Brown & Brown, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Brown & Brown is a diversified insurance intermediary, wholesale broker, insurance-program manager and insurance-related services provider. Its four reportable segments are Retail, National Programs, Wholesale Brokerage and Services. The company primarily acts as an agent or broker, but also participates in a write-your-own flood insurer and two capitalized captive insurance facilities.
This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. The company had 283.6 million common shares outstanding at March 31, 2023 and 283.644 million shares outstanding as of April 24, 2023.
Financial performance and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenues | $1,116.0 million | $904.7 million | 23.4% |
| Commissions and fees | $1,108.0 million | $904.3 million | 22.5% |
| Core commissions and fees | $1,081.2 million | $875.7 million | 23.5% |
| Income before income taxes | $294.2 million | $265.0 million | 11.0% |
| Income before tax margin | 26.4% | 29.3% | Down 2.9 points |
| Net income | $235.5 million | $220.3 million | 6.9% |
| Diluted earnings per share | $0.83 | $0.77 | Increase of $0.06 |
| Adjusted EBITDAC | $398.2 million | $323.1 million | 23.2% |
| Adjusted EBITDAC margin | 35.7% | 35.7% | Flat |
| Operating cash flow | $59.8 million | $103.6 million | Down $43.8 million |
Organic revenue growth was 12.6%, compared with 7.8% in the prior-year quarter. Core commissions and fees growth reflected approximately $107.0 million from net new and renewal business, $113.9 million from acquisitions, a $15.6 million reduction from divested businesses and a $0.7 million foreign-currency headwind.
Investment income increased to $7.0 million from $0.2 million, primarily because of higher average interest rates. Employee compensation and benefits rose 24.4% to $571.1 million and represented 51.2% of revenue, compared with 50.7% in the prior-year quarter. Other operating expenses increased 26.7% to $160.7 million and represented 14.4% of revenue.
Segment performance
| Segment | Q1 2023 revenue | Revenue growth | Organic growth | Income before tax | Adjusted EBITDAC margin |
|---|---|---|---|---|---|
| Retail | $713.5 million | 19.6% | 8.8% | $210.2 million | 37.0% |
| National Programs | $229.8 million | 41.7% | 33.8% | $73.3 million | 39.3% |
| Wholesale Brokerage | $123.4 million | 19.9% | 7.0% | $31.2 million | 30.8% |
| Services | $44.3 million | 1.6% | 1.6% | $5.2 million | 16.5% |
National Programs was the strongest growth contributor, benefiting from new business, rate increases, retention, exposure-unit expansion and claims-related revenue associated with Hurricane Ian. Retail growth was supported by acquisitions, new business and renewal rate increases, but its margin declined due to higher variable expenses, acquisition seasonality and lower profit-sharing commissions. Services profitability declined because of higher salary-related costs and certain one-time expenses.
Cash flow, liquidity and debt
- Cash and cash equivalents were $563.5 million at March 31, 2023, compared with $650.0 million at December 31, 2022.
- Fiduciary cash was $1,380.0 million and fiduciary liabilities were $2,294.3 million. Fiduciary cash is held for clients, carriers or regulatory purposes and is not generally available for corporate use.
- Cash and cash equivalents inclusive of fiduciary cash decreased $89.7 million during the quarter to $1,943.5 million.
- Operating cash flow was $59.8 million, with working-capital movements materially affected by a $688.3 million increase in reinsurance recoverable and a corresponding $687.0 million decrease in loss reserves.
- Investing cash use was $43.2 million, including $37.6 million for acquisitions and $11.8 million of capital expenditures.
- Financing cash use was $120.6 million, including $16.9 million of debt repayments, $16.1 million of acquisition earn-out payments, $36.2 million for employee-tax share withholdings and $32.6 million of dividends.
- Total debt was $3,926.3 million, net of discounts and issuance costs, down from $3,942.1 million at December 31, 2022. No borrowings were outstanding on the revolving credit facility, which provided up to $800.0 million of availability.
