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BROWN & BROWN, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
General
Company Overview
The following discussion should be read in conjunction with our Consolidated Financial Statements and the related Notes to those Financial Statements included elsewhere in this Annual Report on Form 10-K. 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 participate in capitalized captive insurance facilities (the "Captives") for the purpose of having additional capacity to place coverage, drive additional revenues and to participate in underwriting. The Company has traditionally participated in underwriting profits through profit-sharing contingent commissions. These Captives give us another way to deliver incremental revenue growth and continue to participate in underwriting results while limiting exposure to claims expenses. The Captives focus on property insurance for earthquake and wind exposed properties underwritten by certain managing general agents. The Captives limit the Company's exposure to claims expenses either through reinsurance or by only participating in certain tranches of the underwriting. We have increased revenues every year from 1993 to 2022, with the exception of 2009, when our revenues declined 1.0%. Our revenues grew from$95.6 million in 1993 to$3.6 billion in 2022, reflecting a compound annual growth rate of 13.3%. In the same 29-year period, we increased net income from$8.1 million to$671.8 million in 2022, a 16.5% compound annual growth rate. 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 or a reduction of purchased limits the occurrence of catastrophic weather events all affect our revenues. For example, higher levels of inflation, an increase the value of insurable exposure units, or a general decline in economic activity, 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 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 26 --------------------------------------------------------------------------------
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 25.8% in 2022 and 27.4% in 2021.
For the year ended
16.9% and our consolidated Organic Revenue growth rate was 8.1%.
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. Income before income taxes for the year endedDecember 31, 2022 increased by$113.3 million , or 14.9% over 2021, driven by new business and growth from existing customers, acquisitions we completed in the last twelve months and the year-over-year change in estimated acquisition earn-out payables, which were partially offset by incremental operating costs, 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 ofGRP (Jersey) Holdco Limited and its businesses ("GRP"),Orchid Underwriters Agency andCrossCover Insurance Services ("Orchid") andBdB Limited companies ("BdB") as well as increases in the floating-rate benchmark used on our adjustable rate debt and the net change in any gain or loss associated with the sales of businesses or books of business.
Information Regarding Non-GAAP Financial 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 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 Annual Report on Form
10-K 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 they allow 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. 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K
so these non-GAAP financial measures compare both periods on the same basis.
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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 twelve 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 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 Consolidated Financial Statements.
Acquisitions
Part of our business strategy is to attract high-quality insurance
intermediaries and service organizations to join our operations. From 1993
through the fourth quarter of 2022, we acquired 610 insurance intermediary
operations.
Critical Accounting Policies
Our Consolidated Financial Statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We continually evaluate our estimates, which are based upon a combination of historical experience and assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for our judgments about the recognition of revenues, expenses, carrying values of our assets and liabilities, of which values are not readily apparent from other sources. Actual results may differ from these estimates. 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, intangible asset impairments, non-cash stock-based compensation and reserves for litigation. In particular, the accounting for these areas is subject to uncertainty because it 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.
Revenue Recognition
The majority of our revenue is commissions derived from our performance as
agents and brokers, acting on behalf of insurance carriers to sell products to
customers that are seeking to transfer risk, and conversely, acting on behalf of
those customers in negotiating with insurance carriers seeking to acquire risk
in exchange for premiums. In the majority of these arrangements, our performance
obligation is complete upon the effective date of the bound policy, as such,
that is when the associated revenue is recognized. In some arrangements, where
we are compensated through commissions, we also perform other services for our
customer beyond binding of coverage. In those arrangements we apportion the
commission between binding of coverage and other services based on their
relative fair value and recognize the associated revenue as those performance
obligations are satisfied. Where the Company's performance obligations have been
completed, but the final amount of compensation is unknown due to variable
factors, we estimate the amount of such compensation. We refine those estimates
upon our receipt of additional information or final settlement, whichever occurs
first.
To a lesser extent, the Company earns revenues in the form of fees. Like
commissions, fees paid to us in lieu of commission, are recognized upon the
effective date of the bound policy. When we are paid a fee for service, however,
the associated revenue is recognized over a period of time that coincides with
when the customer simultaneously receives and consumes the benefit of our work,
which characterizes
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most of our claims processing arrangements and various services performed in our
property and casualty, and employee benefits practices. Other fees are typically
recognized upon the completion of the delivery of the agreed-upon services to
the customer.
To a much lesser extent, the Company earned revenues starting in 2022 in the
form of net retained earned premiums in connection with the Captives. These
premiums are reported net of the ceded premiums for reinsurance and recognized
evenly over the associated policy periods.
Management determines a policy cancellation reserve based upon historical
cancellation experience adjusted in accordance with known circumstances.
Please see Note 2 "Revenues" in the "Notes to Consolidated Financial Statements"
for additional information regarding the nature and timing of our revenues.
