NOTE 4· Business Combinations

Acquisitions in 2013

During the nine months ended September 30, 2013, Brown & Brown has acquired the assets and assumed certain liabilities of three insurance intermediaries, all of the stock of one insurance intermediary and a book of business (customer accounts). The aggregate purchase price of these acquisitions was $484,319,000, including $379,694,000 of cash payments, the issuance of $85,000 in other payables, the assumption of $101,755,000 of liabilities and $2,785,000 of recorded earn-out payables. All of these acquisitions were acquired primarily to expand Brown & Brown’s core businesses and to attract and hire high-quality individuals. Acquisition purchase prices are typically based on a multiple of average annual operating profit earned over a one- to three-year period within a minimum and maximum price range. 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 Topic 805 – Business Combinations (“ASC 805”). For the nine months ended September 30, 2013, several adjustments were made within the permitted measurement period that resulted in a reduction to the aggregate purchase price of the applicable acquisitions of $1,084,000, including $18,000 of cash payments, a reduction of $454,000 in other payables, the assumption of $73,000 of liabilities and the reduction of $721,000 in recorded earn-out payables.

The following table summarizes the aggregate purchase price allocations made as of the date of each acquisition for current year acquisitions and adjustments made during the measurement period for prior year acquisitions:


(in thousands)
Name	Business Segment	Date of Acquisition	Cash Paid		Other Payable			Recorded Earn-Out Payable			Net Assets Acquired			Maximum Potential Earn- Out Payable
Arrowhead General Insurance Agency Superholding Corporation	National Programs; Services	January 9, 2012	$	—	$	(454	)	$	—		$	(454	)	$	—
Insurcorp & GGM Investments LLC	Retail	May 1, 2012		—		—			(834	)		(834	)		—
Richard W. Endlar Insurance Agency, Inc.	Retail	May 1, 2012		—		—			220			220			—
Texas Security General Insurance Agency, Inc.	Wholesale Brokerage	September 1, 2012		—		—			(107	)		(107	)		—
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		364,643		—			—			364,643			—
Other	Various	Various		1,277		35			464			1,776			748

Total			$	379,712	$	(369	)	$	2,064		$	381,407		$	5,048

The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition and adjustment made during the measurement period for prior year acquisition:


(in thousands)	Arrowhead			Insurcorp			Endlar		Texas Security			Rollins			Beecher			Other			Total
Cash	$	—		$	—		$	—	$	—		$	—		$	40,360		$	—		$	40,360
Other current assets		—			—			—		25			393			51,330			1,528			53,276
Fixed assets		—			—			—		—			30			1,786			9			1,825
Goodwill		(454	)		(566	)		216		(843	)		12,697			267,731			(228	)		278,553
Purchased customer accounts		—			(268	)		4		708			3,878			101,565			502			106,389
Non-compete agreements		—			—			—		—			31			2,758			42			2,831
Other assets		—			—			—		—			—			—			1			1

Total assets acquired		(454	)		(834	)		220		(110	)		17,029			465,530			1,854			483,235
Other current liabilities		—			—			—		3			(866	)		(79,855	)		(78	)		(80,796	)
Deferred income taxes, net		—			—			—		—			—			(18,867	)		—			(18,867	)
Other liabilities		—			—			—		—			—			(2,165	)		—			(2,165	)

Total liabilities assumed		—			—			—		3			(866	)		(100,887	)		(78	)		(101,828	)

Net assets acquired	$	(454	)	$	(834	)	$	220	$	(107	)	$	16,163		$	364,643		$	1,776		$	381,407

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 $278,553,000, was allocated to the Retail, National Programs and Wholesale Brokerage Divisions in the amounts of $252,753,000, $26,612,000 and ($812,000), respectively. Of the total goodwill of $278,553,000, $24,863,000 is currently deductible for income tax purposes and $251,626,000 is non-deductible. The remaining $2,064,000 relates to the earn-out payables and will not be deductible until it is earned and paid.

The results of operations for the acquisitions completed during 2013 have been combined with those of the Company since their respective acquisition dates. The total revenues and income (loss) before income taxes from the acquisitions completed through September, 30, 2013, included in the Condensed Consolidated Statement of Income for the three months ended September 30, 2013, were $29,095,000 and ($3,453,000), respectively. The total revenues and income (loss) before income taxes from the acquisitions completed through September, 30, 2013, included in the Condensed Consolidated Statement of Income for the nine months ended September 30, 2013, were $29,723,000 and ($3,311,000), respectively. If the acquisitions had occurred as of the beginning of the period, 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 three months ended September 30,				For the nine months ended September 30,
(in thousands, except per share data)	2013		2012		2013		2012
Total revenues	$	359,310	$	333,375	$	1,080,725	$	978,275
Income before income taxes		95,455		87,038		292,743		250,428
Net income		57,749		52,771		176,881		150,317
Net income per share:
Basic	$	0.40	$	0.37	$	1.22	$	1.05
Diluted	$	0.39	$	0.36	$	1.21	$	1.03

Weighted average number of shares outstanding:
Basic		141,139		139,465		140,925		139,185
Diluted		142,789		142,097		142,476		141,769

Acquisitions in 2012

During the nine months ended September 30, 2012, Brown & Brown acquired the assets and assumed certain liabilities of 11 insurance intermediaries, all of the stock of one insurance intermediary and a book of business (customer accounts). The aggregate purchase price of these acquisitions was $620,144,000, including $443,475,000 of cash payments, the issuance of notes payable of $59,000, the issuance of $25,776,000 in other payables, the assumption of $135,779,000 of liabilities and $15,055,000 of recorded earn-out payables. The ‘other payables’ amount includes $22,594,000 that the Company is obligated to pay all shareholders of Arrowhead General Insurance Agency Superholding Corporation (“Arrowhead”) on a pro rata basis for certain pre-merger corporate tax refunds and estimated certain potential future income tax credits that were created by net operating loss carryforwards originating from transaction-related tax benefit items. All of these acquisitions were acquired primarily to expand Brown & Brown’s core businesses and to attract and hire high-quality individuals. Acquisition purchase prices are typically based on a multiple of average annual operating profit earned over a one- to three-year period within a minimum and maximum price range. 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 following table summarizes the aggregate purchase price allocations made as of the date of each acquisition:


(in thousands)
Name	Business Segment		2012 Date of Acquisition		Cash Paid		Note Payable		Other Payable		Recorded Earn-out Payable		Net Assets Acquired		Maximum Potential Earn-out Payable
Arrowhead General Insurance Agency Superholding Corporation		National Programs; Services		January 9	$	397,531	$	—	$	22,694	$	3,634	$	423,859	$	5,000
Insurcorp & GGM Investments LLC (d/b/a Maalouf Benefit Resources)		Retail		May 1		15,500		—		900		4,944		21,344		17,000
Texas Security General Insurance Agency, Inc.		Wholesale		September 1		14,506		—		2,182		2,124		18,812		7,200
Other		Various		Various		15,938		59		—		4,353		20,350		10,235

Total					$	443,475	$	59	$	25,776	$	15,055	$	484,365	$	39,435

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


(in thousands)	Arrowhead			Insurcorp			Texas Security			Other			Total
Cash	$	61,786		$	—		$	—		$	—		$	61,786
Other current assets		69,051			180			1,882			524			71,637
Fixed assets		4,629			25			45			67			4,766
Goodwill		322,779			14,745			10,776			12,818			361,118
Purchased customer accounts		99,515			6,490			6,227			8,371			120,603
Non-compete agreements		100			22			14			97			233
Other assets		1			—			—			—			1

Total assets acquired		557,861			21,462			18,944			21,877			620,144
Other current liabilities		(107,579	)		(118	)		(132	)		(1,527	)		(109,356	)
Deferred income taxes, net		(26,423	)		—			—			—			(26,423	)

Total liabilities assumed		(134,002	)		(118	)		(132	)		(1,527	)		(135,779	)

Net assets acquired	$	423,859		$	21,344		$	18,812		$	20,350		$	484,365

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 $361,118,000, was allocated to the Retail, National Programs, Wholesale Brokerage and Services Divisions in the amounts of $26,753,000, $253,766,000, $11,586,000 and $69,013,000, respectively. Of the total goodwill of $361,118,000, $28,326,000 is currently deductible for income tax purposes and $317,737,000 is non-deductible. The remaining $15,055,000 relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

The results of operations for the acquisitions completed during 2012 have been combined with those of the Company since their respective acquisition dates. The total revenues and income before income taxes from the acquisitions completed through September 30, 2012, included in the Condensed Consolidated Statement of Income for the three months ended September 30, 2012, were $37,754,000 and $4,731,000, respectively. The total revenues and income before income taxes from the acquisitions completed through September 30, 2012, included in the Condensed Consolidated Statement of Income for the nine months ended September 30, 2012, were $96,020,000 and $4,279,000, respectively. If the acquisitions had occurred as of the beginning of the period, 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 three months ended September 30,				For the nine months ended September 30,
(in thousands, except per share data)	2012		2011		2012		2011
Total revenues	$	304,776	$	292,599	$	907,796	$	866,115
Income before income taxes		81,998		81,785		239,286		238,144
Net income		49,715		49,699		143,630		144,021

Net income per share:
Basic	$	0.35	$	0.35	$	1.00	$	1.01
Diluted	$	0.34	$	0.34	$	0.98	$	1.00

Weighted average number of shares outstanding:
Basic		139,465		138,690		139,185		138,475
Diluted		142,097		140,443		141,769		140,120

For acquisitions consummated prior to January 1, 2009, additional consideration paid to sellers as a result of 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 2013 as a result of these adjustments totaled $873,000, all of which was allocated to goodwill. Of the $873,000 net additional consideration paid, $873,000 was issued as an other payable. The net additional consideration paid by the Company in 2012 as a result of these adjustments totaled $2,907,000, all of which was allocated to goodwill. Of the $2,907,000 net additional consideration paid, $2,907,000 was paid in cash.

As of September 30, 2013, the maximum future contingency payments related to all acquisitions totaled $135,122,000, 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 September 30, 2013 and 2012, 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). The resulting additions, payments, and net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the three and nine months ended September 30, 2013 and 2012, were as follows:


	For the three months ended September 30,						For the nine months ended September 30,
(in thousands)	2013			2012			2013			2012
Balance as of the beginning of the period	$	48,918		$	57,997		$	52,987		$	47,715
Additions to estimated acquisition earn-out payables		955			2,136			2,787			15,055
Payments for estimated acquisition earn-out payables		(2,518	)		(2,743	)		(10,597	)		(4,388	)

Subtotal		47,355			57,390			45,177			58,382

Net change in earnings from estimated acquisition earn-out payables:

Change in fair value on estimated acquisition earn-out payables		(1,146	)		240			10			(1,966	)
Interest expense accretion		481			618			1,503			1,832

Net change in earnings from estimated acquisition earn-out payables		(665	)		858			1,513			(134	)

Balance as of September 30	$	46,690		$	58,248		$	46,690		$	58,248

Of the $46,690,000 estimated acquisition earn-out payables as of September 30, 2013, $10,909,000 was recorded as accounts payable and $35,781,000 was recorded as other non-current liabilities. Of the $58,248,000 in estimated acquisition earn-out payables as of September 30, 2012, $17,552,000 was recorded as accounts payable and $40,696,000 was recorded as other non-current liabilities.