Today's Viewpoint: A MarshBerry Publication

Brown & Brown, Inc. Announces 1Q20 Earnings

Highlights from the BRO earnings release and analyst call

Brown & Brown, Inc. (BRO) was the first of the publicly traded brokers to report 1Q20. The company posted a strong first quarter with 5.6% organic revenue growth and earnings per share (“EPS”) above analyst expectations. Below are highlights from the earnings release and analyst call.

  • There was minimal impact from COVID-19 on the first quarter in which BRO reduced revenue related to employee benefits (“EB”) and worker’s comp (“WC”) commissions from expected workforce reductions (captured under specific accounting standards in the current quarter). This was mostly related to policies that were bound in January and February where expectations were reduced in March. This adjustment was based on current forecasts and could be further reduced throughout the year, but if forecasts are correct, would eliminate the future impact of payroll audits. This impacted the company’s retail segment’s organic growth by almost 3% during 1Q20.
  • The revenue reduction was essentially offset in the first quarter by reductions to expected earnout payments from recent acquisitions related to lowered revenue forecasts, largely as a result of the pandemic.
  • BRO noted it is expecting the largest revenue impact to appear in its third quarter results but believes 2Q20 growth could be negative. It estimates there is about a 60-day lag before unemployment increases start to impact its EB and WC lines of business. New business is expected to slow, but retention is expected to increase although it is not yet known if these will offset each other.
  • BRO is seeing payment delays from customers and requests (which are in some cases being granted by carriers) to adjust exposure down mid- policy term.
  • The outlook is for full-year revenue growth to be slightly positive or down low-to-mid single digits. This broad range is due to still limited ability to quantify the impact of the global pandemic.
  • BRO added $39M of annual revenue through five acquisitions (including its first program business in Canada) during the quarter where valuations remained high and competition intense. The company is seeing sellers slow down deal timelines to understand the impact COVID-19 may have on their business and valuations, though the company still expects to potentially close some transactions during 2Q20.
  • BRO plans to draw $250M of its $700M available credit on its revolver before May 1,2020, in order to help fund its recently announced acquisition of Loan Protector Insurance Services (expected to close in 2Q20) and bolster its cash position as it navigates the COVID-19 pandemic.
  • BRO continues to see rate increases on most coverage lines, similar with the past several quarters, which it expects will continue through 2Q20. Rate increases have been primarily driven by loss experience to date, however, the future rate environment is uncertain.

Overall, the theme of the call was uncertainty. BRO suggested a wide range of possible outcomes for the year in regards to organic growth, contingent income, potential acquisition closings, profitability, rates, etc. Duration of the national shutdown as a result of the global pandemic seems to be the biggest factor that can swing results for the year from the lower to the higher range of the outlook.

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This earnings summary has been prepared by Marsh, Berry & Co., Inc. and is not intended to provide investment recommendations on any company. It is not a research report, as such term is defined by applicable laws and regulations, and it does not contain sufficient information upon which to make an investment decision. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any securities, financial instruments or to participate in any particular trading strategy. These materials are based solely on information contained in publicly available documents and Marsh, Berry & Co., Inc. has not independently attempted to investigate or to verify such information.

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