I have been thinking about my experiences in the insurance business. As I have written about in this blog, I really enjoy the insurance business. I find it helpful to periodically review the financials of industry firms. Some examples of reviews that led to me posting on this blog: my review of GoodRx, my review of Optum, my review of Cigna, my review of eHealth. Sometimes, when I peruse SEC filings, I am poking based upon a specific question, such as the post about Optum where I was curious about the “reliance by UnitedHealth on the treatment of drug manufacturer rebates on its earnings, and how its subsidiary… fits into the story.” This morning, though, I thought it would be interesting to look at one insurance broker’s performance from a general perspective. I chose Brown and Brown based upon the firm’s size, my familiarity with them in the marketplace, and a personal curiosity about how the firm organizes financial performance by segment. Primary exhibits I reviewed to construct this blog post are the $BRO most recent (Q1, ’21) 10Q and (’20) 10K.
Industry Structure
I wrote a blog post about insurance brokerage market structure in 2020. A few highlights and updates from the first half of 2021:
Below I pasted a recent ranking of top US brokers by BI, as well as the corresponding 2015 rankings. Aside from some swapping of ranks and M&A, the Top 10 is essentially unchanged. Even in the next 10 spots, besides the continued emergence of Alera and growth of Acrisure, both of whom have (or had) capital relationships with Genstar, there is a high level of stability in these rankings.
General background and segmentation of the firm
I started my review of Brown and Brown with a review of the firm’s EV and valuation relative to other large, public insurance agencies. I pulled this from Fidelity and pasted below:
Obviously, Brown and Brown is much smaller than Marsh, Willis, Gallagher, or Aon. Yet, the multiple-on-sales assigned to Brown and Brown is materially better than the other firms on this list. I wonder if this is a function of growth, profitability, or something else? (I am not inquiring into this today…)
As far as Brown and Brown’s business, and its segmentation of services for financial disclosure, the following was provided in the most recent 10Q (red highlights and boldface added by me):
Brown & Brown, Inc., a Florida corporation, and its subsidiaries (collectively, “Brown & Brown” or the “Company”) is a diversified insurance agency, wholesale brokerage, insurance programs and service organization that markets and sells insurance products and services, primarily in the property, casualty and employee benefits areas. Brown & Brown’s business is divided into four reportable segments. The Retail Segment provides a broad range of insurance products and services to commercial, public and quasi-public entities, professional and individual insured customers, and non-insurance riskmitigating products through our automobile dealer services (“F&I”) businesses. The National Programs Segment, which acts as a managing general agent (“MGA”), provides professional liability and related package products for certain professionals, a range of insurance products for individuals, flood coverage, and targeted products and services designated for specific industries, trade groups, governmental entities and market niches, all of which are delivered through a nationwide network of independent agents, including Brown & Brown retail agents. The Wholesale Brokerage Segment markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers, as well as Brown & Brown retail agents. The Services Segment 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.
Source: https://investor.bbinsurance.com/static-files/aba4ba8c-275d-43ae-b919-a01b1fe705e9
I worked with the numbers a bit and generated the following pie-chart in a Jupyter notebook on the 2020 distribution of revenue across segments:
When I look at the distribution of revenue over these two years, the following details emerge:
- Retail: share of total revenue shrinks modestly from 57.16% to 56.35%
- National Programs: share of total revenue increases from 21.67% to 23.37%
- Wholesale Brokerage: share of total revenue increases modestly from 12.96% to 13.50%
- Services: share of total revenue shrinks from 8.10% to 6.66%
- Other: share of total revenue increases modestly from 0.11% to 0.12%
Based on my background in employee benefits consulting leadership, I am always curious about the proportion of employee benefits revenue as a percentage of agency revenue, as well as further segmentation across markets (e.g. micro group, small business, mid-market, and larger cases)… Most publicly held agencies do not disclose their segmentation at this level. However, we can get a proxy of mid-market employee benefits revenue by looking at (publicly available) DOL data. I update a SQL database periodically with this data. Here is the distribution of cases, and revenue, for 100+ participant health and welfare plans brokered by Brown and Brown during the year 2019:
| client_state | commissions | fees | commissions_and_fees | clients | filings |
| FL | $10,239,160 | $3,571,232 | $13,810,392 | 188 | 194 |
| MA | $9,949,480 | $2,588,637 | $12,538,117 | 122 | 133 |
| NY | $9,703,539 | $929,452 | $10,632,991 | 191 | 218 |
| CA | $5,472,146 | $549,743 | $6,021,889 | 77 | 77 |
| TX | $3,344,785 | $1,314,021 | $4,658,806 | 80 | 82 |
| WA | $3,009,915 | $172,291 | $3,182,206 | 62 | 73 |
| NV | $1,701,182 | $543,543 | $2,244,725 | 31 | 36 |
| TN | $1,750,938 | $468,117 | $2,219,055 | 41 | 41 |
| NJ | $1,695,627 | $62,694 | $1,758,321 | 35 | 37 |
| MI | $1,220,247 | $489,807 | $1,710,054 | 27 | 32 |
| PA | $1,244,250 | $301,441 | $1,545,691 | 53 | 54 |
| KY | $1,246,130 | $90,062 | $1,336,192 | 27 | 28 |
| OR | $1,026,153 | $130,058 | $1,156,211 | 38 | 42 |
| OH | $948,196 | $200,015 | $1,148,211 | 32 | 36 |
| LA | $806,330 | $279,864 | $1,086,194 | 15 | 15 |
| Total | $60,974,996 | $13,410,916 | $74,385,912 | 1,233 | 1,343 |
| Top 15 | $53,358,078 | $11,690,977 | $65,049,055 | 1,019 | 1,098 |
| % of total | 88% | 87% | 87% | 83% | 82% |
I think this seems, at first blush, to understate the amount of mid-market EB revenue I would expect from Brown and Brown. I re-ran some state-specific “drill downs” and the query seems reasonable, such as the two qualifiers under WHERE ins_broker_name LIKE ‘BROWN &%’ OR ins_broker_name LIKE ‘BROWN AND%’. In any event, the results above are those generated from this query, which do not seem to “tie out” to the BI rankings for 2019 (which I posted below.)
Profitability
Brown and Brown, Inc. is a profitable firm. The differences in profitability for Q1 2021 and Q1 2020 are included below.
When I compare the full-year profitability measures across 2020 and the prior (less unusual) year, the profitability matches up as follows:
Growth
Initially, I was interested in how Q1 2021 compared, from a revenue growth perspective, against the (reasonably normal) Q1 2020. The details are included below.
I was interested in a longer-term view of the growth, including by segment. Here are the results of a review of two annual reports, spanning six years:
The growth in Retail and Wholesale segments stand out to me here. The growth in Services, at 3.7%, seems weak, especially when considering its relatively low EBITDAC margin and continued weakness in Q1 2021.
Corporate development continues to play an important role in Brown and Brown’s growth. I pulled the 2020 and 2019 transactions from annual reports. Here are some details:
I haven’t parsed the percentage of transaction values by segment, but it is obvious 2019 was almost 100% dedicated to Retail, while 2020 was more diversified. I think it is interesting, but not surprising, to observe nearly all the deals being conducted in cash (rather than stock). If you exclude the sundry category of “Other”, here is a summary of 2020 and 2019 transactions:
| Year | Transactions | Cash payments (total) | Earn outs recorded (total) | Average cash payment per transaction | Average earn out per transaction | Average earn out / Average cash payment |
| 2020 | 18 | $ 707,627 | $ 122,899 | $ 39,313 | $ 6,828 | 17.4% |
| 2019 | 12 | $ 319,595 | $ 73,846 | $ 26,633 | $ 6,154 | 23.1% |
Capital structure
I was curious about variation in capital structure across large, publicly held insurance brokers. A quick search on Fidelity’s website reveals the following:
I also reviewed some third-party research reports on Brown and Brown. Refinitive provides an analysis that uses Willis ($WLTW), Gallagher ($AJG), Aon ($AON), Goosehead ($GSHD), Waterdrop ($WDP), eHealth ($EHTH), Gohealth ($GOCO), BRP Group ($BRP), Huize Holdings ($HUIZ), and Kingstone Companies ($KINS) as peers. Some detail about leverage included below:
This is a good start for my Saturday review of Brown and Brown, Inc. I am interested in delving further into the rationale behind the firm’s decision to hold, and continue to invest into, the Services segment; I wonder what steps the organization is taking to create cost and revenue synergies, especially within the Retail segment, but also across segments. I am also curious about the trends across public brokers relative to capital structure, and how these generally compare against the large number of privately held and PE-backed insurance agencies. But, these are questions for another day!
Thank you for reading my blog! I hope you have a wonderful weekend!