NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2015 AND 2014, AND FOR THE YEAR ENDED DECEMBER 31, 2015
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1.
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DESCRIPTION OF THE PLAN
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The following brief description of the Brown & Brown, Inc. Employee Savings Plan and Trust (the “Plan”) is provided for general information purposes only. Participants should refer to the Plan document for a more complete description of the Plan’s provisions.
General
-The Plan is a defined contribution plan. Substantially all employees who are at least 18 years of age and who are expected to complete a year of service (1,000 hours) are eligible to participate in the Plan effective the first full payroll period after one month of service. The Plan is intended to assist Brown & Brown, Inc. and its subsidiaries (the “Employer”) in its efforts to attract and retain employees by enabling eligible employees who are U.S. citizens with the opportunity to invest a portion of their annual compensation in the Plan, augmented by employer contributions, to supplement the employees’ retirement income. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
Benefit Payments
-Benefits under the Plan are payable upon normal (after age 65) or early (after age 59-1/2) retirement, death, disability, severe financial hardship, or termination of service and are based on the vested balance in the participant’s account. Distributions of vested account balances will be made in the form of a single lump-sum payment or in some other optional form of payment, as defined in the Plan. If the participant’s vested account is $5,000 or less, the participant will be prompted to distribute his or her funds to another qualified plan in a timely fashion or be subject to an immediate lump-sum distribution.
Administration
-The Plan is administered by a designated Plan Administrator (the “Administrator”), which has been appointed by the Board of Directors (the “Board”) of the Employer. Information about the Plan document, such as provisions for allocations to participants’ accounts, vesting, benefits, and withdrawals, is contained in the Summary Plan Description. Copies of this document are available on the employee benefits Web site accessible to employees of the Employer or from the Administrator. Schwab Retirement Plan Services, Inc. (“Schwab”) serves as the recordkeeper of the Plan and Charles Schwab Trust Company, a division of Charles Schwab Bank (the “Trustee”) serves as the trustee of the Plan.
Administrative Expenses
- All investment-related expenses are charged against Plan earnings or are paid by the Plan. Administrative expenses for recordkeeping, accounting and legal are paid by the Plan. All other expenses are paid by the Employer.
Contributions
- Participants may elect to contribute, subject to certain limitations, any percentage of annual compensation as contributions to the Plan, up to the allowable limits specified in the Internal Revenue Code. The Employer makes a fully vested safe harbor matching contribution for each participant equal to the sum of (1) 100% of the participant’s elective deferrals that do not exceed 3% of compensation for the allocation period, plus (2) 50% of the participant’s elective deferrals that exceed 3% of compensation for the allocation period but do not exceed 5% of compensation for the allocation period.
The Plan permits the Board of Directors of the Employer to authorize discretionary profit-sharing contributions. No profit-sharing contributions were made in 2015.
Vesting
-Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Vesting in the Employer matching contributions for plan years beginning before January 1, 2014, and for discretionary profit-sharing contributions are based on years of credited service and are subject to the following vesting schedule:
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Years of
Credited Service
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Vested
Interest
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Less than 1
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0
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%
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1
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20
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2
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40
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3
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60
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4
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80
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5 or more
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100
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For Plan years starting on or after January 1, 2014, the forfeited balances of terminated participants’ non-vested accounts are no longer available to reduce employer matching contribution amounts. As of December 31, 2015 and 2014, forfeited employee amounts available to offset future Plan expenses totaled approximately $423,000 and $496,000, respectively. No forfeitures were used in 2015 to offset Plan expenses.
Investment Income and Expenses
-Each participant’s account shall be allocated the investment income and expenses of each fund based on the value of each participant’s account invested in each fund, in proportion to the total value of all accounts in each fund, taking into account any contributions to or distributions from the participant’s account in each fund. General expenses of the Plan not paid by the Employer and not attributable to any particular fund shall be allocated among participants’ accounts in proportion to the value of each account, taking into consideration each participant’s contributions and distributions.
The agreement between the Trustee and the Plan includes a revenue-sharing arrangement whereby the Trustee shares revenue generated by the Plan in excess of the Trustee’s fee. These deposits are included in the “Other Income” amount in the Statement of Changes to Net Assets Available for Benefits. These funds are used to pay other plan expenses with any remaining amounts being reallocated to participants. During 2015, revenue of approximately $ 194,547 was deposited into the Plan related to this revenue-sharing arrangement. At December 31, 2015 and 2014, approximately $ 56,188 and $80,000, respectively, was available to be reallocated or pay plan expenses
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For the Plan year ended December 31, 2015, Plan expenses of approximately $139,000 were paid by these funds. During 2015 approximately $80,000 of these funds were reallocated to participant accounts. No amounts were reallocated to participants during 2014.
