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, 2021 , and the two discussions should be read together.
GENERAL
Company Overview - Third Quarter of 2022
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, sales or 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. We also operate two capitalized captive insurance facilities (the "Captives") for the purpose of facilitating additional underwriting capacity, one on a quota share basis, currently focused on property insurance for earthquake and wind exposed properties for policies placed by certain of our MGA businesses, and the other through excess of loss reinsurance layers associated with placements made by one of our MGA businesses focused on personal property primarily in the southeasternUnited States . The quota share Captive buys reinsurance, limiting, but not fully eliminating the Company's exposure to underwriting losses. The other Captive has capped exposure through contractual aggregate limits on the reinsurance participations it assumes. 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, higher levels of inflation, which increase the value of insurable exposure units, or a general decline in economic activity, which could decrease the value of insurable exposure units. Conversely, increasing costs of litigation settlements and awards could cause some customers to seek higher levels of insurance coverage. Historically, we have grown our revenues as a result of our focus on net new business and acquisitions. We foster a strong, decentralized sales and service culture, which enables responsiveness to changing business conditions and drives accountability for results. The term "core commissions and fees" excludes profit-sharing contingent commissions, and therefore represents the revenues earned directly from specific insurance policies sold, and specific fee-based services rendered. The net change in core commissions and fees 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; (iv) the net change in fees paid to us by our customers; and (v) any businesses acquired or disposed of. We also earn "profit-sharing contingent commissions," which are commissions based primarily on underwriting results, but in select situations may reflect additional considerations for volume, growth and/or retention. These commissions, which 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. Fee revenues primarily relate to services other than securing coverage for our customers, and to a lesser extent as fees negotiated in lieu of commissions. Fee revenues are generated by: (i) our Services segment, which is primarily a fee-based business that 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, as well as Medicare Set-aside services,Social Security disability and Medicare benefits advocacy services, and claims adjusting services; (ii) our National Programs and Wholesale Brokerage segments, which earn fees primarily for the issuance of insurance policies on behalf of insurance companies; and (iii) 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 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 27.4% in 2021 and 26.1% in 2020.
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 money-market funds and 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.
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Income before income taxes for the three months ended September 30, 2022
increased from the third quarter of 2021 by $21.5 million or 10.9%, driven by
net new business, acquisitions completed in the past 12 months, and the
year-over-year change in estimated acquisition earn-out payables which were
partially offset by increased amortization expense as a result of our recent
acquisitions along with increased interest expense associated with higher
average debt balances from debt issued and bank financing in the first quarter
of 2022 to fund the acquisitions of GRP (Jersey) Holdco Limited and its
businesses ("GRP"), Orchid Underwriters Agency and CrossCover Insurance Services
("Orchid") and BdB Limited companies ("BdB") as well as increases in the
floating-rate benchmark used on our adjustable rate debt. The change in income
before income taxes also reflects: (i) a negative impact to our profit-sharing
contingent commissions of approximately $15.0 million and; (ii) losses of
approximately $11.5 million associated with our Captives, both relating to the
impacts from the estimated insured property losses associated with Hurricane
Ian.
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 the SEC rules: Total Revenues - Adjusted,
Organic Revenue, EBITDAC, EBITDAC Margin, EBITDAC - Adjusted and EBITDAC Margin
- Adjusted. We present these measures because we believe such information is of
interest to the investment community and because we believe it provides
additional meaningful methods to evaluate the Company's operating performance
from period to period on a basis that may not be otherwise apparent on a GAAP
basis due to the impact of certain items that have a high degree of variability
and that we believe are not indicative of ongoing performance. This non-GAAP
financial information should be considered in addition to, not in lieu of, the
Company's consolidated income statements and balance sheets as of the relevant
date. Consistent with Regulation G, a description of such information is
provided below and 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."
We view Organic Revenue and Organic Revenue growth as important indicators when
assessing and evaluating our performance on a consolidated basis and for each of
our four segments, because it allows us to determine a comparable, but non-GAAP,
measurement of revenue growth that is associated with the revenue sources that
were a part of our business in both the current and prior year and that are
expected to continue in the future. We also view Total Revenues - Adjusted,
EBITDAC, EBITDAC - Adjusted, EBITDAC Margin and EBITDAC Margin - Adjusted as
important indicators when assessing and evaluating our performance, as they
present more comparable measurements of our operating margins in a meaningful
and consistent manner. As disclosed in our most recent proxy statement, we use
Organic Revenue and EBITDAC Margin as key performance metrics for our short-term
and long-term incentive compensation plans for executive officers and other key
employees.
Beginning January 1, 2022 , we include guaranteed supplemental commissions
("GSCs") as part of core commissions and fees and, therefore, GSCs are a
component of Organic Revenue. All current and prior periods contained within
this Quarterly Report on Form 10-Q have been adjusted for this treatment. GSCs
are a stable source of revenue that are highly correlated to core commissions,
so isolating them separately provided no meaningful incremental value in
evaluating our revenue.
Beginning January 1, 2022 , the following, in addition to the change in estimated
acquisition earn-out payables, are excluded from certain non-GAAP measures, as
we believe these amounts are not indicative of the ongoing operating performance
of the business and are not easily comparable from period-to-period:
•
"(Gain)/loss on disposal," a caption on our consolidated statements of income which reflects net proceeds received as compared to net book value related to sales of books of business and other divestiture transactions, such as the disposal of a business through sale or closure.
•
"Acquisition/Integration Costs," which represent the acquisition and integration costs (e.g., costs associated with regulatory filings, legal/accounting services, due diligence and the costs of integrating our information technology systems) arising out of our acquisitions of GRP, Orchid and BdB, which are not expected to occur on an ongoing basis in the future.
•
The period-over-period impact of foreign currency translation ("Foreign Currency
Translation"), which is calculated by applying current-year foreign exchange
rates to the various functional currencies in our business to our reporting
currency of U.S. dollars for the same period in the prior year.
We are presenting EBITDAC - Adjusted and EBITDAC Margin - Adjusted for the current and prior year periods contained within this Quarterly Report on Form 10-Q so these non-GAAP financial measures compare both periods on the same basis.
Non-GAAP Revenue Measures
•
Total Revenues - Adjusted is our total revenues, excluding the period-over-period impact of Foreign Currency Translation.
•
Organic Revenue 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. The term "core
commissions and fees" excludes profit-sharing contingent commissions and
therefore represents the revenues earned directly from
30
--------------------------------------------------------------------------------specific insurance policies sold and specific fee-based services rendered. Organic Revenue can be expressed as a dollar amount or a percentage rate when describing Organic Revenue growth.
Non-GAAP Earnings Measures
•
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.
•
EBITDAC - Adjusted is defined as EBITDAC, excluding (i) (gain)/loss on disposal, (ii) Acquisition/Integration Costs and (iii) the period-over-period impact of Foreign Currency Translation.
•
EBITDAC Margin - Adjusted is defined as EBITDAC - Adjusted divided by Total Revenues - Adjusted.
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 and, therefore, comparability may be limited. This supplemental non-GAAP financial information should be considered in addition to, and not in lieu of, the Company's Condensed Consolidated Financial Statements.
