Brown & Brown, Inc. — 2023 Q3 Form 10-Q Summary
Business context and reporting period
Brown & Brown is a diversified insurance intermediary providing retail brokerage, national programs, wholesale brokerage, and insurance-related services. The filing covers the unaudited three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenues | $1,067.7 million | $927.6 million | $3,230.9 million | $2,672.0 million |
| Revenue growth | 15.1% | — | 20.9% | — |
| Net income | $175.9 million | $161.1 million | $601.8 million | $526.6 million |
| Net income growth | 9.2% | — | 14.3% | — |
| Diluted EPS | $0.62 | $0.57 | $2.11 | $1.85 |
| Income before tax margin | 22.7% | 23.5% | 24.5% | 25.5% |
| Adjusted EBITDAC margin | 34.7% | 31.2% | 34.9% | 33.2% |
| Operating cash flow | — | — | $704.1 million | $599.8 million |
Commissions and fees increased 13.4% in Q3 and 19.7% for the first nine months. Organic revenue growth was 9.6% in Q3 and 11.1% year to date. Investment income increased to $16.6 million in Q3 and $33.8 million year to date, primarily due to higher interest rates.
Cash and cash equivalents were $755.7 million at September 30, 2023, compared with $650.0 million at December 31, 2022. Fiduciary cash was $1,515.2 million, while fiduciary liabilities were $2,377.7 million. Total assets were $14.0 billion and shareholders’ equity was $5.2 billion.
Total debt was $3.707 billion, net of discounts and issuance costs, down from $3.942 billion at year-end 2022. The Company had no outstanding balance on its $800.0 million revolving credit facility at September 30, 2023 and reported compliance with all debt covenants. Approximately $987.5 million of debt was tied to SOFR and therefore remains exposed to floating interest rates.
Material changes versus the prior comparable period
- Q3 revenue growth reflected net new and renewal business, acquisitions, higher profit-sharing contingent commissions, and favorable foreign currency translation. Acquisitions contributed $22.0 million of Q3 core commissions and fees and $243.8 million for the first nine months.
- The Company completed 21 acquisitions during the first nine months, with cash consideration of $176.8 million and total consideration of $233.0 million, including estimated earn-outs.
- Adjusted EBITDAC increased 27.0% in Q3 to $370.3 million and 26.7% year to date to $1.127 billion. Adjusted EBITDAC margin expanded despite higher employee-related costs and inflation.
- Income before taxes increased 11.1% in Q3 and 16.0% year to date, but income-before-tax margins declined because of higher interest expense, amortization, and acquisition earn-out charges.
- Interest expense increased 14.5% in Q3 and 48.3% year to date because of higher debt balances and higher floating-rate benchmarks.
- Estimated acquisition earn-out payables generated a $29.9 million Q3 expense versus a $26.6 million benefit in the prior-year quarter. The balance was approximately $258.2 million at September 30, 2023, with maximum future acquisition contingency payments of $550.5 million.
- National Programs was the strongest segment, with Q3 revenue up 20.2%, income before taxes up 60.3%, and adjusted EBITDAC margin of 48.0%. Retail revenue increased 10.9%, Wholesale Brokerage increased 18.4%, and Services increased 3.2%.
Cash flow, capital allocation, and unusual items
- Operating cash flow was $704.1 million for the first nine months, compared with $599.8 million in 2022. Investing cash outflow was $193.3 million, including $163.3 million for acquisitions. Financing cash outflow was $275.1 million, including $238.1 million of debt repayments and $97.9 million of dividends.
- The Company recorded an approximately $11.0 million nonrecurring cost in the first quarter to resolve a business matter; management excludes it from adjusted EBITDAC.
- Prior-year Hurricane Ian claims affected profit-sharing commissions and captive insurance expenses. The Company reported lower related claims costs in 2023, although Hurricane Ian-related reserves and reinsurance estimates remain relevant.
- As of September 30, $45.9 million of federal tax payments had been deferred under Hurricane Idalia relief, with payment due February 15, 2024.
- The quarterly dividend was $0.115 per share. A $0.130 per-share dividend was approved on October 18, 2023. The Company had approximately $249.5 million remaining under its share repurchase authorization, although no open-market repurchases occurred during Q3.
- After quarter-end, the Company acquired Kentro Capital Limited for preliminary consideration of approximately $423.2 million, funded partly with a $250.0 million revolver draw and partly with issued shares.
Guidance, outlook, management commentary, and risks
The filing does not provide a formal quantitative earnings or revenue forecast. Management expressed confidence that cash, investments, operating cash flow, and available credit capacity would satisfy normal liquidity needs, including debt maturities, for at least the next 12 months and the long term. Including expansion options, the Company reported access to up to $1.7 billion of incremental borrowing capacity as of September 30, 2023.
Management attributed operating momentum to net new business, renewal rate increases, acquisitions, strong retention, exposure-unit growth, and continued insurance-market rate increases, particularly in commercial property and catastrophe-exposed property. Offsetting considerations include slower automobile and recreational-vehicle dealer activity, weaker professional-liability pricing, inflation, higher compensation and travel costs, and elevated interest expense.
- Key risks include acquisition execution and integration, employee retention, cybersecurity and data privacy, regulatory changes, insurer capacity and carrier relationships, catastrophe losses, captive underwriting exposure, economic weakness, inflation, interest-rate volatility, foreign currency movements, goodwill impairment, debt covenant compliance, and litigation.
- The Company participates in captive insurance facilities and retains limited underwriting exposure. Hurricane and other catastrophe activity could affect claims expenses, reinsurance recoveries, collateral, and contingent commissions.
- The $500.0 million of 4.200% senior notes due September 2024 was classified as current. The Company was evaluating refinancing alternatives as of the filing date.
- Management stated that no material legal proceeding currently exists that would be expected to adversely affect financial condition, operations, or cash flows, but unfavorable litigation outcomes could still affect future periods.
Important facts for investors to verify
- Reconcile reported revenue and adjusted EBITDAC growth with the contributions from acquisitions, organic growth, contingent commissions, foreign currency, and nonrecurring items.
- Assess the sustainability of the improved National Programs results and the effect of Hurricane Ian-related claims and captive underwriting results.
- Monitor refinancing plans for the $500.0 million notes due in 2024 and sensitivity to SOFR-based borrowing costs.
- Evaluate the cash, debt, earn-out, and acquisition funding impact of the post-quarter-end Kentro transaction.
- Review the assumptions supporting the $258.2 million recorded earn-out liability and $550.5 million maximum future acquisition contingency payments.
- Verify deferred tax payments, legal contingencies, reinsurance recoverables, captive reserves, and catastrophe exposure.
- Consider non-GAAP measures, including Organic Revenue and adjusted EBITDAC, alongside GAAP results because management’s adjustments affect period-to-period comparability.