Business Context and Reporting Period
Company: Brown & Brown, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: The Company is the largest insurance agency and brokerage headquartered in the southeastern United States and the sixth largest in the country (based on 2001 revenues). It operates as an agent and broker, marketing property and casualty insurance products without assuming underwriting risk. Revenue is derived primarily from commissions paid by insurance companies and fees for services.
Operational Footprint: As of December 31, 2002, the Company operated 135 locations across 30 states with approximately 3,384 employees. Business is divided into four segments: Retail Division, National Programs Division, Services Division, and Brokerage Division.
Key Financial Metrics
Revenue: Total commission and fee revenues for 2002 were $452.3 million.
| Segment | 2002 Revenue ($) | % of Total | 2001 Revenue ($) | % of Total |
|---|---|---|---|---|
| Retail Division | $342,331,000 | 75.7% | $281,118,000 | 78.2% |
| National Programs Division | $57,764,000 | 12.8% | $42,176,000 | 11.7% |
| Services Division | $28,149,000 | 6.2% | $24,509,000 | 6.8% |
| Brokerage Division | $24,045,000 | 5.3% | $11,894,000 | 3.3% |
| Total | $452,289,000 | 100.0% | $359,697,000 | 100.0% |
Profit, Cash Flow, Margins, Debt, and Liquidity: The provided filing text does not contain specific values for net income, operating margins, cash flow from operations, total debt, or liquidity ratios. These figures are incorporated by reference from the Company's 2002 Annual Report to Shareholders (pages 24-37) and are not present in the text provided.
Market Data (as of March 18, 2003):
- Stock Price: $30.46 per share
- Shares Outstanding: 68,096,951
- Market Value of Non-Affiliate Voting Stock: $30.46 million (aggregate value stated in text, likely a typo in source or specific calculation context, as 68M shares * $30.46 would be significantly higher; text states "aggregate market value... was $30.46" which appears to be a per-share or specific subset value, but strictly reporting text: "$30.46").
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by approximately 25.7% from $359.7 million in 2001 to $452.3 million in 2002.
- Acquisitions: The Company acquired 32 insurance agency operations in 2002 with aggregate estimated annual revenues of $62.0 million. This follows a significant acquisition year in 2001 (26 operations, $148.0 million estimated revenue).
- Segment Performance: The Brokerage Division saw the highest percentage growth, increasing from $11.9 million in 2001 to $24.0 million in 2002. The Retail Division remained the dominant revenue generator.
- Market Conditions: The Company operated in an environment of increasing premium rates for three consecutive years (2000-2002), reversing the "soft market" trends of the 1990s.
- Accounting Firm Change: On June 14, 2002, the Company replaced Arthur Andersen LLP with Deloitte & Touche LLP as its independent public accountant. No disagreements were reported regarding accounting principles or practices.
Outlook, Risks, and Management Commentary
Outlook: Management believes premium rates will continue to increase through at least 2003. The Company expects to continue acquiring insurance agency operations.
Risks and Contingencies:
- Market Risk: Exposure to interest rate and equity price risk. The Company holds a significant investment in Rock-Tenn Company (559,970 shares), which accounted for 84% of the value of available-for-sale marketable equity securities ($7.55 million as of Dec 31, 2002).
- Interest Rate Hedging: To hedge a $90 million term loan, the Company entered into an interest rate swap agreement (notional amount $64.3 million) converting floating LIBOR rates to a fixed rate of 4.53%.
- Legal Proceedings: The Company prevailed on a motion for summary judgment in a $10+ million lawsuit (Gresham & Associates v. Anthony T. Strianese, et al.), though the plaintiff has appealed. Management does not expect other pending litigation to have a material adverse effect.
- Regulatory Risk: Operations are subject to complex state licensing laws; failure to maintain licenses could restrict business in specific states.
- Concentration Risk: In the Services Division, the largest workers' compensation contract represented 33.4% of that division's TPA revenues (approx. 1.2% of total company revenue).
Investor Verification Checklist
- Financial Statements: Verify net income, EPS, and cash flow figures in the full 2002 Annual Report to Shareholders (incorporated by reference), as they are absent from this text.
- Acquisition Integration: Assess the integration progress and financial contribution of the 32 agencies acquired in 2002 and the 26 acquired in 2001.
- Accountant Transition: Review the transition from Arthur Andersen to Deloitte & Touche for any potential impacts on audit quality or financial reporting consistency.
- Investment Concentration: Monitor the valuation and performance of the Rock-Tenn Company investment, which represents a significant portion of the Company's equity portfolio.
- Legal Appeal: Track the status of the appeal in the Gresham & Associates litigation to ensure no material liability emerges.
- Market Trends: Confirm the continuation of the "hard market" (increasing premiums) in 2003 as predicted by management.