Brown & Brown, Inc. — 2022 Q2 Form 10-Q Summary
Business context and reporting period
Brown & Brown is a diversified insurance intermediary offering retail brokerage, national programs, wholesale brokerage, and insurance-related services. The filing covers the three and six months ended June 30, 2022, compared with the same periods in 2021. The financial statements are unaudited and prepared under U.S. GAAP.
The company completed ten acquisitions during the first six months of 2022, including Orchid Intermediate Holdings. It subsequently completed the GRP acquisition on July 1, 2022; the acquisition was not included in the June 30 operating results.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Year-over-year change | Six months ended June 30, 2022 | Year-over-year change |
|---|---|---|---|---|
| Total revenues | $839.7 million | 15.5% | $1,744.5 million | 13.1% |
| Commissions and fees | $838.7 million | 15.5% | $1,743.1 million | 13.2% |
| Income before income taxes | $198.8 million | 6.7% | $463.9 million | 9.0% |
| Net income | $145.2 million | 4.2% | $365.5 million | 7.8% |
| Diluted earnings per share | $0.51 | From $0.49 | $1.29 | From $1.20 |
| Income before tax margin | 23.7% | From 25.6% | 26.6% | From 27.6% |
| Adjusted EBITDAC | $274.7 million | 16.9% | $598.2 million | 13.7% |
| Adjusted EBITDAC margin | 32.7% | From 32.4% | 34.3% | From 34.2% |
| Operating cash flow | Not separately provided for the quarter | — | $346.2 million | Down from $379.9 million |
Core commissions and fees increased 15.6% in the second quarter and 13.2% for the first six months. Consolidated organic revenue growth was 10.3% in the second quarter and 9.0% year to date. Profit-sharing contingent commissions increased 12.8% in the quarter and 11.4% year to date.
Segment performance
| Segment | Q2 2022 revenue | Q2 revenue growth | Q2 organic growth | Q2 adjusted EBITDAC margin |
|---|---|---|---|---|
| Retail | $457.6 million | 14.1% | 8.8% | 28.3% |
| National Programs | $225.7 million | 28.0% | 19.0% | 44.4% |
| Wholesale Brokerage | $112.4 million | 7.5% | 7.0% | 32.5% |
| Services | $44.0 million | Down 2.0% | Down 0.5% | 20.0% |
National Programs produced the strongest growth, supported by new business, retention, exposure-unit expansion, rate increases, and acquisitions. Services declined because the prior-year period benefited from higher COVID-19-related travel-restricted claims and the current period had fewer weather-related claims and lower claim severity.
Material changes versus the prior comparable period
- Revenue growth reflected approximately $72.7 million of Q2 net new and renewal business and $40.9 million from acquisitions, partly offset by foreign currency and divestiture impacts.
- Other operating expenses increased 59.9% in Q2 and 47.3% year to date, driven by acquisitions, integration costs, higher travel and entertainment expenses, and changes in assets and liabilities associated with the deferred compensation plan.
- Employee compensation increased 4.2% in Q2 and 5.6% year to date, but declined as a percentage of revenue to 49.1% from 54.4% in Q2 and to 49.9% from 53.5% year to date.
- Interest expense rose 120.9% in Q2 and 66.6% year to date because of substantially higher average debt balances and higher floating-rate benchmarks.
- Income before tax margin declined despite revenue growth, while adjusted EBITDAC margin improved modestly due primarily to expense leverage and the exclusion of certain acquisition-related and other items.
- Comprehensive income was reduced by a $130.1 million foreign currency translation loss in Q2, primarily related to British pound-denominated cash balances.
- Goodwill increased to $5.149 billion from $4.737 billion at December 31, 2021, principally because of acquisitions. No goodwill impairment was identified in the latest annual assessment.
Cash flow, debt, and liquidity
- Operating cash flow was $346.2 million for the first six months, compared with $379.9 million in 2021.
- Investing cash flow used $467.5 million, including $457.2 million for acquired businesses. Cash paid for the ten acquisitions was $500.9 million.
- Financing activities provided $2.066 billion, including $2.0 billion of long-term debt proceeds and $350.0 million of revolving-facility borrowings, partly offset by debt repayments, share repurchases, dividends, and debt issuance costs.
- Cash and cash equivalents were $2.384 billion and fiduciary cash was $904.0 million at June 30, 2022. The combined balance was $3.288 billion.
- Total debt was $4.224 billion at June 30, 2022, compared with $2.023 billion at December 31, 2021. The increase primarily funded acquisitions, including the pending GRP transaction.
- The revolving credit facility had $550.0 million of available cash capacity at June 30, 2022. Including expansion options under existing agreements, management stated that up to $1.6 billion of incremental borrowing capacity was available, subject to conditions and lender approval.
- Management believes existing cash, investments, operating cash flow, and available credit will satisfy normal liquidity needs, including debt principal payments, for at least the next 12 months.
Guidance, outlook, risks, and unusual items
The filing does not provide specific quantitative revenue, earnings, or margin guidance. Management emphasizes continued growth through net new business, acquisitions, premium-rate changes, exposure-unit growth, and disciplined expense management. The company also expects acquisition and integration activity to remain relevant, including the GRP acquisition completed after quarter-end and the anticipated BdB closing.
- Principal risks include inflation, economic or market slowdowns, higher interest rates, COVID-19 impacts, employee retention, acquisition execution and integration, cybersecurity and data privacy, regulatory changes, insurer relationship changes, reduced insurer capacity, foreign currency exposure, goodwill impairment, litigation, and debt covenant compliance.
- At June 30, 2022, estimated acquisition earn-out payables totaled $232.9 million; maximum future acquisition contingency payments were $447.2 million.
- Total contractual cash obligations were $6.703 billion, including $4.259 billion of long-term debt, $1.574 billion of interest obligations, $447.2 million of maximum acquisition contingency payments, and $258.7 million of operating leases.
- The company was in compliance with applicable debt covenants at June 30, 2022.
- Pending and threatened litigation arises in the ordinary course of business. Management stated that no current proceedings were expected to have a material adverse effect, although unfavorable developments could affect results, cash flows, or liquidity.
- The company repurchased 777,926 shares for $50.0 million during the quarter and had approximately $249.6 million remaining under its repurchase authorization. The quarterly dividend was $0.1025 per share.
- WNFIC remains primarily liable to policyholders even where premiums are reinsured. The captive insurance facility limits, but does not eliminate, underwriting exposure.
Most important facts for investors to verify
- Assess the effect of the July 1, 2022 GRP acquisition on future revenue, earnings, goodwill, amortization, debt, and foreign currency exposure.
- Reconcile the significant increase in debt with acquisition funding, expected interest expense, leverage, and covenant headroom.
- Monitor floating-rate debt exposure, LIBOR-to-SOFR transition, and the effect of rising interest rates on future margins and cash flow.
- Separate organic growth from acquisition-driven growth and confirm whether current organic growth rates are sustainable.
- Evaluate the deterioration in Services segment revenue and margins and the continued pressure from higher operating expenses.
- Review the assumptions supporting goodwill, intangible assets, and acquisition earn-out valuations, including the $447.2 million maximum contingency exposure.
- Confirm the treatment and availability of cash held for fiduciary purposes and the approximately $1.876 billion of sterling cash earmarked for the GRP transaction.
- Review litigation, regulatory, cybersecurity, insurer-capacity, and captive-insurance disclosures for developments after the filing date.