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Business Combinations
12 Months Ended
Dec. 31, 2015
Business Combinations [Abstract]  
Business Combinations
Business Combinations
During the year ended December 31, 2015, the Company acquired the assets and assumed certain liabilities of thirteen insurance intermediaries and four books of business (customer accounts). Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last twelve months as permitted by Accounting Standards Codification Topic 805 — Business Combinations (“ASC 805”). Such adjustments are presented in the “Other” category within the following two tables. All of these businesses were acquired primarily to expand Brown & Brown’s core business and to attract and hire high-quality individuals. The recorded purchase price for all acquisitions consummated after January 1, 2009 included an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations will be recorded in the Consolidated Statement of Income when incurred.
The fair value of earn-out obligations is based on the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions outlined 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 reflects market participant assumptions regarding revenue growth and/or profitability. The expected future payments are estimated on the basis of the earn-out formula and performance targets specified in each purchase agreement compared to the associated financial projections. These payments are then discounted to present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out payments will be made.
Based on the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company’s Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period, as defined in ASC 805. For the year ended December 31, 2015, several adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $503,442 relating to the assumption of certain liabilities.
Cash paid for acquisitions was $136.0 million and $721.9 million in the twelve-month periods ended December 31, 2015 and 2014, respectively. We completed thirteen acquisitions (excluding book of business purchases) in the twelve-month period ended December 31, 2015. We completed ten acquisitions (excluding book of business purchases) in the twelve-month period ended December 31, 2014.
The following table summarizes the purchase price allocation made as of the date of each acquisition for current year acquisitions and significant adjustments made during the measurement period for prior year acquisitions:
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Name
Business
Segment
 
Effective
Date of
Acquisition
 
Cash
Paid
 
Other
Payable
 
Recorded
Earn-Out
Payable
 
Net Assets
Acquired
 
Maximum
Potential Earn-
Out Payable
Liberty Insurance Brokers, Inc. and Affiliates (Liberty)
Retail
 
February 1, 2015
 
$
12,000

 
$

 
$
2,981

 
$
14,981

 
$
3,750

Spain Agency, Inc. (Spain)
Retail
 
March 1, 2015
 
20,706

 

 
2,617

 
23,323

 
9,162

Bellingham Underwriters, Inc. (Bellingham)
National Programs
 
May 1, 2015
 
9,007

 
500

 
3,322

 
12,829

 
4,400

Fitness Insurance, LLC (Fitness)
Retail
 
June 1, 2015
 
9,455

 

 
2,379

 
11,834

 
3,500

Strategic Benefit Advisors, Inc. (SBA)
Retail
 
June 1, 2015
 
49,600

 
400

 
13,587

 
63,587

 
26,000

Bentrust Financial, Inc. (Bentrust)
Retail
 
December 1, 2015
 
10,142

 
391

 
319

 
10,852

 
2,200

MBA Insurance Agency of Arizona, Inc. (MBA)
Retail
 
December 1, 2015
 
68

 
8,442

 
6,063

 
14,573

 
9,500

Smith Insurance, Inc. (Smith)
Retail
 
December 1, 2015
 
12,096

 
200

 
1,047

 
13,343

 
6,350

Other
Various
 
Various
 
12,926

 
95

 
4,584

 
17,605

 
8,212

Total
 
 
 
 
$
136,000

 
$
10,028

 
$
36,899

 
$
182,927

 
$
73,074


The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition. The data included in the ‘Other’ column shows a negative adjustment for purchased customer accounts. This is driven mainly by the final valuation adjustment for the acquisition of Wright.
(in thousands)
Liberty
 
Spain
 
Bellingham
 
Fitness
 
SBA
 
Bentrust
 
MBA
 
Smith
 
Other
 
Total
Other current assets
$
2,486

 
$
324

 
$

 
$
9

 
$
652

 
$

 
$

 
$

 
$
169

 
$
3,640

Fixed assets
40

 
50

 
25

 
17

 
41

 
36

 
33

 
73

 
59

 
374

Goodwill
10,010

 
15,748

 
9,608

 
8,105

 
39,859

 
8,166

 
13,471

 
10,374

 
21,040

 
136,381

Purchased customer accounts
4,506

 
7,430

 
3,223

 
3,715

 
23,000

 
2,789

 
7,338

 
3,526

 
(2,135
)
 
53,392

Non-compete agreements
24

 
21

 
21

 

 
21

 
43

 
11

 
31

 
156

 
328

Other assets

 

 

 

 
14

 

 

 

 