Business Combinations and Purchase Price Allocations
We have acquired significant intangible assets through acquisitions of businesses. These assets generally consist of purchased customer accounts, non-compete agreements, and the excess of purchase prices over the fair value of identifiable net assets acquired (goodwill). The determination of estimated useful lives and the allocation of purchase price to intangible assets requires significant judgment and affects the amount of future amortization and possible impairment charges. In connection with acquisitions, we record the estimated value of the net tangible assets purchased and the value of the identifiable intangible assets purchased, which typically consist of purchased customer accounts and non-compete agreements. Purchased customer accounts include the right to represent insureds or claimants supported by the physical records and files obtained from acquired businesses that contain information about insurance policies, customers and other matters essential to policy renewals of delivery of services. Their value primarily represents the present value of the underlying cash flows expected to be received over the estimated future duration of the acquired customer relationships. The valuation of purchased customer accounts involves significant estimates and assumptions concerning matters such as cancellation frequency, expenses and discount rates. Any change in these assumptions could affect the carrying value of purchased customer accounts. Non-compete agreements are valued based upon their duration and any unique features of the particular agreements. Purchased customer accounts and non-compete agreements are amortized on a straight-line basis over the related estimated lives and contract periods, which typically range from 3 to 15 years. The excess of the purchase price of an acquisition over the fair value of the identifiable tangible and intangible assets is assigned to goodwill and is not amortized. The recorded purchase prices for all acquisitions include an estimation of the fair value of liabilities associated with any potential earn-out provisions, where an earn-out is part of the negotiated transaction. Subsequent changes in the fair value of earn-out obligations are recorded in the Consolidated Statement of Income as a result of updated expectations for the performance of the associated business. The fair value of earn-out obligations is based upon the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions contained in the respective purchase agreements. In determining fair value, the acquired business's future performance is estimated using financial projections developed by management for the acquired business, and this estimate reflects market participant assumptions regarding revenue growth and/or profitability. The expected future payments are estimated based on the earn-out formula and performance targets specified in each purchase agreement compared to the associated financial projections. These estimates are then discounted to a present value using a risk-adjusted rate that takes into consideration the likelihood that the forecast earn-out payments will be made.
Intangible Assets Impairment
Goodwill is subject to at least an annual assessment for impairment, measured by a fair-value-based test. Amortizable intangible assets are amortized over their useful lives and are subject to an impairment review based upon an estimate of the undiscounted future cash flows resulting from the use of the assets. To determine if there is potential impairment of goodwill, we compare the fair value of each reporting unit with its carrying value. The Company may elect to first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If the Company does not perform a qualitative assessment, or as a result of the qualitative assessment, it is not determined that the fair value of the reporting unit more likely than not exceeds the carrying amount, the Company will calculate the fair value of the reporting unit for comparison against the carrying value. If the fair value of the reporting unit is less than its carrying value, an impairment loss would be recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. Fair value is estimated based upon multiples of EBITDAC, or on a discounted cash flow basis. Management assesses the recoverability of our goodwill and our amortizable intangibles and other long-lived assets annually and whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Any of the following factors, if present, may trigger an impairment review: (i) a significant underperformance relative to historical or projected future operating results, (ii) a significant negative industry or economic trend, and (iii) a significant decline in our market capitalization. If the recoverability of these assets is unlikely because of the existence of one or more of the above-referenced factors, an impairment analysis is performed. Management must make assumptions regarding estimated future cash flows and other factors to determine the fair value of these assets. If these estimates or related assumptions change in the future, we may be required to revise the assessment and, if appropriate, record an impairment charge. We completed our most recent evaluation of impairment for goodwill as ofNovember 30, 2022 and determined that the fair value of goodwill exceeded the carrying value of such assets. Additionally, there have been no impairments recorded for amortizable intangible assets for the years endedDecember 31, 2022 and 2021. 29 -------------------------------------------------------------------------------- Non-Cash Stock-Based Compensation We grant non-vested stock awards to our employees, with the related compensation expense recognized in the financial statements over the associated service period based upon the grant-date fair value of those awards, subject to any performance modification. During the performance measurement period, we review the probable outcome of the performance conditions associated with our performance awards and adjust the expense recognition accruals with the expected performance outcome. During the first quarter of 2021, the performance conditions for approximately 1.2 million shares of the Company's common stock granted under the Company's 2010 SIP and approximately 22,000 shares of the Company's common stock granted under the Company's 2019 SIP were determined by the Compensation Committee to have been satisfied relative to the performance-based grants issued in 2018 and 2020. These grants had a performance measurement period that concluded onDecember 31, 2020 . The vesting condition for these grants requires continuous employment for a period of up to five years from the 2018 grant date and four years from the 2020 grant date in order for the awarded shares to become fully vested and nonforfeitable. As a result of the awarding of these shares, the grantees will be eligible to receive payments of dividends and exercise voting privileges. The awarded shares will be included as issued and outstanding common stock shares and included in the calculation of basic and diluted net income per share. During the first quarter of 2022, the performance conditions for approximately 1.3 million shares of the Company's common stock granted under the Company's 2010 SIP and approximately 22,000 shares of the Company's common stock granted under the Company's 2019 SIP were determined by the Compensation Committee to have been satisfied relative to the performance-based grants issued in 2019 and 2021. These grants had a performance measurement period that concluded onDecember 31, 2021 . The vesting condition for these grants requires continuous employment for a period of up to five years from the 2019 grant date and four years from the 2021 grant date in order for the awarded shares to become fully vested and nonforfeitable. As a result of the awarding of these shares, the grantees will be eligible to receive payments of dividends and exercise voting privileges. The awarded shares will be included as issued and outstanding common stock shares and included in the calculation of basic and diluted net income per share. During the first quarter of 2023, the performance conditions for approximately 970,000 shares of the Company's common stock granted under the under the Company's 2019 SIP were determined by the Compensation Committee to have been satisfied relative to the performance-based grants issued in 2020 and 2022. These grants had a performance measurement period that concluded onDecember 31, 2022 . The vesting condition for these grants requires continuous employment for a period of up to five years from the 2020 grant date and four years from the 2022 grant date in order for the awarded shares to become fully vested and nonforfeitable. As a result of the awarding of these shares, the grantees will be eligible to receive payments of dividends and exercise voting privileges. The awarded shares will be included as issued and outstanding common stock shares and included in the calculation of basic and diluted net income per share.
