Brown & Brown Inc (BRO) — Q1 2022 Earnings Call Transcript

Thank you, Jake. Good morning, everybody and thanks for joining us for our first quarter 2022 earnings call. We delivered another good quarter and are very pleased with our top and bottom line performance. Our consistently high level of performance is driven by our unique culture, whereby approximately 22% of our company is owned by teammates. Since our call on March 8, we've made good progress and are very excited about GRP, BdB and Orchid becoming part of the Brown & Brown team. Their additional capabilities and talented teammates will enhance the solutions we deliver to our customers globally. After that call on the 8th, Barrett Brown, Scott Penny and I spent two weeks traveling around the U.K. and Ireland and met with over 1,000 of our soon-to-be new teammates and visited over 20 locations. After two weeks of engaging with the GRP and BdB teams, we are even more confident about the cultural alignment and are more optimistic about the future. As an update on closing the deals, we're very excited about the closing of Orchid at the end of March. For GRP and BdB, we continue to anticipate closing these acquisitions during the third quarter. Lastly, we completed the financing for these transactions in March. In addition, we published our annual report, ESG report and proxy statement. We encourage everyone to review these documents as each report highlights key aspects of our strategy, our commitment to our ESG initiatives and our philosophies around executive compensation. Now, let's transition to the results for the quarter. I'm on Slide 4. We delivered $905 million of revenue, growing 11% in total and 7.8% organically with good new business and solid retention. Our adjusted EBITDAC margin was strong and remained consistent with the first quarter of 2021. Our net income per share for the first quarter was $0.77 on an as-reported basis and $0.78 on an adjusted basis. Later in the presentation, Andy will discuss our financial results in more detail. We completed two acquisitions during the quarter with annual revenues of approximately $65 million, with Orchid being the majority of that amount. In summary, we're very pleased with our strong performance for the first quarter. I'm now on Slide 5. From a customer and market perspective, businesses continue to expand and the economy grew, albeit at a slower rate than last year. We're seeing some customers beginning to realize initial relief in supply chain issues experienced over the last two years. The main challenges business leaders are managing today are the ability to find enough workers, inflation and rising interest rates. These are putting pressure on margins for many companies across multiple industries and are influencing how leaders invest in their company. From a carrier standpoint, the themes remain fairly consistent as compared to Q1 of '21 and previous quarters which includes the availability of limits for certain classes, heightened pricing sensitivity and increased underwriting rigor for cyber liability and customers with high losses. Consequently, customers continue to modify their deductibles and limits to best manage their premium increases. 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 continue to be down 1% to 3%. From an E&S perspective, rate increases continue to be in the range of 10% to 20%. Cat property, both wind and quake, were up 10% to 30%, with some year-over-year moderation experienced on earthquake rates. A topic that's on the minds of many carriers is insurable values as property prices and replacement costs have increased materially over the past couple of years. Professional liability for most accounts remains very challenging with rates up 10% to 20%. Regarding cyber, rates and deductibles continue to increase with carriers requiring effective security protocols in order to obtain coverage. For professional liability and excess umbrella, the themes are consistent with previous quarters. California and Florida personal property placements are becoming even more challenging due to past losses and aggregate concentrations and we expect the appetite for personal lines in those cat-prone areas will continue to be constrained this year. With that said, we are well positioned to help our customers find creative solutions. I'm now on Page 6. Let's transition to discuss the performance of our four segments. Our Retail, National Programs and wholesale segments delivered another strong quarter with organic revenue growth of 8.9%, 6.1% and 11.6%, respectively. The performance of these segments was fueled by a combination of new business, good retention, rate increases and modest exposure unit improvement. The organic revenue for our Services segment decreased 6.2% for the quarter with the main driver being fewer weather-related claims this year. Now, let me turn it over to Andy to discuss our financial performance in more detail.

