Business Context and Reporting Period
Brown & Brown, Inc. filed this Form 10-K for the fiscal year ended December 31, 2014, with fourth-quarter results included. The company operates as a diversified insurance agency, wholesale broker, insurance-program manager and insurance-services provider through Retail, National Programs, Wholesale Brokerage and Services segments. Operations covered 232 locations in 41 states, plus London, Bermuda and the Cayman Islands, with 7,591 full-time-equivalent employees at year-end.
The May 2014 acquisition of The Wright Insurance Group materially expanded National Programs and added a flood insurance carrier. Wright’s flood underwriting exposure is substantially reinsured through FEMA and third-party reinsurers.
Financial Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenues | $1.576 billion | $1.363 billion | 15.6% |
| Commissions and fees | $1.567 billion | $1.356 billion | 15.6% |
| Income before taxes | $339.7 million | $357.6 million | (5.0%) |
| Net income | $206.9 million | $217.1 million | (4.7%) |
| Diluted EPS | $1.41 | $1.48 | (4.7%) |
| Operating cash flow | $385.0 million | $389.4 million | (1.1%) |
| Capital expenditures | $24.9 million | $16.4 million | 52.3% |
Approximate 2014 margins were 21.6% before tax and 13.1% net, compared with approximately 26.2% and 15.9%, respectively, in 2013. Employee compensation and benefits were 50.2% of revenue, versus 50.1% in 2013; other operating expenses were 14.9%, versus 14.4%.
Core organic commissions and fees increased 2.0%, or $25.6 million, after excluding acquisition contributions and divested business. Profit-sharing contingent commissions were $57.7 million and guaranteed supplemental commissions were $9.9 million. Fee revenue represented 30.6% of commissions and fees, up from 26.6% in 2013.
At December 31, 2014, cash and cash equivalents were $470.0 million, restricted cash and investments were $259.8 million, current assets were $1.570 billion and current liabilities were $1.269 billion, producing a current ratio of 1.24. Total assets were $4.956 billion and shareholders’ equity was $2.114 billion.
Total debt was $1.198 billion, including $550.0 million outstanding under the 2019 term loan facility and approximately $498.5 million of 4.200% senior notes due 2024. Long-term debt increased from $380.0 million at year-end 2013 to $1.153 billion. The company was in compliance with its debt covenants and stated that available cash, operating cash flow and borrowing capacity were sufficient to meet liquidity needs through at least the end of 2015.
Fourth-Quarter Results
| Metric | Q4 2014 | Q4 2013 |
|---|---|---|
| Total revenues | $393.0 million | $343.2 million |
| Income before taxes | $38.4 million | $76.4 million |
| Net income | $24.4 million | $47.2 million |
| Diluted EPS | $0.17 | $0.32 |
Fourth-quarter results included the $47.4 million loss on disposal of Axiom Re. Approximate Q4 2014 margins were 9.8% before tax and 6.2% net, versus 22.3% and 13.8% in Q4 2013.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by acquisitions, including Wright, which contributed approximately $120 million of annualized revenue, and nine other 2014 acquisitions. Acquisition-related core commissions and fees contributed approximately $186.8 million of the year-over-year increase.
- National Programs revenue increased 35.1% to $394.8 million, while pretax income increased 22.0% to $71.2 million. Wright was the principal driver, and the segment also recorded a $6.0 million gain on the sale of Industry Consulting Group.
- Wholesale Brokerage pretax income declined 69.1% to $16.6 million, primarily because of the $47.4 million Axiom Re disposal loss. Excluding that unusual item, underlying performance benefited from new business growth.
- Services pretax income decreased 28.5% to $17.5 million. The comparison was affected by the absence of approximately $18.3 million of Superstorm Sandy-related claims revenue recorded in the prior comparable period; management stated that 2014 internal growth excluding this effect was 6.8%.
- Interest expense increased 72.8% to $28.4 million because of debt raised to fund acquisitions and the 2024 senior notes.
- Goodwill increased to $2.461 billion from $2.006 billion, and amortizable intangible assets increased to $784.6 million from $618.9 million. No impairment was recorded; the November 2014 goodwill test found fair value exceeded carrying value.
- The company repurchased approximately $75.0 million of common stock during 2014 and declared dividends of $0.41 per share, up from $0.37.
Outlook, Commentary, Risks and Unusual Items
Management described 2014 as a strong revenue-growth year but reported only 2.0% internal growth, compared with 6.7% in 2013. Growth was attributed to new business and improving exposure units, while property and casualty rates remained under pressure, particularly in coastal markets.
Employee-benefit rates and exposure units improved with the economy, but the Affordable Care Act contributed to declining coverage among employers with fewer than 50 employees. Low interest rates, alternative capital and the long period without significant storms continued to pressure coastal property pricing.
- The Axiom Re sale produced the $47.4 million loss and represents the company’s strategic exit from reinsurance brokerage.
- WNFIC’s 2014 direct premiums were substantially ceded to FEMA and other reinsurers. The company remains legally liable to policyholders if reinsurers fail to perform, although management considers the credit risk limited.
- Maximum future acquisition contingency payments were approximately $130.7 million; recorded acquisition earn-out payables were $75.3 million at year-end.
- Contractual cash obligations totaled approximately $1.827 billion, including $1.200 billion of debt principal, $182.9 million of operating leases, $263.2 million of interest obligations and $130.7 million of maximum acquisition contingencies.
- Key risks include insurance pricing and carrier capacity, regulatory changes, contingent commission uncertainty, acquisition integration, geographic concentration, litigation and errors-and-omissions claims, technology and cybersecurity incidents, employee retention, goodwill impairment and interest-rate or credit-market changes.
- The filing reports an unqualified audit opinion and an unqualified opinion on internal control over financial reporting. However, management excluded Wright and Pacific Resources from its internal-control assessment because they were acquired during 2014.
- The company elected early adoption of ASU 2014-08 and reported Axiom Re as a disposal with the $47.4 million loss. It was evaluating the impact and adoption method for the new revenue-recognition standard effective January 1, 2017.
Facts an Investor Should Verify
- Whether Wright’s integration, profitability and reinsurance economics develop as expected.
- Organic growth excluding acquisitions, contingent commissions, divestitures and weather-related comparisons.
- The sustainability of margins given higher compensation, amortization and interest expense.
- Debt repayment requirements, covenant headroom and refinancing exposure, particularly maturities in 2015, 2016, 2018, 2019 and 2024.
- The size and resolution of acquisition earn-outs and other contingent payments.
- Exposure to coastal property pricing, carrier capacity, state regulation and concentration in 15 states that generated 86.4% of 2014 revenue.
- Potential future goodwill or intangible-asset impairment, given $3.245 billion of combined goodwill and amortizable intangible assets.
- The adequacy of litigation, errors-and-omissions and insurance-related reserves, including the company’s continuing primary liability for Wright policyholders despite reinsurance.