Brown & Brown, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2023; filed July 27, 2023. Brown & Brown is a diversified insurance agency, wholesale broker, insurance-program manager and insurance-services provider operating through Retail, National Programs, Wholesale Brokerage and Services segments.
Financial Performance and Position
| Metric | Three months ended June 30, 2023 | Year-over-year change | Six months ended June 30, 2023 | Year-over-year change |
|---|---|---|---|---|
| Total revenues | $1,047.3 million | 24.7% | $2,163.3 million | 24.0% |
| Commissions and fees | $1,035.9 million | 23.5% | $2,143.9 million | 23.0% |
| Income before income taxes | $254.4 million | 28.0% | $548.6 million | 18.3% |
| Net income | $190.4 million | 31.1% | $425.9 million | 16.5% |
| Diluted earnings per share | $0.67 | From $0.51 | $1.50 | From $1.29 |
| Income before tax margin | 24.3% | From 23.7% | 25.4% | From 26.6% |
| Adjusted EBITDAC margin | 34.2% | From 32.7% | 35.0% | From 34.3% |
| Operating cash flow | Not separately provided for the quarter | — | $388.5 million | From $346.2 million |
- Core commissions and fees grew 22.7% in the second quarter and 23.1% year to date. Organic revenue growth was 11.2% in the quarter and 11.9% for the six months.
- Growth reflected net new and renewal business, acquisitions, higher profit-sharing contingent commissions and increased investment income from higher interest rates. Six-month core commission and fee growth included $221.9 million from acquisitions, partly offset by $27.6 million from dispositions and $0.8 million of foreign-currency effects.
- Adjusted EBITDAC increased 30.5% to $358.4 million in the second quarter and 26.5% to $756.6 million for the six months.
- Employee compensation and benefits increased 28.7% in the quarter and 26.4% year to date. The six-month ratio to revenue rose to 50.9% from 49.9%, while other operating expenses declined to 14.9% of revenue from 16.1%.
- Interest expense increased 33.1% in the quarter and 74.2% year to date, reflecting higher average debt and floating-rate benchmark costs.
- Cash and cash equivalents were $627.9 million at June 30, 2023, compared with $650.0 million at December 31, 2022. Fiduciary cash was $1,635.5 million, but is held for premium-related purposes and is not generally available for corporate use.
- Total assets were $14.07 billion and shareholders’ equity was $5.07 billion at June 30, 2023. Goodwill was $6.87 billion and amortizable intangible assets were $1.56 billion.
Debt, Liquidity and Capital Allocation
- Total debt was $3.82 billion net of discounts and issuance costs, down from $3.94 billion at December 31, 2022. Debt included $2.74 billion of notes and $1.04 billion under credit agreements, plus $53.1 million of current maturities.
- The Company repaid a $202.5 million term loan on May 31, 2023 because its LIBOR-based benchmark was scheduled to cease; $170.0 million was refinanced through the revolving facility. Revolver borrowings were $100.0 million at June 30, 2023.
- The Company reported up to $700.0 million of available cash under its revolving facility and access to up to $1.6 billion of incremental borrowing capacity, including expansion options. Management expects cash, investments, operating cash flow and available credit to meet normal liquidity needs for at least the next 12 months and thereafter.
- The Company was in compliance with its debt covenants at June 30, 2023. Approximately $1.10 billion of debt was tied to SOFR and exposed to floating interest rates.
- Capital expenditures were $25.1 million for the six months, compared with $18.3 million in the prior-year period. Acquisition payments were $115.3 million in the cash flow statement; cash paid for 13 acquisitions was $127.2 million.
- Dividends paid were $65.2 million in the first six months. The quarterly dividend was $0.115 per share, and approximately $249.5 million remained available under the share repurchase authorization; no open-market repurchases were made during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based: second-quarter segment revenue increased 25.5% in Retail, 25.5% in National Programs and 23.8% in Wholesale Brokerage, while Services declined 1.8%.
- National Programs was the strongest organic growth contributor, with organic revenue growth of 23.3% in the quarter and 27.6% year to date. Retail organic growth was 6.3% in the quarter and 7.7% year to date; Wholesale Brokerage was 13.1% and 10.2%, respectively; Services was negative.
- National Programs margins improved materially, with adjusted EBITDAC margin rising to 49.6% in the quarter from 44.5% and 45.0% year to date from 39.7%.
- Retail’s quarterly adjusted EBITDAC margin increased modestly to 28.4%, but its six-month margin declined to 33.2% from 34.1%. Wholesale Brokerage and Services margins declined in both comparable periods.
- Foreign currency translation improved comprehensive income: comprehensive income was $240.9 million in the quarter and $523.8 million year to date, compared with $14.8 million and $232.1 million, respectively, in the prior-year periods. This largely reflected favorable foreign-currency translation compared with 2022.
- Acquisition-related goodwill increased to $6.87 billion. The Company completed 13 acquisitions during the first six months and recorded $231.5 million of estimated acquisition earn-out payables, with maximum future acquisition contingency payments of $550.0 million.
Guidance, Outlook, Commentary and Risks
- The filing does not provide formal quantitative full-year revenue or earnings guidance. Management emphasizes continued growth through net new business, renewals, acquisitions and a decentralized sales and service model.
- Management cited favorable insurance pricing in many property, employee benefits and liability lines, while workers’ compensation pricing continued to decline and professional liability pricing moderated. Automobile and recreational vehicle dealer-services activity remained pressured by a slowdown in the automobile industry.
- Services performance was affected by external factors affecting Social Security disability advocacy, lower Medicare compliance referrals and lower claim volumes compared with the prior-year period.
- The Company participates in a write-your-own flood insurer and two captive insurance facilities. Hurricane Ian-related estimated losses remained material in the quota-share captive, including $7.6 million of estimated insured losses and a $4.9 million expected net loss for the six months.
- Key risks include acquisition integration and earn-out valuation, employee retention and compensation inflation, higher interest rates and floating-rate debt, insurer capacity and carrier relationships, catastrophic weather and captive claims exposure, cybersecurity and data privacy, regulatory changes, foreign-currency movements, economic conditions, litigation and potential goodwill impairment.
- The Company is involved in ordinary-course litigation and claims. Management believes no current proceedings are materially adverse individually or in aggregate, but unfavorable resolutions could affect future results, cash flows or liquidity.
- Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was identified during the quarter. The filing states that controls provide reasonable, not absolute, assurance.
Most Important Facts for Investors to Verify
- Whether organic revenue growth and strong insurance pricing persist after the contribution from recent acquisitions is separated.
- The sustainability of National Programs’ unusually strong growth and margin expansion, including the effect of Hurricane Ian-related claims development and contingent commissions.
- Integration progress, retention of acquired producers and customers, and future cash requirements under the $550.0 million maximum acquisition contingency exposure.
- Interest-rate sensitivity, refinancing requirements and covenant headroom for the $3.82 billion debt balance, including SOFR-linked borrowings and upcoming maturities.
- Whether compensation, travel, technology and other variable costs moderate sufficiently to protect margins, particularly in Retail, Wholesale Brokerage and Services.
- Potential changes in captive insurance losses, reinsurance recoverables, catastrophe exposure and the availability or cost of insurer capacity.
- Future litigation, regulatory, cybersecurity, data-privacy and goodwill-impairment developments, none of which has a clearly quantifiable maximum exposure in the filing.