Brown & Brown, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Brown & Brown is a diversified insurance agency, wholesale brokerage, insurance-programs and services organization focused primarily on property and casualty products. The filing covers the unaudited three months ended March 31, 2015, compared with the three months ended March 31, 2014. Reportable segments are Retail, National Programs, Wholesale Brokerage and Services.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenues | $404.3 million | $363.6 million | 11.2% |
| Commissions and fees | $403.8 million | $362.0 million | 11.5% |
| Income before taxes | $93.8 million | $86.8 million | 8.0% |
| Net income | $57.0 million | $52.4 million | 8.7% |
| Diluted EPS | $0.39 | $0.36 | 8.3% |
| Dividends declared per share | $0.11 | $0.10 | 10.0% |
| Operating cash flow | $50.7 million | $67.1 million | Down $16.4 million |
Net margin was approximately 14.1% in Q1 2015 versus 14.4% in Q1 2014. Pretax margin was approximately 23.2% versus 23.9%. The effective tax rate was 39.3%, compared with 39.6%.
Core commissions and fees increased 13.2% to $370.5 million. Core organic commissions and fees grew 3.8%, with positive internal growth in every segment. Profit-sharing contingent commissions declined 5.6% to $30.0 million, while guaranteed supplemental commissions increased 14.5% to $3.4 million.
At March 31, 2015, cash and cash equivalents were $340.7 million, restricted cash and investments were $284.8 million, and short-term investments were $10.9 million. Total assets were $4.84 billion. Total debt was approximately $1.17 billion, including $27.5 million classified as current. The company had no borrowings outstanding under its revolving credit facilities and reported compliance with applicable debt covenants.
The company stated that cash, investments, operating cash flow and available credit were expected to satisfy normal liquidity needs, including debt principal payments, for at least the next twelve months. Revolving credit facilities provided up to $825.0 million of availability, and an additional $125.0 million private shelf facility remained available.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven principally by acquisitions, net new business and organic growth. Approximately $36.0 million of the increase in core commissions and fees came from acquisitions completed since Q1 2014.
- The company completed three insurance intermediary acquisitions and two book-of-business purchases during Q1 2015, paying $36.2 million in cash. Acquired businesses contributed $1.7 million of revenue and $0.3 million of pretax income during the quarter.
- Interest expense increased 141.9% to $9.9 million, primarily because of the $550.0 million term loan used in connection with the Wright acquisition and $500.0 million of 4.2% senior notes due 2024.
- Amortization increased 21.0% to $21.6 million, primarily from acquisition-related intangible assets.
- Operating cash flow decreased to $50.7 million from $67.1 million, while investing cash use increased to $34.8 million from $5.3 million because of acquisitions.
- Financing cash use increased to $145.2 million, reflecting $25.0 million of debt repayment, $85.0 million of treasury-stock purchases, a $15.0 million prepayment under an accelerated share repurchase program and $15.8 million of dividends.
- The company repurchased 2.7 million shares under a March 2015 accelerated share repurchase agreement and had $65.0 million remaining under the announced repurchase authorization at March 31, 2015.
Segment Performance
| Segment | Q1 2015 Revenue | Revenue Change | Q1 2015 Pretax Income | Organic Growth |
|---|---|---|---|---|
| Retail | $218.3 million | 6.3% | $47.0 million | 1.6% |
| National Programs | $99.6 million | 29.8% | $9.5 million | 4.4% |
| Wholesale Brokerage | $51.8 million | 3.7% | $14.5 million | 7.3% |
| Services | $34.8 million | 9.9% | $4.5 million | 10.5% |
National Programs revenue benefited substantially from the May 2014 Wright acquisition, but pretax income declined 44.1% because of increased amortization and intercompany interest expense. Services included a $0.6 million one-time revenue item; management indicated organic growth would have been 8.5% excluding that item. National Programs organic growth would have been 2.1% excluding $1.4 million of previously deferred Proctor Financial revenue recognized during the quarter.
Guidance, Outlook, Commentary and Risks
Management did not provide formal quantitative earnings guidance. It stated that, if gradual increases in insurable exposure units continued into 2015, positive quarterly internal revenue growth was expected, even with moderating insurance rates.
Key risks include economic and regulatory conditions, premium-rate and exposure-unit volatility, policy cancellations, competition and acquisition valuations, integration of acquired businesses, personnel retention, liquidity forecasting, tax-rate changes, legal proceedings and the effectiveness of technology and internal controls.
Wright National Flood Insurance Company remains involved in litigation in New York and New Jersey concerning Superstorm Sandy claims-handling practices. Management did not believe the claims were reasonably likely to be material based on current information, but acknowledged that litigation outcomes, reputational effects or loss of participation in the National Flood Insurance Program could materially affect results.
Wright Flood’s statutory capital and surplus was $11.5 million at March 31, 2015, above its $7.5 million minimum requirement. Regulatory restrictions limited ordinary dividends from Wright Flood to $2.3 million during 2015 without prior approval.
The company identified no goodwill impairment in its latest annual assessment. It adopted the presentation change for gains and losses on disposals beginning in the fourth quarter of 2014, affecting comparability of other income and disposal gains. Newly issued revenue-recognition guidance is effective for the company beginning January 1, 2017; the adoption method and impact were still being evaluated.
Important Facts to Verify
- Whether acquisition-driven revenue growth and the 3.8% organic growth rate are sustained as insurance rates moderate.
- The integration, profitability and amortization burden of the Wright acquisition and other recent acquisitions.
- Cash generation relative to debt service, acquisition spending, dividends and share repurchases.
- The timing and final settlement of the $100.0 million accelerated share repurchase program and remaining authorization.
- Potential developments, insurance coverage and regulatory consequences related to Wright Flood’s Superstorm Sandy litigation.
- Future contingent commissions, guaranteed supplemental commissions and other seasonal revenue items.
- The impact of the National Flood Insurance Program, reinsurance arrangements and applicable dividend restrictions on liquidity.