Brown & Brown, Inc. — Fiscal 2022 Form 10-K Summary
Business context and reporting period
Brown & Brown is a diversified insurance intermediary operating through Retail, National Programs, Wholesale Brokerage and Services segments. It primarily earns commissions from insurance carriers and fees from customers and generally does not assume underwriting risk, except for limited participation through Wright National Flood Insurance Company and capitalized captive insurance facilities.
The filing reports the fiscal year ended December 31, 2022, with comparisons to fiscal 2021 and 2020. The company operated 345 domestic locations in 46 states and 150 international locations and had 15,201 employees at year-end. It completed 30 acquisitions during 2022, including Orchid, GRP, BdB and other businesses.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenues | $3,573.4 million | $3,051.4 million | 17.1% increase |
| Commissions and fees | $3,563.2 million | $3,047.5 million | 16.9% increase |
| Core commissions and fees | $3,474.5 million | $2,965.3 million | 17.2% increase |
| Profit-sharing contingent commissions | $88.7 million | $82.2 million | 7.9% increase |
| Income before income taxes | $876.1 million | $762.8 million | 14.9% increase |
| Net income | $671.8 million | $587.1 million | 14.4% increase |
| Diluted earnings per share | $2.37 | $2.07 | 14.5% increase |
| Income before tax margin | 24.5% | 25.0% | 50 basis-point decrease |
| Adjusted EBITDAC | $1,170.9 million | $1,010.1 million | 15.9% increase |
| Adjusted EBITDAC margin | 32.8% | 33.2% | 40 basis-point decrease |
| Organic revenue growth | 8.1% | 10.4% | Lower than prior year |
| Net cash from operating activities | $881.4 million | $808.8 million | 9.0% increase |
| Capital expenditures | $52.6 million | $45.0 million | 16.9% increase |
Revenue growth reflected $239.9 million of net new and renewal business, $288.6 million from acquisitions, a $4.5 million foreign-currency translation reduction and a $14.8 million reduction from dispositions. Fee revenue represented 25.8% of total commissions and fees, compared with 27.4% in 2021.
- Retail revenue increased 17.9% to $2,084.3 million; organic revenue growth was 6.5% and adjusted EBITDAC margin was 30.9%.
- National Programs revenue increased 22.5% to $859.5 million; organic revenue growth was 15.7% and adjusted EBITDAC margin was 40.2%.
- Wholesale Brokerage revenue increased 12.4% to $453.4 million; organic revenue growth was 7.6% and adjusted EBITDAC margin was 32.1%.
- Services revenue decreased 3.9% to $171.9 million; organic revenue declined 2.9% and adjusted EBITDAC margin declined to 19.1%.
Material changes versus the prior comparable period
- Acquisition activity materially increased scale. Cash paid for acquisitions was $1,927.7 million, compared with $366.8 million in 2021. Acquired businesses contributed $217.1 million of 2022 revenue and $8.8 million of pretax income after their acquisition dates.
- Debt increased substantially to $3,942.1 million at December 31, 2022 from $2,022.9 million a year earlier. The increase primarily funded the 2022 acquisitions and included $1.2 billion of senior notes and $800.0 million of term-loan borrowings.
- Interest expense more than doubled to $141.2 million from $65.0 million, reflecting higher debt balances and higher floating-rate benchmarks.
- Other operating expenses increased 48.1% to $596.8 million, driven by acquired operations, travel and other variable costs, and acquisition/integration expenses. The ratio to revenue increased to 16.7% from 13.2%.
- Employee compensation and benefits increased 11.0%, but declined as a percentage of revenue to 50.8% from 53.6%. Inflation, higher health-plan claims and producer compensation increased costs.
- Profit-sharing contingent commissions were affected by estimated insured property losses from Hurricane Ian, particularly in National Programs and the captive facilities.
- Goodwill increased to $6,674.2 million from $4,736.8 million, primarily from acquisitions. The company recorded no goodwill or amortizable intangible asset impairments in 2022, 2021 or 2020.
- Comprehensive income declined to $532.8 million from $577.7 million, primarily because of a $137.5 million foreign-currency translation loss.
Cash flow, liquidity and debt
- Cash and cash equivalents were $650.0 million at year-end, down from $693.2 million. The company held $225.4 million of cash outside the United States that it did not plan to repatriate in the near term.
