Business Context and Reporting Period
Company: Brown & Brown, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: A diversified insurance agency, wholesale brokerage, and services organization headquartered in Florida. The company operates through four segments: Retail, Wholesale Brokerage, National Programs, and Services. It does not assume underwriting risks but earns commissions and fees for placing insurance and providing risk management services.
Key Financial Metrics
| Metric | 2007 | 2006 | Change |
|---|---|---|---|
| Total Revenues | $959.7 million | $878.0 million | +9.3% |
| Commissions & Fees | $914.7 million | $864.7 million | +5.8% |
| Net Income | $191.0 million | $172.4 million | +10.8% |
| Diluted EPS | $1.35 | $1.22 | +10.7% |
| Operating Cash Flow | $215.3 million | $225.2 million | -4.4% |
| Total Assets | $1,960.7 million | $1,808.0 million | +8.4% |
| Long-Term Debt | $227.7 million | $226.3 million | +0.6% |
| Cash & Equivalents | $38.2 million | $88.5 million | -56.8% |
Profit Margins: The effective tax rate was 38.7%. Pre-tax income was $311.5 million. Employee compensation and benefits represented 46.3% of total revenues.
Material Changes vs. Prior Period
- Revenue Composition: While total revenue grew 9.3%, core commissions and fees (excluding acquisitions and profit-sharing) declined by 3.4% ($27.9 million). This was the first year of negative internal growth since 1997.
- Acquisitions: Growth was driven by 41 acquisitions with estimated annualized revenues of $108.3 million. Total acquisition costs were $241.4 million.
- Investment Income: Increased 165.7% to $30.5 million, primarily due to an $18.7 million gain on the sale of the company's 25-year investment in Rock-Tenn Company.
- Other Income: Increased 680% to $14.5 million, largely due to $13.5 million in gains from the sale of various books of business (customer accounts).
- Segment Performance:
- Retail: Negative internal growth of 2.1% due to competitive pricing in Florida and the West.
- Wholesale Brokerage: Negative internal growth of 6.3% due to the slowdown in the home-building industry and Florida market competition.
- National Programs: Negative internal growth of 5.6%, heavily impacted by the Florida Intracoastal Underwriters (FIU) program losing revenue to the state-run "Citizens" insurer.
- Services: Positive internal growth of 1.9%.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook:
- Florida Market: The company expects the impact of the state-run "Citizens Property Insurance Corporation" to be less significant in 2008 than in 2007, as Citizens' rates are guaranteed through 2009 and the sequential year-over-year impact has stabilized.
- Market Conditions: The company anticipates continued influence from a "soft" insurance marketplace and competitive pricing, particularly in casualty lines in Florida.
- Dividends: The company intends to continue paying quarterly dividends, subject to capital availability.
Unusual Items:
- IRS Settlement: Settled an IRS examination for tax years 2004-2006 with a $1.1 million interest payment. The company agreed to accrue profit-sharing commissions for tax purposes differently than for book purposes.
- Florida Settlement: In 2006, paid $5.8 million to Florida regulatory authorities to conclude an investigation into compensation practices (no finding of wrongdoing).
Risks and Contingencies:
- Regulatory Investigations: Ongoing investigations by various state attorneys general and insurance departments regarding contingent commission practices. The company cannot predict the outcome or potential loss.
- Geographic Concentration: 74.1% of commissions and fees are derived from operations in California, Florida, Georgia, Michigan, New Jersey, New York, Pennsylvania, Texas, and Washington.
- Carrier Concentration: Two separate insurance companies each accounted for 5.3% of total revenues in 2007.
- Key Personnel: Significant reliance on Chairman and CEO J. Hyatt Brown.
Investor Verification Checklist
- Internal Growth Sustainability: Verify if the negative 3.4% internal growth rate is a temporary anomaly or a structural shift due to the "soft" market and Florida regulatory changes.
- Acquisition Integration: Assess the integration progress of the 41 acquisitions made in 2007 and their contribution to future earnings.
- Regulatory Exposure: Monitor the status of ongoing state investigations into contingent commissions and the potential for changes in commission structures.
- Florida Market Dynamics: Track the competitive landscape in Florida, specifically the market share held by Citizens Property Insurance Corporation versus private carriers.
- One-Time Gains: Exclude the $18.7 million Rock-Tenn gain and $13.5 million book sales when analyzing recurring operating profitability.