- Management stated that cash, investments, operating cash generation and available revolver capacity should satisfy normal liquidity needs for at least the next 12 months and thereafter. Including expansion options under existing credit agreements, the company reported potential incremental borrowing capacity of up to $1.9 billion.
- The company was in compliance with all debt covenants at March 31, 2023. Approximately $1,006.3 million of debt was tied to SOFR and $202.5 million to overnight LIBOR; the company completed the applicable LIBOR-to-SOFR transition for the relevant credit agreement in February 2023.
Material changes versus the prior comparable period
- Revenue growth accelerated substantially, while net income grew more slowly because of higher amortization, interest expense, compensation and operating costs.
- Interest expense increased 155.2% to $46.7 million, reflecting debt raised to fund prior acquisitions and higher floating-rate benchmarks.
- Amortization increased 33.1% to $41.4 million, primarily from acquired intangible assets.
- Effective income tax rate increased to 20.0% from 16.9%, primarily because of a lower tax benefit from restricted-stock vesting.
- Profit-sharing contingent commissions declined 6.3% to $26.8 million.
- The company completed seven acquisitions during the quarter: five insurance intermediaries, one intermediary asset acquisition and one book-of-business acquisition. Net cash paid was $37.6 million, and recorded acquisition earn-out obligations totaled $254.2 million at quarter-end.
- Goodwill increased to $6,730.2 million from $6,674.2 million at year-end, while amortizable intangible assets declined to $1,581.6 million from $1,595.2 million.
- Comprehensive income increased to $282.9 million from $217.3 million, primarily because of a $47.1 million favorable foreign-currency translation adjustment versus a $2.1 million unfavorable adjustment in Q1 2022.
Guidance, outlook, commentary and risks
The filing does not provide formal quantitative full-year revenue or earnings guidance. Management emphasized continued growth through net new business, renewal activity, acquisitions and a decentralized sales and service model. Management also expects available liquidity and financing resources to support normal needs, including debt service, for at least the next 12 months.
Unusual items included approximately $11.0 million of costs incurred to resolve a business matter, which management classified as nonrecurring, and $3.0 million of acquisition and integration costs. The company also recorded a $5.7 million gain on disposal of businesses or customer accounts.
The company has exposure to underwriting results through WNFIC and two captive facilities. Hurricane Ian-related estimated insured losses in the quota-share captive were $7.8 million, with a $3.6 million estimated reinsurance recoverable and a net expected loss of $4.2 million. The excess-of-loss captive had $6.0 million of Hurricane Ian-related reserves and a maximum underwriting exposure of $5.2 million.
Key risks include acquisition execution and integration, employee retention, cybersecurity and information-technology disruptions, inflation, interest-rate changes, insurer capacity and relationships, regulatory and data-privacy changes, natural catastrophes, litigation, goodwill impairment, economic conditions, competition and compliance with debt covenants. The company reported no material changes to previously disclosed risk factors and no new material legal proceedings during the quarter. Management concluded that disclosure controls were effective as of March 31, 2023.
Most important facts for investors to verify
- Whether organic growth remains durable after separating rate increases, exposure-unit changes, acquisitions, divestitures and catastrophe-related revenue.
- The effect of higher floating interest rates on interest expense, earnings and debt-service capacity.
- The pace, valuation and integration performance of acquisitions, including the $535.9 million maximum future acquisition contingency payments.
- Whether adjusted EBITDAC margins remain stable as compensation, travel, integration and other operating costs increase.
- The development of Hurricane Ian and other catastrophe-related losses, reinsurance recoverables and captive insurance exposures.
- Liquidity available after scheduled debt maturities, dividends, earn-out payments, acquisitions and potential share repurchases.
- The treatment and recurring nature of the $11.0 million business-matter cost and other non-GAAP adjustments.
- Potential goodwill and intangible-asset impairment, given goodwill of $6.7 billion and substantial acquisition-related amortization.