filings.toolsBrown & Brown 10-Q 2024-03-31
Filed 2024-04-24. 8 sections, 157K 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 March 31, 2024
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 April 23, 2024 was 285,249,262.
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 inability to hire, retain and develop qualified employees, as well as the loss of any of our executive officers or other key employees;
A cybersecurity attack or any other interruption in information technology and/or data security that may impact our operations or the operations of third parties that support us;
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, successfully integrate acquired businesses into our operations and expand into new markets;
Risks related to our international operations, which may result in additional risks or require more management time and expense than our domestic operations to achieve or maintain profitability;
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 loss of capacity to write business, additional expense, loss of market share or material decrease in our commissions;
The effect of natural disasters on our profit-sharing contingent commissions, insurer capacity or claims expenses within our capitalized captive insurance facilities;
Adverse economic conditions, political conditions, outbreaks of war, disasters, or regulatory changes in states or countries where we have a concentration of our business;
The inability to maintain our culture or a significant change in management, management philosophy or our business strategy;
Fluctuations in our commission revenue as a result of factors outside of our control;
The effects of sustained inflation or higher interest rates;
Claims expense resulting from the limited underwriting risk associated with our participation in capitalized captive insurance facilities;
Risks associated with our automobile and recreational vehicle dealer services (“F&I”) businesses;
Changes in, or the termination of, certain programs administered by the U.S. federal government from which we derive revenues;
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 shareholders have over the Company;
Changes in data privacy and protection laws and regulations or any failure to comply with such laws and regulations;
Improper disclosure of confidential information;
Our ability to comply with non-U.S. laws, regulations and policies;
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 with insurance carriers 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;
Increasing scrutiny and changing laws and expectations from regulators, investors and customers with respect to our environmental, social and governance practices and disclosure;
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;
Changes in current U.S. or global economic conditions, including an extended slowdown in the markets in which we operate;
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;
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;
Future pandemics, epidemics or outbreaks of infectious diseases, and the resulting governmental and societal responses;
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, and 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 March 31, | ||||||||
| (in millions, except per share data) | 2024 | 2023 | ||||||
| REVENUES | ||||||||
| Commissions and fees | $ | 1,237 | $ | 1,108 | ||||
| Investment income | 18 | 7 | ||||||
| Other income, net | 3 | 1 | ||||||
| Total revenues | 1,258 | 1,116 | ||||||
| EXPENSES | ||||||||
| Employee compensation and benefits | 631 | 571 | ||||||
| Other operating expenses | 161 | 161 | ||||||
| Loss/(gain) on disposal | 2 | (6 | ) | |||||
| Amortization | 43 | 41 | ||||||
| Depreciation | 11 | 10 | ||||||
| Interest | 48 | 47 | ||||||
| Change in estimated acquisition earn-out payables | (2 | ) | (2 | ) | ||||
| Total expenses | 894 | 822 | ||||||
| Income before income taxes | 364 | 294 | ||||||
| Income taxes | 71 | 58 | ||||||
| Net income before non-controlling interests | 293 | 236 | ||||||
| Less: Net income attributable to non-controlling interests | — | — | ||||||
| Net income attributable to the Company | $ | 293 | $ | 236 | ||||
| Net income per share: | ||||||||
| Basic | $ | 1.03 | $ | 0.83 | ||||
| Diluted | $ | 1.02 | $ | 0.83 |
See accompanying Notes to Condensed Consolidated Financial Statements.
BROWN & BROWN, INC.
CONDENSED CONSOLIDATED STATE****MENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
| Three months ended March 31, | ||||||||
| (in millions) | 2024 | 2023 | ||||||
| Net income attributable to the Company | $ | 293 | $ | 236 | ||||
| Foreign currency translation (loss)/gain | (32 | ) | 47 | |||||
| Comprehensive income attributable to the Company | $ | 261 | $ | 283 |
See accompanying Notes to Condensed Consolidated Financial Statements.
BROWN & BROWN, INC.
CONDENSED CONSOLIDATE****D BALANCE SHEETS
(UNAUDITED)
| (in millions, except per share data) | March 31, 2024 | December 31, 2023 | ||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 581 | $ | 700 | ||||
| Fiduciary cash | 1,569 | 1,603 | ||||||
| Short-term investments | 10 | 11 | ||||||
| Commission, fees and other receivables | 932 | 790 | ||||||
| Fiduciary receivables | 1,133 | 1,125 | ||||||
| Reinsurance recoverable | 65 | 125 | ||||||
| Prepaid reinsurance premiums | 428 | 462 | ||||||
| Other current assets | 287 | 314 | ||||||
| Total current assets | 5,005 | 5,130 | ||||||
| Fixed assets, net | 272 | 270 | ||||||
| Operating lease assets | 197 | 199 | ||||||
| Goodwill | 7,386 | 7,341 | ||||||
| Amortizable intangible assets, net | 1,592 | 1,621 | ||||||
| Investments | 21 | 21 | ||||||
| Other assets | 333 | 301 | ||||||
| Total assets | $ | 14,806 | $ | 14,883 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Fiduciary liabilities | $ | 2,702 | $ | 2,727 | ||||
| Losses and loss adjustment reserve | 72 | 131 | ||||||
| Unearned premiums | 488 | 462 | ||||||
| Accounts payable | 322 | 459 | ||||||
| Accrued expenses and other liabilities | 421 | 608 | ||||||
| Current portion of long-term debt | 875 | 569 | ||||||
| Total current liabilities | 4,880 | 4,956 | ||||||
| Long-term debt less unamortized discount and debt issuance costs | 3,009 | 3,227 | ||||||
| Operating lease liabilities | 178 | 179 | ||||||
| Deferred income taxes, net | 614 | 616 | ||||||
| Other liabilities | 338 | 326 | ||||||
| Equity: | ||||||||
| Common stock, par value $0.10 per share; authorized 560 shares; issued 305 shares and outstanding 285 shares at 2024, issued 304shares and outstanding 285 shares at 2023, respectively | 30 | 30 | ||||||
| Additional paid-in capital | 1,003 | 1,027 | ||||||
| Treasury stock, at cost 20 shares at 2024, 20 shares at 2023, respectively | (748 | ) | (748 | ) | ||||
| Accumulated other comprehensive loss | (51 | ) | (19 | ) | ||||
| Non-controlling interests | 9 | — | ||||||
| Retained earnings | 5,544 | 5,289 | ||||||
| Total equity | 5,787 | 5,579 | ||||||
| Total liabilities and equity | $ | 14,806 | $ | 14,883 |
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 | Non-Controlling Interest | Total | ||||||||||||||||||||||||
| Balance at December 31, 2023 | 285 | $ | 30 | $ | 1,027 | $ | (748 | ) | $ | (19 | ) | $ | 5,289 | $ | — | $ | 5,579 | |||||||||||||||
| Net income | 293 | 293 | ||||||||||||||||||||||||||||||
| Foreign currency translation | (32 | ) | (32 | ) | ||||||||||||||||||||||||||||
| Shares issued - employee stock compensation plans: | ||||||||||||||||||||||||||||||||
| Employee stock purchase plan | 4 | 4 | ||||||||||||||||||||||||||||||
| Stock incentive plans | 1 | 25 | 25 | |||||||||||||||||||||||||||||
| Net non-controlling interest acquired (disposed) | 1 | 9 | 10 | |||||||||||||||||||||||||||||
| Repurchase shares to fund tax withholdings for non-cash stock-based compensation | (1 | ) | (54 | ) | (54 | ) | ||||||||||||||||||||||||||
| Cash dividends paid ($0.1300 per share) | (38 | ) | (38 | ) | ||||||||||||||||||||||||||||
| Balance at March 31, 2024 | 285 | $ | 30 | $ | 1,003 | $ | (748 | ) | $ | (51 | ) | $ | 5,544 | $ | 9 | $ | 5,787 | |||||||||||||||
| Balance at December 31, 2022 | 283 | $ | 30 | $ | 920 | $ | (748 | ) | $ | (148 | ) | $ | 4,553 | $ | — | $ | 4,607 | |||||||||||||||
| Net income | 236 | 236 | ||||||||||||||||||||||||||||||
| Foreign currency translation | 47 |
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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, 2023, and the two discussions should be read together.