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 2022, we acquired 601 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, 2021 . 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, 2021 for details regarding our critical and significant accounting policies. 31 --------------------------------------------------------------------------------
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 millions, except
percentages) 2022 2021 % Change 2022 2021 % Change
REVENUES
Core commissions and
fees $ 917.4 $ 752.1 22.0 % $ 2,609.7 $ 2,246.4 16.2 %
Profit-sharing
contingent commissions 7.8 17.6 (55.7 )% 58.5 63.2 (7.4 )%
Investment income 1.2 0.4 200.0 % 1.8 0.9 100.0 %
Other income, net 1.2 0.2 NMF 2.0 2.4 (16.7 )%
Total revenues 927.6 770.3 20.4 % 2,672.0 2,312.9 15.5 %
EXPENSES
Employee compensation
and benefits 470.3 395.0 19.1 % 1,341.3 1,220.1 9.9 %
Other operating
expenses 169.6 101.1 67.8 % 450.6 291.7 54.5 %
(Gain)/loss on
disposal - (0.3 ) NMF (0.9 ) (4.3 ) NMF
Amortization 43.5 29.5 47.5 % 108.2 88.6 22.1 %
Depreciation 11.3 9.2 22.8 % 28.3 25.4 11.4 %
Interest 41.5 16.2 156.2 % 95.8 48.8 96.3 %
Change in estimated
acquisition
earn-out payables (26.6 ) 23.1 NMF (33.1 ) 20.6 NMF
Total expenses 709.6 573.8 23.7 % 1,990.2 1,690.9 17.7 %
Income before income
taxes 218.0 196.5 10.9 % 681.8 622.0 9.6 %
Income taxes 56.9 50.1 13.6 % 155.2 136.6 13.6 %
NET INCOME $ 161.1 $ 146.4 10.0 % $ 526.6 $ 485.4 8.5 %
Income Before Income
Taxes
Margin (1) 23.5 % 25.5 % 25.5 % 26.9 %
EBITDAC - Adjusted (2) $ 289.8 $ 274.0 5.8 % $ 887.7 $ 800.3 10.9 %
EBITDAC Margin -
Adjusted (2) 31.2 % 35.6 % 33.2 % 34.6 %
Organic Revenue growth
rate (2) 6.7 % 8.6 % 8.3 % 10.9 %
Employee compensation
and benefits
relative to total
revenues 50.7 % 51.3 % 50.2 % 52.8 %
Other operating
expenses relative
to total revenues 18.3 % 13.1 % 16.9 % 12.6 %
Capital expenditures $ 14.1 $ 9.5 48.4 % $ 32.4 $ 34.6 (6.4 )%
Total assets at
September 30, $ 13,658.3 $ 9,629.2 41.8 %
(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
Commissions and Fees
Commissions and fees, including profit-sharing contingent commissions, for the three months endedSeptember 30, 2022 increased$155.5 million to$925.2 million , or 20.2%, over the same period in 2021. Core commissions and fees revenue for the third quarter of 2022 increased$165.3 million , composed of : (i) approximately$50.4 million of net new and renewal business, which reflects an Organic Revenue growth rate of 6.7%; (ii)$118.3 million from acquisitions that had no comparable revenues in the same period of 2021; (iii) an offsetting decrease from the impact of foreign currency translation of$1.2 million ; and (iv) an offsetting decrease of$2.2 million related to commissions and fees revenue from business divested in the preceding twelve months. Profit-sharing contingent commissions for the third quarter of 2022 decreased by$9.8 million , or 55.7%, compared to the same period in 2021, driven by a reduction of approximately$15.0 million in our National Programs segment relating to the impacts from the estimated insured property losses associated with Hurricane Ian. For the nine months endedSeptember 30, 2022 , commissions and fees, including profit-sharing contingent commissions, increased$358.6 million to$2,668.2 million , or 15.5%, over the same period in 2021. Core commissions and fees revenue for the nine months endedSeptember 30, 2022 increased$363.3 million , composed of: (i) approximately$184.6 million of net new and renewal business, which reflects an Organic Revenue growth rate of 8.3%; (ii)$188.4 million from acquisitions that had no comparable revenues in the same period of 2021; 32 -------------------------------------------------------------------------------- (iii) an offsetting decrease from the impact from foreign currency translation of$3.0 million ; and (iv) an offsetting decrease of$6.7 million related to commissions and fees revenue from businesses divested in the preceding 12 months. Profit-sharing contingent commissions for the nine months endedSeptember 30, 2022 decreased by$4.7 million , or 7.4%, compared to the same period in 2021, driven by a reduction of approximately$15.0 million in our National Programs segment relating to the impacts from the estimated insured property losses associated with Hurricane Ian.
Investment Income
Investment income for the three months endedSeptember 30, 2022 increased$0.8 million , or 200.0%, from the same period in 2021. Investment income for the nine months endedSeptember 30, 2022 increased$0.9 million , or 100.0%, from the same period in 2021. The increases were primarily driven by higher average interest rates compared to the prior year.
Other Income
Other income for the three months endedSeptember 30, 2022 increased$1.0 million to$1.2 million as compared to the same period in 2021. Other income for the nine months endedSeptember 30, 2022 decreased by$0.4 million , or 16.7%, as compared to the same period in 2021. Other income consists primarily of non-recurring legal settlements and other miscellaneous income and therefore can fluctuate between comparable periods.
Employee Compensation and Benefits
Employee compensation and benefits expense as a percentage of total revenues was 50.7% for the three months endedSeptember 30, 2022 as compared to 51.3% for the three months endedSeptember 30, 2021 , and increased 19.1%, or$75.3 million . This increase included$55.2 million of compensation costs related to stand-alone acquisitions that had no comparable costs in the same period of 2021. Therefore, employee compensation and benefits expense attributable to those offices that existed in the same time periods of 2022 and 2021 increased by$20.1 million , or 5.2%. This underlying employee compensation and benefits expense increase was primarily related to: (i) increased claims associated with our self-insured employee health plan; (ii) an increase in staff salaries attributable to salary inflation; (iii) an increase in producer compensation associated with revenue growth; partially offset by (iv) the year-over-year decrease of approximately$6.1 million in the value of deferred compensation liabilities driven by changes in the market prices of our employees' investment elections associated with our deferred compensation plan, with such amount substantially offset within other operating expenses as we hold assets to fund these liabilities that closely match the investment elections of our employees. Employee compensation and benefits expense as a percentage of total revenues was 50.2% for the nine months endedSeptember 30, 2022 as compared to 52.8% for the nine months endedSeptember 30, 2021 , and increased 9.9%, or$121.2 million . This increase included$80.1 million of compensation costs related to stand-alone acquisitions that had no comparable costs in the same period of 2021. Therefore, employee compensation and benefits expense attributable to those offices that existed in the same time periods of 2022 and 2021 increased by$41.1 million , or 3.4%. This underlying employee compensation and benefits expense increase was primarily related to: (i) increased claims associated with our self-insured employee health plan; (ii) an increase in staff salaries attributable to salary inflation; (iii) an increase in accrued performance bonuses; (iv) an increase in producer compensation associated with revenue growth; partially offset by (v) the year-over-year decrease of approximately$39.8 million in the value of deferred compensation liabilities driven by changes in the market prices of our employees' investment elections associated with our deferred compensation plan, which was substantially offset by other operating expenses as we hold assets to fund these liabilities that closely match the investment elections of our employees.
Other Operating Expenses
Other operating expenses represented 18.3% of total revenues for the third quarter of 2022 as compared to 13.1% for the third quarter of 2021. Other operating expenses for the third quarter of 2022 increased$68.5 million , or 67.8%, from the same period of 2021. The net increase included: (i)$32.7 million of other operating expenses related to stand-alone acquisitions that had no comparable costs in the same period of 2021; (ii) losses of approximately$11.5 million recorded within our Captives as a result of the estimated insured property losses associated with Hurricane Ian; (iii) increased variable costs with travel and entertainment being the largest driver; (iv) acquisition and integration costs associated with the acquisitions ofOrchid, GRP , and BdB, and; (v) the year-over-year decrease of approximately$6.1 million in the value of assets held to fund the associated liabilities within our deferred compensation plan, which was substantially offset within employee compensation and benefits as noted above. Other operating expenses represented 16.9% of total revenues for the nine months endedSeptember 30, 2022 , as compared to 12.6% for the nine months endedSeptember 30, 2021 . Other operating expenses for the first nine months of 2022 increased$158.9 million , or 54.5%, from the same period of 2021. The net increase included: (i)$45.4 million of other operating expenses related to stand-alone acquisitions that had no comparable costs in the same period of 2021; (ii) increased variable costs with travel and entertainment being the largest driver; (iii) losses of approximately$11.5 million recorded within our Captives as a result of the estimated insured property losses associated with Hurricane Ian; (iv) acquisition and integration costs associated with the acquisitions ofOrchid, GRP , and BdB, and; (v) the year-over-year decrease of approximately$39.8 million in the value of assets held to fund the associated liabilities within our deferred compensation plan, which was substantially offset within employee compensation and benefits as noted above. 33 --------------------------------------------------------------------------------
(Gain)/Loss on Disposal
Gain on disposal for the third quarter of 2022 decreased$0.3 million from the third quarter of 2021. Gain on disposal for the nine months endedSeptember 30, 2022 decreased$3.4 million from the nine months endedSeptember 30, 2021 . The gains on disposal were due to activity associated with book of business sales. Although we do not routinely sell businesses or 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 2022 increased$14.0 million , or 47.5%, compared to the third quarter of 2021. Amortization expense for the nine months endedSeptember 30, 2022 increased$19.6 million , or 22.1%, compared to the nine months endedSeptember 30, 2021 . 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 2022 increased$2.1 million , or 22.8%, compared to the third quarter of 2021. Depreciation expense for the nine months endedSeptember 30, 2022 increased$2.9 million , or 11.4%, compared to the nine months endedSeptember 30, 2021 . 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 2022 increased$25.3 million , or 156.2%, compared to the third quarter of 2021. Interest expense for the nine months endedSeptember 30, 2022 increased$47.0 million , or 96.3%, compared to the first nine months of 2021. These increases were due to higher average debt balances resulting from debt issuance and bank financing in the first quarter of 2022 to fund the acquisitions ofOrchid, GRP , and BdB, as well as increases in the floating rate benchmark used on our adjustable-rate debt.
