Good morning, and welcome to the Brown & Brown Fourth Quarter Earnings Call. Today's call is being recorded.

Please note that certain information discussed during this call, including information contained in the slide presentation posted in connection with this call and including answers given in response to your questions, may relate to future results and events or otherwise be forward-looking in nature.

Such statements reflect our current views with respect to future events, including those relating to the company's anticipated financial results for the fourth quarter and are intended to fall within the safe harbor provisions of the securities laws.

Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors, such factors, including the company's determination as it finalizes its financial results for the fourth quarter that its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday.

Other factors that the company may not have currently identified or quantified and those risks and uncertainties identified from the time to time in the company's reports filed with the Securities and Exchange Commission.

Additional discussion of these and other factors affecting the company's business and prospects as well as additional information regarding forward-looking statements is contained in the slide presentation posted in connection with this call and in the company's filing with the Securities and Exchange Commission.

We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, there are certain non-GAAP financial measures used in this conference call.

A reconciliation of any non-GAAP financial measures to the most comparable GAAP financial measures can be found in the company's earnings press release or in the Investor Relation for this call on the company's website at www.bbinsurance.com by clicking on Investor Relations and then Calendar and Events.

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

Thank you, Serge. Good morning, everyone, and thank you for joining us for our fourth quarter 2021 earnings call. I wanted to begin with some overarching comments regarding our outstanding performance for the fourth quarter and the full year.

2021 was a year of milestones for Brown & Brown with revenue surpassing $3 billion, double-digit organic growth of 10.4%, EBITDAC exceeding $1 billion and cash flow from operations of approximately $950 million. Even with all the challenges that faced the economy during 2021, our team performed at a very high level.

We are extremely pleased with our results, which are only possible through the incredible efforts of our nearly 12,000 teammates. The confidence that our customers entrust with us each day and the deep relationships with our carriers. Now let's transition to the results for the quarter and the full year. I'm on Slide 3.

We delivered total revenue of $739 million, growing 15% in total and 9% organically. Our EBITDAC margin was 29.2%, which is an increase of 210 basis points from the fourth quarter of 2020.

Net income per share for the fourth quarter was $0.36 on an as-reported basis and on an adjusted basis, which excludes the change in estimated acquisition earn-out payables, which was $0.42, an increase of 31.3% over the prior quarter. During the quarter, we completed another 8 acquisitions with annual revenues of approximately $67 million.

We welcome all of our new teammates that joined during the quarter and throughout 2021 and thank them for their contributions to our results. I'm on Slide 4. For the year, we delivered over $3 billion in revenue, growing 16.8% in total and 10.4% organically.

This was the highest level of organic growth we've achieved since the early 2000s when we were much smaller and less diversified. Today, we're a highly diversified retail and wholesale broker, one of the largest operators of MGAs and operate a number of great claims businesses.

Our geographical footprint is also expanding as we operate throughout the United States, Bermuda, Canada, the Cayman Islands, Ireland and the United Kingdom. We plan to grow and enhance our capabilities over the coming years and continue to deliver our industry-leading results.

We improved our EBITDAC margin by 240 basis points to 33.5% compared to 2020 as we leverage the growth in organic revenue and manage our expenses, while we continue to make investments in our business to support long-term profitable growth. Our net income per share for the full year of 2021 increased 22.5% to $2.07.

On an adjusted basis, which excludes the change in estimated acquisition earn-out payables, our net income per share increased 31.1% to $2.19.

Lastly, we had another good year of M&A activity, completing 19 acquisitions with approximately $132 million of annualized revenue, continuing our disciplined strategy to acquire top quality businesses that fit culturally and make sense financially. Later in the presentation, Andy will discuss our financial results in more detail.

I'm on Slide number 5. From a customer and market perspective, business confidence continues to improve slowly. Business leaders are cautious due to the emergence of the Omicron variant, which represents another hurdle in the overall growth of the economy.

For many industries, challenges continue to be the ability to find and retain employees, supply chain constraints and inflationary pressures. Ultimately, these factors are impacting how quickly companies can grow.

From a placement standpoint, the themes were pretty consistent as compared to previous quarters, which included heightened pricing sensitivity and coverage availability for cyber liability or customers with high losses. As a result, customers continue to modify their risk management programs to best control premium increases.

