Brown & Brown, Inc. — Fiscal 2010 Form 10-K Summary
Business context and reporting period
Brown & Brown is a diversified insurance agency, wholesale brokerage, insurance-program administrator and insurance-services company. It earns commissions from insurance carriers and fees from customers, primarily in property and casualty and employee-benefits markets. The filing covers the fiscal year ended December 31, 2010, with quarterly information for the fourth quarter included.
The company operated through Retail, National Programs, Wholesale Brokerage and Services divisions, with 205 locations in 37 states and one London office. It had 5,286 full-time-equivalent employees at year-end.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $973.5 million | $967.9 million | 0.6% |
| Commissions and fees | $966.9 million | $964.9 million | 0.2% |
| Core commissions and fees | $912.2 million | $917.2 million | (0.5)% |
| Income before taxes | $266.1 million | $254.8 million | 4.5% |
| Net income | $161.8 million | $153.3 million | 5.5% |
| Diluted EPS | $1.12 | $1.08 | 3.7% |
| Cash flow from operations | $296.1 million | $221.6 million | 33.6% |
| Cash and cash equivalents | $273.0 million | $197.1 million | +$75.9 million |
| Total debt | $251.7 million | $267.3 million | Decrease of $15.6 million |
| Dividends declared per share | $0.3125 | $0.3025 | 3.3% |
Derived margins were approximately 27.3% before tax and 16.6% after tax, compared with approximately 26.3% and 15.8%, respectively, in 2009. Employee compensation and benefits represented 50.1% of revenue, while other operating expenses represented 14.0%.
Fourth-quarter 2010 revenue was $229.9 million, income before taxes was $52.0 million, net income was $32.1 million and diluted EPS was $0.22. Fourth-quarter results were affected by seasonal timing of policy renewals, acquisitions and profit-sharing commissions.
Material changes versus the prior comparable period
- Reported revenue increased modestly despite a fourth consecutive year of negative internal growth. Core commissions and fees declined 4.7% on an internal basis, excluding acquisitions and other specified items.
- Profit-sharing contingent commissions increased 14.9% to $54.7 million, partially offsetting the decline in core commissions. Guaranteed supplemental commissions contributed $13.4 million.
- Income before taxes increased primarily from higher revenue, lower rent and legal costs, lower interest allocations and other cost efficiencies.
- Retail revenue declined 1.4%, while pre-tax income increased 5.1%. National Programs revenue declined 0.7%, but pre-tax income increased 6.4%. Wholesale Brokerage revenue was essentially flat and pre-tax income rose 48.2%. Services revenue increased 41.9%, primarily from acquisitions, and pre-tax income rose 10.0%.
- The company acquired 33 insurance intermediaries and customer-account books for an aggregate purchase price of $186.8 million, including $158.6 million of cash, $0.8 million of notes, $2.3 million of assumed liabilities and $25.1 million of recorded earn-out obligations.
- Goodwill increased to $1.195 billion from $1.074 billion, principally because of acquisitions. The annual goodwill impairment test identified no impairment.
- Total assets increased to $2.401 billion from $2.224 billion, while shareholders’ equity increased to $1.506 billion from $1.370 billion.
Cash flow, debt and liquidity
Operating cash flow of $296.1 million funded $157.6 million of acquisitions, $10.5 million of capital expenditures, $19.4 million of long-term debt payments and $44.5 million of dividends. The current ratio improved to 1.39 from 1.28.
Total debt was $251.7 million, consisting primarily of $250.0 million of unsecured senior notes. There were no borrowings under the revolving credit facility at year-end, and the company was in compliance with its debt covenants. The company stated that cash, investments, operating cash flow and available credit were sufficient for normal liquidity needs through at least the end of 2011.
Contractual cash obligations totaled $542.8 million, including $251.7 million of debt, $95.1 million of operating leases, $39.4 million of interest obligations and $144.4 million of maximum future acquisition contingency payments.
Guidance, outlook, management commentary and risks
- Management expected insurance premium rates to remain soft in 2011, although the rate of decline in exposure units appeared to be slowing. Exposure units were expected to be relatively flat compared with 2010.
- Management expected Citizens Property Insurance Corporation’s rate increases to reduce its competitive impact in Florida during 2011.
- For 2011, revenue from The Advocator Group was expected to exceed $27.4 million and could represent as much as 41.7% of Services Division revenue.
- Management continued to emphasize acquisitions and decentralized sales growth. The company completed 367 acquisitions, including customer accounts, from 1993 through 2010.
- Key risks include cyclical insurance pricing, reduced customer exposure units, uncertainty in contingent commissions, insurer and carrier concentration, regulatory changes, competition, acquisition integration, goodwill impairment, litigation and errors-and-omissions claims, technology and data-security failures, natural disasters, employee retention and economic conditions in concentrated states.
- Profit-sharing commissions represented approximately 4.9% to 5.9% of prior-year revenue over the preceding three years and remain less predictable because they depend partly on insurer loss ratios.
- The company disclosed numerous ordinary-course legal proceedings. Management believed existing provisions and insurance were adequate, but unfavorable resolutions could materially affect results or cash flows in a particular period.
- Management and Deloitte & Touche reported effective internal control over financial reporting and issued unqualified opinions. Internal-control assessments excluded certain 2010 acquisitions representing 7.3% of net assets, 5.5% of total assets, 2.0% of revenue and 2.1% of net income.
- On January 21, 2011, the company agreed to issue $100 million of 4.5% Series E Senior Notes due September 15, 2018, intended to refinance the $100 million Series A notes due in 2011.
Most important facts for investors to verify
- Whether negative internal growth in core commissions and fees improves as insurance exposure units stabilize and pricing remains soft.
- The sustainability and timing of profit-sharing contingent commissions, including the $13.4 million of guaranteed supplemental commissions accrued in 2010.
- Performance and concentration risk associated with the Advocator Group and other recently acquired businesses, including future earn-out payments.
- Goodwill and amortizable intangible assets totaling approximately $1.677 billion and the sensitivity of impairment tests to cash-flow, valuation and market-capitalization changes.
- The refinancing and subsequent maturity profile of the company’s senior notes, as well as the $144.4 million maximum acquisition-contingency obligation.
- Exposure to regulatory and legal developments involving contingent commissions, insurance intermediary practices and errors-and-omissions claims.
- Reliance on concentrated geographic markets, particularly California, Florida, Indiana, Michigan, New Jersey, New York, Pennsylvania, Texas and Washington, which generated 73.4% of 2010 commissions and fees.