4. Business Combinations

During 2018, we acquired substantially all of the net assets of the following firms in exchange for our common stock and/or cash. These acquisitions have been accounted for using the acquisition method for recording business combinations (in millions, except share data):


Name and Effective Date of Acquisition	Common Shares Issued		Common Share Value		Cash Paid		Accrued Liability		Escrow Deposited		Recorded Earnout Payable		Total Recorded Purchase Price		Maximum Potential Earnout Payable
	(000s)
Market Financial Group, Ltd and Austin Consulting Group, Inc. (MFG) January 1, 2018		53	$	3.7	$	33.9	$	—	$	4.2	$	2.7	$	44.5	$	7.0
McGregor & Associates (M&A) March 1, 2018		—		—		13.5		—		2.5		5.1		21.1		12.0
Pronto Insurance (PI) June 5, 2018		—		—		294.8		—		18.7		—		313.5		—
Reassurance Holdings, Inc. (RHI) July 1, 2018		343		24.4		84.4		—		13.3		3.3		125.4		21.5
Buckman-Mitchell, Inc. (BMI) November 1, 2018		—		—		43.9		—		1.9		3.6		49.4		8.5
Accompass Inc. (AI) December 1, 2018		—		—		29.8		—		2.6		4.4		36.8		11.3
42 other acquisitions completed in 2018		430		26.1		291.9		3.1		28.2		74.9		424.2		141.2

		826	$	54.2	$	792.2	$	3.1	$	71.4	$	94.0	$	1,014.9	$	201.5

On December 22, 2018, we signed a definitive agreement to acquire 100% of the equity of Stackhouse Poland Group Limited (which we refer to as Stackhouse Poland) headquartered in Guildford, Surrey, U.K., for approximately $350.0 million of cash consideration. Stackhouse Poland is a large-scale specialist U.K. insurance broker that generates over £55 million in annualized revenues, has more than 500 employees and operates from a network of 23 offices across the U.K. The transaction is subject to regulatory approval and is expected to close in the first quarter of 2019.

Common shares issued in connection with acquisitions are valued at closing market prices as of the effective date of the applicable acquisition. We record escrow deposits that are returned to us as a result of adjustments to net assets acquired as reductions of goodwill when the escrows are settled. The maximum potential earnout payables disclosed in the foregoing table represent the maximum amount of additional consideration that could be paid pursuant to the terms of the purchase agreement for the applicable acquisition. The amounts recorded as earnout payables, which are primarily based upon the estimated future operating results of the acquired entities over a two- to three-year period subsequent to the acquisition date, are measured at fair value as of the acquisition date and are included on that basis in the recorded purchase price consideration in the foregoing table. We will record subsequent changes in these estimated earnout obligations, including the accretion of discount, in our consolidated statement of earnings when incurred.

The fair value of these earnout obligations is based on the present value of the expected future payments to be made to the sellers of the acquired entities in accordance with the provisions outlined in the respective purchase agreements, which is a Level 3 fair value measurement. In determining fair value, we estimated the acquired entity’s future performance using financial projections developed by management for the acquired entity and market participant assumptions that were derived for revenue growth and/or profitability. Revenue growth rates generally ranged from 3.0% to 15.0% for our 2018 acquisitions. We estimated future payments using the earnout formula and performance targets specified in each purchase agreement and these financial projections. We then discounted these payments to present value using a risk-adjusted rate that takes into consideration market-based rates of return that reflect the ability of the acquired entity to achieve the targets. These discount rates generally ranged from 7.5% to 9.5% for our 2018 acquisitions. Changes in financial projections, market participant assumptions for revenue growth and/or profitability, or the risk-adjusted discount rate, would result in a change in the fair value of recorded earnout obligations.

During 2018, 2017 and 2016, we recognized $18.8 million, $20.2 million and $16.9 million, respectively, of expense in our consolidated statement of earnings related to the accretion of the discount recorded for earnout obligations in connection with our acquisitions. In addition, during 2018, 2017 and 2016, we recognized $9.2 million of income, $10.7 million and $15.2 million of expense, respectively, related to net adjustments in the estimated fair value of the liability for earnout obligations in connection with revised projections of future performance for 112, 108 and 101 acquisitions, respectively. The aggregate amount of maximum earnout obligations related to acquisitions made in 2015 and subsequent years was $558.1 million as of December 31, 2018, of which $258.8 million was recorded in the consolidated balance sheet as of that date based on the estimated fair value of the expected future payments to be made. The aggregate amount of maximum earnout obligations related to acquisitions made in 2014 and subsequent years was $567.9 million as of December 31, 2017, of which $264.2 million was recorded in the consolidated balance sheet as of that date based on the estimated fair value of the expected future payments to be made.