Admitted market rates increased consistently with prior quarters and were up 3% to 8% across most lines with the outlier of your -- being workers' compensation rates, which are -- which continue to be down 1% to 3%. From an E&S perspective, most rates continue to be up 10% to 20%.

CAT property, both wind and quake, were up 10% to 30% with some moderation experienced an earthquake rates. Professional liability for most accounts remain very challenging with rates up 10 to 15-plus percent or more.

Regarding cyber, rates and deductibles in many instances have increased dramatically with carriers requiring enhanced security protocols to obtain coverage. For professional liability, cyber and excess umbrella, we continue to see carriers reduce limits while seeking significant rate increases.

Similar to previous quarters, California and Florida placements for personal lines remained challenging due to the losses or aggregate concentrations. We expect the appetite for personal lines in CAT areas to continue to be constrained into 2022, which will likely put pressure on state-sponsored programs, and the cost of insurance for the customer.

I'm now on Slide 6. Let's discuss the performance of our 4 segments. Our Retail segment had another very good quarter, delivering organic growth of 9.5%. The performance was fueled primarily by growth from most lines of business through a combination of new business, good retention, rate increases and modest exposure unit improvement.

Retail organic revenue growth for the full year was a very stout 11%, which is the first time we've delivered double-digit full year organic growth in over 20 years.

These outstanding results are reflective of the benefits from the multiyear investments we've made, our powerful decentralized sales and service model and our high performance-based culture that leverages our capabilities to provide innovative solutions to win and retain more customers.

For the fifth consecutive quarter, our National Programs segment grew double digits, delivering excellent results and growing 10.4% organically in the fourth quarter. This performance was driven by strong new business, good retention, rate increases and increasing exposure units across many of our programs.

For the full year, National programs grew organically 12.4%. The team continues to fire on all cylinders, creating new capabilities and delivering best-in-class solutions for our customers.

Our Wholesale Brokerage segment grew 8.3% organically for the quarter due to strong new business, good retention and continued rate increases despite ongoing headwinds in our personal lines business. For the full year, our Wholesale Brokerage segment grew 8.1% organically, delivering another good year.

Our Services segment grew 1.2% organically for the quarter with growth in property, auto and workers' compensation claims, which was partially offset by continued headwinds in our advocacy businesses. For the full year, organic revenue increased by 3%. 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 #7. My previous quarters, we're going to begin with our GAAP results and then discuss certain non-GAAP financial highlights, which present additional meaningful year-over-year comparisons. For the fourth quarter, we delivered 15% total revenue growth and organic revenue growth of 9%.

Our EBITDAC increased by 24%, which was driven by leveraging our revenues and the continued management of our expenses. During the quarter, we recognized gains on sales of certain businesses or books of business that benefited the growth in EBITDAC margins by approximately 50 basis points.

Our income before income taxes increased by 7.6%, growing at a slower pace than EBITDAC due to the change in estimated acquisition earn-out payables. While these adjustments had a negative impact on income before income taxes and earnings per share, they highlight how recent acquisitions are performing better than our expectations.

On an as-reported basis, our net income increased 4.5% and diluted net income per share increased by 5.9% to $0.36.

Our effective tax rate for the fourth quarter was 27.8%, which was negatively impacted by the nondeductibility of a change in estimated acquisition earn-out payables associated with an acquisition where we purchased the shares of a business.

Our weighted average number of shares were substantially flat compared to the prior year, and our dividends per share increased to $10.03 or 10.8% compared to the fourth quarter of 2020. We're over on Slide #8. This slide presents our results after removing the impact of the estimated acquisition earn-out payables for both years.

The charge was $19.8 million in the fourth quarter of this year compared to a credit of $9.5 million for the same period in 2020. Excluding these amounts, which are substantially noncash in nature, income before income taxes and net income increased by 32.3% versus total revenues growing 15%.

Our adjusted diluted net income per share was $0.42, which grew by 31.3%. In summary, it was another very strong quarter on the top and bottom line. We're over on to Slide #9. This slide presents the key components of our revenue performance.

For the quarter, our total commissions and fees increased by 15.3%, and our contingent commissions and GSCs were up $5.3 million as we qualified for certain additional contingents and GSCs primarily in the National Programs segment.