Notes Receivable from Participants
-A participant may borrow from his or her own account a minimum of $1,000, up to a maximum equal to the lesser of $50,000 or 50% of the participant’s vested account balance. Participants may not have more than two loans outstanding at any time, with a limited exception for grandfathered outstanding loans transferred to the Plan as a result of mergers of plans maintained by acquired companies. Loans, which are repayable each pay period for periods ranging generally up to five years (and up to 15 years for the purchase of a principal residence), are collateralized by a security interest in the borrower’s vested account balance. The loans bear interest at the rate of prime plus 1%, determined at the time the loan is approved. As of December 31, 2015, interest rates applicable to such loans ranged from 4.25% to 9.25%.
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2.
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USE OF ESTIMATES AND SIGNIFICANT ACCOUNTING POLICIES
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Use of Estimates
-The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of net assets available for benefits and changes therein. Actual results could differ from those estimates.
Basis of Accounting
-The accompanying financial statements of the Plan are presented on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.
Notes Receivable from Participants -
Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest. Interest income is recorded on the accrual basis. Related fees are recorded as administrative expenses and are expenses when they are incurred. No allowance for credit losses has been recorded as of December 31, 2015 and 2014. If a participant ceases to make loan repayments and the plan administrator deems the participant loan to be in default, the participant loan balance is reduced and a benefit payment is recorded.
Payment of Benefits -
Benefits are recorded when paid
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Notes Receivable -
Participant loans are recorded as “Notes Receivable from Participants” and are measured at their unpaid principal balance plus any accrued but unpaid interest in the statements of Net Assets Available for Benefits as of December 31, 2015 and 2014. No allowance for credit losses had been recorded as of December 31, 2015 and 2014. Defaulted participant loans are reclassified as distributions based upon the terms of the Plan documents.
Valuation of Investments
-The Plan’s investments in money market funds, mutual funds, and the personal choice retirement account, which includes investments in mutual funds and common stock, are stated at fair value based on quoted market prices at year-end. The fair value of the Brown & Brown stock fund is measured using the unit value calculated from the observable market price of the stock plus the cost of the short term investment fund, which approximates fair value. This non-pooled separate investment account is deemed to be Level 1 investment. The fair value of the pooled separate accounts is based upon the net asset value (NAV) of the underlying assets as determined by the Trustee’s valuation. NAV is used as a practical expedient. The contract value of participation units owned in the pooled separate accounts is based on quoted redemption values, as determined by the Trustee, on the last business day of the Plan year.
The Plan invests in fully benefit-responsive investment contracts held in the Wells Fargo Stable Return Fund G as of December 31, 2015 and 2014. Investment contracts held in a defined-contribution plan are required to be reported at fair value. However, contract value is the relevant measurement attribute for that portion of the net assets available for benefits of a defined-contribution plan attributable to fully benefit-responsive investment contracts because contract value is the amount participants would receive if they were to initiate permitted transactions under terms of the Plan. The Statements of Net
Assets Available for Benefits presents the fair value of these investment contracts as well as their adjustment from fair value to contract value. The Statement of Changes in Net Assets Available for Benefits is prepared on a contract value basis.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on an accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation (depreciation) includes the Plan's gains and losses on investments bought and sold as well as investments held during the year.
Recently Issued Accounting Pronouncements-
In May 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-07, “
Fair Value Measurement (Topic 820):
Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share (or its Equivalent)
”. This ASU removes the requirement to make certain disclosures as well as categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per practical expedient. The amendments in ASU 2015-07 are effective for public entities for interim and annual periods beginning after December 15, 2015. The amendment is required to be applied retrospectively and early adoption is permitted. Other than requiring a change to the disclosures, the adoption of this standard is not expected to have a material impact on the financial statements.
In July 2015, the FASB issued ASU No. 2015-12, “Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contributions Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient”, which is part of the FASB’s Simplification Initiative for employee benefit plans. Part I of this ASU clarifies that contract value is the only required measurement for Fully Benefit-Responsive Investment Contracts (“FBRICs”) and clarifies that indirect investments in FBRICs should no longer be reflected as FBRICs and therefore, should be reported at fair value. Part II of this ASU eliminates the current GAAP requirements for plans to disclose individual investments that represent five percent or more of the net assets available for benefits, and the net appreciation or depreciation for investments by general type for both participant-directed investments and nonparticipant-directed investments. It also allows investments to be disaggregated by general type and eliminates the requirement to disaggregate investments by class. Further, significant investment strategies for an investment in a fund that files a U. S. Department of Labor Form 5500, Annual Return/Report of Employee Benefit Plan, as direct filing entity when the plan measures that investment using the NAV practical expedient are no longer required. The provisions of this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2015. Parts I and II are to be applied retrospectively and early adoption is permitted. Other than requiring a change to the disclosures, the adoption of Parts I and II of this standard is not expected to have a material impact on the financial statements. Part III is not applicable to the Plan.
