How much did Brown & Brown's revenue and earnings grow in 2005?

Total revenues grew 21.5% to $785.8 million, and net income grew 16.9% to $150.6 million. Diluted EPS was $1.08, up from $0.93 in 2004. Part of the growth came from acquisitions, which added roughly $125.9 million of annualized revenue in 2005.

Is the company's organic growth holding up as premium rates decline?

Only partly. The net internal growth rate for core commissions and fees slowed to 3.1% in 2005 from 4.3% in 2004 and 5.9% in 2003. The Retail Division's organic growth fell to 0.6%, while the Brokerage Division's rose to 24.9%, aided by property and construction accounts in markets where premium rates were rising. Management attributes the slowdown to the softening of premium rates across the industry.

What are the main legal and regulatory risks?

Brown & Brown is a defendant in antitrust class actions (consolidated in New Jersey) that allege bid rigging, steering and undisclosed contingent commissions. It has also received information requests or subpoenas from about 19 state agencies and attorneys general, and a Florida action against Marsh & McLennan filed in March 2006 could lead to demands on the company. Management says the outcome could be material and could reduce or eliminate contingent commissions, which made up about 6% of the prior year's commissions and fees.

How is the company financed and is its debt manageable?

Total debt was about $270 million at year-end 2005, including $200 million of unsecured senior notes (5.57% due 2011 and 6.08% due 2014). Current maturities were $55.6 million, mostly acquisition notes. Management says cash, operating cash flow and an undrawn $75 million revolver should cover needs through at least 2006, and it was in compliance with its covenants.

What do the 2006 outlook and insurance cycle mean for the stock?

The filing says the 2005 hurricanes, with insured losses above $50 billion, are expected to put upward pressure on premium rates for coastal property, mainly in the Southeast, though the full effect on 2006 pricing is unknown. Rate declines in other lines were slowing. Investors should weigh this possible rate recovery against continued pressure on commission rates and contingent commissions, and against the legal and regulatory uncertainty the company itself describes as potentially material.

BRO 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 16, 2006. Cited figures are marked; the original filing is the authoritative source.

Brown & Brown, Inc. (NYSE: BRO) closed fiscal 2005 with record results: total revenues rose 21.5% to $785.8 million^a and net income grew 16.9% to $150.6 million, or $1.08 diluted EPS (up from $0.93).

Growth was driven by an aggressive acquisition program (32 agency acquisitions in 2005 with about $125.9 million^b of annualized revenue, including the $175 million Hull & Company deal, the largest in company history) and by a 2005 net internal growth rate in core commissions and fees of only 3.1%, down from 4.3% in 2004 and 5.9% in 2003. The softening of premium rates is the key organic headwind, and the 2005 hurricane season is expected to put upward pressure on coastal property premiums in 2006. The balance sheet expanded considerably: total assets grew to $1.61 billion, goodwill reached $549 million, and debt was modestly lower at roughly $270 million including current maturities.

Operating cash flow was $215 million^c, funding $262 million of acquisitions and $23.6 million of dividends. Management says liquidity is sufficient through at least 2006, and the company retains about $90 million of its $250 million shelf registration. The main risk for investors is regulatory and legal.

Brown & Brown is among more than ten intermediaries named in multi-district antitrust class actions over contingent commissions, and it has received subpoenas or information requests from roughly 19 state agencies. A Florida Attorney General suit against Marsh & McLennan, filed March 14, 2006, raises the prospect of similar exposure in the company's home state. Management could not estimate a range of possible loss and warned that the outcome could be material, and that it could lead to the loss of contingent commissions, which made up about 6%^d of prior-year commissions and fees.

02—Key points

Key Highlights

Total revenues increased 21.5% to $785.8 million in 2005, while net income rose 16.9% to $150.6 million and diluted EPS rose to $1.08 from $0.93 (figures adjusted for the November 2005 two-for-one stock split).
Organic growth is slowing: the net internal growth rate for core commissions and fees fell to 3.1% in 2005 from 4.3% in 2004 and 5.9% in 2003, reflecting softening premium rates.
Acquisitions drove expansion: 32 agencies were acquired in 2005 with about $125.9 million of annualized revenue, and the Hull & Company deal (about $175 million recorded price) was the largest in company history. Three more acquisitions closed in early 2006 for $62 million net cash.
Balance sheet growth was significant: total assets rose to $1.61 billion, goodwill to $549 million, and shareholders' equity to $764 million (book value of $5.48 per share).
Cash generation was solid, with $215 million of operating cash flow in 2005, covering $262 million of acquisition spending and $23.6 million of dividends; the dividend was raised to $0.17 per share from $0.145.
Regulatory and litigation exposure is elevated: the company is a defendant in antitrust class actions tied to contingent commissions, faces inquiries from roughly 19 state agencies, and has not estimated a range of possible loss.
Revenue concentration remains: two insurers provided 8.0% and 5.4% of total revenues, and about 70.6% of commissions and fees came from seven states, with Florida a key market.

03—Questions

Frequently Asked Questions

How much did Brown & Brown's revenue and earnings grow in 2005?
Total revenues grew 21.5% to $785.8 million, and net income grew 16.9% to $150.6 million. Diluted EPS was $1.08, up from $0.93 in 2004. Part of the growth came from acquisitions, which added roughly $125.9 million of annualized revenue in 2005.
Is the company's organic growth holding up as premium rates decline?
Only partly. The net internal growth rate for core commissions and fees slowed to 3.1% in 2005 from 4.3% in 2004 and 5.9% in 2003. The Retail Division's organic growth fell to 0.6%, while the Brokerage Division's rose to 24.9%, aided by property and construction accounts in markets where premium rates were rising. Management attributes the slowdown to the softening of premium rates across the industry.
What are the main legal and regulatory risks?
Brown & Brown is a defendant in antitrust class actions (consolidated in New Jersey) that allege bid rigging, steering and undisclosed contingent commissions. It has also received information requests or subpoenas from about 19 state agencies and attorneys general, and a Florida action against Marsh & McLennan filed in March 2006 could lead to demands on the company. Management says the outcome could be material and could reduce or eliminate contingent commissions, which made up about 6% of the prior year's commissions and fees.
How is the company financed and is its debt manageable?
Total debt was about $270 million at year-end 2005, including $200 million of unsecured senior notes (5.57% due 2011 and 6.08% due 2014). Current maturities were $55.6 million, mostly acquisition notes. Management says cash, operating cash flow and an undrawn $75 million revolver should cover needs through at least 2006, and it was in compliance with its covenants.
What do the 2006 outlook and insurance cycle mean for the stock?
The filing says the 2005 hurricanes, with insured losses above $50 billion, are expected to put upward pressure on premium rates for coastal property, mainly in the Southeast, though the full effect on 2006 pricing is unknown. Rate declines in other lines were slowing. Investors should weigh this possible rate recovery against continued pressure on commission rates and contingent commissions, and against the legal and regulatory uncertainty the company itself describes as potentially material.

04—Continue

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