Brown & Brown, Inc. — Form 10-Q Summary
Business context and reporting period
Brown & Brown is a diversified insurance intermediary providing retail brokerage, national programs, wholesale brokerage and insurance-related services. The filing covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. The financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenues | $727.4 million | $598.8 million | $1.543 billion | $1.297 billion |
| Net income | $139.3 million | $96.8 million | $339.0 million | $249.2 million |
| Diluted EPS | $0.49 | $0.34 | $1.20 | $0.88 |
| Income before tax margin | 25.6% | 21.6% | 27.6% | 25.8% |
| EBITDAC | $239.3 million | $176.8 million | $530.9 million | $418.8 million |
| EBITDAC margin | 32.9% | 29.5% | 34.4% | 32.3% |
| Organic revenue growth | 14.7% | 0.5% | 12.1% | 3.1% |
Q2 revenue increased 21.5%, pretax income increased 44.0% and net income increased 43.9%. For the first six months, revenue increased 18.9%, pretax income increased 27.2% and net income increased 36.1%. The six-month effective tax rate was 20.3%, compared with 25.5% in 2020; management attributed the reduction primarily to tax benefits from incremental vesting of restricted stock awards.
Revenue growth was led by core commissions and fees, which increased 22.1% in the quarter and 19.4% year to date. Q2 core growth included approximately $84.6 million from net new and renewal business and $43.9 million from acquisitions, partially offset by $1.8 million from divested operations. Profit-sharing contingent commissions and guaranteed supplemental commissions were substantially flat in Q2.
- Retail: Q2 revenue increased 28.3%, organic revenue increased 17.6%, and EBITDAC margin rose to 29.7% from 24.6%.
- National Programs: Q2 revenue increased 14.0%, organic revenue increased 13.3%, and EBITDAC margin was 40.1% versus 40.6%.
- Wholesale Brokerage: Q2 revenue increased 17.7%, organic revenue increased 12.3%, and EBITDAC margin increased to 34.0% from 33.7%.
- Services: Q2 revenue increased 4.6%, organic revenue increased 4.6%, and EBITDAC margin increased to 22.4% from 21.5%.
Cash flow, liquidity, debt and capital allocation
- Operating cash flow was $466.3 million for the first six months, compared with $416.7 million in 2020.
- Investing cash flow was negative $136.3 million, including $116.6 million for acquired businesses and $25.1 million of capital expenditures.
- Financing cash flow was negative $250.1 million, reflecting debt repayments, acquisition earn-out payments, share repurchases and $52.2 million of dividends.
- Cash and cash equivalents were $850.2 million at June 30, 2021. Including restricted cash, liquidity was $1.351 billion, compared with $1.062 billion at June 30, 2020.
- Total debt was $2.062 billion net of discounts and issuance costs, down from $2.096 billion at December 31, 2020. Current debt was $300.0 million and long-term debt was $1.762 billion.
- The company had no revolving-credit borrowings and reported up to $800.0 million of availability under its revolving facility. Management stated that existing liquidity and operating cash flow should cover normal needs for at least the next 12 months.
- The company repurchased $81.4 million of shares in the first six months and had approximately $324.8 million of remaining repurchase authorization at June 30, 2021. Dividends declared were $0.185 per share for the first six months.
Material changes, acquisitions and unusual items
- The company completed four acquisitions during the first six months, with cash paid of $162.8 million, common stock issued of $4.9 million and recorded earn-out payables of $25.1 million. The acquisitions added $17.5 million of revenue during the period.
- Goodwill increased to $4.514 billion from $4.396 billion at year-end, primarily due to acquisitions. Amortizable intangible assets were $1.045 billion.
- The change in estimated acquisition earn-out payables was a $2.5 million credit for the first six months, compared with a $10.3 million credit in 2020. Earn-out payables totaled $242.0 million, while maximum future acquisition contingency payments were $543.2 million.
- The company received an $8.1 million reimbursement for qualifying headquarters infrastructure costs under an economic development grant agreement.
- Investment income declined 68.0% year to date because of lower interest rates. The company held $40.2 million of fixed-maturity securities at fair value; unrealized losses were attributed to interest-rate increases and were not considered other-than-temporary impairments.
- COVID-19 remained a source of uncertainty. Management cited economic reopening and vaccine availability as positive factors but continued to monitor variant strains and potential effects on customers, employees, carriers and operations.
Guidance, outlook and risks
The filing does not provide specific quantitative revenue or earnings guidance. Management emphasized long-term growth through net new business, renewals and acquisitions, supported by a decentralized sales and service model. Management also stated that it expects to refinance or extend the credit agreement term loan maturing in June 2022.
- Key risks include COVID-19 developments, employee retention, acquisition execution and integration, cybersecurity and data privacy, regulatory changes, insurance-carrier relationships, insurer capacity, economic conditions, natural catastrophes and competition from technology and financial-services companies.
- Approximately $525.0 million of borrowings under credit agreements carried floating interest rates tied to LIBOR. The company was evaluating transition to alternative benchmarks such as SOFR.
- The company disclosed ordinary-course litigation and claims. Management did not believe current proceedings would materially adversely affect financial condition, operations or cash flows, but unfavorable resolutions could affect future results, liquidity or cash flow.
- Contractual cash obligations totaled $3.384 billion, including $2.075 billion of long-term debt, $543.2 million of maximum acquisition contingencies, $363.3 million of interest obligations and $236.2 million of operating leases.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material changes were reported to previously disclosed risk factors.
Investor verification checklist
- Verify whether the company refinanced or extended the term loan scheduled to mature in June 2022 and the resulting interest cost.
- Track organic revenue growth separately from acquisition-driven growth and assess the sustainability of insurance pricing, exposure-unit growth and renewal retention.
- Evaluate acquisition integration, goodwill and intangible-asset balances, and the $543.2 million maximum acquisition contingency exposure.
- Monitor cash conversion, working-capital movements in premiums and commissions receivable, and continued share repurchases and dividends.
- Assess the effect of COVID-19 variants, inflation, labor costs, insurer capacity, catastrophe activity and regulatory developments on margins and commissions.
- Review the transition from LIBOR and the potential impact of floating-rate debt on interest expense.