GENERAL
Company Overview — First Quarter of 2024
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 concerning 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 capitalized captive insurance facilities (the "Captives") for the purpose of having additional capacity to place coverage, drive additional revenues and to participate in underwriting results. The Captives focus on property insurance for earthquake and wind exposed properties underwritten by certain of our MGUs and limit the Company's exposure to claims expenses through reinsurance or by only participating in certain tranches of the underwriting.
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 reduction of purchased limits, or the occurrence of catastrophic weather events all affect our revenues. For example, higher levels of inflation, generally increase the value of insurable exposure units, or a decline in economic activity, could decrease the value or amount of insurable exposure units. Conversely, increasing costs of litigation settlements and/or 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 new business, customer retention 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, deductibles or insured limits; (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 Consolidated Statements of Income, are estimated and accrued throughout the year based on actual premiums written and knowledge, to the extent it is available, of losses incurred. Payments are primarily received in the first and second quarters of each subsequent year, based upon the aforementioned considerations for the prior year(s), but may differ from the amount estimated and accrued due to the lack of complete visibility regarding loss information until they are received. Over the last three years, profit-sharing contingent commissions have averaged approximately 3.3% of commissions and fees revenue.
Fee revenues primarily relate to services other than securing coverage for our customers, and for fees negotiated in lieu of commissions. Fee revenues are generated by: (i) our Programs and Wholesale Brokerage segments, which earn fees primarily for the issuance of insurance policies on behalf of insurance companies; and (ii) our Retail segment in our large-account customer base, where we primarily earn fees for securing insurance for our customers, 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, and fees for Medicare Set-aside services, Social Security disability and Medicare benefits advocacy services. Fee revenues as a percentage of our total commissions and fees, were 23.9% in 2023 and 25.8% in 2022.
For the three months ended March 31, 2024, our total commissions and fees growth rate was 11.6%, and our consolidated Organic Revenue growth rate was 8.6%.
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 other miscellaneous revenues.
Income before income taxes for the three months ended March 31, 2024 increased from the first quarter of 2023 by $70 million or 23.8%, driven by net new business, increased profit-sharing contingent commissions and acquisitions completed in the past twelve months.
Effective for fiscal year 2024, in conjunction with the divestiture of certain businesses within our Services segment in the fourth quarter of 2023, we aligned our business from four to three segments, and we now report our financial results in the following three reportable segments: Retail, Programs (formerly National Programs) and Wholesale Brokerage. See Note 12 of the Notes to Condensed Consolidated Financial Statements for further information.
Information Regarding Non-GAAP Financial 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: Organic Revenue, EBITDAC, EBITDAC Margin, EBITDAC - Adjusted and EBITDAC Margin - Adjusted. We present these measures because we believe such information is of interest to the investment community and because we believe it provides additional meaningful methods to evaluate the Company’s operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis due to the impact of certain items that have a high degree of variability, that we believe are not indicative of ongoing performance and that are not easily comparable from period to period. This non-GAAP financial information should be considered in addition to, not in lieu of, the Company’s consolidated income statements and balance sheets as of the relevant date. Consistent with Regulation G, a description of such information is provided below and tabular reconciliations of this supplemental non-GAAP financial information to our most comparable GAAP information are contained in this Quarterly Report on Form 10-Q under “Results of Operations - Segment Information.
We view Organic Revenue and Organic Revenue growth as important indicators when assessing and evaluating our performance on a consolidated basis and for each of our three segments, because they allow us to determine a comparable, but non-GAAP, measurement of revenue growth that is associated with the revenue sources that were a part of our business in both the current and prior year and that are expected to continue in the future. We also view EBITDAC, EBITDAC - Adjusted, EBITDAC Margin and EBITDAC Margin - Adjusted as important indicators when assessing and evaluating our performance, as they present more comparable measurements of our operating margins in a meaningful and consistent manner. As disclosed in our most recent proxy statement, we use Organic Revenue growth, and EBITDAC Margin - Adjusted as key performance metrics for our short-term and long-term incentive compensation plans for executive officers and other key employees.
Beginning January 1, 2024, we no longer exclude Foreign Currency Translation from the calculation of EBITDAC - Adjusted and EBITDAC Margin - Adjusted. Prior periods are presented accordingly on the same basis so that the calculations of EBITDAC - Adjusted and EBITDAC Margin - Adjusted are comparable for both periods. We no longer exclude Foreign Currency Translation from the calculation of these earnings measures because fluctuations in Foreign Currency Translation affect both our revenues and expenses, largely offsetting each other. Therefore, excluding Foreign Currency Translation from these earnings measures provides no meaningful incremental value in evaluating our financial performance.
Non-GAAP Revenue Measures
Organic Revenue is our core commissions and fees less: (i) the core commissions and fees earned for the first twelve months by newly acquired operations; (ii) divested business (core commissions and fees generated from offices, books of business or niches sold or terminated during the comparable period); and (iii) Foreign Currency Translation (as defined below). 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. Organic Revenue can be expressed as a dollar amount or a percentage rate when describing Organic Revenue growth.
Non-GAAP Earnings Measures
EBITDAC is defined as income before interest, income taxes, depreciation, amortization and the change in estimated acquisition earn-out payables.
EBITDAC Margin is defined as EBITDAC divided by total revenues.
EBITDAC - Adjusted is defined as EBITDAC, excluding (i) (gain)/loss on disposal, (ii) for 2022 and 2023, Acquisition/Integration Costs (as defined below) and (iii) for 2023, the 1Q23 Nonrecurring Cost (as defined below).
EBITDAC Margin - Adjusted is defined as EBITDAC - Adjusted divided by total revenues.
