Brown and Brown (BRO) Analysis

Brown and Brown ( Ticker BRO) is a general insurance agency with operations in thirty of the fifty states. The company is headquartered in Florida and has approximately 20% of its locations in that state. BRO sells insurance products and services, primarily in the property, casualty and employee benefits areas.

BRO primarily is an agent and doesnt have underwriting risks. BRO makes money compensate for its services primarily by commissions paid by insurance companies and fees paid by customers. The commission is usually a percentage of the premium paid by the insured. In some cases BRO also receive from an insurance company a “contingent commission”, which is a profit-sharing commission based primarily on underwriting results, but may also contain considerations for volume, growth and/or retention. Fees are principally generated by the Services Division, which offers third-party administration, benefit consulting and managed healthcare services, primarily in the area of workers’ compensation.

The company has four divisions - retail division, national programs division, brokerage division, services division and other. The revenues in the company ( and EPS ) have grown steadily year over year. The growth has been 20% year over year in 2003 and 18% year over year in 2004. The company expected a soft market in 2005 for insurance products. For the first nine months of 2005, the earnings were growing at close to 17% rate. The share holders equity increased by 22% year over year in 2005.

In 2005, the revenue growth in primarily came from the brokerages division as revenue growth in the retail division was not spectacular. The increased number of Hurricanes in the gulf coast area should boost the insurance rates this year as many of the policies come up for renewal. Let us quickly look at the analyst estimates for BRO in this year.

According to the consensus estimates, the EPS growth is expected to slow down to 15% and 14% respectively in 2006 and 2007. Currently, the company sports a P/E of 28 while the earnings growth rate is half of that. The revenue growth in this company is pretty solid when comparing to competitors in this sector. I would watch this stock for dips in prices and buy it on dips.