Business Context and Reporting Period
Company: Brown & Brown, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: A diversified insurance agency, wholesale brokerage, and services organization operating in four segments: Retail, Wholesale Brokerage, National Programs, and Services. The company markets and sells insurance products, primarily in the property and casualty area.
Key Financial Metrics
(Amounts in thousands, except per share data)
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenues | $243,766 | $753,715 |
| Net Income | $40,961 | $129,641 |
| Diluted EPS | $0.29 | $0.91 |
| Operating Cash Flow (9mo) | N/A | $189,258 |
| Cash and Equivalents (Sep 30, 2009) | $186,247 | $186,247 |
| Total Debt (Sep 30, 2009) | $262,053 | $262,053 |
| Current Ratio | 1.24 | 1.24 |
Material Changes vs. Prior Period
- Revenue: Total revenues for the nine months ended September 30, 2009, increased 1.1% to $753.7 million compared to $745.5 million in the prior year. However, core commissions and fees experienced negative internal growth of (4.1%) due to a "soft market" and reduced insurable exposure units.
- Profitability: Net income for the nine months decreased 2.3% to $129.6 million from $132.8 million in the prior year. Income before taxes decreased 2.1%.
- Investment Income: Investment income dropped significantly, down 81.6% for the nine months to $0.9 million, primarily due to lower interest yields on short-term money-market investments.
- Acquisitions: The company acquired eight insurance intermediaries and several books of business in the first nine months of 2009 for an aggregate purchase price of approximately $47.0 million. This is a significant reduction from the $234.0 million spent on acquisitions in the same period of 2008.
- Segment Performance:
- Retail: Internal growth rate for core commissions was negative (8.5%) for the nine months.
- Wholesale Brokerage: Internal growth rate for core commissions was negative (7.1%) for the nine months.
- National Programs: Showed positive internal growth of 12.8% for the nine months, driven by net new business.
- Services: Showed positive internal growth of 3.4% for the nine months.
Guidance, Outlook, and Risks
- Market Conditions: Management notes continued challenges from a "soft market" (declining insurance premium rates) and a weakening economy reducing insurable exposure units. Citizens Property Insurance Corporation in Florida remains a competitive factor, though rates are expected to increase by approximately 10% effective January 1, 2010.
- Leadership Change: Effective July 1, 2009, J. Powell Brown succeeded his father, J. Hyatt Brown, as Chief Executive Officer.
- Liquidity: The company maintains a strong liquidity position with $186.2 million in cash and cash equivalents. Management believes existing cash and funds from operations will satisfy normal liquidity needs for the next 12 months.
- Risks:
- Material adverse changes in economic conditions.
- Regulatory actions and conditions in states where the company operates.
- Competition in the insurance agency and brokerage business.
- Governmental investigations regarding compensation practices (profit-sharing contingent commissions) in various states.
Investor Verification Checklist
- Internal Growth Trends: Verify the sustainability of negative internal growth in the Retail and Wholesale Brokerage segments versus the positive growth in National Programs and Services.
- Florida Market Exposure: Assess the impact of Citizens Property Insurance Corporation rate changes effective January 2010 on Florida-based operations.
- Acquisition Strategy: Review the shift in acquisition volume (down significantly from 2008) and the integration of recent acquisitions.
- Regulatory Environment: Monitor the status of governmental investigations into compensation practices and potential impacts on profit-sharing contingent commissions.
- Debt Covenants: Confirm continued compliance with financial ratios required by the $200 million senior notes and the revolving credit facility.