Brown & Brown, Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
Brown & Brown is a diversified insurance intermediary comprising Retail, Programs and Wholesale Brokerage segments. The company markets insurance products and services, operates managing general underwriting businesses, and maintains a write-your-own flood insurer and two captive insurance facilities. This unaudited Form 10-Q covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023.
Beginning in 2024, the company reports three segments following the fourth-quarter 2023 divestiture of certain Services businesses; prior-period segment information was recast for comparability. The company completed six acquisitions during the quarter.
Financial performance and key metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenues | $1,258 million | $1,116 million | 12.7% increase |
| Core commissions and fees | $1,191 million | $1,081 million | 10.2% increase |
| Profit-sharing contingent commissions | $46 million | $27 million | 70.4% increase |
| Income before income taxes | $364 million | $294 million | 23.8% increase |
| Net income attributable to the company | $293 million | $236 million | 24.2% increase |
| Diluted earnings per share | $1.02 | $0.83 | Increase |
| Income before income taxes margin | 28.9% | 26.3% | 260 basis-point increase |
| Adjusted EBITDAC | $466 million | $398 million | 17.1% increase |
| Adjusted EBITDAC margin | 37.0% | 35.7% | 130 basis-point increase |
| Organic Revenue growth | 8.6% | 12.6% | Lower year over year |
Revenue growth reflected approximately $91 million of net new and renewal business, $41 million from acquisitions, $5 million of favorable foreign currency translation and a $27 million reduction from divested businesses. Higher investment income, driven primarily by higher average interest rates, increased investment income to $18 million from $7 million.
Employee compensation and benefits rose 10.5% to $631 million, but declined to 50.2% of revenue from 51.2%. Other operating expenses were flat at $161 million and declined to 12.8% of revenue from 14.4%. The effective tax rate was 19.5%, compared with 19.7% in the prior-year quarter.
Segment results
| Segment | Q1 2024 revenue | Revenue change | Organic growth | Adjusted EBITDAC margin |
|---|---|---|---|---|
| Retail | $806 million | 10.0% | 7.2% | 36.1% |
| Programs | $298 million | 16.9% | 11.8% | 42.3% |
| Wholesale Brokerage | $142 million | 15.4% | 10.8% | 32.4% |
Programs produced the strongest earnings improvement, benefiting from higher contingent commissions, organic growth, expense leverage and the Services divestiture. Retail margin declined modestly because of higher stock-based and performance-based compensation and lower contingent commissions. Wholesale Brokerage benefited from revenue growth, expense leverage and higher contingent commissions.
Cash flow, liquidity and debt
- Cash provided by operating activities was $13 million, down from $60 million in Q1 2023. Working-capital movements included a $142 million increase in commissions, fees and other receivables and a $186 million decrease in accrued expenses and other liabilities.
- Cash used in investing activities was $88 million, including $76 million for acquisitions and $13 million of capital expenditures.
- Cash used in financing activities was $67 million, including $39 million of acquisition earn-out payments, $54 million for shares withheld for employee-tax obligations and $38 million of dividends. The company drew $150 million and repaid $50 million on its revolving facility.
- Cash and cash equivalents were $581 million at March 31, 2024, compared with $700 million at December 31, 2023. Fiduciary cash was $1,569 million, and total cash including fiduciary cash was $2,150 million.
- Total debt was $3,884 million, compared with $3,796 million at December 31, 2023. The revolving facility had $200 million outstanding and approximately $600 million of additional availability. Including expansion options, the company reported access to up to $1.5 billion of incremental borrowing capacity.
- The company was in compliance with all debt covenants and stated that existing cash, investments, operating cash flow and revolver availability should meet normal liquidity needs for at least the next twelve months and over the longer term.
Material changes, outlook and unusual items
- The company completed six acquisitions for total consideration of $87 million, including $76 million of cash, $9 million of initial earn-out liabilities and $2 million of other payables. The acquisitions generated $66 million of goodwill and $21 million of identifiable intangible assets.
- Estimated acquisition earn-out payables declined to $203 million from $249 million at the beginning of the year. Maximum future acquisition contingent payments were $566 million.
- The first-quarter 2023 results included an approximately $11 million nonrecurring cost to resolve a business matter. The 2024 quarter did not include a comparable cost.
- Subsequent to March 31, 2024, a condition related to the sale of certain former Services businesses was achieved. The company expects to recognize an approximately $30 million gain and receive the related cash in the second quarter of 2024.
- No formal financial guidance was provided in the filing. Management highlighted continued new business, customer retention, acquisitions, insurance rate changes and exposure growth as revenue drivers, while noting that contingent commissions and quarterly results can vary.
- The company declared a $0.13-per-share dividend payable May 15, 2024. Approximately $249 million remained available under the share repurchase authorization; first-quarter share purchases were limited to 666,386 shares withheld for employee tax obligations.
Risks and contingencies
Key risks include employee recruitment and retention, cybersecurity and data privacy, acquisition execution and integration, changes in insurer relationships or capacity, natural catastrophes affecting contingent commissions and captive insurance results, inflation and elevated interest rates, economic and regulatory changes, foreign currency movements, debt covenant compliance, goodwill impairment, competition and litigation. The company reported no material changes to previously disclosed risk factors and no legal proceedings expected to have a material adverse effect based on current information.
The Programs segment has exposure to underwriting results through its captives, including catastrophe and Hurricane Ian-related claims. WNFIC policies are fully ceded to FEMA or a private reinsurer, while captive arrangements limit but do not eliminate underwriting risk. The filing states that a significant unfavorable litigation resolution could affect results, cash flow or liquidity, although management does not currently expect a material adverse effect.
Important facts for investors to verify
- Whether the unusually strong increase in profit-sharing contingent commissions, particularly in Programs, is sustainable; management noted that a $7 million benefit from finalizing prior-year estimates is not expected to recur in the first quarter of 2025.
- The conversion of strong earnings into cash, given operating cash flow of only $13 million and substantial working-capital outflows.
- Debt maturities and floating-rate exposure, including $875 million of current debt and $1,162 million of SOFR-linked borrowings.
- Integration, valuation and earn-out assumptions for acquisitions, including $203 million of recorded earn-out liabilities and $566 million of maximum future contingent payments.
- The expected timing and final amount of the approximately $30 million second-quarter gain from the divestiture-related contingent payment.
- Exposure to catastrophe losses, captive insurance claims, insurer capacity changes and the ongoing availability of the National Flood Insurance Program.
- The effect of the 2024 three-segment reorganization and fourth-quarter 2023 Services divestitures on future comparisons.