative positions. This creates a competitive hiring landscape, and it's important to realize that we are not insulated from this issue at all. Additionally, regarding travel and entertainment expenses, we don't anticipate a significant increase in travel itself, but the costs associated with it, like airplane tickets and hotel stays, are seeing considerable pressure. This trend is not unique to us but is observed across various businesses, especially in an inflationary environment. Although we experience high pressure here, it is not as pronounced as it is in places like England and Ireland, where wage pressures are more severe. We are navigating these challenges as they arise.

That's helpful. Can I quickly ask if there has been any impact from the flooding in California on the flood program you administer, as it could be significant?

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.

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

Hi, good morning, everyone, and thank you for taking my questions. My first question, which may relate to a few other inquiries you've already addressed, concerns the property CAT rate environment. Which segments do you believe will benefit the most, and which ones might face more challenges due to factors like reduced commissions and potentially tougher business placements?

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?

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?

First off, I view the situation from a different angle than simply considering whether some segments will benefit more or suffer more. Let's take a look at retail for a moment. Retail has the advantage of dealing directly with customers, so there will be significant effort required to achieve those specific increases. You might see some reductions in commissions in certain cases, but rates are going to increase, which I believe is mildly positive for organic growth in that sector. In wholesale, conditions make things considerably tougher for brokers as they attempt to expand their lines of business. For instance, if you had a $100 million line that was managed by one or two markets, and now that market, which previously handled 80% of it, is reducing its participation, you’ll need to involve six or seven markets to reach your $100 million target. There will continue to be pressure there as well. The greatest conflict in placements will likely occur in both retail and wholesale. In National Programs, it involves the availability of capacity. Many carriers have let their capacity be underwritten by various MGAs and MGUs, and several of them have been unprofitable not just last year but over many years. This leads to what we refer to as a flight to quality. We are pleased with the results we've achieved, even including last year’s losses from Ian and Nicole. In programs, growth potential is constrained by availability. Unlike the previous two segments, where there is intense competition to secure participation, we have the authority in our underwriting facilities to do what we can, but we are limited by capacity. If a market decides to reduce the capacity it provides us, it will affect our growth potential. Similarly, if there is a change in commission levels, that will also impact our growth. One important point to consider is that situations are rarely as good or as bad as they may initially appear. Even though the CAT market is currently facing significant challenges, there will come a time in the future when it improves. I'm not suggesting a forecast, as we cannot predict the future. However, some markets are approaching this situation opportunistically, while others view it as a long-term partnership. Clearly, we would prefer the latter approach. We are actively searching for capacity on a global scale, and I want everyone to understand that this pressure will eventually subside.

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?

I think when you mention the slowdown in M&A activity, it's important to note that this is a broader industry observation. Private equity has been a major player, and the number of private equity transactions announced in Q4 fell significantly compared to both the previous quarter and the same quarter last year. We’re currently at a unique point where rising interest rates are influencing the market, with buyers hoping for a slight reduction in the multiples they pay. At the same time, some businesses, particularly those owned by private equity, are aiming to sell at historically high multiples, possibly due to concerns about future pressure on those multiples. They’re looking to cash out at a higher multiple now, rather than risk lower valuations in the future. I believe we will see increased activity in the next year. Our focus, however, remains on the long term, which for us is measured in years rather than months. We’re seeking businesses that align with our culture and are financially sound, and we’re confident that suitable opportunities will arise. In the meantime, as mentioned, we’re actively reducing our debt, investing in our team, and prioritizing organic growth.

Thank you very much.

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

Yes. Thank you, good morning.

Good morning.

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.

Thank you for the question. It's somewhat uncertain, but currently, we believe a stable outcome is to maintain our capacity without reduction. There may be some instances where certain businesses might slightly decrease their capacity, but overall, we think it's fairly balanced. We see this as a positive outcome. Regarding your question about specific events like a flood or quake, these could affect our wind facilities as well. The growth opportunities in our National Programs are closely tied to the new capacity we can secure. If we aren't able to obtain any new capacity, it may limit our organic growth slightly. However, this doesn't mean we can't grow; rather, our organic growth will improve if we can secure more capacity, which we are actively exploring on a global scale.

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?

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.

Hi, Mark, could you elaborate on what you meant by providing adequate returns? I'm getting the impression that we might not interpret it the same way you do, but I'd like to understand your perspective better.

I think...

We're retaining

Yes. If your revenue is $30 million with a 50% margin, that gives you $15 million. However, if your retention per event is only $13 million and perhaps a hurricane impacts Florida one in three years, that affects the perspective on the economics. That was just some straightforward math I was considering.

Okay. So that is where the opportunity lies to clarify this further. We want everyone to understand that we are participating in the underwriting profits from these captives. Just like with contingent commissions, we are involved in the underwriting profits. This does not mean that we are paying commissions and all that on the business. I think that's where the confusion might be; it's not a traditional operating profit. It's coming through as underwriting profit. We are very pleased with our performance this year, and to Powell’s point, we want to invest our capital in these opportunities because we believe we can achieve an appropriate return.

And the $13 million, Mark, does not guarantee that it will be $13 million. It's important to note that it could be less than that or significantly less than that.

I appreciate the clarity. Thank you.

No. Thank you.

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

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 Hurricane Ian true-ups.

Good morning, Mike. Andy here. I wouldn't say anything was related to Hurricane Ian true-ups. At the end of the third quarter, we had reduced our expectations to $15 million, as we mentioned earlier. At that point, we indicated that based on our estimated losses, we would not record $3 million to $4 million in one of our programs because the development did not meet our expectations, which is a positive outcome. Therefore, we went ahead and recorded that $3 million or $4 million in the fourth quarter. All the other contingencies we recorded in the fourth quarter were based on the profitable growth we achieved for our carrier partners. We perform year-end calculations, and sometimes they work out as expected, and sometimes they do not. Generally, we see the most volatility in our National Programs during this time, as they can shift significantly.

Super helpful. Thank you. Maybe one last quick question about the pressure and specialty. You mentioned lower auto and RV sales. Is there anything else we should consider?

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.

Okay. Thanks very much guys.

We'll take one more question, Norma, that would be great.

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

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?

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.

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?

Sure. GRP includes England and Ireland, specifically the Republic of Ireland, where we already operate, as well as Northern Ireland. Meanwhile, BdB operates in Italy, where we are the largest contributor of Italian business to Lloyd's, accounting for over 50% of that volume. We also engage in business in France and Belgium, in addition to our operations in England within the London marketplace. In England, the situation is similar to here, where we're experiencing significant pressure on wages and cost of living, including utilities like fuel oil. However, from a customer perspective, we have not yet observed a notable decline in their purchasing behaviors. Overall, we believe the economy is progressing well regarding our exposures. Although our footprint in Western Europe is smaller, we are not seeing any unusual trends. It's essential to note that Lloyd's is a substantial global market, with around 50% of premium writings stemming from the United States and the other half from around the world. We continue to enjoy solid growth within our business, particularly among our three Lloyd's brokers, and we are pleased with the progress over the decades.

Okay, thank you.

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

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.

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