What we think about Brown & Brown (BRO)
Brown & Brown in Three Words: Insurance, Culture, Dividend
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Background
No matter what the economy is doing, companies will still need to buy insurance.
While individuals can easily browse insurance options for their homes, cars, and basic properties online, business needs are more complex. Guiding companies in these matters are brokers, often taking a commission as a percentage of the premium paid.
The insurance brokerage industry is fragmented but is consolidating quickly at the top. One of the proven winners in this space is Brown & Brown, returning an incredible 1,410% to shareholders over the past 30 years since its reverse-merger IPO in 1993. Since going public, Brown & Brown has grown revenue at more than a 13% compound annual growth rate (CAGR), increasing every year except in 2009, when revenue declined a mere 1% during the financial crisis. The company is a dividend aristocrat, raising its dividend for 30 consecutive years, making it an excellent company for investors looking for income.
The company recognizes most of its revenue through commissions paid by insurance companies as a percentage of paid premiums. Because commissions are primarily based on a portion of paid premiums, Brown & Brown’s business model enables it to capture the insurance industry’s upside without being exposed to underwriting risk. This allows even nefarious economic factors, such as inflation, to act as a potential net benefit (e.g., customers with higher revenue and asset values now need to insure practices and goods at a higher value). This asset-light business model supports high margins and a free cash flow conversion of 26%.
Because Brown & Brown operates as a broker or agent, it is not liable for insurance underwriting risks – with one glaring exception. The company owns the Wright National Flood Insurance Company, which operates in a risk-bearing capacity. This is particularly relevant because Wright is a flood insurer in Florida, which recently saw Hurricanes Ian and Nicole rip through the state.
While Brown & Brown protects itself from claims-related losses by reinsuring its claims, expect the stock price to be sensitive to news about flood-related claims resulting from the storms.
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