Brown & Brown, Inc. — Form 10-Q Summary
Business context and reporting period
Brown & Brown is a diversified insurance intermediary providing retail insurance brokerage, national insurance programs, wholesale brokerage, and insurance-related services. The filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. The financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $770.3 million | $674.0 million | $2.313 billion | $1.971 billion |
| Income before taxes | $196.5 million | $158.5 million | $622.0 million | $493.2 million |
| Net income | $146.4 million | $134.0 million | $485.4 million | $383.2 million |
| Diluted EPS | $0.52 | $0.47 | $1.71 | $1.35 |
| Income before-tax margin | 25.5% | 23.5% | 26.9% | 25.0% |
| EBITDAC | $274.5 million | $220.8 million | $805.5 million | $639.5 million |
| EBITDAC margin | 35.6% | 32.8% | 34.8% | 32.4% |
| Operating cash flow | Not separately provided | Not separately provided | $627.8 million | $539.6 million |
Q3 commissions and fees increased 14.6% to $769.7 million; nine-month commissions and fees increased 17.5% to $2.310 billion. Organic Revenue growth was 8.5% in Q3 and 10.8% for the first nine months. Q3 employee compensation declined to 51.3% of revenue from 53.8%, while other operating expenses declined to 13.1% from 13.6%.
At September 30, 2021, cash and cash equivalents were $944.0 million, restricted cash was $481.9 million, and total assets were $9.629 billion. Total debt was $2.045 billion net of discounts and issuance costs, including $290.0 million classified as current. The company had no revolving-credit borrowings and stated that its $800.0 million revolving facility was available.
For the first nine months, cash flow included $206.4 million used in investing activities, including $178.0 million for acquired businesses, and $265.2 million used in financing activities. Capital expenditures were $34.6 million, down from $55.8 million in the prior-year period. Dividends paid were $78.3 million and share repurchases were $82.6 million.
Material changes versus the prior comparable period
- Q3 revenue increased 14.3%, pretax income increased 23.9%, and net income increased 9.2%. For the first nine months, revenue increased 17.3%, pretax income increased 26.1%, and net income increased 26.7%.
- Growth reflected net new and renewal business, insurance rate increases, and acquisitions. Acquisitions contributed approximately $38.5 million of Q3 core commissions and fees and $131.2 million for the first nine months.
- The company completed 11 acquisitions during the first nine months, paying $224.1 million in cash. Acquired businesses contributed $28.9 million of revenue and $0.5 million of pretax income from their acquisition dates through September 30.
- Retail was the largest segment and generated Q3 revenue of $423.4 million and pretax income of $71.6 million. National Programs produced $191.1 million of revenue and $72.4 million of pretax income. Wholesale Brokerage revenue was $112.5 million, but pretax income declined 16.2% to $29.4 million. Services revenue was essentially flat at $43.7 million.
- The estimated acquisition earn-out payable increased to $262.9 million and generated a $23.1 million Q3 expense, compared with $15.3 million in Q3 2020. The maximum future acquisition contingency payments were $512.9 million.
- Goodwill increased to $4.565 billion from $4.396 billion at December 31, 2020, principally due to acquisitions. Management reported no goodwill impairment in its most recent annual assessment.
- Total debt declined $50.4 million from year-end 2020 after scheduled repayments, while interest expense increased 15.3% for the first nine months because of higher average debt balances.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management expects existing cash, investments, operating cash flow, and available revolving-credit capacity to satisfy normal liquidity needs for at least the next 12 months. The company was negotiating a refinancing of its credit agreement, expected to include an $800.0 million revolving facility and a $250.0 million term loan maturing five years after renewal; completion and final terms were not assured.
COVID-19 remained a source of uncertainty, although management cited economic reopening and vaccine availability. Risks include new variants, labor retention and hiring, acquisition integration and earn-out obligations, cybersecurity and data privacy, insurance-carrier relationships and capacity, regulatory changes, economic conditions, natural catastrophes, litigation, goodwill impairment, debt covenants, interest rates, LIBOR transition, foreign exchange, and competition or disintermediation in insurance distribution.
Wright National Flood Insurance Company remains primarily liable to policyholders even where risks are reinsured. At September 30, 2021, reinsurance recoverables were $220.4 million and prepaid reinsurance premiums were $411.3 million. Management stated that no current legal proceedings were expected to have a material adverse effect, but unfavorable litigation outcomes could affect earnings, cash flow, or liquidity.
Unusual or notable items included a $21.9 million Q3 increase in the fair value of acquisition earn-outs, a $8.1 million infrastructure reimbursement recorded as a reduction of capital expenditures, lower prior-year costs from a receivable write-off and non-recurring legal expenses, and a higher Q3 effective tax rate of 25.5% versus 15.5% in 2020. The company reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Progress and final terms of the planned credit-agreement refinancing, including the $290.0 million current debt obligation and upcoming maturities.
- Future cash requirements for the $512.9 million maximum acquisition contingency payments, including the $262.9 million already recorded.
- Whether organic growth and insurance-rate increases persist after separating acquisition-related growth.
- Integration results and profitability of the 11 acquisitions completed in 2021, including the large O’Leary acquisition.
- Exposure to COVID-19 developments, labor and compensation inflation, insurance-market capacity, catastrophe losses, and regulatory changes.
- Potential changes in reinsurance recoverability and policyholder obligations at WNFIC.
- LIBOR replacement terms for the $507.5 million of floating-rate borrowings and any effect on interest expense.
- The October 2021 dividend of $0.1025 per share and the remaining share-repurchase authorization of approximately $323.6 million.