BROWN & BROWN, INC. The following discussion updates the Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , and the two discussions should be read together.
GENERAL
Impact of COVID-19
The coronavirus pandemic ("COVID-19") remains dynamic with uncertainty around
its duration and broader impact. We continue to monitor and assess the situation
and will further adapt our business practices over the coming quarters to best
serve our customers and protect our employees. While there is optimism resulting
from the further reopening of the economy and the availability of vaccines, we
continue to assess the situation given the risks associated with variant strains
of COVID-19.
Company Overview - Third Quarter of 2021
The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related Notes to those Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. In addition, please see "Information Regarding Non-GAAP Financial Measures" below regarding important information on non-GAAP financial measures contained in our discussion and analysis. We are a diversified insurance agency, wholesale brokerage, insurance programs and services organization headquartered inDaytona Beach, Florida . As an insurance intermediary, our principal sources of revenue are commissions paid by insurance companies and, to a lesser extent, fees paid directly by customers. Commission revenues generally represent a percentage of the premium paid by an insured and are affected by fluctuations in both premium rate levels charged by insurance companies and the insureds' underlying "insurable exposure units," which are units that insurance companies use to measure or express insurance exposed to risk (such as property values, or sales and payroll levels) to determine what premium to charge the insured. Insurance companies establish these premium rates based upon many factors, including loss experience, risk profile and reinsurance rates paid by such insurance companies, none of which we control. The volume of business from new and existing customers, fluctuations in insurable exposure units, changes in premium rate levels, changes in general economic and competitive conditions, a health pandemic, and the occurrence of catastrophic weather events all affect our revenues. For example, level rates of inflation or a general decline in economic activity could limit increases in the values of insurable exposure units. Conversely, increasing costs of litigation settlements and awards could cause some customers to seek higher levels of insurance coverage. Historically, our revenues have typically grown as a result of our focus on net new business growth and acquisitions. We foster a strong, decentralized sales and service culture with the goal of consistent and sustained growth over the long-term. The term "Organic Revenue," a non-GAAP measure, is our core commissions and fees less: (i) the core commissions and fees earned for the first 12 months by newly-acquired operations; (ii) divested business (core commissions and fees generated from offices, books of business or niches sold or terminated during the comparable period); and (iii) the period-over-period impact of foreign currency translation, which is calculated by applying current-year foreign exchange rates to the same period in the prior year. The term "core commissions and fees" excludes profit-sharing contingent commissions and guaranteed supplemental commissions, and therefore represents the revenues earned directly from specific insurance policies sold, and specific fee-based services rendered. "Organic Revenue" is reported in this manner in order to express the current year's core commissions and fees on a comparable basis with the prior year's core commissions and fees. The resulting net change reflects the aggregate changes attributable to: (i) net new and lost accounts; (ii) net changes in our customers' exposure units; (iii) net changes in insurance premium rates or the commission rate paid to us by our carrier partners; and (iv) the net change in fees paid to us by our customers. Organic Revenue is reported in "Results of Operations" and in "Results of Operations - Segment Information" of this Quarterly Report on Form 10-Q. We also earn profit-sharing contingent commissions, which are commissions based primarily on underwriting results, but which may also reflect considerations for volume, growth and/or retention. These commissions are included in our commissions and fees in the Condensed Consolidated Statements of Income, are accrued throughout the year based on actual premiums written and are primarily received in the first and second quarters of each subsequent year, based upon the aforementioned considerations for the prior year(s). Over the last three years, profit-sharing contingent commissions have averaged approximately 3.0% of commissions and fees revenue. Certain insurance companies offer guaranteed fixed-base agreements, referred to as "Guaranteed Supplemental Commissions" ("GSCs") in lieu of profit-sharing contingent commissions. GSCs are accrued throughout the year based on actual premiums written. Over the last three years, GSCs have averaged less than 1.0% of commissions and fees revenue. Combined, our profit-sharing contingent commissions and GSCs for the three months endedSeptember 30, 2021 increased by$4.9 million from the third quarter of 2020. This increase was the result of recent acquisitions and qualifying for certain profit-sharing contingent commissions and GSCs in 2021 that we did not qualify for in the prior year. Fee revenues primarily relate to services other than securing coverage for our customers, as well as fees negotiated in lieu of commissions, and are recognized as performance obligations are satisfied. Fee revenues have historically been generated primarily by: (1) our Services Segment, which provides insurance-related services, including third-party claims administration and comprehensive medical 25 -------------------------------------------------------------------------------- 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; (2) our National Programs and Wholesale Brokerage Segments, which earn fees primarily for the issuance of insurance policies on behalf of insurance companies; and (3) our Retail Segment in our large-account customer base, where we primarily earn fees for securing insurance for our customers, and in our automobile dealer services ("F&I") businesses where we primarily earn fees for assisting our customers with creating and selling warranty and service risk management programs. Fee revenues as a percentage of our total commissions and fees, represented 26.1% in 2020 and 27.1% in 2019.
For the three months ended
Historically, investment income has consisted primarily of interest earnings on operating cash and where permitted, on premiums and advance premiums collected and held in a fiduciary capacity before being remitted to insurance companies. Our policy as it relates to the Company's capital is to invest available funds in high-quality, short-term fixed income investment securities. Investment income also includes gains and losses realized from the sale of investments. Other income primarily reflects legal settlements and other revenues.
Income before income taxes for the three months ended
Information Regarding Non-GAAP Measures
In the discussion and analysis of our results of operations, in addition to
reporting financial results in accordance with generally accepted accounting
principles ("GAAP"), we provide references to the following non-GAAP financial
measures as defined in Regulation G of SEC rules: Organic Revenue, Organic
Revenue growth, EBITDAC and EBITDAC Margin. EBITDAC is defined as income before
interest, income taxes, depreciation, amortization, and the change in estimated
acquisition earn-out payables. EBITDAC Margin is defined as EBITDAC divided by
total revenues. We view these non-GAAP financial measures as important
indicators when assessing and evaluating our performance on a consolidated basis
and for each of our segments because they allow us to determine a more
comparable, but non-GAAP, measurement of revenue growth and operating
performance that is associated with the revenue sources that were a part of our
business in both the current and prior year. We believe that Organic Revenue
provides a meaningful representation of our operating performance and view
Organic Revenue growth as an important indicator when assessing and evaluating
the performance of our four segments. Organic Revenue can be expressed as a
dollar amount or a percentage rate when describing Organic Revenue growth. We
use Organic Revenue growth in determining incentive cash compensation and as a
performance measure in our equity incentive grants for our executive officers
and other key employees. We use EBITDAC Margin for incentive cash compensation
determinations for our executive officers. We view EBITDAC and EBITDAC Margin as
important indicators of operating performance, because they allow us to
determine more comparable, but non-GAAP, measurements of our operating margins
in a meaningful and consistent manner by removing the significant non-cash items
of depreciation, amortization and the change in estimated acquisition earn-out
payables, and also interest expense and taxes, which are reflective of
investment and financing activities, not operating performance.
These measures are not in accordance with, or an alternative to the GAAP
information provided in this Quarterly Report on Form 10-Q. We present such
non-GAAP supplemental financial information because we believe such information
is of interest to the investment community and because we believe they provide
additional meaningful methods of evaluating certain aspects of the Company's
operating performance from period to period on a basis that may not be otherwise
apparent on a GAAP basis. We believe these non-GAAP financial measures improve
the comparability of results between periods by eliminating the impact of
certain items that have a high degree of variability. Our industry peers may
provide similar supplemental non-GAAP information with respect to one or more of
these measures, although they may not use the same or comparable terminology and
may not make identical adjustments. This supplemental financial information
should be considered in addition to, not in lieu of, our Condensed Consolidated
Financial Statements.
Tabular reconciliations of this supplemental non-GAAP financial information to
our most comparable GAAP information are contained in this Quarterly Report on
Form 10-Q under "Results of Operations - Segment Information."
