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

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

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

Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors.

Such factors include the company's determination as it finalizes its financial results for the first 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 time to time in the company's reports filed with the Securities and Exchange Commission.

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

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

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

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

Good morning, everybody, and welcome to our Q1 2023 earnings call. Before we get into any detail, Q1 was an outstanding quarter and we're very pleased with our results.

I'll provide some high-level comments around our performance for the quarter, along with some updates on the insurance market and M&A landscape; then Andy will discuss our financial results in more detail. And lastly, I'll wrap up with some closing thoughts before we open it up to Q&A. I'm now on slide number four.

We delivered over $1.1 billion of revenue, growing 23% in total and 12.6% organically. To put this in perspective, 11 years ago our total annual revenues were $1.1 billion. Our adjusted EBITDAC margin remained strong for the quarter at 35.7%. We delivered earnings per share of $0.83, growing 7.8% over the first quarter of 2022.

On the M&A front, we completed seven acquisitions with estimated annual revenues of $11 million. We're very pleased to have delivered another outstanding quarter of good profitable growth. I'm on slide five. From an economic standpoint, most businesses continue to grow and companies are still looking to hire employees.

Overall, business leaders are generally cautious about the future while managing the impacts of inflation and higher interest rates. We would say there's not been a material change for what we heard from our customers in the fourth quarter of 2022. The insurance marketplace is very challenging for customers in the first quarter.

Across most lines of coverage, rate increases were similar to prior quarters with admitted markets up 5% to 7% and excess and surplus markets up 10% to 20%. However, there are exceptions. Workers' compensation rates continue to decline.

E&S professional liability rates, primarily public company D&O continued to moderate with rates down 10% or more and in some cases they're up slightly. The areas that remain the most challenging are E&S property and excess liability due to losses and increased insured values.

Carriers continue to elevate their coastal -- evaluate their coastal property portfolios. These actions result in more participants generally on a property placement. We continue to see underwriters increase insured values per square foot, thus customers are seeing premiums rise based on rates and higher values.

As a result, buyers are feeling exhausted with the premium increases and more customers are purchasing loss limits, increased deductibles and decreasing overall limits. Pertaining to the Florida insurance market everyone's watching to see the impact of the legal reforms late last year. Long-term we believe the changes will be positive.

However, we think it will take some time to see improvement related to the legal changes. In the interim, more policies will continue to move into Citizens. Please remember, Citizens was created to be the market of last resort for residential homes, condominiums and apartments.

Right now it's one of the most competitive and at times one of the only solutions for insureds. As it relates to the overall M&A market the level of deals primarily from financial backers has slowed. That does not mean high-quality businesses don't trade at similar multiples to what we've seen over the past year.

But from our perspective, we remain active and GRP had another solid quarter of M&A transactions. We're very pleased with their success and the quality of the businesses they're adding to the Brown & Brown team. Our disciplined approach remains centered on identifying high-quality companies that fit culturally and make sense financially.

I'm now on slide number 6. Our Retail segment delivered impressive organic growth of 8.8%. The growth across all lines of business, were driven by strong new business, good retention and continued rate increases. In addition our employee benefits businesses performed really well in Q1.

Our Program Segment delivered another outstanding quarter of double-digit organic growth of nearly 34% fueled by new business rate increases, good retention and claims processing revenue from Hurricane Ian.

This growth was driven primarily by strong performance from our lender-placed business, our diverse group of wind and quake programs and our captives. Wholesale Brokerage delivered another solid quarter with organic growth of 7% driven by good new business and retention along with continued rate increases.

The rate of growth for open brokerage slowed somewhat while the growth of our delegated authority business improved. Organic growth for the Services segment was 1.6% for the quarter, driven by claims processing revenue primarily related to the winter storms.

I'd like to thank our 15,000-plus teammates throughout the world for delivering these strong results. Now I'd like to turn it over to Andy to discuss our financial results in more detail..

Great. Thanks Powell and good morning everyone. Since Powell discussed our GAAP results earlier in the presentation, I'll review our consolidated financial results on an adjusted basis. We're over on slide number 7.

As a reminder our adjusted measures exclude the change in estimated earn-out payables, one-time acquisition costs associated with our acquisition of GRP, Orchid and BdB last year and gains or losses on business divestitures. This quarter it also excludes $11 million related to resolving a business matter which is considered one-time in nature.