Great. Thank you, Powell. Good morning, everybody. We're over on Slide number 7. Like previous quarters, we're going to discuss our GAAP results and then certain non-GAAP financial highlights. For the first quarter, we delivered 11% total revenue growth and organic revenue growth of 7.8%. Our net income grew 10.3% or $20.6 million and our diluted net income per share increased by 10% to $0.77. The effective tax rate increased to 16.9% for the first quarter of this year as compared to 16.5% in the first quarter of last year. The higher rate was primarily impacted by the change in the tax benefit associated with shares vesting from our stock incentive plans. We continue to anticipate our full year effective tax rate will be in the 24% to 25% range. Our weighted average number of shares increased slightly compared to the prior year and our dividends per share increased to $0.103 or 10.8% compared to the first quarter of 2021. We're over on Slide number 8. This slide presents our results on an adjusted basis. Previously, our adjusted measures only excluded the change in earn-out payables. Beginning this quarter, we refined our adjusted measures to isolate the impact of movements in foreign currencies on both revenues and operating cost as well as to remove the net gain or loss on disposals. In addition, we're removing the nonrecurring acquisition and integration costs associated with GRP, BdB and Orchid due to the materiality of these costs. We anticipate excluding the cost for these acquisitions for the next 18 to 24 months. Please refer back to Slides 15 and 16 for the reconciliation of these amounts to our most comparable GAAP measures. On an adjusted basis, income before income taxes increased by 11.7%, EBITDAC grew by 11.1% with consistently strong year-over-year margins even with higher variable cost over the prior year and our net income increased by 11.3%. From an expense standpoint, our first and second quarters are probably our toughest year-over-year comparisons as travel and entertainment were increasing in the second half of last year. Our adjusted diluted net income per share was $0.78 which grew by 11.4%. In summary, it was another great quarter on the top and bottom line. We're over on Slide number 9. Our Retail segment delivered adjusted total revenue growth of 14.2%, driven by acquisition activity over the last 12 months and organic revenue growth of 8.9% with solid growth across all lines of business. Adjusted EBITDAC grew 18.4% with the associated margin increasing by 130 basis points for the quarter which was driven by leveraging organic revenue growth and managing our expenses even with increased variable operating costs. Moving over to Slide number 10. Our National Programs segment delivered adjusted total revenue growth of 4.7% and organic revenue growth of 6.1% with strong growth across many programs. The difference between adjusted total revenues and organic revenues was driven by slightly lower contingent commissions and the sale of a program in the prior year. Adjusted EBITDAC was substantially in line with the prior year with the associated margin declining by 170 basis points to 33.2% as a result of increased variable expenses, higher noncash stock-based compensation and the timing associated with recognizing revenues and costs related to new customers. We're over on Slide number 11. Our Wholesale Brokerage segment delivered adjusted total revenue growth of 13.2%, driven by acquisitions in the past 12 months and organic revenue growth of 11.6%. Adjusted EBITDAC increased by 23.2% with the associated margin improving by 260 basis points as a result of strong organic revenue growth and higher contingent commissions despite increased variable cost. Moving on to Slide number 12. Adjusted total revenues in our Services segment decreased by 7.2% and organic revenue declined by 6.2% due to fewer weather-related claims as compared to the prior year. For the quarter, adjusted EBITDAC decreased by $3 million or 25.2% due to variability in the volume of weather-related claims. A few comments regarding liquidity and cash conversion. As discussed during our Q4 earnings call last year, we've transitioned to a fiduciary reporting model for cash, accounts receivable and payables held or owed in a fiduciary capacity. The change is to more appropriately reflect the cash flow from operations and the nature of the accounts on our balance sheet. On the cash flow statement, changes in fiduciary receivables and liabilities are presented within financing activities. On the balance sheet, these accounts are labeled as fiduciary assets and liabilities. After delivering another year of strong cash flow in 2021, we started 2022 with a solid performance and delivered cash flow from operations of $104 million. Our ratio of cash flow from operations as a percentage of total revenues was 11.5% for the first quarter of this year as compared to 16.9% in the prior year. The ratio of cash flow from operations as a percentage of total revenues was lower than the prior year due to paying higher incentive bonuses to our teammates for their outstanding performance in 2021 and the payment of acquisition earn-outs as certain acquisitions have overperformed our original expectations. As a reminder, the first quarter is normally our lowest conversion ratio of the year due to payments of prior year bonuses. Consistent with our comments at year-end, post our transition to the fiduciary model, a good estimate of full year cash flow from operations as a percentage of total revenues should be in the range of 27% to 28%, barring anything unusual. As Powell mentioned earlier, we completed the financing for the acquisitions of GRP, BdB and Orchid. The total deployed capital for these acquisitions will be approximately $2.5 billion. $2 billion of the purchase price will come from the $1.2 billion of new 10- and 30-year bonds we issued in mid-March which carry interest rates of 4.2% and 4.95%, respectively. $800 million will be sourced from a new bank facility we finalized at the end of March. The remainder of the purchase price will come from cash on hand as well as cash generated during the first half of this year. Incremental interest expense for the first quarter was approximately $2 million and we expect interest expense to increase approximately $17 million per quarter going forward as a result of the bonds and bank facility. Our excellent capital position and strong cash flow support our strategy to acquire great companies and also enables us to delever over the coming quarters as we've done in the past after larger acquisitions. With that, let me turn it back over to Powell for closing comments.

