ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
The following discussion should be read in conjunction with our Consolidated Financial Statements and the related Notes to those Financial Statements included elsewhere in this Annual Report on Form 10-K. In addition, please see “Information Regarding Non-GAAP Measures” below, regarding important information on non-GAAP financial measures contained in our discussion and analysis.
We are a diversified insurance agency, wholesale brokerage, insurance programs and services organization headquartered in Daytona Beach, Florida. As an insurance intermediary, our principal sources of revenue are commissions paid by insurance companies and, to a lesser extent, fees paid directly by customers. Commission revenues generally represent a percentage of the premium paid by an insured and are affected by fluctuations in both premium rate levels charged by insurance companies and the insureds’ underlying “insurable exposure units,” which are units that insurance companies use to measure or express insurance exposed to risk (such as property values, or sales and payroll levels) to determine what premium to charge the insured. Insurance companies establish these premium rates based upon many factors, including loss experience, risk profile and reinsurance rates paid by such insurance companies, none of which we control.
We have increased revenues every year from 1993 to 2016, with the exception of 2009, when our revenues dropped 1.0%. Our revenues grew from $95.6 million in 1993 to $1.8 billion in 2016, reflecting a compound annual growth rate of 13.5%. In the same 23-year period, we increased net income from $8.1 million to $257.5 million in 2016, a compound annual growth rate of 16.2%.
The volume of business from new and existing customers, fluctuations in insurable exposure units, changes in premium rate levels, and changes in general economic and competitive conditions all affect our revenues. For example, level rates of inflation or a general decline in economic activity could limit increases in the values of insurable exposure units. Conversely, increasing costs of litigation settlements and awards could cause some customers to seek higher levels of insurance coverage. Historically, our revenues have typically grown as a result of our focus on net new business growth and acquisitions. We foster a strong, decentralized sales and service culture with the goal of consistent, sustained growth over the long-term.
The term “Organic Revenue”, a non-GAAP measure, is our core commissions and fees less (i) the core commissions and fees earned for the first twelve months by newly-acquired operations and (ii) divested business (core commissions and fees generated from offices, books of business or niches sold or terminated during the comparable period). The term “core commissions and fees” excludes profit-sharing contingent commissions and guaranteed supplemental commissions, and therefore represents the revenues earned directly from specific insurance policies sold, and specific fee-based services rendered. “Organic Revenue” is reported in this manner in order to express the current year’s core commissions and fees on a comparable basis with the prior year’s core commissions and fees. The resulting net change reflects the aggregate changes attributable to (i) net new and lost accounts, (ii) net changes in our customers’ exposure units, (iii) net changes in insurance premium rates or the commission rate paid to us by our carrier partners; and (iv) the net change in fees paid to us by our customers. Organic Revenue is reported in the Results of Operations and in the Results of Operations - Segment sections of this form 10-K.
We also earn “profit-sharing contingent commissions,” which are profit-sharing commissions based primarily on underwriting results, but which may also reflect considerations for volume, growth and/or retention. These commissions are primarily received in the first and second quarters of each year, based upon the aforementioned considerations for the prior year(s). Over the last three years, profit-sharing contingent commissions have averaged approximately 3.6% of the previous year’s total commissions and fees revenue. Profit-sharing contingent commissions are included in our total commissions and fees in the Consolidated Statement of Income in the year received.
Certain insurance companies offer guaranteed fixed-base agreements, referred to as “Guaranteed Supplemental Commissions” (“GSCs”) in lieu of profit-sharing contingent commissions. Since GSCs are not subject to the uncertainty of loss ratios, they are accrued throughout the year based upon actual premiums written. For the year ended
December 31, 2016
, we had earned $11.5 million of GSCs, of which $9.2 million remained accrued at
December 31, 2016
as most of this will be collected in the first quarter of 2017. For the years ended
December 31, 2016
,
2015
, and
2014
, we earned $11.5 million, $10.0 million and $9.9 million, respectively, from GSCs.
Fee revenues relate to fees negotiated in lieu of commissions, which are recognized as services are rendered. Fee revenues have historically been generated primarily by: (1) our Services Segment, which provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare benefits advocacy services, and claims adjusting services; (2) our National Programs and Wholesale Brokerage Segments, which earn fees primarily for the issuance of insurance policies on behalf of insurance companies and to a lesser extent (3) our Retail Segment in our large-account customer base. Our services are provided over a period of time, which is typically one year. Fee revenues, on a consolidated basis, as a percentage of our total commissions and fees, represented 31.3% in
2016
, 30.6% in
2015
and 30.6% in
2014
.
Additionally, our profit-sharing contingent commissions and GSCs for the year ended
December 31, 2016
increased
by
$3.7 million
over
2015
primarily as a result of an increase in profit-sharing contingent commissions and GSCs in the Retail Segment, partially offset by a decrease in profit-sharing contingent commissions in the Wholesale Brokerage Segment as a result of increased loss ratios. Other income
decreased
by
$0.2 million
primarily as a result of a reduction in the gains on the sale of books of business when compared to
2015
and the change in where this activity is presented in the financial statements as described in the results of operations section below.
For the years ended
December 31, 2016
and
2015
, our consolidated organic revenue growth rate was
3.0%
and
2.6%
respectively. Additionally, each of our four segments recorded positive organic revenue growth for the year ended
December 31, 2016
. In the event that the gradual increases in insurable exposure units that occurred in the past few years continues through 2017 and premium rate changes are similar with 2016, we believe we will continue to see positive quarterly organic revenue growth rates in 2017.
Historically, investment income has consisted primarily of interest earnings on premiums and advance premiums collected and held in a fiduciary capacity before being remitted to insurance companies. Our policy is to invest available funds in high-quality, short-term fixed income investment securities. Investment income also includes gains and losses realized from the sale of investments. Other income primarily reflects legal settlements and other miscellaneous income.
Income before income taxes for the years ended
December 31, 2016
increased
over
2015
by
$20.9 million
, primarily as a result of acquisitions completed in the past twelve months and net new business.
Information Regarding Non-GAAP Measures
In the discussion and analysis of our results of operations, in addition to reporting financial results in accordance with GAAP, we provide information regarding the following non-GAAP measures: Organic Revenue, Organic Revenue growth, and Organic Revenue growth after adjusting for the significant revenue recorded at our former Colonial Claims operation in the first half of 2013 attributable to Superstorm Sandy (“2014 Total core commissions and fees-adjusted”). We view each of these non-GAAP measures as important indicators when assessing and evaluating our performance on a consolidated basis and for each of our segments because they allow us to determine a comparable, but non-GAAP, measurement of revenue growth that is associated with the revenue sources that were a part of our business in both the current and prior year and that are expected to continue in the future. These measures are not in accordance with, or an alternative to the GAAP information provided in this Annual Report on Form 10-K. We believe that presenting these non-GAAP measures allows readers of our financial statements to measure, analyze and compare our consolidated growth, and the growth of each of our segments, in a meaningful and consistent manner. We present such non-GAAP supplemental financial information, as we believe such information provides additional meaningful methods of evaluating certain aspects of our operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis. Our industry peers may provide similar supplemental non-GAAP information with respect to one or more of these measures, although they may not use the same or comparable terminology and may not make identical adjustments. This supplemental financial information should be considered in addition to, not in lieu of, our Consolidated Financial Statements.
Tabular reconciliations of this supplemental non-GAAP financial information to our most comparable GAAP information are contained in this Annual Report on Form 10-K under “Results of Operation - Segment Information.”
Acquisitions
Part of our continuing business strategy is to attract high-quality insurance intermediaries to join our operations. From 1993 through the
fourth
quarter of
2016
, we acquired
479
insurance intermediary operations, excluding acquired books of business (customer accounts). 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). Collectively, these acquired business that had annualized revenues of approximately $56 million.
Critical Accounting Policies
Our Consolidated Financial Statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We continually evaluate our estimates, which are based upon historical experience and on assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for our judgments about the carrying values of our assets and liabilities, of which values are not readily apparent from other sources. Actual results may differ from these estimates.
We believe that of our significant accounting and reporting policies, the more critical policies include our accounting for revenue recognition, business combinations and purchase price allocations, intangible asset impairments, non-cash stock-based compensation and reserves for litigation. In particular, the accounting for these areas requires significant use of judgment to be made by management. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or consolidated results of operations. Refer to Note 1 in the “Notes to Consolidated Financial Statements”.
Revenue Recognition
Commission revenues are recognized as of the effective date of the insurance policy or the date on which the policy premium is processed into our systems and invoiced to the customer, whichever is later. Commission revenues related to installment billings are recognized on the later of the date effective or invoiced, with the exception of our Arrowhead business which follows a policy of recognizing on the later of the date effective or processed into our systems regardless of the billing arrangement. Management determines the policy cancellation reserve based upon historical cancellation experience adjusted in accordance with known circumstances. Subsequent commission adjustments are recognized upon our receipt of notification from insurance companies concerning matters necessitating such adjustments. Profit-sharing
contingent commissions are recognized when determinable, which is generally when such commissions are received from insurance companies, or periodically when we receive formal notification of the amount of such payments. Fee revenues, and commissions for employee benefits coverages and workers’ compensation programs, are recognized as services are rendered.
Business Combinations and Purchase Price Allocations
We have acquired significant intangible assets through business acquisitions. These assets consist of purchased customer accounts, non-compete agreements, and the excess of purchase prices over the fair value of identifiable net assets acquired (goodwill). The determination of estimated useful lives and the allocation of purchase price to intangible assets requires significant judgment and affects the amount of future amortization and possible impairment charges.