- Including fiduciary cash, cash and cash equivalents were $2,033.2 million. Fiduciary cash of $1,383.2 million is held for policyholders, carriers and claims-related obligations and is restricted or otherwise subject to fiduciary requirements.
- Operating cash flow of $881.4 million was more than offset by $1,927.7 million of acquisition payments, $106.3 million of acquisition earn-out payments, $119.5 million of dividends, $74.1 million of share repurchases and $52.6 million of capital expenditures.
- The current ratio was 1.09 at December 31, 2022, compared with 1.25 at December 31, 2021.
- The company reported $800.0 million of available cash capacity under its revolving credit facility and up to $1.9 billion of incremental borrowing capacity under expansion options, subject to conditions and lender approvals.
- Contractual cash obligations totaled $6,518.6 million, including $3,975.6 million of long-term debt, $1,572.4 million of interest obligations, $542.8 million of maximum future acquisition-contingency payments and $278.3 million of operating leases.
- A $210.0 million term loan was classified as current and matured in December 2023. Management was evaluating repayment or refinancing alternatives. The company stated that it was in compliance with its debt covenants at year-end.
- The company had $781.2 million of SOFR-linked debt and $444.4 million of LIBOR-linked borrowings. Management stated that a hypothetical immediate 10% change in interest rates would not have a material effect on the consolidated financial statements.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal numerical revenue, earnings or margin guidance. Management emphasizes continued growth through net new business, customer retention, exposure-unit and insurance-rate changes, acquisitions and a decentralized sales and service model.
- Management expects existing cash, short-term investments, operating cash flow, credit facilities and the Loan Agreement to satisfy normal liquidity needs for the next twelve months.
- Hurricane Ian reduced contingent commissions and generated estimated captive-related losses. One quota-share captive recorded $10.4 million of ultimate loss expense, including $9.7 million related to Hurricane Ian; an excess-of-loss captive recorded a $1.9 million underwriting loss for 2022.
- Acquisition earn-out payables were $251.6 million at year-end, while maximum future acquisition-contingency payments totaled $542.8 million. The year-over-year change in estimated earn-out payables produced a $38.9 million pretax benefit in 2022, compared with a $40.4 million expense in 2021.
- Principal risks include employee retention, acquisition integration, cybersecurity and data privacy, inflation and wage pressure, insurer capacity and carrier relationships, natural catastrophes, regulatory changes, interest rates and LIBOR transition, foreign exchange, competition and potential goodwill impairment.
- Goodwill impairment testing as of November 30, 2022 found that fair value exceeded carrying value for each reporting unit, but management noted that a sustained decline in market capitalization, cash flows or growth could require a future impairment charge.
- Ordinary-course litigation accruals were not material, and management did not believe current legal proceedings would materially adversely affect financial condition, operations or cash flows. Future unfavorable resolutions could nevertheless affect results and liquidity.
- Deloitte & Touche LLP issued unqualified opinions on the financial statements and internal control over financial reporting. Internal controls at certain 2022 acquisitions were excluded from management’s assessment and the auditor’s audit scope.
Most important facts an investor should verify
- Whether acquisition-driven growth converts into sustained organic growth and margin performance, particularly after the 2022 acquisitions are fully integrated.
- The company’s ability to manage the sharp increase in debt, the $210.0 million near-term maturity and higher floating-rate interest expense.
- The performance of the Services segment and the effect of claims volumes, economic conditions and customer concentration on that segment.
- The ultimate effect of Hurricane Ian and future catastrophes on contingent commissions, captive claims, insurer capacity and reinsurance recoveries.
- The valuation and recoverability of $6.7 billion of goodwill and $1.6 billion of amortizable intangible assets.
- The assumptions supporting $251.6 million of recorded acquisition earn-outs and $542.8 million of maximum future contingent payments.
- The status of the LIBOR-to-SOFR transition and the impact of interest-rate changes on debt service and cash flow.
- The distinction between unrestricted cash of $650.0 million and fiduciary cash of $1,383.2 million when assessing usable liquidity.
- The filing’s non-GAAP measures, including Organic Revenue and adjusted EBITDAC, against GAAP revenue, income and cash flow.