Brown & Brown, Inc. (BRO)

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Brown & Brown (BRO)

Q4 2013 Earnings Call

February 04, 2014 8:30 am ET

Executives

J. Powell Brown - Chief Executive Officer, President and Director

Cory T. Walker - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

Analysts

Sarah DeWitt - Barclays Capital, Research Division

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Gregory Locraft - Morgan Stanley, Research Division

Adam Klauber - William Blair & Company L.L.C., Research Division

Joshua D. Shanker - Deutsche Bank AG, Research Division

Elyse Greenspan - Wells Fargo Securities, LLC, Research Division

Dan Farrell - Sterne Agee & Leach Inc., Research Division

Ryan J. Byrnes - Janney Montgomery Scott LLC, Research Division

Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division

Kenneth G. Billingsley - Compass Point Research & Trading, LLC, Research Division

John Campbell - Stephens Inc., Research Division

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Presentation

Operator

Good day, and welcome to the Brown & Brown Fourth Quarter Earnings Conference Call. Today's conference is being recorded.

Certain statements contained in this conference call that are not descriptions of historical facts are forward-looking statements, as such term is defined in the Private Securities Litigation Reform Act of 1995. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include but are not limited to, those discussed in filings made by the company with the Securities and Exchange Commission. Many of the factors that will determine the company's future results are beyond the ability of management to control or predict. Listeners should not place undue reliance on forward-looking statements, which reflect management views only as of the date hereof. The company undertakes no obligation to revise or update any forward-looking statements or to make any other forward-looking statements whether as a result of new information, future events or otherwise.

At this time, I would like to turn the conference over to Mr. Powell Brown. Please go ahead, sir.

J. Powell Brown

Thank you, Linette. Good morning, everybody. We grew 2.2% in the quarter, and Cory will get into the information about the impact of Colonial Claims on Q4. As you know, Colonial was very busy in Q4 of '12 and Q1 of '13. Excluding their results, our internal growth would be 4.5%. National Programs and Wholesale, both grew at or above 10% organically and without our liabilities, we earned $0.33 for Q4 and $1.50 for the year.

So with that, I'd like to turn it over to Cory for our financial results.

Cory T. Walker

Thanks, Powell. Our net income for the fourth quarter of 2013 of $47.2 million was up 8.3% over last year's fourth quarter. Correspondingly, our net income per share for the quarter was $0.31 or up 6.9% over the $0.29 in the fourth quarter of 2012. However, more importantly, when you exclude the line item change in estimated acquisition earn-out payables, our net income per share for the fourth quarter of 2013 was $0.33 and versus last year's $0.30, and that's a 10% increase.

From a revenue standpoint, our commissions and fees for the quarter increased 13% to $339.4 million and that's up from the $300.3 million in last year's fourth quarter.

As we do -- the press release has a table that shows our total growth rates and our internal growth rates from our core commissions and fees, which excludes profit-sharing, continued commissions and the guaranteed supplemental commissions that we have. For the fourth quarter, we did receive $4.4 million of profit-sharing contingent commission, which was in line with what we thought we'd have in the third quarter conference call. That $4.4 million represented a net decrease though of $1.9 million from the $6.3 million of contingencies that we received in last year's fourth quarter. The majority of this net decrease came from our FIU operation.

Additionally, we accrued $1.9 million of guaranteed supplemental commissions in the fourth quarter 2013, and that was very similar to the same amount in the fourth quarter of 2012. If you refer to the internal growth schedule, we had a positive internal growth rate of 2.2%, however, it was 4.5% when you exclude the impact of Colonial Claims, and we'll get into that in a minute.

For the fourth quarter of 2013, our total core commissions and fees increased 14.9% or $43.2 million of net additional core commissions and fees. However, within that net number was $36.7 million of acquired revenues. That means we had $6.5 million more commissions and fees on a same-store sales basis. The biggest number in this internal growth schedule that jumps out is the negative growth rate of 17.8% in the Service division. That amounts to $6.1 million. And that was due exclusively to our flood claims operations, Colonial Claims.

As we pointed out in the third quarter conference call, we would have this big downdraft and it was due to the prior year revenues from Superstorm Sandy claims. Colonial Claims revenues in the fourth quarter of '12 was $7.4 million, as a result of those Superstorm Sandy claims. In the fourth quarter this year, our revenues were at a normal run rate of $1.3 million, thus that's a $6.1 million decline. So if you exclude that $6.1 million, our total organic growth dollars would increase from $6.5 million to $12.6 million, and internal growth rate of 4.5% for the quarter on a consolidated basis.

Our Wholesale Brokerage division continued to have strong new growth with $5.9 million of new business and that translated into a 14.7% internal growth rate for the fourth quarter. Our National Programs division had a strong quarterly internal growth rate of 9.9%, and that represents $6.3 million of net new dollars. Out of that, only $339,000 of the $6.3 million related to Arrowhead's automobile aftermarket and the Everest non-standard auto. $5.9 million of that growth really came from our Proctor's ICG and our Arrowhead commercial lines earthquake operation.

When you add up the internal growth rates of all 4 quarters of 2013, you'll see that 3 out of 4 of our divisions, National Programs, Wholesale Brokerage and Services had annual internal growth rates of their core commissions and fees between 12% and 14% each. These 3 amounts added up to about $66.7 million of net growth dollars. Of the $66.7 million of growth dollars, 3 -- in these 3 divisions, $25.1 million came from the Arrowhead's automobile aftermarket and the Everest non-standard operations. $13 million of that increase came from our Colonial Claims operations. I think it's important to note that when you exclude the impact of Colonial Claims, as well as the Arrowhead automobile aftermarket and the non-standard, our consolidated internal revenue growth rates improved sequentially each quarter during 2013. So when you exclude these 3 operations, the growth rate in the first quarter would have been 1.5%. In the second quarter, it improved to 3.5%. In the third quarter, our consolidated growth rate moved to 4.1% and then in the fourth quarter, without those 3 operations, we're at 4.4%. So you can see that it grew incrementally each quarter, I think it's important to note. So if you look at the whole year, without these 3 operations, the internal growth rate was a combined 3.4%.

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