Brown & Brown, Inc. — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020; filed February 23, 2021. The filing is an annual report, not a standalone quarterly filing, although fourth-quarter results are disclosed. Brown & Brown is a diversified insurance agency, wholesale broker, managing general agent, and insurance-services provider operating through Retail, National Programs, Wholesale Brokerage, and Services segments.
Financial Performance and Position
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenues | $2.613 billion | $2.392 billion | 9.2% |
| Commissions and fees | $2.606 billion | $2.385 billion | 9.3% |
| Core commissions and fees | $2.519 billion | $2.303 billion | 9.4% |
| Organic revenue growth | 3.8% | 3.6% | Up 0.2 percentage points |
| Income before taxes | $624.1 million | $525.9 million | 18.7% |
| Income before tax margin | 23.9% | 22.0% | Up 1.9 percentage points |
| Net income | $480.5 million | $398.5 million | 20.6% |
| Diluted EPS | $1.69 | $1.40 | 20.7% |
| EBITDAC | $813.4 million | $716.9 million | 13.5% |
| EBITDAC margin | 31.1% | 30.0% | Up 1.1 percentage points |
| Operating cash flow | $721.6 million | $678.2 million | 6.4% |
| Capital expenditures | $70.7 million | $73.1 million | Down 3.3% |
Net income margin was approximately 18.4% in 2020, compared with approximately 16.7% in 2019. Employee compensation and benefits increased 9.8% and represented 55.0% of revenue, compared with 54.7% in 2019. Other operating expenses declined 2.9% and fell to 14.0% of revenue, partly because of lower travel and other variable costs during COVID-19.
Segment results
| Segment | 2020 revenue | Revenue change | Organic growth | Income before taxes |
|---|---|---|---|---|
| Retail | $1.473 billion | 7.7% | 2.4% | $262.2 million |
| National Programs | $610.6 million | 17.8% | 12.3% | $182.9 million |
| Wholesale Brokerage | $352.8 million | 13.8% | 5.5% | $93.6 million |
| Services | $174.0 million | Down 10.2% | Down 10.9% | $28.0 million |
Services was the principal operating weakness, reflecting lower claims volumes, reduced Social Security advocacy activity, a terminated customer contract, and lower weather-related claims. National Programs produced the strongest organic growth.
Cash, debt, and liquidity
- Cash and cash equivalents were $817.4 million, up from $542.2 million at year-end 2019. Cash and cash equivalents including restricted cash totaled $1.272 billion.
- Total debt was $2.096 billion, up from $1.555 billion. The increase primarily reflected issuance of $700.0 million of 2.375% senior notes due 2031.
- Debt consisted principally of $1.548 billion of senior notes and $490.0 million of credit-agreement borrowings, net of issuance costs and discounts.
- The revolving credit facility provided up to $800.0 million of available capacity at year-end, with no borrowings outstanding at December 31, 2020. Expansion options could provide up to $1.5 billion of incremental borrowing capacity across existing agreements, subject to lender approval.
- Management stated that cash, short-term investments, operating cash generation, and available credit were sufficient for normal liquidity needs for at least the next 12 months.
- The company reported compliance with its debt covenants. Approximately $560.0 million of borrowings carried floating rates linked to LIBOR and were subject to future benchmark-transition risk.
- Total contractual cash obligations were $3.405 billion, including $2.110 billion of long-term debt payments and $544.7 million of maximum future acquisition-contingency payments.
Material Changes Versus 2019
- Revenue growth accelerated modestly on an organic basis, while reported growth benefited substantially from acquisitions.
- Income before taxes and net income grew faster than revenue, reflecting operating-cost management, acquisition contributions, and lower variable expenses.
- Profit-sharing contingent commissions increased to $70.9 million from $59.2 million. Guaranteed supplemental commissions declined to $16.2 million from $23.1 million, partly because a nonrecurring $9 million contract benefit in 2019 did not recur.
- The company completed 25 strategic acquisitions and paid approximately $722.5 million for acquired businesses, compared with 27 acquisitions and approximately $356.3 million of acquisition payments in 2019.
- Goodwill increased to $4.396 billion from $3.746 billion, primarily because of acquisitions. No goodwill or amortizable-intangible impairment was recorded.
- The company issued $700.0 million of 2.375% senior notes due 2031 and used proceeds for debt repayment, acquisitions, and general corporate purposes.
- Cash dividends paid increased to $100.6 million from $91.3 million; declared dividends per share increased to $0.35 from $0.33.
- The company repurchased 1.234 million shares for $55.1 million, leaving approximately $406.2 million authorized for future repurchases.
Outlook, Commentary, Risks, and Unusual Items
Management did not provide specific numerical revenue or earnings guidance in the filing. Management expects COVID-19 to continue affecting new-business activity, customer exposure units, claims volumes, collections, remote-work arrangements, and economic conditions, but stated that the ultimate effects remain uncertain.
- COVID-19-related risks include reduced insurance demand, delayed customer or carrier payments, premium-relief or premium-refund requirements, potential retroactive expansion of business-interruption or workers’ compensation coverage, and disruption at third parties.
- The company’s acquisition-driven strategy creates integration, earn-out valuation, employee-retention, technology, and goodwill-impairment risks. Recorded acquisition earn-out payables were $258.9 million, against maximum potential payments of $544.7 million.
- Cybersecurity, data privacy, regulatory compliance, contingent commissions, insurer capacity, competition from direct and technology-enabled distribution, and employee retention remain significant risks.
- Revenue is geographically concentrated: approximately 19% came from Florida, 11% from California, 8% from Massachusetts, 8% from Georgia, 7% from New York, and 6% from Michigan. Natural disasters and state-specific regulatory or economic changes could affect results.
- Investment income declined to $2.8 million from $5.8 million because of lower interest rates.
- The company recognized a $4.5 million net credit from changes in estimated acquisition earn-out payables and reported $4.5 million of other income, primarily from legal settlements and miscellaneous items.
- WNFIC’s flood underwriting exposure was substantially ceded to FEMA and highly rated reinsurers; statutory capital and surplus was $32.6 million, with no dividend paid in 2020.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. The audit’s critical audit matter was valuation of acquisition earn-out obligations.
Investor Verification Priorities
- Reconcile reported revenue growth with organic growth and acquisition-related contributions, particularly the sustainability of National Programs growth.
- Assess the Services segment’s recovery prospects and exposure to claims volumes, government programs, customer concentration, and contract losses.
- Evaluate acquisition returns, integration progress, earn-out assumptions, and the growth of goodwill relative to cash flow and operating performance.
- Review debt maturities, floating-rate exposure, LIBOR transition provisions, covenant headroom, and the use of new 2031 note proceeds.
- Confirm the availability and restrictions on cash, including $454.5 million of restricted cash and approximately $34.3 million held outside the United States.
- Monitor contingent and supplemental commissions, which are variable and dependent on carrier profitability, volume, retention, and payment timing.
- Review COVID-19 effects on customer collections, exposure units, carrier relationships, claims volumes, and internal controls.
- Consider concentration in Florida and other major states, cybersecurity and privacy exposure, regulatory developments, litigation claims, and potential future goodwill impairment.