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Highlights from the BRO earnings release and analyst call

Brown & Brown, Inc. (BRO) reported 3Q earnings results this morning, beating analyst estimates by almost $30M in revenue and $0.09 in adjusted Earnings Per Share (EPS), more than 20% over the $0.43 EPS consensus estimate. BRO is the first of the public brokers to report earnings this week. Below are key takeaways from their analyst call earlier today:

  • BRO management was pleased with its 4.3% organic growth performance (compared to 0.5% in 2Q), after expectations earlier in the year had caused the company to believe 3Q would be the weakest organic growth quarter of the year. BRO noted that many sectors of the economy where it was expecting to see reduced employee benefits (“EB”) participation and commissions did not materialize during the quarter as clients called workers back or did not implement significant headcount reductions. Year-to-Date (YTD), the company’s organic revenue growth is 3.5% and overall management indicated that the trajectory of the business is “positive.” However, results could still be impacted by potential shutdowns in 4Q. There is less visibility beyond 6-9 months and the company feels its organic growth could be “bumpy” over that time period vs. a smooth and steady recovery from 2Q organic growth levels.
  • The company’s Retail segment was up 4.1% organically driven by rate increases (on average 3-7% in admitted markets, with auto up 10%+) and strong retention, along with some improving new business trends. The Wholesale and National Programs divisions were up more than 8% organically each with similar drivers to the Retail segment.
  • Profitability improved vs. last year as well, and EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) margin for 3Q was 32.8%, up 1.3% vs. the prior year largely due to cost savings in travel & entertainment and other areas that relate to COVID-19 changes in its business practices. BRO expects a slow and steady increase in some of these “managed” expenses as the business environment returns to “normal” over the next several quarters. Management does not expect much margin expansion opportunity next year and indicated margin pressure is more likely.
  • BRO discussed the current merger & acquisition environment and described the “pause” that was taken during the year as probably a six-week slowdown, compared to what was initially expected to be more on the magnitude of six months. The company is starting to see accelerated interest from owners believing there may be capital gains or other tax changes on the horizon. BRO closed six transactions in 3Q, representing an annual revenue run rate of $31M, bringing the YTD total to 16 transactions at an annual run rate of $117M.
  • Management noted that it reversed some of the reductions that were made to earnout expectations earlier in the year as it is seeing certain business rebound faster than expected. Adjusted earnings results exclude this impact.
  • The company issued $700M of 10.5-year bonds in September, with a coupon rate of 2.375%, a favorable rate when compared a company issuance in March 2019 at a 4.5% annual rate.

Overall, BRO reported largely better than expected underlying trends (fewer reductions to headcounts in its EB practice, returning new business generation, strong retention). However, the company did caution that ongoing significant rate increases could eventually lead to some insureds proactively reducing exposure units to offset these hikes after being hit with several rounds of increases. Other uncertainties (potential for a new round of shutdowns, election implications, etc.) also may pose some risk to exposure units in the coming quarters.

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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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