Brown & Brown, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Brown & Brown is a diversified insurance intermediary operating through Retail, National Programs, Wholesale Brokerage, and Services divisions, primarily in property and casualty insurance.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenues | $260.4 million | $247.6 million | $769.4 million | $743.6 million |
| Income before taxes | $72.7 million | $73.0 million | $210.8 million | $214.1 million |
| Net income | $44.2 million | $44.3 million | $127.5 million | $129.6 million |
| Diluted EPS | $0.30 | $0.31 | $0.88 | $0.90 |
| Net margin | 17.0% | 17.9% | 16.6% | 17.4% |
| Operating cash flow | Not separately provided | Not separately provided | $201.2 million | $226.2 million |
Q3 total revenues increased 5.2%, while net income declined 0.3%. For the first nine months, revenues increased 3.5%, while net income declined 1.6%. Core commissions and fees increased 5.7% in Q3 and 5.3% year to date, but internal growth remained negative at 2.4% and 3.2%, respectively, because acquisition contributions more than offset lost business.
- Profit-sharing contingent commissions declined 25.2% in Q3 to $7.2 million and 20.6% year to date to $38.4 million.
- Total expenses increased 7.5% in Q3 and 5.5% year to date, outpacing revenue growth.
- Employee compensation ratios were 48.7% in Q3 and 49.3% year to date; other operating expense ratios were 14.8% and 14.2%, respectively.
- Cash and cash equivalents were $334.5 million at September 30, 2011, up from $273.0 million at December 31, 2010. The current ratio was 1.50.
- Total debt was $251.7 million, including $250.0 million of senior notes. No borrowings were outstanding under the $50 million revolving facility.
- Total assets were $2.56 billion, including $1.27 billion of goodwill and $481.9 million of amortizable intangible assets.
- Dividends paid during the first nine months were $34.3 million. The quarterly dividend was subsequently increased from $0.0800 to $0.0850 per share.
Material Changes Versus the Prior Comparable Period
- The Retail Division increased Q3 revenue 5.3% and pretax income 7.8%, although internal core revenue growth was negative 4.6%. Year-to-date Retail pretax income increased 4.1%.
- National Programs revenue was essentially flat in Q3 and declined 6.7% year to date; year-to-date pretax income declined 13.1%, primarily due to weaker Proctor results.
- Wholesale Brokerage revenue declined 0.7% in Q3 and 2.7% year to date, while pretax income increased 16.2% and 9.1%, respectively, due to expense efficiencies and lower intercompany interest.
- Services revenue increased 47.8% in Q3 and 62.6% year to date, primarily from acquisitions, but pretax income declined 56.9% in Q3 and 4.0% year to date due to earn-out charges and higher interest expense.
- Brown & Brown acquired 29 insurance intermediaries, one insurance intermediary through a stock acquisition, and several books of business during the first nine months. Aggregate purchase price was $126.5 million, including $100.4 million of cash.
- On September 15, 2011, the company redeemed $100 million of Series A senior notes and issued $100 million of Series E senior notes due 2018 at a fixed 4.50% rate.
- Other operating expenses included a $2.6 million payment related to a legal claim first raised in 1996, and higher legal costs.
Outlook, Commentary, Risks, and Unusual Items
Management reported that insurance premium rates continued to decline through 2011, although the rate of decline appeared to be slowing. Management expected a gradual improvement in insurable exposure units during the remaining three months of 2011, but continued to report negative internal growth through the third quarter. The filing does not provide formal quantitative revenue or earnings guidance.
- Management expected Proctor’s Q4 2011 commissions and fees revenue to be $0.5 million to $1.0 million higher than Q4 2010.
- Management stated that existing cash, investments, operating cash flow, debt facilities, and notes should satisfy normal liquidity needs for at least the next twelve months.
- The Board authorized up to $100 million of share repurchases during the following twelve months; no shares had been repurchased as of November 9, 2011.
- After September 30, the company announced acquisitions with an aggregate minimum purchase price of approximately $57.6 million and potential maximum consideration of $86.4 million over a three-year earn-out period.
- Maximum future acquisition earn-out payments were $104.4 million. The filing contains inconsistent reported balances for estimated acquisition earn-out payables: Note 5 states $40.461 million, while MD&A states $40.761 million.
- Key risks include continued soft insurance markets, declining exposure units, competition and regulatory changes, concentration in several states, unpredictable premium rates and policy cancellations, acquisition integration and earn-out estimates, litigation, tax changes, and goodwill or intangible-asset impairment.
- Management reported no goodwill impairment indicators through September 30, 2011, and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective.
Facts Investors Should Verify
- Whether acquisition-driven revenue growth can transition to positive internal growth, particularly in Retail and National Programs.
- The sustainability of profit-sharing contingent commissions and the effect of their year-over-year decline on margins.
- The impact of the $2.6 million legal claim payment and ongoing legal activity on future operating expenses.
- The accuracy and expected cash settlement timing of acquisition earn-out obligations, including the inconsistent $40.461 million versus $40.761 million balances.
- The integration, profitability, and earn-out exposure associated with 2011 acquisitions and the post-quarter acquisitions.
- Future debt maturities, covenant compliance, interest expense, and the effect of the 2011 refinancing.
- Whether the authorized share repurchase program and increased dividend will reduce flexibility for acquisitions or other capital uses.