Our organic revenue, which excludes the net impact of M&A activity and foreign exchange increased by 9% for the quarter. We're over on to Slide #10. Our Retail segment delivered total revenue growth of 19.1%, driven by acquisition activity over the last 12 months and organic revenue growth of 9.5% with strong growth across most lines of business.

EBITDAC grew 25% and with the margin increasing by 120 basis points for the quarter, which was driven by leveraging organic revenue growth and managing our expenses even with increased variable operating cost.

The change in income before income tax as compared to the change in EBITDAC is impacted by fluctuations in intercompany interest, amortization, depreciation and estimated acquisition earn-out payables, which is applicable for all segments. We're over on to Slide #11.

Our National Programs segment increased total revenues by 12.6% and organic revenue by 10.4%. The increase in total revenue was driven by strong organic growth across many programs and increased contingent commissions.

EBITDAC increased by 25.4% with the margin improving 420 basis points as a result of strong organic revenue growth, managing our expenses, higher contingent commissions and a gain on the sale of one of our businesses. The gain on the sale benefited margin improvement by approximately 250 basis points. Over to Slide #12.

Our Wholesale Brokerage segment delivered total revenue growth of 12.4%, driven by acquisitions in the past 12 months and organic revenue growth of 8.3%.

EBITDAC increased by 14%, with the margin improving by 40 basis points as a result of good organic revenue growth, the impact of the foreign exchange charge recorded in the prior year managing our expenses despite higher variable costs. Over to Slide #13. Our Services segment increased total revenues by 0.5% and organic revenue by 1.2%.

For the quarter, EBITDAC decreased by 18.3% due to the mix of revenue growth in the businesses, along with certain investments to support future growth. We're over on to Slide #14. This slide represents our GAAP results for both years. In 2021, we delivered revenues of over $3 billion, growing 16.8% and earnings per share of $2.07, growing 22.5%.

EBITDAC increased by 25.5% and the margin increased by 240 basis points. For the year, our share count increased slightly in our dividends paid during 2021 increased by 9.2%. The results for 2021 were just simply outstanding. Over to Slide #15.

This slide presents our results excluding the impact of the change in estimated acquisition earn-out payables for both years. For the full year of 2021, on an adjusted basis, our income before income taxes grew 29.6% and net income per share was $2.19, growing 31.1% as compared to total revenue growth of 16.8%.

A few comments regarding liquidity and cash conversion. In addition to our strong revenue and income performance metrics, we also had another great year for cash generation delivering $948 million of cash flow from operations.

Among publicly traded brokers, Brown & Brown continues to deliver the highest cash flow conversion which we define as cash flow from operations divided by total revenues. We also finished the year in a strong liquidity position.

With this capital the cash we will generate in 2022 as well as the capacity on our revolver, we are well positioned to fund continued investments in our company. We've got a few comments regarding outlook for 2022. First, regarding contingent commissions, we anticipate them to be relatively flat year-over-year.

As it pertains to taxes, we expect our effective tax rate for 2022 to be in the range of 24% to 25%. This does not take into consideration any potential changes in federal or state tax rates. We anticipate interest expense may increase slightly depending upon the frequency and magnitude of Fed rate increases this year.

For reference, our floating rate debt is less than $500 million. In the first quarter of 2022, we'll be transitioning to a fiduciary reporting model for cash, accounts receivable and payables held or owed in a fiduciary capacity.

This change is to reflect the nature of the accounts more appropriately on our balance sheet and reduce volatility in the cash flow from operations. On the balance sheet, we'll label them fiduciary assets and fiduciary liabilities. In the cash flow statement, changes in fiduciary cash will be presented within financing activities.

For 2021, our conversion ratio of revenues to cash flow from operations was 31%. Taking into consideration the upcoming change, it would have been approximately 27% to 28%. Starting in the first quarter of '22, will present the prior periods on the same basis.

And then lastly, regarding EBITDAC margins, we've communicated in the past that we believe our margins should be in the 30% to 35% range. We feel good about our current profile after increasing margins by 350 basis points over the past 2 years.

For 2022, while we'll have some headwinds from increasing variable costs, we are targeting margins to be relatively flat year-over-year, barring something unusual happening. With that, let me turn it back over to Powell for closing comments..

Thanks, Andy, great report. We had an outstanding 2021. We're well positioned to deliver profitable growth this year and are confident in our ability to execute.