 
14

Total assets acquired
17,066

 
23,573

 
12,877

 
11,846

 
63,587

 
11,034

 
20,853

 
14,004

 
19,289

 
194,129

Other current liabilities
(42
)
 
(250
)
 
(48
)
 
(12
)
 

 
(182
)
 
(6,280
)
 
(504
)
 
(4,895
)
 
(12,213
)
Deferred income tax, net

 

 

 

 

 

 

 

 
2,576

 
2,576

Other liabilities
(2,043
)
 

 

 

 

 

 

 
(157
)
 
635

 
(1,565
)
Total liabilities assumed
(2,085
)
 
(250
)
 
(48
)
 
(12
)
 

 
(182
)
 
(6,280
)
 
(661
)
 
(1,684
)
 
(11,202
)
Net assets acquired
$
14,981

 
$
23,323

 
$
12,829

 
$
11,834

 
$
63,587

 
$
10,852

 
$
14,573

 
$
13,343

 
$
17,605

 
$
182,927


The weighted average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15 years; and non-compete agreements, 5 years.
Goodwill of $136.4 million was allocated to the Retail, National Programs and Wholesale Brokerage Segments in the amounts of $113.8 million, $18.0 million and $4.6 million, respectively. Of the total goodwill of $136.4 million, $91.1 million is currently deductible for income tax purposes and $8.4 million is non-deductible. The remaining $36.9 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.
For the acquisitions completed during 2015, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues from the acquisitions completed through December 31, 2015, included in the Consolidated Statement of Income for the year ended December 31, 2015, were $28.2 million. The income before income taxes, including the inter-company cost of capital charge, from the acquisitions completed through December 31, 2015, included in the Consolidated Statement of Income for the year ended December 31, 2015, was $1.5 million. If the acquisitions had occurred as of the beginning of the respective periods, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.
(UNAUDITED)
For the Year Ended December 31, 
(in thousands, except per share data)
2015
 
2014
Total revenues
$
1,688,297

 
$
1,630,992

Income before income taxes
$
411,497

 
$
356,426

Net income
$
248,720

 
$
217,053

Net income per share:
 
 
 
Basic
$
1.76

 
$
1.50

Diluted
$
1.73

 
$
1.48

Weighted average number of shares outstanding:
 
 
 
Basic
137,810

 
140,944

Diluted
140,112

 
142,891


Acquisitions in 2014
During the year ended December 31, 2014, Brown & Brown acquired the assets and assumed certain liabilities of nine insurance intermediaries, all of the stock of one insurance intermediary that owns an insurance carrier and five books of business (customer accounts). The cash paid for these acquisitions was $721.9 million. Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last twelve months as permitted by Accounting Standards Codification Topic 805 — Business Combinations (“ASC 805”). Such adjustments are presented in the “Other” category within the following two tables. All of these acquisitions were acquired primarily to expand Brown & Brown’s core business and to attract and hire high-quality individuals.
For the year ended December 31, 2014, several adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $25,941 relating to the assumption of certain liabilities.
The following table summarizes the purchase price allocation made as of the date of each acquisition for current year acquisitions and significant adjustment made during the measurement period for prior year acquisitions:
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Name
Business
Segment
 
Effective
Date of
Acquisition
 
Cash
Paid
 
Other
Payable
 
Recorded
Earn-Out
Payable
 
Net Assets
Acquired
 
Maximum
Potential Earn-
Out Payable
The Wright Insurance Group, LLC
National Programs
 
May 1, 2014
 
$
609,183

 
$
1,471

 
$

 
$
610,654

 
$

Pacific Resources Benefits Advisors, LLC ("PacRes")
Retail
 
May 1, 2014
 
90,000

 

 
27,452

 
117,452

 
35,000

Axia Strategies, Inc ("Axia")
Wholesale Brokerage
 
May 1, 2014
 
9,870

 

 
1,824

 
11,694

 
5,200

Other
Various
 
Various
 
12,798

 
433

 
3,953

 
17,184

 
9,262

Total
 
 
 
 
$
721,851

 
$
1,904

 
$
33,229

 
$
756,984

 
$
49,462


The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition.
(in thousands)
Wright
 
PacRes
 
Axia
 
Other
 
Total
Cash
$
25,365

 
$

 
$

 
$

 
$
25,365

Other current assets
16,474

 
3,647

 
101

 
742

 
20,964

Fixed assets
7,172

 
53

 
24

 
1,724

 
8,973

Reinsurance recoverable
25,238

 

 

 

 
25,238

Prepaid reinsurance premiums
289,013

 

 

 

