Brown & Brown, Inc. — 2017 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Brown & Brown is a diversified insurance intermediary operating through Retail, National Programs, Wholesale Brokerage, and Services segments. The filing covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenues | $465.1 million | $424.2 million | 9.6% |
| Commissions and fees | $444.6 million | $422.3 million | 5.3% |
| Organic revenue growth | 3.5% | 1.3% | Improved |
| Income before taxes | $111.0 million | $102.5 million | 8.2% |
| Net income | $70.1 million | $62.1 million | 12.9% |
| Diluted EPS | $0.49 | $0.44 | 11.4% |
| Dividends declared per share | $0.14 | $0.12 | 16.7% |
- Net margin was approximately 15.1%, compared with approximately 14.6% in the prior-year quarter. Pretax margin was approximately 23.9%, compared with approximately 24.2%.
- Core commissions and fees increased 6.1% to $411.9 million. Acquisition revenue contributed $10.6 million, while organic revenue increased $13.5 million after divestitures.
- Other income increased to $20.3 million from $1.4 million, primarily because of a $20.0 million legal settlement with AssuredPartners recognized in the quarter.
- Operating expenses increased 10.1% to $354.1 million. Employee compensation increased 9.7%; other operating expenses increased 5.2%; amortization was essentially unchanged.
- The effective income tax rate declined to 36.8% from 39.5%, principally because of the prospective adoption of ASU 2016-09 concerning employee share-based compensation tax effects.
- Net cash provided by operating activities was $90.0 million, compared with $33.2 million in Q1 2016. Cash used in investing activities was $2.1 million, versus $44.9 million, primarily because there were no business acquisitions requiring cash consideration in Q1 2017.
- Cash and cash equivalents were $546.7 million at March 31, 2017. Including restricted cash, total cash was $826.1 million, up from $781.3 million at December 31, 2016.
- Total assets were $5.20 billion and shareholders’ equity was $2.42 billion at March 31, 2017.
- Total debt was reported in the MD&A at $1.0675 billion, down $13.9 million from year-end; the balance-sheet carrying amount was $1.0600 billion after discounts and debt issuance costs. The company had $467.5 million outstanding under its term loan and no revolving-loan borrowings.
Segment Results
| Segment | Q1 2017 Revenue | Revenue Change | Organic Growth | Pretax Income | Pretax Change |
|---|---|---|---|---|---|
| Retail | $239.3 million | 3.1% | 4.0% | $48.9 million | (3.2%) |
| National Programs | $101.2 million | 0.1% | (0.1%) | $12.5 million | (9.2%) |
| Wholesale Brokerage | $65.2 million | 22.2% | 7.4% | $15.3 million | 4.8% |
| Services | $39.3 million | 7.5% | 4.9% | $6.1 million | 21.2% |
Wholesale Brokerage benefited from acquisitions and new business. Retail profitability was pressured by lower contingent commissions, higher earn-out adjustments, reduced disposal gains, and a new producer incentive program. National Programs was affected by carrier transitions, lower coastal property rates, and the absence of prior-year premium-tax refunds. Services benefited from organic growth, including weather-related claims activity.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated, with organic growth improving to 3.5% from 1.3%.
- The $20.0 million AssuredPartners settlement materially increased other income and was the principal unusual contributor to the increase in pretax income.
- Profit-sharing contingent commissions and guaranteed supplemental commissions declined by a combined $1.4 million because of higher carrier loss ratios, particularly in Retail.
- The acquisition earn-out adjustment changed from a $0.8 million credit in Q1 2016 to a $4.0 million expense in Q1 2017. Estimated earn-out payables were $57.4 million at March 31, 2017, with maximum future acquisition contingency payments of $106.4 million.
- The company made no insurance intermediary acquisitions during the quarter, although it recorded a $0.5 million measurement-period purchase-price adjustment relating to prior acquisitions with no current-period earnings or cash impact.
- The company early adopted the restricted-cash cash-flow presentation standard retrospectively and adopted the employee share-based payment standard prospectively.
Guidance, Outlook, Risks, and Contingencies
- Management stated that, if gradual increases in insurable exposure units continue and premium-rate changes remain similar to 2016, positive quarterly organic revenue growth is expected during 2017. No quantitative earnings or revenue guidance was provided.
- Management believes cash, short-term investments, operating cash flow, and available revolving credit capacity will satisfy normal liquidity needs, including debt payments, for at least the next twelve months. The revolving facility provides up to $800.0 million of capacity, subject to its terms.
- A scheduled $13.8 million term-loan principal payment was due June 30, 2017. Total contractual cash obligations were $1.62 billion, including debt, leases, interest, tax benefits, and acquisition contingencies.
- Key business risks include changes in insurance premium rates and exposure units, economic conditions, regulatory changes, competition, acquisition integration, acquisition valuations, employee retention, policy cancellations, technology and control effectiveness, and litigation outcomes.
- The company remains exposed to floating-rate risk on $467.5 million of term-loan borrowings and to foreign-exchange risk from its United Kingdom operations; management stated that an immediate hypothetical 10% change in rates or exchange rates would not materially affect the financial statements.
- Ordinary-course litigation continues. Management believes no current proceeding is expected to have a material adverse effect, but unfavorable legal or insurance-coverage outcomes could affect future earnings, cash flow, or liquidity.
- Wright Flood had $24.3 million of statutory capital and surplus, above its $7.5 million regulatory minimum. Its 2017 dividend capacity without prior approval was $8.2 million.
Important Facts for Investors to Verify
- Determine the portion of Q1 earnings growth attributable to the nonrecurring $20.0 million AssuredPartners settlement.
- Monitor organic revenue growth, especially the negative growth in National Programs and the effect of premium rates in catastrophe-prone property markets.
- Review contingent-commission trends, carrier loss ratios, and their effect on Retail and Wholesale Brokerage profitability.
- Assess debt maturities, scheduled term-loan amortization, floating-rate exposure, and compliance with debt covenants.
- Track the $57.4 million recorded acquisition earn-out liability and $106.4 million maximum future acquisition contingency payments.
- Evaluate the impact of pending accounting standards, particularly revenue recognition and lease accounting, although management did not expect a material revenue-recognition impact based on its evaluation to date.
- Reconcile reported debt amounts between the MD&A gross figure and the balance-sheet carrying amount after discounts and debt issuance costs.