Business Context and Reporting Period
Brown & Brown, Inc. filed its Form 10-K for the fiscal year ended December 31, 2021. The company is a diversified insurance intermediary operating through Retail, National Programs, Wholesale Brokerage, and Services segments. It primarily earns commissions from insurance carriers and fees from customers, and generally does not assume underwriting risk except through its reinsured flood business and a recently formed captive insurance facility.
At year-end, the company operated through 331 domestic locations in 44 states and 20 international locations, with 12,023 employees. It completed 19 acquisitions during 2021.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenues | $3.051 billion | $2.613 billion | +16.8% |
| Commissions and fees | $3.048 billion | $2.606 billion | +16.9% |
| Core commissions and fees | $2.946 billion | $2.519 billion | +17.0% |
| Income before income taxes | $762.8 million | $624.1 million | +22.2% |
| Net income | $587.1 million | $480.5 million | +22.2% |
| Diluted earnings per share | $2.07 | $1.69 | +22.5% |
| Income before income taxes margin | 25.0% | 23.9% | +110 basis points |
| EBITDAC | $1.021 billion | $813.4 million | +25.5% |
| EBITDAC margin | 33.5% | 31.1% | +240 basis points |
| Operating cash flow | $942.5 million | $721.6 million | +30.6% |
| Capital expenditures | $45.0 million | $70.7 million | -36.3% |
Organic Revenue growth was 10.4%, compared with 3.8% in 2020. Employee compensation and benefits increased 14.0% but declined to 53.6% of revenue from 55.0%; other operating expenses increased 10.1% and declined to 13.2% of revenue from 14.0%. The effective tax rate was 23.0% in both years.
Segment commissions and fees were $1.767 billion for Retail, $701.1 million for National Programs, $402.6 million for Wholesale Brokerage, and $178.9 million for Services. Organic Revenue growth was 11.0%, 12.4%, 8.1%, and 3.0%, respectively.
Liquidity, Cash Flow, Debt, and Capital Allocation
- Cash and cash equivalents were $887.0 million at December 31, 2021, including $245.6 million held in a fiduciary capacity. Restricted cash and investments were $583.2 million.
- The company reported a current ratio of 1.25, compared with 1.26 at year-end 2020.
- Total debt was $2.023 billion, down from $2.096 billion. Long-term debt included $1.548 billion of fixed-rate senior notes and $486.9 million of floating-rate credit-agreement borrowings.
- The amended credit agreement extended the $800.0 million revolving facility and related $250.0 million term loan maturity to October 2026. No revolving borrowings were outstanding at year-end.
- Available borrowing capacity under the revolving facility was $800.0 million. Including expansion options, management reported potential incremental borrowing capacity of up to $1.5 billion.
- Management stated that cash, short-term investments, operating cash flow, and available credit should satisfy normal liquidity needs for at least the next 12 months.
- Cash uses included $366.8 million for acquisitions, $89.1 million for acquisition earn-out payments, $107.2 million for dividends, $82.6 million for share repurchases, $73.1 million for debt principal payments, and $45.0 million for capital expenditures.
- The board had $323.6 million remaining under the share repurchase authorization at December 31, 2021. The annual dividend increased to $0.38 per share from $0.35.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated, with Organic Revenue growth increasing to 10.4% from 3.8%, supported by net new and renewal business, rate increases, exposure-unit growth, and acquisitions.
- Income before taxes and net income each increased 22.2%, while EBITDAC margin expanded 240 basis points.
- Profit-sharing contingent commissions and guaranteed supplemental commissions increased by $14.1 million in aggregate, partly because of acquisitions and qualification for commissions not received in the prior year.
- Acquisition activity remained significant: 19 acquisitions were completed, with gross cash paid of $424.6 million and $350.0 million of goodwill recorded from the 2021 acquisitions.
- The estimated acquisition earn-out liability increased to $291.0 million from $258.9 million and generated a $40.4 million expense in 2021, compared with a $4.5 million credit in 2020.
- Goodwill increased to $4.737 billion from $4.396 billion. No goodwill or amortizable intangible-asset impairments were recorded for 2021, 2020, or 2019.
- Services segment growth remained comparatively modest at 2.8% revenue growth and 3.0% Organic Revenue growth, while Wholesale Brokerage income before taxes increased only 1.3% despite 14.3% revenue growth.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide specific numerical revenue, earnings, or margin guidance. Management expects existing liquidity and operating cash generation to support normal needs and continues to pursue growth through organic expansion and acquisitions.
- The company expects to begin recognizing net retained earned premiums from its captive insurance facility in 2022 and to include guaranteed supplemental commissions in Organic Revenue, with prior periods expected to be presented consistently.
- The company remained exposed to COVID-19 effects, inflation, salary pressure, economic conditions, insurer capacity, natural catastrophes, and changes in insurance regulation.
- Cybersecurity, data privacy, technology disruption, employee retention, acquisition integration, and loss of carrier relationships were identified as material risks.
- Approximately 18% of revenue was generated in Florida, 11% in California, 8% in Massachusetts, 7% in Georgia, 7% in New York, and 6% in Michigan, creating geographic concentration and catastrophe exposure.
- Approximately $4.7 billion of goodwill is subject to impairment risk. Management’s November 30, 2021 test found fair value exceeded carrying value.
- Approximately $484.8 million of maximum future acquisition contingency payments remained possible, including the $291.0 million estimated earn-out liability.
- About $486.9 million of debt was tied to LIBOR-based rates. The company is transitioning to alternative reference rates, including SOFR, before the expected cessation of relevant LIBOR settings.
- Accrued legal liabilities were not material, and management stated that no current legal proceedings were expected to have a material adverse effect; however, future claims and errors-and-omissions matters could affect results and liquidity.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. Controls over certain 2021 acquisitions were excluded from management’s assessment because those businesses were acquired during the year.
Most Important Facts for Investors to Verify
- Whether 2021’s 10.4% Organic Revenue growth and expanded margins are sustainable after separating acquisition contributions, rate increases, and contingent commissions.
- The valuation, forecast assumptions, and cash requirements associated with the $291.0 million earn-out liability and $484.8 million maximum contingency exposure.
- The company’s ability to integrate acquisitions and manage goodwill of $4.737 billion without future impairment charges.
- Debt covenant compliance, scheduled maturities, floating-rate exposure, and the financial impact of the LIBOR-to-SOFR transition.
- Whether inflation, labor-market pressures, insurer capacity constraints, catastrophe losses, and COVID-19 effects could pressure expenses or customer demand.
- The concentration of revenue and operations in higher-risk states, particularly Florida and California.
- The performance and risk profile of the new captive insurance facility beginning in 2022.