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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 001-13619

 

BROWN & BROWN, INC.

(Exact name of Registrant as specified in its charter)

 

 

Florida

 

 

59-0864469

(State or other jurisdiction of

incorporation or organization)

 

 

(I.R.S. Employer

Identification Number)

220 South Ridgewood Avenue,

Daytona Beach, FL

 

 

32114

(Address of principal executive offices)

 

 

(Zip Code)

Registrant’s telephone number, including area code: (386252-9601

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.10 Par Value

BRO

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

The number of shares of the Registrant’s common stock, $0.10 par value, outstanding as of July 28, 2020 was 282,813,879.

 

 

 

 

 


Table of Contents

 

BROWN & BROWN, INC.

INDEX

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PAGE NO.

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited):

 

 

 

 

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2020 and 2019

 

5

 

 

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

 

6

 

 

Condensed Consolidated Statements of Equity for the three and six months ended June 30, 2020 and 2019

 

7

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019

 

8

 

 

Notes to Condensed Consolidated Financial Statements

 

9

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

43

Item 4.

 

Controls and Procedures

 

43

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

44

Item 1A.

 

Risk Factors

 

44

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

45

Item 6.

 

Exhibits

 

46

SIGNATURE

 

47

 

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Disclosure Regarding Forward-Looking Statements

Brown & Brown, Inc., together with its subsidiaries (collectively, “we,” “Brown & Brown” or the “Company”), makes “forward-looking statements” within the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995, as amended, throughout this report and in the documents we incorporate by reference into this report , including those relating to the potential effects of the COVID-19 pandemic (“COVID-19”) on the Company’s business, operations, financial performance and prospects. You can identify these statements by forward-looking words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “estimate,” “plan” and “continue” or similar words. We have based these statements on our current expectations about potential future events. Although we believe the expectations expressed in the forward-looking statements included in this Quarterly Report on Form 10-Q and the reports, statements, information and announcements incorporated by reference into this report are based upon reasonable assumptions within the bounds of our knowledge of our business, a number of factors could cause actual results to differ materially from those expressed in any forward-looking statements, whether oral or written, made by us or on our behalf. Further, statements about the effects of COVID-19 on our business, operations, financial performance and prospects may constitute forward-looking statements and are subject to the risk that the actual impacts may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of COVID-19, actions taken by governmental authorities in response to the COVID-19, and the direct and indirect impact of the COVID-19 on our customers, insurance carriers, third parties and us. Many of these factors have previously been identified in filings or statements made by us or on our behalf. Important factors which could cause our actual results to differ materially from the forward-looking statements in this report include but are not limited to the following items, in addition to those matters described in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:

 

 

COVID-19 and the resulting governmental and societal responses, the severity and duration of COVID-19, and the resulting impact on the U.S. economy, the global economy, and the Company’s business, liquidity, customers, insurance carriers and third parties;

 

The inability to retain or hire qualified employees, as well as the loss of any of our executive officers or other key employees;

 

Acquisition-related risks that could negatively affect the success of our growth strategy, including the possibility that we may not be able successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our operations, and expand into new markets;

 

A cybersecurity attack or any other interruption in information technology and/or data security and/or outsourcing relationships;

 

The requirement for additional resources and time to adequately respond to dynamics resulting from rapid technological change;

 

Changes in data privacy and protection laws and regulations or any failure to comply with such laws and regulations;

 

The loss of or significant change to any of our insurance company relationships, which could result in additional expense, loss of market share or material decrease in our profit-sharing contingent commissions, guaranteed supplemental commissions or incentive commissions;

 

Adverse economic conditions, natural disasters, or regulatory changes in states where we have a high concentration of our business;

 

The inability to maintain our culture or a change in management, management philosophy or our business strategy;

 

Risks facing us in our Services Segment, including our third-party claims administration operations, that are distinct from those we face in our insurance intermediary operations;

 

Our failure to comply with any covenants contained in our debt agreements;

 

The possibility that covenants in our debt agreements could prevent us from engaging in certain potentially beneficial activities;

 

Changes in estimates, judgments or assumptions used in the preparation of our financial statements;

 

Improper disclosure of confidential information;

 

The limitations of our system of disclosure and internal controls and procedures in preventing errors or fraud, or in informing management of all material information in a timely manner;

 

The potential adverse effect of certain actual or potential claims, regulatory actions or proceedings on our businesses, results of operations, financial condition or liquidity;

 

Changes in the U.S.-based credit markets that might adversely affect our business, results of operations and financial condition;

