Business Combinations

12 Months Ended

Dec. 31, 2017

Business Combinations [Abstract]

Business Combinations

Business Combinations

During the year ended December 31, 2017, the Company acquired the assets and assumed certain liabilities of eleven insurance intermediaries and one book 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 upon 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 upon 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, 2017, several adjustments were made within the permitted measurement period that resulted in an increase in the aggregate purchase price of the affected acquisitions of $1.5 million relating to the assumption of certain liabilities. These measurement period adjustments have been reflected as current period adjustments for the year ended December 31, 2017 in accordance with the guidance in ASU 2015-16 “Business Combinations.” The measurement period adjustments impacted goodwill, with no effect on earnings or cash in the current period.

Cash paid for acquisitions was $41.5 million and $124.7 million in the years ended December 31, 2017 and 2016, respectively. We completed eleven acquisitions (excluding book of business purchases) during the year ended December 31, 2017. We completed eight acquisitions (excluding book of business purchases) during the year ended December 31, 2016.

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. During the measurement periods, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. These adjustments are made in the period in which the amounts are determined and the current period income effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date.

(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
Other	Various	Various	$	41,471	$	11,708	$	6,921	$	60,100	$	27,451
Total			$	41,471	$	11,708	$	6,921	$	60,100	$	27,451

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

(in thousands)	Total
Other current assets	$	601
Fixed assets	69
Goodwill	42,172
Purchased customer accounts	18,738
Non-compete agreements	721
Total assets acquired	62,301
Other current liabilities	(1,512		)
Deferred income tax, net	(689		)
Total liabilities assumed	(2,201		)
Net assets acquired	$	60,100

The weighted-average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15.0 years; and non-compete agreements, 5.0 years.

Goodwill of $42.2 million was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $33.1 million, $7.2 million, $1.2 million and $0.7 million, respectively. Of the total goodwill of $42.2 million, $35.3 million is currently deductible for income tax purposes. The remaining $6.9 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

For the acquisitions completed during 2017, 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, 2017 included in the Consolidated Statement of Income for the year ended December 31, 2017 were $7.8 million. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through December 31, 2017 included in the Consolidated Statement of Income for the year ended December 31, 2017 was $2.4 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)	2017		2016
Total revenues	$	1,891,701	$	1,784,776
Income before income taxes	$	453,397	$	429,490
Net income	$	401,908	$	261,133
Net income per share:
Basic	$	2.88	$	1.87
Diluted	$	2.83	$	1.85
Weighted-average number of shares outstanding:
Basic	136,290		136,139
Diluted	138,793		137,804

Acquisitions in 2016

During the year ended December 31, 2016, the Company acquired the assets and assumed certain liabilities of seven insurance intermediaries, all of the stock of one insurance intermediary and three 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 ASC 805. Such adjustments are presented in the “Other” category within the following two tables.

For the year ended December 31, 2016, several adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $917,497, 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 adjustments made during the measurement period for prior year acquisitions:

(in thousands)
Name	Business Segment	Effective Date of Acquisition	Cash Paid		Note Payable		Other Payable		Recorded Earn-Out Payable		Net Assets Acquired		Maximum Potential Earn- Out Payable
Social Security Advocates for the Disabled LLC (SSAD)	Services	February 1, 2016	$	32,526	$	492	$	—	$	971	$	33,989	$	3,500
Morstan General Agency, Inc. (Morstan)	Wholesale Brokerage	June 1, 2016	66,050		—		10,200		3,091		79,341		5,000
Other	Various	Various	26,140		—		464		400		27,004		7,785
Total			$	124,716	$	492	$	10,664	$	4,462	$	140,334	$	16,285

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

(in thousands)	SSAD			Morstan			Other			Total
Cash	$	2,094		$	—		$	—		$	2,094
Other current assets	1,042			2,482			1,555			5,079
Fixed assets	307			300			77			684
Goodwill	22,352			51,454			19,570			93,376
Purchased customer accounts	13,069			26,481			11,075			50,625
Non-compete agreements	72			39			117			228
Other assets	—			—			20			20
Total assets acquired	38,936			80,756			32,414			152,106
Other current liabilities	(1,717		)	(1,415		)	(5,410		)	(8,542		)
Deferred income tax, net	(3,230		)	—			—			(3,230		)
Total liabilities assumed	(4,947		)	(1,415		)	(5,410		)	(11,772		)
Net assets acquired	$	33,989		$	79,341		$	27,004		$	140,334

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 $93.4 million was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $13.1 million, $(1.2) thousand, $57.9 million and $22.4 million, respectively. Of the total goodwill of $93.4 million, $88.9 million is currently deductible for income tax purposes. The remaining $4.5 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

For the acquisitions completed during 2016, 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, 2016 included in the Consolidated Statement of Income for the year ended December 31, 2016 were $34.2 million. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through December 31, 2016 included in the Consolidated Statement of Income for the year ended December 31, 2016 was $4.3 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)	2016		2015
Total revenues	$	1,789,790	$	1,716,592
Income before income taxes	$	428,194	$	414,911
Net income	$	260,346	$	250,783
Net income per share:
Basic	$	1.86	$	1.78
Diluted	$	1.84	$	1.75
Weighted-average number of shares outstanding:
Basic	136,139		137,810
Diluted	137,804		140,112

Acquisitions in 2015

During the year ended December 31, 2015, Brown & Brown acquired the assets and assumed certain liabilities of thirteen insurance intermediaries and four books of business (customer accounts). The cash paid for these acquisitions was $136.0 million. Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last twelve months as permitted by ASC 805. Such adjustments are presented in “Other” 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.

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.

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 intercompany 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
Total revenues	$	1,688,297
Income before income taxes	$	411,497
Net income	$	248,720
Net income per share:
Basic	$	1.76
Diluted	$	1.73
Weighted-average number of shares outstanding:
Basic	137,810
Diluted	140,112

As of December 31, 2017, the maximum future contingency payments related to all acquisitions totaled $88.4 million, all of which relates to acquisitions consummated subsequent to January 1, 2009.

ASC 805 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, 2017, 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, 2017, 2016 and 2015 were as follows:

	For the Year Ended December 31,
(in thousands)	2017			2016			2015
Balance as of the beginning of the period	$	63,821		$	78,387		$	75,283
Additions to estimated acquisition earn-out payables	6,920			4,462			36,899
Payments for estimated acquisition earn-out payables	(43,766		)	(28,213		)	(36,798		)
Subtotal	26,975			54,636			75,384
Net change in earnings from estimated acquisition earn-out payables:
Change in fair value on estimated acquisition earn-out payables	6,874			6,338			13
Interest expense accretion	2,326			2,847			2,990
Net change in earnings from estimated acquisition earn-out payables	9,200			9,185			3,003
Balance as of December 31,	$	36,175		$	63,821		$	78,387

Of the $36.2 million of estimated acquisition earn-out payables as of December 31, 2017, $25.1 million was recorded as accounts payable, and $11.1 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 of the acquisition and may therefore differ from previously reported amounts. Of the $63.8 million of estimated acquisition earn-out payables as of December 31, 2016, $31.8 million was

recorded as accounts payable, and $32.0 million was recorded as other non-current liabilities. Of the $78.4 million of 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 another non-current liability.