Business Context and Reporting Period
Company: Brown & Brown, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: A diversified insurance agency, wholesale brokerage, programs, and services organization operating in four segments: Retail, Wholesale Brokerage, National Programs, and Services. The company markets and sells insurance products primarily in property and casualty and employee benefits arenas.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $247,029 | $745,464 |
| Net Income | $40,593 | $132,751 |
| Diluted EPS | $0.29 | $0.94 |
| Operating Cash Flow (9mo) | $204,065 | |
| Total Assets | $2,107,301 | |
| Total Debt | $261,358 | |
| Cash & Cash Equivalents | $0 (All cash classified as restricted) |
Material Changes vs. Prior Period
- Revenue: Total revenues increased 4.1% for the quarter and 0.4% for the nine-month period compared to 2007. Core commissions and fees grew 8.1% in the quarter but declined 5.1% on an internal growth basis due to a "soft" insurance market and economic headwinds.
- Profitability: Net income decreased 12.2% for the quarter and 16.0% for the nine-month period. Income before taxes dropped 11.1% (quarter) and 15.4% (nine months).
- Investment Income: Decreased significantly (62.6% for the quarter, 81.6% for nine months) primarily due to the sale of the Rock-Tenn Company investment in 2007 and reduced invested funds used for acquisitions.
- Acquisitions: The company acquired 28 insurance intermediaries and several books of business in the first nine months of 2008 for an aggregate purchase price of approximately $234 million. This activity drove a significant increase in goodwill ($138.4 million added) and amortization expenses.
- Liquidity: Cash and cash equivalents dropped to $0 from $38.2 million at year-end 2007. The company utilized $221.6 million of cash for acquisitions, resulting in all remaining cash being classified as "Restricted cash and investments" held in fiduciary capacity.
Outlook, Risks, and Management Commentary
- Market Conditions: Management cites a continuing "soft" insurance marketplace with declining premium rates, particularly in Florida due to the state-run "Citizens" insurer, and negative impacts from the slowing residential home-building industry.
- Segment Performance:
- Retail: Internal growth rate was negative (-5.0% for the quarter) due to rate declines.
- Wholesale Brokerage: Significant internal decline (-17.0% for the quarter) driven by soft rates and movement of business to standard carriers.
- National Programs: Positive internal growth (7.8% for the quarter) driven by net new business.
- Services: Declined (-15.7% for the quarter) due to the loss of a major third-party administration client.
- Legal & Regulatory: The company is subject to ongoing governmental investigations regarding profit-sharing contingent compensation agreements. While no material loss can be estimated, resolution could impact future revenue. A final judgment of $2.17 million was entered against a subsidiary in Texas.
- Financial Risks: Risks include potential failure of depository institutions holding cash balances (exceeding FDIC limits), disruption in credit markets affecting access to capital, and liquidity issues with insurance carriers owing commissions.
Investor Verification Checklist
- Cash Position: Verify the classification of all cash as "restricted" and the company's ability to access funds for operations versus fiduciary obligations.
- Acquisition Integration: Assess the realization of synergies from the $234 million in acquisitions and the impact of increased amortization on future earnings.
- Florida Market Exposure: Monitor the impact of the "Citizens" Property Insurance Corporation on the Retail and Wholesale Brokerage segments in Florida.
- Regulatory Investigations: Track the status of state-level investigations into profit-sharing commissions and potential changes to commission structures.
- Debt Covenants: Confirm continued compliance with financial ratios required by the $200 million senior notes and the $50 million revolving credit facility.