 

The significant control certain existing shareholders have over the Company;

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Risks related to our international operations, which may require more time and expense than our domestic options to achieve or maintain profitability;

 

Risks associated with the current interest rate environment and to the extent we use debt to finance our investments, changes in interest rates will affect our cost of capital and net investment income;

 

Disintermediation within the insurance industry, including increased competition from insurance companies, technology companies and the financial services industry, as well as the shift away from traditional insurance markets;

 

Changes in current U.S. or global economic conditions;

 

Effects related to pandemics, epidemics, or outbreaks of infectious diseases;

 

Conditions that result in reduced insurer capacity;

 

Quarterly and annual variations in our commissions that result from the timing of policy renewals and the net effect of new and lost business production;

 

The possibility that one of the financial institutions we use fails or is taken over by the U.S. Federal Deposit Insurance Corporation (FDIC);

 

Uncertainty in our business practices and compensation arrangements due to potential changes in regulations;

 

Regulatory changes that could reduce our profitability or growth by increasing compliance costs, technology compliance, restricting the products or services we may sell, the markets we may enter, the methods by which we may sell our products and services, or the prices we may charge for our services and the form of compensation we may accept from our customers, carriers and third-parties;

 

Intangible asset risk, including the possibility that our goodwill may become impaired in the future;

 

A decrease in demand for liability insurance as a result of tort reform litigation;

 

Changes in our credit ratings;

 

Volatility in our stock price; and

 

Other risks and uncertainties as may be detailed from time to time in our public announcements and Securities and Exchange Commission (“SEC”) filings.

Assumptions as to any of the foregoing and all statements are not based upon historical fact, but rather reflect our current expectations concerning future results and events. Forward-looking statements that we make or that are made by others on our behalf are based upon a knowledge of our business and the environment in which we operate, but because of the factors listed above, among others, actual results may differ from those in the forward-looking statements. Consequently, these cautionary statements qualify all of the forward-looking statements we make herein. We cannot assure you that the results or developments anticipated by us will be realized or, even if substantially realized, that those results or developments will result in the expected consequences for us or affect us, our business or our operations in the way we expect. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of their dates. We assume no obligation to update any of the forward-looking statements.

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PART I — FINANCIAL INFORMATION

ITEM 1 — Financial Statements (Unaudited)

BROWN & BROWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

 

 

For the three months

ended June 30,

 

 

For the six months

ended June 30,

 

(in thousands, except per share data)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commissions and fees

 

$

598,157

 

 

$

572,932

 

 

$

1,294,660

 

 

$

1,190,395

 

Investment income

 

 

333

 

 

 

1,525

 

 

 

1,495

 

 

 

2,606

 

Other income, net

 

 

316

 

 

 

762

 

 

 

1,147

 

 

 

1,498

 

Total revenues

 

 

598,806

 

 

 

575,219

 

 

 

1,297,302

 

 

 

1,194,499

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

 

346,515

 

 

 

309,610

 

 

 

696,139

 

 

 

642,447

 

Other operating expenses

 

 

75,568

 

 

 

98,050

 

 

 

182,700

 

 

 

186,833

 

(Gain)/loss on disposal

 

 

(31

)

 

 

(1,016

)

 

 

(291

)

 

 

(511

)

Amortization

 

 

26,741

 

 

 

25,954

 

 

 

53,132

 

 

 

52,146

 

Depreciation

 

 

6,168

 

 

 

5,666

 

 

 

12,189

 

 

 

11,701

 

Interest

 

 

13,809

 

 

 

16,293

 

 

 

29,100

 

 

 

31,491

 

Change in estimated acquisition earn-out payables

 

 

635

 

 

 

(2,860

)

 

 

(10,322

)

 

 

(1,650

)

Total expenses

 

 

469,405

 

 

 

451,697

 

 

 

962,647

 

 

 

922,457

 

Income before income taxes

 

 

129,401

 

 

 

123,522

 

 

 

334,655

 

 

 

272,042

 

Income taxes

 

 

32,617

 

 

 

30,929

 

 

 

85,471

 

 

 

65,553

 

Net income

 

$

96,784

 

 

$

92,593

 

 

$

249,184

 

 

$

206,489

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.34

 

 

$

0.33

 

 

$

0.88

 

 

$

0.73

 

Diluted

 

$

0.34

 

 

$

0.33

 

 

$

0.88

 

 

$

0.73

 

Dividends declared per share

 