The charge relates to a pre-acquisition event from a business we bought over 10 years ago. We believe isolating the above items gives a better reflection of the performance of the business and provides enhanced comparability.

The reconciliation of these amounts -- adjusted amounts to the most closely comparable GAAP amounts can be found in the appendix to this presentation. Total revenues were $1.1 billion for the first quarter, a new record for us growing 23.5% as compared to the prior year. Income before income taxes increased by 13.2% and EBITDAC grew by 23.2%.

We had good leverage across the business even with a few moving parts this quarter that included some additional one-time costs that substantially offset the benefit of incremental investment income.

In addition the margins for GRP, as we've mentioned before, are more evenly weighted throughout the year versus our seasonally higher margin in the first quarter for the company. This means, it negatively impacted the first quarter margin by approximately 40 basis points. As a result, GRP will benefit our margins in future quarters.

Income before income taxes grew at a slower rate than total revenues, due to the incremental interest and amortization expense associated with acquisitions we completed last year. The effective tax rate came in at 20% which is in line with our expectations and compares to 16.8% in the first quarter of last year.

The higher tax rate is due to a lower benefit from the vesting of incentive stock shares that traditionally occur in the first quarter of the year. Our diluted net income per share increased by, 7.7% from last year to $0.84.

Due to the changes in the liabilities and assets associated with our deferred compensation plan, salaries and related expenses as a percentage of revenue were negatively impacted year-over-year by 150 basis points. There's an offsetting benefit within other operating expenses.

Lastly, our weighted average share count increased slightly and dividends paid increased about 12% both as compared to the first quarter of last year. We're on Slide number 8. The Retail segment had an outstanding quarter delivering organic growth of 8.8%. The adjusted EBITDAC margin contracted slightly to 37% for the quarter.

While the margin remained strong, it was impacted about 100 basis points by the level phasing of revenue and profit from GRP as compared to our higher Q1 margin in the United States, driven by our employee benefits business. We expect this will reverse and provide a positive impact to our margins in future quarters.

We also realized some year-over-year headwinds associated with higher travel and related expenses, which we expect these headwinds to lessen as the year continues. We're over on Slide number 9. National Programs had another very strong quarter, with organic growth of 33.8% and adjusted EBITDAC margin expansion of 610 basis points.

The margin improvement was driven by leveraging our expense base along with the strong organic growth. Keep in mind that, revenue for the quarter includes approximately $8 million of claims processing revenue associated with Hurricane Ian.

In addition, our captive facilities that we started last year are expected to deliver $30 million to $35 million of revenue this year. We recognized approximately $10 million of revenue in the first quarter of this year as compared to approximately $1 million of revenue in the first quarter of last year.

The positive impact to organic growth from these captives will diminish in each subsequent quarter and will be negligible by the fourth quarter as we will be on a more comparative basis.

While we anticipate National Programs will have a good 2023, we do expect lower organic growth in the second half of this year as compared to the second half of last year. This is due to the fact that, the captives will be on a more comparative basis.

We had a onetime non-recurring growth bonus of $7 million in the fourth quarter of last year, and we realized approximately $8 million of revenue associated with Hurricane Ian in the fourth quarter of last year. We're moving over to slide number 10.

Our wholesale segment delivered another good quarter with organic growth of 7% and the adjusted EBITDAC margin contracted slightly. The driver of the margin decrease was higher salaries and related costs due to incremental hiring as well as salary inflation. We're on slide number 11.

The Services segment grew by 1.6% organically for the quarter and the adjusted EBITDAC margin decreased by 390 basis points. The primary drivers of the margin decrease with the volume of claims revenues for certain businesses higher salary and related costs as well as some onetime expense items.

A few comments regarding cash generation and capital allocation. We generated approximately $60 million of cash flow from operations in the first quarter of this year, which was impacted by higher interest and paying taxes for last year that were deferred as a result of Hurricane Ian relief.

We are continuing to expect another strong year of cash generation and disciplined deployment. We ended the quarter with approximately $564 million of operating cash. We are planning further debt repayments during the year as we've done following larger deployments of capital.