Acquisitions
Part of our continuing business strategy is to attract high-quality insurance intermediaries to join our operations. From 1993 through the third quarter of 2021, we acquired 572 insurance intermediary operations.
Critical Accounting Policies
We have had no changes to our Critical Accounting Policies as described in our most recent Form 10-K for the year endedDecember 31, 2020 . We believe that of our significant accounting and reporting policies, the more critical policies include our accounting for revenue recognition, business combinations and purchase price allocations including potential earn-out obligations, intangible asset impairments, non-cash stock-based compensation and reserves for litigation. In particular, the accounting for these areas requires significant use of judgment to be made by management. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or consolidated results of operations. Refer to Note 1 in the "Notes to Consolidated Financial Statements" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 for details regarding our critical and significant accounting policies. 26 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
The following discussion and analysis regarding results of operations and liquidity and capital resources should be considered in conjunction with the accompanying Condensed Consolidated Financial Statements and related Notes.
Financial information relating to our condensed consolidated financial results
for the three and nine months ended
Three months ended September 30, Nine months ended September 30,
(in thousands, except
percentages) 2021 2020 % Change 2021 2020 % Change
REVENUES
Core commissions and
fees $ 746,632 $ 653,261 14.3 % $ 2,231,876 $ 1,897,163 17.6 %
Profit-sharing
contingent
commissions 17,618 13,739 28.2 % 63,163 56,334 12.1 %
Guaranteed
supplemental
commissions 5,404 4,396 22.9 % 14,571 12,559 16.0 %
Investment income 430 349 23.2 % 909 1,844 (50.7 )%
Other income, net 221 2,217 (90.0 )% 2,414 3,364 (28.2 )%
Total revenues 770,305 673,962 14.3 % 2,312,933 1,971,264 17.3 %
EXPENSES
Employee compensation and benefits 394,997 362,767 8.9 % 1,220,107 1,058,907 15.2 % Other operating expenses 101,071 91,403 10.6 % 291,690 274,103 6.4 % (Gain)/loss on disposal (288 ) (994 ) (71.0 )% (4,332 ) (1,285 ) NMF Amortization 29,523 27,059 9.1 % 88,562 80,190 10.4 % Depreciation 9,200 6,647 38.4 % 25,457 18,836 35.2 % Interest 16,175 13,234 22.2 % 48,802 42,334 15.3 % Change in estimated acquisition earn-out payables 23,138 15,318 51.1 % 20,643 4,996 NMF Total expenses 573,816 515,434 11.3 % 1,690,929 1,478,081 14.4 % Income before income taxes 196,489 158,528 23.9 % 622,004 493,183 26.1 % Income taxes 50,135 24,549 104.2 % 136,617 110,020 24.2 % NET INCOME$ 146,354 $ 133,979 9.2 %$ 485,387 $ 383,163 26.7 % Income Before Income Taxes Margin (1) 25.5 % 23.5 % 26.9 % 25.0 % EBITDAC (2)$ 274,525 $ 220,786 24.3 %$ 805,468 $ 639,539 25.9 % EBITDAC Margin (2) 35.6 % 32.8 % 34.8 % 32.4 % Organic Revenue growth rate (2) 8.5 % 4.3 % 10.8 % 3.5 % Employee compensation and benefits relative to total revenues 51.3 % 53.8 % 52.8 % 53.7 % Other operating expenses relative to total revenues 13.1 % 13.6 % 12.6 % 13.9 % Capital expenditures$ 9,475 $ 19,882 (52.3 )%$ 34,617 $ 55,820 (38.0 )% Total assets at September 30,$ 9,629,166 $ 8,795,379 9.5 %
(1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues.
(2) A non-GAAP financial measure.
NMF = Not a meaningful figure
Commissions and Fees
Commissions and fees, including profit-sharing contingent commissions and GSCs, for the three months endedSeptember 30, 2021 increased$98.3 million to$769.7 million , or 14.6%, over the same period in 2020. Core commissions and fees revenue for the third quarter of 2021 increased$93.4 million , composed of (i) approximately$55.6 million of net new and renewal business, which reflects an Organic Revenue growth rate of 8.5%; (ii)$38.5 million from acquisitions that had no comparable revenues in the same period of 2020; (iii) a positive impact from foreign currency translation of$0.3 million ; and (iv) an offsetting decrease of$1.0 million related to commissions and fees revenue from business divested in the preceding twelve months. Profit-sharing contingent commissions and GSCs for the third quarter of 2021 increased by$4.9 million , or 26.9%, compared to the same period in 2020. For the nine months endedSeptember 30, 2021 , commissions and fees, including profit-sharing contingent commissions and GSCs, increased$343.6 million to$2,309.6 million , or 17.5%, over the same period in 2020. Core commissions and fees revenue for the nine months 27 -------------------------------------------------------------------------------- endedSeptember 30, 2021 increased$334.7 million , composed of: (i) approximately$205.6 million of net new and renewal business, which reflects an Organic Revenue growth rate of 10.8%; (ii)$131.2 million from acquisitions that had no comparable revenues in the same period of 2020; (iii) a positive impact from foreign currency translation of$1.0 million ; and (iv) an offsetting decrease of$3.1 million related to commissions and fees revenue from businesses divested in the preceding 12 months. Profit-sharing contingent commissions and GSCs for the nine months endedSeptember 30, 2021 increased by$8.8 million , or 12.8%, compared to the same period in 2020.
Investment Income
Investment income for the three months endedSeptember 30, 2021 increased$0.1 million , or 23.2%, from the same period in 2020. Investment income for the nine months endedSeptember 30, 2021 decreased$0.9 million , or 28.2%, from the same period in 2020. The increase for the quarter was primarily driven by higher average cash balances as compared to the prior year, and the decrease for the nine months endedSeptember 2021 was primarily driven by lower interest rates as compared to the prior year. Other Revenues Other revenue for the three months endedSeptember 30, 2021 was$0.2 million , compared with$2.2 million in the same period in 2020. Other income for the nine months endedSeptember 30, 2021 was$2.4 million , compared with$3.4 million in the same period in 2020. Other income consists primarily of legal settlements and other miscellaneous income.
Employee Compensation and Benefits
Employee compensation and benefits expense as a percentage of total revenues was 51.3% for the three months endedSeptember 30, 2021 as compared to 53.8% for the three months endedSeptember 30, 2020 , and increased 8.9%, or$32.2 million . This increase included$12.6 million of compensation costs related to stand-alone acquisitions that had no comparable costs in the same period of 2020. Therefore, employee compensation and benefits expense attributable to those offices that existed in the same time periods of 2021 and 2020 increased by$19.6 million or 5.4%. This underlying employee compensation and benefits expense increase was primarily related to: (i) an increase in staff salaries attributable to salary inflation; (ii) an increase in accrued performance bonuses; and (iii) an increase in producer compensation associated with revenue growth. Employee compensation and benefits expense as a percentage of total revenues was 52.8% for the nine months endedSeptember 30, 2021 as compared to 53.7% for the nine months endedSeptember 30, 2020 , and increased 15.2%, or$161.2 million . This increase included$51.2 million of compensation costs related to stand-alone acquisitions that had no comparable costs in the same period of 2020. Therefore, employee compensation and benefits expense attributable to those offices that existed in the same time periods of 2021 and 2020 increased by$110.0 million or 10.5%. This underlying employee compensation and benefits expense increase was primarily related to: (i) an increase in staff salaries attributable to salary inflation; (ii) an increase in accrued performance bonuses; and (iii) an increase in producer compensation associated with revenue growth. Other Operating Expenses Other operating expenses represented 13.1% of total revenues for the third quarter of 2021 as compared to 13.6% for the third quarter of 2020. Other operating expenses for the third quarter of 2021 increased$9.7 million , or 10.6%, from the same period of 2020. The net increase included: (i)$9.7 million of other operating expenses related to stand-alone acquisitions that had no comparable costs in the same period of 2020; and (ii) increased variable expenses with higher travel and entertainment being the largest driver which was substantially offset by non-recurring legal costs and the write-off of certain receivables in one of our programs where it was determined the collectability was in doubt recorded in the third quarter of 2020. Other operating expenses represented 12.6% of total revenues for the nine months endedSeptember 30, 2021 , as compared to 13.9% for the nine months endedSeptember 30, 2020 . Other operating expenses for the first nine months of 2021 increased$17.6 million , or 6.4%, from the same period of 2020. The net increase included: (i)$31.2 million of other operating expenses related to stand-alone acquisitions that had no comparable costs in the same period of 2020; partially offset by (ii) non-recurring legal costs and the write-off recorded in the third quarter of 2020 of certain receivables in one of our programs where it was determined the collectability was in doubt and which did not recur in the third quarter of 2021; and (iii) lower variable operating expenses, including travel and entertainment and meeting-related expenses, primarily resulting from responses to COVID-19.