Litigation and Claims
We are subject to numerous litigation claims that arise in the ordinary course
of business. If it is probable that a liability has been incurred at the date of
the financial statements and the amount of the loss is estimable, an accrual for
the costs to resolve these claims is recorded in accrued expenses in the
accompanying Consolidated Financial Statements. Professional fees related to
these claims are included in other operating expenses in the accompanying
Consolidated Statement of Income as incurred. Management, with the assistance of
in-house and outside counsel, determines whether it is probable that a liability
has been incurred and estimates the amount of loss based upon analysis of
individual issues. New developments or changes in settlement strategy in dealing
with these matters may significantly affect the required reserves and affect our
net income.
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RESULTS OF OPERATIONS FOR THE YEARS ENDED
The following discussion and analysis regarding results of operations and liquidity and capital resources should be considered in conjunction with the accompanying Consolidated Financial Statements and related Notes. For a comparison of our results of operations and liquidity and capital resources for the years endedDecember 31, 2021 and 2020, please see Part II, Item 7 of our Annual Report on Form 10-K filed with theSecurities and Exchange Commission onFebruary 22, 2022 .
Financial information relating to our Consolidated Financial Results is as
follows:
(in millions, except percentages) 2022 % Change
2021
REVENUES
Core commissions and fees$ 3,474.5 17.2 %$ 2,965.3 Profit-sharing contingent commissions 88.7 7.9 % 82.2 Investment income 6.5 NMF 1.1 Other income, net 3.7 32.1 % 2.8 Total revenues 3,573.4 17.1 % 3,051.4 EXPENSES Employee compensation and benefits 1,816.9 11.0 % 1,636.9 Other operating expenses 596.8 48.1 % 403.0 (Gain)/loss on disposal (4.5 ) (53.1 )% (9.6 ) Amortization 146.6 22.6 % 119.6 Depreciation 39.2 17.7 % 33.3 Interest 141.2 117.2 % 65.0 Change in estimated acquisition earn-out payables (38.9 ) (196.3 )% 40.4 Total expenses 2,697.3 17.9 % 2,288.6 Income before income taxes 876.1 14.9 % 762.8 Income taxes 204.3 16.3 % 175.7 NET INCOME$ 671.8 14.4 %$ 587.1 Income Before Income Taxes Margin (1) 24.5 % 25.0 % EBITDAC - Adjusted (2)$ 1,170.9 15.9 %$ 1,010.1 EBITDAC Margin - Adjusted (2) 32.8 % 33.2 % Organic Revenue growth rate (2) 8.1 % 10.4 %
Employee compensation and benefits relative
to total revenues 50.8 % 53.6 % Other operating expenses relative to total revenues 16.7 % 13.2 % Capital expenditures$ 52.6 16.9 %$ 45.0 Total assets at December 31$ 13,973.5 42.7 %$ 9,795.4 (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 Commissions and Fees Commissions and fees, including profit-sharing contingent commissions for 2022, increased$515.7 million to$3,563.2 million , or 16.9% over 2021. Core commissions and fees in 2022 increased$509.2 million , composed of (i)$239.9 million of net new and renewal business, which reflects an Organic Revenue growth rate of 8.1%; (ii)$288.6 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$4.5 million ; and (iv) an offsetting decrease of$14.8 million related to commissions and fees revenue from business divested in the preceding twelve months. Profit-sharing contingent commissions for 2022 increased by$6.5 million , or 7.9%, compared to the same period in 2021. This increase was the result of recent acquisitions and qualifying for certain profit-sharing contingent commissions in 2022 that we did not qualify for in the prior year, partially offset by reduced profit-sharing contingent commissions relating to the impacts from the estimated insured property losses associated with Hurricane Ian.
Investment Income
Investment income for 2022 was$6.5 million , compared with$1.1 million in 2021. The increase was primarily driven by higher average interest rates compared to 2021. Other Income, Net
Other income for 2022 was
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Employee Compensation and Benefits
Employee compensation and benefits expense as a percentage of total revenues was 50.8% for the year endedDecember 31, 2022 as compared to 53.6% for the year endedDecember 31, 2021 , and increased 11.0%, or$180.0 million . This increase included$128.6 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$51.4 million or 3.2%. 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 salaries attributable to inflation; (iii) an increase in producer compensation associated with revenue growth; partially offset by (iv) the year-over-year decrease of approximately$36.6 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 within 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 16.7% of total revenues for 2022 as compared to 13.2% for the year endedDecember 31, 2021 . Other operating expenses for 2022 increased$193.8 million , or 48.1%, from the same period of 2021. The net increase included: (i)$73.7 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) acquisition and integration costs associated with the acquisitions ofOrchid, GRP , and BdB, and; (iv) the year-over-year increase of approximately$36.6 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.
Gain or Loss on Disposal
The Company recognized net gains on disposals of$4.5 million in 2022 and$9.6 million in 2021. The gains on disposal were due to activity associated with sales of businesses or book of business. 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 2022 increased$27.0 million to$146.6 million , or 22.6% over 2021. This increase reflects the amortization of new intangibles from businesses acquired within the past twelve months, partially offset by certain intangible assets becoming fully amortized.
Depreciation
Depreciation expense for 2022 increased$5.9 million to$39.2 million , or 17.7% over 2021. Changes in depreciation expense reflect the addition of fixed assets resulting from business initiatives, net additions of fixed assets resulting from businesses acquired in the past twelve months, partially offset by fixed assets which became fully depreciated.
Interest Expense
Interest expense for 2022 increased$76.2 million to$141.2 million , or 117.2%, from 2021. The increase is 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 Consolidated Statement 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.
