BRO Brown & Brown
Quality broker trading at premium to goodwill-inflated book; economics better than accounting ROE suggests.
The story
Brown & Brown is a high-quality insurance broker with strong organic growth and a proven M&A engine, but its book equity is swollen by ~$9B of goodwill from decades of acquisitions. Trailing ROE of 9.6% understates economic returns on tangible capital, but for residual-income valuation on reported book, normalized ROE near 10.5% is the honest anchor. Revenue growth remains robust (17% 5yr CAGR) but margins have compressed from 32% to 29%, suggesting cyclical softness in pricing.
Maintaining ROE at 10.5% as the normalized through-cycle return on reported book equity; goodwill-heavy balance sheet caps accounting ROE even though economic returns are higher. Terminal growth nudged to 4.5% (just under risk-free) reflecting durable broker economics and continued tuck-in M&A. Beta held at 0.82, consistent with insurance distribution's lower cyclicality.
Value drivers
| Return on equity (normalized) | 10.5% |
| Book-value growth (Y1) | 7.0% |
| Terminal book growth | 4.5% |
| Beta | 0.82 |
| Failure probability | 0.5% |
| Cost of equity | 8.5% |
Valuation bridge
| PV of excess returns | 2.13B |
| PV of terminal excess | 4.90B |
| Equity value | 19.47B |
| ÷ shares → per share | $58.19 |
News
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Projected excess returns on equity
| Yr | Book equity | ROE | Excess return | PV |
|---|---|---|---|---|
| 1 | 12.55B | 10.5% | 254.20M | 234.34M |
| 2 | 13.43B | 10.5% | 271.61M | 230.83M |
| 3 | 14.33B | 10.5% | 289.45M | 226.78M |
| 4 | 15.25B | 10.5% | 307.67M | 222.22M |
| 5 | 16.19B | 10.5% | 326.17M | 217.18M |
| 6 | 17.15B | 10.5% | 344.88M | 211.70M |
| 7 | 18.11B | 10.5% | 363.71M | 205.82M |
| 8 | 19.07B | 10.5% | 382.56M | 199.57M |
| 9 | 20.04B | 10.5% | 401.32M | 193.00M |
| 10 | 20.99B | 10.5% | 419.89M | 186.16M |
Key risks
- Goodoverhang: ~$9B goodwill means reported book equity overstates deployable capital, depressing accounting ROE and inflating the book-value base
- Margin compression: operating margin declined from 32% to 29.1%, potentially signaling pricing pressure or integration costs from larger acquisitions
- Cyclical insurance pricing softening could slow organic growth and fee income
Catalysts
- Hardening insurance market cycles lifting commission revenue and margins
- Successful integration of recent large acquisitions (Accession, Risk & Benefits) driving operating leverage
- Share repurchases at discount to intrinsic value narrowing the gap