Business Context and Reporting Period
Brown & Brown, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The company is a diversified insurance intermediary operating through Retail, National Programs, Wholesale Brokerage, and Services segments, primarily marketing insurance products and related services rather than assuming underwriting risk. It also operates a flood insurance carrier and two captive insurance facilities.
The company completed 21 acquisitions during the first nine months of 2022, including Orchid, GRP, First Insurance Solutions, BdB, Smithwick, and VistaNational. The GRP acquisition was funded with a combination of newly issued debt, revolving borrowings, cash, and other financing.
Key Financial Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenues | $927.6 million, up 20.4% | $2,672.0 million, up 15.5% |
| Core commissions and fees | $917.4 million, up 22.0% | $2,609.7 million, up 16.2% |
| Profit-sharing contingent commissions | $7.8 million, down 55.7% | $58.5 million, down 7.4% |
| Income before income taxes | $218.0 million; 23.5% margin | $681.8 million; 25.5% margin |
| Net income | $161.1 million, up 10.0% | $526.6 million, up 8.5% |
| Diluted earnings per share | $0.57 | $1.85 |
| Adjusted EBITDAC | $289.8 million; 31.2% margin | $887.7 million; 33.2% margin |
| Organic revenue growth | 6.7% | 8.3% |
| Cash flow from operating activities | Not separately provided for the quarter | $599.8 million |
| Capital expenditures | $14.1 million | $32.4 million |
Employee compensation and benefits were $470.3 million for the quarter and $1,341.3 million for the nine-month period. Other operating expenses were $169.6 million and $450.6 million, respectively. Interest expense increased to $41.5 million for the quarter and $95.8 million for the nine-month period.
At September 30, 2022, cash and cash equivalents were $579.5 million and fiduciary cash was $1,271.3 million. Total assets were $13.66 billion, including $6.52 billion of goodwill and $1.59 billion of amortizable intangible assets. Total debt was $4.11 billion, compared with $2.02 billion at December 31, 2021. The company reported $650.0 million of available capacity under its revolving credit facility and stated that existing liquidity and operating cash flow should meet normal needs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected approximately $118.3 million of third-quarter core commission and fee revenue from acquisitions, approximately $50.4 million of net new and renewal business, and a $1.2 million foreign-currency translation headwind.
- Nine-month revenue growth included approximately $188.4 million from acquisitions and $184.6 million from net new and renewal business, partly offset by $3.0 million of foreign-currency translation effects and $6.7 million from dispositions.
- Adjusted EBITDAC margin declined from 35.6% to 31.2% in the quarter and from 34.6% to 33.2% for the nine-month period. Management attributed the pressure primarily to higher variable operating expenses, acquisition-related costs, seasonality, and Hurricane Ian impacts.
- Income before taxes benefited from a $26.6 million third-quarter credit and a $33.1 million nine-month credit from changes in estimated acquisition earn-out payables, compared with expense increases of $23.1 million and $20.6 million, respectively, in the prior-year periods.
- Interest expense rose 156.2% for the quarter and 96.3% for the nine-month period because of higher debt balances used to fund acquisitions and higher floating-rate benchmarks.
- Operating cash flow decreased to $599.8 million from $627.8 million, while investing cash use increased sharply to $1.91 billion, principally because of $1.89 billion of cash paid for acquired businesses.
- Foreign currency translation reduced comprehensive income by $172.3 million in the quarter and $304.5 million for the nine-month period, resulting in comprehensive loss of $11.6 million for the quarter.
- Retail, National Programs, and Wholesale Brokerage revenue increased for both periods, while Services revenue declined 5.9% in the quarter and 5.0% for the nine-month period. Services results were affected by fewer weather-related claims and lower claim severity.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific full-year revenue, earnings, or margin guidance. Management expects liquidity from cash, short-term investments, operating cash flow, and available credit to cover normal requirements, including debt repayments, for at least the next 12 months.
Hurricane Ian materially affected the quarter. Management estimated approximately $15.0 million of lower profit-sharing contingent commissions and approximately $11.5 million of captive losses related to estimated insured property losses. The quota-share captive recorded estimated ultimate loss expense of $11.7 million, including $11.2 million related to Hurricane Ian, with an estimated $6.8 million reinsurance recovery. The excess-of-loss captive recorded a $7.0 million catastrophe incurred-but-not-reported reserve.
Future acquisition contingency payments had a maximum potential value of $550.3 million at September 30, 2022, including $249.9 million of recorded estimated earn-out payables. Four GRP-related earn-outs had no stated maximum potential amount; the recorded balance for those arrangements was $2.8 million.
Total contractual cash obligations were $6.71 billion, including $4.14 billion of long-term debt, $1.59 billion of interest obligations, $550.3 million of maximum acquisition contingency payments, and $272.1 million of operating leases. The company was in compliance with its debt covenants at September 30, 2022.
Principal risks include inflation, interest-rate increases, foreign exchange volatility, acquisition integration and goodwill impairment, employee retention, cybersecurity and data privacy, insurer relationship or capacity changes, regulatory developments, litigation, catastrophe losses, COVID-19 effects, and fluctuations in contingent commissions. Management stated that no legal proceeding was expected to have a material adverse effect based on current information, although unfavorable litigation outcomes could affect results, cash flow, or liquidity.
Disclosure controls and procedures were considered effective as of September 30, 2022, and no material change in internal control over financial reporting was identified during the quarter. The filing states that there were no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Whether acquisition-driven growth, particularly from GRP and Orchid, converts into sustainable organic revenue and margin performance.
- The effect of higher floating-rate debt and potential additional rate increases on interest expense and cash flow.
- The ultimate cost of Hurricane Ian losses, captive reserves, reinsurance recoverables, and related contingent commission reductions.
- The company’s ability to reduce leverage while continuing acquisitions, share repurchases, and dividends.
- The valuation and impairment sensitivity of $6.52 billion of goodwill and $1.59 billion of amortizable intangible assets.
- The timing and amount of the $550.3 million maximum acquisition contingency payments, including uncapped GRP-related provisions.
- The sustainability of the 8.3% nine-month organic revenue growth rate and the decline in adjusted EBITDAC margin.
- Availability and terms of the stated $650.0 million revolving capacity and up to $1.7 billion of potential incremental borrowing capacity.