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The net charge or credit to the 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 December 31, 2022 , the fair values of the estimated acquisition earn-out
payables were reevaluated 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 years ended December 31, 2022
and 2021 were as follows:
(in millions) 2022 2021
Change in fair value of estimated acquisition earn-out payables
$ 34.2 Interest expense accretion 7.0
6.2
Net change in earnings from estimated acquisition
earn-out payables$ (38.9 ) $ 40.4 For the years endedDecember 31, 2022 and 2021, the fair value of estimated earn-out payables was reevaluated and decreased by$45.9 million for 2022 and increased by$34.2 million for 2021, which are credits and charges respectively, exclusive of interest expense accretion, to the Consolidated Statements of Income for 2022 and 2021. As ofDecember 31, 2022 , the estimated acquisition earn-out payables equaled$251.6 million , of which$119.3 million was recorded as accounts payable and$132.3 million was recorded as other non-current liabilities. As ofDecember 31, 2021 , the estimated acquisition earn-out payables equaled$291.0 million , of which$78.4 million was recorded as accounts payable and$212.6 million was recorded as other non-current liabilities.
Income Taxes
The effective tax rate on income from operations was 23.3% in 2022 and 23.0% in
2021.
RESULTS OF OPERATIONS - SEGMENT INFORMATION
As discussed in Note 16 "Segment Information" of the Notes to Consolidated Financial Statements, we operate four reportable segments: Retail, National Programs, Wholesale Brokerage and Services. On a segmented basis, changes in amortization, depreciation and interest expenses generally result from activity associated with acquisitions. Likewise, other revenues in each segment reflects net gains primarily from legal settlements and miscellaneous income. As such, in evaluating the operational efficiency of a segment, management focuses on the Organic Revenue growth rate and EBITDAC margin. The reconciliation of total commissions and fees included in the Consolidated Statements of Income to Organic Revenue, a non-GAAP financial measure, including by segment, and the growth rates for Organic Revenue for the year endedDecember 31, 2022 are as follows: 2022 Retail(1) National Programs Wholesale Brokerage Services Total (in millions, except percentages) 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 Commissions and fees$ 2,080.4 $ 1,764.9 $ 858.1 $ 701.1 $ 452.8 $ 402.6 $ 171.9 $ 178.9 $ 3,563.2 $ 3,047.5 Total change$ 315.5 $ 157.0 $ 50.2 $ (7.0 ) $ 515.7 Total growth % 17.9 % 22.4 % 12.5 % (3.9 )% 16.9 % Profit-sharing contingent commissions (48.8 ) (38.9 ) (27.6 ) (35.3 ) (12.3 ) (8.0 ) - - (88.7 ) (82.2 ) Core commissions and fees$ 2,031.6 $ 1,726.0 $ 830.5 $ 665.8 $ 440.5 $ 394.6 $ 171.9 $ 178.9 $ 3,474.5 $ 2,965.3 Acquisitions (205.1 ) - (64.9 ) - (18.6 ) - - - (288.6 ) - Dispositions - (7.2 ) - (3.3 ) - (2.4 ) - (1.9 ) - (14.8 ) Foreign currency translation - (3.9 ) - (0.6 ) - - - - - (4.5 ) Organic Revenue(2)$ 1,826.5 $ 1,714.9 $ 765.6 $ 661.9 $ 421.9 $ 392.2 $ 171.9 $ 177.0 $ 3,185.9 $ 2,946.0 Organic Revenue growth(2)$ 111.6 $ 103.7 $ 29.7 $ (5.1 ) $ 239.9 Organic Revenue growth rate(2) 6.5 % 15.7 % 7.6 % (2.9 )% 8.1 % (1) The Retail segment includes commissions and fees reported in the "Other" column of the Segment Information table in Note 16 of the Notes to the Consolidated Financial Statements, which includes corporate and consolidation items. (2) A non-GAAP financial measure. 33
-------------------------------------------------------------------------------- The reconciliation of total commissions and fees included in the Consolidated Statements of Income to Organic Revenue, a non-GAAP financial measure, including by segment, and the growth rates for Organic Revenue for the year endedDecember 31, 2021 , 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$ 1,764.9 $ 1,470.1 $ 701.1 $ 609.8 $ 402.6 $ 352.2 $ 178.9 $ 174.0 $ 3,047.5 $ 2,606.1 Total change$ 294.8 $ 91.3 $ 50.4 $ 4.9 $ 441.4 Total growth % 20.1 % 15.0 % 14.3 % 2.8 % 16.9 % Profit-sharing contingent commissions (38.9 ) (35.8 ) (35.3 ) (27.3 ) (8.0 ) (7.9 ) - - (82.2 ) (71.0 ) Core commissions and fees$ 1,726.0 $ 1,434.3 $ 665.8 $ 582.5 $ 394.6 $ 344.3 $ 178.9 $ 174.0 $ 2,965.3 $ 2,535.1 Acquisitions (139.0 ) - (8.2 ) - (23.0 ) - - - (170.2 ) - Dispositions - (4.4 ) - (0.5 ) - - - (0.4 ) - (5.3 ) Foreign currency translation - - - 1.2 - - - - - 1.2
Organic Revenue(2)
$ 371.6 $ 344.3 $ 178.9 $ 173.6 $ 2,795.1 $ 2,531.0 Organic Revenue growth(2)$ 157.1 $ 74.4 $ 27.3 $ 5.3 $ 264.1 Organic Revenue growth rate(2) 11.0 % 12.8 % 7.9 % 3.1 % 10.4 % (1) The Retail segment includes commissions and fees reported in the "Other" column of the Segment Information table in Note 16 of the Notes to the Consolidated Financial Statements, which includes corporate and consolidation items. (2) A non-GAAP financial measure. The reconciliation of Total Revenues to Total Revenues - Adjusted, a non-GAAP measure, income before incomes taxes, included in the 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, including by segment, for the year endedDecember 31, 2022 , is as follows: National Wholesale (in millions) Retail Programs Brokerage Services Other Total Total Revenues$ 2,084.3 $ 859.5 $ 453.4 $ 171.9 $ 4.3 $ 3,573.4 Total Revenues - Adjusted(2) 2,084.3 859.5 453.4 171.9 4.3 3,573.4 Income before income taxes 466.7 271.1 117.7 24.1 (3.5 ) 876.1 Income Before Income Taxes Margin(1) 22.4 % 31.5 % 26.0 % 14.0 % NMF 24.5 % Amortization 96.7 35.4 9.4 5.1 - 146.6 Depreciation 12.8 15.3 2.7 1.6 6.8 39.2 Interest 94.3 33.0 12.9 2.1 (1.1 ) 141.2 Change in estimated acquisition earn-out payables (26.3 ) (10.9 ) (1.7 ) - - (38.9 ) EBITDAC(2)$ 644.2 $ 343.9 $ 141.0 $ 32.9 $ 2.2 $ 1,164.2 EBITDAC Margin(2) 30.9 % 40.0 % 31.1 % 19.1 % NMF 32.6 % (Gain)/loss on disposal (8.4 ) 0.8 3.1 - - (4.5 ) Acquisition/Integration Costs 7.6 0.5 1.5 - 1.6 11.2 EBITDAC - Adjusted(2)$ 643.4 $ 345.2 $ 145.6 $
