For owners and executives of private insurance brokers, Brown & Brown's first quarter earnings call provides a treasure trove of information. Sica | Fletcher believes Brown & Brown is the publicly traded company that is most comparable to private, middle market U.S. insurance brokers. BRO just reported Q1 results and here is our take on it:
1. Impact from COVID-19 Minimal, For Now
Given lockdowns were not entirely underway until the last two weeks of the quarter, we are not surprised by the immaterial effect on BRO in the first quarter, although the company does expect the uncertain economic environment to drive decreased exposure units over the coming quarters. Powell Brown, President and CEO of Brown and Brown Insurance commented:
“The first quarter was an interesting one until early March. We saw the U.S. economy continue to grow and most companies continue to hire employees and invest in their businesses, ultimately driving expansion of exposure units. Then in the middle of March, everything changed due to many stay-at-home or shelter-in-place mandates. We're now seeing companies either terminating employees or putting them on furlough and driving the GDP lower for the first quarter and beyond. We've said in the past that one of the primary drivers of our organic growth is exposure units, so we do expect an impact over the coming quarter...”
2. 34.6% EBITDAC Margin Overall and 36.4% EBITDAC Margin in Retail!
EBITDAC is defined as income before interest, income taxes, depreciation, amortization, and the change in estimated acquisition earn-out payables.
We’re constantly emphasizing to our clients that a 30% margin is the minimum they should be striving to achieve. In Q1 2020, Brown & Brown operated at a 34.6% company-wide EBITDAC margin and a 36.4% EBTIDAC margin in its retail segment, which seems high even for us. We speculate that BRO’s average producer renewal rate of 20% and tailwinds from a hardening market contributed to this strong margin.
If you're a retailer with less than a 25-30% margin, these figures present a good reach goal to shoot for.
3. Revenue Mix = Retail , Wholesale, Programs + Services
Most think of Brown & Brown as a retailer, and are surprised to learn 43% of its revenue comes from non-retail operations. In fact, 35% of BRO’s revenues are generated by wholesale and national programs. Of BRO’s total revenue of $2.3 billion in 2019, here’s the breakdown:
4. Free Cash Flow Machine
In 2019 for every $100 of revenue, BRO generated $26 of free cash flow, which means with $2.3 billion of total revenue, it produced $600 million in free cash flow. That is impressive and shows the impact of the company’s substantial EBITDAC margin.
5. Best-In-Class Balance Sheet
Supported by substantial free cash flows and a healthy EBITDAC margin, Brown & Brown has perhaps the strongest balance sheet in the industry. The typical PE-backed broker is levered at 6.0x EBITDA. That is, for every $1 of EBITDA they have $6 of debt. If BRO followed that same model they would have $4.3 billion of debt given the 6.0x 2019 EBITDAC of $717 million. Yet, BRO shows a net debt of only $1.5 billion: a ratio of 2.1x. Ironically, this is historically significant for BRO given that in 2011 they only had $251 million of debt.
For more details, see BRO’s Q1 presentation.
If you would like to have a discussion about your strategic options in these uncertain times, please reach out to us.