Definitions Related to Certain Components of Non-GAAP Measures
“Acquisition/Integration Costs” means the acquisition and integration costs (e.g., costs associated with regulatory filings, legal/accounting services, due diligence and the costs of integrating our information technology systems) arising out of our acquisitions of GRP (Jersey) Holdco Limited and its business ("GRP"), Orchid Underwriters Agency and CrossCover Insurance Services, and BdB Limited companies, which are not considered to be normal, recurring or part of the ongoing operations.
“Foreign Currency Translation” means the period-over-period impact of foreign currency translation, which is calculated by applying current-year foreign exchange rates to the various functional currencies in our business to our reporting currency of U.S. dollars for the same period in the prior year.
“1Q23 Nonrecurring Cost” means approximately $11 million expensed and substantially paid in the first quarter of 2023 to resolve a business matter, which is not considered to be normal, recurring or part of the ongoing operations.
“(Gain)/loss on disposal” a caption on our consolidated statements of income which reflects net proceeds received as compared to net book value related to sales of books of business and other divestiture transactions, such as the disposal of a business through sale or closure.
Our industry peers may provide similar supplemental non-GAAP information with respect to one or more of these measures, although they may not use the same or comparable terminology and may not make identical adjustments and, therefore comparability may be limited. This supplemental non-GAAP financial information should be considered in addition to, and not in lieu of, the Company's Condensed Consolidated Financial Statements.
Acquisitions
Part of our continuing business strategy is to attract high-quality insurance intermediaries and service organizations to join our operations. From 1993 through the first quarter of 2024, we acquired 650 insurance intermediary operations.
Critical Accounting Policies
We have had no changes to our Critical Accounting Policies as described in our most recent Form 10-K for the year ended December 31, 2023. We believe that of our significant accounting and reporting policies, the more critical policies include our accounting for revenue recognition, business combinations and purchase price allocations, intangible asset impairments, non-cash stock-based compensation and reserves for litigation. In particular, the accounting for these areas is subject to uncertainty because it requires significant use of judgment to be made by management. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or consolidated results of operations. Refer to Note 1 in the “Notes to Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, 2023 for details regarding our critical and significant accounting policies.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023
The following discussion and analysis regarding results of operations and liquidity and capital resources should be considered in conjunction with the accompanying Condensed Consolidated Financial Statements and related Notes.
Financial information relating to our condensed consolidated financial results is as follows:
| Three months ended March 31, | ||||||||||||
| (in millions, except percentages) | 2024 | 2023 | % Change | |||||||||
| REVENUES | ||||||||||||
| Core commissions and fees | $ | 1,191 | $ | 1,081 | 10.2 | % | ||||||
| Profit-sharing contingent commissions | 46 | 27 | 70.4 | % | ||||||||
| Investment income | 18 | 7 | 157.1 | % | ||||||||
| Other income, net | 3 | 1 | 200.0 | % | ||||||||
| Total revenues | 1,258 | 1,116 | 12.7 | % | ||||||||
| EXPENSES | ||||||||||||
| Employee compensation and benefits | 631 | 571 | 10.5 | % | ||||||||
| Other operating expenses | 161 | 161 | — | % | ||||||||
| (Gain)/loss on disposal | 2 | (6 | ) | (133.3 | %) | |||||||
| Amortization | 43 | 41 | 4.9 | % | ||||||||
| Depreciation | 11 | 10 | 10.0 | % | ||||||||
| Interest | 48 | 47 | 2.1 | % | ||||||||
| Change in estimated acquisition earn-out payables | (2 | ) | (2 | ) | — | % | ||||||
| Total expenses | 894 | 822 | 8.8 | % | ||||||||
| Income before income taxes | 364 | 294 | 23.8 | % | ||||||||
| Income taxes | 71 | 58 | 22.4 | % | ||||||||
| Net income before non-controlling interests | 293 | 236 | 24.2 | % | ||||||||
| Less: Net income attributable to non-controlling interests | — | — | ||||||||||
| Net income attributable to the Company | $ | 293 | $ | 236 | 24.2 | % | ||||||
| Income Before Income Taxes Margin (1) | 28.9 | % | 26.3 | % | ||||||||
| EBITDAC - Adjusted (2) | $ | 466 | $ | 398 | 17.1 | % | ||||||
| EBITDAC Margin - Adjusted (2) | 37.0 | % | 35.7 | % | ||||||||
| Organic Revenue growth rate (2) | 8.6 | % | 12.6 | % | ||||||||
| Employee compensation and benefits relative to total revenues | 50.2 | % | 51.2 | % | ||||||||
| Other operating expenses relative to total revenues | 12.8 | % | 14.4 | % | ||||||||
| Capital expenditures | $ | 13 | $ | 12 | 8.3 | % | ||||||
| Total assets at March 31, | $ | 14,806 | $ | 13,400 | 10.5 | % |
(1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues.
(2) A non-GAAP financial measure.
NMF = Not a meaningful figure
Commissions and Fees
Commissions and fees, including profit-sharing contingent commissions and earned premiums, for the three months ended March 31, 2024 increased $129 million to $1,237 million, or 11.6%, over the same period in 2023. Core commissions and fees revenue for the first quarter of 2024 increased $110 million or 10.2%, composed of: (i) approximately $91 million of net new and renewal business, which reflects an Organic Revenue growth rate of 8.6%; (ii) $41 million from acquisitions that had no comparable revenues in the same period of 2023; (iii) an increase from the impact of Foreign Currency Translation of $5 million; and (iv) an offsetting decrease of $27 million related to commissions and fees revenue from businesses or books of business divested in the preceding twelve months. Profit-sharing contingent commissions for the first quarter of 2024 increased by $19 million, compared to the same period in 2023. This increase was driven primarily by (i) improved underwriting results and qualifying for certain profit-sharing contingent commissions in 2023 that had not been accrued as we did not qualify for them in the prior year and (ii) recent acquisitions.
Investment Income
Investment income for the three months ended March 31, 2024 increased $11 million, from the same period in 2023. The increase was primarily driven by higher average interest rates compared to the prior year.
Other Income
Other income for the three months ended March 31, 2024 increased $2 million to $3 million as compared to the same period in 2023. Other income consists primarily of miscellaneous income and therefore can fluctuate between comparable periods.
Employee Compensation and Benefits
Employee compensation and benefits expense as a percentage of total revenues was 50.2% for the three months ended March 31, 2024 as compared to 51.2% for the three months ended March 31, 2023, and increased 10.5%, or $60 million. This increase included $24 million of compensation costs related to stand-alone acquisitions that had no comparable costs in the same period of 2023. Therefore, employee compensation and benefits expense attributable to those offices that existed in the same time periods of 2024 and 2023 increased by $36 million, or 6.3%. This underlying employee compensation and benefits expense increase was primarily related to: (i) an increase in staff salaries and bonuses attributable to new hires; (ii) an increase in producer compensation associated with revenue growth and (iii) an increase in non-cash stock-based compensation driven by the strong financial performance of the Company, partially offset by (iv) employee compensation and benefits associated with businesses divested in the fourth quarter of 2023.
