filings.toolsBrown & Brown 10-Q 2022-09-30
Filed 2022-11-03. 7 sections, 250K characters. Original on sec.gov · Markdown · JSON
Cover and 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 September 30, 2022
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) | |||
| 300 North Beach Street**,** Daytona Beach**,** FL | 32114 | |||
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (386) 252-9601
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 November 1, 2022 was 283,222,367.
BROWN & BROWN, INC.
IND****EX
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. 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. 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, possibly 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”:
The future impacts of the COVID-19 pandemic ("COVID-19") and the resulting governmental and societal responses, including the direct and indirect impact of COVID-19 on the U.S. economy, the global economy and the Company’s business, liquidity, customers, insurance carriers and third parties;
An extended slowdown in the markets in which we operate;
The effects of inflation;
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 to 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;
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 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;
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 significant control certain existing shareholders have over the Company;
Risks related to our international operations, which result in additional risks and require more management time and expense than our domestic operations to achieve or maintain profitability;
Changes in data privacy and protection laws and regulations or any failure to comply with such laws and regulations;
Improper disclosure of confidential information;
The potential adverse effect of certain actual or potential claims, regulatory actions or proceedings on our businesses, results of operations, financial condition or liquidity;
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;
A decrease in demand for liability insurance as a result of tort reform legislation;
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 the U.S.-based credit markets that might adversely affect our business, results of operations and financial condition;
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;
Intangible asset risk, including the possibility that our goodwill may become impaired in the future;
The effects of acquisitions on our business relationships, operating results and business generally;
Other risks and uncertainties as may be detailed from time to time in our public announcements and Securities and Exchange Commission (“SEC”) filings; and
Other factors that the Company may not have currently identified or quantified.
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. All forward-looking statements made herein are made only as of the date of this filing, the Company does not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur or of which the Company hereafter becomes aware.
PART I — FINANC****IAL INFORMATION
Item 1. Financial Statements (Unaudited)
BROWN & BROWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| (in millions, except per share data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| REVENUES | ||||||||||||||||
| Commissions and fees | $ | 925.2 | $ | 769.7 | $ | 2,668.2 | $ | 2,309.6 | ||||||||
| Investment income | 1.2 | 0.4 | 1.8 | 0.9 | ||||||||||||
| Other income, net | 1.2 | 0.2 | 2.0 | 2.4 | ||||||||||||
| Total revenues | 927.6 | 770.3 | 2,672.0 | 2,312.9 | ||||||||||||
| EXPENSES | ||||||||||||||||
| Employee compensation and benefits | 470.3 | 395.0 | 1,341.3 | 1,220.1 | ||||||||||||
| Other operating expenses | 169.6 | 101.1 | 450.6 | 291.7 | ||||||||||||
| (Gain)/loss on disposal | — | (0.3 | ) | (0.9 | ) | (4.3 | ) | |||||||||
| Amortization | 43.5 | 29.5 | 108.2 | 88.6 | ||||||||||||
| Depreciation | 11.3 | 9.2 | 28.3 | 25.4 | ||||||||||||
| Interest | 41.5 | 16.2 | 95.8 | 48.8 | ||||||||||||
| Change in estimated acquisition earn-out payables | (26.6 | ) | 23.1 | (33.1 | ) | 20.6 | ||||||||||
| Total expenses | 709.6 | 573.8 | 1,990.2 | 1,690.9 | ||||||||||||
| Income before income taxes | 218.0 | 196.5 | 681.8 | 622.0 | ||||||||||||
| Income taxes | 56.9 | 50.1 | 155.2 | 136.6 | ||||||||||||
| Net income | $ | 161.1 | $ | 146.4 | $ | 526.6 | $ | 485.4 | ||||||||
| Net income per share: | ||||||||||||||||
| Basic | $ | 0.57 | $ | 0.52 | $ | 1.86 | $ | 1.72 | ||||||||
| Diluted | $ | 0.57 | $ | 0.52 | $ | 1.85 | $ | 1.71 | ||||||||
| Dividends declared per share | $ | 0.103 | $ | 0.093 | $ | 0.309 | $ | 0.278 |
See accompanying Notes to Condensed Consolidated Financial Statements.
BROWN & BROWN, INC.
