Business Context and Reporting Period
Brown & Brown, Inc. is a diversified insurance agency, wholesale broker, insurance programs and services organization. Its four reportable segments are Retail, National Programs, Wholesale Brokerage and Services. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
Financial Performance and Key Metrics
| Metric | Three months ended June 30, 2019 | Year-over-year change | Six months ended June 30, 2019 | Year-over-year change |
|---|---|---|---|---|
| Total revenues | $575.2 million | 21.6% | $1,194.5 million | 22.6% |
| Income before income taxes | $123.5 million | 22.4% | $272.0 million | 24.0% |
| Net income | $92.6 million | 25.3% | $206.5 million | 25.4% |
| Diluted earnings per share | $0.33 | From $0.26 | $0.73 | From $0.58 |
| Income before tax margin | 21.5% | From 21.3% | 22.8% | From 22.5% |
| EBITDAC | $168.6 million | 22.4% | $365.7 million | 24.2% |
| EBITDAC margin | 29.3% | From 29.1% | 30.6% | From 30.2% |
| Organic revenue growth | 3.9% | From 5.2% | 2.9% | From 5.4% |
Commissions and fees increased 21.4% in the second quarter and 22.4% for the first six months. Growth was driven primarily by acquisitions, with additional contribution from net new and renewal business. Core commissions and fees increased 20.3% in the quarter and 21.8% year to date.
- Operating cash flow was $305.7 million for the first six months, compared with $277.4 million in 2018.
- Investing cash outflow was $184.5 million, including $146.6 million for acquired businesses and $35.2 million of capital expenditures.
- Financing cash outflow was $84.0 million, including $44.9 million of dividends, $22.5 million of scheduled debt repayments and $20.0 million of treasury-stock purchases.
- Cash and cash equivalents were $432.5 million at June 30, 2019. Restricted cash was $382.2 million, resulting in cash and cash equivalents inclusive of restricted cash of $814.8 million.
- Total debt was $1.482 billion net of discounts and issuance costs, down from $1.507 billion at December 31, 2018. The company had no revolving-credit borrowings outstanding at quarter-end and reported compliance with all debt covenants.
- The company stated that cash, investments, operating cash flow and available revolving-credit capacity should satisfy normal liquidity needs for at least the next 12 months. The facility provides up to $800 million of available cash.
- Total assets were $7.165 billion, including $3.552 billion of goodwill and $899.6 million of amortizable intangible assets.
- The company declared dividends of $0.080 per share, compared with $0.075 per share in the prior-year periods.
Material Changes Versus the Prior Comparable Period
- Acquisition activity was the primary growth driver. Brown & Brown completed 12 acquisitions, excluding book-of-business purchases, during the first six months of 2019, compared with eight in the prior-year period. Cash paid for acquisitions was $149.9 million.
- The Hays acquisition increased revenue and expenses but also contributed to higher amortization and interest expense. Interest expense increased 62.1% in the quarter and 59.7% year to date, primarily because of debt issued for Hays and higher rates on floating-rate borrowings.
- A $9.6 million guaranteed supplemental commission in the National Programs segment materially benefited second-quarter results. Management stated that this was a one-time item tied to a completed multi-year contract and is not expected to recur.
- Profit-sharing contingent commissions declined 14.3% in the quarter, primarily because of carrier loss experience, but increased 6.4% for the first six months.
- Organic revenue growth slowed to 3.9% in the quarter and 2.9% year to date. Six-month organic growth was 4.5% in Retail, negative 0.1% in National Programs, 5.2% in Wholesale Brokerage and negative 1.9% in Services.
- Services organic revenue declined because of lower claims in the Social Security advocacy business. National Programs was affected by lower flood claims-processing revenue and a transition in its non-standard auto program.
- The company adopted lease accounting under ASC Topic 842 on January 1, 2019, recognizing $184.0 million of operating lease assets and $209.4 million of operating lease liabilities at June 30, 2019. The adoption had no significant effect on reported operating results.
- The company issued $350 million of 4.500% senior notes due 2029 and used the proceeds primarily to repay revolving borrowings associated with the Hays acquisition.
- The board authorized an additional $372.5 million of share repurchases, bringing aggregate remaining authorization to approximately $500 million after completion of the accelerated share repurchase agreement.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management stated that positive full-year 2019 organic revenue growth was expected if insurable exposure units continued to increase gradually and premium-rate changes remained similar to 2018.
- Management attributed overall performance to net new business, acquisitions, expense leverage and prior investments, while noting that the Hays business had lower seasonal margins in the second quarter.
- Key risks include integration and performance of acquisitions, industry consolidation and acquisition pricing, debt management, interest-rate exposure, insurance-market and premium volatility, carrier or client insolvency, catastrophic events, competition and disintermediation, employee and client retention, regulatory and tax changes, information-security or systems failures, and errors-and-omissions claims.
- Maximum future acquisition contingency payments were $224.1 million, including $105.0 million of estimated earn-out payables at June 30, 2019.
- Contractual cash obligations totaled $2.362 billion, including $1.493 billion of long-term debt, $236.4 million of operating leases, $342.4 million of interest obligations and the acquisition contingencies.
- The company reported ordinary-course litigation and claims exposure but stated that no pending proceeding was currently expected to have a material adverse effect on financial condition, operations or cash flows. Future unfavorable resolutions could nevertheless affect results, cash flow or liquidity.
- Floating-rate debt totaled approximately $642.5 million. Management stated that an immediate hypothetical 10% change in interest rates would not have a material financial-statement effect.
- Wright Flood’s direct flood premiums were substantially ceded to reinsurers and FEMA-related arrangements. Reinsurance recoverables were $77.3 million and prepaid reinsurance premiums were $343.6 million at quarter-end.
Important Facts for Investors to Verify
- Whether organic revenue growth improves from the 2.9% first-half rate and whether National Programs and Services return to positive organic growth.
- The sustainability of earnings after excluding the one-time $9.6 million National Programs guaranteed supplemental commission.
- Hays integration progress, acquisition-related margins, amortization, earn-outs and the effect of acquisition leverage on interest expense.
- Debt repayment requirements, floating-rate exposure, covenant compliance and availability under the $800 million revolving facility.
- The conversion of operating cash flow into free cash flow after acquisitions, capital expenditures, dividends and share repurchases.
- Future carrier loss experience, contingent commissions, catastrophe exposure and reinsurance recoverability, particularly within the National Programs segment.
- Potential litigation outcomes, regulatory developments and the company’s ability to retain key employees and acquired customer relationships.