 
289,013

Goodwill
420,209

 
76,023

 
7,276

 
10,417

 
513,925

Purchased customer accounts
213,677

 
38,111

 
4,252

 
4,384

 
260,424

Non-compete agreements
966

 
21

 
41

 
166

 
1,194

Other assets
20,045

 

 

 

 
20,045

Total assets acquired
1,018,159

 
117,855

 
11,694

 
17,433

 
1,165,141

Other current liabilities
(14,322
)
 
(403
)
 

 
(249
)
 
(14,974
)
Losses and loss adjustment reserve
(25,238
)
 

 

 

 
(25,238
)
Unearned premiums
(289,013
)
 

 

 

 
(289,013
)
Deferred income tax, net
(46,566
)
 

 

 

 
(46,566
)
Other liabilities
(32,366
)
 

 

 

 
(32,366
)
Total liabilities assumed
(407,505
)
 
(403
)
 

 
(249
)
 
(408,157
)
Net assets acquired
$
610,654

 
$
117,452

 
$
11,694

 
$
17,184

 
$
756,984


The weighted average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15 years; and non-compete agreements, 3.4 years.
Goodwill of $513.9 million was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $86.4 million, $420.0 million, $7.7 million and $(0.2) million, respectively. Of the total goodwill of $513.9 million, $141.9 million is currently deductible for income tax purposes and $338.8 million is non-deductible. The remaining $33.2 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.
For the acquisitions completed during 2014, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues and income before income taxes, including the inter-company cost of capital, from the acquisitions completed through December 31, 2014, included in the Consolidated Statement of Income for the year ended December 31, 2014, were $112.2 million and $(1.3) million, respectively. If the acquisitions had occurred as of the beginning of the respective periods, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.
(UNAUDITED)
For the Year Ended December 31, 
(in thousands, except per share data)
2014
 
2013
Total revenues
$
1,630,162

 
$
1,520,858

Income before income taxes
$
358,229

 
$
409,522

Net income
$
218,150

 
$
248,628

Net income per share:
 
 
 
Basic
$
1.51

 
$
1.72

Diluted
$
1.49

 
$
1.70

Weighted average number of shares outstanding:
 
 
 
Basic
140,944

 
141,033

Diluted
142,891

 
142,624


Acquisitions in 2013
During the year ended December 31, 2013, Brown & Brown acquired the assets and assumed certain liabilities of eight insurance intermediaries, all of the stock of one insurance intermediary and one book of business (customer accounts). The cash paid for these acquisitions was $408.1 million. Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last twelve months as permitted by Accounting Standards Codification Topic 805 — Business Combinations (“ASC 805”). Such adjustments are presented in the “Other” category within the following two tables. All of these acquisitions were acquired primarily to expand Brown & Brown’s core business and to attract and hire high-quality individuals.
For the year ended December 31, 2013, several adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $504,300 relating to the assumption of certain liabilities.
The following table summarizes the aggregate purchase price allocation made as of the date of each acquisition for current year acquisitions and adjustment made during the measurement period for prior year acquisitions:
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Name
Business
Segment
 
Effective
Date of
Acquisition
 
Cash
Paid
 
Other
Payable
 
Recorded
Earn-Out
Payable
 
Net Assets
Acquired
 
Maximum
Potential Earn-
Out Payable
The Rollins Agency, Inc.
Retail
 
June 1, 2013
 
$
13,792

 
$
50

 
$
2,321

 
$
16,163

 
$
4,300

Beecher Carlson Holdings, Inc.
Retail; National Programs
 
July 1, 2013
 
364,256

 

 

 
364,256

 

ICA, Inc.
Services
 
December 31, 2013
 
19,770

 

 
727

 
20,497

 
5,000

Other
Various
 
Various
 
10,254

 
502

 
2,043

 
12,799

 
7,468

Total
 
 
 
 
$
408,072

 
$
552

 
$
5,091

 
$
413,715

 
$
16,768


The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition.

