BRO

Business Context and Reporting Period

Company: Brown & Brown, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: A diversified insurance agency, wholesale brokerage, and services organization operating in four segments: Retail, Wholesale Brokerage, National Programs, and Services. The company markets and sells insurance products primarily in the property and casualty area.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 2.7% year-over-year, driven by a 4.1% increase in commissions and fees. However, profit-sharing contingent commissions decreased 17.7% due to lower profitability of insurance carriers in 2008.
• Profitability Decline: Net income decreased 7.2% to $48.0 million. Income before taxes dropped 6.4% to $79.2 million.
• Internal Growth: The company reported a negative internal growth rate of (2.2)% for core commissions and fees, marking the ninth consecutive quarter of negative internal growth. This was attributed to a "soft market" (declining premium rates), competition from Florida's Citizens Property Insurance Corporation, and a weakening economy.
• Segment Performance:
  • Retail: Pre-tax income fell 19.6% due to net lost business and lower contingent commissions.
  • Wholesale Brokerage: Pre-tax income plummeted 58.7% to $3.0 million, heavily impacted by Florida market conditions.
  • National Programs: Pre-tax income surged 64.6% to $26.4 million, driven by new business in the Special Programs unit (specifically lender-placed insurance via Proctor Financial).
  • Services: Relatively flat with a 3.0% decrease in pre-tax income.
• Acquisitions: The company spent $29.3 million on acquisitions in Q1 2009 (two agencies and a book of business), compared to $79.4 million in Q1 2008. These acquisitions offset some of the internal revenue decline.

Outlook, Risks, and Management Commentary

• Market Conditions: Management expects continued declining exposure units to have a greater negative impact on revenues than declining premium rates in 2009. The "soft market" and economic weakness remain significant headwinds.
• Florida Regulatory Environment: Citizens Property Insurance Corporation remains a dominant competitor in Florida, offering rates significantly lower than the private market. While Citizens' rates are expected to remain unchanged in 2009, pending legislation could increase them by approximately 10% in 2010.
• Legal and Regulatory Risks: The company faces ongoing governmental investigations regarding compensation practices (profit-sharing contingent commissions) in several states. While management believes these will not have a material adverse effect, the outcome is uncertain and could impact future revenue models.
• Liquidity: Cash and cash equivalents increased significantly to $126.4 million. The company maintains a $50 million revolving credit facility (currently unutilized) and $250 million in senior notes. Management believes existing resources are sufficient for the next 12 months.
• Succession: J. Powell Brown is scheduled to succeed his father, J. Hyatt Brown, as CEO in July 2009.

Investor Verification Checklist

• Internal Growth Trend: Verify the sustainability of the negative internal growth rate (-2.2%) and the extent to which acquisitions are masking organic decline.
• Florida Exposure: Assess the specific revenue impact of Citizens Property Insurance Corporation on the Retail and Wholesale Brokerage segments in Florida.
• Contingent Commissions: Monitor the trend of profit-sharing contingent commissions, which dropped 17.7% and are a significant revenue component.
• Regulatory Investigations: Track the status of state-level investigations into compensation practices and potential changes to commission structures.
• Debt Covenants: Confirm continued compliance with financial ratios required by the $250 million senior notes and the revolving credit facility.