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, 2022 and 2021, 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, 2022 and 2021 were
as follows:
Three months ended September 30, Nine months ended September 30,
(in millions) 2022 2021 2022 2021
Change in fair value of estimated
acquisition earn-out payables $ (28.5 ) $ 21.8 $ (38.1 ) $ 15.8
Interest expense accretion 1.9 1.3 5.0 4.8
Net change in earnings from estimated
acquisition earn-out payables $ (26.6 ) $ 23.1 $ (33.1 ) $ 20.6
For the three months and nine months endedSeptember 30, 2022 , the fair value of estimated earn-out payables was re-evaluated and decreased by$28.5 million and$38.1 million , respectively, which resulted in credits to the Condensed Consolidated Statements of Income, respectively. As ofSeptember 30, 2022 , estimated acquisition earn-out payables totaled$249.9 million , of which$100.5 million was recorded as accounts payable and$149.4 million was recorded as other non-current liabilities. 34 --------------------------------------------------------------------------------
Income Taxes
The effective tax rate on income from operations for the three months endedSeptember 30, 2022 and 2021 was 26.1% and 25.5% respectively. The effective tax rate on income from operations for the nine months endedSeptember 30, 2022 and 2021 was 22.8% and 22.0%, respectively. 35 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS - SEGMENT INFORMATION
As discussed in Note 12 to the Condensed Consolidated Financial Statements, we operate four reportable segments: Retail, National Programs, Wholesale Brokerage, and Services. On a segmented basis, changes in amortization, depreciation and interest expenses generally result from activity associated with acquisitions. Likewise, other revenues in each segment reflects net gains primarily from legal settlements and miscellaneous income. As such, in evaluating the operational efficiency of a segment, management focuses on the Organic Revenue growth rate and EBITDAC Margin. The reconciliation of commissions and fees included in the Condensed Consolidated Statements of Income to Organic Revenue, a non-GAAP financial measure, for the three months endedSeptember 30, 2022 and 2021, including by segment, and the growth rates for Organic Revenue for the three months endedSeptember 30, 2022 , including by segment, are as follows: 2022 Retail (1) National Programs Wholesale Brokerage Services Total (in millions, except percentages) 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 Commissions and fees$ 526.9 $ 422.8 $ 231.1 $ 190.9 $ 126.1 $ 112.3 $ 41.1 $ 43.7 $ 925.2 $ 769.7 Total change$ 104.1 $ 40.2 $ 13.8 (2.6 )$ 155.5 Total growth % 24.6 % 21.1 % 12.3 % (5.9 )% 20.2 % Profit-sharing contingent commissions (10.9 ) (8.7 ) 6.2 (6.5 ) (3.1 ) (2.4 ) - - (7.8 ) (17.6 ) Core commissions and fees$ 516.0 $ 414.1 $ 237.3 $ 184.4 $ 123.0 $ 109.9 $ 41.1 $ 43.7 $ 917.4 $ 752.1 Acquisitions (82.7 ) - (27.4 ) - (8.2 ) - - - (118.3 ) - Dispositions - (0.7 ) - (0.9 ) - - - (0.6 ) - (2.2 ) Foreign currency translation - (1.0 ) - (0.2 ) - - - - - (1.2 ) Organic Revenue (2)$ 433.3 $ 412.4 $ 209.9 $ 183.3 $ 114.8 $ 109.9 $ 41.1 $ 43.1 $ 799.1 $ 748.7 Organic Revenue growth (2)$ 20.9 $ 26.6 $ 4.9 $ (2.0 ) $ 50.4 Organic Revenue growth rate (2) 5.1 % 14.5 % 4.5 % (4.6 )% 6.7 % (1) The Retail Segment includes commissions and fees reported in the "Other" column of the Segment Information in Note 12 of this 10-Q 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, 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 millions, except percentages) 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 Commissions and fees$ 422.8 $ 359.0 $ 190.9 $ 167.8 $ 112.3 $ 101.1 $ 43.7 $ 43.5 $ 769.7 $ 671.4 Total change$ 63.8 $ 23.1 $ 11.2 $ 0.2 $ 98.3 Total growth % 17.8 % 13.8 % 11.1 % 0.5 % 14.6 % Profit-sharing contingent commissions (8.7 ) (6.4 ) (6.5 ) (5.5 ) (2.4 ) (1.9 ) - - (17.6 ) (13.8 ) Core commissions and fees 414.1 352.6 184.4 162.3 109.9 99.2 43.7 43.5 752.1 657.6 Acquisition revenues$ (32.7 ) $ - $ - $ - $
(5.9 ) $ - $ - $ -$ (38.6 ) $ - Divested business - (1.0 ) - - - - - - - (1.0 ) Foreign currency translation - - - 0.3 - - - - - 0.3 Organic Revenue (2)$ 381.4 $ 351.6 $ 184.4 $ 162.6 $ 104.0 $ 99.2 $ 43.7 $ 43.5 $ 713.5 $ 656.9 Organic Revenue growth (2)$ 29.8 $ 21.8 $ 4.8 $ 0.2 $ 56.6 Organic Revenue growth rate (2) 8.5 % 13.4 % 4.8 % 0.5 % 8.6 % (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. 36 --------------------------------------------------------------------------------
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
2022 Retail (1) National Programs Wholesale Brokerage Services Total (in millions, except percentages) 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 Commissions and fees$ 1,579.7 $ 1,345.0 $ 618.6 $ 521.6 $ 341.2 $ 307.4 $ 128.8 $ 135.6 $ 2,668.3 $ 2,309.6 Total change$ 234.7 $ 97.0 $ 33.8 $ (6.8 ) $ 358.7 Total growth % 17.4 % 18.6 % 11.0 % (5.0 )% 15.5 % Profit-sharing contingent commissions (38.3 ) (32.8 ) (12.0 ) (23.9 ) (8.2 ) (6.5 ) - - (58.5 ) (63.2 ) Core commissions and fees 1,541.4 1,312.2 606.6 497.7 333.0 300.9 128.8 135.6 2,609.8 2,246.4 Acquisitions$ (133.8 ) $ -$ (45.1 ) $ -$ (9.6 ) $ - $ - $ -$ (188.5 ) $ - Dispositions - (1.9 ) - (3.0 ) - - - (1.8 ) - (6.7 ) Foreign currency translation - (2.7 ) - (0.3 ) - - - - - (3.0 ) Organic Revenue (2)$ 1,407.6 $ 1,307.6 $ 561.5 $ 494.4 $ 323.4 $ 300.9 $ 128.8 $ 133.8 $ 2,421.3 $ 2,236.7 Organic Revenue growth (2)$ 100.0 $ 67.1 $ 22.5 $ (5.0 ) $ 184.6 Organic Revenue growth % (2) 7.6 % 13.6 % 7.5 % (3.7 )% 8.3 % (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.
