What drove Brown & Brown's strong 2002 earnings growth?

Growth came from several sources: rising property and casualty premium rates beginning in 2000, net new business production, acquisitions (32 agencies in 2002), and operating efficiencies. Other operating expenses fell to 15% of revenues from 16% in 2001, and employee compensation fell to 49% of revenues from 51%, which expanded margins.

How much of the revenue growth is organic versus acquired?

Core commissions and fees, which exclude acquisitions accounted for under the purchase method and divested operations, grew 12.1% in 2002, compared with 11.3% in 2001 and 11.1% in 2000. The reported 25.7% total growth therefore includes a substantial contribution from acquisitions, with roughly half or more of the increase coming from purchased agencies.

Is the company's debt load a concern?

No. Long-term debt declined to $57.6 million at year-end 2002 from $78.2 million, and total current debt was $27.3 million. The company used proceeds from its March 2002 equity offering to repay debt, and it was in compliance with all loan covenants. The $90 million SunTrust term loan carries a 4.53% fixed effective rate through an interest rate swap, though the swap has a fair value liability of about $2.1 million net of taxes.

What are the main risks identified in the filing?

Key risks include adverse economic conditions in the company's markets (concentrated in Florida, New York, California and Arizona), changes in state regulation, competition from insurers selling direct and from larger firms, difficulties integrating acquisitions, and the cyclical nature of premium rates. The company also flagged the loss of its Physicians Protector Plan carrier contract in March 2003 and dependence on contingent commissions, which averaged about 6.1% of prior-year commissions and fees.

Why did the company switch auditors, and was there any controversy?

In June 2002 the board replaced Arthur Andersen with Deloitte & Touche, following an Audit Committee recommendation. Andersen's reports for 2001 and 2000 contained no adverse opinions or qualifications, and the filing states there were no disagreements with Andersen. The change was a routine procedural matter disclosed under Item 9.

BRO 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 24, 2003. Cited figures are marked; the original filing is the authoritative source.

Brown & Brown, Inc. (NYSE: BRO) closed 2002 with a strong year of growth driven by a firm premium-rate environment, acquisitions, and net new business.

Total revenues rose 24.9% to $455.7 million^a, commissions and fees grew 25.7% to $452.3 million, and net income increased 54.2% to $83.1 million, or $1.22 diluted EPS (up 43.5%). Pre-tax margin reached roughly 29.5% in 2002, and management notes that 2002 is the first full year free of pooling-of-interests restatement effects, making it the most representative baseline for ongoing profitability. Core commissions and fees (excluding acquisitions and divestitures) grew 12.1%, which suggests that organic growth, rather than acquisitions alone, is supporting the top line.

Management says it expects premium rates to keep rising through at least 2003. The balance sheet strengthened materially. A March 2002 follow-on offering of 5 million shares raised $149.4 million^b net, which funded $120.9 million of acquisitions and debt repayment.

Total assets grew 54% to $754.3 million^c, shareholders' equity more than doubled to $391.6 million, and long-term debt fell to $57.6 million from $78.2 million. Concentration and litigation risks are modest: one carrier accounted for 3.4% of revenues, the Retail Division is not dependent on any single client, and the principal pending lawsuit (Gresham & Associates) has been resolved in the company's favor at the summary judgment stage. Key watch items for investors include the expiration of the Physicians Protector Plan carrier contract in March 2003 (2002 revenue of about $2.3 million, with 2003 revenue expected below $0.5 million without a replacement), a continued reliance on acquisitions for growth, and the cyclical nature of commission revenue tied to premium rates.

02—Key points

Key Highlights

Total revenues rose 24.9% to $455.7 million in 2002; commissions and fees rose 25.7% to $452.3 million, with core commissions and fees up 12.1%.
Net income increased 54.2% to $83.1 million; diluted EPS rose 43.5% to $1.22, versus the company's stated long-term target of at least 15% annual EPS growth.
Pre-tax margin of about 29.5% in 2002 (income before taxes of $134.7 million), with the company citing this as the most representative ongoing margin since it is free of pooling restatement effects.
A $149.4 million net follow-on equity offering in March 2002 strengthened the balance sheet: shareholders' equity more than doubled to $391.6 million and long-term debt declined to $57.6 million.
Acquisition activity was heavy: 32 agencies acquired in 2002 with about $62.0 million of annualized revenue, including CalSurance (acquired November 2002), and $120.9 million paid in cash for acquisitions.
Management expects premium rates to continue rising through at least 2003, following the first three consecutive years of rate increases since 1987.
Risk items: the Physicians Protector Plan carrier contract expires March 2003 with no confirmed replacement (2002 revenue about $2.3 million), and one carrier represented 3.4% of 2002 revenues.

03—Questions

Frequently Asked Questions

What drove Brown & Brown's strong 2002 earnings growth?
Growth came from several sources: rising property and casualty premium rates beginning in 2000, net new business production, acquisitions (32 agencies in 2002), and operating efficiencies. Other operating expenses fell to 15% of revenues from 16% in 2001, and employee compensation fell to 49% of revenues from 51%, which expanded margins.
How much of the revenue growth is organic versus acquired?
Core commissions and fees, which exclude acquisitions accounted for under the purchase method and divested operations, grew 12.1% in 2002, compared with 11.3% in 2001 and 11.1% in 2000. The reported 25.7% total growth therefore includes a substantial contribution from acquisitions, with roughly half or more of the increase coming from purchased agencies.
Is the company's debt load a concern?
No. Long-term debt declined to $57.6 million at year-end 2002 from $78.2 million, and total current debt was $27.3 million. The company used proceeds from its March 2002 equity offering to repay debt, and it was in compliance with all loan covenants. The $90 million SunTrust term loan carries a 4.53% fixed effective rate through an interest rate swap, though the swap has a fair value liability of about $2.1 million net of taxes.
What are the main risks identified in the filing?
Key risks include adverse economic conditions in the company's markets (concentrated in Florida, New York, California and Arizona), changes in state regulation, competition from insurers selling direct and from larger firms, difficulties integrating acquisitions, and the cyclical nature of premium rates. The company also flagged the loss of its Physicians Protector Plan carrier contract in March 2003 and dependence on contingent commissions, which averaged about 6.1% of prior-year commissions and fees.
Why did the company switch auditors, and was there any controversy?
In June 2002 the board replaced Arthur Andersen with Deloitte & Touche, following an Audit Committee recommendation. Andersen's reports for 2001 and 2000 contained no adverse opinions or qualifications, and the filing states there were no disagreements with Andersen. The change was a routine procedural matter disclosed under Item 9.

04—Continue

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