Thanks, Andy, for a great report. We finished 2021 with significant momentum which continued into 2022 and enabled us to deliver another great quarter on top and bottom line performance. We believe economic growth will continue to return to more normal levels. However, there are a number of topics that will influence business confidence and economic expansion which are the continued high levels of inflation and rising interest rates. We are also following topics as additional drivers of the economy as: one, availability of employees across all industries; two, the resolution of supply chain constraints; and three, how current global geopolitical matters resolve themselves. How each of these areas play out over the coming quarters will drive the growth trajectory of the economy. This will then influence how leaders invest in their businesses and corresponding exposure unit expansion. From a rate perspective, we anticipate premium increases for admitted markets will remain relatively constant for the next few quarters. From an E&S perspective, we expect premium rate increases for the second quarter to be consistent with levels experienced in the first quarter. Depending on weather-related and other losses incurred over the next few months, rates for certain lines may increase further or moderate slightly in the months to follow. In states like California and Florida, premiums are becoming very expensive for certain classes. As a result, customers are managing expenses by modifying deductibles or aggregate limits. On an M&A front, regulatory approval for the closing of GRP and BdB is progressing as expected and we anticipate closing during the third quarter. More broadly, we expect competition and valuations to remain at peak levels until interest rates increase materially. We have a good pipeline. We are actively seeking firms that fit culturally and make sense financially and we're well positioned to deliver value for our stakeholders. From an innovation standpoint, we're making good progress to leverage data in order to enhance the customer experience, streamline the placement of coverage and create new products. We're also working to implement efficiency tools that will enhance the experience for our teammates so they can spend more time delivering solutions for our customers. In closing, we feel great about our business as we continue to expand our capabilities and most importantly, about our 12,000-plus teammates that will soon be nearly 15,000 teammates when GRP and BdB are closed. We're focused on delivering for our customers, writing more new business and acquiring great companies as these will be the key drivers of our long-term growth. With that, let me turn it back over to Jake for the Q&A.

Hi, thanks. Good morning. My first question is on the margin. You guys have pointed to flat margins for the year. I know, Andy, you guys pointed out that you had tougher year-over-year compares in the first and the second quarter as T&E started to increase in the back half of last year. So since the margins were flat to start the year, does that position you guys to see margins come in better than you originally expected?

Elyse, I think since we're at the end of the first quarter, similar to the comments last year, we'll probably stick with our current guidance for the full year and then let's see how the next quarter or two round up for us. But the fact that we said flat, that could be up slightly, down slightly for the full year, still seems like a pretty good range at this stage. But we're very pleased with the first quarter.

Okay, great. And then my second question, in terms of organic. Retail, you pointed to broad-based growth across the different businesses. Can you give us a sense of how the core Retail business is doing versus benefits in the Q1? And I know last year, you guys showed pretty strong growth in the second quarter in benefits. Should we think about the year-over-year compare being tough? Or would you expect to show good growth in benefits in the second quarter this year as well?

So Elyse, we are very pleased with the performance of all segments of the business in Retail. And although we don't break out those segments, we're very pleased with how commercial, P&C and benefits and personal lines performed in the first quarter and we anticipate that they will perform well in the second quarter.

