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William Haddad

Dan Pan

BRO AT A GLANCE

P/E ► 17.3 AVG EV/EBITDA ► 11.4 AVG ROA ► 7.6% AVG ROE ► 13.1% AVG Debt to Equity ► 0.698 AVG Current Ratio ► 39.9 VERY HIGH Interest Coverage Ratio ► 19.1 AVG

 

 

 

 

 

 

Brown & Brown (NYSE:BRO) is the world's sixth largest insurance broker by revenue.^{[1] [2]} BRO has offices that sell property and casualty insurance in 38 states, with the most locations in Florida.^[3] BRO does not take on any underwriting risks itself, profiting predominantly from commissions paid to them by the insurance companies that they sell insurance for.^[4] BRO also sells professional insurance to dentists, lawyers, and opticians^[5], and provides third party administration for companies who choose to self-insure.^[6]

In 2007, BRO's internal revenue growth rate was negative for the first time since BRO began tracking that number in 1997. ^[7] Commissions and fees also decreased by 3.4% or $27.9 million in 2007 due to lower industry-wide commisions and the slowing home building market.^[8] In 2007, the government of Florida started an insurance company offering below-market rates so that homeowners can afford hurricane insurance, which hurts private insurers like Brown & Brown.^[9]

To combat the reduced internal growth, BRO made 41 acquisitions with estimated annual revenues of $108.3 million in 2007.^[10] In January and February of 2008, BRO purchased seven insurance intermediaries, two customer accounts, and one general insurance agency for $71.08 million.^[11]

Company Overview

From 2005 to 2007, BRO's total revenues have increased 22.13% and net income has increased 26.84%. ^[12]

Business Segments

BRO 2007 Commissions and Fees Revenue ^[13]

• Retail Division (60.20% Total Revenues, 65.53% Income Before Taxes) sells insurance to commercial, professional, and individual customers. This segment sells property, legal liability, workers compensation, life, and health insurance.^[14] The retail division also offers risk management consulting services to their clients.^[15] Commission and fees revenue for the retail division has increased 11.94% since 2005. ^[16]

• Wholesale Brokerage Division (19.15% Total Revenues, 11.51% Income Before Taxes) sells insurance to other retail insurance brokers, including BRO itself. This division is also involved in offering reinsurance as well as specialty insurance. In August 2007, BRO acquired The Combined Group, Inc., which has estimated annualized revenues of $12.6 million, to expand this arm of BRO. ^[17] Since 2005, this segment's commission and fees revenue has increased 39.63%. ^[18]

• National Programs Division (16.86% Total Revenues, 19.39% Income Before Taxes) consists of two units, the professional programs and specialized programs. The professional programs sells insurance specialized for professionals, such as dentists, lawyers, and optometrists. The specialized programs offers products tailored for specific industries, trade groups, niche markets, and public and quasi-public entities. Since 2005, commission and fees revenue has increased 17.92%. ^[19]

• Services Division (3.79% Total Revenues, 3.56% Income Before Taxes) provides insurance-related administrative services to clients. This segment provides risk management and third party administration services for workers' compensation and liability plans. Other offerings of this segment include medical utilization management services and Medicare compliance related services. Since 2005, commission and fees revenue for the services division has 33.65%. ^[20]

Business and Financial Metrics

On October 20, 2008, BRO announced 3rd Quarter 2008 net income per share of $0.29 down from $0.33 per share the same quarter of 2007. ^[21] The Chairman and CEO, J. Hyatt Brown, named falling property and casualty insurance rates as the main contributor to the decrease. ^[22] In that same press release, BRO announced that in the first 3 quarters of 2008 BRO has made 44 transactions with estimated annualized revenues of $100.2 million.^[23] Jim W. Henderson, the Vice Chairman and Chief Operating Officer, said that the acquisitions would continue as soft market conditions and a weak economy are making mergers and acquisitions more attractive.^[24] BRO also announced on October 22, 2008 that it would be increasing its quarterly dividend to 7.5 cents per share, a 7.1% increase.^[25]

^[26]

Key Trends and Forces

Continued Slump in Home Construction Reduces Customers

The current downturn in housing prices has led to reduced home building and lower house prices. Brown's retail segment specializes in insuring the home building segment and professional liability coverage for title agents. The rate of home building has decreased and insurance sales have also been hit by the slump. This segment also operates primarily in Florida, which was one of the hardest areas in the housing slump. Moreover, the reduced housing prices will lower the amount people insure through their property insurance. Since people will be paying less is premiums, BRO will receive less in commissions.^[27]

Government-backed Insurance Corporation Increases Competition

Brown & Brown has been hurt by government regulation in Florida. After devastating natural disasters, it is common for the government to create an organization which will provide insurance to homeowners. This results from an inability for people to purchase insurance from private insurers, who have also been hurt form paying out claims. An example of this type of government organization, Citizens' Property Insurance Corporation, which establishes a residual market for property insurance in Florida, has reduced rates and become the most competitive insurance broker in the Florida market. This puts private insurers at a significant disadvantage because the government program, which was initially designed to be a short term insurer of last resort, has become the cheapest option.^[28]

Soft Insurance Market Hurts Profits

After two consecutive years of lower-than-average hurricane losses, insurance carriers are cutting prices to win new business. ^[29] According to the Council of Insurance Agents & Brokers in Washington, premiums for commercial property/casualty insurance decreased 11% in the 3rd Q of 2008 from a year before. ^[30] As the price of insurance decreases, the commissions BRO earns for selling the insurance also go down. Continued softness in the insurance markets means reduced commission revenue for BRO.

