Business Context and Reporting Period
Company: Brown & Brown, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: A diversified insurance agency, wholesale brokerage, and services organization headquartered in Daytona Beach and Tampa, Florida. The company operates through four segments: Retail Division, Wholesale Brokerage Division, National Programs Division, and Services Division. It does not assume underwriting risks but earns commissions and fees for placing insurance and providing risk management services.
Key Financial Metrics
| Metric (in thousands) | 2008 | 2007 | 2006 |
|---|---|---|---|
| Total Revenues | $977,554 | $959,667 | $878,004 |
| Commissions & Fees | $965,983 | $914,650 | $864,663 |
| Net Income | $166,124 | $190,959 | $172,350 |
| Diluted EPS | $1.17 | $1.35 | $1.22 |
| Total Assets | $2,119,580 | $1,960,659 | $1,807,952 |
| Long-Term Debt | $253,616 | $227,707 | $226,252 |
| Cash & Cash Equivalents | $78,557 | $38,234 | $88,490 |
| Operating Cash Flow | $341,753 | $215,340 | $225,214 |
Margins & Ratios:
- Effective Tax Rate: 39.0% (2008) vs. 38.7% (2007).
- Employee Compensation Ratio: 49.7% of total revenues (2008).
- Return on Beginning Shareholders' Equity: 15% (2008).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 1.9% to $977.6 million, driven primarily by acquisitions ($120.2 million in annualized revenue) which offset a negative internal growth rate of 5.5% in core commissions and fees.
- Profitability Decline: Net income decreased 13.0% to $166.1 million. Income before taxes dropped 12.5% to $272.5 million.
- Investment Income: Investment income plummeted 80.1% to $6.1 million, largely due to the absence of the $18.7 million gain from the sale of the Rock-Tenn Company investment recorded in 2007.
- Segment Performance:
- Retail: Revenues up 4.9%, but internal core growth was negative 6.9% due to competitive pricing in Florida.
- Wholesale Brokerage: Revenues down 4.6% with a significant negative internal growth of 14.6%, impacted by the "soft market" and competition from Florida's Citizens Property Insurance Corporation.
- National Programs: Revenues up 13.2%, driven by strong growth in the Proctor Financial subsidiary (lender-placed insurance).
- Services: Revenues down 9.2% following the loss of a major client's claims-paying business in late 2007.
- Acquisitions: Completed 62 transactions in 2008 with an aggregate purchase price of $278.7 million, compared to 41 transactions in 2007.
Guidance, Outlook, Risks, and Unusual Items
Outlook & Management Commentary:
Management anticipates that declining "insurable exposure units" (sales and payroll expenditures) due to the U.S. recession will have a greater negative impact on 2009 revenues than declining premium rates. The "soft market" (declining insurance rates) is expected to persist, particularly in the southeast and southwest regions.
Key Risks:
- Economic Recession: Reduced customer demand and potential insolvency of customers or insurance carriers.
- Florida Market: Continued aggressive competition from Citizens Property Insurance Corporation, which has significantly impacted Florida-based wholesale and retail operations.
- Financial Institution Risk: Exposure to potential losses if depository institutions holding cash balances fail, though the company has moved funds to FDIC-insured accounts.
- Goodwill Impairment: $1.02 billion in goodwill is recorded; a sustained decline in stock price or cash flows could trigger impairment charges.
- Regulatory: Ongoing investigations by state authorities regarding profit-sharing contingent commissions.
Unusual Items:
- 2007 Comparison: 2007 results included a one-time $18.7 million gain on the sale of Rock-Tenn Company and $13.5 million in gains from sales of books of business, making 2008 results appear weaker by comparison.
- IRS Settlement: In 2007, the company settled an IRS audit regarding profit-sharing commission recognition for a $1.1 million interest payment.
Investor Verification Checklist
- Internal Growth vs. Acquisitions: Verify the sustainability of revenue growth given the 5.5% negative internal growth rate in core commissions.
- Florida Exposure: Assess the long-term impact of Citizens Property Insurance Corporation on the company's Florida operations, which represent a significant portion of revenue.
- Goodwill Valuation: Monitor the $1.02 billion goodwill balance for potential impairment triggers given the economic downturn and stock price volatility.
- Cash Management: Review the company's strategy for managing cash balances in excess of FDIC limits amidst the 2008 financial crisis.
- Profit-Sharing Commissions: Evaluate the predictability of future revenues given the volatility of profit-sharing contingent commissions and ongoing regulatory scrutiny.