Okay. And then one last. When you guys announced the GRP deal, you were talking about potentially looking to use that platform to do some other bolt-on deals overseas. Since you announced the deal, do you have any kind of update just on the market that you guys are seeing in U.K. and Ireland and how that could translate into additional M&A opportunities for Brown & Brown?

What I would say, Elyse, is that it’s a smaller economy with 66 million people compared to 330 million in the United States. However, there are many firms in the small and medium space. The key, and GRP has been successful in this area, is to continue identifying firms that align culturally and make financial sense. They are actively seeking opportunities and currently engaged in transactions, and we expect this to continue. However, we don’t provide guidance on what we will buy or what’s in the pipeline until deals are completed. We do believe there will be some promising opportunities for us, and we are very excited about them and looking forward to welcoming our new teammates once we receive FCA approval.

Okay. Thanks for the color.

Thanks, Elyse.

Good morning, everyone. Powell, in your comments, you discussed inflation, supply constraints, and a mild war on talent. Within the insurance brokerage sector, there seems to be significant focus on the war for talent, with teams periodically moving from one organization to another. Could you elaborate on how your producer and teammate retention is performing? Additionally, please share any pressures you might be experiencing related to wage inflation affecting your teammates.

Sure, Greg. A while back, I mentioned that our industry has struggled significantly with recruiting and developing talent across the board. It's not just a particular firm or segment; it's a widespread issue in the industry. Additionally, we are observing a lot of movement on the carrier side, more than I've seen in my over 30 years in the insurance business. We have noticed teams shifting to other firms in the brokerage area. When it comes to acquisitions, we emphasize cultural fit, which is also a key factor in our hiring process. A foundational value at Brown & Brown is wealth creation for our teammates. All our staff can purchase stock through an employee stock purchase plan or similar options at a discount, though participation is voluntary. We foster an ownership culture, with over 22% of the company owned by Brown & Brown teammates, and we know at least 65% of our team members hold shares, likely even more. This ownership culture is quite rare in larger public companies. People generally want to be part of winning teams, and we feel we attract talented individuals, especially those in independent local roles, who can also grow their wealth by meeting specific revenue targets and benefiting from share purchases. Yes, we do have turnover, but it's not more pronounced now than it was two years ago. We certainly don't take losing talented teammates lightly, but we are continuously seeking individuals who want to join our winning team. We believe we offer the right mix of rewards that align with our company goals and encourage the desired behavior.

Got it. Just a point of clarification in your answer. You talked about the churn of talent at the carrier level. I'm wondering, are you seeing any disruptive consequence of that with renewals as you think about your total book of business?

There are two ways to approach that question. At the local office level, when there's a change, such as the departure of an underwriter, it can create some disruption. While it's manageable, it often leads to someone needing to re-evaluate the account or ask additional questions that the previous underwriter would have known. At a higher level, we usually navigate through these situations fairly well. However, at the desk level, the outcome is variable. In some cases, transitions can be challenging, while in others, they go more smoothly. It really depends on the specific situation.

Thank you for the insight on that issue. I understand this may be ahead of the process, but you mentioned spending considerable time with your colleagues in GRP and BdB. Could you share your observations on their performance in the first quarter? I’m particularly interested in how their organic growth, margin profile, and free cash flow conversion will align with your operations. While you've previously shared some overarching comments on this, perhaps you could take this opportunity to provide an update.

Thank you for your question. I will address it as diplomatically as possible. First, we haven't finalized the transaction, as it requires approval from the FCA, which we expect to receive in the third quarter. They had a strong first quarter, but I won't delve into specifics as I don't know all the details. What I find more significant, though not quantifiable for your models, is the feeling I get when visiting offices in communities across England and Ireland. It reminds me of Brown & Brown two decades ago. For those familiar with our early days, we were effective in sales and service while continually enhancing our capabilities and achieving organic growth. We've accomplished some impressive things over the last 20 years. I want to emphasize that my visits to many offices and meetings with coworkers in England and Ireland reveal a great deal of enthusiasm. We have a unique narrative compared to others in the market, especially since not many public companies exist in the brokerage industry, and we boast 23% to 22% insider ownership among our teammates. Our culture emphasizes ownership, prioritizing customer interests on a foundation of honesty and integrity, which ensures long-term success for Brown & Brown. I could elaborate on Mike Bruce and his team in England as well as Silvestro and his team at BdB in London, but I'm very pleased with both teams and look forward to them officially joining us in the third quarter.

