Brown & Brown, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Brown & Brown is a diversified insurance agency, wholesale brokerage, insurance programs and related services provider that helps clients manage and purchase insurance and risk management products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Brown & Brown operates within the complex and ever-evolving insurance landscape, acting as an intermediary between insurance providers and their clients. This unique position allows them to generate revenue through commissions and fees, rather than taking on insurance risk directly. The nature of their business also results in a diverse portfolio of services within the insurance industry, offering some insulation against isolated downturns.

Business Explanation:

  • Revenue Distribution: BRO’s revenue streams are primarily derived from commissions and fees for their brokering and insurance services.
    • Commissions and Fees: This includes commissions earned on premiums placed through their retail brokerage operations, and fees for various insurance-related services. These are often the most stable revenues but sensitive to premium prices.
    • Service Fees: They collect administrative fees, and consulting fees for insurance services and related solutions.
    • Profit Sharing & Contingent Commissions: They have programs with insurance carriers, whereby the amount of commissions may increase if the insurer has generated an acceptable number of sales and minimal claims over the past policy year.
    • Wholesale Brokerage: Revenue from placing business through their wholesale operations.

According to their 10K report in 2022, the Retail segment accounts for 46% of revenue, the National Programs segment contributed 37%, and the Wholesale Brokerage segment generated 17%.

  • Industry Trends:
    • The insurance industry is characterized by cycles, regulatory changes, and an increasing demand for specialized coverage, leading to a complex and competitive environment.
    • Technology continues to shape the insurance industry. This includes more efficient communication and online portals for customers, and automation of core processes, improving efficiency and lowering administrative costs.
    • Clients are becoming more sophisticated and demand tailored solutions.
    • The insurance industry is becoming increasingly consolidated due to mergers and acquisitions.
    • There has been a shift towards more customized insurance products.
    • The cost of insurance is rising due to inflation.
    • The demand for specialty coverages, especially in cyber, cybersecurity, and data privacy insurance is steadily increasing.
  • Margins:
    • The company’s margins can be affected by various factors such as competition, changes in pricing and cost management
    • EBITDA Margin from 2019-2021 were 33.5%, 33.7%, and 31.8%.
  • Competitive Landscape:
    • The insurance industry has some heavy-hitters with high market share. As such, the market is very competitive.
    • Competition in both brokerage services and underwriting of insurance is strong.
    • They face challenges from both traditional insurance players, as well as tech-enabled disruptors that can reduce cost and premiums, while increasing convenience for customers.
  • What Makes the Company Different:
    • Focus on diverse insurance niches, including retail and wholesale brokerage, insurance programs, and other related services.
    • Decentralized operations, with independent profit centers, allows for adaptability and specialization.
    • Strong track record of strategic acquisitions to expand their market reach and offerings.
    • Emphasis on developing proprietary technology and processes to achieve efficiency and improve service quality.
    • The firm’s culture is well-regarded, and they are ranked high for workplace satisfaction.
  • Financials Overview:
    • Revenue: Total revenues reached $3.7 billion in 2022, which represents a growth of 13.5% when compared to the prior year, and demonstrates stable revenue growth.
    • Profitability: They have consistently delivered a profit, highlighting the resilience of their business model, they made $672 million net income in 2022, a 20.8% jump from 2021.
    • Share Repurchases and Dividends: Have increased dividends and share repurchases in 2022.
    • Strong Balance Sheet: Stable cash flow, low debt, and increasing book value
    • Acquisition-Driven Growth: BRO has been very active in acquisitions. They have a detailed and robust plan for how they plan to integrate, and generate synergies, from acquired companies, giving them more organic-driven growth, and making their overall business more efficient and profitable.

Moat Rating: 3 / 5

While Brown & Brown has established a significant presence and a diverse revenue base within the insurance industry, its moat can be described as moderate. Their diverse geographic footprint, large client base, and strong relationships with insurance providers do confer a moat. However, the insurance business is very competitive, and the barriers to entry are generally low; therefore their moat can easily be encroached by competitors. In addition, it is important for the company to maintain a strong brand reputation as that influences clients’ decision to seek out their services.