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 millions, except percentages) 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 Commissions and fees$ 1,345.0 $ 1,117.3 $ 521.6 $ 450.5 $ 307.4 $ 267.4 $ 135.6 $ 130.9 $ 2,309.6 $ 1,966.1 Total change$ 227.7 $ 71.1 $ 40.0 $ 4.7 $ 343.5 Total growth % 20.4 % 15.8 % 15.0 % 3.6 % 17.5 % Profit-sharing contingent commissions (32.8 ) (29.4 ) (23.9 ) (20.5 ) (6.5 ) (6.5 ) - - (63.2 ) (56.4 ) Core commissions and fees$ 1,312.2 $ 1,087.9 $ 497.7 $ 430.0 $ 300.9 $ 260.9 $ 135.6 $ 130.9 $ 2,246.4 $ 1,909.7 Acquisition revenues (102.9 ) - (8.1 ) - (20.2 ) - - - (131.2 ) - Divested business - (3.1 ) - - - - - - - (3.1 ) Foreign currency translation - - - 1.0 - - - - - 1.0 Organic Revenue (2)$ 1,209.3 $ 1,084.8 489.6$ 431.0
$ 280.7 $ 260.9 $ 135.6 $ 130.9 $ 2,115.2 $ 1,907.6 Organic Revenue growth (2)$ 124.5 $ 58.6 $ 19.8 $ 4.7 $ 207.6 Organic Revenue growth % (2) 11.5 % 13.6 % 7.6 % 3.6 % 10.9 % (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. 37 -------------------------------------------------------------------------------- The reconciliation of Total Revenues to Total Revenues - Adjusted, a non-GAAP measure, income before incomes taxes, included in the Condensed Consolidated Statement of Income, to EBITDAC, a non-GAAP measure, and EBITDAC - Adjusted, a non-GAAP measure, and Income Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, and EBITDAC Margin - Adjusted, a non-GAAP measure, for the three months endedSeptember 30, 2022 , including by segment, is as follows: National Wholesale (in millions) Retail Programs Brokerage Services Other Total Total Revenues$ 528.2 $ 231.4 $ 126.3 $ 41.1 $ 0.6 $ 927.6 Total Revenues - Adjusted(2) 528.2 231.4 126.3 41.1 0.6 927.6 Income before income taxes 112.2 69.7 35.4 4.7 (4.0 ) 218.0 Income Before Income Taxes Margin(1) 21.2 % 30.1 % 28.0 % 11.4 % NMF 23.5 % Amortization 28.2 11.4 2.6 1.3 - 43.5 Depreciation 3.9 4.6 0.7 0.4 1.7 11.3 Interest 22.8 10.2 3.2 0.5 4.8 41.5 Change in estimated acquisition earn-out payables (18.6 ) (10.8 ) 2.8 - - (26.6 ) EBITDAC(2) 148.5 85.1 44.7 6.9 2.5 287.7 EBITDAC Margin(2) 28.1 % 36.8 % 35.4 % 16.8 % NMF 31.0 % (Gain)/loss on disposal - - - - - -
Acquisition/Integration
Costs 1.2 0.1 0.8 - - 2.1 EBITDAC - Adjusted(2)$ 149.7 $ 85.2 $ 45.5 $ 6.9 $ 2.5 $ 289.8 EBITDAC Margin - Adjusted(2) 28.3 % 36.8 % 36.0 % 16.8 % NMF 31.2 % (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 reconciliation of Total Revenues to Total Revenues - Adjusted, a non-GAAP measure, income before incomes taxes, included in the Condensed Consolidated Statement of Income, to EBITDAC - Adjusted, a non-GAAP measure, and Income Before Income Taxes Margin to EBITDAC Margin - Adjusted, a non-GAAP measure, for the three months endedSeptember 30, 2021 , including by segment, is as follows: National Wholesale (in millions) Retail Programs Brokerage Services Other Total Total Revenues$ 423.4 $ 191.1 $ 112.5 $ 43.7 $ (0.4 ) $ 770.3 Foreign Currency Translation (1.1 ) (0.2 ) - - - (1.3 ) Total Revenues - Adjusted(2) 422.3 190.9 112.5 43.7 (0.4 ) 769.0 Income before income taxes 71.6 72.4 29.4 7.1 16.0 196.5 Income Before Income Taxes Margin(1) 16.9 % 37.9 % 26.1 % 16.2 % NMF 25.5 % Amortization 19.1 6.8 2.3 1.3 - 29.5 Depreciation 2.8 3.0 0.6 0.3 2.5 9.2 Interest 22.4 2.2 3.9 0.7 (13.0 ) 16.2 Change in estimated acquisition earn-out payables 17.3 - 5.8 - - 23.1 EBITDAC(2) 133.2 84.4 42.0 9.4 5.5 274.5 EBITDAC Margin(2) 31.5 % 44.2 % 37.3 % 21.5 % NMF 35.6 % (Gain)/loss on disposal (0.3 ) - - - - (0.3 ) Acquisition/Integration Costs - - - - - - Foreign Currency Translation (0.1 ) (0.1 ) - - - (0.2 ) EBITDAC - Adjusted(2)$ 132.8 $ 84.3 $ 42.0 $ 9.4 $ 5.5 $ 274.0 EBITDAC Margin - Adjusted(2) 31.4 % 44.2 % 37.3 % 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 Total Revenues to Total Revenues - Adjusted, a non-GAAP measure, income before incomes taxes, included in the Condensed Consolidated Statement of Income, to EBITDAC - Adjusted, a non-GAAP measure, and Income Before Income Taxes Margin to EBITDAC Margin - Adjusted, a non-GAAP measure, for the nine months endedSeptember 30, 2022 , including by segment, is as follows: 38 --------------------------------------------------------------------------------
National Wholesale
(in millions) Retail Programs Brokerage Services Other Total
Total Revenues $ 1,582.3 $ 619.3 $ 341.6 $ 128.8 $ - $ 2,672.0
Total Revenues -
Adjusted(2) 1,582.3 619.3 341.6 128.8 - 2,672.0
Income before income taxes 378.8 187.9 94.8 18.0 2.3 681.8
Income Before Income Taxes
Margin(1) 23.9 % 30.3 % 27.8 % 14.0 % NMF 25.5 %
Amortization 69.8 27.9 6.7 3.9 (0.1 ) 108.2
Depreciation 9.1 10.9 2.0 1.2 5.1 28.3
Interest 69.9 22.8 10.0 1.6 (8.5 ) 95.8
Change in estimated
acquisition
earn-out payables (21.8 ) (10.6 ) (0.7 ) - - (33.1 )
EBITDAC(2) 505.8 238.9 112.8 24.7 (1.2 ) 881.0
EBITDAC Margin(2) 32.0 % 38.6 % 33.0 % 19.2 % NMF 33.0 %
(Gain)/loss on disposal (1.1 ) - 0.2 - - (0.9 )
Acquisition/Integration
Costs 4.3 0.4 1.5 - 1.4 7.6
EBITDAC - Adjusted(2) $ 509.0 $ 239.3 $ 114.5 $ 24.7 $ 0.2 $ 887.7
EBITDAC Margin -
Adjusted(2) 32.2 % 38.6 % 33.5 % 19.2 % NMF 33.2 %
(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 reconciliation of Total Revenues to Total Revenues - Adjusted, a non-GAAP
measure, income before incomes taxes, included in the Condensed Consolidated
Statement of Income, to EBITDAC - Adjusted, a non-GAAP measure, and Income
Before Income Taxes Margin to EBITDAC Margin - Adjusted, a non-GAAP measure, for
the nine months ended September 30, 2021 , including by segment, is as follows:
National Wholesale
(in millions) Retail Programs Brokerage Services Other Total
Total Revenues $ 1,347.4 $ 522.3 $ 307.9 $ 135.6 $ (0.3 ) $ 2,312.9
Foreign Currency
Translation (2.8 ) (0.3 ) - - - (3.1 )
Total Revenues -
Adjusted(2) 1,344.6 522.0 307.9 135.6 (0.3 ) 2,309.8
Income before income taxes 293.4 180.2 74.5 24.0 49.9 622.0
Income Before Income Taxes
Margin(1) 21.8 % 34.5 % 24.2 % 17.7 % NMF 26.9 %
Amortization 56.9 20.6 7.1 4.0 - 88.6
Depreciation 8.3 7.5 2.0 1.1 6.5 25.4
Interest 67.6 9.2 12.2 2.2 (42.4 ) 48.8
Change in estimated
acquisition
earn-out payables 20.8 (8.2 ) 8.0 - - 20.6
EBITDAC(2) 447.0 209.3 103.8 31.3 14.0 805.4
EBITDAC Margin(2) 33.2 % 40.1 % 33.7 % 23.1 % NMF 34.8 %
(Gain)/loss on disposal (4.3 ) - - - - (4.3 )
Acquisition/Integration
Costs - - - - - -
Foreign Currency
Translation (0.7 ) (0.1 ) - - - (0.8 )
EBITDAC - Adjusted(2) $ 442.0 $ 209.2 $ 103.8 $ 31.3 $ 14.0 $ 800.3
EBITDAC Margin -
Adjusted(2) 32.9 % 40.1 % 33.7 % 23.1 % NMF 34.6 %
(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
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 F&I
businesses. Approximately 76.4% of the Retail segment's commissions and fees
revenue is commission based.