We are very proud of our industry-leading ratio of cash flow from operations to total revenues, and believe we are in a strong capital position to invest in the business and help drive further growth in the future. Lastly, we want to update our full year guidance regarding margins.

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

Thanks, Andy for a great report. We continue to watch the impact of inflation and increases in interest rates on the economies in which we operate. As a result, we expect business leaders will continue to be cautious regarding the pace of their hiring and investing over the coming quarters. With that said, most of our customers are prospering.

In the marketplace, buyers have pricing fatigue due to increases delivered over the last several years. We anticipate similar rate increases in coastal property in the near to intermediate term. As a result, we're seeing buyers either decrease limits increase deductibles or possibly opt for loss limits.

In some instances, we're seeing personal lines customers paying off their mortgage and going without wind coverage in their personal policies. We continue to talk with our carrier partners about capacity, the flight equality and diversification. Our MGAs and MGUs have delivered good underwriting results over many years due to our disciplined approach.

As a result, this positions us well to retain and/or increase our capacity that will help deliver incremental organic growth from our programs. We are pleased with the performance of our recent international acquisitions of GRP and BdB. They're growing nicely winning new business and retaining customers.

In the case of GRP, they're also completing high-quality acquisitions and adding to our capabilities and geographic footprint. Many of you have seen that we completed our first Canadian retail acquisition of Highcourt Breckles on April 1.

They're located in Toronto with approximately 110 teammates and will add to our capabilities in the Canadian marketplace. We'd like to welcome all teammates that have joined us over the past few months. And lastly, we're in a strong position with a good M&A pipeline. Overall, we feel really positive about our business and how our team is executing.

We're winning more new business and doing a good job of retaining our customers. Our focus is on leveraging the total capabilities of Brown & Brown for the benefit of our customers both domestically and internationally. We're looking forward to having a good 2023, and have a lot of momentum coming out of the first quarter.

With that, we'll turn it back over to Mikee and open the lines for Q&A..

Thank you. [Operator Instructions] Your first question comes from the line of Weston Bloomer from UBS. Your line is open..

Hi. Good morning. My first question is on the outlook for now margin expansion for the full year. I was hoping you could break out maybe by segment where you're expecting to see margin expansion. I'm more focused on Retail there where in the 1Q the margin was still down ex-GRP. So if you could maybe break out the pluses and minuses there that'd be great.

.

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

That will reverse itself over the coming quarters and will be a benefit. And as we mentioned the cost around travel and entertainment some of the inflation side of it that will continue to lessen as the year comes along and we're on a more comparative basis. So hopefully that kind of gives you an idea of what it should look like. .

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

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

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

No, sir..

Great. Thanks for taking the questions..

Thank you..

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

Hi. Thanks. Good morning. My first question was also on the margin side. So, first of all, I just want to understand, I guess, the only thing you're calling out, I guess, from having a significant impact on margins in the quarter is that 40 basis points all from GRP.

And then as we think about that reversing over the course of the year, does that get better in all other quarters? I just want to think about the seasonality of that.

And then also would you expect in that updated guidance that your margins will expand in the other three quarters of the year?.

Let's see if we can take a few of those pieces there. Let's see so on the first one on the GRP and the 40 basis points is yes, that will reverse in the back end of the year and it's relatively evenly spread not perfect. So it's not 25% each quarter, but pretty even through the year consistent with what we've communicated in the past in there.

Other thing to keep in mind and we had mentioned it is, we did have some one-time items in the quarter that are in our numbers that offset the benefit from our investment income. So, again, we'd not envision that those would recur in future quarters that are out there. .

And then is the Q1 investment income, right, I think it's trending better than what you guys had provided last quarter. I think you had said $14 million to $17 million for the full year.

Is the Q1 a good run rate level for investment income?.

Yeah, probably somewhere in that range all depends upon what the balances are on cash, which can move up and down but that's probably a reasonable number. When you think about it from an absolute, what you wouldn't want to do is put that on incremental year-over-year remember because rates were going up last year as the year was coming along.

So think about it on a run rate basis when you model it, okay?.

Yeah, it’s great. And then last one, retail. You guys both highlighted it seems like a good environment there both on the core brokerage and the benefits business. I guess, good growth in both in the Q1.

Anything one-off or anything you guys want to highlight as we think about just the go-forward organic growth of that segment?.