  • Sources of Moat:
    • Intangible Assets: BRO’s established brand name in the insurance brokerage business, reputation, along with their proprietary technology and processes provides a competitive advantage.
    • Switching Costs: High switching costs are due to the complexity of insurance contracts and the need for customized solutions. Clients have to invest time and resources into switching providers.
    • Scale Economies: Although not dominating any one sector, the size of their operations combined with a decentralized strategy gives a degree of bargaining power and makes it harder for any newcomer to achieve the same scale and geographical reach in the short-run.
  • Moat Summary:
    • The moat is not wide, however, it is still meaningful. It protects them from intense competition.
    • While they have a somewhat durable moat, the low barrier of entry in the insurance broker sector can result in intense competition that erodes their returns.

Risks that Could Harm the Moat and Business Resilience:

  • Intensifying Competition: Insurance brokerage is a highly competitive business, and the entry of new competitors could pressure their margins.
  • Regulatory Changes: Changes in insurance regulations could negatively affect BRO’s business, particularly their commission and fee structure.
  • Technological Disruptions: The emergence of more digital, automated, and streamlined processes in the insurance industry can pose a threat if the firm fails to adapt quickly, or if it isn’t able to innovate as fast as its competitors.
  • Economic Downturn: Economic downturns, which can be affected by rising interest rates and inflation, may cause a decline in premium volume, and therefore, directly negatively impact their commission and fee revenue.
  • Acquisition Failures: Aggressive acquisitions are their main source of growth. However, the failure to adequately integrate acquisitions, or poor target selection may hamper their growth trajectory.

  • Interest Rate Changes: Their earnings are negatively correlated with interest rates, as the increase in the yield curve will reduce the profitability of their investment income.

  • Business Resilience
    • BRO is mostly insulated from the volatility within the insurance industry. Because the company doesn’t take on insurance risk, and acts as a fee and commission-based service, it’s returns are generally more stable.
    • Diversified operations across different segments, and multiple regions ensures that the company is not overly reliant on just one area.

Understandability Rating: 2 / 5

The business is not entirely easy to understand. Though their operating model is quite straightforward, the nature of their financials requires a detailed analysis that a lay investor may find too complex. The nuances and intricacies of the insurance industry, along with the accounting complexities of a business like this, that is often built on acquisitions, also contributes to the difficulty in understandability.

  • Justification:
    • The service BRO provides is conceptually simple to understand-they are an intermediary for insurance sales.
    • However, the way their revenue is broken down requires deeper insight, and some of their operations are difficult to understand from the outside.

Balance Sheet Health Rating: 4 / 5 While not perfect, BRO’s balance sheet is in strong standing, due to strong growth, conservative financing approach, and efficient management of capital.

  • Justification:
    • The company has shown consistent and strong growth over the last several years and has consistently grown its book value per share.
    • The company has high cash holdings and a low amount of debt, which allows it to easily deal with unforeseen consequences and also make acquisitions.
    • They seem to be very prudent when it comes to capital allocation and financial decisions.

Recent Issues and Management Response:

  • Inflation: Management stated that while the interest rate environment has increased borrowing costs, they have strong operating performance which allows them to manage debt obligations. Management emphasized that while inflation has impacted prices, the demand for their services has remained strong, and their pricing power allows them to partially offset rising costs.
  • Acquisition Integrations: Management believes that acquisitions will continue to be a key part of BRO’s strategy. They have created a system and methodology to integrate new acquisitions seamlessly, and take advantage of the synergy and growth that is derived from acquisitions. In 2022 they acquired 40+ firms, and believe to continue acquiring new firms at the same rate.
  • Volatility: Management believes that their diversified approach to business insulates them from economic volatility, along with their low dependency on interest-sensitive businesses, that allows them to stay strong and resilient to market downturns.