39
--------------------------------------------------------------------------------
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 millions, except
percentages) 2022 2021 % Change 2022 2021 % Change
REVENUES
Core commissions and
fees $ 516.2 $ 414.4 24.6 % $ 1,542.4 $ 1,313.4 17.4 %
Profit-sharing
contingent commissions 10.9 8.7 25.3 % 38.3 32.8 16.8 %
Investment income - 0.2 - % - 0.3 - %
Other income, net 1.1 0.1 NMF 1.6 0.9 77.8 %
Total revenues 528.2 423.4 24.8 % 1,582.3 1,347.4 17.4 %
EXPENSES
Employee compensation
and benefits 285.6 225.9 26.4 % 821.6 710.9 15.6 %
Other operating
expenses 94.1 64.6 45.7 % 256.0 193.8 32.1 %
(Gain)/loss on
disposal - (0.3 ) NMF (1.1 ) (4.3 ) (74.4 )%
Amortization 28.2 19.1 47.6 % 69.8 56.9 22.7 %
Depreciation 3.9 2.8 39.3 % 9.1 8.3 9.6 %
Interest 22.8 22.4 1.8 % 69.9 67.6 3.4 %
Change in estimated
acquisition
earn-out payables (18.6 ) 17.3 NMF (21.8 ) 20.8 NMF
Total expenses 416.0 351.8 18.2 % 1,203.5 1,054.0 14.2 %
Income before income
taxes $ 112.2 $ 71.6 56.7 % $ 378.8 $ 293.4 29.1 %
Income Before Income
Taxes
Margin (1) 21.2 % 16.9 % 23.9 % 21.8 %
EBITDAC - Adjusted (2) $ 149.7 $ 132.8 12.7 % $ 509.0 $ 442.0 15.2 %
EBITDAC Margin -
Adjusted (2) 28.3 % 31.4 % 32.2 % 32.9 %
Organic Revenue growth
rate (2) 5.1 % 8.5 % 7.6 % 11.5 %
Employee compensation
and benefits
relative to total
revenues 54.1 % 53.4 % 51.9 % 52.8 %
Other operating
expenses relative
to total revenues 17.8 % 15.3 % 16.2 % 14.4 %
Capital expenditures $ 4.7 $ 2.1 123.8 % $ 8.4 $ 5.8 44.8 %
Total assets at
September 30, $ 7,128.1 $ 7,385.8 (3.5 %)
(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 Retail Segment's total revenues for the three months ended September 30,
2022 increased 24.8%, or $104.8 million , as compared to the same period in 2021,
to $528.2 million . The $101.8 million increase in core commissions and fees
revenue was driven by: (i) approximately $82.7 million related to the core
commissions and fees revenue from acquisitions that had no comparable revenues
in the same period of 2021; (ii) an increase of $20.9 million related to net new
and renewal business; (iii) an offsetting decrease from the impact of foreign
currency translation of $1.0 million ; and (iv) an offsetting decrease of $0.7
million related to commissions and fees recorded in 2021 from businesses since
divested. Profit-sharing contingent commissions for the third quarter of 2022
increased 25.3%, or $2.2 million , as compared to the same period in 2021, to
$10.9 million . This increase was primarily the result of recent acquisitions and
to a lesser extent qualifying for certain profit-sharing contingent commissions
in 2022 that we did not qualify for in the prior year. The Retail Segment's
total commissions and fees increased by 24.6%, and the Organic Revenue growth
rate was 5.1% for the third quarter of 2022. 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 professional liability,
employee benefits, and condo property, partially offset by continued premium
rate reductions in workers' compensation. This growth was partially offset by a
decline in revenue within our F&I businesses due to the slowdown in the
automobile industry.
Income before income taxes for the three months ended September 30, 2022
increased 56.7%, or $40.6 million , as compared to the same period in 2021, to
$112.2 million . The primary factors driving this increase were: (i) the profit
associated with the net increase in revenue as described above; (ii) a decrease
to the change in estimated acquisition earn-out payables, partially offset by
(iii) amortization and depreciation expenses growing faster than total revenues.
EBITDAC - Adjusted for the three months ended
40
--------------------------------------------------------------------------------the same period in 2021. The decrease in EBITDAC Margin - Adjusted was driven by: (i) increased variable operating expenses, which are largely travel and meeting related; (ii) the seasonality of profit associated with recent acquisitions and (iii) certain one-time costs.
The Retail Segment's total revenues for the nine months endedSeptember 30, 2022 increased 17.4%, or$234.9 million , as compared to the same period in 2021, to$1,582.3 million . The$229.0 million increase in core commissions and fees revenue was driven by: (i) approximately$133.8 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2021; (ii) an increase of$101.4 million related to net new and renewal business; (iii) an offsetting decrease from the impact of foreign currency translation of$2.7 million ; and (iv) an offsetting decrease of$1.9 million related to commissions and fees recorded in 2021 from businesses since divested. Profit-sharing contingent commissions for the nine months of 2022 increased 16.8%, or$5.5 million , as compared to the same period in 2021, to$38.3 million . The Retail Segment's total commissions and fees increased by 17.4%, and the Organic Revenue growth rate was 7.6% for the first nine months of 2022. 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, employee benefits, professional and excess liability, and condo partially offset by continued premium rate reductions in workers' compensation. This growth was partially offset by a decline in revenue within our F&I businesses due to the slowdown in automobile industry. Income before income taxes for the nine months endedSeptember 30, 2022 increased 29.1%, or$85.4 million , as compared to the same period in 2021, to$378.8 million . The primary factors driving this increase were: (i) the profit associated with the net increase in revenue as described above; (ii) the drivers of EBITDAC described below; (iii) amortization and depreciation growing faster than total revenues; and (iv) a decrease in the change in estimated acquisition earn-out payables. EBITDAC - Adjusted for the nine months endedSeptember 30, 2022 increased 15.2%, or$67.0 million , as compared to the same period in 2021, to$509.0 million . EBITDAC Margin - Adjusted for the nine months endedSeptember 30, 2022 decreased to 32.2% from 32.9% in the same period in 2021. The decrease in EBITDAC Margin - Adjusted was primarily driven by increased variable operating expenses, which are largely travel and meeting related, and to a lesser extent certain one-time expenses and the timing of expenses based on year-to-date performance. 41 --------------------------------------------------------------------------------
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. This segment also operates our write-your-own flood insurance carrier,Wright National Flood Insurance Company ("WNFIC") as well as two Captives. WNFIC's underwriting business consists of policies written under and fully ceded to the National Flood Insurance Program ("NFIP"). The Captives provide additional underwriting capacity and participate in underwriting results, one on a quota share basis, currently focused on property insurance for earthquake and wind exposed properties for policies placed by certain of our MGA businesses, and the other through excess of loss reinsurance layers associated with placements made by another of our MGA businesses focused on personal property primarily in the southeasternUnited States . The National Programs Segment operations can be grouped into five broad categories: Professional Programs, Personal Lines Programs, Commercial Programs, Public Entity-Related Programs and Specialty Programs. Approximately 75.2% of the National Programs Segment's commissions and fees revenue is 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 millions, except
percentages) 2022 2021 % Change 2022 2021 % Change
REVENUES
