10-QPeriod: Q1 FY2008

BROWN & BROWN, INC. Quarterly Report for Q1 Ended Mar 31, 2008

Filed May 12, 2008For Securities:BRO

Summary

Brown & Brown, Inc. reported a decrease in net income for the first quarter of 2008 compared to the same period in 2007, primarily driven by a significant drop in investment income due to the prior year's gain from the sale of Rock-Tenn Company stock and a decrease in profit-sharing contingent commissions. Total revenues saw a slight decline of 0.7%. However, the company continued its aggressive acquisition strategy, with nine acquisitions completed in the first quarter of 2008, contributing to revenue growth in core commissions and fees. Employee compensation and benefits expenses rose due to these acquisitions, impacting profitability margins. The company's financial position remains solid, with total assets increasing and a manageable current ratio. Brown & Brown's liquidity appears sufficient, supported by operating cash flows and existing credit facilities. The company is actively navigating a challenging insurance market characterized by softening premium rates and economic headwinds affecting certain industry segments. Despite these challenges, the company's diversification across multiple segments and its ongoing M&A activity are key strategic elements.

Key Highlights

  • 1Net income decreased by 13.3% to $51.8 million for Q1 2008 compared to $59.7 million in Q1 2007, impacted by a significant reduction in investment income.
  • 2Total revenues declined slightly by 0.7% to $256.7 million in Q1 2008, influenced by a decrease in investment income and profit-sharing contingent commissions.
  • 3Core commissions and fees (excluding profit-sharing) saw an increase of $18.0 million, primarily driven by $26.1 million from recent acquisitions, though overall internal growth in core commissions and fees was negative at (4.1%).
  • 4The company completed nine acquisitions in Q1 2008 for an aggregate purchase price of $79.4 million, indicating a continued focus on strategic growth through M&A.
  • 5Employee compensation and benefits expense increased by 9.4% to $121.2 million, largely due to the integration of new employees from acquisitions.
  • 6Goodwill increased by $50.2 million in Q1 2008, primarily from new acquisitions, reaching $896.5 million.
  • 7The company maintained a current ratio of 1.08 at March 31, 2008, indicating sufficient short-term liquidity.

Frequently Asked Questions

The primary reason for the decrease in net income was a significant drop in investment income, largely due to the absence of a large gain from the sale of Rock-Tenn Company stock that was recognized in the first quarter of 2007. Additionally, profit-sharing contingent commissions also decreased.

The company continues to actively pursue acquisitions. In Q1 2008, nine acquisitions were completed, contributing positively to core commissions and fees revenue. However, these acquisitions also led to an increase in employee compensation and benefits expenses and amortization, impacting overall profitability margins.

Brown & Brown is facing challenges including a 'soft' insurance marketplace with generally declining premium rates, governmental involvement in the Florida insurance market (particularly with Citizens Property Insurance Corporation), and the negative impact of the broader economy on certain industries like home-building. These factors are contributing to negative internal growth in core commissions and fees.

The company has a robust debt structure with various senior notes and credit facilities. While long-term debt increased due to acquisitions, the company's liquidity is considered sufficient, supported by operating cash flows and existing credit lines. They also have unused capacity under their Master Shelf and Note Purchase Agreement and Revolving Agreement. The company was in compliance with all debt covenants.