32.9$ 3.8 $ 1,170.9 EBITDAC Margin - Adjusted(2) 30.9 % 40.2 % 32.1 % 19.1 % 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. Current year not adjusted for foreign currency translation as the prior year is converted at current year rates. NMF = Not a meaningful figure 34 -------------------------------------------------------------------------------- The reconciliation of Total Revenues to Total Revenues - Adjusted, a non-GAAP measure, income before incomes taxes, included in the 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, including by segment, for the year endedDecember 31, 2021 , is as follows: National Wholesale (in millions) Retail Programs Brokerage Services Other Total Total Revenues$ 1,767.9 $ 701.9 $ 403.4 $ 178.9 $ (0.7 ) $ 3,051.4 Foreign Currency Translation (4.1 ) (0.7 ) - - - (4.8 ) Total Revenues - Adjusted(2) 1,763.8 701.2 403.4 178.9 (0.7 ) 3,046.6 Income before income taxes 334.4 242.3 94.8 28.3 63.0 762.8 Income Before Income Taxes Margin(1) 18.9 % 34.5 % 23.5 % 15.8 % NMF 25.0 % Amortization 77.8 27.4 9.1 5.3 - 119.6 Depreciation 11.2 9.8 2.6 1.5 8.2 33.3 Interest 91.4 11.4 16.0 2.9 (56.7 ) 65.0 Change in estimated acquisition earn-out payables 40.8 (7.7 ) 7.3 - - 40.4 EBITDAC(2)$ 555.6 $ 283.2 $ 129.8 $ 38.0 $ 14.5 $ 1,021.1 'EBITDAC Margin(2) 31.4 % 40.3 % 32.2 % 21.2 % NMF 33.5 % (Gain)/loss on disposal (5.1 ) (4.5 ) - - - (9.6 ) Acquisition/Integration Costs - - - - - - Foreign Currency Translation (1.0 ) (0.4 ) - - - (1.4 ) EBITDAC - Adjusted(2)$ 549.5 $ 278.3 $ 129.8 $
38.0$ 14.5 $ 1,010.1 EBITDAC Margin - Adjusted(2) 31.2 % 39.7 % 32.2 % 21.2 % 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 35
--------------------------------------------------------------------------------
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.
Financial information relating to our Retail segment for the twelve months ended
(in millions, except percentages) 2022 % Change
2021
REVENUES
Core commissions and fees$ 2,032.8 17.7 %$ 1,727.7 Profit-sharing contingent commissions 48.8 25.4 % 38.9 Investment income 0.1 (66.7 )% 0.3 Other income, net 2.6 160.0 % 1.0 Total revenues 2,084.3 17.9 % 1,767.9 EXPENSES Employee compensation and benefits 1,093.0 15.1 % 949.3 Other operating expenses 355.5 32.6 % 268.1 (Gain)/loss on disposal (8.4 ) 64.7 % (5.1 ) Amortization 96.7 24.3 % 77.8 Depreciation 12.8 14.3 % 11.2 Interest 94.3 3.2 % 91.4 Change in estimated acquisition earn-out payables (26.3 ) (164.5 )% 40.8 Total expenses 1,617.6 12.8 % 1,433.5 Income before income taxes$ 466.7 39.6 %$ 334.4 Income Before Income Taxes Margin (1) 22.4 % 18.9 % EBITDAC - Adjusted (2)$ 643.4 17.1 %$ 549.5 EBITDAC Margin - Adjusted (2) 30.9 % 31.2 % Organic Revenue growth rate (2) 6.5 % 11.0 % Employee compensation and benefits relative to total revenues 52.4 % 53.7 % Other operating expenses relative to total revenues 17.1 % 15.2 % Capital expenditures$ 18.6 129.6 %$ 8.1 Total assets at December 31$ 7,458.6 48.0 %$ 5,040.7 (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 Retail segment's total revenues in 2022 increased 17.9%, or$316.4 million , over 2021, to$2,084.3 million . The$305.1 million increase in core commissions and fees was driven by the following: (i)$111.6 million related to net new and renewal business; (ii) approximately$205.1 million related to the core commissions and fees 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$3.9 million ; and (iv) an offsetting decrease of$7.2 million related to commissions and fees recorded in 2021 from businesses since divested. Profit-sharing contingent commissions in 2022 increased 25.4%, or$9.9 million , over 2021, to$48.8 . The Retail segment's growth rate for total commissions and fees was 17.8% and the Organic Revenue growth rate was 6.5% for 2022. The Organic Revenue growth rate was driven by net new business written during the preceding twelve months and growth on renewals of existing customers. Renewal business was impacted by rate increases in most lines of business with continued increases in employee benefits, commercial and condominium property, partially offset by continued premium rate reductions in workers' compensation. Income before income taxes for 2022 increased 39.6%, or$132.3 million , over the same period in 2021, to$466.7 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 2022 increased 17.1%, or$93.9 million , from the same period in 2022, to$643.4 million . EBITDAC Margin - Adjusted for 2022 decreased to 30.9% from 31.2% in the same period in 2021. EBITDAC Margin was impacted by increased variable operating expenses, which are largely travel and meeting related.