CONDENSED CONSOLIDATED STATE****MENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| (in millions) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Net income | $ | 161.1 | $ | 146.4 | $ | 526.6 | $ | 485.4 | ||||||||
| Foreign currency translation | (172.3 | ) | (2.9 | ) | (304.5 | ) | (6.7 | ) | ||||||||
| Unrealized (loss) gain on available-for-sale debt securities, net of tax | (0.4 | ) | (0.1 | ) | (1.6 | ) | 0.2 | |||||||||
| Comprehensive (loss) income | $ | (11.6 | ) | $ | 143.4 | $ | 220.5 | $ | 478.9 |
See accompanying Notes to Condensed Consolidated Financial Statements.
BROWN & BROWN, INC.
CONDENSED CONSOLIDATE****D BALANCE SHEETS
(UNAUDITED)
| (in millions, except per share data) | September 30, 2022 | December 31, 2021 | ||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 579.5 | $ | 693.2 | ||||
| Fiduciary cash | 1,271.3 | 777.0 | ||||||
| Short-term investments | 11.2 | 12.9 | ||||||
| Commission, fees and other receivables | 625.3 | 522.6 | ||||||
| Fiduciary receivables | 723.4 | 693.7 | ||||||
| Reinsurance recoverable | 1,021.6 | 63.1 | ||||||
| Prepaid reinsurance premiums | 409.9 | 392.2 | ||||||
| Other current assets | 208.6 | 175.6 | ||||||
| Total current assets | 4,850.8 | 3,330.3 | ||||||
| Fixed assets, net | 239.2 | 212.0 | ||||||
| Operating lease assets | 214.5 | 197.0 | ||||||
| Goodwill | 6,522.3 | 4,736.8 | ||||||
| Amortizable intangible assets, net | 1,588.0 | 1,081.5 | ||||||
| Investments | 24.0 | 31.0 | ||||||
| Other assets | 219.5 | 206.8 | ||||||
| Total assets | $ | 13,658.3 | $ | 9,795.4 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Fiduciary liabilities | $ | 1,994.7 | $ | 1,470.7 | ||||
| Losses and loss adjustment reserve | 1,033.5 | 63.1 | ||||||
| Unearned premiums | 430.7 | 392.2 | ||||||
| Accounts payable | 276.3 | 242.7 | ||||||
| Accrued expenses and other liabilities | 435.9 | 456.2 | ||||||
| Current portion of long-term debt | 67.5 | 42.5 | ||||||
| Total current liabilities | 4,238.6 | 2,667.4 | ||||||
| Long-term debt less unamortized discount and debt issuance costs | 4,040.4 | 1,980.4 | ||||||
| Operating lease liabilities | 191.4 | 180.0 | ||||||
| Deferred income taxes, net | 572.3 | 386.8 | ||||||
| Other liabilities | 305.0 | 383.9 | ||||||
| Shareholders’ Equity: | ||||||||
| Common stock, par value $0.10 per share; authorized 560.0 shares; issued 302.9 shares and outstanding 283.3 shares at 2022, issued 301.0shares and outstanding 282.5 shares at 2021, respectively | 30.3 | 30.1 | ||||||
| Additional paid-in capital | 903.4 | 849.4 | ||||||
| Treasury stock, at cost at 19.6 shares at 2022, 18.5 shares at 2021, respectively | (748.0 | ) | (673.9 | ) | ||||
| Accumulated other comprehensive loss | (315.5 | ) | (9.4 | ) | ||||
| Retained earnings | 4,440.4 | 4,000.7 | ||||||
| Total shareholders’ equity | 4,310.6 | 4,196.9 | ||||||
| Total liabilities and shareholders’ equity | $ | 13,658.3 | $ | 9,795.4 |
See accompanying Notes to Condensed Consolidated Financial Statements.
BROWN & BROWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
| Common Stock | ||||||||||||||||||||||||||||
| (in millions, except per share data) | Shares Outstanding | Par Value | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Retained Earnings | Total | |||||||||||||||||||||
| Balance at December 31, 2021 | 282.5 | $ | 30.1 | $ | 849.4 | $ | (673.9 | ) | $ | (9.4 | ) | $ | 4,000.7 | $ | 4,196.9 | |||||||||||||
| Net income | 220.3 | 220.3 | ||||||||||||||||||||||||||
| Net unrealized holding (loss) gain on available-for-sale securities | (0.9 | ) | (0.9 | ) | ||||||||||||||||||||||||
| Foreign currency translation | (2.1 | ) | (2.1 | ) | ||||||||||||||||||||||||
| Shares issued - employee stock compensation plans: | ||||||||||||||||||||||||||||
| Employee stock purchase plan |
Showing the first 8K of 116K characters. Open the full section
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion updates the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and the two discussions should be read together.
