Brown & Brown, Inc. — Q3 2020 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2020; unaudited interim financial statements. Brown & Brown is an insurance intermediary, wholesale broker, managing general agent, and insurance-related services provider operating through Retail, National Programs, Wholesale Brokerage, and Services segments.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | Change | 9M 2020 | 9M 2019 | Change |
|---|---|---|---|---|---|---|
| Total revenues | $674.0 million | $618.7 million | 8.9% | $1,971.3 million | $1,813.2 million | 8.7% |
| Income before taxes | $158.5 million | $151.8 million | 4.4% | $493.2 million | $423.9 million | 16.3% |
| Net income | $134.0 million | $115.5 million | 16.0% | $383.2 million | $322.0 million | 19.0% |
| Diluted EPS | $0.47 | $0.41 | 14.6% | $1.35 | $1.14 | 18.4% |
| Income before tax margin | 23.5% | 24.5% | Down 100 bps | 25.0% | 23.4% | Up 160 bps |
| EBITDAC | $220.8 million | $195.0 million | 13.2% | $639.5 million | $560.7 million | 14.1% |
| EBITDAC margin | 32.8% | 31.5% | Up 130 bps | 32.4% | 30.9% | Up 150 bps |
| Organic revenue growth | 4.3% | 3.4% | Up 90 bps | 3.5% | 3.1% | Up 40 bps |
EBITDAC and organic revenue are non-GAAP measures defined and reconciled by the Company.
Cash Flow, Liquidity, and Capital Structure
- Net cash provided by operating activities was $539.6 million for the first nine months, compared with $447.1 million in the prior-year period.
- Investing cash use was $452.3 million, including $402.4 million for acquisitions and $55.8 million for capital expenditures.
- Cash and cash equivalents were $1.070 billion at September 30, 2020; restricted cash and investments were $431.7 million. Cash inclusive of restricted cash totaled $1.502 billion.
- Total debt was $2.109 billion, net of discounts and issuance costs, compared with $1.555 billion at December 31, 2019. The increase primarily reflects the September 2020 issuance of $700.0 million of 2.375% senior notes due 2031.
- The Company had no borrowings outstanding under its $800 million revolving credit facility at September 30, 2020 and stated that it had sufficient liquidity for normal needs for at least the next 12 months.
- Cash dividends declared were $0.085 per share for the quarter and $0.255 per share for the first nine months. Approximately $454.0 million remained available under the share repurchase authorization after third-quarter purchases.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by acquisitions, net new and renewal business, and insurance rate increases. Q3 core commissions and fees increased 9.1%; nine-month core commissions and fees increased 8.7%.
- COVID-19 reduced new-business activity and customers’ insurable exposure units, but expense reductions in travel, entertainment, meetings, and professional fees supported margins.
- Services was the primary underperformer: revenue declined 13.2% in Q3 and 13.0% for the first nine months, while Q3 EBITDAC declined 22.4% and nine-month EBITDAC declined 21.3%.
- National Programs and Wholesale Brokerage produced strong growth. Q3 organic revenue growth was 8.4% and 8.2%, respectively; Retail organic revenue growth was 4.1%.
- Sixteen acquisitions were completed during the first nine months, with recorded net assets acquired of $518.7 million and $402.4 million of cash consideration. Acquired businesses contributed $52.6 million of revenue but a $1.2 million pretax loss after acquisition.
- Estimated acquisition earn-out payables totaled $252.3 million at September 30, 2020, with a maximum future contingency payment exposure of approximately $480.2 million. The Q3 remeasurement produced a $15.3 million expense versus a $5.3 million credit in Q3 2019.
- The effective tax rate declined to 15.5% in Q3 from 23.9%, primarily due to tax benefits from additional vesting of stock awards.
Outlook, Commentary, Risks, and Unusual Items
- The filing provides no formal quantitative revenue or earnings guidance. Management expects COVID-19 to continue affecting customer demand, new business, exposure units, claims activity, carrier relationships, and cash collections, but the duration and magnitude remain uncertain.
- Management stated that existing cash, investments, operating cash flow, and revolving-credit availability should satisfy normal liquidity needs for at least the next 12 months.
- Material risks include COVID-19-related economic disruption, delayed customer or carrier payments, potential premium refunds or retroactive coverage requirements, reduced insurer capacity, acquisition integration and earn-out risk, cybersecurity and technology disruptions, regulatory changes, litigation, goodwill impairment, and LIBOR transition risk.
- The Company was in compliance with its debt covenants at September 30, 2020. Floating-rate debt exposure was $573.8 million; management stated that a hypothetical immediate 10% change in interest rates would not materially affect the financial statements.
- Legal proceedings continued in the ordinary course. Management stated that no current proceeding was expected to have a material adverse effect, although unfavorable developments could affect results, cash flow, or liquidity.
- Controls and disclosure procedures were assessed as effective, with no material change in internal control over financial reporting identified during the quarter.
Investor Verification Checklist
- Verify whether COVID-19-related reductions in exposure units and Services Segment claims volumes persist or reverse.
- Reconcile reported revenue and earnings growth to acquisition contributions, organic growth, insurance rate changes, and contingent commissions.
- Monitor debt repayment, leverage, covenant compliance, interest-rate exposure, and the transition from LIBOR.
- Assess the valuation and performance assumptions supporting the $252.3 million of earn-out liabilities and up to approximately $480.2 million of contingent payments.
- Review the integration, profitability, and goodwill implications of the sixteen 2020 acquisitions.
- Evaluate the sustainability of margin improvement from COVID-19-related expense reductions and the effect of higher compensation, amortization, and technology costs.
- Confirm the status of litigation, potential COVID-19-related insurance legislation, premium refunds, and carrier or reinsurer obligations.