(Gain)/Loss on Disposal
Gain on disposal for the third quarter of 2021 decreased$0.7 million from the third quarter of 2020. Gain on disposal for the nine months endedSeptember 30, 2021 increased$3.0 million from the nine months endedSeptember 30, 2020 . The changes in the (gain)/loss on disposal were due to activity associated with book of business sales. Although we are not in the business of selling customer accounts, we periodically sell an office or a book of business (one or more customer accounts) that we believe does not produce reasonable margins or demonstrate a potential for growth, or because doing so is in the Company's best interest. Amortization Amortization expense for the third quarter of 2021 increased$2.5 million , or 9.1%, compared to the third quarter of 2020. Amortization expense for the nine months endedSeptember 30, 2021 increased$8.4 million , or 10.4%, compared to the nine months endedSeptember 30 , 28 --------------------------------------------------------------------------------
2020. These increases reflect the amortization of new intangibles from businesses acquired within the past 12 months, partially offset by certain intangible assets becoming fully amortized.
Depreciation
Depreciation expense for the third quarter of 2021 increased$2.6 million , or 38.4%, compared to the third quarter of 2020. Depreciation expense for the nine months endedSeptember 30, 2021 increased$6.6 million , or 35.2%, compared to the nine months endedSeptember 30, 2020 . Changes in depreciation expense reflect the addition of fixed assets resulting from business initiatives, and net additions of fixed assets resulting from businesses acquired in the past 12 months, which were partially offset by fixed assets that became fully depreciated.
Interest Expense
Interest expense for the third quarter of 2021 increased$2.9 million , or 22.2%, compared to the third quarter of 2020. Interest expense for the nine months endedSeptember 30, 2021 increased$6.5 million , or 15.3%, compared to the first nine months of 2020. These increases were due to higher average debt balances from increased borrowings associated with the issuance of bonds inSeptember 2020 , partially offset by the decrease in interest rates associated with our floating rate debt balances.
Change in Estimated Acquisition Earn-Out Payables
Accounting Standards Codification ("ASC") Topic 805-Business Combinations is the
authoritative guidance requiring an acquirer to recognize 100% of the fair value
of acquired assets, including goodwill, and assumed liabilities (with only
limited exceptions) upon initially obtaining control of an acquired entity.
Additionally, the fair value of contingent consideration arrangements (such as
earn-out purchase price arrangements) at the acquisition date must be included
in the purchase price consideration. The recorded purchase price for
acquisitions includes an estimation of the fair value of liabilities associated
with any potential earn-out provisions. Subsequent changes in these earn-out
obligations are required to be recorded in the Condensed Consolidated Statements
of Income when incurred or reasonably estimated. Estimations of potential
earn-out obligations are typically based upon future earnings of the acquired
operations or entities, usually for periods ranging from one to three years.
The net charge or credit to the Condensed Consolidated Statements of Income for
the period is the combination of the net change in the estimated acquisition
earn-out payables balance, and the interest expense imputed on the outstanding
balance of the estimated acquisition earn-out payables.
As of September 30, 2021 and 2020, the fair values of the estimated acquisition
earn-out payables were re-evaluated based upon projected operating results and
measured at fair value on a recurring basis using unobservable inputs (Level 3)
as defined in ASC 820-Fair Value Measurement. The resulting net changes, as well
as the interest expense accretion on the estimated acquisition earn-out
payables, for the three and nine months ended September 30, 2021 and 2020 were
as follows:
Three months ended September 30, Nine months ended September 30,
(in thousands) 2021 2020 2021 2020
Change in fair value of estimated
acquisition earn-out payables $ 21,855 $ 13,433 $ 15,814 $ (516 )
Interest expense accretion 1,283 1,885 4,829 5,512
Net change in earnings from estimated
acquisition earn-out payables $ 23,138 $
15,318
For the three months and nine months endedSeptember 30, 2021 , the fair value of estimated earn-out payables was re-evaluated and increased by$21.9 million and$15.8 million , respectively, which resulted in charges to the Condensed Consolidated Statements of Income, respectively.
As of
Income Taxes
The effective tax rate on income from operations for the three months endedSeptember 30, 2021 and 2020 was 25.5% and 15.5% respectively. The effective tax rate on income from operations for the nine months endedSeptember 30, 2021 and 2020 was 22.0% and 22.3%, respectively. The increase for the three months endedSeptember 30, 2021 was driven primarily by the tax benefit associated with incremental vesting of restricted stock awards in the third quarter of 2020. In 2016, we began issuing the majority of our restricted stock awards in the first quarter of each year, and the vesting of such awards is generally tied to the fifth anniversary of the date of grant, subject to certain exceptions. 29 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS - SEGMENT INFORMATION
As discussed in Note 12 to the Condensed Consolidated Financial Statements, we operate four reportable segments: Retail, National Programs, Wholesale Brokerage, and Services. On a segmented basis, changes in amortization, depreciation and interest expenses generally result from activity associated with acquisitions. Likewise, other revenues in each segment reflects net gains primarily from legal settlements and miscellaneous income. As such, in evaluating the operational efficiency of a segment, management focuses on the Organic Revenue growth rate and EBITDAC Margin. The reconciliation of commissions and fees included in the Condensed Consolidated Statements of Income to Organic Revenue, a non-GAAP financial measure, for the three months endedSeptember 30, 2021 and 2020, including by segment, and the growth rates for Organic Revenue for the three months endedSeptember 30, 2021 , including by segment, are as follows: 2021 Retail (1) National Programs Wholesale Brokerage Services Total (in thousands, except percentages) 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 Commissions and fees$ 422,667 $ 359,022 $ 190,920 $ 167,802 $ 112,335 $ 101,075 $ 43,732 $ 43,497 $ 769,654 $ 671,396 Total change$ 63,645 $ 23,118 $ 11,260 $ 235 $ 98,258 Total growth % 17.7 % 13.8 % 11.1 % 0.5 % 14.6 % Profit-sharing contingent commissions (8,705 ) (6,359 ) (6,499 ) (5,499 ) (2,414 ) (1,881 ) - - (17,618 ) (13,739 ) GSCs (4,454 ) (3,591 ) (549 ) (182 ) (401 ) (623 ) - - (5,404 ) (4,396 ) Core commissions and fees$ 409,508 $ 349,072 $ 183,872 $ 162,121 $ 109,520 $ 98,571 $ 43,732 $ 43,497 $ 746,632 $ 653,261 Acquisitions (32,662 ) - - - (5,873 ) - - - (38,535 ) - Dispositions - (1,014 ) - - - - - - - (1,014 ) Foreign currency translation - - - 262 - - - - - 262 Organic Revenue (2)$ 376,846 $ 348,058 $ 183,872 $ 162,383 $ 103,647 $ 98,571 $ 43,732 $ 43,497 $ 708,097 $ 652,509 Organic Revenue growth (2)$ 28,788 $ 21,489 $ 5,076 $ 235 $ 55,588 Organic Revenue growth rate (2) 8.3 % 13.2 % 5.1 % 0.5 % 8.5 % (1) The Retail Segment includes commissions and fees reported in the "Other" column of the Segment Information in Note 12 of the Notes to the Condensed Consolidated Financial Statements, which includes corporate and consolidation items.