The following is a summary of the estimated fair values of the net assets acquired at the date of each acquisition made in 2018 (in millions):


													42 Other
	MFG		M&A		PI		RHI		BMI		AI		Acquisitions		Total

Cash	$	0.1	$	—	$	7.2	$	—	$	0.1	$	0.4	$	11.8	$	19.6
Other current assets		3.0		0.5		66.8		18.4		12.4		1.9		103.1		206.1
Fixed assets		0.4		1.4		2.6		2.2		0.1		0.1		1.5		8.3
Noncurrent assets		—		—		8.3		0.4		—		—		17.5		26.2
Goodwill		24.6		5.2		209.4		77.9		18.8		21.4		227.3		584.6
Expiration lists		19.6		15.1		56.7		41.9		26.0		17.2		205.3		381.8
Non-compete agreements		—		0.1		0.2		0.5		0.2		1.7		2.6		5.3
Trade names		0.1		—		58.1		3.2		—		—		0.1		61.5

Total assets acquired		47.8		22.3		409.3		144.5		57.6		42.7		569.2		1,293.4

Current liabilities		2.3		0.4		64.2		7.2		8.2		0.8		94.6		177.7
Noncurrent liabilities		1.0		0.8		31.6		11.9		—		5.1		50.4		100.8

Total liabilities assumed		3.3		1.2		95.8		19.1		8.2		5.9		145.0		278.5

Total net assets acquired	$	44.5	$	21.1	$	313.5	$	125.4	$	49.4	$	36.8	$	424.2	$	1,014.9

Among other things, these acquisitions allow us to expand into desirable geographic locations, further extend our presence in the retail and wholesale insurance brokerage services and risk management industries and increase the volume of general services currently provided. The excess of the purchase price over the estimated fair value of the tangible net assets acquired at the acquisition date was allocated to goodwill, expiration lists, non-compete agreements and trade names in the amounts of $584.6 million, $381.8 million, $5.3 million and $61.5 million, respectively, within the brokerage segment.

Provisional estimates of fair value are established at the time of the acquisition and are subsequently reviewed within the first year of operations subsequent to the acquisition date to determine the necessity for adjustments. The fair value of the tangible assets and liabilities for each applicable acquisition at the acquisition date approximated their carrying values. The fair value of expiration lists was established using the excess earnings method, which is an income approach based on estimated financial projections developed by management for each acquired entity using market participant assumptions. Revenue growth and attrition rates generally ranged from 3.0% to 4.4% and 3.5% to 11.0% for our 2018 acquisitions, respectively, for which valuations were performed in 2018. We estimate the fair value as the present value of the benefits anticipated from ownership of the subject customer list in excess of returns required on the investment in contributory assets necessary to realize those benefits. The rate used to discount the net benefits was based on a risk-adjusted rate that takes into consideration market-based rates of return and reflects the risk of the asset relative to the acquired business. These discount rates generally ranged from 11.5% to 14.0% for our 2018 acquisitions, for which a valuation was performed. The fair value of non-compete agreements was established using the profit differential method, which is an income approach based on estimated financial projections developed by management for the acquired company using market participant assumptions and various non-compete scenarios.

Expiration lists, non-compete agreements and trade names related to our acquisitions are amortized using the straight-line method over their estimated useful lives (two to fifteen years for expiration lists, three to five years for non-compete agreements and two to fifteen years for trade names), while goodwill is not subject to amortization. We use the straight-line method to amortize these intangible assets because the pattern of their economic benefits cannot be reasonably determined with any certainty. We review all of our intangible assets for impairment periodically (at least annually) and whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. In reviewing intangible assets, if the fair value were less than the carrying amount of the respective (or underlying) asset, an indicator of impairment would exist and further analysis would be required to determine whether or not a loss would need to be charged against current period earnings as a component of amortization expense. Based on the results of impairment reviews in 2018, 2017 and 2016, we wrote off $10.6 million, $6.2 million and $1.8 million of amortizable intangible assets related to the brokerage segment.

Of the $381.8 million of expiration lists, $5.3 million of non-compete agreements and $61.5 million of trade names related to the 2018 acquisitions, $219.3 million, $4.1 million and $61.5 million, respectively, is not expected to be deductible for income tax purposes. Accordingly, we recorded a deferred tax liability of $58.8 million, and a corresponding amount of goodwill, in 2018 related to the nondeductible amortizable intangible assets.

Our consolidated financial statements for the year ended December 31, 2018 include the operations of the acquired entities from their respective acquisition dates. The following is a summary of the unaudited pro forma historical results, as if these entities had been acquired at January 1, 2017 (in millions, except per share data):


	Year Ended December 31,
	2018		2017
Total revenues	$	7,125.5	$	6,572.4
Net earnings attributable to controlling interests		646.1		496.4
Basic earnings per share		3.53		2.74
Diluted earnings per share		3.46		2.71

The unaudited pro forma results above have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had these acquisitions occurred at January 1, 2017, nor are they necessarily indicative of future operating results. Annualized revenues of entities acquired in 2018 totaled approximately $339.8 million. Total revenues and net earnings recorded in our consolidated statement of earnings for 2018 related to the 2018 acquisitions in the aggregate, were $158.0 million and $6.9 million, respectively.