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
36
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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, WNFIC and
participates in two Captives. WNFIC's underwriting business consists of policies
written under and fully ceded to the NFIP and excess flood and private flood
policies which are fully reinsured in the private market. The Captives provide
additional underwriting capacity and allow us to participate in underwriting
results. The Company has traditionally participated in underwriting profits
through profit-sharing contingent commissions. These Captives give us another
way to continue to participate in underwriting results while limiting exposure
to claims expenses. The Captives focus on property insurance for earthquake and
wind exposed properties underwritten by certain managing general agents. The
Captives limit the Company's exposure to claims expenses either through
reinsurance or by participating in limited tranches of the underwriting risk.
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 76.1% of
the National Programs segment's commissions and fees revenue is commission
based.
Financial information relating to our National Programs segment for the twelve
months ended
(in millions, except percentages) 2022 % Change
2021
REVENUES
Core commissions and fees$ 830.5 24.7 %$ 665.8 Profit-sharing contingent commissions 27.6 (21.8 )% 35.3 Investment income 1.3 116.7 % 0.6 Other income, net 0.1 (50.0 )% 0.2 Total revenues 859.5 22.5 % 701.9 EXPENSES Employee compensation and benefits 318.7 8.1 % 294.7 Other operating expenses 196.1 52.6 % 128.5 (Gain)/loss on disposal 0.8 (117.8 )% (4.5 ) Amortization 35.4 29.2 % 27.4 Depreciation 15.3 56.1 % 9.8 Interest 33.0 189.5 % 11.4 Change in estimated acquisition earn-out payables (10.9 ) 41.6 % (7.7 ) Total expenses 588.4 28.0 % 459.6 Income before income taxes$ 271.1 11.9 %$ 242.3 Income Before Income Taxes Margin (1) 31.5 % 34.5 % EBITDAC - Adjusted (2)$ 345.2 24.0 %$ 278.3 EBITDAC Margin - Adjusted (2) 40.2 % 39.7 % Organic Revenue growth rate (2) 15.7 % 12.8 % Employee compensation and benefits relative to total revenues 37.1 % 42.0 % Other operating expenses relative to total revenues 22.8 % 18.3 % Capital expenditures$ 20.2 49.6 %$ 13.5 Total assets at December 31$ 4,467.8 51.8 %$ 2,943.0 (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 2022 increased 22.5%, or$157.6 million , as compared to the same period in 2021, to$859.5 million . The$164.7 million increase in core commissions and fees revenue was driven by: (i) approximately$103.7 million of net new and renewal business; (ii)$64.9 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$0.6 million ; and (iv) an offsetting decrease of$3.3 million related to commissions and fees revenue from business divested in the preceding twelve months. Profit-sharing contingent commissions in 2022 decreased 21.8%, or$7.7 million , from 2021, to$27.6 primarily relating to the impacts from the estimated insured property losses associated with Hurricane Ian. The National Programs segment's growth rate for total commissions and fees was 22.4% and the Organic Revenue growth rate was 15.7% for 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 2022 increased 11.9%, or$28.8 million , from the same period in 2021, to$271.1 million . Income before income taxes increased due to the drivers of EBITDAC described below. This was partially offset by an increase in intercompany interest expense and increased amortization expense associated with recent acquisitions. EBITDAC - Adjusted for 2022 increased 24.0%, or$66.9 million , from the same period in 2021, to$345.2 million . EBITDAC Margin - Adjusted for 2022 increased to 40.2% from 39.7% in the prior year due to strong total revenue growth along with leverage our expense base. 37 --------------------------------------------------------------------------------
Wholesale Brokerage Segment
The Wholesale Brokerage segment markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers, including Brown & Brown retail agents. Approximately 84.9% of the Wholesale Brokerage segment's commissions and fees revenue is commission based.
Financial information relating to our Wholesale Brokerage segment for the twelve
months ended
(in millions, except percentages) 2022 % Change
2021
REVENUES
Core commissions and fees$ 440.5 11.6 %$ 394.6 Profit-sharing contingent commissions 12.3 53.8 % 8.0 Investment income 0.3 50.0 % 0.2 Other income, net 0.3 (50.0 )% 0.6 Total revenues 453.4 12.4 % 403.4 EXPENSES Employee compensation and benefits 239.3 12.5 % 212.8 Other operating expenses 70.0 15.1 % 60.8 (Gain)/loss on disposal 3.1 - - Amortization 9.4 3.3 % 9.1 Depreciation 2.7 3.8 % 2.6 Interest 12.9 (19.4 )% 16.0 Change in estimated acquisition earn-out payables (1.7 ) (123.3 )% 7.3 Total expenses 335.7 8.8 % 308.6 Income before income taxes$ 117.7 24.2 %$ 94.8 Income Before Income Taxes Margin (1) 26.0 % 23.5 % EBITDAC - Adjusted (2)$ 145.6 12.2 %$ 129.8 EBITDAC Margin - Adjusted (2) 32.1 % 32.2 % Organic Revenue growth rate (2) 7.6 % 7.9 % Employee compensation and benefits relative to total revenues 52.8 % 52.7 % Other operating expenses relative to total revenues 15.4 % 15.0 % Capital expenditures$ 2.8 75.0 %$ 1.6 Total assets at December 31$ 1,401.6 21.4 %$ 1,154.4 (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 The Wholesale Brokerage segment's total revenues for 2022 increased 12.4%, or$50.0 million , over 2021, to$453.4 million . The$45.9 million increase in core commissions and fees was driven by the following: (i) approximately$29.7 million of net new and renewal business; (ii)$18.6 million from acquisitions that had no comparable revenues in the same period of 2021; and (iii) an offsetting decrease of$2.4 million related to commissions and fees revenue from business divested in the preceding twelve months. Profit-sharing contingent commissions for 2022 increased$4.3 million compared to 2021, to$12.3 million . The Wholesale Brokerage segment's growth rate for total commissions and fees was 12.5%, and the Organic Revenue growth rate was 7.6% for 2022. The Organic Revenue growth rate was driven by new business, good retention as well as rate increases for most lines of coverage, which was partially offset by shrinking capacity in the catastrophe exposed personal lines market. Income before income taxes for 2022 increased 24.2%, or$22.9 million , over 2021, to$117.7 million , primarily due to the following: (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 2022 increased 12.2%, or$15.8 million , from the same period in 2021, to$145.6 million . EBITDAC Margin for 2022 decreased to 32.1% from 32.2% in the same period in 2021. EBITDAC Margin - Adjusted decreased due to: (i) higher broker compensation; (ii) increased variable operating expenses, which are primarily travel and meeting related; partially offset by (iii) higher profit-sharing contingent commissions; and (iv) leveraging our expense base in connection with revenue growth.