No, I wouldn't say anything that we haven't said Elyse. We're really pleased with how retail is performing. And as I like to say, we continue to hire talented teammates to help us service the market and producing the business that we're bringing on and that those customers that we already have, our existing customer base.

So nothing out of the ordinary about growth itself, but I would just tell you we are very pleased with where the retail business is positioned both domestically and with our new acquisitions, not just like last year in GRP but in Ireland and excited about Canada as well..

Thank you..

Thank you..

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

Good morning Paul and Andy. I guess, I'm going to go back Powell to your comments about the impact of all the challenges in Florida. It's my impression that if there's a migration to Citizens that might be some pressure on commission rates for the company.

And so maybe you could spend a minute and just talk to us about the economic conditions in Florida, considering what's going on in the property insurance market.

Are you seeing any other pressures economically with any of the business developments et cetera? And then talk about the migration of Citizens and its impact on your business?.

Sure. So first of all I'd like to clarify that in a business that's $2-plus billion of revenue, the impact of Florida today versus the impact of Florida 15 years ago is much different. So I think it's important to start there.

The second thing that I would tell you is that from an economic standpoint, generally speaking in our -- with our customer base in Florida, they seem to be doing quite well. And what I mean by that is the construction is booming, people are growing.

That does not mean that their margins are necessarily growing, because they -- different industries are having different levels of inflation and impact on cost into their P&Ls. But I would tell you that -- and if you go to dinner, it's packed. So it's still -- the economy is doing well in Florida.

As it relates to Citizens, I'd like to talk about two scenarios, because this is -- there are some similarities and some differences for those of you that have been around since 2007. I'd like to talk about that. So here's basically the parallels. In 2007 and today.

Citizens is deemed as the market of last resort, okay? So let's start there and we're going to start in retail and that's where the similarities end. So in 2007 if in fact -- and these are just examples. This is not -- it's a hypothetical example, so just bear with me.

If the market was bearing an $0.85 rate on a condominium and Citizens being the market of last resort was quoting a dollar rate and the then Governor implemented wind mitigation credits, that took that rate from $1 in Citizens down to $0.50. So effectively the buyer was going from $0.85 to $0.50 per – in terms of insured values.

That action in and of itself took us to negative organic growth in 2007, as an organization, much different concentration in Florida all that stuff. The final thing is Citizens was the market of last resort. They would write anything, anything, okay? So now fast forward to 2023 and Citizens has underwriting guidelines and there's not a rate cut.

So if in fact, I'm just going to use the same scenario that we just had there. If they were at $0.85 and Citizens was $1 or $1.25, and the general market is at $1.75 or $1.50 then there are underwriting criteria, roof construction all kinds of things where Citizens is actually trying to qualify accounts. So remember, it's much different.

It doesn't mean it's not complex. It is complex. So it takes a lot of time to get through a government entity to get the – but that's the difference now. In Retail, if you take an account that's from the E&S market and you bring it over into Citizens, the commission level would be, let's say flat to down slightly to up slightly.

But let's just call it flattish but it has a lot more work. That said, in the wholesale segment, it has the potential to one an account can move. So you could go in the E&S market and they lose the entire account because it goes to Citizens with the retailer or you can have a scenario where Citizens quotes the wind-only and we quote an ex-wind quote.

And remember, the example is it was $0.85 on – and its superior construction, the wind-only rate – I mean the ex-wind rate might be $0.07 or $0.10. So all of a sudden the premium has gone down substantially and we get paid commission on that much lower rate. So that's how it manifests itself Greg.

And maybe a little more than you wanted but I think it's important for people to understand the difference today between 2007 because it's a big difference. And it's important you understand that..

Yes. That's great color. Just a point of clarification.

Is it fair to sort of I'm guessing right now but is it – when I look at your Florida residential book of property, is it fair to say that Citizens is about 20% of that book, or do you think it is a lower or higher percentage?.

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

Yes. Residential homes, condos and apartments..

Okay. So the short answer is no, I don't think it's 20% presently. And what you find is there's a lot of activity in the residential, specifically condos and apartments in the first half of the year. So there's a lot of activity right now going on.