And Greg, to your question about organic and margins, we'll address the organic once the businesses have been in with us. But no change in our previous commentary regarding overall profitability and cash flow conversion for the businesses. As we said back in the early part of March, that has a very similar profile, those businesses and the divisions in which they're going to be part of. So nothing has changed on that front. We're very, very excited about having them be part of the team and adding their capabilities.

So Andy, on that point, like cash bonuses and the expenses that go through your cash flow in the first quarter, that's similar to what's going on at GRP and BdB, correct?

For the most part, yes, there is some different phasing but nothing substantially different.

Thank you. Good morning. I would like to know your current views on the net effects of this volatility. For instance, in California and Florida, while you are experiencing significant rate increases, some customers are adjusting their deductibles and switching to Citizens in Florida. Considering the organic growth consequences of this situation, do you see this as a favorable environment for organic growth? Are these markets achieving faster growth because of this dynamic?

Let's take a step back and acknowledge that there will be ongoing pressure on state funds or state-backed alternatives in California and Florida. Currently, in Florida, four take-out companies have been either downgraded or completely eliminated by Demotech. This downgrade indicates that these companies do not believe they can continue operating, which is a concerning trend. There is a significant amount of turnover in certain segments of the housing market in Florida. The governor has convened a special session that includes several topics, insurance being one of them. The objective is to make Florida more consumer-friendly by providing more choices, recognizing the challenges that insurers face due to past and future losses. For our team members in personal lines, this situation will increase their workload. Additionally, customers from downgraded carriers may see higher-than-expected increases in their insurance rates, prompting them to explore other options. However, our approach is to offer a range of choices to our customers, which does present some opportunities for organic growth, albeit with some limitations. While I wouldn't classify the situation as entirely negative or overwhelmingly positive, it leans more toward neutral to slightly positive, with certain challenges accompanying the circumstances.

Yes, Mark, it's important to consider a few other points on this. I understand you recently released a significant research report on the cat properties and related topics. There are several factors that determine our commission revenue. While rates online are generally increasing, as we've mentioned, customers are adjusting their deductibles and looking at the overall limits they are purchasing. Additionally, with Citizens, we receive a different commission rate compared to other carriers. Therefore, numerous factors are at play. Just because the online rate may rise by 15%, it does not necessarily mean our commission revenue will increase by the same percentage. Please keep all of this in mind when evaluating the market opportunity.

You mentioned on the National Programs, one of the EBITDA impact was from timing of revenue. Does that become more favorable at some point in the near term here?

Yes, I think over the year, one of the points we mentioned, Mark, was about customer onboarding. We've discussed this in previous calls: when we acquire new customers, we typically hire team members ahead of time to train them and prepare for the account onboarding. As the revenues begin to flow into the profit and loss statement, the situation balances out. This is not unusual, but when examining individual quarters, the figures can fluctuate.

So this was more of a negative quarter, likely to balance out and be more positive at some point in the future?

That's probably a fair comment, yes.

Hi, good morning. One of the things you guys touched on in the prepared remarks was on the geopolitical matters and the impact that could have on growth. I was hoping you could provide additional context on that in context to your guidance around the March '22 M&A. Maybe expand on any potential indirect or direct exposures and just help frame the conservatism that was maybe built into that. I understand you can't get into specifics but have you noticed any slowdown in the U.K. or eurozone and related exposures?

To the best of our knowledge, we do not have any exposure in Ukraine or Russia, either currently or anticipated with the acquisition that is subject to FCA approval. During the first quarter, we have experienced general inflationary pressure, similar to what we see in the United States, affecting food and gas prices, among other things. We haven't observed a slowdown in the first quarter, and we believe that trend will continue. It's important to note that while inflation increases the cost of goods like gas and food, if a company's exposure units are tied to payrolls or sales, an increase in sales price could slightly offset the premium paid. Similarly, rising payrolls could affect premium costs due to wage inflation. Based on our observations, we anticipate that the inflationary situation will mirror what we've seen in the United States.