Services Segment
The Services segment provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers' compensation and all-lines liability arenas. The Services segment also provides Medicare Set-aside account services,Social Security disability and Medicare benefits advocacy services, and claims adjusting services. 38 --------------------------------------------------------------------------------
Unlike the other segments, nearly all of the Services segment's revenue is
generated from fees which are not significantly affected by fluctuations in
general insurance premiums.
Financial information relating to our Services segment for the twelve months
ended
(in millions, except percentages) 2022 % Change
2021
REVENUES
Core commissions and fees$ 171.9 (3.9 )%$ 178.9 Profit-sharing contingent commissions - - - Investment income - - - Other income, net - - - Total revenues 171.9 (3.9 )% 178.9 EXPENSES Employee compensation and benefits 90.6 1.0 % 89.7 Other operating expenses 48.4 (5.5 )% 51.2 (Gain)/loss on disposal - - - Amortization 5.1 (3.8 )% 5.3 Depreciation 1.6 6.7 % 1.5 Interest 2.1 (27.6 )% 2.9 Change in estimated acquisition earn-out payables - - - Total expenses 147.8 (1.9 )% 150.6 Income before income taxes$ 24.1 (14.8 )%$ 28.3 Income Before Income Taxes Margin (1) 14.0 % 15.8 % EBITDAC - Adjusted (2)$ 32.9 (13.4 )%$ 38.0 EBITDAC Margin - Adjusted (2) 19.1 % 21.2 % Organic Revenue growth rate (2) (2.9 )% 3.1 % Employee compensation and benefits relative to total revenues 52.7 % 50.2 % Other operating expenses relative to total revenues 28.2 % 28.6 % Capital expenditures$ 1.0 (37.5 )%$ 1.6 Total assets at December 31$ 295.0 (1.4 )%$ 299.2 (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 Services segment's total revenues for 2022 decreased 3.9%, or$7.0 million , from 2021, to$171.9 million . The$7.0 million decrease in core commissions and fees, was driven by: (i) higher COVID-19 travel restricted claims in 2021; and (ii) a lack of weather-related claims coupled with reduced severity in 2022 and (iii) partially offset by new business resulting in Organic Revenue decreasing by 2.9% in 2022.
Income before income taxes for 2022 decreased 14.8%, or
to
EBITDAC - Adjusted for 2022 decreased 13.4%, or
period in 2021, to
to 19.1% from 21.2% in the same period in 2021. The decrease in EBITDAC and
EBITDAC Margin was driven primarily by lower revenues.
Other
As discussed in Note 16 of the Notes to Consolidated Financial Statements, the "Other" column in the Segment Information table includes any income 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 ofDecember 31, 2022 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 and the Loan Agreement (the "Loan Agreement"), will be sufficient to satisfy its normal liquidity needs, including principal payments on our long-term debt, for the next twelve months. 39 -------------------------------------------------------------------------------- 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 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$1.9 billion of incremental borrowing capacity as ofDecember 31, 2022 . Our cash and cash equivalents of$650.0 million atDecember 31, 2022 reflected a decrease of$43.3 million from the$693.2 million balance atDecember 31, 2021 . During 2022,$881.4 million of cash was generated from operating activities, representing an increase of 9.0%. During this period,$1,927.7 million of cash was used for acquisitions,$106.3 million was used for acquisition earn-out payments,$52.6 million was used to purchase additional fixed assets,$119.5 million was used for payment of dividends,$74.1 million was used for share repurchases and$61.3 million was used to pay outstanding principal balances owed on long-term debt.
We hold approximately
currently have no plans to repatriate in the near future.
Our cash and cash equivalents of$693.2 million atDecember 31, 2021 reflected an increase of$37.0 million from the$656.2 million balance atDecember 31, 2020 . During 2021,$808.8 million of cash was generated from operating activities, representing an increase of 13.4%. During this period,$366.8 million of cash was used for acquisitions,$83.6 million was used for acquisition earn-out payments,$45.0 million was used to purchase additional fixed assets,$107.2 million was used for payment of dividends,$82.6 million was used for share repurchases and$73.1 million was used to pay outstanding principal balances owed on long-term debt.