(2) A non-GAAP financial measure.
The reconciliation of commissions and fees included in the Condensed Consolidated Statements of Income to Organic Revenue, a non-GAAP financial measure, for the three months endedSeptember 30, 2020 and 2019, including by segment, and the growth rates for Organic Revenue for the three months endedSeptember 30, 2020 , including by segment, are as follows: 2020 Retail (1) National Programs Wholesale Brokerage Services Total (in thousands, except percentages) 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 Commissions and fees$ 359,022 $ 337,821 $ 167,802 $ 142,487 $ 101,075 $ 86,986 $ 43,497 $ 50,069 $ 671,396 $ 617,363 Total change$ 21,201 $ 25,315 $ 14,089 $ (6,572 ) $ 54,033 Total growth % 6.3 % 17.8 % 16.2 % (13.1 )% 8.8 % Profit-sharing contingent commissions (6,359 ) (7,848 ) (5,499 ) (4,412 ) (1,881 ) (1,927 ) - - (13,739 ) (14,187 ) GSCs (3,591 ) (3,415 ) (182 ) (609 ) (623 ) (598 ) - - (4,396 ) (4,622 ) Core commissions and fees 349,072 326,558 162,121 137,466 98,571 84,461 43,497 50,069 653,261 598,554 Acquisition revenues$ (11,808 ) $ -$ (13,043 ) $ -$ (7,145 ) $ - $ - $ -$ (31,996 ) $ - Divested business - (2,647 ) - - - - - - - (2,647 ) Foreign currency translation - - - - - - - - - - Organic Revenue (2) 337,264 323,911 149,078 137,466 91,426 84,461 43,497 50,069 621,265 595,907 Organic Revenue growth (2)$ 13,353 $ 11,612 $ 6,965 $ (6,572 ) $ 25,358 Organic Revenue growth rate (2) 4.1 % 8.4 % 8.2 % (13.1 )% 4.3 % (1) The Retail Segment includes commissions and fees reported in the "Other" column of the Segment Information in Note 12 of the Notes to the Condensed Consolidated Financial Statements, which includes corporate and consolidation items.
(2) A non-GAAP financial measure.
30
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The reconciliation of commissions and fees included in the Condensed
Consolidated Statements of Income to Organic Revenue, a non-GAAP financial
measure, for the nine months ended
2021 Retail (1) National Programs Wholesale Brokerage Services Total (in thousands, except percentages) 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020
Commissions and fees
$ 227,543 $ 71,155 $ 40,145 $ 4,711 $ 343,554 Total growth % 20.4 % 15.8 % 15.0 % 3.6 % 17.5 % Profit-sharing contingent commissions (32,848 ) (29,380 ) (23,833 ) (20,478 ) (6,482 ) (6,476 ) - - (63,163 ) (56,334 ) GSCs (12,383 ) (11,429 ) (1,316 ) 525 (872 ) (1,655 ) - - (14,571 ) (12,559 ) Core commissions and fees 1,299,683 1,076,562 496,475
430,516 300,128 259,206 135,590 130,879 2,231,876 1,897,163 Acquisitions
$ (102,890 ) $ -$ (8,151 ) $ -$ (20,192 ) $ - $ - $ -$ (131,233 ) $ - Dispositions - (3,072 ) - - - - - - - (3,072 ) Foreign currency translation - - - 978 - - - - -$ 978 Organic Revenue (2) 1,196,793 1,073,490 488,324 431,494 279,936 259,206 135,590 130,879 2,100,643 1,895,069 Organic Revenue growth (2)$ 123,303 $ 56,830 $ 20,730 $ 4,711 $ 205,574 Organic Revenue growth % (2) 11.5 % 13.2 % 8.0 % 3.6 % 10.8 % (1) The Retail Segment includes commissions and fees reported in the "Other" column of the Segment Information in Note 12 of the Notes to the Condensed Consolidated Financial Statements, which includes corporate and consolidation items.
(2) A non-GAAP financial measure.
The reconciliation of commissions and fees included in the Condensed
Consolidated Statements of Income to Organic Revenue, a non-GAAP financial
measure, for the nine months ended
2020 Retail (1) National Programs Wholesale Brokerage Services Total (in thousands, except percentages) 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019
Commissions and fees
$ 81,278 $ 67,351 $ 29,066 $ (19,397 ) $ 158,298 Total growth % 7.8 % 17.6 % 12.2 % (12.9 )% 8.8 % Profit-sharing contingent commissions (29,380 ) (26,054 ) (20,478 ) (9,365 ) (6,476 ) (6,073 ) - - (56,334 ) (41,492 ) GSCs (11,429 ) (9,211 ) 525 (10,225 ) (1,655 ) (1,564 ) - - (12,559 ) (21,000 ) Core commissions and fees$ 1,076,562 $ 1,000,828 $ 430,516 $
363,528
- (24,841 ) - (16,010 ) - (1,484 ) - (100,722 ) -
Divested business - (9,625 ) - (376 ) - 1 - - - (10,000 )
Foreign currency
translation - - - - - - - - - -
Organic Revenue (2) $ 1,018,175 $ 991,203 $ 405,675 $ 363,152 $ 243,196 $ 230,635 $ 129,395 $ 150,276 $ 1,796,441 $ 1,735,266
Organic Revenue
growth (2) $ 26,972 $ 42,523 $ 12,561 $ (20,881 ) $ 61,175
Organic Revenue
growth % (2) 2.7 % 11.7 % 5.4 % (13.9 )% 3.5 %
(1) The Retail Segment includes commissions and fees reported in the "Other"
column of the Segment Information in Note 12 of the Notes to the Condensed
Consolidated Financial Statements, which includes corporate and consolidation
items.
(2) A non-GAAP financial measure.
31
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The reconciliation of income before incomes taxes, included in the Condensed
Consolidated Statement of Income, to EBITDAC, a non-GAAP measure, and Income
Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, for the three
months ended September 30, 2021 , is as follows:
National Wholesale
(in thousands) Retail Programs Brokerage Services Other Total
Income before income
taxes $ 71,639 $ 72,358 $ 29,365 $ 7,080 $ 16,047 $ 196,489
Income Before Income
Taxes Margin(1) 16.9 % 37.9 % 26.1 % 16.2 % NMF 25.5 %
Amortization 19,057 6,821 2,360 1,285 - 29,523
Depreciation 2,775 2,987 649 374 2,415 9,200
Interest 22,417 2,190 3,916 680 (13,028 ) 16,175
Change in estimated
acquisition
earn-out payables 17,316 37 5,785 - - 23,138
EBITDAC(2) $ 133,204 $ 84,393 $ 42,075 $ 9,419 $ 5,434 $ 274,525
EBITDAC Margin(2) 31.5 % 44.2 % 37.4 % 21.5 % NMF 35.6 %
(1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues.
(2) A non-GAAP financial measure.
NMF = Not a meaningful figure
The reconciliation of income before incomes taxes included in the Condensed
Consolidated Statement of Income to EBITDAC, a non-GAAP measure, and Income
Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, for the three
months ended
National Wholesale
(in thousands) Retail Programs Brokerage Services Other Total
Income before income
taxes $ 56,057 $ 47,171 $ 35,038 $ 6,041 $ 14,221 $ 158,528
Income Before Income
Taxes Margin(1) 15.6 % 28.1 % 34.6 % 13.9 % NMF 23.5 %
Amortization 16,624 7,100 1,945 1,390 - 27,059
Depreciation 2,347 2,300 548 355 1,097 6,647
Interest 20,519 5,335 2,488 1,004 (16,112 ) 13,234
Change in estimated
acquisition
earn-out payables 11,376 3,814 128 - - 15,318
EBITDAC(2) $ 106,923 $ 65,720 $ 40,147 $ 8,790 $ (794 ) $ 220,786
EBITDAC Margin(2) 29.7 % 39.1 % 39.7 % 20.2 % NMF 32.8 %
(1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues.