As the economic growth starts to return to more normal levels, there are several issues that will influence business confidence in the economy, which include the availability of employees across all industries, the resolution of supply chain constraints, inflation, interest rate increases, resolution of global geopolitical matters and the continued management of COVID.

How and when each of these play out over the coming quarters will influence the trajectory of the economy, how leaders invest in their businesses and exposure unit expansion. With that being said, we feel really good about our business and the ability for our team to perform well this year.

From a rate perspective, we anticipate premium increases to remain relatively constant or may moderate downwards slightly in the first half as compared to the second half of '21. The main challenge for many E&S lines of coverage will be the availability of capacity, which may impact some of our growth in 2022. A few comments regarding the M&A market.

Until interest rates increase materially and capital becomes constrained, we expect competition and valuations to remain at peak levels. We continue to feel good about our positioning and have a solid pipeline to attract great companies to join the Brown & Brown team.

Our continued disciplined approach of focusing on culture and financial alignment will be the keys to our long-term success of delivering shareholder value. We think the market will further evolve in 2022 as it pertains to innovation and the experience for the customer.

As a result, differentiated utilization of data, collaboration and technology to attract and retain customers will be even more important. The combination of these will enhance the underwriting process, provide more tailored solutions, improve the delivery of insurance and how we engage with our customers and carriers.

We have a very talented team that continues to be focused on the most important deliverables to enhance the solutions we provide for our customers. In closing, we feel great about our business, our capabilities and most importantly, our team. We're making thoughtful investments in allocating capital to drive long-term profitable growth.

With that, let me turn it back over to Serge for the Q&A..

[Operator Instructions] The first question comes from Mark Hughes from Cures..

Powell, on organic growth front, I know you don't provide specific guidance, but you've had a very strong year in 2021, double digits.

How do you think that impacts 2022? Does that make for a tougher comp? Or with still good pricing tailwinds too, does the organic outlook look a little bit better than your historical norm?.

So we think about it in several fronts, Mark. One, there was -- if you know, GDP was, I think, 6.7% in '21. So we believe there will probably be a moderation in GDP slightly. So when you go back to some sort of normal level, yes, we believe so. Two, inflation; 3, interest rates; and four, availability of employees to our customers.

And so you put all those together, and we believe that it's going to be another good year, but as you said, we don't give organic growth guidance. And to have a year where we did 10.4%, we were extremely happy and very, very pleased with the performance.

But we also understand that last year there were some unusual factors and how some of those moderate this year, how and when they moderate, we don't know..

Understood. And then one other question. You had mentioned the appetite on the part of carriers for some of the CAT-exposed personal lines that maybe that is a constraint in 2022.

When you think about your business, net-net, presumably you're getting rate increases, which would be a benefit, but maybe some shift into, say, citizens, which would be more of a headwind.

How do you think about this, the CAT-exposed market? Is it the -- is this incrementally better for you, all things considered?.

Yes. Let me make sure that we're clear. We talk mostly about CAT personal lines, but it's not exclusively CAT personal lines, there are admitted personal lines issues in California and Florida.

So I think it's important, and those are big name companies that you might have your personal lines with that are taking what you might say, is dramatic action in some instances.

Having said that, I think that it is -- it places a lot of pressure on our teams to be able to deliver palatable product in some instances, particularly if you live in a buyer -- a burn zone or a brush zone, as I call it in California or here in Florida on the coast, particularly if you have an older home or not, the construction is not that good.

That's a nice way of saying I think it will continue to be a headwind in wholesale, as we've alluded to. I think in retail, it's probably a push. That's how I would -- but a little bit on the negative, probably a little bit pressure in retail, but that's what -- Andy, were you going to say --.

Yes, Mark, I think we're probably also within programs just because that's primarily where we really see the impact on the quake and the wind programs depending upon what the capacity looks like in '22, that could represent a little bit of a headwind. There's a lot of discussions going on right now..

Our next question comes from Elyse Greenspan from Wells Fargo..

My first question, I'm going to go back to organic growth, recognizing you guys don't give guidance. You guys did start off 2021 with some pretty impressive growth within your Retail segment that I -- if I'm remembering correctly, it was driven off of some pretty good benefits results and some new business wins that you guys had.

So can you just talk to us about how we should think about the growth in that business as you lap some pretty impressive comps, right, because you saw some really strong growth to start 2021?.

