01—Abstract
Summary
Summary of the 10-K filed March 14, 2001. Cited figures are marked; the original filing is the authoritative source.
Brown & Brown, Inc. (NYSE: BRO) closed fiscal 2000 with strong top- and bottom-line growth.
Commissions and fees rose 11.5% to $204.9 milliona, total revenues grew 11.3% to $209.7 million, and net income increased 23.9% to $33.2 million, or $1.16 per diluted share. Pre-tax margin expanded to 25.7% from 23.4% in 1999, driven by a general increase in property and casualty premium rates, modest new business growth, and cost containment under the 'Project 28' initiative. Management noted that premium rates rose for four consecutive quarters in 2000, ending the soft market that had persisted since the mid-1980s, and expects increases to continue through at least the first half of 2001.
Core (organic) commissions and fees grew only 8% in 2000, versus 2% in each of 1999 and 1998, so much of the growth still came from acquisitions. The most significant event for investors is the January 3, 2001 acquisition of Riedman Corporation's agency operations, which added more than 60 offices in 13 states and roughly $53.4 millionb of 2000 revenue. The purchase price is expected to be about $83 million, funded by a new $90 million seven-year term loan, and management expects Riedman could add up to $0.06 to 2001 EPS.
Total locations rise from 39 to 108 across 24 states, and the company's 2001 workforce grows from 1,614 to 2,277 full-time equivalents. This materially increases leverage and integration risk, although the balance sheet entering 2001 was lightly levered, with only $5.3 millionc of long-term debt at year-end 2000. Risks remain concentrated.
About 7% of 2000 revenues came from a single carrier, down from 17% in 1998, and the company's business is concentrated in Arizona, Florida, and New York. Commission revenue remains exposed to premium-rate cycles, and the National Programs division's commissions declined for a third consecutive year. A pending lawsuit (Gresham & Associates) seeks punitive damages of at least $10 milliond, although management characterizes the claims as defensible and does not expect a material adverse effect.
02—Key points
Key Highlights
- Commissions and fees rose 11.5% to $204.9 million in 2000, but organic growth was only 8%, with the remainder driven by acquisitions.
- Net income increased 23.9% to $33.2 million ($1.16 per share), and pre-tax margin widened to 25.7% from 23.4%.
- Premium rates increased for four consecutive quarters in 2000, the first such period since 1987, ending a soft market that began in the mid-1980s; management expects increases through at least the first half of 2001.
- The January 2001 Riedman acquisition (about $83 million, funded by a $90 million term loan) adds over 60 offices in 13 states and about $53.4 million of annual revenue, expanding the footprint to 108 locations in 24 states.
- Riedman is expected to contribute up to $0.06 to 2001 EPS, and pro forma 2000 revenue including Riedman would be about $264 million.
- Client concentration is moderate but notable: one carrier represented about 7% of 2000 revenue, and the business is concentrated in Arizona, Florida, and New York.
- Balance sheet entered 2001 lightly levered, with $5.3 million of total debt at year-end 2000, $31.3 million of cash, and shareholders' equity of $121.9 million; the Riedman term loan will materially increase leverage.
03—Questions
Frequently Asked Questions
What drove Brown & Brown's earnings growth in 2000?
Net income grew 23.9% to $33.2 million, driven by an 11.5% increase in commissions and fees and a 22.7% increase in pre-tax income. Higher property and casualty premium rates, modest new business growth, and operating efficiencies (operating expenses fell to 16% of revenue from 18%) contributed. Acquisitions also contributed meaningfully, since organic commission growth was 8%.
How significant is the Riedman acquisition for the company?
It is transformational in scale. Riedman's offices were largely in states where Brown & Brown previously had no presence, and the company's locations rise from 39 to 108 across 24 states. The purchase price of about $83 million is financed with a $90 million seven-year term loan at LIBOR plus 0.50% to 1.00%, and management estimates it could add up to $0.06 to 2001 EPS. Investors should watch integration execution and the effect of higher debt on margins and flexibility.
Is the pricing environment for insurance brokers improving?
Yes. After more than a decade of falling premium rates (the 'soft market' from 1986 through 1999), premium rates rose in every quarter of 2000. Management said the increases varied by line and region, cannot predict their future timing or extent, and expects them to continue through at least the first half of 2001. Rising rates generally lift commission revenue, though the company notes that the National Programs division's commissions declined.
What are the main risks to the business?
Key risks include concentration in Arizona, Florida, and New York, where adverse economic or regulatory conditions or natural disasters could materially affect results; dependence on carriers, with one carrier accounting for about 7% of 2000 revenue; sensitivity to premium-rate cycles; competition from larger firms and from direct writers; and litigation, most notably the Gresham & Associates suit seeking punitive damages of at least $10 million. The company believes it has meritorious defenses and does not expect a material adverse effect.
How strong is the balance sheet and cash generation?
At December 31, 2000, the company had $31.3 million of cash, $5.3 million of total debt, and $121.9 million of shareholders' equity, with book value of $4.25 per share. Operating cash flow was $44.1 million in 2000, which funded $18.2 million of acquisitions, $7.5 million of dividends, and $5.5 million of share repurchases. The Riedman financing will substantially increase debt in 2001, so the balance sheet will look materially different going forward.
04—Continue