Brown & Brown, Inc. 2013 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2013, filed February 28, 2014. Brown & Brown is a diversified insurance agency, wholesale brokerage, insurance programs and services company operating through Retail, National Programs, Wholesale Brokerage and Services divisions. It had 6,992 full-time equivalent employees and operated in 245 locations in 41 states, plus operations in London, Bermuda and the Cayman Islands.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenues | $1,363.3 million | $1,200.0 million | 13.6% |
| Commissions and fees | $1,355.5 million | $1,189.1 million | 14.0% |
| Income before income taxes | $357.6 million | $304.8 million | 17.3% |
| Net income | $217.1 million | $184.0 million | 18.0% |
| Diluted earnings per share | $1.48 | $1.26 | 17.5% |
| Net cash from operating activities | $389.4 million | $220.3 million | 76.7% |
| Cash and cash equivalents | $203.0 million | $219.8 million | Decrease of $16.9 million |
| Total debt | $480.0 million | $450.1 million | Increase of $29.9 million |
| Total shareholders’ equity | $2,007.1 million | $1,807.3 million | 11.1% |
- Approximate net margin was 15.9%, compared with 15.3% in 2012; approximate pretax margin was 26.2%, compared with 25.4%.
- Core organic commissions and fees increased 6.7%, versus 2.6% in 2012. Acquisition revenue contributed substantially to reported growth.
- Employee compensation and benefits were $683.0 million, or 50.1% of total revenues, versus 50.7% in 2012. Other operating expenses were 14.4% of revenues, versus 14.5%.
- Capital expenditures were $16.4 million. Acquisition payments were $367.7 million, acquisition earn-out payments were $15.5 million, dividends paid were $53.5 million, and proceeds from new long-term debt were $30.0 million.
- Restricted cash and investments were $250.0 million, and premiums, commissions and fees receivable were $395.9 million at year-end.
- The current ratio declined to 1.02 from 1.34. Management stated that existing cash, investments, operating cash flow and available credit facilities were expected to meet normal liquidity needs through at least the end of 2014.
- Reported total contractual cash obligations were $866.4 million, including $480.0 million of long-term debt, $174.5 million of operating leases and $130.6 million of maximum future acquisition contingency payments.
Fourth-quarter results
| Metric | Q4 2013 | Q4 2012 |
|---|---|---|
| Total revenues | $343.2 million | $302.8 million |
| Income before income taxes | $76.4 million | $69.2 million |
| Net income | $47.2 million | $42.6 million |
| Diluted EPS | $0.32 | $0.29 |
Fourth-quarter revenue increased approximately 13.3% and net income increased approximately 10.8% year over year. Quarterly results are affected by policy-renewal timing, acquisitions and the timing of profit-sharing commissions.
Material changes versus the prior comparable period
- Brown & Brown completed the Beecher Carlson acquisition on July 1, 2013 for an aggregate purchase price of $469.3 million, including $364.3 million of cash and $105.0 million of assumed liabilities. The acquisition expanded the Retail and National Programs divisions and increased Retail fee revenue by nearly $40 million.
- The company completed 2013 acquisitions with estimated annualized revenues of $142.8 million and an aggregate purchase price of $519.8 million.
- Fee revenue increased as a percentage of commissions and fees to 26.6% from 21.7%, primarily because of Beecher Carlson’s fee-based large-account business.
- Profit-sharing contingent commissions increased to $51.3 million from $43.7 million, while guaranteed supplemental commissions declined to $8.3 million from $9.1 million.
- Goodwill increased to $2.006 billion from $1.712 billion, primarily from acquisitions. Management’s November 30, 2013 impairment test found that fair value exceeded carrying value; no goodwill or amortizable intangible-asset impairment was recorded.
- Debt increased to $480.0 million from $450.1 million, while cash declined because operating cash flow was more than offset by acquisitions, capital expenditures, earn-out payments and dividends.
Guidance, outlook, commentary, risks and unusual items
- Management expected property and casualty premium rates and insurable exposure units to continue increasing modestly and gradually in 2014, assuming continued economic improvement.
- Management expected 2014 Retail fee revenue of approximately $110 million, compared with $73 million in 2013.
- Brown & Brown entered into an agreement to acquire The Wright Insurance Group for $602.5 million, plus potential contingent consideration of up to $37.5 million. The transaction was expected to close around April 1, 2014, subject to regulatory and other closing conditions.
- Superstorm Sandy materially benefited Colonial Claims revenue in late 2012 and early 2013. Management estimated Colonial Claims revenue would be less than $1 million in the first quarter of 2014 absent another major flooding event, compared with $17.2 million in the first quarter of 2013.
- Unusual or nonrecurring items included a $6.8 million producer bonus in 2012 that did not recur in 2013, a $2.5 million 2013 expense from changes in estimated acquisition earn-out payables, and $6.6 million of higher non-cash stock-based compensation.
- Principal risks include cyclical insurance pricing, customer exposure-unit changes, contingent commission volatility, acquisition integration and earn-out estimates, goodwill impairment, regulatory changes, litigation and errors-and-omissions claims, insurer or financial-institution credit risk, concentrated exposure to certain states, cybersecurity and technology failures, employee retention, and natural disasters.
- The company reported no material legal proceedings based on current information, although future litigation outcomes could materially affect results, cash flows or liquidity. The company was in compliance with debt covenants at December 31, 2013.
- Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Internal controls excluded Beecher Carlson and ICA from management’s assessment because they were acquired during 2013.
Important facts for investors to verify
- Whether the Wright acquisition closed as expected, its final purchase price and financing, and the resulting leverage and liquidity profile.
- The sustainability of 6.7% organic growth after adjusting for acquisitions and the nonrecurrence of Superstorm Sandy-related claims revenue.
- Integration progress, profitability and retention of Beecher Carlson and other acquired operations.
- Future premium-rate trends, exposure-unit growth and the level and timing of contingent commissions.
- Goodwill and intangible-asset carrying values, particularly the $2.006 billion goodwill balance and assumptions used in impairment testing.
- Debt maturities, including $100 million due in 2014 and $255 million due in 2016, alongside the financing requirements for planned acquisitions and contractual obligations.
- Changes in contingent commission regulation, insurance intermediary litigation, cybersecurity exposure and state-specific regulatory or catastrophe risk.