Other Operating Expenses
Other operating expenses represented 12.8% of total revenues for the first quarter of 2024 as compared to 14.4% for the first quarter of 2023. Other operating expenses for the first quarter of 2024 were flat compared to the same period of 2023. This includes: (i) $11 million of other operating expenses related to stand-alone acquisitions that had no comparable costs in the same period of 2023; (ii) increased information technology related costs; (iii) and to a lesser extent, increased variable costs associated with revenue growth, offset by (iv) expenses of approximately $11 million recorded in the first quarter of 2023 to resolve a business matter which was not considered to be normal or a recurring part of ongoing operations and (v) other operating expenses associated with businesses divested in the first quarter of 2023.
(Gain)/Loss on Disposal
Gain on disposal for the first quarter of 2024 decreased $8 million from the first quarter of 2023. Activity for (Gain)/Loss on disposal is associated with book of business sales or sales of entire businesses. Although we do not routinely sell businesses or customer accounts, we periodically sell an office or a book of business (one or more customer accounts) that we believe does not produce reasonable margins or demonstrate a potential for adequate growth, or because doing so is in the Company’s best interest.
Amortization
Amortization expense for the first quarter of 2024 increased $2 million, or 4.9%, compared to the first quarter of 2023. This change reflects the amortization of new intangibles from businesses acquired within the past twelve months, net of certain intangible assets becoming fully amortized or written off in the (Gain)/Loss on disposal.
Depreciation
Depreciation expense for the first quarter of 2024 increased $1 million, or 10.0%, compared to the first quarter of 2023. Changes in depreciation expense reflect net additions of fixed assets resulting from businesses acquired in the past twelve months and the addition of fixed assets resulting from business initiatives, net of the impact of fixed assets that became fully depreciated or written off in the gain or loss on disposal.
Interest Expense
Interest expense for the first quarter of 2024 increased $1 million, or 2.1%, compared to the first quarter of 2023.
Change in Estimated Acquisition Earn-Out Payables
Accounting Standards Codification (“ASC”) Topic 805-Business Combinations is the authoritative guidance requiring an acquirer to recognize 100% of the fair value of acquired assets, including goodwill, and assumed liabilities (with only limited exceptions) upon initially obtaining control of an acquired entity. Additionally, the fair value of contingent consideration arrangements (such as earn-out purchase price arrangements) at the acquisition date must be included in the purchase price consideration. The recorded purchase price for acquisitions includes an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in these earn-out obligations are required to be recorded in the Condensed Consolidated Statements of Income when incurred or reasonably estimated. Estimations of potential earn-out obligations are typically based upon future earnings of the acquired operations or entities, usually for periods ranging from one to three years.
The net charge or credit to the Consolidated Statements of Income for the period is the combination of the net change in the estimated acquisition earn-out payables liability, and the accretion of the present value discount on those liabilities.
As of March 31, 2024 and 2023, the fair values of the estimated acquisition earn-out payables were reevaluated and measured at fair value on a recurring basis using unobservable inputs (Level 3) as defined in ASC 820-Fair Value Measurement. The resulting net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the three months ended March 31, 2024 and 2023 were as follows:
| Three months ended March 31, | ||||||||
| (in millions) | 2024 | 2023 | ||||||
| Change in fair value of estimated acquisition earn-out payables | $ | (4 | ) | $ | (4 | ) | ||
| Interest expense accretion | 2 | 2 | ||||||
| Net change in earnings from estimated acquisition earn-out payables | $ | (2 | ) | $ | (2 | ) |
For the three months ended March 31, 2024 and 2023, the fair value of estimated earn-out payables was re-evaluated. The result was a decrease of $4 million in both periods which are credits, exclusive of interest accretion, in the Condensed Consolidated Statements of Income.
As of March 31, 2024, estimated acquisition earn-out payables totaled $203 million, of which $118 million was recorded as accounts payable and $85 million was recorded as other non-current liabilities.
Income Taxes
The effective tax rate on income from operations for the three months ended March 31, 2024 and 2023 was 19.5% and 19.7% respectively.
RESULTS OF OPERATIONS — SEGMENT INFORMATION
As discussed in Note 12 to the Condensed Consolidated Financial Statements, we operate three reportable segments: Retail, Programs, and Wholesale Brokerage. On a segmented basis, changes in amortization, depreciation and interest expenses generally result from activity associated with acquisitions. Likewise, other income consists primarily of miscellaneous income and therefore can fluctuate between comparable periods. As such, in evaluating the operational efficiency of a segment, management focuses on the Organic Revenue growth rate and EBITDAC Margin.
The reconciliation of commissions and fees included in the Condensed Consolidated Statements of Income to Organic Revenue, a non-GAAP financial measure, for the three months ended March 31, 2024, and the growth rates for Organic Revenue for the three months ended March 31, 2024, including by segment, are as follows:
| 2024 | Retail (1) | Programs | Wholesale Brokerage | Total | ||||||||||||||||||||||||||||
| (in millions, except percentages) | 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||
| Commissions and fees | $ | 804 | $ | 731 | $ | 292 | $ | 254 | $ | 141 | $ | 123 | $ | 1,237 | $ | 1,108 | ||||||||||||||||
| Total change | $ | 73 | $ | 38 | $ | 18 | $ | 129 | ||||||||||||||||||||||||
| Total growth % | 10.0 | % | 15.0 | % | 14.6 | % | 11.6 | % | ||||||||||||||||||||||||
| Profit-sharing contingent commissions | (14 | ) | (15 | ) | (26 | ) | (8 | ) | (6 | ) | (4 | ) | (46 | ) | (27 | ) | ||||||||||||||||
| Core commissions and fees | $ | 790 | $ | 716 | $ | 266 | $ | 246 | $ | 135 | $ | 119 | $ | 1,191 | $ | 1,081 | ||||||||||||||||
| Acquisitions | (19 | ) | — | (20 | ) | — | (2 | ) | — | (41 | ) | — | ||||||||||||||||||||
| Dispositions | — | (1 | ) | — | (26 | ) | — | — | — | (27 | ) | |||||||||||||||||||||
| Foreign Currency Translation | 4 | — | 1 | 5 | ||||||||||||||||||||||||||||
| Organic Revenue (2) | $ | 771 | $ | 719 | $ | 246 | $ | 220 | $ | 133 | $ | 120 | $ | 1,150 | $ | 1,059 | ||||||||||||||||
| Organic Revenue growth (2) | $ | 52 | $ | 26 | $ | 13 | $ | 91 | ||||||||||||||||||||||||
| Organic Revenue growth rate (2) | 7.2 | % | 11.8 | % | 10.8 | % | 8.6 | % |
(1) The Retail segment includes commissions and fees reported in the “Other” column of the Segment Information in Note 12 of this 10-Q of the Notes to the Condensed Consolidated Financial Statements, which includes corporate and consolidation items.
