Brown & Brown, Inc. (BRO)

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Brown & Brown Insurance (BRO)

Q3 2012 Earnings Call

October 16, 2012 8:30 am ET


Powell Brown – President, Chief Executive Officer

Cory Walker – Senior Vice President, Chief Financial Officer


Keith Walsh – Citi

Sarah Dewitt – Barclays Capital

Greg Locraft – Morgan Stanley

Arash Soleimani – Stifel Nicolaus

Josh Shanker – Deutsche Bank

Matthew Heimermann – JP Morgan

Ray Iardella – Macquarie

Brett Huff – Stevens

Eric Fraser – Goldman Sachs

Chris Likum (ph) – William Blair



Good morning and welcome to the Brown & Brown Incorporated Third Quarter Earnings conference call. Today’s call is being recorded.

Please note that certain information discussed during this call, including answers given in response to your questions, may relate to future results and events or otherwise be forward-looking in nature and reflect our current views with respect to future events, including financial performance. Such statements are intended to fall within the Safe Harbor provisions of the securities laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors, including those risks and uncertainties that have been or will be identified from time to time in the Company reports filed with the Securities and Exchange Commission. Additional discussions of these and other factors affecting the Company’s business and prospects are contained in the Company’s filings with the Securities and Exchange Commission.

With that said, I will now turn the call over to Mr. Powell Brown, our President and Chief Executive Officer.

Powell Brown

Thank you, Lisa. Good morning everybody. We’re pleased with our organic growth in Q3. It was in line with our expectations, and there are some positive signs within our retail division that you’ll hear about. Rates are up in many places, flat in some places, and rarely but periodically down, and we also closed one acquisition, as you know, in Q3 for $5.8 million in revenue.

With that, I’ll turn it over to Cory for our financial report.

Cory Walker

Thanks Powell. Now that we’ve had three straight quarters of positive internal growth, we definitely have a trend, and most importantly our largest division, retail, had its second consecutive quarter of positive growth with expanding margins, and that trend is expected to continue. Our net income for the third quarter of 2012 was $49.5 million, and that’s up 12.1% over the third quarter of 2011. Correspondingly, our net income per share for the quarter was $0.34 and that’s a 13.3% increase over the $0.30 of last year’s third quarter.

From the revenue standpoint, commissions and fees for the quarter increased 16.7% to $303.8 million. That’s up from the $260.4 million in last year’s third quarter. As always, included in our press release is our normal table that summarizes the total growth rates and the internal growth rates from our core commissions and fees, which excludes profit-sharing contingent commissions and guaranteed supplemental commissions, which we refer to as GSCs. We received $12.1 million of profit-sharing contingent commissions, which represented a net increase of about $4.8 million from the 7.2 that we earned last year in the third quarter. The vast majority of this net increase was from our Arrowhead operations.

For the fourth quarter of 2012, we estimate that we may receive between 2 and $3 million as long as the hurricanes behave and they stay away from Florida for the rest of the year. Additionally, we accrued $2.4 million of guaranteed supplemental commission for the third quarter of 2012. That is $540,000 less than the 2.9 that we accrued for in the third quarter of 2011. As we’ve mentioned in previous conference calls, this reductions is due to the fact that several of our insurance carrier partners have reverted back to their profit-sharing contingent commission contracts beginning this year in 2012. So presumable if the carriers’ loss ratios remain stable, this revenue should flow back to us in 2013 in the form of profit-sharing contingencies.

Now looking at the internal growth schedule, we had a positive internal growth rate of 1%, which is much stronger than you initially perceive by just the raw number of 1%. For the third quarter of 2012, our total core commissions and fees increased 18.2% or $44.3 million of core commissions and fees. But within that net number was $41.8 million of acquired revenues. That means that we had $2.4 million more of commissions and fee revenues on a same store sales basis. We view this 1% organic growth as consistent with the trends that we saw developing in the second quarter when our organic growth was 3.2% on a consolidated basis. The differences in the organic growth from 3.2 to 1% centers primarily on the wholesale brokerage division and three separate program division operations. The wholesale division grew organically $1.1 million in the third quarter as compared to the $3.4 million that they grew in the second quarter. This slightly lower growth is due to lower increases in the coastal cap property rates than what we saw in the first half of 2012. We continue to expect increases in the coastal cap property rates during the fourth quarter; however, it will be at rates more similar to what we saw in the current third quarter numbers.

The first of the three program operations that we’d like to highlight due to their differences from the second quarter is Proctor Financial. Proctor had $1.2 million organic growth in the second quarter; however, this quarter they had a $300,000 decline as compared to the prior year. Proctor continues to have an outstanding year of new business; however, the flow of revenue from their clients can be uneven at times, as was the case this quarter. We expect much of this quarterly difference to flow into the fourth quarter. Proctor has a very good pipeline of potential new clients also. It is important to note that the Proctor team is doing an excellent job. They have not lost a single client this year and they’ve picked up several new clients. Proctor’s revenue recognition is highly dependent upon their clients’ processing of their loan portfolio computer files and approving which loans are placed ultimately in the program. This quarter, we had several of their clients for different reasons get backed up on their loan file processing and thus has delayed some of Proctor’s revenues to be recognized.

The second program operation to highlight is our operation that provides facultative reinsurance products to certain insurance carriers. One of our larger clients decided to self-absorb more of the underwriting risk and chose not to renew two large facultative reinsurance treaties, and as such that represented nearly $1 million of less commissions for us. Once again, our folks in this operation have done a great job over time. In fact, this is one of our operations that has had positive internal growth each of the last four years, and that’s during our economic Armageddon this happened. So this was a tough quarter for them, but I’m confident that they will find new accounts to write.

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