Core commissions and
fees $ 237.3 $ 184.4 28.7 % $ 606.6 $ 497.8 21.9 %
Profit-sharing
contingent commissions (6.2 ) 6.5 (195.4 )% 12.0 23.9 (49.8 )%
Investment income 0.3 0.1 200.0 % 0.6 0.4 50.0 %
Other income, net - 0.1 - % 0.1 0.2 - %
Total revenues 231.4 191.1 21.1 % 619.3 522.3 18.6 %
EXPENSES
Employee compensation
and benefits 82.9 74.1 11.9 % 234.8 218.1 7.7 %
Other operating
expenses 63.4 32.6 94.5 % 145.6 94.9 53.4 %
(Gain)/loss on
disposal - - - % - - - %
Amortization 11.4 6.8 67.6 % 27.9 20.6 35.4 %
Depreciation 4.6 3.0 53.3 % 10.9 7.5 45.3 %
Interest 10.2 2.2 NMF 22.8 9.2 147.8 %
Change in estimated
acquisition
earn-out payables (10.8 ) - NMF (10.6 ) (8.2 ) 29.3 %
Total expenses 161.7 118.7 36.2 % 431.4 342.1 26.1 %
Income before income
taxes $ 69.7 $ 72.4 (3.7 )% $ 187.9 $ 180.2 4.3 %
Income Before Income
Taxes
Margin (1) 30.1 % 37.9 % 30.3 % 34.5 %
EBITDAC - Adjusted (2) $ 85.2 $ 84.3 1.1 % $ 239.3 $ 209.2 14.4 %
EBITDAC Margin -
Adjusted (2) 36.8 % 44.2 % 38.6 % 40.1 %
Organic Revenue growth
rate (2) 14.5 % 13.4 % 13.6 % 13.6 %
Employee compensation
and benefits
relative to total
revenues 35.8 % 38.8 % 37.9 % 41.8 %
Other operating
expenses relative
to total revenues 27.4 % 17.1 % 23.5 % 18.2 %
Capital expenditures $ 3.3 $ 4.7 (29.8 %) $ 14.2 $ 11.3 25.7 %
Total assets at
September 30, $ 4,476.3 $ 3,789.4 18.1 %
(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 ended
September 30, 2022 increased 21.1%, or $40.3 million , as compared to the same
period in 2021, to $231.4 million . The $52.9 million increase in core
commissions and fees revenue was driven by: (i) approximately $26.6 million of
net new and renewal business; (ii) $27.4 million from acquisitions that had no
comparable revenues in the same period of 2021; (iii) an offsetting decrease
from the impact of foreign currency translation of $0.2 million ; and (iv) an
offsetting decrease of $0.9 million related to commissions and fees revenue from
business divested in the preceding twelve months. Profit-sharing contingent
42
--------------------------------------------------------------------------------
commissions for the third quarter of 2022 decreased approximately $12.7 million
or 195.4% as compared to the third quarter of 2021. This decrease was driven by
a reduction of approximately $15.0 million due to estimated insured property
losses associated with Hurricane Ian.
The National Programs Segment's total commissions and fees increase by 28.7%,
and the Organic Revenue growth rate was 14.5% for the three months ended
September 30, 2022 . The Organic Revenue growth was driven primarily by an
increase in lender-placed coverage, good new business and retention, exposure
unit expansion and rate increases for many programs.
Income before income taxes for the three months ended September 30, 2022
decreased 3.7%, or $2.7 million , as compared to the same period in 2021, to
$69.7 million . Income before income taxes decreased due to the drivers of
EBITDAC described below along with an increase in intercompany interest expense
and amortization expense related to recent acquisitions, partially offset by a
decrease in estimated acquisition earn-out payables associated with a business
impacted by Hurricane Ian.
EBITDAC - Adjusted for the three months ended September 30, 2022 increased 1.1%,
or $0.9 million , from the same period in 2021, to $85.2 million . EBITDAC Margin
- Adjusted for the three months ended September 30, 2022 decreased to 36.8% from
44.2% in the same period in 2021. EBITDAC - Adjusted increased slower than
revenues due to lower profit-sharing contingent commissions and estimated losses
in our Captives driven by estimated insured property losses associated with
Hurricane Ian.
The National Programs Segment's total revenue for the nine months ended
September 30, 2022 increased 18.6%, or $97.0 million , as compared to the same
period in 2021, to $619.3 million . The $108.8 million increase in core
commissions and fees revenue was driven by: (i) approximately $67.2 million of
net new and renewal business; (ii) $45.0 million from acquisitions that had no
comparable revenues in the same period of 2021; (iii) an offsetting decrease
from the impact of foreign currency translation of $0.3 million ; and (iv) an
offsetting decrease of $3.0 million related to commissions and fees revenue from
business divested in the preceding twelve months.
The National Programs Segment's total commissions and fees increase by 21.9%,
and the Organic Revenue growth rate was 13.6%, for the nine months ended
September 30, 2022 . The Organic Revenue growth was driven primarily by an
increase in lender placed coverage, good new business and retention, exposure
unit expansion and rate increases for many programs.
Income before income taxes for the nine months ended
EBITDAC - Adjusted for the nine months endedSeptember 30, 2022 increased 14.4%, or$30.1 million , as compared to the same period in 2021, to$239.3 million . EBITDAC Margin - Adjusted for the nine months endedSeptember 30, 2022 decreased to 38.6% from 40.1% in the same period in 2021. EBITDAC - Adjusted increased slower than revenues due to lower profit-sharing contingent commissions and estimated losses in our Captives driven by estimated insured property losses associated with Hurricane Ian. 43 --------------------------------------------------------------------------------
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. Approximately 83.3% of the Wholesale Brokerage Segment's commissions and fees revenue is 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 millions, except
percentages) 2022 2021 % Change 2022 2021 % Change
REVENUES
Core commissions and
fees $ 123.0 $ 110.0 11.8 % $ 333.0 $ 301.0 10.6 %
Profit-sharing
contingent commissions 3.1 2.4 29.2 % 8.2 6.5 26.2 %
Investment income 0.1 - - % 0.2 0.1 100.0 %
Other income, net 0.1 0.1 - % 0.2 0.3 (33.3 )%
Total revenues 126.3 112.5 12.3 % 341.6 307.9 10.9 %
EXPENSES
Employee compensation
and benefits 63.0 55.3 13.9 % 177.2 160.0 10.8 %
Other operating
expenses 18.6 15.2 22.4 % 51.4 44.1 16.6 %
(Gain)/loss on
disposal - - - % 0.2 - - %
Amortization 2.6 2.3 13.0 % 6.7 7.1 (5.6 )%
Depreciation 0.7 0.6 16.7 % 2.0 2.0 - %
Interest 3.2 3.9 (17.9 )% 10.0 12.2 (18.0 )%
Change in estimated
acquisition
earn-out payables 2.8 5.8 (51.7 )% (0.7 ) 8.0 (108.8 )%
Total expenses 90.9 83.1 9.4 % 246.8 233.4 5.7 %
Income before income
taxes $ 35.4 $ 29.4 20.4 % $ 94.8 $ 74.5 27.2 %
Income Before Income
Taxes
Margin (1) 28.0 % 26.1 % 27.8 % 24.2 %
EBITDAC - Adjusted (2) $ 45.5 $ 42.0 8.3 % $ 114.5 $ 103.8 10.3 %
EBITDAC Margin -
Adjusted (2) 36.0 % 37.3 % 33.5 % 33.7 %
Organic Revenue growth
rate (2) 4.5 % 4.8 % 7.5 % 7.6 %
Employee compensation
and benefits
relative to total
revenues 49.9 % 49.2 % 51.9 % 52.0 %
Other operating
expenses relative to
total revenues 14.7 % 13.5 % 15.0 % 14.3 %
Capital expenditures $ 0.7 $ 0.2 NMF $ 1.5 $ 1.3 15.4 %
Total assets at
September 30, $ 1,366.5 $ 1,918.2 (28.8 %)
(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 Wholesale Brokerage Segment's total revenues for the three months ended
September 30, 2022 increased 12.3%, or $13.8 million , as compared to the same
period in 2021, to $126.3 million . The $13.0 million net increase in core
commissions and fees revenue was driven primarily by: (i) $4.9 million related
to net new and renewal business; and (ii) $8.2 million related to the core
commissions and fees revenue from acquisitions that had no comparable revenues
in the same period of 2021. Profit-sharing contingent commissions for the third
quarter of 2022 increased $0.7 million compared to the third quarter of 2021.
