Brown & Brown, Inc. — First-Quarter 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021, compared with the three months ended March 31, 2020. Financial statements are unaudited and prepared under U.S. GAAP.
Business Context
Brown & Brown is a diversified insurance intermediary, wholesale broker, managing general agent, insurance-program provider and insurance-related services company. Its reportable segments are Retail, National Programs, Wholesale Brokerage and Services. The company primarily earns commissions and fees from property, casualty and employee-benefits products and related services.
Management stated that the impact of COVID-19 lessened during the quarter, although duration, variants, vaccination levels, economic reopening and potential government actions remained uncertain.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenues | $815.3 million | $698.5 million | 16.7% increase |
| Commissions and fees | $814.0 million | $696.5 million | 16.9% increase |
| Core commissions and fees | $782.8 million | $668.7 million | 17.1% increase |
| Income before income taxes | $239.2 million | $205.3 million | 16.5% increase |
| Income before tax margin | 29.3% | 29.4% | 0.1 percentage-point decrease |
| Net income | $199.7 million | $152.4 million | 31.1% increase |
| Diluted earnings per share | $0.70 | $0.54 | Increase |
| EBITDAC | $291.6 million | $242.0 million | 20.5% increase |
| EBITDAC margin | 35.8% | 34.6% | 1.2 percentage-point increase |
| Operating cash flow | $125.1 million | $33.8 million | Increase |
| Capital expenditures | $11.4 million | $16.5 million | 30.6% decrease |
Net income benefited from revenue growth, acquisitions, expense management and a lower effective tax rate. The effective tax rate declined to 16.5% from 25.8%, primarily due to a tax benefit associated with incremental vesting of restricted stock awards.
Employee compensation and benefits increased 22.8% to $429.5 million and represented 52.7% of revenue, compared with 50.1% in the prior-year quarter. Other operating expenses declined 11.9% to $94.4 million and represented 11.6% of revenue, compared with 15.3%.
Segment Performance
| Segment | Q1 2021 Revenue | Revenue Growth | Organic Revenue Growth | Income Before Tax | EBITDAC Margin |
|---|---|---|---|---|---|
| Retail | $522.9 million | 16.9% | 9.8% | $151.2 million | 37.2% |
| National Programs | $154.9 million | 20.6% | 13.0% | $41.1 million | 34.9% |
| Wholesale Brokerage | $90.9 million | 17.0% | 6.8% | $18.8 million | 28.9% |
| Services | $47.0 million | 5.7% | 5.7% | $9.3 million | 25.2% |
Consolidated organic revenue growth was 9.8%, compared with 5.6% in the prior-year quarter. Management attributed growth to net new and renewal business, insurance rate increases in several lines, acquisitions and continued program expansion. Services revenue benefited from weather-related claims in Texas and increased travel-restriction claims, partly offset by lower awards and referrals in Social Security and Medicare businesses.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $678.7 million at March 31, 2021, compared with $817.4 million at December 31, 2020. Restricted cash was $462.0 million, bringing cash and restricted cash to $1.14 billion.
- Total debt was $2.079 billion, net of discounts and issuance costs, down from $2.096 billion at December 31, 2020. The company had no borrowings outstanding under its revolving credit facility.
- The revolving credit facility provided up to $800.0 million of available capacity. Including expansion options under existing credit agreements, management reported access to up to $1.5 billion of incremental borrowing capacity.
- The company was in compliance with its debt covenants at March 31, 2021. Scheduled principal payments during the quarter totaled $17.5 million.
- Management believes cash, investments, operating cash flow and available revolver capacity will satisfy normal liquidity needs, including debt payments, for at least the next 12 months.
- Operating cash flow was $125.1 million. Investing activities used $82.4 million, including $70.4 million for acquisitions. Financing activities used $173.8 million, including $70.0 million for open-market share repurchases, $45.1 million for tax-withholding share repurchases, $26.1 million of dividends and $15.1 million of acquisition earn-out payments.
- The quarterly dividend was $0.093 per share, compared with $0.085 in the prior-year quarter. The company repurchased 1.56 million shares for $70.0 million and had approximately $336.2 million remaining under its repurchase authorization.
Material Changes and Unusual Items
- The company acquired one insurance intermediary and one book of business. Cash paid for two acquisitions was $116.6 million, and the acquisitions contributed $8.7 million of revenue and $0.4 million of pretax income during the quarter.
- Goodwill increased to $4.473 billion from $4.396 billion at year-end, primarily due to acquisitions, partly offset by foreign-currency translation.
- Estimated acquisition earn-out payables totaled $257.6 million, with maximum future acquisition contingency payments of $558.5 million. The quarter included a $0.9 million credit from changes in estimated earn-out payables, compared with a $11.0 million credit in Q1 2020.
- Investment income declined 78.5% to $0.3 million because of lower interest rates.
- The company held $31.1 million of deferred employer payroll taxes under the CARES Act at year-end 2020; the balance is payable in equal installments by December 31, 2021 and December 31, 2022.
- The company adopted ASU 2019-12 on income taxes effective January 1, 2021; the impact was not material.
- WNFIC’s flood-program premiums are substantially ceded to FEMA and other reinsurers. WNFIC reported statutory capital and surplus of $33.0 million at March 31, 2021, versus a $7.5 million minimum requirement.
Outlook, Risks and Contingencies
The filing does not provide formal revenue or earnings guidance. Management emphasized long-term growth through organic new business and acquisitions, while noting that COVID-19 uncertainty remained. The company expects available liquidity and operating cash generation to support normal requirements for at least the next 12 months.
- COVID-19, economic conditions, governmental responses, insurer capacity and changes in customer demand could affect revenue, liquidity and operating results.
- Acquisition risks include identifying suitable targets, completing transactions, integrating acquired operations and meeting earn-out projections. Goodwill and other intangible assets totaled approximately $5.5 billion and remain subject to impairment risk.
- Insurance-carrier relationship changes could reduce market share, increase expenses or lower contingent and supplemental commissions.
- The company faces cybersecurity, data privacy, technology, regulatory, employee-retention and international operating risks.
- Approximately $542.5 million of borrowings under credit agreements carried floating interest rates tied to LIBOR. The company was evaluating a transition to alternative reference rates, including SOFR.
- The company is involved in ordinary-course litigation and regulatory proceedings. Management did not believe current matters would materially adversely affect financial condition, operations or cash flows, but unfavorable outcomes could affect future results, cash flow or liquidity.
- Maximum future acquisition contingency payments were $558.5 million, including $257.6 million of recorded earn-out payables.
Investor Verification Checklist
- Verify the sustainability of 9.8% organic revenue growth and the contribution from acquisitions.
- Assess whether higher employee compensation, stock-based compensation and salary inflation could pressure margins.
- Monitor the effective tax rate, which benefited from restricted-stock vesting in the quarter and may not recur at the same level.
- Review debt maturities, floating-rate exposure, LIBOR transition provisions and the company’s ability to refinance or repay upcoming obligations.
- Evaluate the conversion of operating cash flow into available cash after acquisitions, earn-outs, share repurchases and dividends.
- Track the $257.6 million recorded earn-out liability and $558.5 million maximum contingent-payment exposure.
- Assess goodwill and intangible-asset concentration, along with potential impairment indicators.
- Monitor COVID-19 developments, insurer capacity, rate changes, catastrophe activity and litigation or regulatory matters.