Business Context and Reporting Period
Company: Brown & Brown, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: A diversified insurance agency, wholesale brokerage, and services organization operating in four segments: Retail, National Programs, Wholesale Brokerage, and Services. The company markets and sells insurance products, primarily in the property and casualty area.
Key Financial Metrics
| Metric (in thousands) | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $252,273 | $263,580 |
| Net Income | $44,128 | $48,012 |
| Net Income Per Share (Diluted) | $0.31 | $0.34 |
| Operating Cash Flow | $73,791 | $93,160 |
| Cash and Cash Equivalents (End of Period) | $228,805 | $126,439 |
| Total Debt | $256,045 | $267,333 |
| Current Ratio | 1.37 | 1.28 (Dec 31, 2009) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 4.3% year-over-year. Core commissions and fees (excluding profit-sharing and divestitures) declined 6.5%, driven by an 8.6% negative internal growth rate due to a "soft market" and reduced insurable exposure units.
- Profitability: Net income decreased 8.0% to $44.1 million. Income before taxes fell 7.7% to $73.1 million.
- Expense Management: Total expenses decreased 2.8%. Employee compensation and benefits dropped 4.1%, and other operating expenses rose slightly by 1.3% (partially offset by reductions in occupancy and travel costs).
- Acquisitions: The company acquired five insurance intermediaries in Q1 2010 for an aggregate purchase price of $25.6 million, compared to two acquisitions in Q1 2009.
- Segment Performance:
- Retail: Revenues down 5.6%; internal growth rate of -5.9%.
- National Programs: Revenues down 5.0%; internal growth rate of -22.0% (heavily impacted by client losses at Proctor Financial).
- Wholesale Brokerage: Revenues down 1.4%; internal growth rate of -3.1%.
- Services: Revenues up 11.4% (driven by acquisitions); internal growth rate of 0.3%.
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes the 13th consecutive quarter of negative internal revenue growth. While the rate of decline in insurance premium rates appears to be slowing, there are no current indications of improvement in exposure units or pricing.
- Florida Insurance Market: The "Citizens Property Insurance Corporation" (state-backed insurer) raised rates by an average of 10% effective January 1, 2010. Management expects the competitive impact of Citizens to decline in 2010, potentially benefiting the company's Florida operations.
- Proctor Financial Impact: A significant portion of the revenue decline in the National Programs segment is attributed to Proctor Financial, a subsidiary providing lender-placed insurance, which lost several major clients to business failures.
- Liquidity: The company maintains a strong liquidity position with $228.8 million in cash and cash equivalents. It has a $50 million revolving credit facility (currently unutilized) and $250 million in unsecured senior notes.
- Risks: Key risks include material adverse changes in economic conditions, regulatory actions (specifically regarding compensation practices and profit-sharing commissions), and competition. The company is subject to ongoing governmental investigations regarding compensation practices in several states.
Investor Verification Checklist
- Internal Growth Trends: Verify the sustainability of the negative internal growth rate (-8.6%) and the timeline for potential recovery in core commissions.
- Proctor Financial Exposure: Assess the long-term impact of client losses at Proctor Financial on the National Programs segment's future revenue.
- Florida Market Dynamics: Monitor the effectiveness of the Citizens Property Insurance Corporation rate increases in restoring competitiveness for private insurers in Florida.
- Acquisition Integration: Review the performance of the five Q1 2010 acquisitions to ensure they meet projected profitability targets.
- Regulatory Developments: Track the status of governmental investigations into profit-sharing contingent commissions and override commissions, as resolution could materially affect revenue models.