The Wholesale Brokerage Segment's growth rate for total commissions and fees was
11.8%, and the Organic Revenue growth rate was 4.5% for the third quarter of
2022. The Organic Revenue growth rate was driven by new business, good retention
as well as rate increases for open brokerage. However, the Organic Revenue
growth was impacted by the performance of a business sold in the fourth quarter
of 2022 and continued headwinds in our personal lines business caused by reduced
carrier appetite to write coverage in certain geographies or lines of business.
Income before income taxes for the three months ended September 30, 2022
increased 20.4%, or $6.0 million , as compared to the same period in 2021, to
$35.4 million . The increase was due to: (i) the drivers of EBITDAC - Adjusted
described below; (ii) decrease in the change in estimated acquisition earn-out
payables; and (iii) lower intercompany interest expense; partially offset by
(iv) acquisition/integration costs.
44
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EBITDAC - Adjusted for the three months ended September 30, 2022 increased 8.3%,
or $3.5 million , as compared to the same period in 2021, to $45.5 million .
EBITDAC Margin - Adjusted for the three months ended September 30, 2022
decreased to 36.0% from 37.3%, as compared to the same period in 2021. EBITDAC
Margin - Adjusted decreased due to: (i) the seasonality of recent acquisitions;
and (ii) increased variable operating expenses as compared to prior year.
The Wholesale Brokerage Segment's total revenues for the nine months ended
September 30, 2022 increased 10.9%, or $33.7 million , as compared to the same
period in 2021, to $341.6 million . The $32.0 million net increase in core
commissions and fees revenue was driven primarily by: (i) $22.5 million related
to net new and renewal business; and (ii) $9.6 million related to core
commissions and fees revenue from acquisitions that had no comparable revenues
in the same period of 2021. Profit-sharing contingent commissions for the first
nine months of 2022 increased approximately $1.7 million compared to the same
period of 2021. The Wholesale Brokerage Segment's growth rate for total
commissions and fees was 10.6%, and the Organic Revenue growth rate was 7.5% for
the first nine months of 2022. The Organic Revenue growth rate was driven by new
business, good retention as well as rate increases for most lines of coverage.
However, the Organic Revenue growth was impacted by the performance of a
business sold in the fourth quarter of 2022 and declines in our personal lines
business caused by reduced carrier appetite to write coverage in certain
geographies or lines of business.
Income before income taxes for the nine months ended September 30, 2022
increased 27.2%, or $20.3 million , as compared to the same period in 2021, to
$94.8 million . (i) the drivers of EBITDAC - Adjusted described below; (ii)
decrease in the change in estimated acquisition earn-out payables; and (iii)
lower intercompany interest expense; partially offset by (iv)
acquisition/integration costs.
EBITDAC - Adjusted for the nine months ended September 30, 2022 increased 10.3%,
or $10.7 million , as compared to the same period in 2021, to $114.5 million .
EBITDAC Margin - Adjusted for the nine months ended September 30, 2022 decreased
to 33.5% from 33.7% in the same period in 2021. EBITDAC Margin - Adjusted
decreased due to: (i) higher broker compensation; (ii) increased variable
operating expenses, which are primarily travel and meeting related; and (iii)
the seasonality of recent acquisitions; partially offset by (iv) higher
profit-sharing contingent commissions; and (v) leveraging our expense base in
connection with revenue growth.
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.
45
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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 millions, except
percentages) 2022 2021 % Change 2022 2021 % Change
REVENUES
Core commissions and fees $ 41.1 $ 43.7 (5.9 %) $ 128.8 $ 135.6 (5.0 %)
Profit-sharing contingent
commissions - - - % - - - %
Investment income - - - % - - - %
Other income, net - - - % - - - %
Total revenues 41.1 43.7 (5.9 %) 128.8 135.6 (5.0 %)
EXPENSES
Employee compensation and
benefits 22.5 22.2 1.4 % 67.2 67.0 0.3 %
Other operating expenses 11.7 12.1 (3.3 )% 36.9 37.3 (1.1 %)
(Gain)/loss on disposal - - - % - - - %
Amortization 1.3 1.3 - % 3.9 4.0 (2.5 )%
Depreciation 0.4 0.3 33.3 % 1.2 1.1 9.1 %
Interest 0.5 0.7 (28.6 )% 1.6 2.2 (27.3 )%
Change in estimated acquisition
earn-out payables - - - % - - - %
Total expenses 36.4 36.6 (0.5 )% 110.8 111.6 (0.7 )%
Income before income taxes $ 4.7 $ 7.1 (33.8 %) $ 18.0 $ 24.0 (25.0 )%
Income Before Income Taxes
Margin (1) 11.4 % 16.2 % 14.0 % 17.7 %
EBITDAC - Adjusted (2) $ 6.9 $ 9.4 (26.6 %)
16.8 % 21.5 % 19.2 % 23.1 %
Organic Revenue growth rate (2) (4.6 %) 0.5 % (3.7 %) 3.6 %
Employee compensation and
benefits relative to total
revenues 54.7 % 50.8 % 52.2 % 49.4 %
Other operating expenses
relative to total revenues 28.5 % 27.7 % 28.6 % 27.5 %
Capital expenditures $ 0.3 $ 0.9 (66.7 )%
$ 289.1 $ 449.5 (35.7 )% (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, 2022 decreased 5.9%, or$2.6 million , as compared to the same period in 2021, to$41.1 million . The Services Segment's Organic Revenue declined 4.6% for the third quarter of 2022 driven by a lack of weather-related claims coupled with reduced severity in the current year. Income before income taxes for the three months endedSeptember 30, 2022 decreased 33.8%, or$2.4 million , as compared to the same period in 2021, to$4.7 million . Income before income taxes decreased due to the drivers of EBITDAC - Adjusted described below. EBITDAC - Adjusted for the three months endedSeptember 30, 2022 decreased 26.6%, or$2.5 million , from the same period in 2021, to$6.9 million . EBITDAC Margin - Adjusted for the three months endedSeptember 30, 2022 decreased to 16.8% from 21.5% in the same period in 2021. The decrease in EBITDAC and EBITDAC Margin was driven primarily by the reduction in revenue. The Services Segment's total revenues for the nine months endedSeptember 30, 2022 decreased 5.0%, or$6.8 million from the same period in 2021, to$128.8 million . The Services Segment's total commissions and fees and Organic Revenue growth declined 3.8% for the first nine months of 2022. The decrease in Organic Revenue was caused primarily by: (i) higher COVID-19 travel restricted claims in the prior year; and (ii) a lack of weather-related claims coupled with reduced severity in the current year.
Income before income taxes for the nine months ended
EBITDAC - Adjusted for the nine months endedSeptember 30, 2022 decreased 21.1%, or$6.6 million , from the same period in 2021, to$24.7 million . EBITDAC Margin - Adjusted for the nine months endedSeptember 30, 2022 decreased to 19.2% from 23.1% in the same period in 2021. The decrease in EBITDAC and EBITDAC Margin were driven primarily by the decrease in revenue. 46 --------------------------------------------------------------------------------
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, 2022 provided up to$650.0 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. OnMarch 31, 2022 , the Company entered into a Loan Agreement (the "Loan Agreement") which provided term loan capacity of$800.0 million . Additionally, the Company may, subject to satisfaction of certain conditions, including receipt of additional term loan commitments by new or existing lenders, increase either Term Loan Commitment under the existing Loan Agreement or the term loans issued thereunder or issue new tranches of term loans in an aggregate additional amount of up to$400.0 million . Including the expansion options under all existing credit agreements, the Company has access to up to$1.7 billion of incremental borrowing capacity as ofSeptember 30, 2022 .