Fair Value Measurements
-The Plan adopted a fair value measurement method that establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 - Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly;
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The fair values estimated and derived from each fair value calculation may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with those utilized by other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following tables set forth by level within the fair value hierarchy the Plan investment assets and investment liabilities at fair value, as of December 31, 2015 and 2014. As required by Accounting Standards Codification Topic 820-Fair Value Measurements and Disclosures, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
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Investment Assets at Fair
Value as of December 31, 2015
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Level 1
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Level 2
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Level 3
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Total
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Registered investment companies
(mutual funds):
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Index funds
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$
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106,377,016
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$
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—
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$
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—
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$
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106,377,016
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Value funds
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60,767,261
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—
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—
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60,767,261
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Growth funds
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57,297,226
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—
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—
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57,297,226
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Bond funds
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63,273,348
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—
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—
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63,273,348
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Growth and Income funds
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34,160,088
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—
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—
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34,160,088
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Asset Allocation/Retirement Strategy funds
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38,726,540
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—
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—
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38,726,540
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Total - Registered investment companies(mutual funds):
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360,601,479
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—
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—
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360,601,479
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Pooled separate account
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Stable Value Fund
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—
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49,964,259
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—
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49,964,259
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Employer common stock fund
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29,182,998
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—
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—
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29,182,998
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Personal choice accounts
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—
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Cash
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19,950
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—
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—
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19,950
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Money market funds
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1,698,248
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—
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—
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1,698,248
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Registered investment companies (mutual funds)
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1,904,087
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—
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—
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1,904,087
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Common stock
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5,025,594
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—
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—
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5,025,594
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Preferred stock
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5,383
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—
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—
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5,383
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Pooled separate accounts
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—
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3,707,823
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—
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3,707,823
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Total –Personal choice accounts
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8,653,262
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3,707,823
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—
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12,361,085
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Total investments at fair value
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$
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398,437,739
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$
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53,672,082
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$
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—
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$
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452,109,821
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Investment Assets at Fair
Value as of December 31, 2014
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Level 1
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Level 2
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Level 3
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Total
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Registered investment companies
(mutual funds):
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Index funds
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$
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93,380,732
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$
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—
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$
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—
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$
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93,380,732
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Value funds
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61,578,891
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—
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—
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61,578,891
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Growth funds
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54,131,527
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—
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—
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54,131,527
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Bond funds
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56,162,539
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—
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—
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56,162,539
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Growth and Income funds
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39,110,723
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|
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—
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—
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39,110,723
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Asset Allocation/Retirement Strategy funds
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36,352,920
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|
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—
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—
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36,352,920
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Total - Registered investment companies(mutual funds):
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340,717,332
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—
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—
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340,717,332
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Pooled separate account
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Stable Value Fund
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—
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53,595,461
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—
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53,595,461
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Employer common stock fund
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34,167,658
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—
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—
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34,167,658
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Personal choice accounts
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Cash
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58,347
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—
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—
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58,347
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Money market funds
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2,015,292
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|
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—
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—
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2,015,292
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Registered investment companies (mutual funds)
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2,363,491
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—
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—
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2,363,491
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Common stock
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6,242,076
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—
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—
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6,242,076
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Preferred stock
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5,979
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—
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—
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5,979
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Pooled separate accounts
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—
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3,736,654
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—
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3,736,654
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Total –Personal choice accounts
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10,685,185
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3,736,654
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—
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14,421,839
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Total investments at fair value
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$
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385,570,175
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$
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57,332,115
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$
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—
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$
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442,902,290
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Risks and Uncertainties—Investments
—The Plan invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the statements of net assets available for benefits.
The fair value of individual investments that represent five percent or more of the Plan’s net assets available for benefits as of December 31, 2015 and 2014, respectively, are summarized as follows:
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2015
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2014
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Dodge & Cox Income Fund
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$
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28,075,297
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$
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—
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Employer common stock fund
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29,176,908
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34,167,658
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Harbor Capital Appreciation Fund
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40,834,391
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|
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36,641,960
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Invesco Growth and Income R5 Fund
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38,664,699
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|
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37,516,472
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Pimco Total Return Bond Administration Fund
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—
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|
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28,547,805
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Vanguard Institutional Index Fund
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67,109,308
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|
|
64,077,672
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Wells Fargo Stable Return Fund G*
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49,964,259
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|
|
53,595,461
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*
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Wells Fargo Stable Return Fund G is shown at fair value. Contract Value was $49,715,681 and $52,855,484 at December 31, 2015 and 2014, respectively.