All of our business combinations initiated after June 30, 2001 have been accounted for using the acquisition method. In connection with these acquisitions, we record the estimated value of the net tangible assets purchased and the value of the identifiable intangible assets purchased, which typically consist of purchased customer accounts and non-compete agreements. Purchased customer accounts include the physical records and files obtained from acquired businesses that contain information about insurance policies, customers and other matters essential to policy renewals. However, they primarily represent the present value of the underlying cash flows expected to be received over the estimated future renewal periods of the insurance policies comprising those purchased customer accounts. The valuation of purchased customer accounts involves significant estimates and assumptions concerning matters such as cancellation frequency, expenses and discount rates. Any change in these assumptions could affect the carrying value of purchased customer accounts. Non-compete agreements are valued based upon their duration and any unique features of the particular agreements. Purchased customer accounts and non-compete agreements are amortized on a straight-line basis over the related estimated lives and contract periods, which range from 3 to 15 years. The excess of the purchase price of an acquisition over the fair value of the identifiable tangible and intangible assets is assigned to goodwill and is not amortized.
Acquisition purchase prices are typically based upon 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 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 the fair value of earn-out obligations are 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 contained 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 this estimate 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 estimates are then discounted to a present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out payments will be made.
Intangible Assets Impairment
Goodwill is subject to at least an annual assessment for impairment measured by a fair-value-based test. Amortizable intangible assets are amortized over their useful lives and are subject to an impairment review based upon an estimate of the undiscounted future cash flows resulting from the use of the assets. To determine if there is potential impairment of goodwill, we compare the fair value of each reporting unit with its carrying value. If the fair value of the reporting unit is less than its carrying value, an impairment loss would be recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. Fair value is estimated based upon multiples of earnings before interest, income taxes, depreciation, amortization and change in estimated acquisition earn-out payables (“EBITDAC”), or on a discounted cash flow basis.
Management assesses the recoverability of our goodwill and our amortizable intangibles and other long-lived assets annually and whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Any of the following factors, if present, may trigger an impairment review: (i) a significant underperformance relative to historical or projected future operating results; (ii) a significant negative industry or economic trend; and (iii) a significant decline in our market capitalization. If the recoverability of these assets is unlikely because of the existence of one or more of the above-referenced factors, an impairment analysis is performed. Management must make assumptions regarding estimated future cash flows and other factors to determine the fair value of these assets. If these estimates or related assumptions change in the future, we may be required to revise the assessment and, if appropriate, record an impairment charge. We completed our most recent evaluation of impairment for goodwill as of November 30, 2016 and determined that the fair value of goodwill exceeded the carrying value of such assets. Additionally, there have been no impairments recorded for amortizable intangible assets for the years ended December 31, 2016, 2015 and 2014.
Non-Cash Stock-Based Compensation
We grant non-vested stock awards, and to a lesser extent, stock options to our employees, with the related compensation expense recognized in the financial statements over the associated service period based upon the grant-date fair value of those awards.
During the first quarter of 2016, the performance conditions for approximately 1.4 million shares of the Company’s common stock granted under the Company’s Stock Incentive Plan were determined by the Compensation Committee to have been satisfied relative to performance-based grants issued in 2011. These grants had a performance measurement period that concluded on December 31, 2015. The vesting condition for these grants requires continuous employment for a period of up to ten years from the January 2011 grant date in order for the awarded shares to become fully vested and nonforfeitable. As a result of the awarding of these shares, the grantees became eligible to receive payments of dividends and exercise voting privileges after the awarding date.
During the first quarter of 2017, the performance conditions for approximately 169,000 shares of the Company’s common stock granted under the Company’s Stock Incentive Plan were determined by the Compensation Committee to have been satisfied relative to performance-based grants issued in 2012. These grants had a performance measurement period that concluded on December 31, 2016. The vesting condition for these grants requires continuous employment for a period of up to ten years from the January 2012 grant date in order for the awarded shares to become fully vested and nonforfeitable. As a result of the awarding of these shares, the grantees will be eligible to receive payments of dividends and exercise voting privileges after the awarding date, and the awarded shares will be included as issued and outstanding common stock shares and included in the calculation of basic and diluted EPS.
Litigation and Claims
We are subject to numerous litigation claims that arise in the ordinary course of business. If it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss is estimable, an accrual for the costs to resolve these claims is recorded in accrued expenses in the accompanying Consolidated Balance Sheets. Professional fees related to these claims are included in other operating expenses in the accompanying Consolidated Statement of Income as incurred. Management, with the assistance of in-house and outside counsel, determines whether it is probable that a liability has been incurred and estimates the amount of loss based upon analysis of individual issues. New developments or changes in settlement strategy in dealing with these matters may significantly affect the required reserves and affect our net income.
RESULTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31,
2016
,
2015
AND
2014
The following discussion and analysis regarding results of operations and liquidity and capital resources should be considered in conjunction with the accompanying Consolidated Financial Statements and related Notes.
Financial information relating to our Consolidated Financial Results is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentages)
|
2016
|
|
%
Change
|
|
2015
|
|
%
Change
|
|
2014
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
Core commissions and fees
|
$
|
1,697,308
|
|
|
6.4
|
%
|
|
$
|
1,595,218
|
|
|
6.4
|
%
|
|
$
|
1,499,903
|
|
|
Profit-sharing contingent commissions
|
54,000
|
|
|
4.4
|
%
|
|
51,707
|
|
|
(10.4
|
)%
|
|
57,706
|
|
|
Guaranteed supplemental commissions
|
11,479
|
|
|
14.5
|
%
|
|
10,026
|
|
|
1.8
|
%
|
|
9,851
|
|
|
Investment income
|
1,456
|
|
|
45.0
|
%
|
|
1,004
|
|
|
34.4
|
%
|
|
747
|
|
|
Other income, net
|
2,386
|
|
|
(6.6
|
)%
|
|
2,554
|
|
|
(66.3
|
)%
|
|
7,589
|
|
|
Total revenues
|
1,766,629
|
|
|
6.4
|
%
|
|
1,660,509
|
|
|
5.4
|
%
|
|
1,575,796
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
925,217
|
|
|
8.0
|
%
|
|
856,952
|
|
|
5.7
|
%
|
|
811,112
|
|
|
Other operating expenses
|
262,872
|
|
|
4.7
|
%
|
|
251,055
|
|
|
6.7
|
%
|
|
235,328
|
|
|
Loss/(gain) on disposal
|
(1,291
|
)
|
|
108.6
|
%
|
|
(619
|
)
|
|
(101.3
|
)%
|
|
47,425
|
|
|
Amortization
|
86,663
|
|
|
(0.9
|
)%
|
|
87,421
|
|
|
5.5
|
%
|
|
82,941
|
|
|
Depreciation
|
21,003
|
|
|
0.5
|
%
|
|
20,890
|
|
|
—
|
%
|
|
20,895
|
|
|
Interest
|
39,481
|
|
|
0.6
|
%
|
|
39,248
|
|
|
38.2
|
%
|
|
28,408
|
|
|
Change in estimated acquisition earn-out payables
|
9,185
|
|
|
NMF
|
|
|
3,003
|
|
|
(69.8
|
)%
|
|
9,938
|
|
|
Total expenses
|
1,343,130
|
|
|
6.8
|
%
|
|
1,257,950
|
|
|
1.8
|
%
|
|
1,236,047
|
|
|
Income before income taxes
|
423,499
|
|
|
5.2
|
%
|
|
402,559
|
|
|
18.5
|
%
|
|
339,749
|
|
|
Income taxes
|
166,008
|
|
|
4.2
|
%
|
|
159,241
|
|
|
19.9
|
%
|
|
132,853
|
|
|
NET INCOME
|
$
|
257,491
|
|
|
5.7
|
%
|
|
$
|
243,318
|
|
|
17.6
|
%
|
|
$
|
206,896
|
|
|
Organic revenue growth rate
(1)
|
3.0
|
%
|
|
|
|
2.6
|
%
|
|
|
|
2.0
|
%
|
|
Employee compensation and benefits relative to total revenues
|
52.4
|
%
|
|
|
|
51.6
|
%
|
|
|
|
51.5
|
%
|
|
Other operating expenses relative to total revenues
|
14.9
|
%
|
|
|
|
15.1
|
%
|
|
|
|
14.9
|
%
|
|
Capital expenditures
|
$
|
17,765
|
|
|
|
|
$
|
18,375
|
|
|
|
|
$
|
24,923
|
|
|
Total assets at December 31
|
$
|
5,287,343
|
|
|
|
|
$
|
5,004,479
|
|
|
|
|
$
|
4,946,560
|
|
(1) A non-GAAP measure
NMF = Not a meaningful figure
Commissions and Fees
Commissions and fees, including profit-sharing contingent commissions and GSCs for
2016
,
increased
$105.8 million
to
$1,762.8 million
, or
6.4%
over
2015
. Core commissions and fees revenue for
2016
increased
$102.1 million
, of which approximately
$61.7 million
represented core commissions and fees from agencies acquired since
2015
that had no comparable revenues. After accounting for divested business of
$6.6 million
, the remaining net increase of $47.0 million represented net new business, which reflects a growth rate of
3.0%
for core organic commissions and fees. Profit-sharing contingent commissions and GSCs for
2016
increased
by
$3.7 million
, or
6.1%
, compared to the same period in
2015
. The net increase of
$3.7 million
was mainly driven by an increase in profit-sharing contingent commissions and GSCs in the Retail Segment, partially offset by a decrease in profit-sharing contingent commissions in the Wholesale Brokerage Segment as a result of increased loss ratios.