$

0.085

 

 

$

0.080

 

 

$

0.170

 

 

$

0.160

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

 

BROWN & BROWN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

(in thousands, except per share data)

 

June 30,

2020

 

 

December 31,

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

623,240

 

 

$

542,174

 

Restricted cash and investments

 

 

438,964

 

 

 

420,801

 

Short-term investments

 

 

18,111

 

 

 

12,325

 

Premiums, commissions and fees receivable

 

 

1,080,896

 

 

 

942,834

 

Reinsurance recoverable

 

 

45,210

 

 

 

58,505

 

Prepaid reinsurance premiums

 

 

356,820

 

 

 

366,021

 

Other current assets

 

 

141,736

 

 

 

152,142

 

Total current assets

 

 

2,704,977

 

 

 

2,494,802

 

Fixed assets, net

 

 

174,376

 

 

 

148,627

 

Operating lease assets

 

 

190,322

 

 

 

184,288

 

Goodwill

 

 

4,023,298

 

 

 

3,746,094

 

Amortizable intangible assets, net

 

 

965,364

 

 

 

916,768

 

Investments

 

 

21,592

 

 

 

27,378

 

Other assets

 

 

121,129

 

 

 

104,864

 

Total assets

 

$

8,201,058

 

 

$

7,622,821

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Premiums payable to insurance companies

 

$

1,205,604

 

 

$

1,014,317

 

Losses and loss adjustment reserve

 

 

45,210

 

 

 

58,505

 

Unearned premiums

 

 

356,820

 

 

 

366,021

 

Premium deposits and credits due customers

 

 

102,389

 

 

 

113,841

 

Accounts payable

 

 

195,793

 

 

 

99,960

 

Accrued expenses and other liabilities

 

 

289,960

 

 

 

337,717

 

Current portion of long-term debt

 

 

62,500

 

 

 

55,000

 

Total current liabilities

 

 

2,258,276

 

 

 

2,045,361

 

Long-term debt less unamortized discount and debt issuance costs

 

 

1,566,409

 

 

 

1,500,343

 

Operating lease liabilities

 

 

173,717

 

 

 

167,855

 

Deferred income taxes, net

 

 

323,558

 

 

 

328,277

 

Other liabilities

 

 

295,580

 

 

 

230,706

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

Common stock, par value $0.10 per share; authorized 560,000 shares; issued 299,151 shares and outstanding 283,658 shares at 2020, issued 297,106

shares and outstanding 281,655 shares at 2019 - in thousands.

 

 

29,915

 

 

 

29,711

 

Additional paid-in capital

 

 

749,285

 

 

 

716,049

 

Treasury stock, at cost at 15,493 shares at 2020, 15,451 shares at 2019, respectively - in thousands

 

 

(537,672

)

 

 

(536,243

)

Retained earnings

 

 

3,341,990

 

 

 

3,140,762

 

Total shareholders’ equity

 

 

3,583,518

 

 

 

3,350,279

 

Total liabilities and shareholders’ equity

 

$

8,201,058

 

 

$

7,622,821

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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BROWN & BROWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share data)

 

Shares

 

 

Par Value

 

 

Additional

Paid-In

Capital

 

 

Treasury

Stock

 

 

Retained

Earnings

 

 

Total

 

Balance at December 31, 2019

 

 

297,106

 

 

$

29,711

 

 

$

716,049

 

 

$

(536,243

)

 

$

3,140,762

 

 

$

3,350,279

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

152,400

 

 

 

152,400

 

Net unrealized holding (loss) gain on available-for-

   sale securities

 

 

 

 

 

 

 

 

 

 

194

 

 

 

 

 

 

99

 

 

 

293

 

Common stock issued for employee stock benefit plans

 

 

1,828

 

 

 

182

 

 

 

2,018

 

 

 

 

 

 

 

 

 

 

 

2,200

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,429

)

 

 

 

 

 

 

(1,429

)

Cash dividends paid ($0.085 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,902

)

 

 

(23,902

)

Balance at March 31, 2020

 

 

298,934

 

 

$

29,893

 

 

$

718,261

 

 

$

(537,672

)

 

$

3,269,359

 

 

$

3,479,841

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

96,784

 

 

 

96,784

 

Net unrealized holding (loss) gain on available-for-

   sale securities

 

 

 

 

 

 

 

 

 

 

384

 

 

 

 

 

 

 

(69

)

 

 

315

 

Common stock issued for employee stock benefit plans

 

 

(73

)