(2) A non-GAAP financial measure.
The reconciliation of commissions and fees included in the Condensed Consolidated Statements of Income to Organic Revenue, a non-GAAP financial measure, for the three months ended March 31, 2023, including by segment, and the growth rates for Organic Revenue for the three months ended March 31, 2023, including by segment, are as follows:
| 2023 | Retail (1) | Programs | Wholesale Brokerage | Total | ||||||||||||||||||||||||||||
| (in millions, except percentages) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||
| Commissions and fees | $ | 731 | $ | 615 | $ | 254 | $ | 186 | $ | 123 | $ | 103 | $ | 1,108 | $ | 904 | ||||||||||||||||
| Total change | $ | 116 | $ | 68 | $ | 20 | $ | 204 | ||||||||||||||||||||||||
| Total growth % | 18.9 | % | 36.6 | % | 19.4 | % | 22.6 | % | ||||||||||||||||||||||||
| Profit-sharing contingent commissions | (15 | ) | (18 | ) | (8 | ) | (8 | ) | (4 | ) | (3 | ) | (27 | ) | (29 | ) | ||||||||||||||||
| Core commissions and fees | 716 | 597 | 246 | 178 | 119 | 100 | 1,081 | 875 | ||||||||||||||||||||||||
| Acquisition revenues | $ | (79 | ) | $ | — | $ | (20 | ) | $ | — | $ | (15 | ) | $ | — | $ | (114 | ) | $ | — | ||||||||||||
| Dispositions | (9 | ) | — | (4 | ) | — | (3 | ) | — | (16 | ) | |||||||||||||||||||||
| Foreign Currency Translation | — | — | — | — | ||||||||||||||||||||||||||||
| Organic Revenue (2) | $ | 637 | $ | 588 | $ | 226 | $ | 174 | $ | 104 | $ | 97 | $ | 967 | $ | 859 | ||||||||||||||||
| Organic Revenue growth (2) | $ | 49 | $ | 52 | $ | 7 | $ | 108 | ||||||||||||||||||||||||
| Organic Revenue growth rate (2) | 8.3 | % | 29.9 | % | 7.2 | % | 12.6 | % |
(1) The Retail segment includes commissions and fees reported in the “Other” column of the Segment Information in Note 12 of the Notes to the Condensed Consolidated Financial Statements, which includes corporate and consolidation items.
(2) A non-GAAP financial measure.
The reconciliation of income before incomes taxes, included in the Condensed Consolidated Statement of Income, to EBITDAC, a non-GAAP measure, and EBITDAC - Adjusted, a non-GAAP measure, and Income Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, and EBITDAC Margin - Adjusted, a non-GAAP measure, for the three months ended March 31, 2024, including by segment, is as follows:
| (in millions) | Retail | Programs | Wholesale Brokerage | Other | Total | |||||||||||||||
| Total Revenues | $ | 806 | $ | 298 | $ | 142 | $ | 12 | $ | 1,258 | ||||||||||
| Income before income taxes | 238 | 101 | 41 | (16 | ) | 364 | ||||||||||||||
| Income Before Income Taxes Margin(1) | 29.5 | % | 33.9 | % | 28.9 | % | NMF | 28.9 | % | |||||||||||
| Amortization | 29 | 11 | 3 | — | 43 | |||||||||||||||
| Depreciation | 5 | 4 | 1 | 1 | 11 | |||||||||||||||
| Interest | 19 | 8 | 3 | 18 | 48 | |||||||||||||||
| Change in estimated acquisition earn-out payables | (1 | ) | 1 | (2 | ) | — | (2 | ) | ||||||||||||
| EBITDAC(2) | 290 | 125 | 46 | 3 | 464 | |||||||||||||||
| EBITDAC Margin(2) | 36.0 | % | 41.9 | % | 32.4 | % | NMF | 36.9 | % | |||||||||||
| (Gain)/loss on disposal | 1 | 1 | — | — | 2 | |||||||||||||||
| EBITDAC - Adjusted(2) | $ | 291 | $ | 126 | $ | 46 | $ | 3 | $ | 466 | ||||||||||
| EBITDAC Margin - Adjusted(2) | 36.1 | % | 42.3 | % | 32.4 | % | NMF | 37.0 | % |
(1) “Income Before Income Taxes Margin” is defined as income before income taxes divided by total revenues.
(2) A non-GAAP financial measure.
NMF = Not a meaningful figure
The reconciliation of income before incomes taxes, included in the Condensed Consolidated Statement of Income, to EBITDAC, a non-GAAP measure, and EBITDAC - Adjusted, a non-GAAP measure, and Income Before Income Taxes Margin to EBITDAC Margin - Adjusted, a non-GAAP measure, for the three months ended March 31, 2023, including by segment, is as follows:
| (in millions) | Retail | Programs | Wholesale Brokerage | Other | Total | |||||||||||||||
| Total Revenues | $ | 733 | $ | 255 | $ | 123 | $ | 5 | $ | 1,116 | ||||||||||
| Income before income taxes | 214 | 75 | 31 | (26 | ) | 294 | ||||||||||||||
| Income Before Income Taxes Margin(1) | 29.2 | % | 29.4 | % | 25.2 | % | NMF | 26.3 | % | |||||||||||
| Amortization | 28 | 11 | 3 | (1 | ) | 41 | ||||||||||||||
| Depreciation | 5 | 3 | 1 | 1 | 10 | |||||||||||||||
| Interest | 22 | 10 | 3 | 12 | 47 | |||||||||||||||
| Change in estimated acquisition earn-out payables | (3 | ) | — | — | 1 | (2 | ) | |||||||||||||
| EBITDAC(2) | 266 | 99 | 38 | (13 | ) | 390 | ||||||||||||||
| EBITDAC Margin(2) | 36.3 | % | 38.8 | % | 30.9 | % | NMF | 34.9 | % | |||||||||||
| (Gain)/loss on disposal | — | (6 | ) | — | — | (6 | ) | |||||||||||||
| Acquisition/Integration Costs | 3 | — | — | — | 3 | |||||||||||||||
| 1Q23 Nonrecurring Cost | — | — | — | 11 | 11 | |||||||||||||||
| EBITDAC - Adjusted(2) | $ | 269 | $ | 93 | $ | 38 | $ | (2 | ) | $ | 398 | |||||||||
| EBITDAC Margin - Adjusted(2) | 36.7 | % | 36.5 | % | 30.9 | % | NMF | 35.7 | % |
(1) “Income Before Income Taxes Margin” is defined as income before income taxes divided by total revenues.
(2) A non-GAAP financial measure.
NMF = Not a meaningful figure
Retail Segment
The Retail segment provides a broad range of insurance products and services to commercial, public and quasi-public, professional and individual insured customers, and non-insurance risk-mitigating products through our F&I businesses. Approximately 78% of the Retail segment’s commissions and fees revenue is commission based.
