Brown & Brown, Inc. — Form 10-Q Summary
Business context and reporting period
Brown & Brown is a diversified insurance intermediary operating through Retail, National Programs, Wholesale Brokerage, and Services segments. The filing covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. The financial statements are unaudited.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $432.2 million | $421.4 million | $1,255.9 million | $1,182.8 million |
| Income before taxes | $112.8 million | $112.7 million | $307.5 million | $301.3 million |
| Net income | $67.4 million | $68.3 million | $185.4 million | $182.5 million |
| Diluted EPS | $0.47 | $0.47 | $1.29 | $1.24 |
| Net margin | 15.6% | 16.2% | 14.8% | 15.4% |
| Operating cash flow | Not separately provided | Not separately provided | $290.6 million | $285.4 million |
- Core commissions and fees increased 3.5% in the quarter and 7.0% year to date. Core organic internal growth was 2.4% and 2.6%, respectively.
- Employee compensation and benefits represented 48.9% of revenue in the quarter and 50.0% year to date, versus 48.2% and 49.3% in the comparable periods.
- Other operating expenses were 15.3% of revenue in both the quarter and year to date, compared with 15.4% and 15.0% in 2014.
- Cash and cash equivalents were $448.8 million at September 30, 2015, compared with $470.0 million at December 31, 2014. Restricted cash and investments were $217.6 million.
- Total debt was $1.160 billion, including $41.3 million classified as current, compared with $1.198 billion at year-end 2014. The company had no revolving credit borrowings outstanding and was in compliance with debt covenants.
- Capital expenditures were $12.8 million for the first nine months, versus $20.2 million in 2014. Cash used for acquisitions was $109.9 million, compared with $694.8 million in 2014.
- Cash dividends paid were $46.8 million for the first nine months. The quarterly dividend declared was $0.11 per share, up from $0.10 in the comparable period.
Material changes versus the prior comparable period
- Quarterly revenue increased 2.6%, while year-to-date revenue increased 6.2%. Net income declined 1.3% in the quarter but increased 1.6% year to date.
- Interest expense increased 35.4% in the quarter and 60.0% year to date, primarily because of debt incurred for the 2014 Wright acquisition and related financing activities.
- Profit-sharing contingent commissions declined $2.9 million in the quarter and $3.9 million year to date, primarily because of higher loss ratios in Wholesale Brokerage and lower contributions from certain National Programs.
- Quarterly and year-to-date results included $0.7 million and $1.3 million of gains on disposal, respectively. The company changed the presentation of disposal gains under ASU 2014-08, reducing comparability with prior-period “other income.”
- Management completed nine insurance intermediary acquisitions and four books-of-business purchases during the first nine months. Cash paid for acquisitions was $109.9 million, with $29.5 million of recorded earn-out payables.
- Segment income before taxes increased 4.9% in Retail, 22.2% in National Programs, 2.4% in Wholesale Brokerage, and 17.0% in Services for the quarter. Year-to-date increases were 6.2%, 1.9%, 11.0%, and 23.8%, respectively.
Guidance, outlook, commentary, risks and unusual items
- Management expected positive quarterly internal revenue growth in 2015 if exposure-unit trends continued, although premium-rate increases were moderating. The filing does not provide formal earnings or revenue guidance.
- Management stated that cash, investments, operating cash generation, and available credit facilities should satisfy normal liquidity needs, including debt principal payments, for at least the next twelve months. Revolving facilities provided up to $825.0 million of available capacity, and an additional $125.0 million private note facility remained unused.
- Contractual cash obligations totaled $1.780 billion, including $1.161 billion of long-term debt, $236.3 million of interest obligations, $196.5 million of operating leases, and maximum future acquisition contingency payments of $127.1 million.
- Key operating risks include economic and regulatory conditions, exposure to catastrophe-prone markets, premium-rate and exposure-unit changes, competition, employee retention, acquisition valuations and integration, policy cancellations, legal proceedings, technology and internal-control execution, and the ability to forecast liquidity needs through at least the end of 2016.
- Wright Flood’s business is fully reinsured, but Wright Flood remains primarily liable to policyholders if reinsurers fail to perform. Its statutory capital and surplus was $14.2 million, above the $7.5 million minimum requirement.
- Management reported no material change in previously disclosed risk factors, no new material legal proceedings, effective disclosure controls, and no material change in internal control over financial reporting.
- The company authorized aggregate share repurchases of up to $450.0 million. As of September 30, 2015, 5.44 million shares had been repurchased since the first quarter of 2014.
Investor verification checklist
- Verify whether organic growth can remain positive as insurance premium rates moderate, particularly in catastrophe-prone property markets.
- Assess the effect of lower contingent commissions and higher loss ratios on future revenue and margins.
- Monitor interest expense, scheduled debt amortization, refinancing requirements, and compliance with leverage covenants.
- Evaluate acquisition returns, earn-out obligations, goodwill of $2.559 billion, and amortizable intangible assets of $758.1 million for impairment or integration risk.
- Reconcile cash liquidity with fiduciary and restricted premium funds; management cautions that reclassified unrestricted premium funds should not be viewed as a source of operating cash.
- Review the potential cash impact of the $127.1 million maximum future acquisition contingency payments and ongoing share repurchases.