Commissions and fees, including profit-sharing contingent commissions and GSCs for
2015
,
increased
$89.5 million
to
$1,657.0 million
, or
5.7%
over the same period in
2014
. Core commissions and fees revenue in
2015
increased
$95.3 million
, of which approximately
$76.6 million
represented core commissions and fees from acquisitions that had no comparable revenues in
2014
. After accounting for divested business of
$19.3 million
, the remaining net increase of $38.0 million represented net new business, which reflects a growth rate of
2.6%
for core organic commissions and fees. Profit-sharing contingent commissions and GSCs for
2015
decreased
by
$5.8 million
, or
8.6%
, compared
to the same period in
2014
. The net decrease of
$5.8 million
was mainly driven by a decrease in profit-sharing contingent commissions in the National Programs Segment as a result of increased loss ratios.
Investment Income
Investment income
increased
to
$1.5 million
in
2016
, compared with
$1.0 million
in
2015
due to additional interest income driven by higher average invested cash balances. Investment income
increased
to
$1.0 million
in
2015
, compared with
$0.7 million
in
2014
due to additional interest income driven by cash management activities to earn a higher yield.
Other Income, Net
Other income for
2016
was
$2.4 million
, compared with
$2.6 million
in
2015
and
$7.6 million
in
2014
. Other income consists primarily of legal settlements and other miscellaneous income for 2016 and 2015. In 2014, other income included legal settlements and gains and loss on the sale and disposition of fixed assets as well as gains and losses from the sale on books of business (customer accounts). Prior to the adoption of ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”) in the fourth quarter of 2014, net gains and losses on the sale of businesses or customer accounts were reflected in other income. Any such gains or losses are now reflected on a net basis in the expense section since the adoption of ASU 2014-08. We recognized gains of
$1.3 million
, $0.6 million and $5.3 million from sales on books of business (customer accounts) in
2016
,
2015
and
2014
, respectively.
Employee Compensation and Benefits
Employee compensation and benefits expense
increased
8.0%
, or
$68.3 million
, in
2016
over
2015
. This increase included
$23.3 million
of compensation costs related to stand-alone acquisitions that had no comparable costs in the same period of
2015
. Therefore, employee compensation and benefits expense attributable to those offices that existed in the same time periods of
2016
and
2015
increased by
$45.0 million
or 5.2%. This underlying employee compensation and benefits expense increase was primarily related to (i) an increase in producer commissions correlated to increased revenue; (ii) increased staff salaries that included severance cost; (iii) increased profit center bonuses due to increased revenue and operating profit; (iv) the increased cost of health insurance; and (v) an increase in non-cash stock-based compensation expense due to forfeiture credits recognized in 2015. Employee compensation and benefits expense as a percentage of total revenues was
52.4%
for
2016
as compared to
51.6%
for the year ended December 31,
2015
.
Employee compensation and benefits expense increased,
5.7%
or
$45.8 million
in
2015
over
2014
. This increase included $26.3 million of compensation costs related to new acquisitions that were stand-alone offices. Therefore, employee compensation and benefits from those offices that existed in the same time periods of
2015
and
2014
increased by $19.5 million or 4.3%. This underlying employee compensation and benefits expense increase was primarily related to (i) an increase in producer and staff salaries as we made targeted investments in our business; (ii) increased profit center bonuses and commissions due to increased revenue and operating profit; and (iii) the increased cost of health insurance. Employee compensation and benefits expense as a percentage of total revenues was
51.6%
for 2015 as compared to
51.5%
for the year ended December 31,
2014
.
Other Operating Expenses
As a percentage of total revenues, other operating expenses represented
14.9%
in
2016
,
15.1%
in
2015
, and
14.9%
in
2014
. Other operating expenses in
2016
increased
$11.8 million
, or
4.7%
, over
2015
, of which
$9.5 million
was related to acquisitions that had no comparable costs in the same period of
2015
. The other operating expenses for those offices that existed in the same periods in both
2016
and
2015
increased by
$2.3 million
or 0.9%, which was primarily attributable to increased data processing related to the information technology spend for our multi-year investment program, partially offset by the receipt of certain premium tax refunds by our National Flood Program business.
As a percentage of total revenues, other operating expenses represented
15.1%
in
2015
,
14.9%
in
2014
, and 14.4% in 2013. Other operating expenses in
2015
increased
$15.7 million
, or
6.7%
, over
2014
, of which
$12.6 million
was related to acquisitions that had no comparable costs in the same period of
2014
. The other operating expenses for those offices that existed in the same periods in both
2015
and
2014
, increased by
$3.1 million
or 1.3%, which was primarily attributable to increased sales meetings, legal and consulting expenses, partially offset by decreases in expenses associated with office rent, telecommunications and bank fees.
Gain or Loss on Disposal
The Company recognized a gain on disposal of
$1.3 million
and
$0.6 million
in
2016
and
2015
respectively, and a loss of
$47.4 million
in
2014
. The pretax loss for 2014 is the result of the disposal of the Axiom Re business as part of the Company’s strategy to exit the reinsurance brokerage business. Prior to the adoption of ASU 2014-08 in the fourth quarter of 2014, net gains and losses on the sale of businesses or customer accounts were reflected in Other Income. Although we are not in the business of selling customer accounts, we periodically sell an office or a book of business (one or more customer accounts) that we believe does not produce reasonable margins or demonstrate a potential for growth, or because doing so is in the Company’s best interest. In 2014 the Company recognized $5.3 million in gains from sales on books of business (customer accounts) reported as Other Income.
Amortization
Amortization expense
decreased
$0.8 million
, or
0.9%
, in
2016
, and
increased
$4.5 million
, or
5.5%
, in
2015
. The decrease for 2016 is a result of certain intangibles becoming fully amortized or otherwise written off as part of disposed businesses, partially offset with amortization of new intangibles from recently acquired businesses. The increase for 2015 is a result of the amortization of newly acquired intangibles being greater than the decrease associated with intangibles that became fully amortized or otherwise written off as part of disposed businesses during 2015.
Depreciation
Depreciation expense increased
$0.1 million
, or
0.5%
, in
2016
and remained flat in
2015
. These changes were due primarily to the addition of fixed assets resulting from acquisitions completed in 2015 and 2016, net of assets which became fully depreciated. The increase in 2015 was due primarily to the addition of fixed assets resulting from acquisitions completed since 2014, while the stable level of expense in 2016 versus 2015 reflected capital additions approximately equal to the value of prior capital additions that became fully depreciated.
Interest Expense
Interest expense
increased
$0.2 million
, or
0.6%
, in
2016
, and
$10.8 million
, or
38.2%
in
2015
. The increase in 2015 was primarily due to the increased debt borrowings and an increase in our effective rate of interest for the
years ended
2015 and 2014. The increased debt borrowings from 2014 include: the Credit Facility term loan entered into in May 2014 in the initial amount of $550.0 million at LIBOR plus 137.5 basis points, and the $500.0 million Senior Notes due 2024 issued in September 2014 at a fixed rate of interest of 4.200%. The Credit Facility term loan proceeds replaced pre-existing debt of $230.0 million with similar rates of interest. The proceeds from the Senior Notes due 2024 were used to settle the Credit Facility revolver debt of $375.0 million, which had a lower, but variable rate of interest based upon an adjusted LIBOR. This transitioned the debt to a favorable long-term fixed rate of interest and extended the date of maturity of those funds. These changes were the result of an evolution and maturation of our previous debt structure and provide increased debt capacity and flexibility. The increase in 2016 versus 2015 is due to the rise in the floating interest rate of our Credit Facility term loan, partially offset by the scheduled amortized principal payments on the Credit Facility term loan which has reduced the Company’s average debt balance.
Change in Estimated Acquisition Earn-Out Payables
Accounting Standards Codification (“ASC”) Topic 805-Business Combinations is the authoritative guidance requiring an acquirer to recognize 100% of the fair value 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 price 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 are required to be recorded in the Consolidated Statement of Income when incurred or reasonably estimated. Estimations of potential earn-out obligations are typically based upon future earnings of the acquired operations or entities, usually for periods ranging from one to three years.
The net charge or credit to the Consolidated Statement of Income for the period is the combination of the net change in the estimated acquisition earn-out payables balance, and the interest expense imputed on the outstanding balance of the estimated acquisition earn-out payables.
As of
December 31, 2016
, 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 net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the years ended
December 31, 2016
,
2015
, and
2014
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2016
|
|
2015
|
|
2014
|
|
Change in fair value of estimated acquisition earn-out payables
|
$
|
6,338
|
|
|
$
|
13
|
|
|
$
|
7,375
|
|
|
Interest expense accretion
|
2,847
|
|
|
2,990
|
|
|
2,563
|
|
|
Net change in earnings from estimated acquisition earn-out payables
|
$
|
9,185
|
|
|
$
|
3,003
|
|
|
$
|
9,938
|
|
For the
years ended
December 31, 2016
,
2015
and
2014
, the fair value of estimated earn-out payables was re-evaluated and increased by
$6.3 million
,
$13.0 thousand
and
$7.4 million
, respectively, which resulted in charges to the Consolidated Statement of Income.
