10-QPeriod: Q3 FY2005

BROWN & BROWN, INC. Quarterly Report for Q3 Ended Sep 30, 2005

Filed November 9, 2005For Securities:BRO

Summary

Brown & Brown, Inc. (BRO) reported strong financial performance for the nine months ended September 30, 2005, with total revenues increasing by 21.7% to $588.95 million and net income rising 16.5% to $114.83 million compared to the same period in 2004. This growth was largely driven by a significant increase in commissions and fees, up 21.2%, fueled by a robust acquisition strategy and modest internal growth. The company's balance sheet shows substantial growth in goodwill and amortizable intangible assets, reflecting its aggressive M&A activity. The company continues to execute its strategy of acquiring general insurance agencies and books of business, with over $246 million in acquisitions during the first three quarters of 2005. This growth, however, comes with increased expenses, particularly in employee compensation and benefits, and amortization, which rose by 20.0% and 51.4% respectively for the nine-month period. Despite these increases, the company managed to improve its expense ratios as a percentage of revenue in several categories, indicating successful integration of acquired businesses. Investors should note the ongoing scrutiny of contingent commissions within the insurance industry, although Brown & Brown has not chosen to discontinue receiving them at this time.

Key Highlights

  • 1Total revenues increased 21.7% to $588.95 million for the nine months ended September 30, 2005, compared to $483.89 million in the prior year.
  • 2Net income grew 16.5% to $114.83 million for the nine months ended September 30, 2005, compared to $98.59 million in the prior year.
  • 3Acquisition activity remains high, with $246.4 million spent on acquiring 28 general insurance agencies and several books of business during the first nine months of 2005.
  • 4Goodwill increased significantly to $528.3 million, up from $360.8 million at the end of 2004, reflecting the company's M&A strategy.
  • 5Amortization expense rose by 51.4% to $24.34 million for the nine months ended September 30, 2005, primarily due to recent acquisitions and a change in amortization period for purchased customer accounts.
  • 6Interest expense increased by 194.4% for the nine months due to the issuance of $200 million in unsecured senior notes in 2004.
  • 7The company experienced a decrease in cash and cash equivalents to $76.7 million from $188.1 million, largely due to significant investments in acquisitions.

Frequently Asked Questions

The primary driver of Brown & Brown's revenue growth is its consistent strategy of acquiring other insurance agencies and books of business. For the nine months ended September 30, 2005, the company acquired businesses for approximately $246.4 million, contributing significantly to the 21.7% increase in total revenues.

While acquisitions lead to higher expenses, particularly in employee compensation and amortization, Brown & Brown is focusing on integrating these businesses effectively. For example, employee compensation and benefits as a percentage of revenue decreased slightly, and the company noted improved expense ratios due to the assimilation of acquisitions.

The insurance industry, including contingent commissions, is under scrutiny from governmental entities, and class-action lawsuits have been filed. Some major brokers have stopped accepting contingent commissions. While Brown & Brown continues to receive them, any significant decrease or elimination could materially and adversely impact its results of operations.

The company's cash and cash equivalents decreased substantially to $76.7 million as of September 30, 2005, from $188.1 million at the end of 2004. This reduction is primarily due to significant cash outflows for acquisitions ($225.2 million) and other investments, despite positive cash flow from operations.