GENERAL
Company Overview — Third Quarter of 2022
The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related Notes to those Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. In addition, please see “Information Regarding Non-GAAP Financial Measures” below regarding important information on non-GAAP financial measures contained in our discussion and analysis.
We are a diversified insurance agency, wholesale brokerage, insurance programs and services organization headquartered in Daytona Beach, Florida. As an insurance intermediary, our principal sources of revenue are commissions paid by insurance companies and, to a lesser extent, fees paid directly by customers. Commission revenues generally represent a percentage of the premium paid by an insured and are affected by fluctuations in both premium rate levels charged by insurance companies and the insureds’ underlying “insurable exposure units,” which are units that insurance companies use to measure or express insurance exposed to risk (such as property values, sales or payroll levels) to determine what premium to charge the insured. Insurance companies establish these premium rates based upon many factors, including loss experience, risk profile and reinsurance rates paid by such insurance companies, none of which we control. We also operate two capitalized captive insurance facilities (the "Captives") for the purpose of facilitating additional underwriting capacity, one on a quota share basis, currently focused on property insurance for earthquake and wind exposed properties for policies placed by certain of our MGA businesses, and the other through excess of loss reinsurance layers associated with placements made by one of our MGA businesses focused on personal property primarily in the southeastern United States. The quota share Captive buys reinsurance, limiting, but not fully eliminating the Company's exposure to underwriting losses. The other Captive has capped exposure through contractual aggregate limits on the reinsurance participations it assumes.
The volume of business from new and existing customers, fluctuations in insurable exposure units, changes in premium rate levels, changes in general economic and competitive conditions, a health pandemic, and the occurrence of catastrophic weather events all affect our revenues. For example, higher levels of inflation, which increase the value of insurable exposure units, or a general decline in economic activity, which could decrease the value of insurable exposure units. Conversely, increasing costs of litigation settlements and awards could cause some customers to seek higher levels of insurance coverage. Historically, we have grown our revenues as a result of our focus on net new business and acquisitions. We foster a strong, decentralized sales and service culture, which enables responsiveness to changing business conditions and drives accountability for results.
The term “core commissions and fees” excludes profit-sharing contingent commissions, and therefore represents the revenues earned directly from specific insurance policies sold, and specific fee-based services rendered. The net change in core commissions and fees reflects the aggregate changes attributable to: (i) net new and lost accounts; (ii) net changes in our customers’ exposure units; (iii) net changes in insurance premium rates or the commission rate paid to us by our carrier partners; (iv) the net change in fees paid to us by our customers; and (v) any businesses acquired or disposed of.
We also earn “profit-sharing contingent commissions,” which are commissions based primarily on underwriting results, but in select situations may reflect additional considerations for volume, growth and/or retention. These commissions, which are included in our commissions and fees in the Condensed Consolidated Statements of Income, are accrued throughout the year based on actual premiums written and are primarily received in the first and second quarters of each subsequent year, based upon the aforementioned considerations for the prior year(s). Over the last three years, profit-sharing contingent commissions have averaged approximately 3.0% of commissions and fees revenue.
Fee revenues primarily relate to services other than securing coverage for our customers, and to a lesser extent as fees negotiated in lieu of commissions. Fee revenues are generated by: (i) our Services segment, which is primarily a fee-based business that provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare benefits advocacy services, and claims adjusting services; (ii) our National Programs and Wholesale Brokerage segments, which earn fees primarily for the issuance of insurance policies on behalf of insurance companies; and (iii) our Retail segment in our large-account customer base, where we primarily earn fees for securing insurance for our customers, and in our automobile dealer services (“F&I”) businesses where we earn fees for assisting our customers with creating and selling warranty and service risk management programs. Fee revenues as a percentage of our total commissions and fees, represented 27.4% in 2021 and 26.1% in 2020.
For the three months ended September 30, 2022, our total commissions and fees growth rate was 20.2%, and our consolidated Organic Revenue growth rate was 6.7%.