As of
December 31, 2016
, the estimated acquisition earn-out payables equaled
$63.8 million
, of which
$31.8 million
was recorded as accounts payable and
$32.0 million
was recorded as other non-current liability. As of December 31,
2015
, the estimated acquisition earn-out payables equaled
$78.4 million
, of which
$25.3 million
was recorded as accounts payable and
$53.1 million
was recorded as other non-current liability.
Income Taxes
The effective tax rate on income from operations was
39.2%
in
2016
,
39.6%
in
2015
, and
39.1%
in
2014
. The decrease in the effective tax rate is driven by several permanent tax differences along with the apportionment of taxable income in the states where we operate.
RESULTS OF OPERATIONS — SEGMENT INFORMATION
As discussed in Note 15 of the Notes to Consolidated Financial Statements, we operate four reportable segments: Retail, National Programs, Wholesale Brokerage, and Services. On a segmented basis, increases in amortization, depreciation and interest expenses generally result from completed acquisitions within a given segment within the preceding 12 months. Likewise, other income in each segment reflects net gains primarily from legal settlements and miscellaneous income. As such, in evaluating the operational efficiency of a segment, management emphasizes the net organic revenue growth rate of core commissions and fees revenue, the ratio of total employee compensation and benefits to total revenues, and the ratio of other operating expenses to total revenues.
The reconciliation of total commissions and fees, included in the Consolidated Statement of Income, to organic revenue for the years ended
December 31, 2016
, and
2015
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(in thousands)
|
2016
|
|
2015
|
|
Total commissions and fees
|
$
|
1,762,787
|
|
|
$
|
1,656,951
|
|
|
Less profit-sharing contingent commissions
|
54,000
|
|
|
51,707
|
|
|
Less guaranteed supplemental commissions
|
11,479
|
|
|
10,026
|
|
|
Total core commissions and fees
|
1,697,308
|
|
|
1,595,218
|
|
|
Less acquisition revenues
|
61,713
|
|
|
—
|
|
|
Less divested business
|
—
|
|
|
6,669
|
|
|
Organic Revenue
|
$
|
1,635,595
|
|
|
$
|
1,588,549
|
|
The growth rates for organic revenue, a non-GAAP measure as defined in the General section of this MD&A, for the years ended
December 31, 2016
,
2015
and
2014
by Segment, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
For the Year Ended December 31,
|
|
Total Net
Change
|
|
Total Net
Growth %
|
|
Less
Acquisition
Revenues
|
|
Organic
Growth $
(2)
|
|
Organic
Growth %
(2)
|
|
(in thousands, except percentages)
|
2016
|
|
2015
|
|
|
Retail
(1)
|
$
|
881,090
|
|
|
$
|
834,197
|
|
|
$
|
46,893
|
|
|
5.6
|
%
|
|
$
|
31,151
|
|
|
$
|
15,742
|
|
|
1.9
|
%
|
|
National Programs
|
430,479
|
|
|
411,589
|
|
|
18,890
|
|
|
4.6
|
%
|
|
1,680
|
|
|
17,210
|
|
|
4.2
|
%
|
|
Wholesale Brokerage
|
229,657
|
|
|
200,835
|
|
|
28,822
|
|
|
14.4
|
%
|
|
20,164
|
|
|
8,658
|
|
|
4.3
|
%
|
|
Services
|
156,082
|
|
|
141,928
|
|
|
14,154
|
|
|
10.0
|
%
|
|
8,718
|
|
|
5,436
|
|
|
3.8
|
%
|
|
Total core commissions and fees
|
$
|
1,697,308
|
|
|
$
|
1,588,549
|
|
|
$
|
108,759
|
|
|
6.8
|
%
|
|
$
|
61,713
|
|
|
$
|
47,046
|
|
|
3.0
|
%
|
The reconciliation of total commissions and fees, included in the Consolidated Statement of Income, to organic revenue for the years ended
December 31, 2015
and
2014
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(in thousands)
|
2015
|
|
2014
|
|
Total commissions and fees
|
$
|
1,656,951
|
|
|
$
|
1,567,460
|
|
|
Less profit-sharing contingent commissions
|
51,707
|
|
|
57,706
|
|
|
Less guaranteed supplemental commissions
|
10,026
|
|
|
9,851
|
|
|
Total core commissions and fees
|
1,595,218
|
|
|
1,499,903
|
|
|
Less acquisition revenues
|
76,632
|
|
|
—
|
|
|
Less divested business
|
—
|
|
|
19,336
|
|
|
Organic Revenue
|
$
|
1,518,586
|
|
|
$
|
1,480,567
|
|
Segment results for 2014 have been recast to reflect the current year segmental structure. Certain reclassifications have been made to the prior year amounts reported in this Annual Report on Form 10-K in order to conform to the current year presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
For the Year Ended December 31,
|
|
Total Net
Change
|
|
Total Net
Growth %
|
|
Less
Acquisition
Revenues
|
|
Organic
Growth $
(2)
|
|
Organic
Growth %
(2)
|
|
(in thousands, except percentages)
|
2015
|
|
2014
|
|
|
Retail
(1)
|
$
|
836,123
|
|
|
$
|
789,503
|
|
|
$
|
46,620
|
|
|
5.9
|
%
|
|
$
|
35,644
|
|
|
$
|
10,976
|
|
|
1.4
|
%
|
|
National Programs
|
412,885
|
|
|
367,672
|
|
|
45,213
|
|
|
12.3
|
%
|
|
38,519
|
|
|
6,694
|
|
|
1.8
|
%
|
|
Wholesale Brokerage
|
200,835
|
|
|
187,257
|
|
|
13,578
|
|
|
7.3
|
%
|
|
2,469
|
|
|
11,109
|
|
|
5.9
|
%
|
|
Services
|
145,375
|
|
|
136,135
|
|
|
9,240
|
|
|
6.8
|
%
|
|
—
|
|
|
9,240
|
|
|
6.8
|
%
|
|
Total core commissions and fees
|
$
|
1,595,218
|
|
|
$
|
1,480,567
|
|
|
$
|
114,651
|
|
|
7.7
|
%
|
|
$
|
76,632
|
|
|
$
|
38,019
|
|
|
2.6
|
%
|
The reconciliation of total commissions and fees, included in the Consolidated Statement of Income, to organic revenue for the years ended
December 31, 2014
and
2013
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(in thousands)
|
2014
|
|
2013
|
|
Total commissions and fees
|
$
|
1,567,460
|
|
|
$
|
1,355,503
|
|
|
Less profit-sharing contingent commissions
|
57,706
|
|
|
51,251
|
|
|
Less guaranteed supplemental commissions
|
9,851
|
|
|
8,275
|
|
|
Total core commissions and fees
|
1,499,903
|
|
|
1,295,977
|
|
|
Less acquisition revenues
|
186,785
|
|
|
—
|
|
|
Less divested business
|
—
|
|
|
8,457
|
|
|
Organic Revenue
|
$
|
1,313,118
|
|
|
$
|
1,287,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
For the Year Ended December 31,
|
|
Total Net
Change
|
|
Total Net
Growth %
|
|
Less
Acquisition
Revenues
|
|
Organic
Growth $
(2)
|
|
Organic
Growth %
(2)
|
|
(in thousands, except percentages)
|
2014
|
|
2013
|
|
|
Retail
(1)
|
$
|
792,794
|
|
|
$
|
701,211
|
|
|
$
|
91,583
|
|
|
13.1
|
%
|
|
$
|
77,315
|
|
|
$
|
14,268
|
|
|
2.0
|
%
|
|
National Programs
|
376,483
|
|
|
277,082
|
|
|
99,401
|
|
|
35.9
|
%
|
|
93,803
|
|
|
5,598
|
|
|
2.0
|
%
|
|
Wholesale Brokerage
|
194,144
|
|
|
177,725
|
|
|
16,419
|
|
|
9.2
|
%
|
|
68
|
|
|
16,351
|
|
|
9.2
|
%
|
|
Services
|
136,482
|
|
|
131,502
|
|
|
4,980
|
|
|
3.8
|
%
|
|
15,599
|
|
|
(10,619
|
)
|
|
(8.1
|
)%
|
|
Total core commissions and fees
|
$
|
1,499,903
|
|
|
$
|
1,287,520
|
|
|
$
|
212,383
|
|
|
16.5
|
%
|
|
$
|
186,785
|
|
|
$
|
25,598
|
|
|
2.0
|
%
|
|
Less Superstorm Sandy
|
$
|
—
|
|
|
$
|
(18,275
|
)
|
|
$
|
18,275
|
|
|
100.0
|
%
|
|
$
|
—
|
|
|
$
|
18,275
|
|
|
100.0
|
%
|
|
2014 Total core commissions and fees-adjusted
|
$
|
1,499,903
|
|
|
$
|
1,269,245
|
|
|
$
|
230,658
|
|
|
18.2
|
%
|
|
$
|
186,785
|
|
|
$
|
43,873
|
|
|
3.5
|
%
|
|
|
|
|
(1)
|
The Retail Segment includes commissions and fees reported in the “Other” column of the Segment Information in Note 15 of the Notes to the Consolidated Financial Statements, which includes corporate and consolidation items.
|
There would have been a 3.5% Organic Growth rate when excluding the $18.3 million of revenues recorded at our Colonial Claims operation in the first half of 2013 related to Superstorm Sandy.
Retail Segment
The Retail Segment provides a broad range of insurance products and services to commercial, public and quasi-public, professional and individual insured customers. Approximately
85.7%
of the Retail Segment’s commissions and fees revenue is commission-based. Because most of our other operating expenses are not correlated to changes in commissions on insurance premiums, a significant portion of any fluctuation in the commissions we receive, net of related producer compensation, will result in a similar fluctuation in our income before income taxes, unless we make incremental investments in the organization.