And as I said, there are properties, not only where you live but up and down the West Coast and the East Coast, that are currently in the E&S market that have been submitted to Citizens but we don't know yet, if they're going to qualify. So how that ultimately plays out this year is yet to be determined..

Yes Greg, keep in mind that the limitation that Powell talks about, on the homeowners side if you go down into Tri-County, I think the limit -- I might be off on this just by a little bit. I think the line is $999,000 I believe is the number. So if you think about how many homes are below $900,000 or $999,000 in Tri-County, not a lot of them.

It's a very expensive real estate market down there. And then the rest of the state, I believe it's $700000 is the limit. So, not everything can actually go into Citizens. So there's a lot of press around all of it. But only certain things go into that box. And then there's a lot of limitations as to what they will take in the way of quality.

So, the reason why we added all that color is the market is very different today than what it was in 2007. So there's been a lot of speculation regarding what this does to our numbers. And we've talked a lot about diversification of our organization and that we're not a Florida-based organization, the way we were at least weighted 15, 20 years ago.

But our Florida businesses performed really well in the first quarter. We're very, very pleased both in Retail as well as Wholesale and Programs..

Got it. That's excellent detail. And I feel like we could probably have an hour-long conversation just on this topic alone. But I'm going to pivot, and my last question just will focus on inside your commentary around GRP, you commented about how they're making acquisitions, and I guess I haven't really seen any press releases come out from Brown.

So, how are -- how is that coming through in the reported numbers, or where are we -- where do we see the acquisition activity inside GRP as is reported through Brown & Brown's consolidated statements?.

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

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

Is that correct?.

Correct..

Yes..

Got it. Thanks for your answers..

Yes..

Thank you..

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

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

Yes. So I think the way we look at it is we still have a positive outlook on exposure growth, not so much inside of existing clients but the growth in number of clients.

So we do believe that our customer base on a net basis will actually expand in terms of adding new people to their plans but the biggest part of the growth will be new benefits plans where we're helping people manage their costs and the delivery of what they want to their employee base..

Great. Thank you.

And just as a follow-up the pressure in professional lines, did the D&O pressure, which I think is most acute in the E&S market accelerate this quarter? And do you see any signs of stabilization in D&O rates?.

Yes. The short answer is did we see an acceleration in the decline? And yes we saw a little bit. That's correct. And remember I would -- and I don't have this right off the tip of my tongue but remember D&O rates were going up more quickly and sooner than this property trend.

So, they had gotten to a level that the marketplace felt as though it was appropriate or high and then people started piling back in.

Now, one, Robert could make the argument, I am not making this argument, but I'm pointing it out, that if someone on the risk-bearing side is trying to manage volatility in their earnings and doing that by looking closely at their CAT property portfolio, they have to redeploy that -- those assets and they're redeploying those assets in a place like professional liability.

Thus, we're having price decreases or continued price decreases in professional liability. So some people have taken that position. I'm not necessarily trying to imply that. I'm just trying to give that to you so you can kind of chew on it..

Got it. Thank you. That’s helpful..

[Operator Instructions] Your next question is from the line of Yaron Kinar from Jefferies. Your line is now open..

Thank you. Good morning. My first question goes to the Retail segment and employee benefits. I think the last couple of quarters you'd called out the potential for some pressure on growth from employee benefits and yet, I think, numbers actually came in quite strong.

Can you maybe talk about what changed or what actually happened this quarter relative to your expectations there? And would that then create a headwind for 1Q 2024?.

So, do we think it's a headwind for 1Q, 2024? No, not really as we sit here today. That's the first part. But you're on it. If you go back to what we said, there was one particular business that had an impact in Q4 in terms of a headwind. And that business -- that individual business still actually was encouraging headwinds in Q1.

But the other businesses performed really, really well.

And as Andy has said before, remember we have a front-end loaded, from a 606 revenue recognition standpoint, in Q1, because of employee benefits, but that's a function of us writing a lot of new employee benefits business and all the other businesses performing that much better relative to -- and offsetting of that little bit of a headwind in that one particular business.

So we feel good about -- I mean, I don't want to give you the impression that we only feel good about employee benefits. Please don't take that out of my -- our comments. We feel really good about our P&C and we feel really good about our personal lines businesses too in Retail.