Great. That's super helpful. My follow-up is, I guess, on the broader pace of M&A across your portfolio. In the past, you've done around 20-ish deals per year. Just curious on the pipeline you're seeing from here. Is that roughly around the same level that we should expect for 2022? Or could it potentially be lighter given the recent large-scale M&A? Just curious on what you're seeing by size, multiple type of deal.

Yes. So Weston, I wouldn’t focus too much on the number of transactions as it may not lead to the desired outcome. I want to emphasize that we prioritize cultural fit. The reasons and timing for sales vary, and if you look at our averages over the past five or ten years, we’ve acquired approximately $135 million in revenue annually. However, some years, like this one, may exceed that, pending approval and closure of the transactions mentioned. Each deal is evaluated independently, so completing a significant transaction doesn't affect our commitment or interest in acquiring another firm in the U.S. Those are separate decisions regarding our investment strategy, and we believe we can manage both simultaneously. Therefore, I wouldn’t concentrate on the number of transactions. At the beginning of the year, we can't predict how many we will complete. What we have announced already exceeds $135 million, dependent on approvals. There are numerous opportunities we are exploring, but we can’t determine when or if they will close. We don’t discuss the pipeline because it consists of potential opportunities rather than confirmed acquisitions. Ultimately, what matters is what we finalize, and you will be informed about those when they are completed.

Weston, it's Andy. I think you might be asking whether we are out of the M&A market. Let me clarify that we are not out of the M&A market. We have sufficient capital to continue acquiring strong businesses this year. We also plan to reduce our debt after these transactions. Overall, we feel confident about our position. The question now is about timing and when the businesses will align for sale, but this alignment varies from quarter to quarter due to cultural factors.

Thank you. Good morning. Maybe a continuation on this M&A front. So if valuations remain elevated at this point, how are you thinking about team hires as another option to bring people in as opposed to outright M&A? Maybe you can help us think about the pros and cons of it and when you prefer a team hire over just purchasing a business.

I would say that whenever we find talented individuals, we are open to hiring them, regardless of the business cycle. We don’t typically engage in team lift-outs as a strategy for building our business, but that doesn’t mean we aren’t considering potential hires. If the right individuals express interest in joining us, we’re willing to explore how to make that happen. However, we adhere to our contracts and expect others to do the same, without asking anyone to breach their agreements. We are mindful of this and don’t approach potential hires with a legal mindset or intent to engage in legal disputes. Our focus is on maintaining an ethical process. If someone is interested in joining us, we encourage them to honor their existing contracts and then focus on building new business together. Once any covenants expire, they can pursue their former business if they choose.

Okay, that's helpful. And then on a totally different topic, going back to Elyse's question in the beginning of the Q&A. You had flat margins in the first quarter. It sounds like you're saying second half of the year, you could see a little bit of alleviating pressure on the margin side and yet, you're maintaining the overall full year guidance as kind of flattish margins. What are the headwinds that you're seeing or that you were potentially seeing that could offset some of the margin expansion in the second half of the year? Is it just slower growth?

Have you flown on an airplane lately? Have you flown on an airplane lately? I know you have. So the point is did you see how much you had to pay for that ticket?

Yes.

The costs for hotel rooms, rental cars, airline tickets, and gas, especially in places like California where prices can reach $5 or $6 a gallon, are all under pressure. I'm not trying to be dismissive; I’m highlighting that these input costs are significant. Overall, our margins are strong, and we are pleased with their current state. If we manage to maintain flat margins by year-end, that would be commendable given the circumstances. However, many costs are variable and beyond our control. This doesn’t imply that we expect everyone to resume travel as usual. For instance, if you used to send six people to see a client and now only send two, but the cost to travel with those two is two to three times higher, that could offset some impacts. Regarding our margin profile, if we exceed our flat margin target, that’s excellent. If we fall slightly short, that’s acceptable as well. The critical point is that we are growing our business organically and profitably, and more importantly, we’re turning that growth into cash and reinvesting it. We’ve emphasized cash conversion for a while, and we believe it’s vital, particularly in comparison to how others manage cash. Our ability to utilize that cash effectively to invest in our company is essential.

