01—Abstract
Summary
Summary of the 10-K filed March 2, 2015. Cited figures are marked; the original filing is the authoritative source.
Brown & Brown, Inc. (NYSE: BRO) closed 2014 with a substantially larger footprint after its May 2014 acquisition of The Wright Insurance Group (Wright, about $609.2 milliona in cash) and the July 2013 Beecher Carlson deal.
Total revenues rose 15.6% to $1.58 billionb, and commissions and fees reached $1.57 billion. Net income fell 4.7% to $206.9 million, and diluted EPS declined to $1.41 from $1.48. The decline was driven by a $47.4 million pretax loss on the disposal of Axiom Re, which the company is exiting as part of a strategy to leave the reinsurance brokerage business, along with higher interest expense (up 72.8% to $28.4 million) and a $9.9 million charge from changes in acquisition earn-out estimates.
Underlying organic growth improved. Net internal growth in core organic commissions and fees was 2.0%c for 2014, compared with 6.7% in 2013, and management attributes the slowdown to Superstorm Sandy-related claims revenue in 2013 that did not recur. Excluding Sandy, the Services Segment's 2014 internal growth would have been 6.8%.
Management cites new business, rising exposure units, and improving employee benefit rates as tailwinds, while coastal property rate pressure and the Affordable Care Act's effect on small-employer coverage are headwinds. The balance sheet expanded significantly. Total assets grew to $4.96 billiond from $3.65 billion, and long-term debt rose to $1.15 billion from $380 million, largely to fund Wright.
The company issued $500 million of 4.200% senior notes due 2024, and its $1.35 billion credit agreement includes a $550 million term loan. Shareholders' equity rose to $2.11 billion.
Management says cash and facilities are sufficient through at least the end of 2015. The company also repurchased $50 million of stock under a $200 million authorization, and 2014 dividends were $0.41 per share, up from $0.37.
02—Key points
Key Highlights
- Total revenues rose 15.6% to $1.576 billion, and commissions and fees grew 15.6% to $1.567 billion, largely from acquisitions including Wright and Beecher Carlson.
- Net income declined 4.7% to $206.9 million, and diluted EPS fell to $1.41 from $1.48, primarily due to a $47.4 million pretax loss on the Axiom Re disposal.
- Core organic (internal) revenue growth slowed to 2.0% from 6.7% in 2013, which management attributes to the non-recurrence of Superstorm Sandy flood-claims revenue.
- Total debt roughly tripled to about $1.2 billion after the Wright acquisition, and interest expense rose 72.8% to $28.4 million.
- Total assets increased to $4.96 billion, with goodwill of $2.46 billion, and shareholders' equity grew to $2.11 billion.
- Fee revenue rose to 30.6% of total commissions and fees (from 26.6%), reflecting the Wright and Beecher Carlson acquisitions' fee-based models and increased exposure to Wright's flood business.
- Board authorized a $200 million share repurchase plan, of which $50 million was executed in 2014; the dividend increased to $0.41 per share from $0.37.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2014filed March 2, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $1.58B$1.36B | +15.6% |
| Operating Expenses | $1.24B$1.01B | +22.9% |
| Interest Expense | $28.41M$16.44M | +72.8% |
| Net Income | $206.90M$217.11M | −4.7% |
| EPS (Basic) | $0.71$0.75 | −4.7% |
| EPS (Diluted) | $0.70$0.74 | −4.7% |
| Shares Outstanding (Basic) | 281.89M282.07M | −0.1% |
| Shares Outstanding (Diluted) | 285.78M285.25M | +0.2% |
05—Questions
Frequently Asked Questions
Why did net income and EPS decline in 2014 despite strong revenue growth?
The decline mainly reflects a $47.4 million pretax loss on the December 31, 2014 sale of Axiom Re, a reinsurance brokerage office the company is exiting, which reduced diluted EPS by about $0.21. Higher interest expense from acquisition debt and a $9.9 million earn-out charge also weighed on results. Excluding these items, earnings growth would have been stronger.
How strong is the underlying organic growth, and is it sustainable?
Net internal growth in core organic commissions and fees was 2.0% in 2014, down from 6.7% in 2013, which was boosted by Superstorm Sandy claims and new Arrowhead programs. Management points to new business and rising exposure units, but notes continued pressure on coastal property rates and a shrinking small-employer market under the Affordable Care Act. Growth is positive but moderate.
How did the Wright acquisition change Brown & Brown's risk and balance sheet profile?
Wright, acquired May 1, 2014 for $609.2 million in cash, added a National Flood Insurance Program carrier (WNFIC). Its premiums are almost entirely ceded to FEMA or reinsurers rated A or better, so underwriting exposure is minimal, but the deal increased goodwill, intangibles, and debt. Long-term debt rose to $1.15 billion from $380 million, so interest costs and leverage are now materially higher.
Is the company's liquidity and debt position manageable?
Management states that cash, operating cash flow (about $385 million in 2014), and credit facilities should cover liquidity needs through at least the end of 2015, and the company was in compliance with its covenants at year-end. The $1.35 billion credit agreement matures in 2019 and the 4.200% notes in 2024. Debt maturities are modest in 2015 ($45.6 million), but future interest and acquisition payments are significant.
What risks should investors monitor going forward?
Key risks include reduced profit-sharing contingent commissions, which averaged about 4.3% of prior-year revenue; concentration of revenue in 16 states (about 86% of revenue in 2014); exposure to Florida and California catastrophe risk; potential goodwill impairment given $2.46 billion of goodwill; ongoing regulatory scrutiny of contingent commission practices; and the integration of Wright and Pacific Resources, which were excluded from internal control testing for 2014.
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