Brown & Brown, Inc. — FY2017 Form 10-K 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 company primarily earns commissions from insurance carriers and fees from customers. The filing covers the fiscal year ended December 31, 2017, with comparisons to 2016 and 2015. Operations included 238 locations in 40 states and international operations in England, Canada, Bermuda, and the Cayman Islands, with 8,491 full-time equivalent employees at year-end.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenues | $1.881 billion | $1.767 billion | 6.5% |
| Commissions and fees | $1.857 billion | $1.763 billion | 5.4% |
| Organic revenue growth | 4.4% | 3.0% | Improved |
| Income before income taxes | $449.7 million | $423.5 million | 6.2% |
| Net income | $399.6 million | $257.5 million | 55.2% |
| Diluted EPS | $2.81 | $1.82 | 54.4% |
| Operating cash flow | $442.0 million | $411.0 million | 7.5% |
| Capital expenditures | $24.2 million | $17.8 million | Increase |
| Cash and cash equivalents | $573.4 million | $515.6 million | Increase |
| Total debt | $976.1 million | $1.074 billion | Decrease |
| Shareholders’ equity | $2.583 billion | $2.360 billion | Increase |
Net margin was approximately 21.2% in 2017, compared with approximately 14.6% in 2016. The effective tax rate declined to 11.1% from 39.2%, primarily because of a $120.9 million one-time tax benefit from revaluing deferred tax liabilities under the Tax Cuts and Jobs Act and recognizing transition-tax effects. Excluding the unusual tax benefit, the reported increase in net income would have been materially lower.
- Retail commissions and fees: $942.2 million, up 2.8%; pretax income: $196.6 million, up 4.6%.
- National Programs commissions and fees: $479.0 million, up 7.0%; pretax income: $110.0 million, up 19.8%.
- Wholesale Brokerage commissions and fees: $271.1 million, up 11.7%; pretax income: $68.8 million, up 9.9%.
- Services commissions and fees: $165.1 million, up 5.8%; pretax income: $30.5 million, up 25.3%.
Material changes versus the prior comparable period
- Core commissions and fees increased 5.7% to $1.795 billion. Acquisitions contributed $27.7 million of revenue, while divestitures reduced comparable revenue by $4.9 million; remaining organic growth was $74.6 million.
- All four reportable segments generated positive organic revenue growth: Retail 2.9%, National Programs 6.1%, Wholesale Brokerage 6.6%, and Services 5.1%.
- Profit-sharing contingent commissions and guaranteed supplemental commissions declined by $2.9 million, primarily because of higher loss ratios and lower premium rates in Retail and Wholesale Brokerage.
- Other income increased by $20.1 million to $22.5 million, including a $20.0 million legal settlement recognized in the first quarter.
- Employee compensation and benefits increased 7.5% and reached 52.9% of revenue, compared with 52.4% in 2016. Other operating expenses increased 7.8% to $283.5 million.
- The company acquired eleven insurance intermediaries and one book of business for $41.5 million of cash consideration. Acquired businesses had approximately $17.5 million of annualized revenue.
- Debt declined by $97.7 million. The company amended its credit agreement, extending the $800.0 million revolving facility and term-loan maturity to June 2022; no revolving borrowings were outstanding at year-end.
- Share repurchases totaled approximately $139.9 million in cash during 2017, and $238.7 million remained available under the authorization at year-end. The quarterly dividend increased to $0.56 per share for the year from $0.50.
Guidance, outlook, commentary, risks, and unusual items
Management stated that, if gradual increases in insurable exposure units continued through 2018 and premium-rate changes were similar to 2017, it expected positive quarterly organic revenue growth in 2018. The filing does not provide formal earnings or revenue guidance.
- Management expects existing cash, short-term investments, operating cash flow, and available credit capacity to satisfy normal liquidity needs for at least the next twelve months.
- The company is pursuing a multi-year technology upgrade program and anticipates investing approximately $30 million to $40 million, which may pressure operating margins and cash flow and could cause implementation disruptions.
- Insurance premium rates, exposure units, renewal timing, cancellations, contingent commissions, and insurer capacity are outside the company’s control and can produce quarterly volatility.
- Business concentration is significant: approximately 89.1% of 2017 revenue came from operations in a group of states including Florida, California, Texas, New York, and others exposed to regulatory changes, economic weakness, hurricanes, earthquakes, fires, and other disasters.
- Acquisition execution, integration, earn-out estimates, goodwill, and intangible-asset valuation are material risks. Goodwill was $2.716 billion at year-end; management reported no goodwill or amortizable-intangible impairment for 2017.
- The company faces cybersecurity, technology, data privacy, regulatory, licensing, legal-claim, insurer-credit, employee-retention, and competitive risks.
- Contractual cash obligations totaled $1.525 billion, including $985.0 million of scheduled long-term debt payments, $210.6 million of operating leases, and $88.4 million of maximum future acquisition contingency payments.
- The company adopted the new revenue standard effective January 1, 2018 using the modified-retrospective method and estimated an increase to opening shareholders’ equity of $70 million to $110 million. Full-year impact was expected to be limited, but quarterly revenue and expense timing may change.
- After year-end, the board authorized a 2-for-1 stock split, expected to increase outstanding shares from approximately 138 million to approximately 276 million.
Most important facts for investors to verify
- Separate the $120.9 million tax benefit and $20.0 million legal settlement from recurring earnings when assessing 2017 profitability.
- Reconcile reported revenue growth with organic growth, acquisition contributions, divestitures, and the decline in contingent commissions.
- Review the amended credit agreement, 2018 debt maturities, covenant compliance, floating-rate exposure, and remaining revolving capacity.
- Assess the sustainability and cash impact of technology investments, acquisition spending, earn-out payments, dividends, and share repurchases.
- Monitor goodwill of $2.716 billion and acquired customer-account intangibles of $641.0 million for impairment sensitivity.
- Evaluate exposure to catastrophe-prone states, insurer capacity and credit quality, reinsurance recoverables, and the company’s legal and regulatory contingencies.
- Confirm the accounting and per-share effects of the January 1, 2018 revenue-standard adoption and the subsequent 2-for-1 stock split.