Historically, investment income has consisted primarily of interest earnings on operating cash and where permitted, on premiums and advance premiums collected and held in a fiduciary capacity before being remitted to insurance companies. Our policy as it relates to the Company’s capital is to invest available funds in high-quality, short-term money-market funds and fixed income investment securities. Investment income also includes gains and losses realized from the sale of investments. Other income primarily reflects legal settlements and other revenues.
Income before income taxes for the three months ended September 30, 2022 increased from the third quarter of 2021 by $21.5 million or 10.9%, driven by net new business, acquisitions completed in the past 12 months, and the year-over-year change in estimated acquisition earn-out payables which were partially offset by increased amortization expense as a result of our recent acquisitions along with increased interest expense associated with higher average debt balances from debt issued and bank financing in the first quarter of 2022 to fund the acquisitions of GRP (Jersey) Holdco Limited and its businesses ("GRP"), Orchid Underwriters Agency and CrossCover Insurance Services ("Orchid") and BdB Limited companies ("BdB") as well as increases in the floating-rate benchmark used on our adjustable rate debt. The change in income before income taxes also reflects: (i) a negative impact to our profit-sharing contingent commissions of approximately $15.0 million and; (ii) losses of approximately $11.5 million associated with our Captives, both relating to the impacts from the estimated insured property losses associated with Hurricane Ian.
Information Regarding Non-GAAP Measures
In the discussion and analysis of our results of operations, in addition to reporting financial results in accordance with generally accepted accounting principles (“GAAP”), we provide references to the following non-GAAP financial measures as defined in Regulation G of the SEC rules: Total R
Showing the first 8K of 106K characters. Open the full section
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign exchange rates and equity prices. We are exposed to market risk through our investments, revolving credit line, term loan agreements and international operations.
Our invested assets are held primarily as cash and cash equivalents, restricted cash, available-for-sale marketable debt securities, non-marketable debt securities, certificates of deposit, U.S. Treasury securities, and professionally managed short-term duration fixed income funds. These investments are subject to interest rate risk. The fair value of our invested assets at September 30, 2022 and December 31, 2021 approximated their respective carrying values due to their short-term duration and therefore, such market risk is not considered to be material.
We do not actively invest or trade in equity securities. In addition, we generally dispose of any significant equity securities received in conjunction with an acquisition shortly after the acquisition date.
As of September 30, 2022, we had $787.5 million outstanding under the Loan Agreement tied to the Secured Overnight Financing Rate (“SOFR”) and $605.0 million of borrowings outstanding under certain credit agreements tied to the overnight London Interbank Offered Rate (“LIBOR”). These aforementioned notes bear interest on a floating basis and are therefore subject to changes in the associated interest expense. The effect of an immediate hypothetical 10% change in interest rates would not have a material effect on our Condensed Consolidated Financial Statements. As of July 2017, the UK Financial Conduct Authority (“FCA”) has urged banks and institutions to discontinue their use of the LIBOR benchmark rate for floating-rate debt, and other financial instruments tied to the rate after 2021. However, on November 30, 2020, the ICE Benchmark Administration Limited (“IBA”), announced that it would consult in early December 2020 on its intention to cease the publication of the one-week and two-month U.S. dollar LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the remaining U.S. dollar LIBOR settings (overnight and one, three, six and 12 months) immediately following the LIBOR publication on June 30, 2023. In connection to the released statement from the IBA, on December 4, 2020, the FCA released a similar statement in support of the continuation of the LIBOR rate beyond 2021. The Alternative Reference Rates Committee (“ARRC”) have recommended the Secured Overnight Financing Rate (“SOFR”) as the best alternative rate to LIBOR post discontinuance and has proposed a transition plan and timeline designed to encourage the adoption of SOFR from LIBOR. Post consultation on March 5, 2021, IBA confirmed its proposed dates to stop publishing the London interbank offered rate for dollars ("USD LIBOR") on a representative basis.
When the Company entered into the Second Amended and Restated Credit on October 27, 2021, it included provisions regarding transition from LIBOR to SOFR in preparation of the LIBOR cessation. On March 31, 2022, the Company entered into the Loan Agreement which bears interest tied to the annual rate for the adjusted Secured Overnight Financing Rate ("Adjusted Term SOFR"). In the coming periods, the Company will assess any other current agreements with benchmark rates tied to LIBOR with an expectation that the Company will be prepared for a termination of LIBOR benchmarks prior to June 30, 2023 when typical rate settings will no longer be available.