So remember, we don't break out the growth by line of business in our retail segment. Having said that, I would tell you that we were pleased with the performance, and we continue to think that, that line of business, along with the other lines of business can perform very nicely this year.

And so I don't -- I'm not -- I don't want to -- I'm not trying to take you off in one direction or another relative to retail and specifically employee benefits. I think the important thing is this, I know that you want, everybody on this call is looking for organic growth guidance, and we just don't give it.

And the answer is we were very pleased with our performance last year, and we know that we're well positioned for this year, subject to the things that I just talked about with Mark's question relative to GDP growth, inflation, interest rates and availability of employees..

Okay. Maybe I'll try -- maybe shifting to the margin side, right? So Andy, I think you said you guys are targeting flat margins in '22 and some headwinds from variable costs you did mention.

So when you came up to that kind of flat in totality, can you just help us think about what you were thinking in terms of organic and revenue growth or just how you came up to that figure, recognizing that there could be some greater leverage, obviously, the greater growth you would show in 2022?.

I think you've hit on all of the key items that we evaluated. As we looked at '22 and trying to give the guidance for it, is based upon the overall growth of the business, the mix of the business inside, changes in variable costs, which will probably go up in 2022. And then just how we manage our costs through the year.

I think we feel comfortable right now at this stage, as we mentioned, barring something unusual happening that we'll manage our way through increasing variable costs and should end up with margins around flat for 2022. Again, we think that will be a very, very good year, considering the 350 basis points of expansion that we did over the last 2 years.

.

But as you know, we're not going to answer your question. I like your backwards way of asking it, but we're not going to answer your growth question..

And then just one last quick one, Andy. I think you usually talk to noncash stock-based comp in like your outlook and guidance figures.

Any sense you can give us on noncash stock-based comp in '22 relative to '21?.

Yes, it will probably go up a little bit, but again, nothing overly material. Otherwise, we would have called it out..

Greg Peters, Raymond James..

I guess the first question I will focus on will be, you did provide some guidance around profit sharing and contingent being flat for '22 relative to -- or close to flat for '22 versus '21? And I guess I'm trying to understand the mechanics of that.

I mean the -- as you know, well know, and have talked about the market's been pretty hard, especially on the commercial line side, and it seems like personal lines is also there.

Why wouldn't profit sharing go higher as the carriers profitability improves? And maybe you can just give us some background information on why you think it's going to be flat, those line items would be flat for this year?.

And as you know, this last year was a very active loss year for the insurance industry, not just in CAT-prone areas.

And so although your thought process is logical, I don't think it's applicable in this instance because what you have is, you have things where terms -- I'm not a big fan of them, but things like social inflation, nuclear verdicts and things like that. I don't typically use those, but those are real.

And so I would tell you that the industry, the carriers are doing better. And if, in fact, interest rates were to go up that would help their performance, but the losses and the loss costs continue to go up. And so we believe it will probably be more flattish barring something that we don't see..

And Greg, when we made that comment, we try to look across the 3 segments that participate in contingents and GSCs. And we're still not seeing movement in the wholesale space yet. I think your comment is one of shouldn’t we already, but honestly, we would have thought that a couple of years ago, and we still are not seeing a move.

So that's why we think at least flat for right now seems like a pretty reasonable approach..

Got it. I just had a follow-up on your answer. Can you give us like the split between what's personal lines and what's commercial lines just as a big picture percentage in terms of profit sharing and guaranteed supplementals.

And then, Powell, in your answer, you mentioned interest rates, I would have figured that these type of numbers would have been based on underwriting results, exclusive of investment income?.

Let me take the last question first. The answer is, that's true. But I'm just talking about the overall results of the carriers could improve, and yes, they are involved based just on -- well, profit sharing is based on underwriting results of the carrier, not investment income, that's correct.

So Andy, do you want to add to that?.

Yes, Greg. On your first question, we just break out contingents and GSCs by each of the segments, which we do in the MD&A section. But we don't break it out by the different lines of business..

Got it. Okay. My second question is on the free cash flow number, which was a phenomenal result, especially if you look at the growth rate. And then you talked about your change in accounting moving fiduciary cash around.

When helping us work through the moving pieces when we think about cash flow for '22, if we -- it sounds like it's going to be down for the [month] because the change in accounting, but maybe I'm missing something and maybe you could provide us just some additional color there..