Global Expansion Demands Large Investment

Thus far, BRO has solely operated in the U.S., but has announced plans to expand to the U.K.^[31] Challenges of the expansion include adapting to different government regulation and insurance markets, and establishing the infrastructure to support a U.K. insurance brokerage operation. The U.K. insurance brokerage market is already very established, as large competitors such as Arthur J. Gallagher are active there. ^[32]

Competition

The insurance brokerage is a highly competitive business where companies compete mainly on the basis of prices as well as the services that the company can provide. The six largest brokers of business in the world and the U.S. are BRO, Marsh & McLennan, Aon, Willis, Arthur J. Gallagher, and Wells Fargo (WFC).^{[33] [34]} BRO is the world's 6th largest 3rd party property/casualty claims administrator and the 6th largest insurance broker based on revenues. ^{[35] [36]} These five companies are the five largest competitors of BRO however competition comes from all over in this industry. The top 50 companies in size control only 20% of the market, showing how many players there are. ^[37] Moreover, BRO faces competition from government entities such as the Citizens Property Insurance Corporation, which are created by the government to provide people who live in areas often hit by natural disasters to receive affordable insurance. The competition which BRO faces will only increase as they enter into the new U.K. market.^[38]

References

1. ↑ Kevin Edison and Karen Tucker (July 16, 2007). World’s 10 largest insurance brokers.
2. ↑ Kevin Edison and Karen Tucker (July 16, 2007). 100 largest brokers of U.S. business.
3. ↑ BRO 2007 10-k pg. 3-4  
4. ↑ BRO 2007 10-k pg. 3  
5. ↑ BRO 2007 10-k pg. 8  
6. ↑ BRO 2007 10-k pg. 9  
7. ↑ BRO 2007 10-k pg. 5  
8. ↑ BRO 2007 10-k pg. 5  
9. ↑ BRO 2007 10-k pg. 5  
10. ↑ BRO 2007 10-k pg. 5  
11. ↑ BRO 2007 10-k pg. 6  
12. ↑ BRO 2007 10-k pg. 3, 21  
13. ↑ BRO 2007 10-k pg. 3, 21  
14. ↑ BRO 2007 10-k pg. 3, 7  
15. ↑ BRO 2007 10-k pg. 3, 7  
16. ↑ BRO 2007 10-k pg. 3, 6  
17. ↑ BRO 2007 10-k pg. 3, 7  
18. ↑ BRO 2007 10-k pg. 3, 6  
19. ↑ BRO 2007 10-k pg. 3, 6  
20. ↑ BRO 2007 10-k pg. 3, 6  
21. ↑ Brown & Brown, Inc. Announces an 8.1% Increase in Commissions.
22. ↑ Brown & Brown, Inc. Announces an 8.1% Increase in Commissions.
23. ↑ Brown & Brown, Inc. Announces an 8.1% Increase in Commissions.
24. ↑ Brown & Brown, Inc. Announces an 8.1% Increase in Commissions.
25. ↑ Brown & Brown, Inc. Announces an Increase in Its Quarterly Cash.
26. ↑ BRO 2007 10-k pg. 21  
27. ↑ BRO 2007 10-k pg. 3, 22  
28. ↑ BRO 2007 10-k pg. 3, 5  
29. ↑ Andrew Frye (July 18, 2008). Brown & Brown Leads Brokerages Lower on Profit Drop.
30. ↑ Commercial P/C Premiums Continue to Drop in Third Quarter (October 22, 2008).
31. ↑ BRO 2007 10-k pg. 3, 13  
32. ↑ BRO 2007 10-k pg. 3, 13-14  
33. ↑ Kevin Edison and Karen Tucker (July 16, 2007). World’s 10 largest insurance brokers.
34. ↑ Kevin Edison and Karen Tucker (July 16, 2007). 100 largest brokers of U.S. business.
35. ↑ Kevin Edison and Karen Tucker (July 16, 2007). World’s 10 largest insurance brokers.
36. ↑ Kevin Edison and Karen Tucker (July 16, 2007). 100 largest brokers of U.S. business.
37. ↑ Hoover's Insurance Agency Overview
38. ↑ BRO 2007 10-k pg. 3, 13-14  
39. ↑ Yahoo Insurance Brokers Overview