Financial information relating to our Retail segment for the three months ended March 31, 2024 and 2023 is as follows:
| Three months ended March 31, | ||||||||||||
| (in millions, except percentages) | 2024 | 2023 | % Change | |||||||||
| REVENUES | ||||||||||||
| Core commissions and fees | $ | 789 | $ | 717 | 10.0 | % | ||||||
| Profit-sharing contingent commissions | 14 | 15 | (6.7 | %) | ||||||||
| Investment income | 1 | — | NMF | |||||||||
| Other income, net | 2 | 1 | 100.0 | % | ||||||||
| Total revenues | 806 | 733 | 10.0 | % | ||||||||
| EXPENSES | ||||||||||||
| Employee compensation and benefits | 400 | 363 | 10.2 | % | ||||||||
| Other operating expenses | 115 | 104 | 10.6 | % | ||||||||
| (Gain)/loss on disposal | 1 | — | NMF | |||||||||
| Amortization | 29 | 28 | 3.6 | % | ||||||||
| Depreciation | 5 | 5 | — | % | ||||||||
| Interest | 19 | 22 | (13.6 | %) | ||||||||
| Change in estimated acquisition earn-out payables | (1 | ) | (3 | ) | (66.7 | %) | ||||||
| Total expenses | 568 | 519 | 9.4 | % | ||||||||
| Income before income taxes | $ | 238 | $ | 214 | 11.2 | % | ||||||
| Income Before Income Taxes Margin (1) | 29.5 | % | 29.2 | % | ||||||||
| EBITDAC - Adjusted (2) | $ | 291 | $ | 269 | 8.2 | % | ||||||
| EBITDAC Margin - Adjusted (2) | 36.1 | % | 36.7 | % | ||||||||
| Organic Revenue growth rate (2) | 7.2 | % | 8.3 | % | ||||||||
| Employee compensation and benefits relative to total revenues | 49.6 | % | 49.5 | % | ||||||||
| Other operating expenses relative to total revenues | 14.3 | % | 14.2 | % | ||||||||
| Capital expenditures | $ | 7 | $ | 5 | 40.0 | % | ||||||
| Total assets at March 31, | $ | 8,557 | $ | 7,913 | 8.1 | % |
(1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues.
(2) A non-GAAP financial measure.
NMF = Not a meaningful figure
The Retail segment’s total revenues for the three months ended March 31, 2024 increased 10.0%, or $73 million, as compared to the same period in 2023, to $806 million. The $72 million increase in core commissions and fees revenue was driven by: (i) approximately $19 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2023; (ii) an increase of $52 million related to net new and renewal business; (iii) an increase from the impact of Foreign Currency Translation of $4 million; and (iv) a decrease of $1 million related to commissions and fees recorded in 2023 from businesses since divested. Profit-sharing contingent commissions for the first quarter of 2024 decreased 6.7%, or $1 million, as compared to the same period in 2023, to $14 million. This decrease was primarily the result of not qualifying for certain profit-sharing contingent commissions in 2024 that we qualified for in the prior year. The Retail segment’s total commissions and fees increased by 10.0%, and the Organic Revenue growth rate was 7.2% for the first quarter of 2024. The Organic Revenue growth rate was driven by net new business written during the preceding twelve months and growth on renewals of existing customers. Renewal business was impacted by rate increases with continued increases in property and casualty, employee benefits and auto.
Income before income taxes for the three months ended March 31, 2024 increased 11.2%, or $24 million, as compared to the same period in 2023, to $238 million. The primary factors driving this increase were: (i) a decrease in intercompany interest expense and (ii) the profit associated with the net increase in revenue as described above.
EBITDAC - Adjusted for the three months ended March 31, 2024 increased 8.2%, or $22 million, as compared to the same period in 2023, to $291 million. EBITDAC Margin - Adjusted for the three months ended March 31, 2024 decreased to 36.1% from 36.7% in the same period in 2023. The decrease in EBITDAC Margin - Adjusted was driven by: (i) higher non-cash stock-based compensation; (ii) higher performance-based compensation associated with increased level of Organic Revenue growth and (iii) a decrease in profit-sharing contingent commissions which was partially offset by, (iv) the net increase in revenue as described above.
Programs Segment
The Programs segment manages over 60 programs supported by over 100 well-capitalized carrier partners. In most cases, the insurance carriers that support these programs have delegated underwriting and, in many instances, claims-handling authority to our programs operations. These programs are generally distributed through a nationwide network of independent agents and Brown & Brown retail agents, and offer targeted products and services designed for specific industries, trade groups, professions, public entities and market niches. This segment also operates our write-your-own flood insurance carrier, WNFIC and operates two Captives. WNFIC’s underwriting business consists of policies written on behalf of and fully ceded to the NFIP, as well as excess flood policies, which are fully reinsured in the private market. The Captives provide additional underwriting capacity that enable growth in core commissions and fees, and allow us to participate in underwriting results with limited exposure to claims expenses. The Company has traditionally participated in underwriting profits through profit-sharing contingent commissions. These Captives give us another way to continue to participate in underwriting results while limiting exposure to claims expenses. The Captives focus on property insurance for earthquake and wind exposed properties underwritten by certain of our MGUs. The Captives limit the Company's exposure to claims expenses either through reinsurance or by participating in limited tranches of the underwriting risk.
The Programs segment operations can be grouped into five broad categories: Professional Programs, Personal Lines Programs, Commercial Programs, Public Entity-Related Programs and Specialty Programs. Approximately 76% of the Programs segment’s commissions and fees revenue is commission based.
Financial information relating to our Programs segment for the three months ended March 31, 2024 and 2023 is as follows:
| Three months ended March 31, | ||||||||||||
| (in millions, except percentages) | 2024 | 2023 | % Change | |||||||||
| REVENUES | ||||||||||||
| Core commissions and fees | $ | 266 | $ | 246 | 8.1 | % | ||||||
| Profit-sharing contingent commissions | 26 | 8 | NMF | |||||||||
| Investment income | 5 | 1 | NMF | |||||||||
| Other income, net | 1 | — | NMF | |||||||||
| Total revenues | 298 | 255 | 16.9 | % | ||||||||
| EXPENSES | ||||||||||||
| Employee compensation and benefits | 109 | 103 | 5.8 | % | ||||||||
| Other operating expenses | 63 | 59 | 6.8 | % | ||||||||
| (Gain)/loss on disposal | 1 | (6 | ) | (116.7 | )% | |||||||
| Amortization | 11 | 11 | — | % | ||||||||
| Depreciation | 4 | 3 | 33.3 | % | ||||||||
| Interest | 8 | 10 | (20.0 | )% | ||||||||
| Change in estimated acquisition earn-out payables | 1 | — | NMF | |||||||||
| Total expenses | 197 | 180 | 9.4 | % | ||||||||
| Income before income taxes | $ | 101 | $ | 75 | 34.7 | % | ||||||
| Income Before Income Taxes Margin (1) | 33.9 | % | 29.4 | % | ||||||||
| EBITDAC - Adjusted (2) | $ | 126 | $ | 93 | 35.5 | % | ||||||
| EBITDAC Margin - Adjusted (2) | 42.3 | % | 36.5 | % | ||||||||
| Organic Revenue growth rate (2) | 11.8 | % | 29.9 | % | ||||||||
| Employee compensation and benefits relative to total revenues | 36.6 | % | 40.4 | % | ||||||||
| Other operating expenses relative to total revenues | 21.1 | % | 23.1 | % | ||||||||
| Capital expenditures | $ | 5 | $ | 5 | — | % | ||||||
| Total assets at March 31, | $ | 4,221 | $ | 3,652 | 15.6 | % |
(1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues.