Financial information relating to our Retail Segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentages)
|
2016
|
|
% Change
|
|
2015
|
|
% Change
|
|
2014
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
Core commissions and fees
|
$
|
881,729
|
|
|
5.3
|
%
|
|
$
|
837,420
|
|
|
5.5
|
%
|
|
$
|
793,865
|
|
|
Profit-sharing contingent commissions
|
25,207
|
|
|
14.3
|
%
|
|
22,051
|
|
|
2.0
|
%
|
|
21,616
|
|
|
Guaranteed supplemental commissions
|
9,787
|
|
|
18.0
|
%
|
|
8,291
|
|
|
7.3
|
%
|
|
7,730
|
|
|
Investment income
|
37
|
|
|
(57.5
|
)%
|
|
87
|
|
|
29.9
|
%
|
|
67
|
|
|
Other income, net
|
646
|
|
|
(74.1
|
)%
|
|
2,497
|
|
|
NMF
|
|
|
408
|
|
|
Total revenues
|
917,406
|
|
|
5.4
|
%
|
|
870,346
|
|
|
5.7
|
%
|
|
823,686
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
486,303
|
|
|
6.3
|
%
|
|
457,351
|
|
|
5.8
|
%
|
|
432,169
|
|
|
Other operating expenses
|
146,286
|
|
|
6.4
|
%
|
|
137,519
|
|
|
2.9
|
%
|
|
133,682
|
|
|
Loss/(gain) on disposal
|
(1,291
|
)
|
|
7.0
|
%
|
|
(1,207
|
)
|
|
—
|
%
|
|
—
|
|
|
Amortization
|
43,447
|
|
|
(3.8
|
)%
|
|
45,145
|
|
|
5.1
|
%
|
|
42,935
|
|
|
Depreciation
|
6,191
|
|
|
(5.6
|
)%
|
|
6,558
|
|
|
1.7
|
%
|
|
6,449
|
|
|
Interest
|
38,216
|
|
|
(6.9
|
)%
|
|
41,036
|
|
|
(5.7
|
)%
|
|
43,502
|
|
|
Change in estimated acquisition earn-out payables
|
10,253
|
|
|
NMF
|
|
|
2,006
|
|
|
(73.1
|
)%
|
|
7,458
|
|
|
Total expenses
|
729,405
|
|
|
6.0
|
%
|
|
688,408
|
|
|
3.3
|
%
|
|
666,195
|
|
|
Income before income taxes
|
$
|
188,001
|
|
|
3.3
|
%
|
|
$
|
181,938
|
|
|
15.5
|
%
|
|
$
|
157,491
|
|
|
Organic revenue growth rate
(1)
|
1.9
|
%
|
|
|
|
1.4
|
%
|
|
|
|
2.0
|
%
|
|
Employee compensation and benefits relative to total revenues
|
53.0
|
%
|
|
|
|
52.5
|
%
|
|
|
|
52.5
|
%
|
|
Other operating expenses relative to total revenues
|
15.9
|
%
|
|
|
|
15.8
|
%
|
|
|
|
16.2
|
%
|
|
Capital expenditures
|
$
|
5,951
|
|
|
|
|
$
|
6,797
|
|
|
|
|
$
|
6,873
|
|
|
Total assets at December 31
|
$
|
3,854,393
|
|
|
|
|
$
|
3,507,476
|
|
|
|
|
$
|
3,229,484
|
|
(1) A non-GAAP measure
NMF = Not a meaningful figure
The Retail Segment’s total revenues in
2016
increased
5.4%
, or
$47.1 million
, over the same period in
2015
, to
$917.4 million
. The
$44.3 million
increase
in core commissions and fees revenue was driven by the following: (i) approximately $31.2 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of
2015
; (ii) $15.7 million related to net new business; and (iii) an offsetting decrease of $2.6 million related to commissions and fees revenue from business divested in
2015
and
2016
. Profit-sharing contingent commissions and GSCs in
2016
increased
15.3%
, or
$4.7 million
, over
2015
, to
$35.0 million
. The Retail Segment’s organic revenue growth rate for core organic commissions and fees revenue was
1.9%
for
2016
and was driven by revenue from net new business written during the preceding twelve months along with modest increases in commercial auto rates and underlying exposure unit values that drive insurance premiums, and partially offset by rate reductions in most lines of coverage, other than commercial auto, with the most pronounced declines realized for insurance premium rates for properties in catastrophe-prone areas.
Income before income taxes for
2016
increased
3.3%
, or
$6.1 million
, over the same period in
2015
, to
$188.0 million
. This growth in income before income taxes was negatively impacted by $10.3 million in expense associated with the change in estimated acquisition earn-out payables, an increase of $8.2 million over the same period in 2015. Other factors affecting this increase were: (i) the net increase in revenue as described above; (ii) a 6.3%, or $29.0 million increase in employee compensation and benefits due primarily to the year on year impact of new teammates related to acquisitions completed in the past twelve months and to a lesser extent continued investment in producers and other staff to support current and future expected organic revenue growth; and (iii) operating expenses which
increased
by
$8.8 million
or
6.4%
, primarily
due to increased value-added consulting services to support our customers and increases in office rent expense, offset by a combined decrease in amortization, depreciation and intercompany interest expense of $4.9 million.
The Retail Segment’s total revenues in
2015
increased
5.7%
, or
$46.7 million
, over the same period in
2014
, to
$870.3 million
. The
$43.6 million
increase
in core commissions and fees revenue was driven by the following: (i) approximately $35.6 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of
2014
; (ii) $11.0 million related to net new business; and (iii) an offsetting decrease of $3.0 million related to commissions and fees revenue recorded from business divested in
2014
and
2015
. Profit-sharing contingent commissions and GSCs in
2015
increased
3.4%
, or
$1.0 million
, over
2014
, to
$30.3 million
. The Retail Segment’s organic revenue growth rate for core organic commissions and fees revenue was
1.4%
for
2015
and was driven by revenue from net new business written during the preceding twelve months along with modest increases in commercial auto rates, and partially offset by: (i) terminated association health plans in the State of Washington; (ii) continued pressure on the small employee benefits business as some accounts adopt alternative plan designs and move to a per employee/per month payment model due to the implementation of the Affordable Care Act; and (iii) reductions in property insurance premium rates specifically in catastrophe-prone areas.
Income before income taxes for
2015
increased
15.5%
, or
$24.4 million
, over the same period in
2014
, to
$181.9 million
. The primary factors affecting this increase were: (i) the net increase in revenue as described above; (ii) a 7.1%, or $29.4 million increase in employee compensation and benefits due primarily to the year on year impact of new teammates related to acquisitions completed in the past twelve months in addition to incremental investments in revenue producing teammates; and (iii) operating expenses which
increased
by
$3.8 million
or
2.9%
, due to increased travel and value added consulting services; offset by (iv) a reduction in the change in estimated acquisition earn-out payables of $5.5 million, or 73.1% to $2.0 million; and (v) a $4.2 million, or 25.7% reduction in non-cash stock-based compensation to $12.1 million due to the forfeiture of certain grants where performance conditions were not fully achieved.
National Programs Segment
The National Programs Segment manages over 50 programs with approximately 40 well-capitalized carrier partners. In most cases, the insurance carriers that support the programs have delegated underwriting and, in many instances, claims-handling authority to our programs operations. These programs are generally distributed through a nationwide network of independent agents and Brown & Brown retail agents, and offer targeted products and services designed for specific industries, trade groups, professions, public entities and market niches. The National Programs Segment operations can be grouped into five broad categories: Professional Programs, Arrowhead Insurance Programs, Commercial Programs, Public Entity-Related Programs and the National Flood Program. The National Programs Segment’s revenue is primarily commission-based.
