Business Context and Reporting Period
Company: Brown & Brown, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: A diversified insurance agency, wholesale brokerage, and services organization headquartered in Florida. The company operates through four segments: Retail, National Programs, Wholesale Brokerage, and Services. It does not assume underwriting risk but earns commissions and fees for placing insurance and providing risk management services.
Key Financial Metrics (Year Ended Dec 31, 2009)
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Total Revenues | $967.9 million | $977.6 million | (1.0)% |
| Commissions and Fees | $964.9 million | $966.0 million | (0.1)% |
| Net Income | $153.3 million | $166.1 million | (7.7)% |
| Diluted EPS | $1.08 | $1.17 | (7.7)% |
| Operating Cash Flow | $221.6 million | $341.8 million | (35.2)% |
| Total Assets | $2,224.2 million | $2,119.6 million | 5.0% |
| Long-Term Debt | $250.2 million | $253.6 million | (1.3)% |
| Cash and Equivalents | $197.1 million | $78.6 million | 150.8% |
| Goodwill | $1,074.4 million | $1,023.4 million | 5.0% |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 1.0% to $967.9 million. This marks the third consecutive year of negative internal revenue growth, driven by a "soft market" (declining insurance premium rates) and a significant reduction in "insurable exposure units" (e.g., payroll, sales) due to the U.S. economic recession.
- Profitability Pressure: Net income fell 7.7% to $153.3 million. Profit-sharing contingent commissions dropped 15.6% to $47.6 million due to higher loss ratios and lower profitability among insurance carriers.
- Investment Income Collapse: Investment income plummeted 80.9% to $1.2 million, primarily due to historically low interest rates and the absence of the $18.7 million gain from the sale of Rock-Tenn Company shares recorded in 2007.
- Segment Performance:
- Retail: Revenues declined 1.2%; internal core growth was negative 8.7%.
- National Programs: Revenues increased 6.9%, driven by growth in the Proctor Financial subsidiary (lender-placed insurance).
- Wholesale Brokerage: Revenues declined 7.2% due to competitive pressures and reduced exposure units.
- Services: Revenues increased 1.9%.
- Liquidity Improvement: Cash and cash equivalents increased significantly to $197.1 million, up from $78.6 million in 2008, despite $44.7 million in acquisition spending and $42.9 million in dividends.
Guidance, Outlook, and Risks
- Outlook: Management does not anticipate significant additional declines in exposure units or pricing in 2010 but sees no immediate indications of improvement. The company expects declining exposure units to continue having a greater negative impact than declining premium rates.
- Florida Market: The company notes that the impact of "Citizens Property Insurance Corporation" (a state-run insurer of last resort) should decline in 2010 as Citizens raised rates by an average of 10% effective January 1, 2010.
- Acquisition Strategy: Acquisition activity slowed in 2009 as sellers deferred sales due to lower valuations. The company completed 11 acquisitions in 2009 with an aggregate purchase price of $56.3 million.
- Key Risks:
- Economic Conditions: Continued recession could further reduce insurable exposure units and customer ability to pay.
- Financial Institution Risk: Significant cash balances are held in excess of FDIC limits; failure of a depository institution could cause liquidity issues.
- Regulatory/Commission Risk: Ongoing investigations into profit-sharing contingent commissions by state authorities could lead to reduced commissions or legal liabilities.
- Goodwill Impairment: A sustained decline in stock price or future cash flows could trigger a goodwill impairment charge.
Investor Verification Checklist
- Internal Growth Rate: Verify the sustainability of the negative 5.1% internal core growth rate and the timeline for recovery in insurable exposure units.
- Florida Exposure: Assess the concentration of revenue in Florida (approx. 25% of total) and the specific impact of Citizens Property Insurance Corporation on the Retail and Wholesale segments.
- Contingent Commissions: Monitor the status of state regulatory investigations regarding profit-sharing commissions, as these represent a volatile revenue stream (approx. 5% of total revenue).
- Goodwill Valuation: Review the annual goodwill impairment test results, given the $1.07 billion goodwill balance and the company's reliance on stock price multiples for valuation.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly the funded debt to EBITDA ratio, given the revolving credit facility and senior notes.