Business Context and Reporting Period
Brown & Brown, Inc. is a diversified insurance intermediary with Retail, National Programs, Wholesale Brokerage, and Services segments. The unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Beginning January 1, 2022, the Company separately presents fiduciary assets and liabilities and reports fiduciary cash flows within financing activities; prior periods were recast for comparability.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenues | $904.7 million | $815.3 million | 11.0% |
| Core commissions and fees | $875.7 million | $788.1 million | 11.1% |
| Profit-sharing contingent commissions | $28.6 million | $25.9 million | 10.4% |
| Income before income taxes | $265.0 million | $239.2 million | 10.8% |
| Income before tax margin | 29.3% | 29.3% | Flat |
| Net income | $220.3 million | $199.7 million | 10.3% |
| Diluted earnings per share | $0.77 | $0.70 | 10.0% |
| Adjusted EBITDAC | $323.3 million | $291.1 million | 11.1% |
| Adjusted EBITDAC margin | 35.7% | 35.7% | Flat |
| Organic revenue growth | 7.8% | 9.9% | Down 2.1 percentage points |
| Cash flow from operating activities | $103.6 million | $138.0 million | Down $34.4 million |
Employee compensation and benefits were $459.0 million, or 50.7% of revenue, versus 52.7% in the prior-year quarter. Other operating expenses increased to $126.8 million, or 14.0% of revenue, from 11.6%. The effective tax rate was 16.9%, compared with 16.5%.
At March 31, 2022, cash and cash equivalents were $1.695 billion and fiduciary cash was $731.6 million. Total cash, cash equivalents, and fiduciary cash were $2.426 billion. Short-term investments were $17.6 million. Fiduciary cash is held for remittance to carriers or customers and should not be treated as unrestricted operating liquidity.
Total debt was $3.540 billion, net of discounts and issuance costs, compared with $2.023 billion at December 31, 2021. Total assets were $11.273 billion and shareholders’ equity was $4.335 billion at March 31, 2022.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected $61.4 million of net new and renewal business, $29.3 million from acquisitions, a $0.7 million foreign-currency headwind, and a $2.4 million reduction from divested business.
- Organic revenue growth was strongest in Wholesale Brokerage at 11.6% and Retail at 8.9%; National Programs grew 6.1%. Services declined 6.2% organically.
- Retail revenue increased 14.1% and adjusted EBITDAC margin improved to 38.5% from 37.2%. Wholesale Brokerage revenue increased 13.2% and adjusted EBITDAC margin improved to 31.5% from 28.9%.
- National Programs revenue increased 4.7%, but adjusted EBITDAC margin declined to 33.2% from 34.9% due primarily to higher variable costs, stock-based compensation, and onboarding costs.
- Services revenue declined 7.2%, and adjusted EBITDAC margin fell to 20.4% from 25.3%, primarily because of lower catastrophic-weather claims activity, COVID-19-related travel restrictions on claims activity, and delays in the advocacy business.
- Operating cash flow decreased despite higher net income, primarily reflecting working-capital movements, including increases in commissions and other receivables and a larger decrease in accrued expenses and other liabilities.
- The Company acquired Orchid Intermediate Holdings for approximately $476.2 million in cash and acquired another book of business; total cash paid for two acquisitions was $479.7 million. The acquisitions added approximately $404.6 million of goodwill and $120.9 million of purchased customer accounts.
- On March 17, 2022, the Company issued $600.0 million of 4.200% senior notes due 2032 and $600.0 million of 4.950% senior notes due 2052, generating approximately $1.178 billion of net proceeds.
- The Company drew $350.0 million on its revolving credit facility to help fund the Orchid acquisition. On March 31, 2022, it also entered into an $800.0 million delayed-draw term loan facility; the filing states that the facility was fully drawn by April 28, 2022, after the reporting date.
- The quarterly dividend was $0.1025 per share, and the Company repurchased $24.1 million of common stock in open-market transactions. Approximately $299.6 million remained available under the repurchase authorization after those purchases.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal quantitative revenue or earnings guidance. Management stated that existing cash, short-term investments, operating cash generation, and available credit were expected to satisfy normal liquidity needs for at least the next 12 months as of the filing date. The Company reported up to $2.3 billion of incremental borrowing capacity as of March 31, 2022, including expansion options, but subsequently drew the $800.0 million delayed-draw facility.
The Company had a definitive agreement pending regulatory approval to acquire GRP (Jersey) Holdco Limited and its businesses and also referenced pending acquisitions of GRP and BdB Limited companies. The 2032 notes contain a special mandatory redemption provision requiring redemption at 101% of principal if the GRP acquisition is not completed by December 31, 2022, or is terminated earlier. The 2052 notes do not contain this provision.
Principal risks identified include COVID-19 and its economic effects, inflation, employee retention, acquisition execution and integration, cybersecurity and data privacy, carrier relationships and capacity, regulatory changes, litigation, economic conditions, interest-rate and LIBOR transition risk, foreign exchange, debt covenants, competition, quarterly seasonality, and potential goodwill impairment.
The Company reported $250.9 million of estimated acquisition earn-out payables and maximum future acquisition contingency payments of $452.3 million. Contractual cash obligations totaled $5.947 billion, including $3.576 billion of long-term debt, $1.475 billion of interest obligations, $452.3 million of maximum acquisition contingency payments, and $266.7 million of operating leases.
Management stated that no legal proceeding was expected, individually or in the aggregate, to have a material adverse effect on financial condition, operations, or cash flows. However, unfavorable litigation outcomes or insurance coverage disputes could materially affect future results, cash flows, or liquidity. The Company was in compliance with its debt covenants at March 31, 2022.
Most Important Facts to Verify
- Confirm the post-quarter-end $800.0 million term-loan draw and its effect on total debt, interest expense, leverage, and covenant headroom.
- Track completion, timing, financing, regulatory approval, and integration of the GRP and BdB acquisitions, including the 2032 notes’ special mandatory redemption exposure.
- Assess whether Services segment weakness and lower catastrophic-weather claims activity persist or reverse.
- Reconcile unrestricted cash with fiduciary cash when evaluating liquidity and acquisition funding capacity.
- Monitor organic revenue growth, carrier pricing and capacity, inflation-driven exposure-unit changes, employee cost inflation, and higher variable operating expenses.
- Review acquisition-related goodwill, intangible assets, earn-out obligations, and the risk of future impairment or cash earn-out payments.
- Evaluate exposure to floating-rate debt, LIBOR-to-SOFR transition provisions, and the effect of rising interest rates on future interest expense.