Brown & Brown, Inc. — FY2015 Form 10-K Summary
Business context and reporting period
Brown & Brown is a diversified insurance agency, wholesale brokerage, insurance programs and services organization. Its four reportable segments are Retail, National Programs, Wholesale Brokerage and Services. The filing covers the fiscal year ended December 31, 2015, with comparative results for 2014 and 2013. Operations comprised 236 locations in 41 states, plus England, Bermuda and the Cayman Islands, and employed 7,807 full-time equivalent employees at year-end.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenues | $1,660.5 million | $1,575.8 million | 5.4% |
| Commissions and fees | $1,657.0 million | $1,567.5 million | 5.7% |
| Income before taxes | $402.6 million | $339.7 million | 18.5% |
| Net income | $243.3 million | $206.9 million | 17.6% |
| Diluted EPS | $1.70 | $1.41 | 20.6% |
| Operating cash flow | $411.8 million | $385.0 million | 7.0% |
| Capital expenditures | $18.4 million | $24.9 million | Decrease |
| Cash and cash equivalents | $443.4 million | $470.0 million | Decrease of $26.6 million |
| Total debt | $1,153.0 million | $1,198.5 million | Decrease of $45.5 million |
| Shareholders’ equity | $2,149.8 million | $2,113.7 million | Increase of $36.0 million |
Calculated net margin was approximately 14.7% in 2015 versus 13.1% in 2014. Calculated pretax margin was approximately 24.2% versus 21.6%. The effective tax rate increased to 39.6% from 39.1%. Goodwill was $2,586.7 million, or approximately 52% of total assets; management’s November 30, 2015 impairment review found fair value above carrying value, and no amortizable intangible-asset impairments were recorded.
Segment revenue and pretax income were: Retail revenue of $870.3 million and pretax income of $181.9 million; National Programs revenue of $428.7 million and pretax income of $67.7 million; Wholesale Brokerage revenue of $217.0 million and pretax income of $64.7 million; and Services revenue of $145.4 million and pretax income of $19.7 million.
Material changes versus the prior comparable period
- Core commissions and fees increased 6.4% to $1,595.2 million. Acquisitions contributed approximately $76.6 million, divested operations reduced revenue by $19.3 million, and core organic growth was 2.6%.
- Profit-sharing contingent commissions declined $6.0 million, or 10.4%, to $51.7 million, primarily because of higher loss ratios in the National Programs and Wholesale Brokerage segments. Guaranteed supplemental commissions were $10.0 million.
- Income growth reflected acquisitions and net new business, while interest expense increased 38.2% to $39.2 million because of the post-2014 debt structure and higher effective interest costs.
- 2014 included a $47.4 million pretax loss on the disposal of Axiom Re. The absence of that loss materially improved 2015 Wholesale Brokerage pretax income.
- Brown & Brown completed 13 insurance intermediary acquisitions and acquired four books of business in 2015, paying $136.0 million in cash. Acquired operations contributed $28.2 million of 2015 revenue and $1.5 million of pretax income.
- The Company sold its Colonial Claims business in the fourth quarter of 2015; the filing states the impact on 2015 Services revenue and pretax income was immaterial.
- The Company repurchased $175.0 million of stock in 2015 through accelerated share repurchases and ended the year with 138.985 million shares outstanding, versus 143.486 million at year-end 2014. The quarterly dividend increased to $0.12 per share in the fourth quarter, and total declared dividends were $0.45 per share for 2015.
Liquidity, debt and cash flow
Operating cash flow was $411.8 million. Cash uses included $136.0 million for acquisitions, $25.4 million for acquisition earn-out payments, $18.4 million for capital expenditures, $64.1 million for dividends, $175.0 million for share repurchases and $45.6 million for debt principal payments. Management stated that cash, short-term investments, operating cash generation and available credit were sufficient for normal liquidity needs for at least the next twelve months.
The Company reported up to $825.0 million of available revolving credit capacity. Debt consisted primarily of a $529.4 million term loan, $500.0 million of 4.20% senior notes due 2024, $100.0 million of 4.50% senior notes due 2018 and $25.0 million of 5.66% senior notes due 2016. Scheduled 2016 debt payments totaled $73.1 million. The Company was in compliance with its debt covenants at December 31, 2015.
Guidance, outlook, commentary and risks
Management did not provide formal earnings or revenue guidance. It stated that, if gradual increases in insurable exposure units continued through 2016 and premium-rate changes remained similar to 2015, positive quarterly internal revenue growth was expected to continue.
- Growth remains dependent on acquisitions, net new business, customer retention, exposure units, premium rates and contingent commissions.
- The insurance market was described as cyclical, with premium pricing affected by insurer loss experience, reinsurance costs, interest rates and available underwriting capacity.
- Material risks include competition, regulatory changes, adverse economic conditions, natural disasters in concentrated states, policy cancellations, loss of key employees, technology and cybersecurity failures, litigation and errors-and-omissions claims, and reduced insurer capacity.
- Approximately 88.4% of 2015 revenue came from operations in California, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Massachusetts, Michigan, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Texas, Virginia and Washington.
- Goodwill impairment, acquisition integration, earn-out estimates and contingent commission variability could materially affect future results. Maximum future acquisition contingency payments were $137.4 million, including $78.4 million of recorded earn-out payables.
- Wright National Flood Insurance Company’s flood premiums are substantially reinsured through FEMA and other reinsurers, but the subsidiary remains primarily liable to policyholders if reinsurers fail to perform.
- Legal accruals were not material at year-end, and management did not identify any current legal proceedings expected to have a material adverse effect; however, future claims and litigation outcomes remain uncertain.
Important facts for investors to verify
- Reconcile reported growth with the 2.6% core organic growth rate and quantify the ongoing contribution and profitability of acquisitions.
- Monitor contingent commissions, loss ratios and premium-rate trends, particularly in National Programs and Wholesale Brokerage.
- Review debt maturities, floating-rate exposure on the term loan, covenant headroom and the planned 2016 debt repayment requirements.
- Assess goodwill and acquired-intangible concentration relative to total assets and the sensitivity of impairment tests to slower growth or lower market valuations.
- Evaluate the sustainability of $411.8 million of operating cash flow after acquisitions, dividends and share repurchases.
- Confirm the effect of the Colonial Claims divestiture and the treatment of premium-related restricted cash, which management cautioned should not be viewed as operating liquidity.
- Review the Company’s geographic concentration, regulatory exposure, cybersecurity controls, errors-and-omissions insurance and unresolved claims.
- Note that the independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting, while excluding certain 2015 acquisitions representing 2.91% of assets and 1.03% of revenue from management’s controls assessment.