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During the year ended December 31, 2015, the fair value of the Plan’s investments appreciated (depreciated) in the amounts shown:
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Amount
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Mutual funds
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$
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(16,031,018
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)
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Employer common stock fund
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(855,734
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)
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Pooled separate accounts
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769,899
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Net depreciation in fair value of investments
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$
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(16,116,853
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)
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As of December 31, 2015, contributions to the Plan were invested in one or more of various investment fund options, including money market funds, mutual funds and Employer Company stock fund, at the direction of each participant. The Plan also allows participants to invest in the Charles Schwab & Co. Personal Choice Retirement Account, which enables each participant to self-direct his or her money into a full range of investment options, including individual stocks and bonds, as well as allowing access to over 800 additional mutual funds. The Charles Schwab & Co. Personal Choice Retirement Account is presented as “self-directed investments” in the accompanying statements of net assets available for benefits.
One investment in the Plan is a guaranteed pooled separate account managed by Wells Fargo Bank called the Stable Return Fund G (the “Stable Return Fund”), which invests in a variety of investment contracts such as guaranteed investment contracts (“GICs”) issued by insurance companies and other financial institutions and other investment products (such as separate account contracts and synthetic GICs) with similar characteristics. The Stable Return Fund investment in each contract is presented at fair value. The fair value of a GIC is based on the present value of future cash flows using the current discount rate. The fair value of a security-backed contract includes the value of the underlying securities and the value of the wrapper contract. The fair value of a wrapper contract provided by a security-backed contract issuer is the present value of the difference between the current wrapper fee and the contracted wrapper fee.
An adjustment is made to the fair value in the statements of net assets available for benefits to present the investment at contract value. Contract value is based upon contributions made under the contract, plus interest credited, less participant withdrawals. There are no reserves against contract value for credit risk of the contract issuer or otherwise. The crediting interest rate is effective for a 12-month period and is set annually. The crediting interest rate is determined based on (i) the projected market yield-to-maturity of the market value of assets, net of expenses, (ii) the timing and amounts of deposits, transfers, and withdrawals expected to be made during the interest crediting period, and (iii) the amortization of the difference between the fair value of the pooled separate account and the balance of the Stable Return Fund. The crediting interest rate for the Stable Return Fund for the years ended December 31, 2015 and 2014 was 1.79% and 1.64%, respectively. The average yield for the Stable Return Fund for the years ended December 31, 2015 and 2014, was 1.83% and 1.40%, respectively.
There is no event that limits the ability of the Plan to transact at contract value with the issuer. There are also no events or circumstances that would allow the issuer to terminate the fully benefit-responsive investment contract with the Plan and settle at an amount different from contract value.
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5.
|
PARTY-IN-INTEREST TRANSACTIONS
|
The Plan’s investments include Brown & Brown, Inc. common stock fund, which represents party-in-interest transactions that qualify as exempt prohibited transactions. Additionally, through the personal choice retirement account, certain investments are managed by affiliates of the Trustee of the Plan.
The Plan issues notes to participants, which are secured by the balances in the participants’ accounts. These transactions qualify as party-in-interest transactions.
Although it has not expressed any intent to do so, the Employer may terminate the Plan at any time, either wholly or partially, by notice in writing to the participants and the Trustee. Upon termination, the rights of participants in their accounts will become 100% vested. The Employer may temporarily discontinue contributions to the Plan, either wholly or partially, without terminating the Plan.
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7.
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FEDERAL INCOME TAX STATUS
|
The Plan has received a favorable determination letter from the Internal Revenue Service dated November 16, 2015, relating to the qualification of the Plan under Section 401(a) of the Internal Revenue Code of 1986, as amended (“IRC”). The Plan’s management believes that the Plan is designed and is currently being operated in compliance with applicable requirements of the IRC and regulations issued thereunder and, therefore, believes the Plan, as amended and restated, is qualified and the related trust is tax exempt
Accounting principles generally accepted in the United States of America require Plan management to evaluate uncertain tax positions taken by the Plan. The financial statement effects of a tax position are recognized when the position is more likely than not, based on the technical merits, to be sustained upon examination by the IRS. The Plan Administrator has analyzed the tax positions taken by the Plan, and has concluded that as of December 31, 2015, there are no uncertain positions taken or expected to be taken. The Plan has recognized no interest or penalties related to uncertain tax positions. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.