BRO

Business Context and Reporting Period

Company: Brown & Brown, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2001
Business Overview: The largest insurance agency and brokerage headquartered in the southeastern United States and the eighth largest in the country (based on 2000 revenues). The company operates four segments: Retail, National Programs, Services, and Brokerage. It does not assume underwriting risks but earns commissions and fees for placing insurance and providing risk management services.

Key Financial Metrics (Year Ended Dec 31, 2001)

Profit Margins: Pre-tax margin was 24.8% in 2001 (restated for pooling-of-interests acquisitions). Without the effect of pooling acquisitions, the margin was 27.9%.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 37.5% to $365.0 million, driven by a 39% increase in commissions and fees. This growth was fueled by rising premium rates (a "hard market" trend continuing from 2000) and significant acquisition activity.
• Acquisitions: The company acquired 26 agency operations in 2001, including the assets of Riedman Corporation. This was largely accelerated by the impending elimination of the "pooling-of-interests" accounting method.
• Debt Increase: Long-term debt surged from $10.7 million to $78.2 million. This was primarily due to a new $90 million term loan obtained in January 2001 to fund the Riedman acquisition.
• Expense Increases: Employee compensation rose 25% to $187.7 million, and amortization expense jumped 72% to $15.9 million due to the integration of acquired intangible assets.
• Cash Position: Cash and cash equivalents decreased by $21.0 million to $16.0 million, reflecting heavy capital deployment for acquisitions ($131.0 million) and debt repayments.

Guidance, Outlook, and Risks

• Market Outlook: Management expects premium rates to continue increasing through at least 2002, citing the post-September 11, 2001 environment and rising loss ratios in the insurance industry.
• Acquisition Strategy: The pace of acquisitions is expected to slow in 2002 compared to 2001, as the regulatory impetus to use pooling-of-interests accounting has passed. Future acquisitions will be accounted for under the purchase method.
• Interest Rate Risk: The company entered into an interest rate swap agreement in January 2002 to lock in a fixed rate of 4.53% on its $90 million term loan to hedge against rising rates.
• Legal Proceedings: The company is a defendant in a lawsuit filed by Gresham & Associates, Inc., alleging tortious interference with employment contracts. The plaintiff seeks compensatory damages of at least $750,000 per employee and punitive damages of at least $10 million. Management intends to contest vigorously.
• Concentration Risk: Approximately 5.2% of total revenues in 2001 were derived from a single insurance carrier. Significant business is also concentrated in Arizona, Florida, and New York.

Investor Verification Checklist

• Debt Covenants: Verify compliance with financial ratios required by the $90 million term loan and $50 million revolving credit facility with SunTrust Banks, Inc.
• Acquisition Integration: Assess the realization of synergies and revenue retention from the 26 agencies acquired in 2001, particularly the Riedman Corporation assets.
• Legal Exposure: Monitor the status of the Gresham & Associates litigation and potential impact on financial statements.
• Goodwill Accounting: Review the impact of SFAS No. 142 (effective 2002), which eliminates goodwill amortization but requires annual impairment testing, on future earnings.
• Premium Rate Sustainability: Evaluate the durability of the "hard market" premium rate increases driving current revenue growth.