Our ratio of current assets to current liabilities (the "current ratio") was
1.09 and 1.25 for
Contractual Cash Obligations
As of
Payments Due by Period
Less Than After 5
(in millions) Total 1 Year 1-3 Years 4-5 Years Years
Long-term debt $ 3,975.6 $ 250.6 $ 943.7 $ 531.3 $ 2,250.0
Other liabilities 149.5 8.4 15.4 11.2 114.5
Operating leases(1) 278.3 53.0 97.0 62.1 66.2
Interest obligations 1,572.4 179.7 286.5 208.8 897.4
Maximum future acquisition
contingency payments(2) 542.8 181.1 355.5 6.2 -
Total contractual cash
obligations(3) $ 6,518.6 $ 672.8 $ 1,698.1 $ 819.6 $ 3,328.1
(1)
Includes $12.4 million of future lease commitments expected to commence in 2023.
(2)
Includes $251.6 million of current and non-current estimated earn-out payables.
Earn-out payables for acquisitions not denominated in U.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 of December 31, 2022 , is $3.0 million . The Company deems a
significant increase to this amount to be unlikely.
(3)
Does not include approximately $32.6 million of current liability for a dividend
of $0.1150 per share approved by the board of directors on
January 18, 2023 and paid on February 15, 2023 .
Debt
Total debt atDecember 31, 2022 was$3,942.1 million net of unamortized discount and debt issuance costs, which was an increase of$1,919.2 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$3.8 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$61.3 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) throughDecember 31, 2022 the 40 -------------------------------------------------------------------------------- Company repaying$350.0 million of debt related to the outstanding amount drawn under the Revolving Credit Facility under the Second Amended and Restated Credit Agreement. During the twelve months endedDecember 31, 2022 , the Company repaid$12.5 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$234.4 million as ofDecember 31, 2022 . The Company's next scheduled amortized principal payment is dueMarch 31, 2023 and is equal to$3.1 million . During the twelve months endedDecember 31, 2022 , the Company repaid$30.0 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$210.0 million as ofDecember 31, 2022 . As ofDecember 31, 2022 , the total term loan balance of$210.0 million is presented under current portion of long-term debt as the agreement and underlying debt instruments are within one-year of maturity. The Company is evaluating options with regard to the loan's remaining balance, including retiring the balance at maturity or refinancing the balance or a portion thereof. The Company's next scheduled amortized principal payment is dueMarch 31, 2023 and is equal to$7.5 million . During the twelve months endedDecember 31, 2022 , the Company repaid$18.8 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$481.3 million as ofDecember 31, 2022 . The Company's next scheduled amortized principal payment is dueMarch 31, 2023 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 is payable semi-annually in arrears. The Notes are senior unsecured obligations of the Company and 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 ofDecember 31, 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 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 ofDecember 31, 2022 the outstanding balance on the Loan Agreement was$781.3 million . OnMarch 31, 2022 the Company borrowed$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 ofDecember 31, 2022 the outstanding loan balance was repaid. Total debt atDecember 31, 2021 was$2,022.9 million net of unamortized discount and debt issuance costs, which was a decrease of$73.0 million compared toDecember 31, 2020 . The decrease includes: (i) the repayment of the principal balance of$73.1 million for scheduled 41
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principal amortization balances related to our various existing floating rate debt term notes; (ii) an additional$2.7 million including debt issuance costs related to the Company's refinanced credit facility, the Second Amended and Restated Credit Agreement (as defined below), onOctober 27, 2021 ; offset by (iii) net of the amortization of discounted debt related to our various unsecured Senior Notes, and debt issuance cost amortization of$2.8 million . During the twelve months endedDecember 31, 2021 , the Company repaid$30.0 million of principal related to the amended and restated credit agreement term loan through quarterly scheduled amortized principal payments each equaling$10.0 million onMarch 31, 2021 ,June 30, 2021 ,September 30, 2021 and onOctober 27, 2021 in conjunction with the closing of the Second Amended and Restated Credit Agreement, the Company repaid an additional$10.0 million of outstanding principal related to the term loan under the amended and restated credit agreement. OnDecember 31, 2021 , the Company repaid$3.1 million under the Second Amended and Restated Credit Agreement as part of a scheduled amortized principal payment/ The Second Amended and Restated Credit Agreement term loan had an outstanding balance of$246.9 million as ofDecember 31, 2021 . During the twelve months endedDecember 31, 2021 , the Company repaid$30.0 million of principal related to the term loan credit agreement through quarterly scheduled amortized principal payments each equaling$7.5 million onMarch 31, 2021 ,June 30, 2021 ,September 30, 2021 andDecember 31, 2021 . The term loan credit agreement had an outstanding balance of$240.0 million as ofDecember 31, 2021 . OnOctober 27, 2021 , the Company entered into an amended and restated credit agreement (the "Second Amended and Restated Credit Agreement") with the lenders named therein,JPMorgan Chase Bank, N.A . as administrative agent,Bank of America, N.A .,Truist Bank andBMO Harris Bank N.A . as co-syndication agents, andU.S. Bank National Association ,Fifth Third Bank , National Association,Wells Fargo Bank, National Association ,PNC Bank, National Association ,Morgan Stanley Senior Funding, Inc. andCitizens Bank, N.A. as co-documentation agents. The Second Amended and Restated Credit Agreement amended and restated the credit agreement datedApril 17, 2014 , among certain of such parties, as amended by that certain amended and restated credit agreement datedJune 28, 2017 (the "Original Credit Agreement"). The Second Amended and Restated Credit Agreement, among other certain terms, extended the maturity of the Revolving Credit Facility of$800.0 million and unsecured term loans associated with the agreement of$250.0 million toOctober 27, 2026 . At the time of the renewal, the Company added an additional$2.7 million in debt issuance costs related to the transaction. The Company carried forward$0.6 million of existing debt issuance costs related to the previous credit facility agreements while expensing$0.1 million in debt issuance costs due to certain lenders exiting the renewed facility agreement.
KKR & CO. INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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