Brown & Brown, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Brown & Brown is a diversified insurance intermediary providing retail insurance, national programs, wholesale brokerage, and insurance-related services. The filing covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. The financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Q2 2015 | Q2 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Total revenue | $419.4 million | $397.8 million | $823.7 million | $761.4 million |
| Revenue growth | 5.5% | 8.2% | ||
| Income before taxes | $100.9 million | $101.8 million | $194.7 million | $188.6 million |
| Net income | $61.0 million | $61.8 million | $118.0 million | $114.2 million |
| Diluted EPS | $0.43 | $0.42 | $0.82 | $0.78 |
| Net margin | 14.5% | 15.5% | 14.3% | 15.0% |
| Effective tax rate | 39.6% | 39.3% | 39.4% | 39.5% |
Commissions and fees increased 5.7% in the second quarter and 8.5% in the first half. Core commissions and fees increased 5.5% and 9.0%, respectively. Reported internal growth in core organic commissions and fees was 1.9% for the quarter and 2.8% for the first half.
Operating cash flow was $227.4 million for the first half of 2015, compared with $177.6 million in the prior-year period. Investing cash outflows were $110.6 million, including $105.1 million for acquisitions. Financing cash outflows were $174.3 million, including $85.0 million for treasury-stock purchases, a $15.0 million ASR prepayment, and $31.3 million of dividends. Cash and cash equivalents declined to $412.6 million from $470.0 million at December 31, 2014.
At June 30, 2015, total debt was $1.167 billion, consisting of $34.4 million current debt and $1.132 billion long-term debt. The company had no revolving-credit borrowings outstanding and reported compliance with all debt covenants. Management stated that cash, investments, operating cash flow, and available credit facilities were sufficient for normal liquidity needs for at least the next twelve months. Revolving facilities provided up to $825.0 million of availability, and an additional $125.0 million shelf facility was available.
Material Changes Versus the Prior Comparable Period
- Net income declined 1.2% in the second quarter despite 5.5% revenue growth, while first-half net income increased 3.3%.
- Interest expense increased 38.1% in the quarter and 76.3% in the first half, primarily because of debt raised for the Wright acquisition and the 2024 senior notes.
- Employee compensation and benefits increased 7.7% in the quarter and 9.5% year to date; the related revenue ratios rose to 50.4% and 50.6% from 49.4% and 50.0%.
- Other operating expense ratios increased to 15.3% for the quarter and 15.2% for the first half.
- Acquisition activity remained significant: seven insurance intermediary acquisitions and three books of business were completed in the first half, for $105.1 million of cash consideration and $27.1 million of recorded earn-out obligations.
- Goodwill increased to $2.560 billion from $2.461 billion at year-end 2014, primarily from acquisitions.
- The National Programs Segment generated strong quarterly growth, with revenue up 10.2% and pretax income up 38.1%, but first-half pretax income declined 13.6% because of additional amortization and interest associated with Wright and seasonal revenue patterns.
- Wholesale Brokerage and Services delivered first-half pretax income growth of 18.2% and 28.2%, respectively. Retail first-half pretax income increased 6.8%.
- A second accelerated share repurchase program was substantially completed after quarter-end. The company repurchased 5.1 million shares through June 30, 2015 and subsequently received authorization to repurchase up to an aggregate $450.0 million of common stock.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide formal quantitative earnings guidance. It expected positive quarterly internal revenue growth during 2015 if exposure units continued to increase, although insurance premium rates were moderating downward.
The company identified sensitivity to economic conditions, premium rates and insured exposure units, policy cancellations, competition, regulatory changes, catastrophe exposure, personnel retention, acquisition valuations, liquidity forecasting, legal proceedings, tax-rate changes, technology and internal-control execution. A significant portion of business is concentrated in several U.S. states, including Florida, California, Texas, New York, and others.
Wright Flood operates under the National Flood Insurance Program and cedes substantially all written premiums to reinsurers or FEMA-related arrangements. Reinsurance recoverables and prepaid reinsurance premiums totaled $381.8 million at June 30, 2015; Wright Flood remains primarily liable to policyholders if reinsurers fail to perform. Statutory capital and surplus was $13.4 million, above the $7.5 million minimum, and the maximum ordinary dividend payable without prior approval was $2.3 million.
Restricted cash presentation changed during the second quarter: approximately $41 million was reclassified to unrestricted cash because the funds were not legally or contractually restricted. Management cautioned that these funds represented customer premiums payable to carriers and should not be viewed as operating cash.
Pending litigation and regulatory matters arose in the ordinary course. Management believed they would not materially affect consolidated financial position, but unfavorable developments could materially affect results or cash flow in a particular period. No material changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Whether organic growth can remain positive as premium rates moderate and the company integrates acquisitions.
- The effect of increased leverage and interest expense on future earnings and cash generation.
- The performance, seasonality, reinsurance structure, and regulatory capital of Wright Flood and the broader National Programs Segment.
- The valuation and potential cash requirements of $90.1 million in estimated acquisition earn-out payables and up to $159.0 million of maximum future acquisition contingency payments.
- The pace and valuation of the newly authorized $450.0 million share-repurchase program relative to acquisition and debt-repayment priorities.
- Whether compensation and operating-cost ratios improve as recent acquisitions mature.
- Potential exposure from pending litigation, regulatory proceedings, policy cancellations, catastrophe events, and premium-rate declines.
- The impact of the planned adoption of new revenue-recognition guidance beginning January 1, 2018; the company was still evaluating its effect.