Yes. So Greg, I think what we're trying to do with this one is based upon the timing of receipts and disbursements to the -- from the customers and the carriers, we do get volatility in our cash flow from operations. And you can see that this year and specifically in the fourth quarter, and we've had these in the past, it moves around.

So what we want to be able to do with the new fiduciary reporting is we'll take that -- those movements in the fiduciary assets liabilities, put those down in the financing section.

So therefore, cash flow from operations is reflective of our direct management of our working capital, okay? So that's why we gave the reference of that 27% to 28% on a conversion. That's a pretty good range, we think, on a go-forward basis. But don't view that, “Hey, went from 31% to 27% or 28%,” that's a negative.

That could flip right back around in Q1. That's the whole volatility factor of fiduciary..

And just to follow up, the 27% to 28%, is that a full year number? Or is that sort of the target range of expectation we should expect every quarter? I would imagine there would be some volatility going around that quarters?.

Yes, definitely by the quarter. So that's a full year guidance. But if you look back you'll be able to get an idea by the quarters when just based upon the EBITDAC that we deliver each quarter. You'll got a pretty good idea of how that will flow..

Our next question comes from Mike Zaremski from Wolfe Research..

Okay. Great.

Just for Andy, I think the '24 to '25 tax guides up a point or so from the previous tax guide, is this just kind of variability? Or like is it 24% to 25% the potential new normal?.

Mike, the -- when we looked across kind of all of our blended effective state tax rates, they are inching up about 1% going into 2022. So that's why in '21, we have given the range of 23% to 24%. And at least what we can see right now, we think 24%, 25% is a pretty good range and that's barring if anything else happens at the Fed or State level..

Okay. Great. Understood. So some pressure, I guess, from certain states. Okay. And next question is on -- we get a lot of questions on wage inflation, which is one of your main expenses.

Maybe you can kind of talk about what BRO is – Brown & Brown is seeing in terms of wage inflation and expense management has been used in a number of the prepared remarks.

Maybe you can kind of talk about whether expense management is alleviating if there are any kind of upward impetus on wage inflation?.

Okay. I'll take that. So as you know, Mike, our goal is to grow our business and grow it profitably. So we're focused on profitable growth over a long period of time. So we don't have a lot of extra expenses that we're trying to take out. So we don't think of it as expense control, we believe that our expenses are controlled.

Having said that, yes, we are absolutely encountering wage inflation. And it's not just in areas that are bigger cities. It's kind of across the board. And where and how much that impact is occurring is dependent on a bunch of factors.

But what we're trying to do is our business, as you know, is a very localized sales and service business where local leadership addresses compensation needs as they see fit in order to keep the best people -- to reward the best people for their efforts and doing a good job for our customers. So we will work through this.

We're not going to give a number and say, this is exactly how much it is because in different markets, it's different and we don't give an aggregate number. But we are working our way through it. We are absolutely subject to the pressures of it that anybody else right now is.

I think that I've read recently that we're in a somewhere between a 30- to 40-year low in terms of labor shortage across all industries. And I'm not going to say that's indicative exclusively of our industry, but I'm saying the industry hasn't done a very good job of reinvesting in the teams that are there.

We feel really good about our team, and we are going to continue to reward people appropriately. And as you know, one of the fundamental trademarks of our business is wealth creation for all teammates.

So all of our teammates are able to buy stock at a discount and they can -- they've been able to participate in the appreciation of the equity, which has helped them and their families. And so that's part of the overall compensation, not just cash comp and every teammate is able to participate in that. So we think that's really important..

That's helpful. Finally, one last follow-up. I think it's a thank you for Andy, for moving out of fiduciary, some income impacts from the cash flow. Just curious, if U.S.

Fed fund rates or overnight rates do rise over the coming year to 2 years, does BRO benefit a little bit from making a margin on fiduciary assets?.

We do a little bit Mike, but honestly, probably by the time you take all of it together between the fiduciary, our other cash and then an increase in our borrowing. You're probably about to push anyway..

Our next question comes from Mike Phillips from Morgan Stanley..

I want to stick with the theme of pressures on recruiting. And I guess, wage inflation as well there. I guess maybe 2 questions on that.

