Brown & Brown Q2 Earnings Miss Estimates but Rises Y/Y

Brown & Brown Inc. (BRO) reported an operating net income of 38 cents per share for second-quarter 2014, thereby missing estimates for the fourth time in a row. Results fell short of the Zacks Consensus Estimate by 7.3%. However, the figure marked a year-over-year improvement of 8.6% based on higher revenues.

Including a 4 cents per share positive impact from Beecher Carlson large accounts and Wright Insurance Group, net income came in at 42 cents per share.

Behind the Headlines

Total revenue increased 22.1% to $397.8 million year over year, driven by rise in commissions and fees as well as other income. The results outperformed Zacks Consensus Estimate of $390 million. Organic revenue growth was 3.8% in the reported quarter.

Commissions and Fees increased driven by organic growth as well as in higher Profit-Sharing Contingent Commissions and Guaranteed Supplemental Commissions.

Among the four business divisions of Brown & Brown, Wholesale Brokerage and Services witnessed high organic revenue growth rate of 8.1% and 2.3%, respectively. While Retail Divisions recorded a 2.0% increase, organic revenue growth at National Programs climbed 2.2% year over year.

Investment income for the reported quarter remained unchanged from the year-ago quarter.

Total expense increased 23.5% year over year to $296 million, attributable to higher employee compensation and benefits expense, operating expenses as well as interest expense.

A higher magnitude of revenue increase compensated for higher expenses leading to an 18.2% improvement in pretax income.

Net income before interest, income taxes, depreciation, amortization and the change in estimated acquisition earn-out payables (EBITDAC) margins increased year over year by 40 basis points (bps) to 34.2%.

During the quarter, Brown & Brown completed five acquisitions with revenues of $157 million.

Financial Update

Brown & Brown exited the second quarter of 2014 with cash and investments of $609.5 million, improving 34.5% from 2013-end.

During the second quarter of 2014, the company funded the new Credit Facility associated with the Wright acquisition and repaid $230 million of the existing term loan debt. The Credit Facility included a Term A Loan of $550 million and Revolving Loan Facility of $800 million.

After withdrawal of Revolving Loan of $375 million, the total debt outstanding reported was $1175 million as of Jun 30, 2014.

Long-term debt of the company was $1168.1 million at the quarter-end, up significantly from $380 million as of 2013-end level.

Share Repurchase Update

The company’s board of directors approved an additional $200 million stock buyback, apart from the $25 million stock buyback, which was completed in the reported quarter.

Dividend Update

Brown & Brown’s board of directors declared a quarterly cash dividend of 10 cents per share. The dividend will be paid on Aug 13, 2014 to shareholders of record on Aug 8, 2014.

Performance of Other Property & Casualty Insurers

Platinum Underwriters Holdings Ltd (PTP) reported second-quarter 2014 operating earnings of $1.34 per share, missing the Zacks Consensus Estimate by a couple of cents. Earnings declined 16% year over year due to lower premiums.

Progressive Corp. (PGR) posted second-quarter operating earnings of 45 cents per share, falling short of the Zacks Consensus Estimate by a couple of cents. However, earnings improved 10% year over year.

RLI Corp. (RLI) reported second-quarter operating income of 66 cents per share, in line with the Zacks Consensus Estimate. The figure also marked a 4.8% year-over-year increase.

Zacks Rank

Brown & Brown presently carries Zacks Rank #3 (Hold).