(in thousands)
Rollins
 
Beecher
 
ICA
 
Other
 
Total
Cash
$

 
$
40,360

 
$

 
$

 
$
40,360

Other current assets
393

 
57,632

 

 
1,573

 
59,598

Fixed assets
30

 
1,786

 
75

 
24

 
1,915

Goodwill
12,697

 
265,174

 
12,377

 
5,696

 
295,944

Purchased customer accounts
3,878

 
101,565

 
7,917

 
5,623

 
118,983

Non-compete agreements
31

 
2,758

 
21

 
76

 
2,886

Other assets

 

 
107

 
1

 
108

Total assets acquired
17,029

 
469,275

 
20,497

 
12,993

 
519,794

Other current liabilities
(866
)
 
(80,090
)
 

 
(194
)
 
(81,150
)
Deferred income tax, net

 
(22,764
)
 

 

 
(22,764
)
Other liabilities

 
(2,165
)
 

 

 
(2,165
)
Total liabilities assumed
(866
)
 
(105,019
)
 

 
(194
)
 
(106,079
)
Net assets acquired
$
16,163

 
$
364,256

 
$
20,497

 
$
12,799

 
$
413,715


The weighted average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15 years; and non-compete agreements, 5 years.
Goodwill of $295.9 million was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $257.2 million, $27.1 million, $(0.8) million and $12.4 million, respectively. Of the total goodwill of $295.9 million, $41.6 million is currently deductible for income tax purposes and $249.2 million is non-deductible. The remaining $5.1 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.
For the acquisitions completed during 2013, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues and income before income taxes, including the inter-company cost of capital, from the acquisitions completed through December 31, 2013, included in the Consolidated Statement of Income for the year ended December 31, 2013, were $63.8 million and $0.9 million, respectively. If the acquisitions had occurred as of the beginning of the respective periods, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.
(UNAUDITED)
For the Year Ended December 31, 
(in thousands, except per share data)
2013
 
2012
Total revenues
$
1,439,918

 
$
1,329,262

Income before income taxes
$
373,175

 
$
329,291

Net income
$
226,562

 
$
198,826

Net income per share:
 
 
 
Basic
$
1.57

 
$
1.39

Diluted
$
1.55

 
$
1.36

Weighted average number of shares outstanding:
 
 
 
Basic
141,033

 
139,634

Diluted
142,624

 
142,010


For acquisitions consummated prior to January 1, 2009, additional consideration paid to sellers as a result of the purchase price earn-out provisions are recorded as adjustments to intangible assets when the contingencies are settled. The net additional consideration paid by the Company in 2015 as a result of those adjustments totaled $0. The net additional consideration paid by the Company in 2014 as a result of these adjustments totaled $26,000, all of which was allocated to goodwill. Of the $26,000 net additional consideration paid, $26,000 was recorded in other payables.
As of December 31, 2015, the maximum future contingency payments related to all acquisitions totaled $137.4 million, all of which relates to acquisitions consummated subsequent to January 1, 2009.
ASC Topic 805-Business Combinations is the authoritative guidance requiring an acquirer to recognize 100% of the fair values 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 arrangements) at the acquisition date must be included in the purchase price consideration. As a result, the recorded purchase prices for all acquisitions consummated after January 1, 2009 include an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in these earn-out obligations will be recorded in the Consolidated Statement of Income when incurred. Potential earn-out obligations are typically based upon future earnings of the acquired entities, usually between one and three years.
As of December 31, 2015, the fair values of the estimated acquisition earn-out payables were re-evaluated and measured at fair value on a recurring basis using unobservable inputs (Level 3) as defined in ASC 820-Fair Value Measurement. The resulting additions, payments, and net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the years ended December 31, 2015, 2014 and 2013 were as follows:
 
For the Year Ended December 31, 
(in thousands)
2015
 
2014
 
2013
Balance as of the beginning of the period
$
75,283

 
$
43,058

 
$
52,987

Additions to estimated acquisition earn-out payables
36,899

 
34,356

 
5,816

Payments for estimated acquisition earn-out payables
(36,798
)
 
(12,069
)
 
(18,278
)
Subtotal
75,384

 
65,345

 
40,525

Net change in earnings from estimated acquisition earn-out payables:
 
 
 
 
 
Change in fair value on estimated acquisition earn-out payables
2,990

 
7,375

 
570

Interest expense accretion
13

 
2,563

 
1,963

Net change in earnings from estimated acquisition earn-out payables
3,003

 
9,938

 
2,533

Balance as of December 31,
$
78,387

 
$
75,283

 
$
43,058


Of the $78.4 million estimated acquisition earn-out payables as of December 31, 2015, $25.3 million was recorded as accounts payable and $53.1 million was recorded as other non-current liabilities. Included within additions to estimated acquisition earn-out payables are any adjustments to opening balance sheet items prior to the one-year anniversary date and may therefore differ from previously reported amounts. Of the $75.3 million estimated acquisition earn-out payables as of December 31, 2014, $26.0 million was recorded as accounts payable and $49.3 million was recorded as an other non-current liability. Of the $43.1 million estimated acquisition earn-out payables as of December 31, 2013, $6.3 million was recorded as accounts payable and $36.8 million was recorded as an other non-current liability.