(2) A non-GAAP financial measure.
NMF = Not a meaningful figure
The reconciliation of income before incomes taxes included in the Condensed
Consolidated Statement of Income to EBITDAC, a non-GAAP measure, and Income
Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, for the nine
months ended
National Wholesale
(in thousands) Retail Programs Brokerage Services Other Total
Income before income
taxes $ 293,342 $ 180,222 $ 74,539 $ 24,002 $ 49,899 $ 622,004
Income Before Income
Taxes Margin(1) 21.8 % 34.5 % 24.2 % 17.7 % NMF 26.9 %
Amortization 56,892 20,557 7,121 3,991 1 88,562
Depreciation 8,337 7,498 1,973 1,120 6,529 25,457
Interest 67,641 9,188 12,220 2,219 (42,466 ) 48,802
Change in estimated
acquisition
earn-out payables 20,838 (8,239 ) 8,044 - - 20,643
EBITDAC(2) $ 447,050 $ 209,226 $ 103,897 $ 31,332 $ 13,963 $ 805,468
EBITDAC Margin(2) 33.2 % 40.1 % 33.7 % 23.1 % NMF 34.8 %
(1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues.
(2) A non-GAAP financial measure.
NMF = Not a meaningful figure
32
--------------------------------------------------------------------------------
The reconciliation of income before incomes taxes included in the Condensed
Consolidated Statement of Income to EBITDAC, a non-GAAP measure, and Income
Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, for the nine
months ended
National Wholesale
(in thousands) Retail Programs Brokerage Services Other Total
Income before income
taxes $ 221,549 $ 125,160 $ 77,432 $ 22,557 $ 46,485 $ 493,183
Income Before Income
Taxes Margin(1) 19.8 % 27.7 % 28.9 % 17.2 % NMF 25.0 %
Amortization 49,363 20,331 6,326 4,170 - 80,190
Depreciation 6,530 6,298 1,446 1,059 3,503 18,836
Interest 63,620 15,212 6,793 3,137 (46,428 ) 42,334
Change in estimated
acquisition
earn-out payables 5,406 2,821 (146 ) (3,085 ) - 4,996
EBITDAC(2) $ 346,468 $ 169,822 $ 91,851 $ 27,838 $ 3,560 $ 639,539
EBITDAC Margin(2) 30.9 % 37.6 % 34.3 % 21.3 % NMF 32.4 %
(1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues.
(2) A non-GAAP financial measure.
NMF = Not a meaningful figure
33
--------------------------------------------------------------------------------Retail Segment
The Retail Segment provides a broad range of insurance products and services to
commercial, public and quasi-public, professional and individual insured
customers, and non-insurance risk-mitigating products through our automobile
dealer services ("F&I") businesses. Approximately 77.3% of the Retail Segment's
commissions and fees revenue is commission based. Because most of our other
operating expenses are not correlated to changes in commissions on insurance
premiums, a significant portion of any fluctuation in the commissions we
receive, net of related producer compensation and cost to fulfill expense
deferrals and releases as required by ASC 340, Other Assets and Deferred Costs,
will result in a similar fluctuation in our income before income taxes, unless
we make incremental investments or modifications to the costs in the
organization.
Financial information relating to our Retail Segment for the three and nine
months ended
Three months ended September 30, Nine months ended September 30,
(in thousands, except
percentages) 2021 2020 % Change 2021 2020 % Change
REVENUES
Core commissions and
fees $ 409,911 $ 349,381 17.3 % $ 1,301,003 $ 1,077,516 20.7 %
Profit-sharing
contingent
commissions 8,705 6,359 36.9 % 32,848 29,380 11.8 %
Guaranteed
supplemental
commissions 4,454 3,591 24.0 % 12,383 11,429 8.3 %
Investment income 236 19 NMF 271 143 89.5 %
Other income, net 115 123 (6.5 )% 930 1,056 (11.9 )%
Total revenues 423,421 359,473 17.8 % 1,347,435 1,119,524 20.4 %
EXPENSES
Employee compensation and benefits 225,923 202,302 11.7 % 710,906 612,494 16.1 % Other operating expenses 64,582 51,242 26.0 % 193,820 161,847 19.8 % (Gain)/loss on disposal (288 ) (994 ) (71.0 )% (4,341 ) (1,285 ) NMF Amortization 19,057 16,624 14.6 % 56,892 49,363 15.3 % Depreciation 2,775 2,347 18.2 % 8,337 6,530 27.7 % Interest 22,417 20,519 9.2 % 67,641 63,620 6.3 % Change in estimated acquisition earn-out payables 17,316 11,376 52.2 % 20,838 5,406 NMF Total expenses 351,782 303,416 15.9 % 1,054,093 897,975 17.4 % Income before income taxes$ 71,639 $ 56,057 27.8 %$ 293,342 $ 221,549 32.4 % Income Before Income Taxes Margin (1) 16.9 % 15.6 % 21.8 % 19.8 % EBITDAC (2)$ 133,204 $ 106,923 24.6 %$ 447,050 $ 346,468 29.0 % EBITDAC Margin (2) 31.5 % 29.7 % 33.2 % 30.9 % Organic Revenue growth rate (2) 8.3 % 4.1 % 11.5 % 2.7 % Employee compensation and benefits relative to total revenues 53.4 % 56.3 % 52.8 % 54.7 % Other operating expenses relative to total revenues 15.3 % 14.3 % 14.4 % 14.5 % Capital expenditures$ 2,092 $ 5,232 (60.0 )%$ 5,779 $ 10,959 (47.3 )% Total assets at September 30,$ 7,385,770 $ 6,583,606 12.2 %
(1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues.
(2) A non-GAAP financial measure.