Financial information relating to our National Programs Segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentages)
|
2016
|
|
% Change
|
|
2015
|
|
% Change
|
|
2014
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
Core commissions and fees
|
$
|
430,479
|
|
|
4.3
|
%
|
|
$
|
412,885
|
|
|
9.7
|
%
|
|
$
|
376,483
|
|
|
Profit-sharing contingent commissions
|
17,306
|
|
|
11.2
|
%
|
|
15,558
|
|
|
(25.3
|
)%
|
|
20,822
|
|
|
Guaranteed supplemental commissions
|
23
|
|
|
(23.3
|
)%
|
|
30
|
|
|
42.9
|
%
|
|
21
|
|
|
Investment income
|
628
|
|
|
199.0
|
%
|
|
210
|
|
|
28.0
|
%
|
|
164
|
|
|
Other income, net
|
80
|
|
|
56.9
|
%
|
|
51
|
|
|
(99.2
|
)%
|
|
6,749
|
|
|
Total revenues
|
448,516
|
|
|
4.6
|
%
|
|
428,734
|
|
|
6.1
|
%
|
|
404,239
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
191,199
|
|
|
4.6
|
%
|
|
182,854
|
|
|
7.9
|
%
|
|
169,405
|
|
|
Other operating expenses
|
83,822
|
|
|
(2.7
|
)%
|
|
86,157
|
|
|
9.4
|
%
|
|
78,744
|
|
|
Loss/(gain) on disposal
|
—
|
|
|
(100.0
|
)%
|
|
458
|
|
|
—
|
%
|
|
—
|
|
|
Amortization
|
27,920
|
|
|
(2.0
|
)%
|
|
28,479
|
|
|
13.3
|
%
|
|
25,129
|
|
|
Depreciation
|
7,868
|
|
|
8.5
|
%
|
|
7,250
|
|
|
(7.1
|
)%
|
|
7,805
|
|
|
Interest
|
45,738
|
|
|
(17.9
|
)%
|
|
55,705
|
|
|
12.2
|
%
|
|
49,663
|
|
|
Change in estimated acquisition earn-out payables
|
207
|
|
|
31.0
|
%
|
|
158
|
|
|
(49.8
|
)%
|
|
315
|
|
|
Total expenses
|
356,754
|
|
|
(1.2
|
)%
|
|
361,061
|
|
|
9.1
|
%
|
|
331,061
|
|
|
Income before income taxes
|
$
|
91,762
|
|
|
35.6
|
%
|
|
$
|
67,673
|
|
|
(7.5
|
)%
|
|
$
|
73,178
|
|
|
Organic revenue growth rate
(1)
|
4.2
|
%
|
|
|
|
1.8
|
%
|
|
|
|
2.0
|
%
|
|
Employee compensation and benefits relative to total revenues
|
42.6
|
%
|
|
|
|
42.6
|
%
|
|
|
|
41.9
|
%
|
|
Other operating expenses relative to total revenues
|
18.7
|
%
|
|
|
|
20.1
|
%
|
|
|
|
19.5
|
%
|
|
Capital expenditures
|
$
|
6,977
|
|
|
|
|
$
|
6,001
|
|
|
|
|
$
|
14,133
|
|
|
Total assets at December 31
|
$
|
2,711,378
|
|
|
|
|
$
|
2,505,752
|
|
|
|
|
$
|
2,455,749
|
|
(1) A non-GAAP measure
National Programs total revenues in
2016
increased
4.6%
, or
$19.8 million
, over
2015
, to a total
$448.5 million
. The
$17.6 million
increase
in core commissions and fees revenue was driven by the following: (i) an increase of approximately $1.7 million related to core commissions and fees revenue from acquisitions that had no comparable revenues in
2015
; and (ii) $17.2 million related to net new business offset by (iii) a decrease of $1.3 million related to commissions and fees revenue recorded in
2015
from businesses since divested. Profit-sharing contingent commissions and GSCs were
$17.3 million
in
2016
, which was
an increase
of
$1.7 million
over
2015
, which was primarily driven by the improved loss experience of our carrier partners.
The National Programs Segment’s organic revenue growth rate for core commissions and fees revenue was
4.2%
for
2016
. This organic revenue growth rate was mainly due to increased flood claims revenues and the on-boarding of net new customers by our lender placed coverage program. Growth in these businesses was partially offset by certain programs that have been affected by lower rates and certain carriers changing their risk appetite for new or existing programs.
Income before income taxes for
2016
increased
35.6%
, or
$24.1 million
, from the same period in
2015
, to
$91.8 million
. The increase is the result of a lower intercompany interest charge of $10.0 million, the receipt of certain premium tax refunds by our National Flood Program business, along with revenue growth of $19.8 million.
The National Programs Segment’s total revenues in
2015
increased
6.1%
, or
$24.5 million
, over
2014
, to a total of
$428.7 million
. The
$36.4 million
increase
in core commissions and fees revenue was driven by the following: (i) an increase of approximately $38.5 million related to core commissions and fees revenue from acquisitions that had no comparable revenues in
2014
; (ii) $6.7 million related to net new business offset by (iii) a decrease of $8.8 million related to commissions and fees revenue recorded in
2014
from businesses since divested. Profit-sharing contingent commissions and GSCs were
$15.6 million
in
2015
, a
decrease
of
$5.3 million
from the same period of
2014
, which was primarily driven by the loss experience of our carrier partners.
The National Programs Segment’s organic revenue growth rate for core commissions and fees revenue was
1.8%
for
2015
. This organic revenue growth rate was mainly due to the Arrowhead Personal Property program, which continued to produce more written premium, the Arrowhead Automotive Aftermarket program which received a commission rate increase from their carrier partner, growth in our Wright Specialty education program and the on-boarding of new customers by Proctor Financial. Growth in these businesses was partially offset by certain programs that have been affected by lower rates.
Income before income taxes for
2015
decreased
7.5%
, or
$5.5 million
, from the same period in
2014
, to
$67.7 million
. The decrease is the result of the $6.0 million gain on the sale of Industry Consulting Group (“ICG”), along with the $3.7 million SIP grant forfeiture benefit associated with Arrowhead, which were both credits recorded in 2014. After adjusting for these one-time items in 2014, underlying Income before income taxes increased and was driven by the net revenue growth noted above and expense management initiatives as we grow and scale our programs.
Wholesale Brokerage Segment
The Wholesale Brokerage Segment markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers, including Brown & Brown Retail Segment. Like the Retail and National Programs Segments, the Wholesale Brokerage Segment’s revenues are primarily commission-based.
Financial information relating to our Wholesale Brokerage Segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentages)
|
2016
|
|
% Change
|
|
2015
|
|
% Change
|
|
2014
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
Core commissions and fees
|
$
|
229,657
|
|
|
14.4
|
%
|
|
$
|
200,835
|
|
|
3.4
|
%
|
|
$
|
194,144
|
|
|
Profit-sharing contingent commissions
|
11,487
|
|
|
(18.5
|
)%
|
|
14,098
|
|
|
(7.7
|
)%
|
|
15,268
|
|
|
Guaranteed supplemental commissions
|
1,669
|
|
|
(2.1
|
)%
|
|
1,705
|
|
|
(18.8
|
)%
|
|
2,100
|
|
|
Investment income
|
4
|
|
|
(97.3
|
)%
|
|
150
|
|
|
NMF
|
|
|
26
|
|
|
Other income, net
|
286
|
|
|
37.5
|
%
|
|
208
|
|
|
(44.2
|
)%
|
|
373
|
|
|
Total revenues
|
243,103
|
|
|
12.0
|
%
|
|
216,996
|
|
|
2.4
|
%
|
|
211,911
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
121,863
|
|
|
16.4
|
%
|
|
104,692
|
|
|
1.7
|
%
|
|
102,959
|
|
|
Other operating expenses
|
42,139
|
|
|
22.6
|
%
|
|
34,379
|
|
|
(5.1
|
)%
|
|
36,234
|
|
|
Loss/(gain) on disposal
|
—
|
|
|
(100.0
|
)%
|
|
(385
|
)
|
|
(100.8
|
)%
|
|
47,425
|
|
|
Amortization
|
10,801
|
|
|
10.9
|
%
|
|
9,739
|
|
|
(9.0
|
)%
|
|
10,703
|
|
|
Depreciation
|
1,975
|
|
|
(7.8
|
)%
|
|
2,142
|
|
|
(13.3
|
)%
|
|
2,470
|
|
|
Interest
|
3,976
|
|
|
NMF
|
|
|
891
|
|
|
(31.1
|
)%
|
|
1,294
|
|
|
Change in estimated acquisition earn-out payables
|
(274
|
)
|
|
(133.0
|
)%
|
|
830
|
|
|
(67.5
|
)%
|
|
2,550
|
|
|
Total expenses
|
180,480
|
|
|
18.5
|
%
|
|
152,288
|
|
|
(25.2
|
)%
|
|
203,635
|
|
|
Income before income taxes
|
$
|
62,623
|
|
|
(3.2
|
)%
|
|
$
|
64,708
|
|
|
NMF
|
|
|
$
|
8,276
|
|
|
Organic revenue growth rate
(1)
|
4.3
|
%
|
|
|
|
5.9
|
%
|
|
|
|
9.2
|
%
|
|
Employee compensation and benefits relative to total revenues
|
50.1
|
%
|
|
|
|
48.2
|
%
|
|
|
|
48.6
|
%
|
|
Other operating expenses relative to total revenues
|
17.3
|
%
|
|
|
|
15.8
|
%
|
|
|
|
17.1
|
%
|
|
Capital expenditures
|
$
|
1,301
|
|
|
|
|
$
|
3,084
|
|
|
|
|
$
|
1,526
|
|
|
Total assets at December 31
|
$
|
1,108,829
|
|
|
|
|
$
|
895,782
|
|
|
|
|
$
|
857,804
|
|
(1) A non-GAAP measure
NMF = Not a meaningful figure
The Wholesale Brokerage Segment’s total revenues for
2016
increased
12.0%
, or
$26.1 million
, over
2015
, to
$243.1 million
. The
$28.8 million
net
increase
in core commissions and fees revenue was driven by the following: (i)
$8.7 million
related to net new business; (ii)
$20.2 million
related to the core commissions and fees revenue from acquisitions that had no comparable revenues in
2015
; and (iii) an offsetting decrease of $0.1 million related to commissions and fees revenue recorded in
2015
from businesses divested in the past year. Contingent commissions and GSCs for
2016
decreased $
2.6 million
over
2015
, to
$13.2 million
. This decrease was driven by an increase in loss ratios for one carrier. The Wholesale Brokerage Segment’s organic revenue growth rate for core organic commissions and fees revenue was
4.3%
for
2016
, and was driven by net new business and modest increases in exposure units, partially offset by significant contraction in insurance premium rates for catastrophe-prone properties and to a lesser extent all other lines of coverage.