 

 

(7

)

 

 

20,082

 

 

 

 

 

 

 

 

 

 

 

20,075

 

Common stock issued for agency acquisitions

 

 

274

 

 

 

27

 

 

 

9,973

 

 

 

 

 

 

 

 

 

 

 

10,000

 

Common stock issued to directors

 

 

16

 

 

 

2

 

 

 

585

 

 

 

 

 

 

 

 

 

 

 

587

 

Cash dividends paid ($0.085 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24,084

)

 

 

(24,084

)

Balance at June 30, 2020

 

 

299,151

 

 

$

29,915

 

 

$

749,285

 

 

$

(537,672

)

 

$

3,341,990

 

 

$

3,583,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

293,380

 

 

$

29,338

 

 

$

615,180

 

 

$

(477,572

)

 

$

2,833,622

 

 

$

3,000,568

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

113,896

 

 

 

113,896

 

Net unrealized holding (loss) gain on available-for-

   sale securities

 

 

 

 

 

 

 

 

 

 

106

 

 

 

 

 

 

 

 

 

 

 

106

 

Common stock issued for employee stock benefit plans

 

 

2,465

 

 

 

246

 

 

 

5,963

 

 

 

 

 

 

 

 

 

 

 

6,209

 

Cash dividends paid ($0.080 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22,348

)

 

 

(22,348

)

Balance at March 31, 2019

 

 

295,845

 

 

$

29,584

 

 

$

621,249

 

 

$

(477,572

)

 

$

2,925,170

 

 

$

3,098,431

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

92,593

 

 

 

92,593

 

Net unrealized holding (loss) gain on available-for-

   sale securities

 

 

 

 

 

 

 

 

 

 

205

 

 

 

 

 

 

 

(24

)

 

 

181

 

Common stock issued for employee stock benefit plans

 

 

(54

)

 

 

(5

)

 

 

11,084

 

 

 

 

 

 

 

 

 

 

 

11,079

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

20,000

 

 

 

(20,000

)

 

 

 

 

 

 

 

Common stock issued to directors

 

 

28

 

 

 

3

 

 

 

877

 

 

 

 

 

 

 

 

 

 

 

880

 

Cash dividends paid ($0.080 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22,533

)

 

 

(22,533

)

Balance at June 30, 2019

 

 

295,819

 

 

$

29,582

 

 

$

653,415

 

 

$

(497,572

)

 

$

2,995,206

 

 

$

3,180,631

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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BROWN & BROWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)  

 

 

 

Six months ended

June 30,

 

(in thousands)

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

249,184

 

 

$

206,489

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Amortization

 

 

53,132

 

 

 

52,146

 

Depreciation

 

 

12,189

 

 

 

11,701

 

Non-cash stock-based compensation

 

 

30,087

 

 

 

24,128

 

Change in estimated acquisition earn-out payables

 

 

(10,322

)

 

 

(1,650

)

Deferred income taxes

 

 

(4,766

)

 

 

(5,342

)

Amortization of debt discount and disposal of deferred financing costs

 

 

1,066

 

 

 

988

 

Accretion (amortization) of discounts and premiums, investment

 

 

14

 

 

 

(12

)

Net gain/(loss) on sales of investments, fixed assets and customer accounts

 

 

86

 

 

 

(346

)

Payments on acquisition earn-outs in excess of original estimated payables

 

 

(576

)

 

 

(267

)

Changes in operating assets and liabilities, net of effect from acquisitions and divestitures:

 

 

 

 

 

 

 

 

Premiums, commissions and fees receivable (increase) decrease

 

 

(130,110

)

 

 

(71,614

)

Reinsurance recoverables (increase) decrease

 

 

13,295

 

 

 

(11,939

)

Prepaid reinsurance premiums (increase) decrease

 

 

9,201

 

 

 

(5,674

)

Other assets (increase) decrease

 

 

(2,691

)

 

 

(22,122

)

Premiums payable to insurance companies increase (decrease)

 

 

177,685

 

 

 

116,472

 

Premium deposits and credits due customers increase (decrease)

 

 

(12,103

)

 

 

(12,003

)

Losses and loss adjustment reserve increase (decrease)

 

 

(13,295

)

 

 

12,123

 

Unearned premiums increase (decrease)

 

 

(9,201

)

 

 

5,674

 

Accounts payable increase (decrease)

 

 

101,124

 

 

 

23,773

 

Accrued expenses and other liabilities increase (decrease)

 

 

(47,742

)