Brown & Brown, Inc. — 2013 Q1 Form 10-Q Summary
Business context and reporting period
Brown & Brown is a diversified insurance agency, wholesale brokerage, insurance programs, and services organization. Its four reportable segments are Retail, National Programs, Wholesale Brokerage, and Services. This unaudited Form 10-Q covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenues | $335.0 million | $302.5 million | 10.8% |
| Commissions and fees | $333.8 million | $296.5 million | 12.6% |
| Income before income taxes | $99.5 million | $82.8 million | 20.2% |
| Net income | $60.1 million | $49.4 million | 21.6% |
| Diluted EPS | $0.41 | $0.34 | 20.6% |
| Operating cash flow | $137.0 million | $25.8 million | Increase of $111.2 million |
Income before taxes was approximately 29.7% of revenue, compared with 27.4% in the prior-year quarter. Net income margin was approximately 18.0%, compared with 16.3%. The effective tax rate declined to 39.6% from 40.3%.
- Core commissions and fees increased 13.6% to $306.5 million.
- Core organic commissions and fees grew 10.2%, generating $27.3 million of internal growth. All four divisions recorded positive internal growth.
- Profit-sharing contingent commissions and guaranteed supplemental commissions totaled $27.3 million, up $0.4 million year over year.
- Employee compensation and benefits increased 6.6%, while its ratio to revenue improved to 47.6% from 49.5%. Other operating expenses represented 13.8% of revenue versus 14.3%.
- Cash and cash equivalents were $340.2 million at March 31, 2013, up from $219.8 million at December 31, 2012. The current ratio improved to 1.43 from 1.34.
- Total debt was $450.1 million, consisting primarily of $450.0 million of unsecured senior notes. There were no borrowings under the revolving credit facilities, and the company was in compliance with its debt covenants.
- Capital expenditures were $2.9 million, compared with $5.9 million in Q1 2012. Cash dividends paid were $13.0 million, and dividends declared increased to $0.09 per share from $0.085.
Material changes versus the prior comparable period
- Services Division revenue increased 65.1% to $42.6 million, primarily from significant claims activity related to 2012 Superstorm Sandy through Colonial Claims. Services pretax income increased to $14.0 million from $3.0 million.
- National Programs revenue increased 6.7%, but pretax income declined 12.2% to $14.0 million because profit-sharing contingent commissions declined $3.8 million, primarily at Proctor Financial due to higher carrier loss ratios.
- Retail revenue increased 4.4% and pretax income increased 9.5% to $46.2 million. Retail internal growth was 0.8%.
- Wholesale Brokerage revenue increased 12.5% and pretax income increased 16.7% to $10.4 million; internal growth was 8.8%.
- Other income declined to $1.0 million from $5.8 million because Q1 2012 included $2.6 million of gains on business sales and a $2.2 million legal settlement.
- The company made no insurance intermediary acquisitions during Q1 2013. Purchase-price adjustments to prior acquisitions reduced aggregate purchase price by approximately $1.1 million. Estimated acquisition earn-out payables were $49.5 million at March 31, 2013, and the quarter included a $1.5 million expense from changes in estimated earn-outs, compared with a $0.4 million credit in Q1 2012.
- Operating cash flow improved substantially, while Q1 2012 included $341.8 million of acquisition payments; Q1 2013 acquisition payments were only $0.1 million.
Outlook, commentary, risks, and unusual items
Management reported that insurance premium rates and insurable exposure units were gradually increasing. It stated that, if these trends continued through the remainder of 2013, positive quarterly internal revenue growth was expected to continue. The filing does not provide formal numerical revenue or earnings guidance.
Management expects existing cash, investments, operating cash generation, and available financing facilities to satisfy normal liquidity needs through at least the end of 2013, including scheduled debt payments. Contractual cash obligations totaled $830.0 million, including $450.1 million of debt, $134.6 million of operating leases, $49.4 million of interest obligations, and $147.6 million of maximum future acquisition contingency payments.
- Results benefited materially from Superstorm Sandy-related claims activity, which may not recur at the same level.
- Revenue depends on insurance premium rates, exposure units, new and retained accounts, carrier underwriting results, and competitive conditions.
- Profit-sharing commissions are concentrated in the first and second quarters and can fluctuate with carrier loss ratios.
- Key risks include economic weakness, regulatory changes, competition, policy cancellations, acquisition integration, earn-out estimates, litigation, and adverse developments in states with significant company exposure.
- The company faces ordinary-course legal proceedings. Management believes they will not materially affect consolidated financial position, but unfavorable resolutions could materially affect results or cash flow in a particular period.
- Goodwill impairment testing at November 30, 2012 identified no impairment. Goodwill was $1.71 billion and amortizable intangible assets were $550.7 million at March 31, 2013.
- Disclosure controls were judged effective, and no material change in internal control over financial reporting was identified during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether Superstorm Sandy-related Services revenue and margins normalize in subsequent quarters.
- The sustainability and composition of the 10.2% core organic internal growth rate, particularly the contribution from Arrowhead and the new automobile aftermarket program.
- Future profit-sharing commissions, especially the recovery or further decline of Proctor Financial commissions.
- Debt maturities, covenant compliance, interest costs, and the company’s ability to fund future acquisitions while maintaining liquidity.
- Changes in the $49.5 million estimated earn-out liability and the $147.6 million maximum future acquisition contingency payments.
- Potential volatility from litigation, regulatory developments, policy cancellations, insurance pricing, exposure units, and claims activity.