BRO

Business Context and Reporting Period

Company: Brown & Brown, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: A diversified insurance agency, wholesale brokerage, and services organization operating in four segments: Retail, Wholesale Brokerage, National Programs, and Services. The company markets and sells insurance products primarily in the property and casualty area.

Key Financial Metrics (Six Months Ended June 30, 2009)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 2.3% year-over-year. However, core commissions and fees (excluding acquisitions and profit-sharing) experienced negative internal growth of 3.5% due to a "soft market" (declining premium rates) and reduced insurable exposure units from the economic downturn.
• Profitability: Net income decreased 3.8% to $88.7 million. Income before taxes declined 3.3% to $146.2 million.
• Investment Income: Decreased 80.3% to $0.8 million, primarily due to lower interest yields on short-term money-market investments.
• Acquisitions: The company acquired six insurance intermediaries and a book of business for an aggregate purchase price of $41.4 million. These acquisitions contributed approximately $17.8 million in annualized revenues.
• Segment Performance:
  • Retail: Internal core growth was negative (8.6%) due to Florida market conditions and Citizens Property Insurance Corporation competition.
  • Wholesale Brokerage: Internal core growth was negative (7.9%) driven by declining property rates and reduced exposure units.
  • National Programs: Strong internal core growth of 18.8%, driven by net new business in Special Programs.
  • Services: Modest internal core growth of 2.7%.

Guidance, Outlook, and Risks

• Market Outlook: Management anticipates that declining exposure units will have a greater negative impact on commissions in the second half of 2009 than declining premium rates. Citizens Property Insurance Corporation rates are expected to increase by approximately 10% effective January 1, 2010.
• Liquidity: The company maintains a strong liquidity position with $190 million in cash and cash equivalents. Management believes existing resources and operating cash flows are sufficient to meet needs for the next 12 months.
• Key Risks:
  • Regulatory/Compensation: Ongoing governmental investigations regarding profit-sharing contingent commissions and override commissions in several states. Resolution could materially affect financial condition if commissions are eliminated or reduced.
  • Economic Conditions: Continued weakness in the general economy and specific markets (e.g., Florida, California) could reduce insurable exposure units.
  • Legal Proceedings: Numerous pending proceedings in the ordinary course of business; management does not expect a material adverse effect, but outcomes are uncertain.
• Management Changes: J. Powell Brown succeeded J. Hyatt Brown as CEO effective July 1, 2009. Mr. Hyatt Brown retired as CEO but remains Chairman of the Board.

Investor Verification Checklist

• Verify the impact of the "soft market" and Citizens Property Insurance Corporation on Florida-based revenue streams.
• Monitor the status of governmental investigations into compensation practices and potential changes to profit-sharing commission structures.
• Review the integration progress and performance of the six acquisitions completed in the first half of 2009.
• Assess the sustainability of the National Programs Division's growth, particularly the non-recurring nature of some new business in Special Programs.
• Confirm compliance with debt covenants, specifically the funded debt to EBITDA ratio, given the company's leverage.