Any impact on the current quarter because of that? In other words, organic would have been X were it not for that or margins would have been X if it were not for that? And then is there any impact on that on M&A multiples? Does this actually help the M&A multiples because folks that maybe otherwise would have sold or maybe more willing to sell because of their own pressures on wage inflation?.

So no meaningful impact in Q4. And no, it doesn't impact purchase price multiples. And I'm not trying to be funny, but I'm saying the short answer is it's still frothy relative to the M&A market..

Okay. Yes, sure. It feels like there's still plenty of maybe PE firms out there kind of trying to chase it. So that's probably a bigger impact, keeping as high. That's just --.

Yes. Short-term money, that's right..

Yes. Okay. The second question is still kind of related to that recruiting issue, a little bit with that in the backdrop, here this question.

How does that influence -- how do you think about prioritizing investments for the coming year? You mentioned customer experience in tech, how does that -- how do you weigh those kind of investments with possible hiring given the impact on recruiting? And so just kind of prioritizing your investments priorities for the year?.

Sure. Remember, we do 3 things with the money that we earn. One, we reinvest it in ourselves, meaning hiring new people and investing in technology that can help drive not only efficiency but experience both for teammates and customers to a higher and better level.

Two, we acquire businesses; and three, we return it to shareholders in the form of dividend. And sometimes, if we believe the stock price is undervalued, we would buy some back.

That said, we have and Andy and I have talked about, made some concerted technology investments over the last several years, and we'll continue to do so, but it's not as though we're going to make one big investment.

And we are going to do that in a very thoughtful way in how we do that because any organization can only withstand a certain amount of change from a technology standpoint. So nice way of saying it, we think it's all about people and the right firms. So we will probably do a mix depending on what becomes available.

And if we find the right firms that fit culturally and make sense financially of hiring people, to add to our existing team and acquiring businesses that fit culturally and make sense financially..

Mike, just a couple of things for you to think about there also is inflation is going to move up and down over time, as you know well, right? The ability to just throw technology at things just doesn't happen overnight.

So if you recall, I mean when we started on some of the investments back in ’16, one of the areas inside of there was about how do we improve the experience for our teammates and the work that they have to go through and do each day. So we've been on this journey for a number of years.

I think those investments that we've made in the past have actually helped position us even better for working through times like this..

Yaron Kinar from Jefferies..

So my first question is, can you maybe spend a little more time discussing the impact of the pullback of insurers from the standard homeowners market in California on the various segments. I guess it's not intuitive to me that that would be a negative to the wholesale business.

I would have thought that the pullback from standard markets into the E&S market would be positive for wholesale?.

Yes. Let's talk about that. And you're referencing there was an article, I think it was last week, where there were several large admitted carriers that were pulling back on thousands of personal lines accounts in California, particularly high end and super high-end values. These are 5 and 10 and $15 million coverage A or the home value and up.

So I was thinking about those, Yaron, in 2 distinct capabilities. Number one, the scenario is, in retail, it puts pressure on the organic growth of personal lines there if you're not able to find a replacement or if you do move it to wholesale, it's at lower commission. That's number one.

And number two, the E&S market, the impact on the E&S market is independent although some of that business, you're right, will move into the E&S market. But there is such another impact in the burn area -- the brush zones and some of these other zones that there continues to be a downward pressure on that segment for wholesale.

So I want to make sure that I'm clear. Your assessment is correct initially, which is, yes, it could be more positive for wholesale. However, there is a bigger impact on wholesale in those 2 areas.

So I don't think that, that group of -- let's make that up, 25,000 homes flowing in, is going to offset the other homes that are being impacted and potentially have to go to the fair plan. That's our impression right now. Now something may change.

If one of those large carriers takes more draconian action, which I don't think they will, because there's only so much you can do -- the insurance regulator in the State of California will let you do at a time, because if they were to take more dramatic action if that was necessary, then the regulator may say something like you can't write in the state of California, which is not what they want..

Got it. That's very helpful color. I appreciate that. And then my second question is going back to the prepared comments, I think what you had referenced there was that organic growth in '22 could be impacted by your clients' ability to hire.

I guess what I'm trying to get to is what about Brown & Brown's ability to hire? And will the company be willing to forgo some organic growth because it's not willing to spend more on more expensive hires?.