The majority of our international operations do not have material activity transacted in currencies other than their functional currency which would expose the Company to transactional currency rate risk. The primary exposure to operational exchange rate risk in our U.K.-based wholesale brokerage business which has a cost base principally denominated in British pounds and a revenue base in several other currencies, but principally in U.S. dollars, which is deemed the functional currency for this business. We are subject to translational exchange rate risk having businesses operating outside of the U.S. in the following functional currencies, Canadian dollar, British pounds and euros. Based upon our foreign currency rate exposure as of September 30, 2022, an immediate 10% hypothetical change of foreign currency exchange rates
would not have a material effect on our Condensed Consolidated Financial Statements.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation (the “Evaluation”) required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15 and 15d-15 under the Exchange Act (“Disclosure Controls”) as of September 30, 2022. Based upon the Evaluation, our CEO and CFO concluded that the design and operation of our Disclosure Controls were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to our senior management, including our CEO and CFO, to allow timely decisions regarding required disclosures.
Changes in Internal Controls
There has not been any change in our internal control over financial reporting identified in connection with the Evaluation that occurred during the quarter ended September 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Internal Control Over Financial Reporting
Our management, including our CEO and CFO, does not expect that our Disclosure Controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
CEO and CFO Certifications
Exhibits 31.1 and 31.2 are the Certifications of the CEO and the CFO, respectively. The Certifications are supplied in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This Item 4 of Part I of this Quarterly Report on Form 10-Q contains the information concerning the evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.
PART II
ITEM 1. Legal Proceedings
In Item 3 of Part I of the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2021, certain information concerning litigation claims arising in the ordinary course of business was disclosed. Such information was current as of the date of filing. During the Company’s fiscal quarter ended September 30, 2022, no new legal proceedings, or material developments with respect to existing legal proceedings, occurred which require disclosure in this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
There were no material changes in the risk factors previously disclosed in Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 2. Unregistered Sales of Equi****ty Securities and Use of Proceeds
Recent Sales of Unregistered Securities
In connection with certain business combinations, the Company issued 252,802 shares of the Company's common stock on July 1, 2022 to the owners of the businesses acquired. The issuance was made in reliance upon the following exemptions or exclusions from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"): Section 4(a)(2) of the Securities Act, Regulation D promulgated under the Securities Act, and Regulation S promulgated under the Securities Act.
Issuer Purchases of Equity Securities
The following table provides information about our repurchase of shares of our common stock during the three months ended September 30, 2022:
| Total number of shares purchased (1) | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum value that may yet be purchased under the plans or programs (2) | |||||||||||||
| July 1, 2022 to July 31, 2022 | 2,533 | $ | 59.51 | — | $ | 249.6 | ||||||||||
| August 1, 2022 to August 31, 2022 | 2,457 | 66.54 | — | 249.6 | ||||||||||||
| September 1, 2022 to September 30, 2022 | 719 | 58.92 | — | 249.6 | ||||||||||||
| Total | 5,709 | $ | 62.46 | — | $ | 249.6 |
(1)
All shares reported in this column are attributable to shares withheld for taxes in connection with vesting of restricted shares awarded under our Performance Stock Plan, our 2010 Stock Incentive Plan.
(2)
On July 18, 2014, the Board of Directors authorized the repurchase of up to $200.0 million of the Company's shares of common stock, and on July 20, 2015, the Board of Directors authorized the repurchase of an additional $400.0 million of the Company's shares of common stock. On May 1, 2019, the Board of Directors approved an additional repurchase authorization amount of $372.5 million to bring the total available share repurchase authorization to approximately $500.0 million. After completing these open market repurchases, the Company’s outstanding Board approved share repurchase authorization is approximately $249.6 million. Between January 1, 2014 and September 30, 2022, the Company repurchased a total of approximately 19.7 million shares for an aggregate cost of approximately $748.0 million.
(3)
Dollar values stated in millions.
Item 6. Exhibits
The following exhibits are filed as a part of this Report:
SIGN****ATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| BROWN & BROWN, INC. | ||
| /s/ R. Andrew Watts | ||
| Date: November 3, 2022 | R. Andrew Watts | |
| Executive Vice President, Chief Financial Officer and Treasurer | ||
| (duly authorized officer, principal financial officer and principal accounting officer) |