But I just mentioned it, because there were people on the call in Q4 that felt like the organic growth was a trend, which is not and we said that. But we just wanted to kind of clarify that.

And we also clarified it, because we did talk about a business that had a significant impact on the revenues in Q4 and there's still a bit of a headwind there but we've overcome that..

Yaron, I think we also -- we made mention in the fourth quarter, one of our specialty aligned businesses also had headwinds in the fourth quarter. And we anticipated some headwinds in the first quarter. We did see those. So that came through.

But I think our commentary back at the time on the earnings, as we said we thought it would be modest in the first quarter. That's pretty much kind of what we saw through. So we were very, very pleased with 8.8 organic still with those modest headwinds. And we don't see those headwinds as a material issue on those businesses on the future quarters..

Got it. Thanks. And then, my second question is with regards to the captive revenues.

Is it fair to think of them as, kind of, full margin revenues, at least in kind of the first half of the year until we hit storm season barring an earthquake?.

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

And that's wind and quake you're on, make sure -- I want to make sure you knew it. Yes. Okay. Thank you very much..

Thank you..

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

Thanks, guys. Good morning. Maybe just following up on that last one. I think you mentioned you had $10 million of earned premium for the captives in the quarter, but the - I think the guidance was $30 million to $35 million.

So I was just wondering what's in that guide for the year, assume some level of losses?.

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

That's how we took that into consideration. So you won't probably see it be exactly perfect by each of the quarters on an earned basis. It will be down a little bit in the third quarter. .

Okay. That's helpful. Thank you.

And then thinking about capital deployment how much -- or management how much debt paydown do you anticipate doing from here? And do you have a targeted leverage ratio that you're looking to get to?.

Why don't we tackle the last one first. So what we have said publicly is on a gross basis 0 to 3. We're very comfortable with that range and 0 to 2.5 on a net basis. Michael, if you look back over time, we traditionally will move on the higher end of that range around acquisitions, and then we trend back down.

And we normally kind of operate in kind of that middle part of the range in both net and gross, if you look at it over a longer period of time. And that's probably not unreasonable for our business. That will kind of continue to go down.

One is, we repay debt normal maturities that are coming along on a quarterly basis and then as we just continue to grow the organization. If you look back we normally will delever about 0.25 to 0.5 turn per year is a pretty decent amount..

And that's also assuming, if we're going to continue to invest in the business and we have to continue to weigh and measure M&A opportunities as they come along. But yeah..

Thanks, guys..

Your next question is from the line of Meyer Shields from Keefe, Bruyette & Woods. Your line is now open..

Thanks, and good morning. One, I guess small question.

When we look at the international acquisitions do they have a different fiduciary investment income profile than the legacy domestic business? Is there more investment income associated with their placements than the direct build test we have in the US?.

Hey, good morning, Meyer. No, we don't earn as much on a fiduciary income internationally as what we do in the US.

And again keep in mind in the US that, there's still limitations even here where you have trust restricted states that only allow you to earn interest up to your bank fees and then where we have relationships also with our carrier partners. Some of those also will only allow us on banks. So you don't see everything move on a linear basis. .

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

Correct. Yes, yeah. Don't read that that was all benefit of GRP and/or anything of that nature now..

Okay. And then I just wanted to confirm something.

I think you mentioned this in your recent comments, but one of the LPI insurers has significant catastrophe losses in the quarter and you're saying that that -- there were no losses in the captive reinsurance component?.

Can you -- repeat that one more time please?.

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

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

No. No, there isn't. But keep in mind the captives that we have are not -- they're not linked with our lender-placed business. They're on large condominiums as well as on the quake side. So, wind and quake in there. And no, we did not have any storm-related claim cost in the first quarter..

Okay. Perfect. Thanks so much for the clarification..

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

Yeah. Thank you. Good morning. Powell, I wanted to be a little more optimistic around capacity, the capacity for our programs. And I wonder I think last quarter you had suggested that might be a -- something you'd be keeping an eye on and that would be potentially a gating factor for organic.

Have you seen that change over the last three months?.

No. I don't want to give you the impression that there's some like found new capacity. I wish we could say that. But I think the issue is this every carrier or market participant is evaluating how they want to deploy their capacity. As I said earlier carriers are looking for more protection against earnings volatility nothing new.