Income before income taxes for
2016
decreased
$2.1 million
over
2015
, to
$62.6 million
, primarily due to the following: (i) the net increase in revenue as described above, offset by; (ii) an increase in employee compensation and benefits of $17.2 million, of which $10.8 million was related to acquisitions that had no comparable compensation and benefits in the same period of 2015, with the remainder related to additional teammates to support increased transaction volumes; (iii) a decrease in profit from lower contingent commissions and GSCs; (iv) a $7.8 million increase in operating expenses, of which $3.2 million was related to acquisitions that had no comparable expenses in the same period of 2015 and (v) higher intercompany interest charge related to acquisitions completed in the previous year.
The Wholesale Brokerage Segment’s total revenues for
2015
,
increased
2.4%
, or
$5.1 million
, over
2014
, to
$217.0 million
. The
$6.7 million
net increase in core commissions and fees revenue was driven by the following: (i) $11.1 million related to net new business; (ii) $2.5 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in
2014
; and (iii) an offsetting decrease of $6.9 million related to commissions and fees revenue recorded in
2014
from businesses divested in the past year. Contingent
commissions and GSCs for
2015
decreased $
1.6 million
over
2014
, to $15.8 million. This decrease was driven by an increase in loss ratios. The Wholesale Brokerage Segment’s organic revenue growth rate for core organic commissions and fees revenue was
5.9%
for
2015
, and was driven by net new business and modest increases in exposure units, partially offset by significant contraction in insurance premium rates for catastrophe-prone properties.
Income before income taxes for
2015
,
increased
$56.4 million
, over
2014
, to
$64.7 million
, primarily due to the following: (i) the $47.4 million net pretax loss on disposal of the Axiom Re business in 2014; (ii) the net increase in revenue as described above and (iii) the impact of the Axiom Re business divested in 2014 that reported lower margins than the Wholesale Brokerage Segment’s average.
Services Segment
The Services Segment provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas. The Services Segment also provides Medicare Set-aside account services, Social Security disability and Medicare benefits advocacy services, and claims adjusting services.
Unlike the other segments, nearly all of the Services Segment’s revenue is generated from fees, which are not significantly affected by fluctuations in general insurance premiums.
Financial information relating to our Services Segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentages)
|
2016
|
|
% Change
|
|
2015
|
|
% Change
|
|
2014
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
Core commissions and fees
|
$
|
156,082
|
|
|
7.4
|
%
|
|
$
|
145,375
|
|
|
6.5
|
%
|
|
$
|
136,482
|
|
|
Profit-sharing contingent commissions
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
Guaranteed supplemental commissions
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
Investment income
|
283
|
|
|
NMF
|
|
|
42
|
|
|
NMF
|
|
|
3
|
|
|
Other income, net
|
—
|
|
|
(100.0
|
)%
|
|
(52
|
)
|
|
(171.2
|
)%
|
|
73
|
|
|
Total revenues
|
156,365
|
|
|
7.6
|
%
|
|
145,365
|
|
|
6.4
|
%
|
|
136,558
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
78,804
|
|
|
2.2
|
%
|
|
77,094
|
|
|
5.8
|
%
|
|
72,879
|
|
|
Other operating expenses
|
42,908
|
|
|
19.0
|
%
|
|
36,057
|
|
|
12.1
|
%
|
|
32,168
|
|
|
Loss/(gain) on disposal
|
—
|
|
|
(100.0
|
)%
|
|
515
|
|
|
—
|
%
|
|
—
|
|
|
Amortization
|
4,485
|
|
|
11.6
|
%
|
|
4,019
|
|
|
(2.8
|
)%
|
|
4,135
|
|
|
Depreciation
|
1,881
|
|
|
(5.4
|
)%
|
|
1,988
|
|
|
(10.2
|
)%
|
|
2,213
|
|
|
Interest
|
4,950
|
|
|
(17.1
|
)%
|
|
5,970
|
|
|
(22.2
|
)%
|
|
7,678
|
|
|
Change in estimated acquisition earn-out payables
|
(1,001
|
)
|
|
NMF
|
|
|
9
|
|
|
(102.3
|
)%
|
|
(385
|
)
|
|
Total expenses
|
132,027
|
|
|
5.1
|
%
|
|
125,652
|
|
|
5.9
|
%
|
|
118,688
|
|
|
Income before income taxes
|
$
|
24,338
|
|
|
23.5
|
%
|
|
$
|
19,713
|
|
|
10.3
|
%
|
|
$
|
17,870
|
|
|
Organic revenue growth rate
(1)
|
3.8
|
%
|
|
|
|
6.8
|
%
|
|
|
|
(8.1
|
)%
|
|
Employee compensation and benefits relative to total revenues
|
50.4
|
%
|
|
|
|
53.0
|
%
|
|
|
|
53.4
|
%
|
|
Other operating expenses relative to total revenues
|
27.4
|
%
|
|
|
|
24.8
|
%
|
|
|
|
23.6
|
%
|
|
Capital expenditures
|
$
|
656
|
|
|
|
|
$
|
1,088
|
|
|
|
|
$
|
1,210
|
|
|
Total assets at December 31
|
$
|
371,645
|
|
|
|
|
$
|
285,459
|
|
|
|
|
$
|
296,034
|
|
(1) A non-GAAP measure
NMF = Not a meaningful figure
The Services Segment’s total revenues for
2016
increased
7.6%
, or
$11.0 million
, over
2015
, to
$156.4 million
. The
$10.7 million
increase in core commissions and fees revenue was driven primarily by the following: (i)
$8.7 million
related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of
2015
; and (ii)
$5.4 million
related to net new business; (iii) partially offset by a decrease of $3.4 million related to commissions and fees revenue recorded in
2015
from business since divested. The Services Segment’s organic revenue growth rate for core commissions and fees revenue was
3.8%
for
2016
, primarily driven by our claims.
Income before income taxes for
2016
increased
23.5%
, or
$4.6 million
, over
2015
, to
$24.3 million
due to a combination of: (i) the acquisition of SSAD; (ii) our claims office that handled catastrophe claims; (iii) the continued efficient operation of our businesses; and (iv) lower intercompany interest charges.
The Services Segment’s total revenues for
2015
increased
6.4%
, or
$8.8 million
, over
2014
, to
$145.4 million
. The
$8.9 million
increase
in core commissions and fees revenue primarily resulted from growth in our advocacy businesses driven by new customers and growth in several of our claims processing units related to new customer relationships. The Services Segment’s organic revenue growth rate for core commissions and fees revenue was
6.8%
for
2015
.
Income before income taxes for
2015
increased
10.3%
, or
$1.8 million
, over
2014
, to
$19.7 million
due to a combination of: (i) organic revenue growth noted above; (ii) the continued efficient operation of our businesses; and (iii) a decrease in the intercompany interest expense charge. The impact from the sale of the Colonial Claims business on 2015 revenues and income before income taxes was immaterial.
Other
As discussed in Note 15 of the Notes to Consolidated Financial Statements, the “Other” column in the Segment Information table includes any income and expenses not allocated to reportable segments, and corporate-related items, including the intercompany interest expense charges to reporting segments.
LIQUIDITY AND CAPITAL RESOURCES
The Company seeks to maintain a conservative balance sheet and liquidity profile. Our capital requirements to operate as an insurance intermediary are low and we have been able to grow and invest in our business principally through cash that has been generated from operations. We have the ability to access the use of our revolving credit facility, which provides up to $800.0 million in available cash, and we believe that we have access to additional funds, if needed, through the capital markets to obtain further debt financing under the current market conditions. The Company believes that its existing cash, cash equivalents, short-term investment portfolio and funds generated from operations, together with the funds available under the credit facility, will be sufficient to satisfy our normal liquidity needs, including principal payments on our long-term debt, for at least the next twelve months.
Our cash and cash equivalents of $515.6 million at December 31, 2016 reflected an increase of $72.2 million from the $443.4 million balance at December 31, 2015. During 2016, $375.1 million of cash was generated from operating activities. During this period, $122.6 million of cash was used for acquisitions, $28.2 million was used for acquisition earn-out payments, $17.8 million was used for additions to fixed assets, $70.3 million was used for payment of dividends, $7.7 million was used for share repurchases, and $73.1 million was used to pay outstanding principal balances owed on long-term debt.
We hold approximately $19.9 million in cash outside of the U.S. for which we have no plans to repatriate in the near future.
Our cash and cash equivalents of $443.4 million at December 31, 2015 reflected a decrease of $26.6 million from the $470.0 million balance at December 31, 2014. During 2015, $411.8 million of cash was generated from operating activities. During this period, $136.0 million of cash was used for acquisitions, $36.8 million was used for acquisition earn-out payments, $18.4 million was used for additions to fixed assets, $64.1 million was used for payment of dividends, $175.0 million was used as part of accelerated share repurchase programs, and $45.6 million was used to pay outstanding principal balances owed on long-term debt.
Our cash and cash equivalents of $470.0 million at December 31, 2014 reflected an increase of $267.1 million from the $203.0 million balance at December 31, 2013. During 2014, $385.0 million of cash was generated from operating activities. During this period, $696.5 million of cash was used for acquisitions, $12.1 million was used for acquisition earn-out payments, $24.9 million was used for additions to fixed assets, $59.3 million was used for payment of dividends, and $718.0 million was provided from proceeds received on net new long-term debt.
On May 1, 2014, we completed the acquisition of Wright for a total cash purchase price of $609.2 million, subject to certain adjustments. We financed the acquisition through various modified and new credit facilities.
Our ratio of current assets to current liabilities (the “current ratio”) was 1.22 and 1.16 at December 31, 2016 and 2015, respectively.