NMF = Not a meaningful figure
The Retail Segment's total revenues for the three months endedSeptember 30, 2021 increased 17.8%, or$63.9 million , as compared to the same period in 2020, to$423.4 million . The$60.5 million increase in core commissions and fees revenue was driven by: (i) approximately$32.7 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2020; (ii) an increase of$28.8 million related to net new and renewal business; offset by (iii) a decrease of$1.0 million related to commissions and fees recorded in 2020 from businesses since divested. Profit-sharing contingent commissions and GSCs for the third quarter of 2021 increased 32.3%, or$3.2 million , as compared to the same period in 2020, to$13.2 million . This increase was the result of recent acquisitions and qualifying for certain profit-sharing contingent commissions and GSCs in 2021 that we did not qualify for in the prior year. The Retail Segment's total commissions and fees increased by 17.7%, and the Organic Revenue growth rate was 8.3% for the third quarter of 2021. The Organic Revenue growth rate was driven by revenue from net new business, which was impacted by rate increases in most lines of business 34
-------------------------------------------------------------------------------- with the most pronounced being the continued increases in commercial property, professional liability, and condo property, partially offset by continued premium rate reductions in workers' compensation. Organic Revenue growth was realized across all lines of business. Income before income taxes for the three months endedSeptember 30, 2021 increased 27.8%, or$15.6 million , as compared to the same period in 2020, to$71.6 million . The primary factors affecting this increase were: (i) the profit associated with the net increase in revenue as described above; (ii) intercompany interest and amortization expenses growing slower than EBITDAC; partially offset by (iii) an increase to the change in estimated acquisition earn-out payables. EBITDAC for the three months endedSeptember 30, 2021 increased 24.6%, or$26.3 million , as compared to the same period in 2020, to$133.2 million . EBITDAC Margin for the three months endedSeptember 30, 2021 increased to 31.5% from 29.7% in the same period in 2020. The increase in EBITDAC Margin was driven by: (i) the total revenue increase; and (ii) higher profit-sharing contingent commissions and GSCs; which were partially offset by slightly higher variable operating expenses. The Retail Segment's total revenues for the nine months endedSeptember 30, 2021 increased 20.4%, or$227.9 million , as compared to the same period in 2020, to$1,347.4 million . The$223.5 million increase in core commissions and fees revenue was driven by: (i) approximately$102.9 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2020; (ii) an increase of$123.7 million related to net new and renewal business; and (iii) an offsetting decrease of$3.1 million related to commissions and fees recorded in 2020 from businesses since divested. Profit-sharing contingent commissions and GSCs for the nine months of 2021 increased 10.8%, or$4.4 million , as compared to the same period in 2020, to$45.2 million . The Retail Segment's total commissions and fees increased by 20.4%, and the Organic Revenue growth rate was 11.5% for the first nine months of 2021. The Organic Revenue growth rate was driven by net new business written during the preceding 12 months and growth on renewals of existing customers. Renewal business was impacted by rate increases in most lines of business with continued increases in commercial P&C, and professional liability, partially offset by continued premium rate reductions in workers' compensation. Income before income taxes for the nine months endedSeptember 30, 2021 increased 32.4%, or$71.8 million , as compared to the same period in 2020, to$293.3 million . The primary factors affecting this increase were: (i) the profit associated with the net increase in revenue as described above; and (ii) the drivers of EBITDAC described below; (iii) intercompany interest and amortization growing slower than EBITDAC; which were partially offset by (iv) an increase in the change in estimated acquisition earn-out payables. EBITDAC for the nine months endedSeptember 30, 2021 increased 29.0%, or$100.6 million , as compared to the same period in 2020, to$447.1 million . EBITDAC Margin for the nine months endedSeptember 30, 2021 increased to 33.2% from 30.9% in the same period in 2020. The increases in EBITDAC and EBITDAC Margin were primarily driven by: (i) the net increase in revenue of$227.9 million ; and (ii) cost savings delivered in response to COVID-19; which were partially offset by (iii) higher non-cash stock-based compensation. 35 --------------------------------------------------------------------------------
National Programs Segment
The National Programs Segment manages over 40 programs supported by approximately 100 well-capitalized carrier partners. In most cases, the insurance carriers that support these programs have delegated underwriting and, in many instances, claims-handling authority to our programs operations. These programs are generally distributed through a nationwide network of independent agents and Brown & Brown retail agents, and offer targeted products and services designed for specific industries, trade groups, professions, public entities and market niches. The National Programs Segment operations can be grouped into five broad categories: Professional Programs, Personal Lines Programs, Commercial Programs, Public Entity-Related Programs and the National Flood Program. The National Programs Segment's revenue is primarily commission based.
Financial information relating to our National Programs Segment for the three
and nine months ended
Three months ended September 30, Nine months ended September 30,
(in thousands, except
percentages) 2021 2020 % Change 2021 2020 % Change
REVENUES
Core commissions and
fees $ 183,872 $ 162,121 13.4 % $ 496,475 $ 430,516 15.3 %
Profit-sharing
contingent
commissions 6,499 5,499 18.2 % 23,833 20,478 16.4 %
Guaranteed
supplemental
commissions 549 182 NMF 1,316 (525 ) NMF
Investment income 136 205 (33.7 )% 423 597 (29.1 )%
Other income, net 9 11 (18.2 )% 185 32 NMF
Total revenues 191,065 168,018 13.7 % 522,232 451,098 15.8 %
EXPENSES
Employee compensation
and benefits 74,097 67,785 9.3 % 218,097 190,998 14.2 %
Other operating
expenses 32,575 34,513 (5.6 )% 94,909 90,278 5.1 %
(Gain)/loss on
disposal - - - % - - - %
Amortization 6,821 7,100 (3.9 )% 20,557 20,331 1.1 %
Depreciation 2,987 2,300 29.9 % 7,498 6,298 19.1 %
Interest 2,190 5,335 (59.0 )% 9,188 15,212 (39.6 )%
Change in estimated
acquisition
earn-out payables 37 3,814 (99.0 )% (8,239 ) 2,821 NMF
Total expenses 118,707 120,847 (1.8 )% 342,010 325,938 4.9 %
Income before income
taxes $ 72,358 $ 47,171 53.4 % $ 180,222 $ 125,160 44.0 %
Income Before Income
Taxes
Margin (1) 37.9 % 28.1 % 34.5 % 27.7 %
EBITDAC (2) $ 84,393 $ 65,720 28.4 % $ 209,226 $ 169,822 23.2 %EBITDAC Margin (2) 44.2 % 39.1 % 40.1 % 37.6 % Organic Revenue growth rate (2) 13.2 % 8.4 % 13.2 % 11.7 % Employee compensation and benefits relative to total revenues 38.8 % 40.3 % 41.8 % 42.3 % Other operating expenses relative to total revenues 17.0 % 20.5 % 18.2 % 20.0 % Capital expenditures$ 4,660 $ 2,203 111.5 %$ 11,313 $ 5,248 115.6 % Total assets at September 30,$ 3,789,376 $ 3,530,345 7.3 %
(1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues.
(2) A non-GAAP financial measure.
NMF = Not a meaningful figure
The National Programs Segment's total revenue for the three months endedSeptember 30, 2021 increased 13.7%, or$23.0 million , as compared to the same period in 2020, to$191.1 million . The$21.8 million increase in core commissions and fees revenue was driven by: (i) approximately$21.5 million related to net new and renewal business; and (ii) a positive impact from foreign currency translation of$0.3 million . Profit-sharing contingent commissions and GSCs for the third quarter of 2021 increased approximately$1.4 million compared to the third quarter of 2020. The National Programs Segment's total commissions and fees increased by 13.8%, and the Organic Revenue growth rate was 13.2% for the three months endedSeptember 30, 2021 . The Organic Revenue growth was driven primarily by strong net new business, retention and rate increases for many programs. 36 -------------------------------------------------------------------------------- Income before income taxes for the three months endedSeptember 30, 2021 increased 53.4%, or$25.2 million , as compared to the same period in 2020, to$72.4 million . Income before income taxes increased due to: (i) the drivers of EBITDAC described below; (ii) decreased estimated acquisition earn-out payables; and (iii) lower intercompany interest expense. EBITDAC for the three months endedSeptember 30, 2021 increased 28.4%, or$18.7 million , from the same period in 2020, to$84.4 million . EBITDAC Margin for the three months endedSeptember 30, 2021 increased to 44.2% from 39.1% in the same period in 2020. The EBITDAC growth was higher than total revenue growth due to leveraging our expense base and the impact of a non-recurring receivable write-off recorded in the prior year. The National Programs Segment's total revenue for the nine months endedSeptember 30, 2021 increased 15.8%, or$71.1 million , as compared to the same period in 2020, to$522.2 million . The$66.0 million increase in core commissions and fees revenue was driven by: (i)$56.8 million related to net new and renewal business; (ii) approximately$8.2 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2020; and (iii) a positive impact from foreign currency translation of$1.0 million . The National Programs Segment's total commissions and fees increased by 15.8%, and the Organic Revenue growth rate was 13.2%, for the nine months endedSeptember 30, 2021 . The Organic Revenue growth was driven primarily by net new business, good retention and rate increases for many programs. Income before income taxes for the nine months endedSeptember 30, 2021 increased 44.0%, or$55.1 million , from the same period in 2020, to$180.2 million . Income before income taxes increased due to: (i) the drivers of EBITDAC described below; (ii) decreased estimated acquisition earn-out payables; and (iii) lower intercompany interest expense. EBITDAC for the nine months endedSeptember 30, 2021 increased 23.2%, or$39.4 million , as compared to the same period in 2020, to$209.2 million . EBITDAC Margin for the nine months endedSeptember 30, 2021 increased to 40.1% from 37.6% in the same period in 2020. The increase in EBITDAC and EBITDAC Margin was driven by: (i) total revenue growth; (ii) leveraging our expense base; and (iii) cost savings delivered in response to COVID-19; (iv) the impact of a non-recurring receivable write-off recorded in the prior year; partially offset by (v) incremental costs associated with the onboarding of new customers and increased non-cash stock-based compensation.