Good morning. Thanks. Just looking at the investment income. Can you just talk about what interest rates matter the most? I would have expected an increase but it looks like it didn't change all that much. And that's why I'm asking.

Yes. Derek, Andy here. Probably two ways maybe for you to think about that. Let's talk about on the interest income side. As you probably saw, for the quarter, we generated about $100,000 of net interest income. So the movement in interest rates will probably not have a material upside on interest income because there's a lot of factors that go into the net earnings of that because of restricted accounts and bank fees, et cetera, inside of there. So I think maybe that's one way to park it. And then when you look at the debt side of things, is we'll have in the range of about $1.2 billion, $1.25 billion of floating-rate debt out there. So you can get a pretty good idea of kind of what every 1% increase does on there. We think we're well positioned between fixed and floating in order to optimize the interest rates that are out there. And as it relates to the guidance that we gave on the $17 million, we've incorporated our thoughts in there as to probably what will happen with rates over the coming year.

Got it. That was really helpful. And I just had another question on contingents. It looks like the programs contingents were down a little bit, only modestly but the wholesale contingents were actually up. Can you just talk about what's driving that? Why the different directions year-over-year?

Yes. Let’s start with the programs, which can be quite volatile. This is because they are linked to individual programs and their profitability and volumes, which can fluctuate over time. There’s nothing unusual here and no fundamental changes in the business. As for the wholesale side, it’s encouraging to see a slight increase, but we don’t believe we’re completely out of the woods, and we anticipate that contingents will not significantly rise. They have been down for several years due to overall profitability at the carriers. While it’s good to see a small uptick, it’s just one quarter, and some of this is related to adjustments from previous year accruals. Therefore, there’s nothing particularly unusual at this point.

Got it. Thank you for all the answers.

Thanks, Mark.

Yes, thank you. Any update on the social security advocacy business?

The answer is yes, Mark. I would say that the processing of those claims seems to be slowing down or continuing to be slow. In the near term, meaning the next quarter or two, we don't anticipate any changes. There continues to be a backlog of claims to be processed, and I don't see a way to clear this efficiently in the short term. Therefore, we don't have a significant update on that. Do you have anything else on that, Andy?

Yes, think about it in two ways, Mark. One is the inflow into the business, and we have mentioned this on previous calls. We are very pleased with the volume of potential claims coming to us and the relationships we have with our customers. So inbound is good, which is important for us in how we view the business. Then the question is the number that ultimately gets processed by the Social Security Administration, which has a constraint based on the number of employees they have. It is somewhat at the same level as where it was about a year ago. Right now, we do not see anything suggesting they will add more resources at the SSA to increase the volume. However, we have seen this change in the past. It tends to go in cycles, leading to a backlog, and then there will be some activity that results in additional resources being allocated to clear it out. It comes in waves, but overall, the health of the business is very good. We just have to wait for it to come out on the back end. It is a cycle.

Yes. And then one final question. I don't think you've addressed this directly on this call but the duration of the P&C cycle. You described your outlook for rates to be largely steady, it sounds like, at least for the near term; steady as in steady increases. And that may be a little more optimistic than some of these calls in the past. Any thoughts on the duration of the cycle, what you might have seen here recently that influences your view on the durability of the cycle?

Let me clarify the rate ranges for clarity. If we say the rate increases range from 3% to 7% and most of them are at 6%, then in the next quarter, they shift to 5% or 4.5%, that's a slight moderation in rates. Do we expect rates to stay in the range we mentioned? Yes, we do. It's important to recognize that there is a range. Generally, in most business sectors, we are observing slight moderation in rates, but still within that range. Additionally, I've been in the industry for 32 years, and I haven't encountered a situation like the current one. Various reports indicate that while loss costs are increasing, profitability is also rising, which includes significant claims awards outside the typical range of large verdicts. Furthermore, juries in some regions show a strong sympathy for claimants. Insurers are aware of these trends and are improving their disciplined underwriting strategies, though this situation might not persist indefinitely. Eventually, as some call it, we may enter what is referred to as the "cheating phase" where pricing undercutting begins. I don't foresee that happening soon, but it’s on the horizon. One important caveat is that a major hurricane hitting Florida would significantly alter the market conditions here, which are already challenging. Similarly, a substantial earthquake in California would affect the dynamics of earthquake insurance, influencing both the buyers and the pricing. In the absence of major natural disasters—such as a significant hurricane in Texas, Florida, or Louisiana, or a large earthquake—the trend will likely continue to see pricing moderation. However, any major events in those areas could lead to a chaotic insurance market. I hope this clarifies our perspective and, although you didn't ask directly, for the remainder of the year, I expect slight moderation, contingent upon any major natural losses.