(2) A non-GAAP financial measure.
NMF = Not a meaningful figure
The Programs segment’s total revenue for the three months ended March 31, 2024 increased 16.9%, or $43 million, as compared to the same period in 2023, to $298 million. The $20 million increased in core commissions and fees revenue was driven by: (i) approximately $20 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2023; (ii) approximately $26 million of new business, net renewal business, and fee revenues; and (iii) an offsetting decrease of $26 million related to commissions and fees revenue from businesses divested in the preceding twelve months. Profit-sharing contingent commissions for the first
quarter of 2024 increased approximately $18 million as compared to the first quarter of 2023. This increase was driven by improved underwriting results, an increase of $7 million resulting from the finalization of the calculation of profit-sharing contingent commissions that were estimated and accrued in 2023 and for which a similar increase is not expected to recur in the first quarter of 2025, and acquisitions completed in the past twelve months.
The Programs segment’s total commissions and fees increased by 8.1%, and the Organic Revenue growth rate was 11.8% for the three months ended March 31, 2024. The Organic Revenue growth was driven by strong new business and good retention, which was partially offset by lower claims revenue in the current year.
Income before income taxes for the three months ended March 31, 2024 increased 34.7%, or $26 million, as compared to the same period in 2023, to $101 million. Income before income taxes increased due to the drivers of EBITDAC - Adjusted described below along with an increase in depreciation, a decrease in intercompany interest expense, and an increase in estimated acquisition earn-out payables.
EBITDAC - Adjusted for the three months ended March 31, 2024 increased 35.5%, or $33 million, from the same period in 2023, to $126 million. EBITDAC Margin - Adjusted for the three months ended March 31, 2024 increased to 42.3% from 36.5% in the same period in 2023. EBITDAC - Adjusted grew due to higher profit-sharing contingent commissions, strong Organic Revenue growth, leveraging our expense base, and the sale of certain third-party claims administration and adjusting services businesses in the fourth quarter of 2023.
Wholesale Brokerage Segment
The Wholesale Brokerage segment markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers, including Brown & Brown retail agents. Approximately 86% of the Wholesale Brokerage segment’s commissions and fees revenue is commission based.
Financial information relating to our Wholesale Brokerage segment for the three months ended March 31, 2024 and 2023 is as follows:
| Three months ended March 31, | ||||||||||||
| (in millions, except percentages) | 2024 | 2023 | % Change | |||||||||
| REVENUES | ||||||||||||
| Core commissions and fees | $ | 135 | $ | 119 | 13.4 | % | ||||||
| Profit-sharing contingent commissions | 6 | 4 | 50.0 | % | ||||||||
| Investment income | 1 | — | NMF | |||||||||
| Other income, net | — | — | — | % | ||||||||
| Total revenues | 142 | 123 | 15.4 | % | ||||||||
| EXPENSES | ||||||||||||
| Employee compensation and benefits | 77 | 67 | 14.9 | % | ||||||||
| Other operating expenses | 19 | 18 | 5.6 | % | ||||||||
| (Gain)/loss on disposal | — | — | — | % | ||||||||
| Amortization | 3 | 3 | — | % | ||||||||
| Depreciation | 1 | 1 | — | % | ||||||||
| Interest | 3 | 3 | — | % | ||||||||
| Change in estimated acquisition earn-out payables | (2 | ) | — | NMF | ||||||||
| Total expenses | 101 | 92 | 9.8 | % | ||||||||
| Income before income taxes | $ | 41 | $ | 31 | 32.3 | % | ||||||
| Income Before Income Taxes Margin (1) | 28.9 | % | 25.2 | % | ||||||||
| EBITDAC - Adjusted (2) | $ | 46 | $ | 38 | 21.1 | % | ||||||
| EBITDAC Margin - Adjusted (2) | 32.4 | % | 30.9 | % | ||||||||
| Organic Revenue growth rate (2) | 10.8 | % | 7.2 | % | ||||||||
| Employee compensation and benefits relative to total revenues | 54.2 | % | 54.5 | % | ||||||||
| Other operating expenses relative to total revenues | 13.4 | % | 14.6 | % | ||||||||
| Capital expenditures | $ | 1 | $ | — | NMF | |||||||
| Total assets at March 31, | $ | 1,617 | $ | 1,441 | 12.2 | % |
(1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues.
(2) A non-GAAP financial measure.
NMF = Not a meaningful figure
The Wholesale Brokerage segment’s total revenues for the three months ended March 31, 2024 increased 15.4%, or $19 million, as compared to the same period in 2023, to $142 million. The $16 million net increase in core commissions and fees revenue was driven primarily by: (i) $13 million related to new business and net renewal business; and (ii) $2 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2023 and ; (iii) an increase from the impact of Foreign Currency Translation of $1 million. Profit-sharing contingent commissions for the first quarter of 2024 increased $2 million compared to the first quarter of 2023, primarily driven by qualifying for certain profit-sharing contingent commissions in 2023 that we did not qualify for in the prior year so therefore were not accrued and, to a lesser extent, by acquired businesses in the last year. The Wholesale Brokerage segment’s growth rate for total commissions and fees was 13.4%, and the Organic Revenue growth rate was 10.8% for the first quarter of 2024. The Organic Revenue growth rate was driven by strong new business and good retention, as well as modest rate increases for most lines of coverage, except for professional liability which continued to generally see rate decreases.
Income before income taxes for the three months ended March 31, 2024 increased 32.3%, or $10 million, as compared to the same period in 2023, to $41 million. The increase was due to: (i) the growth of EBITDAC - Adjusted described below; and (ii) a decrease in the change in estimated acquisition earn-out payables.
EBITDAC - Adjusted for the three months ended March 31, 2024 increased 21.1%, or $8 million, as compared to the same period in 2023, to $46 million. EBITDAC Margin - Adjusted for the three months ended March 31, 2024 increased to 32.4% from 30.9%, as compared to the same period in 2023. EBITDAC Margin - Adjusted increased due to: (i) total revenue growth; (ii) leveraging our expense base; and (iii) higher profit sharing contingent commissions, but partially offset by higher non-cash stock-based compensation.
Other
As discussed in Note 12 of the Notes to Condensed Consolidated Financial Statements, the “Other” column in the Segment Information table includes any revenue and expenses not allocated to reportable segments, and corporate-related items, including the intercompany interest expense charges to reporting segments.