Wholesale Brokerage Segment
The Wholesale Brokerage Segment markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers, including Brown & Brown retail agents. Like the Retail and National Programs Segments, the Wholesale Brokerage Segment's revenues are primarily commission based.
Financial information relating to our Wholesale Brokerage Segment for the three
and nine months ended
Three months ended September 30, Nine months ended September 30,
(in thousands, except
percentages) 2021 2020 % Change 2021 2020 % Change
REVENUES
Core commissions and fees$ 109,520 $ 98,571 11.1 %$ 300,128 $ 259,206 15.8 % Profit-sharing contingent commissions 2,414 1,881 28.3 % 6,482 6,476 0.1 % Guaranteed supplemental commissions 401 623 (35.6 )% 872 1,655 (47.3 )% Investment income 35 45 (22.2 )% 120 141 (14.9 )% Other income, net 98 119 (17.6 )% 332 312 6.4 % Total revenues 112,468 101,239 11.1 % 307,934 267,790 15.0 %
EXPENSES
Employee compensation and benefits 55,262 47,483 16.4 % 160,045 136,576 17.2 % Other operating expenses 15,131 13,609 11.2 % 43,992 39,363 11.8 % (Gain)/loss on disposal - - - % - - - % Amortization 2,360 1,945 21.3 % 7,121 6,326 12.6 % Depreciation 649 548 18.4 % 1,973 1,446 36.4 % Interest 3,916 2,488 57.4 % 12,220 6,793 79.9 % Change in estimated acquisition earn-out payables 5,785 128 NMF 8,044 (146 ) NMF Total expenses 83,103 66,201 25.5 % 233,395 190,358 22.6 % Income before income taxes$ 29,365 $ 35,038 (16.2 )%$ 74,539 $ 77,432 (3.7 )% Income Before Income Taxes Margin (1) 26.1 % 34.6 % 24.2 % 28.9 % EBITDAC (2)$ 42,075 $ 40,147 4.8 %$ 103,897 $ 91,851 13.1 % EBITDAC Margin (2) 37.4 % 39.7 % 33.7 % 34.3 % 37
--------------------------------------------------------------------------------
Organic Revenue growth rate (2) 5.1 % 8.2 % 8.0 % 5.4 % Employee compensation and benefits relative to total revenues 49.1 % 46.9 % 52.0 % 51.0 % Other operating expenses relative to total revenues 13.5 % 13.4 % 14.3 % 14.7 % Capital expenditures$ 210 $ 1,170 (82.1 )%$ 1,311
$ 2,952 (55.6 )% Total assets at September 30,$ 1,918,263 $ 1,646,287 16.5 %
(1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues.
(2) A non-GAAP financial measure.
NMF = Not a meaningful figure
The Wholesale Brokerage Segment's total revenues for the three months endedSeptember 30, 2021 increased 11.1%, or$11.2 million , as compared to the same period in 2020, to$112.5 million . The$10.9 million net increase in core commissions and fees revenue was driven primarily by: (i)$5.8 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2020; and (ii)$5.1 million related to net new and renewal business. Profit-sharing contingent commissions and GSCs for the third quarter of 2021 increased$0.3 million compared to the third quarter of 2020. The Wholesale Brokerage Segment's growth rate for total commissions and fees was 11.1%, and the Organic Revenue growth rate was 5.1% for the third quarter of 2021. The Organic Revenue growth rate was driven by rate increases for most lines of coverage as well as new business. Income before income taxes for the three months endedSeptember 30, 2021 decreased 16.2%, or$5.7 million , as compared to the same period in 2020, to$29.4 million . The decrease was due to an increase in the change in estimated acquisition earnout payables and intercompany interest expense; which was partially offset by the drivers of EBITDAC described below. EBITDAC for the three months endedSeptember 30, 2021 increased 4.8%, or$1.9 million , as compared to the same period in 2020, to$42.1 million . EBITDAC Margin for the three months endedSeptember 30, 2021 decreased to 37.4% from 39.7%, as compared to the same period in 2020. EBITDAC Margin decreased due to: (i) higher broker compensation; (ii) slightly higher variable expenses as compared to prior year; and (iii) non recurring intercompany IT charges. The Wholesale Brokerage Segment's total revenues for the nine months endedSeptember 30, 2021 increased 15.0%, or$40.1 million , as compared to the same period in 2020, to$307.9 million . The$40.9 million net increase in core commissions and fees revenue was driven primarily by: (i)$20.2 million related to core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2020; and (ii)$20.7 million related to net new and renewal business. Profit-sharing contingent commissions and GSCs for the first nine months of 2021 decreased approximately$0.8 million compared to the same period of 2020. The Wholesale Brokerage Segment's growth rate for total commissions and fees was 15.0%, and the Organic Revenue growth rate was 8.0% for the first nine months of 2021. The Organic Revenue growth rate was driven by: (i) rate increases for most lines of coverage; and (ii) net new business and exposure unit expansion during the first nine months of 2021.
Income before income taxes for the nine months ended
EBITDAC for the nine months endedSeptember 30, 2021 increased 13.1%, or$12.0 million , as compared to the same period in 2020, to$103.9 million . EBITDAC Margin for the nine months endedSeptember 30, 2021 decreased to 33.7% from 34.3% in the same period in 2020. The increase in EBITDAC was due to: (i) the profit of newly acquired businesses; and (ii) leveraging our expense base; partially offset by (iii) slightly higher variable expenses as compared to prior year. Services Segment 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. The Services Segment also provides Medicare Set-aside account services,Social Security disability and Medicare benefits advocacy services, and claims adjusting services.
Unlike the other segments, nearly all of the Services Segment's revenue is generated from fees, which are not significantly affected by fluctuations in general insurance premiums.
38
--------------------------------------------------------------------------------
Financial information relating to our Services Segment for the three and nine
months ended
Three months ended September 30, Nine months ended September 30,
(in thousands, except
percentages) 2021 2020 % Change 2021 2020 % Change
REVENUES
Core commissions and fees $ 43,732 $ 43,497 0.5 % $ 135,590 $ 130,879 3.6 %
Profit-sharing contingent
commissions - - - % - - - %
Guaranteed supplemental
commissions - - - % - - - %
Investment income - - - % 3 - - %
Other income, net - - - % - - - %
Total revenues 43,732 43,497 0.5 % 135,593 130,879 3.6 %
EXPENSES
Employee compensation and
benefits 22,230 22,144 0.4 % 67,034 66,495 0.8 %
Other operating expenses 12,083 12,563 (3.8 )% 37,218 36,546 1.8 %
(Gain)/loss on disposal - - - % 9 - - %
Amortization 1,285 1,390 (7.6 )% 3,991 4,170 (4.3 )%
Depreciation 374 355 5.4 % 1,120 1,059 5.8 %
Interest 680 1,004 (32.3 )% 2,219 3,137 (29.3 )%
Change in estimated
acquisition earn-out payables - - - % - (3,085 ) 100.0 %
Total expenses 36,652 37,456 (2.1 )% 111,591 108,322 3.0 %
Income before income taxes $ 7,080 $ 6,041 17.2 % $ 24,002 $ 22,557 6.4 %
Income Before Income Taxes
Margin (1) 16.2 % 13.9 % 17.7 % 17.2 %
EBITDAC (2) $ 9,419 $ 8,790 7.2 % $ 31,332 $ 27,838 12.6 %
EBITDAC Margin (2) 21.5 % 20.2 % 23.1 % 21.3 %
Organic Revenue growth rate
(2) 0.5 % (13.1 )% 3.6 % (13.9 )%
Employee compensation and
benefits relative to total
revenues 50.8 % 50.9 % 49.4 % 50.8 %
Other operating expenses
relative to total revenues 27.6 % 28.9 % 27.4 % 27.9 %
Capital expenditures $ 887 $ 584 51.9 % $ 1,396 $ 1,057 32.1 %
Total assets at September 30, $ 449,494 $ 467,889 (3.9 )%
(1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues.