Yes. I appreciate the clarity. Thanks, Powell.

Thank you. All right. I think we have one more question. What do we have, Jake?

Thank you for having me. I have one question. Regarding the national program, it's clear that achieving the same 12% to 13% organic growth as the past two years is not feasible. However, could you provide some insights on how we might think about the remainder of the year as we compare it to the 6% growth from this quarter?

Michael, it's Powell. Think of National Programs as consisting of a couple of categories. One of these categories involves catastrophic exposure, such as earthquakes and wind events. Your growth potential in that market will depend on the availability of capacity. If new capacity isn't obtained, you might see minor increases in your existing book, but you won’t be able to write new business. Additionally, if some of this exposure shifts to another market, it could hinder your growth. I want you to remember that a portion of the National Programs relies on capacity. Reflecting on what Andy mentioned earlier regarding our loan tracking business, we have portfolios that were sold in a particular quarter, but we can't predict when those sales will happen, similar to how we can’t anticipate when portfolios will be purchased. This uncertainty can have a negative impact during certain quarters. For example, if one of our clients buys several portfolios in either the second or third quarter, we could see a slight uptick. Now, a significant segment of our National Programs is flood insurance, which recently underwent a re-rating. This means certain flood zones have been reclassified, leading to different charges than before, with some now being charged more than they were previously. If there are no significant changes and flood insurance costs increase dramatically, some individuals in flood zones may choose not to purchase it, which might sound surprising but could happen. The remaining portion of our National Programs consists of casualty-driven businesses. Take our dental program, for instance, where we provide professional liability coverage for dentists across the country. I am not aware of significant rate pressure affecting dentists. Their professional liability exposure typically arises from issues such as performing an incorrect procedure or a patient falling in the office. Historically, this program has performed well, but there is competition from others wanting to enter that line of business. So, Michael, to summarize, our portfolio of National Programs reflects an insurance model where we do not bear the risk ourselves. We underwrite on behalf of our carrier partners, with the goal of turning a profit for them. Each category I've outlined comes with its unique advantages and disadvantages as we navigate the rest of the year.

Okay. Thank you, Powell. That’s very helpful. I appreciate your time.

Yes. Have a nice day. This will be our last question, Jake.

Thank you. Andy, my question is about the GRP deal announcement. You provided a low and high case for the financials, and I've noticed that the interest expense is slightly higher. Assuming everything else remains constant, I expect you will provide an update when the deal closes, but can you share any insights at this point?

Not at this stage. I think you're spot on, Elyse. Once we close the deal, which we anticipate will happen during the third quarter for both GRP and BdB, we will provide applicable updates for projections as we gather more information. We can only go so far since we don’t own the businesses yet, so we will adjust accordingly. The interest rate is slightly up, but it likely remains within the overall ranges we previously provided.

Regarding the integration costs, I believe they were recorded under corporate this quarter. Will they continue to be categorized that way even after the deal closes? Or when will they transition to the Retail segment?

Yes. If you look in the back of the earnings deck, we've actually got a schedule in there that breaks them down by each of the divisions. So we did have costs in more than other or corporate. And going forward, they may be in different places but the schedule will be able to break that right out for you nice and clearly.

That would be it. Thank you all very much. I want to let you know that we're very excited about our performance in Q1 and look forward to another good performance in Q2. We're very pleased with the outlook on the business, the margin profile of the business, the M&A opportunities and most importantly, all of our teammates. As I said, we have just over 12,000 teammates today going to just under 15,000 when we close the BdB and the GRP deals. So we look forward to talking to you at the end of next quarter. You all have a nice day and thank you for your time.