They're looking for balance of risk to the extent possible where we have a very large group of programs that are not just CAT. So we're able to balance those with people and so that's a very positive and we've had really good results over a long period of time.

So we feel like as I've said before that we are effectively an outsourced insurance company. We can do everything other than bear the risk. And as a result of that and the results that we have delivered if in fact someone is considering, expanding or repositioning, which is a better thing.

I don't think of it as expanding but repositioning capacity then we typically like to think that we're going to be near the top of that list because they've seen our results and they've seen the growth that we've had in the past. So there's no found bucket of gold under the rainbow. It's not that kind of deal.

But I do feel like there's some really good discussions around us being able to keep capacity, which is as equally as important. I view that as a win Mark not just cutting capacity, because a lot of people have had a lot of capacity cuts.

And if we can keep our capacity that to wind and then we might get cut a little bit somewhere but we get a little new. And so on a net basis, we're about even or maybe up just slightly..

Thank you for that. And then you mentioned that Florida construction sounds like its good.

How about nationally?.

Yeah. What I would tell you Mark is, if we go around the system and you look in places, it's remarkable. I mean places that come to mind I'll give you an example Nashville, Tennessee, Atlanta. You get up in the Northeast in several areas, Boston. You get in Colorado. I mean, Phoenix. You get in all these places all around and you just got a lot going.

And so if you think about it, the industry -- the one industry that we're in that has got a headwind as a higher level in a specialty lines business is auto dealers. We do some auto dealer work and auto dealer units are down. So think about it. Their pricing is coming back down to MSRP levels or below. There's an impact on used cars.

And so that's a direct relation to our interest rate increases. So having said that at some point that's going to turn as well. So that's a slight headwind in our -- but if you think about other industries there's a lot of businesses that are looking for people.

I think the restaurant business is tough particularly anything that is not defined as seated. It doesn't have to be fine dining but like a nicer restaurant, they're having a hard time in terms of getting people to work because if it's fast food, it's just tough..

Yeah, yeah. And then one final question.

Andy I don't know if you gave the revenue impacts from the winter storm claims?.

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

Okay, great. Thank you..

Yeah.

And just for clarity those sit in services, okay?.

Yeah, understood. All right..

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

Hello, Elyse..

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

So if I assume Ian and the captive right, which I think was $18 million revenue is 75% margin and I adjust the overall margin for that, and I add back the 40 basis point headwind from GRP, I still get that you're about a 35.4% margin for the quarter.

So will it still would have been down a little bit year-over-year right? And you did have the NII tailwind.

What am I missing, I guess, in thinking about this math and then tying it back to your guide for margin improvement over the balance of the year?.

Hi, Elyse. So I think maybe a couple of things to think about and we mentioned in the comments is there are some moving parts in there. We thought it was easier just to give everybody guidance on the full year, right? Because otherwise there's always puts and takes. There's business mix inside everything else.

It's just -- it's not as easy as just adding up a couple of items. So what we're trying to do is just keep it relatively simple for everybody and give an idea as to what the full year would look like for the organization. .

Okay. And then when thinking from here, I guess, the only, I guess, one-off items embedded within the updated full year guide is just right programs will be some stronger revenue from the captive right until we kind of annualize that later in the year.

So that could help margins, I guess, in the second quarter and then also just the higher investment income.

Are there any other like headwinds or tailwinds in that updated full year guide for the rest of the three quarters?.

Well, so I think in the second quarter, yes, I think your comment would be fair. Now keep in mind that the revenue from the captives, right, will start to level out.

So we're not going to get the benefit of organic lift each quarter going forward like what we saw in the first quarter, okay? Because we'll be -- we're writing basically a specific amount of premium, right, is what we committed to do inside of the captive. So that's limited in nature.

That's why you get basically to a level amount of revenue by the back end of the year. Keep in mind also, we mentioned the one-time bonus in programs that we had in the fourth quarter of last year and also the $8 million of Ian claims.

Just take those into consideration, when you're thinking about organic in the back end of the year and what that might mean on margins. .

Okay.

And then one last one the $30 million to $35 million of captive revenue this year what was that last year in your full year…?.

Yes, we said it was about $25 million last year. .

Okay. Thank you..

Yes. Thank you. Appreciate it..

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

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

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