(2) A non-GAAP financial measure.
NMF = Not a meaningful figure
The Services Segment's total revenues for the three months endedSeptember 30, 2021 increased 0.5%, or$0.2 million , as compared to the same period in 2020, to$43.7 million . The Services Segment's total commissions and fees and Organic Revenue growth rate was 0.5% for the third quarter of 2021 driven by: (i) expansion of existing programs; (ii) specialized claims handling in our advisory business; and (iii) COVID-19 travel restricted claims; which were partially offset by (iv) lower claims in our advocacy businesses. Income before income taxes for the three months endedSeptember 30, 2021 increased 17.2%, or$1.0 million , as compared to the same period in 2020, to$7.1 million . Income before income taxes increased faster than EBITDAC due to lower intercompany interest expense and amortization. EBITDAC for the three months endedSeptember 30, 2021 increased 7.2%, or$0.6 million , from the same period in 2020, to$9.4 million . EBITDAC Margin for the three months endedSeptember 30, 2021 increased to 21.5% from 20.2% in the same period in 2020. The increases in EBITDAC and EBITDAC Margin were driven by continued expense management. The Services Segment's total revenues for the nine months endedSeptember 30, 2021 increased 3.6%, or$4.7 million from the same period in 2020, to$135.6 million . The Services Segment's total commissions and fees and Organic Revenue growth rate was 3.6% for the first nine months of 2020. The increase in Organic Revenue was caused primarily by: (i) travel restricted claims due to COVID-19; (ii) specialized claims handling in our advocacy business; and (iii) weather related claim activity; which were partially offset by (iv) lower claims in our advocacy businesses. Income before income taxes for the nine months endedSeptember 30, 2021 increased 6.4%, or$1.4 million , from the same period in 2020, to$24.0 million . The increase was driven by: (i) a lower change in estimated acquisition earn-out payables as compared to the prior year; (ii) lower intercompany interest expense; and (iii) the drivers of EBITDAC described below. 39 -------------------------------------------------------------------------------- EBITDAC for the nine months endedSeptember 30, 2021 increased 12.6%, or$3.5 million , from the same period in 2020, to$31.3 million . EBITDAC Margin for the nine months endedSeptember 30, 2021 increased to 23.1% from 21.3% in the same period in 2020. The increase in EBITDAC and EBITDAC Margin were driven primarily by leveraging our expense base with higher Organic Revenue growth and lower variable expenses in response to COVID-19.
Other
As discussed in Note 12 of the Notes to Condensed Consolidated Financial Statements, the "Other" column in the Segment Information table includes any revenue and expenses not allocated to reportable segments, and corporate-related items, including the intercompany interest expense charges to reporting segments.
LIQUIDITY AND CAPITAL RESOURCES
The Company seeks to maintain a conservative balance sheet and strong liquidity profile. Our capital requirements to operate as an insurance intermediary are low and we have been able to grow and invest in our business principally through cash that has been generated from operations. We have the ability to utilize our Revolving Credit Facility, which as ofSeptember 30, 2021 provided up to$800.0 million in available cash. We believe that we have access to additional funds, if needed, through the capital markets or private placements to obtain further debt financing under the current market conditions. The Company believes that its existing cash, cash equivalents, short-term investment portfolio and funds generated from operations, together with the funds available under the Revolving Credit Facility, will be sufficient to satisfy our normal liquidity needs, including principal payments on our long-term debt, for at least the next 12 months. The Revolving Credit Facility contains an expansion option for up to an additional$500.0 million of borrowing capacity, subject to the approval of participating lenders. In addition, under the Term Loan Credit Agreement, the unsecured term loan in the initial amount of$300.0 million may be increased by up to$150.0 million , subject to the approval of participating lenders. Including the expansion options under all existing credit agreements, the Company has access to up to$1.5 billion of incremental borrowing capacity as ofSeptember 30, 2021 .
Contractual Cash Obligations
As of
Payments Due by Period
(in thousands) Less than 1-3 4-5 After
Total 1 year years years 5 years
Long-term debt $ 2,057,500 $ 290,000 $ 717,500 $ - $ 1,050,000
Other liabilities (1) 189,249 43,051 33,321 10,185 102,692
Operating leases (2) 245,316 48,375 83,494 55,619 57,828
Interest obligations 347,278 60,308 109,381 64,750 112,839
Unrecognized tax benefits 881 - 881 - -
Maximum future acquisition
contingency payments (3) 512,873 131,057 381,816 - -
Total contractual cash obligations
(4) $ 3,353,097 $ 572,791 $ 1,326,393 $ 130,554 $ 1,323,359
(1)
Includes the current portion of other long-term liabilities, and approximately
$31.1 million of deferred employer-only payroll tax payments related to the
CARES Act which are expected to be paid in equal installments in each of
December 2021 and December 2022 .
(2)
Includes $12.2 million of future lease commitments expected to commence later in
2021 and 2022.
(3)
Includes $262.9 million of current and non-current estimated earn-out payables.
$25.0 million of this balance is not subject to any further contingency as a
result of the Amendment dated as of July 27, 2020 by and among the Company, The
Hays Group, Inc. , and certain of their affiliates, to the Asset Purchase
Agreement, dated as of October 22, 2018 . Earn-out payables for acquisitions not
denominated in U.S. dollars are measured at the current foreign exchange rate.
(4)
Does not include approximately $29.0 million of current liability for a dividend
of $0.1025 per share approved by the Board of Directors on October 19, 2021 .
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--------------------------------------------------------------------------------Debt
Total debt atSeptember 30, 2021 was$2,045.5 million net of unamortized discount and debt issuance costs, which was a decrease of$50.4 million compared toDecember 31, 2020 . The decrease includes: (i) the repayment of the principal balance of$52.5 million for scheduled principal amortization balances related to our various existing floating rate debt term notes; (ii) net of the amortization of discounted debt related to our various unsecured Senior Notes, and debt issuance cost amortization of$2.1 million . During the nine months endedSeptember 30, 2021 , the Company repaid$30.0 million of principal related to the Amended and Restated Credit Agreement term loan through the quarterly scheduled amortized principal payments. The Amended and Restated Credit Agreement term loan had an outstanding balance of$260.0 million as ofSeptember 30, 2021 . The Company is in active dialogue with currently participating banks and potential new banks related to the refinancing of our Amended and Restated Credit Agreement which consists of the Revolving Credit Facility and term loan component. The renewed facilities are expected to consist of an$800.0 million revolving credit facility and$250.0 million term loan and will mature in five years from the time of renewal. Much of the terms and covenants within the agreement are expected to be unchanged when compared to the Amended and Restated Credit Agreement. During the nine months endedSeptember 30, 2021 , the Company repaid$22.5 million of principal related to the Term Loan Credit Agreement through quarterly scheduled amortized principal payments. The Term Loan Credit Agreement had an outstanding balance of$247.5 million as ofSeptember 30, 2021 . The Company's next scheduled amortized principal payment is dueDecember 31, 2021 and is equal to$7.5 million .
Off-Balance Sheet Arrangements
Neither we nor our subsidiaries have ever incurred off-balance sheet obligations through the use of, or investment in, off-balance sheet derivative financial instruments or structured finance or special purpose entities organized as corporations, partnerships or limited liability companies or trusts.
For further discussion of our cash management and risk management policies, see "Quantitative and Qualitative Disclosures About Market Risk."
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