Improving Commissions and Fees Aid BRO, High Expenses Ail
Brown & Brown BRO is poised to grow on the strength of higher core commissions and fees, new business, solid retention, rate increases, strategic acquisitions, a strong financial position and effective capital deployment. BRO's earnings have risen 18.4% over the last five years, better than the industry average of 13.2%.
BRO has a solid earnings surprise history. It surpassed estimates in each of the last four quarters, the average earnings surprise being 9.82%.
The top line benefits from improving commissions and fees, which, in turn, is fueled by increasing new business, strong retention and continued rate increases for most lines of coverage. The top line witnessed a five-year annual growth rate of 14%.
The insurance broker continually makes investments in boosting organic growth and margin expansion. It boasts an industry-leading adjusted EBITDAC margin.
Brown & Brown’s inorganic growth is impressive. Strategic buyouts help it to capitalize on growing market opportunities, strengthen its compelling products and service portfolio, expand global reach and accelerate its growth rate. In the second quarter of 2024, the insurance broker made 10 acquisitions with estimated annual revenues of $13 million and continued to build relationships with many other companies.
Banking on operational performance, Brown & Brown has a strong liquidity position with an improving leverage ratio. The strength of its operating model and diversity of businesses ensures strong cash conversion. Continuous cash flow generation ensures wealth distribution for shareholders via dividend increases. BRO has an impressive dividend history, raising dividends for 30 straight years. Dividends increased at a five-year CAGR of 8.7%.
However, Brown & Brown has been experiencing rising expenses due to higher employee compensation and benefits, amortization, change in estimated acquisition earn-out payables as well as other operating expenses and interest expense. The company must strive to control costs, else margins could erode.
BRO’s trailing 12-month return on equity was 17%, lagging the industry average of 32.4%. Return on equity, a profitability measure, reflects how effectively a company is utilizing its shareholders’ fund.
Also, the return on invested capital in the trailing 12 months was 7.6%, comparing unfavorably with the industry average of 9.7%. It is reflecting BRO’s inefficiency in utilizing funds to generate income.
Nonetheless, BRO’s total shareholder return has outperformed its peer group and the S&P 500 in the last five years. The 10-year average total shareholders' return was 399%.
Some Key Industry Players
Other players in the insurance industry are Heritage Insurance HRTG, Palomar Holdings PLMR and CNO Financial Group CNO.
Heritage Insurance’s earnings surpassed estimates in three of the last four quarters and missed in one, the average surprise being 49.15%.
Rate adequacy, limiting new business in over-concentrated markets or products and selective profit-oriented underwriting criteria should drive growth at Heritage Insurance. The excess and supply (E&S) business is another growth driver for Heritage. This super-regional U.S. property and casualty insurance holding company stated that it will consider and evaluate growth opportunities in a greater number of states. Its solid reinsurance program protects its balance sheet, particularly given coastal exposure to hurricanes and other severe weather events.
Palomar’s earnings surpassed estimates in the last four quarters, the average surprise being 17.10%.
New business, strong premium retention rates for existing business and renewals of existing policies, better pricing and effective capital deployment should drive growth at Palomar. Palomar’s fee-generating PLMR-FRONT should fuel growth in the medium term. The addition of a fee-based revenue stream to the business is expected to strengthen its earnings base. PLMR’s risk transfer strategy lowers exposure to major events, which, in turn, reduces earnings volatility. Banking on operational strength, Palomar expects to generate adjusted net income between $110 million and $115 million in 2024.
CNO Financial’s earnings surpassed estimates in three of the last four quarters and missed in one, the average surprise being 21.21%.
Focus on the underserved middle-income market, its unique distribution model and broad product offerings poise CNO for growth. The insurance player continues to exhibit a growing agent force and improving underwriting margins. Significant investment in technology improves agent productivity and sales as well as improves its efficiency. Improving insurance product margin, general account assets and new annualized premiums will continue to support its bottom-line growth.
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CNO Financial Group, Inc. (CNO) : Free Stock Analysis Report
Brown & Brown, Inc. (BRO) : Free Stock Analysis Report
Heritage Insurance Holdings, Inc. (HRTG) : Free Stock Analysis Report
Palomar Holdings, Inc. (PLMR) : Free Stock Analysis Report