Well, let me make it clear. We're very focused on people that fit culturally with Brown & Brown. And so we are going to continue to invest in people that embellish our capabilities either existing or new capabilities and embody the characteristics of the team that we've assembled.

And so having said that, that does not mean that we are not impacted by hiring and the impact of wage pressure, but we are going to continue to invest in the right people when the right people come along, because usually, I think of it as it's fairly simple.

When you meet somebody that's so good that you can't afford not to hire them then you just hire them, and we'll figure out how to make it work in the budget. And so that's the way we look at it, and we will continue to look at it that way..

Yes, Yaron. I mean you've heard us make comments in the past that while the quarterly results are important, we're not in this game for the 90-day sprint, we're in this for the long term. And so that would be extremely unusual that we would make a trade-off on a good investment just to try to make a number for the quarter.

That's just not how we run our business. We think we've got good people or technology investments or whatever the case might be, we think that moves the ball forward over the long term, we're going to make those investments. That's a good thing for our company. That's out there.

So again, we're not foreshadowing anything, just saying this is how we think about running the organization and how all of our leaders make investments in the businesses..

And our next question comes from Meyer Shields from KBW..

I want to start, I guess, with a follow-up on the last question. There's a fair amount of the compensation expense that Brown & Brown has is paying producers a percentage of the revenues that they bring in.

Is that percentage being impacted by the sort of national workers orders that we keep hearing about?.

No. Remember, that's part of the reward plan you are paid -- as it relates to a producer, you get paid commissions, and there's also an equity component, which is a long-term wealth creation component that producers qualify for -- based on their performance. So it's a combination. It's not just a cash reward system.

It's a cash and equity reward system..

Understood. I'm thinking that, that should mitigate the impact of rising wages on the overall income statement if that --.

No, don't think of it that way, Meyer. It's -- remember, there's a lot of people who are teammates that are paid on a salary plus a bonus or whatever the case may be. And so with roughly 12,000 teammates. There's a lot of people that are on salary, so that would impact their income..

Okay. No, that's helpful. I didn't think it would be real. Second question, going back to organic growth. I just want to understand it. If you have a year with phenomenal organic growth.

And there's nothing unusual in the timing of that? In other words, it's not as though you had like one-off revenues, would that have any implication on the following year's organic growth? In other words, isn't it just raising the rates?.

Well, let me ask you this. If you have a year where interest rates are close to 0 and the Fed stimulates with trillions of dollars into the economy, at some point that starts to change. And so when that changes, i.e., you have a more normal or historical growth level.

Let's talk about GDP for a moment, because our business is more of a reflection of GDP or plus or minus GDP, number one. Number two, when interest rates do go up, it's not if. And then when inflation is present, and it's higher than the Fed would want to acknowledge, those all impact the organic growth in subsequent quarters or years.

That doesn't mean we're negative on it, Meyer. That's not what we're saying. We're trying to be -- we're trying to moderate the understanding of what is the possible out there for anybody growing a big base in the coming market.

And so as I said, we were very, very pleased with our performance in 2021, that year is now over, and we're out executing in 2022. We think, as Andy said earlier, we don't think quarter-to-quarter, we think how do we do year-over-year, how will we do in the next 3 to 5 years, next 10 years, and we're very positive on that outlook.

So I know it's hard to answer that for you without giving -- without saying much more, but -- we are very -- we think we're very thoughtful around how we grow the business and how we try to present that to the outside world, including yourself. So that's kind of the take on it..

And we have a follow-up question from Mark Hughes from Chorus..

Anything on the advocacy business changed here lately. I know that's been a headwind in any crack starting to open.

And then just more broadly, any thoughts about the services growth prospects?.

Yes. No, I think our comment would be pretty similar this quarter as it was in the previous quarters on the advocacy businesses. We're seeing really good flow in. So that we view as a positive around just the health of the business continue to be challenged getting ultimate awards and everything else of the Security administration.

Again, that's a cycle that we've seen in the past, but no cracks there on that front yet that's there. So that would probably be the item that would probably have the largest influence on the organic growth for services depending upon the direction that goes..

Thank you all, and there are currently no further questions in the phone queue. At this time, I would like to hand the call over back over to our speaker, Mr. Powell Brown for any additional or closing remarks..

Thank you all very much, and have a great first quarter of the year. We'll talk to you next quarter. Good day..

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect..