10-QPeriod: Q3 FY2004

BROWN & BROWN, INC. Quarterly Report for Q3 Ended Sep 30, 2004

Filed November 9, 2004For Securities:BRO

Summary

Brown & Brown, Inc. reported a solid third quarter for 2004, with total revenues increasing by 20.1% to $160.4 million compared to the prior year's quarter. This growth was primarily driven by a 20.2% increase in commissions and fees, largely attributable to strategic acquisitions completed since the fourth quarter of 2003, which contributed approximately $28.1 million to revenue. Net income also saw a healthy rise of 15.5% to $30.1 million, translating to a diluted EPS of $0.43, up from $0.38 in the same period last year. The company continued its aggressive acquisition strategy, investing significantly in new businesses. This expansion, while driving top-line growth and increasing goodwill and intangible assets, also led to higher amortization expenses and interest costs due to increased debt financing. Despite these factors, the company managed to improve its employee compensation and benefits as a percentage of revenue, indicating successful integration and operational efficiency. Investors should note the ongoing industry scrutiny regarding contingent commissions, which Brown & Brown continues to accept, posing a potential future risk if regulations or industry practices shift.

Key Highlights

  • 1Total revenues grew 20.1% year-over-year to $160.4 million for Q3 2004.
  • 2Commissions and fees increased by 20.2%, with acquisitions contributing significantly to this growth.
  • 3Net income rose 15.5% to $30.1 million, and diluted EPS increased to $0.43 from $0.38.
  • 4The company made substantial investments in acquisitions during the nine months, totaling approximately $192.4 million in cash.
  • 5Goodwill increased significantly due to acquisitions, reaching $320.6 million.
  • 6Interest expense more than doubled (161.7% increase) in Q3 due to new debt financing for acquisitions and general corporate purposes.
  • 7Legal proceedings, including a class-action lawsuit and governmental investigations concerning contingent commissions, pose a potential future risk.

Frequently Asked Questions

Revenue growth was primarily driven by a 20.2% increase in commissions and fees, totaling $158.9 million. A significant portion of this increase, approximately $28.1 million in the third quarter, came from agencies acquired since the fourth quarter of 2003, supplemented by $3.9 million in net new business production.

Brown & Brown has actively pursued acquisitions, as evidenced by $192.4 million in payments for businesses acquired during the first nine months of 2004. This growth strategy has led to a substantial increase in goodwill and amortizable intangible assets. To finance these activities and for general corporate purposes, the company issued $200 million in senior notes in July/September 2004. This financing, along with other debt, resulted in a significant increase in interest expense, which rose by 161.7% in the third quarter compared to the prior year.

The insurance industry is currently facing scrutiny from various governmental entities and has seen a class-action lawsuit filed concerning pricing and placement of insurance, which includes allegations related to contingent commissions. While some competitors are discontinuing or reviewing their acceptance of these commissions, Brown & Brown continues to accept them. An elimination or significant decrease in contingent commissions could have a material adverse impact on the company's results of operations.

Acquisitions have led to increased expenses, particularly in employee compensation and benefits (up 18.8% in Q3) and amortization (up 37.3% in Q3), reflecting the integration of new employees and the amortization of acquired intangible assets. While these increased costs are noted, the company managed to slightly improve its employee compensation and benefits as a percentage of revenue, suggesting some efficiency in integration.