Contractual Cash Obligations
As of
Payments Due by Period
(in millions) Less than 1-3 4-5 After
Total 1 year years years 5 years
Long-term debt $ 4,142.5 $ 67.5 $ 1,125.0 $ 700.0 $ 2,250.0
Other liabilities (1) 152.5 24.9 12.2 11.2 104.2
Operating leases (2) 272.1 57.4 94.8 59.9 60.0
Interest obligations 1,592.3 169.8 288.6 214.7 919.2Unrecognized tax benefits 3.1 - 3.1 - - Maximum future acquisition contingency payments (3) 550.3 166.8 375.7 7.8 - Total contractual cash obligations (4)$ 6,712.8 $ 486.4 $ 1,899.4 $ 993.6 $ 3,333.4 (1)
Includes the current portion of other long-term liabilities, and approximately
(2)
Includes
(3)
Includes$249.9 million of current and non-current estimated acquisition earn-out payables. Earn-out payables for acquisitions not denominated inU.S. dollars are measured at the current foreign exchange rate. Four of the estimated acquisition earn-out payables assumed in connection with the acquisition of GRP included provisions with no maximum potential earn-out amount. The amount recorded for these acquisitions as ofSeptember 30, 2022 is$2.8 million . The Company deems a significant increase to this amount to be unlikely.
(4)
Does not include approximately
47
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Total debt atSeptember 30, 2022 was$4,107.9 million net of unamortized discount and debt issuance costs, which was an increase of$2,085.0 million compared toDecember 31, 2021 . The increase includes: (i) the issuance of$1,200.0 million in aggregate principal amount of Senior Notes onMarch 17, 2022 , exclusive of debt issuance costs and discounts applied to the principal; (ii) the drawdown of$350.0 million of the revolving credit facility in conjunction with the acquisition payment for Orchid onMarch 31, 2022 ; (iii) the aggregate drawdown of$800.0 million under the Loan Agreement in connection with the funding of the acquisitions of GRP and BdB which occurred on various dates on or before the final draw onApril 28, 2022 ; and (iv) net of the amortization of discounted debt related to our various unsecured Senior Notes, and debt issuance cost amortization of$2.8 million ; offset by decreases due to: (i) the scheduled principal amortization balances related to our various existing floating-rate debt term notes in total of$44.4 million ; (ii) added discounted debt balances related to the issuance of$600.0 million in aggregate principal amount of the Company's 4.200% Senior Notes due 2032 (the "2032 Notes") and$600.0 million in aggregate principal amount of the Company's 4.950% Senior Notes due 2052 (the "2052 Notes," and together with the 2032 Notes, the "Notes") of$10.4 million ; (iii) debt issuance costs related to the Notes and the Loan Agreement of$13.0 million ; and (iv) throughSeptember 30, 2022 the Company repaying$200.0 million of debt related to the outstanding amount drawn under the revolving credit facility under the Second Amended and Restated Credit Agreement. During the nine months endedSeptember 30, 2022 , the Company repaid$9.4 million of principal related to the Second Amended and Restated Credit Agreement term loan through the quarterly scheduled amortized principal payments. The Second Amended and Restated Credit Agreement term loan had an outstanding balance of$237.5 million as ofSeptember 30, 2022 . The Company's next scheduled amortized principal payment is dueDecember 31, 2022 and is equal to$3.1 million . During the nine months endedSeptember 30, 2022 , 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$217.5 million as ofSeptember 30, 2022 . The Company's next scheduled amortized principal payment is dueDecember 31, 2022 and is equal to$7.5 million . During the nine months endedSeptember 30, 2022 , the Company repaid$12.5 million of principal related to the Term Loans issued under the Term A-2 Loan Commitment ("Term A-2 Loans") through quarterly scheduled amortized principal payments. The Term A-2 Loans had an outstanding balance of$487.5 million as ofSeptember 30, 2022 . The Company's next scheduled amortized principal payment is dueDecember 31, 2022 and is equal to$6.3 million . OnMarch 17, 2022 , the Company completed the issuance of$600.0 million aggregate principal amount of the Company's 4.200% Senior Notes due 2032 and$600.0 million aggregate principal amount of the Company's 4.950% Senior Notes due 2052 (and together with the 2032 Notes, the "Notes"). The net proceeds to the Company from the issuance of the Notes, after deducting underwriting discounts and estimated offering expenses, were approximately$1,178.2 million . The Senior Notes were given investment grade ratings of BBB- stable outlook and Baa3 stable outlook. The 2032 Notes bear interest at the rate of 4.200% per year and will mature onMarch 17, 2032 . The 2052 Notes bear interest at the rate of 4.950% per year and will mature onMarch 17, 2052 . Interest on the Notes will be payable semi-annually in arrears. The Notes are senior unsecured obligations of the Company and will rank equal in right of payment to all of the Company's existing and future senior unsecured indebtedness. The Company may redeem the Notes in whole or in part at any time and from time to time, at the "make whole" redemption prices specified in the Prospectus Supplement for the Notes being redeemed, plus accrued and unpaid interest thereon to, but excluding the redemption date. The Company used the net proceeds from the offering of the Notes, together with borrowings under its revolving credit facility, cash on hand and other borrowings, to fund the cash consideration and other amounts payable under the GRP Acquisition Agreement and to pay fees and expenses associated with the foregoing. As ofSeptember 30, 2022 , there was a total outstanding debt balance of$1,200.0 million exclusive of the associated discount balance on both Notes. OnMarch 31, 2022 , the Company entered into the Loan Agreement with the lenders named therein,BMO Harris Bank N.A ., as administrative agent,Fifth Third Bank , National Association,PNC Bank, National Association ,U.S. Bank National Association andWells Fargo Bank, National Association , as co-syndication agents andBMO Capital Markets Corp. ,BofA Securities, Inc. ,JPMorgan Chase Bank, N.A . andTruist Securities, Inc. , as joint bookrunners and joint lead arrangers. The Loan Agreement evidences commitments for (i) unsecured delayed draw term loans in an aggregate amount of up to$300.0 million (the "Term A-1 Loan Commitment") and (ii) unsecured delayed draw term loans in an amount of up to$500.0 million (the "Term A-2 Commitment" and, together with the Term A-1 Loan Commitments, the "Term Loan Commitments"). The Company may, subject to satisfaction of certain conditions, including receipt of additional term loan commitments by new or existing lenders, increase either Term Loan Commitment or the term loans issued thereunder or issue new tranches of term loans in an aggregate additional amount of up to$400.0 million . The Company may borrow term loans (the "Term Loans") under either of the Term Loan Commitments during the period from the Effective Date (the "Effective Date") until the date which is the first anniversary thereof. Once borrowed, Term Loans issued under the Term A-1 Loan Commitment ("Term A-1 Loans") are due and payable on the date that is the third anniversary of the Effective Date unless such maturity date is extended as provided under the Loan Agreement. Once borrowed, Term Loans issued under the Term A-2 Loan Commitment ("Term A-2 Loans") are repayable in installments until the fifth anniversary the Effective Date with any remaining outstanding amounts due and payable on such fifth anniversary of the Effective Date unless such maturity date is extended as provided under the Loan Agreement. While outstanding, the undrawn Term Loan Commitments accrue a commitment fee of 0.15% beginning on the earlier of the initial funding of Term Loans under the Loan Agreement and the date that is 120 days from the Effective Date. Once drawn, Term A-1 Loans will bear interest at the annual rate of Adjusted Term SOFR plus 1.125% or Base Rate plus 0.125% (subject to a 48 -------------------------------------------------------------------------------- pricing grid for changes in the Company's credit rating and/or leverage) and Term A-2 Loans will bear interest at the annual rate of Adjusted Term SOFR plus 1.25% or Base Rate plus 0.25% (subject to a pricing grid for changes in the Company's credit rating and/or leverage). The Loan Agreement includes various covenants (including financial covenants), limitations and events of default customary for similar facilities for similarly rated borrowers. As ofSeptember 30, 2022 the outstanding balance on the Loan Agreement was$787.5 million . OnMarch 31, 2022 the Company accessed$350.0 million of available proceeds on the revolving credit facility under the Second Amended and Restated Credit Agreement. The proceeds were used in conjunction with the funding of the Orchid acquisition along with funds from cash on hand. As ofSeptember 30, 2022 the outstanding loan balance was$150.0 million . 49
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