10-QPeriod: Q1 FY2004

BROWN & BROWN, INC. Quarterly Report for Q1 Ended Mar 31, 2004

Filed May 10, 2004For Securities:BRO

Summary

Brown & Brown, Inc. reported a strong first quarter in 2004, with net income increasing by 20.5% to $36.3 million, or $0.53 per diluted share. This growth was primarily driven by a significant 13.9% increase in commissions and fees, largely attributable to contributions from recent acquisitions and a rise in contingent commissions. Investment income and other income also saw substantial percentage increases, though from smaller bases. The company continues its aggressive acquisition strategy, which contributed $11.8 million to commission and fee growth. While expenses like employee compensation and benefits, and other operating expenses also rose due to acquisitions, they grew at a slower pace than revenues, leading to improved expense ratios. The company also highlighted its robust liquidity, sufficient cash flow from operations, and an available credit facility, with plans to potentially issue senior unsecured notes to fund future acquisitions. However, the company acknowledged ongoing inquiries regarding compensation agreements with underwriters, which could impact future results.

Key Highlights

  • 1Net income increased by 20.5% to $36.3 million ($0.53 per diluted share) in Q1 2004 compared to Q1 2003.
  • 2Commissions and fees grew by 13.9% ($20.1 million), with approximately $11.8 million coming from acquisitions since Q2 2003.
  • 3Contingent commissions significantly contributed to revenue growth, particularly in the Retail and Brokerage divisions.
  • 4Employee compensation and benefits as a percentage of total revenue decreased from 47.1% to 46.1%, indicating improved operational efficiency.
  • 5The company maintains a strong liquidity position with $18.4 million in cash and equivalents and a $75 million revolving credit facility, with plans to potentially issue up to $200 million in senior unsecured notes for future acquisitions.
  • 6Interest expense decreased by 29.4% due to lower outstanding debt balances.
  • 7The company is cooperating with inquiries from regulatory bodies concerning compensation agreements with underwriters, noting a potential negative impact if contingent commissions decrease.

Frequently Asked Questions

The primary driver for the 20.5% increase in net income was a 13.9% rise in commissions and fees. This growth was fueled by revenues from agencies acquired since the second quarter of 2003 and an increase in contingent commissions, alongside net new business production.

The company reported strong cash flow from operations and has an existing $75 million revolving credit facility. To support future acquisition activities, Brown & Brown is considering issuing up to $200 million in senior unsecured notes through a private debt offering in the second quarter of 2004.

Brown & Brown's market risk exposure is primarily related to interest rate risk on its debt and equity price risk associated with its long-term investment in Rock-Tenn Company's common stock. The company has an interest rate swap to mitigate interest rate risk on its term loan, and its exposure to equity price risk is concentrated in the Rock-Tenn investment.

The company is cooperating with inquiries from the New York Attorney General and the State of New York Insurance Department regarding compensation agreements with insurance underwriters. While the company has not received a subpoena, a New York subsidiary was fined $250,000 in relation to a consent order with the Texas Department of Insurance concerning workers' compensation insurance procurement. Management believes these matters will not have a material adverse effect on the company's financial position, but acknowledges that a decrease in contingent commissions could negatively impact results.