LIQUIDITY AND CAPITAL RESOURCES
The Company seeks to maintain a conservative balance sheet and strong liquidity profile. Our capital requirements to operate as an insurance intermediary are low and we have been able to grow and invest in our business through a combination of cash that has been generated from operations, the disciplined use of debt and the issuance of equity as part of the purchase price consideration to acquire certain businesses. We have the ability to utilize our Revolving Credit Facility, which as of March 31, 2024 provided up to $600 million in additional available cash.
The Revolving Credit Facility contains an expansion option for up to an additional $500 million of borrowing capacity, subject to the approval of participating lenders. On March 31, 2022, the Company entered into a Loan Agreement (the “Loan Agreement”) which provided term loan capacity of $800 million. Additionally, the Company may, subject to satisfaction of certain conditions, including receipt of additional term loan commitments by new or existing lenders, increase either Term Loan Commitment under the existing Loan Agreement or the term loans issued thereunder or issue new tranches of term loans in an aggregate additional amount of up to $400 million. Including the expansion options under all existing credit agreements, the Company has access to up to $1,500 million of incremental borrowing capacity as of March 31, 2024.
We believe that we have access to additional funds, if needed, through the capital markets or private placements to obtain further debt financing under the current market conditions. The Company believes that its existing cash, cash equivalents, short-term investment portfolio and funds generated from operations, together with the funds available under the Revolving Credit Facility, will be sufficient to satisfy its normal liquidity needs, including principal payments on our long-term debt, for at least the next twelve months and in the long term.
Contractual Cash Obligations
As of March 31, 2024, our contractual cash obligations were as follows:
| Payments Due by Period | ||||||||||||||||||||
| (in millions) | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | |||||||||||||||
| Long-term debt | $ | 3,912 | $ | 875 | $ | 487 | $ | 650 | $ | 1,900 | ||||||||||
| Other liabilities | 227 | 14 | 20 | 17 | 176 | |||||||||||||||
| Operating leases (1) | 249 | 51 | 88 | 56 | 54 | |||||||||||||||
| Interest obligations | 1,403 | 176 | 264 | 174 | 789 | |||||||||||||||
| Maximum future acquisition contingent payments (2) | 566 | 259 | 307 | — | — | |||||||||||||||
| Total contractual cash obligations (3) | $ | 6,357 | $ | 1,375 | $ | 1,166 | $ | 897 | $ | 2,919 |
(1)
Includes $1 million of future lease commitments expected to commence later in 2024.
(2)
Includes $203 million of current and non-current estimated acquisition earn-out payables. Earn-out payables for acquisitions not denominated in U.S. dollars are measured at the current foreign exchange rate. Three of the estimated acquisition earn-out payables assumed in connection with the acquisition of GRP included provisions with no maximum potential earn-out amount. The amount recorded for these acquisitions as of March 31, 2024 is $5 million. The Company deems a significant increase to this amount to be unlikely.
(3)
Does not include approximately $37 million of current liability for a dividend of $0.1300 per share approved by the Board of Directors on April 22, 2024.
Debt
Total debt as of March 31, 2024 was $3,884 million net of unamortized discount and debt issuance costs, which was an increase of $88 million compared to December 31, 2023. The increase includes: a net drawdown on the Revolving Credit Facility of $100 million, offset by; the scheduled principal payments related to our various existing floating-rate debt term notes in total of $12 million.
During the three months ended March 31, 2024, the Company repaid $6 million of principal related to the Second Amended and Restated Credit Agreement term loan through quarterly scheduled principal payments. The Second Amended and Restated Credit Agreement term loan had an outstanding balance of $213 million as of March 31, 2024. The Company's next scheduled principal payment is due June 30, 2024 and is equal to $6 million.
During the three months ended March 31, 2024, the Company repaid $6 million of principal related to the Term Loans issued under the Term A-2 Loan Commitment (“Term A-2 Loans”) through quarterly scheduled principal payments. The Term A-2 Loans had an outstanding balance of $450 million as of March 31, 2024. The Company’s next scheduled principal payment is due June 30, 2024 and is equal to $13 million.
On February 13, 2024, the Company drew down on the Revolving Credit Facility $150 million and the proceeds were used for general corporate purposes. During the three months ended March 31, 2024, the Company repaid $50 million of the outstanding balance on Revolving Credit Facility. The Revolving Credit Facility balance outstanding is $200 million as of March 31, 2024.
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 March 31, 2024 and December 31, 2023 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 March 31, 2024, we had $1,162 million outstanding under the Second Amended and Restated Credit Agreement and the Loan Agreement tied to the Secured Overnight Financing Rate (“SOFR”). These agreements 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.
The majority of our international operations do not have material transactions in currencies other than their functional currency which would expose the Company to transactional currency rate risk. We are subject to translational exchange rate risk having businesses operating outside of the U.S. in the following functional currencies, British pounds, Canadian dollar, and euros. Based upon our foreign currency rate exposure as of March 31, 2024, 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 March 31, 2024. 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 March 31, 2024, 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, 2023, 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 March 31, 2024, 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, 2023.
ITEM 2. Unregistered Sales of Equi****ty Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information about our repurchase of shares of our common stock during the three months ended March 31, 2024:
| 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 of shares that may yet be purchased under the plans or programs (2) | |||||||||||||
| January 1, 2024 to January 31, 2024 | 121,128 | $ | 71.67 | — | $ | 249 | ||||||||||
| February 1, 2024 to February 28, 2024 | 461,711 | 84.19 | — | 249 | ||||||||||||
| March 1, 2024 to March 31, 2024 | 83,547 | 84.94 | — | 249 | ||||||||||||
| Total | 666,386 | $ | 82.01 | — | $ | 249 |
(1)
All shares reported in this column are attributable to shares withheld for taxes in connection with vesting of restricted shares awarded under our 2010 Stock Incentive Plan and 2019 Stock Incentive Plan.
(2)
On July 18, 2014, the Board of Directors authorized the repurchase of up to $200 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 million of the Company's shares of common stock. On May 1, 2019, the Board of Directors approved an additional repurchase authorization amount of $373 million to bring the total available share repurchase authorization to approximately $500 million. After completing these open market repurchases, the Company’s outstanding Board approved share repurchase authorization is approximately $249 million. Between January 1, 2014 and March 31, 2024, the Company repurchased a total of approximately 20 million shares for an aggregate cost of approximately $748 million.
(3)
Dollar values stated in millions.
Item 5. Other Information
During the first quarter of 2024, none of the Company’s officers or directors adopted or terminated any “Rule 10b5-1 trading arrangement”
or any “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.
Item 6. Exhibits
The following exhibits are filed as a part of this Report:
SIGN****ATURES
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: April 23, 2024 | R. Andrew Watts | |
| Executive Vice President, Chief Financial Officer and Treasurer | ||
| (duly authorized officer, principal financial officer and principal accounting officer) |