Contractual Cash Obligations
As of
December 31, 2016
, our contractual cash obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
(in thousands)
|
Total
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
4-5 Years
|
|
After 5
Years
|
|
Long-term debt
|
$
|
1,081,750
|
|
|
$
|
55,500
|
|
|
$
|
526,250
|
|
|
$
|
—
|
|
|
$
|
500,000
|
|
|
Other liabilities
(1)
|
67,863
|
|
|
18,578
|
|
|
13,175
|
|
|
1,792
|
|
|
34,318
|
|
|
Operating leases
|
213,160
|
|
|
42,727
|
|
|
73,782
|
|
|
51,615
|
|
|
45,036
|
|
|
Interest obligations
|
193,974
|
|
|
36,550
|
|
|
58,549
|
|
|
42,000
|
|
|
56,875
|
|
|
Unrecognized tax benefits
|
750
|
|
|
—
|
|
|
750
|
|
|
—
|
|
|
—
|
|
|
Maximum future acquisition contingency payments
(2)
|
117,231
|
|
|
46,975
|
|
|
69,601
|
|
|
655
|
|
|
—
|
|
|
Total contractual cash obligations
|
$
|
1,674,728
|
|
|
$
|
200,330
|
|
|
$
|
742,107
|
|
|
$
|
96,062
|
|
|
$
|
636,229
|
|
|
|
|
|
(1)
|
Includes the current portion of other long-term liabilities.
|
|
|
|
|
(2)
|
Includes $63.8 million of current and non-current estimated earn-out payables resulting from acquisitions consummated after January 1, 2009.
|
Debt
Total debt at
December 31, 2016
was $1,073.9 million, which was a decrease of $70.9 million compared to December 31, 2015. The decrease includes the repayment of $73.1 million in principal, net of the amortization of discounted debt related to our 4.200% Notes due 2024 and debt issuance cost amortization of $1.7 million plus the addition of $0.5 million in a short-term note payable related to the recent acquisition of Social Security Advocates for the Disabled, LLC.
As of
December 31, 2016
, the Company satisfied the sixth installment of scheduled quarterly principal payments on the Credit Facility term loan. The Company has satisfied $68.8 million in total principal payments through December 31, 2016 since the inception of the note. Scheduled quarterly principal payments are expected to be made until maturity. The balance of the Credit Facility term loan was $481.3 million as of December 31, 2016. Of the total amount, $55.0 million is classified as current portion of long-term debt in the Condensed Consolidated Balance Sheet as the date of maturity is less than one year.
On March 14, 2016, the Company terminated the Wells Fargo Revolver $25.0 million facility without incurring any fees. The facility was to mature on December 31, 2016. The Company terminated the Wells Fargo Revolver as it has flexibility with the Credit Facility revolver capacity and current capital and credit resources available.
Total debt at December 31, 2015 was $1,153.0 million, which was a decrease of $45.5 million compared to December 31, 2014. This decrease was primarily due to the repayments of $45.6 million in principal payments, and the amortization of discounted debt related to our 4.200% Notes due 2024, of $0.1 million.
On January 15, 2015, the Company retired the Series D Senior Notes of $25.0 million that matured and were issued under the original private placement note agreement from December 2006.
As of December 31, 2015, the Company satisfied the third installment of scheduled quarterly principal payments on the Credit Facility term loan. Each installment equaled $6.9 million. The Company has satisfied $20.6 million in total principal payments through December 31, 2015. Scheduled quarterly principal payments are expected to be made until maturity. The balance of the Credit Facility term loan was $529.4 million as of December 31, 2015. Of the total amount, $48.1 million is classified as short-term debt and current portion of long-term debt in the Consolidated Balance Sheet as the date of maturity is less than one year representing the quarterly debt payments that were due in 2016.
During 2015, the $25.0 million of 5.660% Notes due December 2016 were classified as short-term debt and current portion of long-term debt in the Consolidated Balance Sheet as the date of maturity is less than one year. On December 22, 2016, the Series C notes were retired at maturity and settled with cash.
Off-Balance Sheet Arrangements
Neither we nor our subsidiaries have ever incurred off-balance sheet obligations through the use of, or investment in, off-balance sheet derivative financial instruments or structured finance or special purpose entities organized as corporations, partnerships or limited liability companies or trusts.
For further discussion of our cash management and risk management policies, see “Quantitative and Qualitative Disclosures About Market Risk.”
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign exchange rates and equity prices. We are exposed to market risk through our investments, revolving credit line, term loan agreements and international operations.
Our invested assets are held primarily as cash and cash equivalents, restricted cash, available-for-sale marketable debt securities, non-marketable debt securities, certificates of deposit, U.S. treasury securities, and professionally managed short duration fixed income funds. These investments are subject to interest rate risk. The fair values of our invested assets at
December 31, 2016
and
December 31, 2015
, approximated their respective carrying values due to their short-term duration and therefore, such market risk is not considered to be material.
We do not actively invest or trade in equity securities. In addition, we generally dispose of any significant equity securities received in conjunction with an acquisition shortly after the acquisition date.
As of
December 31, 2016
we had $481.3 million of borrowings outstanding under our term loan which bears interest on a floating basis tied to the London Interbank Offered Rate (LIBOR) and therefore subject to changes in the associated interest expense. The effect of an immediate hypothetical 10% change in interest rates would not have a material effect on our Consolidated Financial Statements.
We are subject to exchange rate risk primarily in our U.K-based wholesale brokerage business that has a cost base principally denominated in British pounds and a revenue base in several other currencies, but principally in U.S. dollars. Based upon our foreign currency rate exposure as of December 31, 2016, an immediate 10% hypothetical changes of foreign currency exchange rates would not have a material effect on our Consolidated Financial Statements.
ITEM 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
Page No.
|
|
Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014
|
|
|
Consolidated Balance Sheets as of December 31, 2016 and 2015
|
|
|
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2016, 2015 and 2014
|
|
|
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
|
|
|
Notes to Consolidated Financial Statements for the years ended December 31, 2016, 2015 and 2014
|
|
|
Note 1: Summary of Significant Accounting Policies
|
|
|
Note 2: Business Combinations
|
|
|
Note 3: Goodwill
|
|
|
Note 4: Amortizable Intangible Assets
|
|
|
Note 5: Investments
|
|
|
Note 6: Fixed Assets
|
|
|
Note 7: Accrued Expenses and Other Liabilities
|
|
|
Note 8: Long-Term Debt
|
|
|
Note 9: Income Taxes
|
|
|
Note 10: Employee Savings Plan
|
|
|
Note 11: Stock-Based Compensation
|
|
|
Note 12: Supplemental Disclosures of Cash Flow Information
|
|
|
Note 13: Commitments and Contingencies
|
|
|
Note 14: Quarterly Operating Results (Unaudited)
|
|
|
Note 15: Segment Information
|
|
|
Note 16: Reinsurance
|
|
|
Note 17: Statutory Financial Information
|
|
|
Note 18: Subsidiary Dividend Restrictions
|
|
|
Note 19: Shareholders’ Equity
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
BROWN & BROWN, INC.
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
For the Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
REVENUES
|
|
|
|
|
|
|
Commissions and fees
|
$
|
1,762,787
|
|
|
$
|
1,656,951
|
|
|
$
|
1,567,460
|
|
|
Investment income
|
1,456
|
|
|
1,004
|
|
|
747
|
|
|
Other income, net
|
2,386
|
|
|
2,554
|
|
|
7,589
|
|
|
Total revenues
|
1,766,629
|
|
|
1,660,509
|
|
|
1,575,796
|
|
|
EXPENSES
|
|
|
|
|
|
|
Employee compensation and benefits
|
925,217
|
|
|
856,952
|
|
|
811,112
|
|
|
Other operating expenses
|
262,872
|
|
|
251,055
|
|
|
235,328
|
|
|
(Gain)/loss on disposal
|
(1,291
|
)
|
|
(619
|
)
|
|
47,425
|
|
|
Amortization
|
86,663
|
|
|
87,421
|
|
|
82,941
|
|
|
Depreciation
|
21,003
|
|
|
20,890
|
|
|
20,895
|
|
|
Interest
|
39,481
|
|
|
39,248
|
|
|
28,408
|
|
|
Change in estimated acquisition earn-out payables
|
9,185
|
|
|
3,003
|
|
|
9,938
|
|
|
Total expenses
|
1,343,130
|
|
|
1,257,950
|
|
|
1,236,047
|
|
|
Income before income taxes
|
423,499
|
|
|
402,559
|
|
|
339,749
|
|
|
Income taxes
|
166,008
|
|
|
159,241
|
|
|
132,853
|
|
|
Net income
|
$
|
257,491
|
|
|
$
|
243,318
|
|
|
$
|
206,896
|
|
|
Net income per share:
|
|
|
|
|
|
|
Basic
|
$
|
1.84
|
|
|
$
|
1.72
|
|
|
$
|
1.43
|
|
|
Diluted
|
$
|
1.82
|
|
|
$
|
1.70
|
|
|
$
|
1.41
|
|
|
Dividends declared per share
|
$
|
0.50
|
|
|
$
|
0.45
|
|
|
$
|
0.41
|
|
See accompanying notes to Consolidated Financial Statements.
BROWN & BROWN, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
December 31,
2016
|
|
December 31,
2015
|
|
ASSETS
|
|
|
|
|
Current Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
515,646
|
|
|
$
|
443,420
|
|
|
Restricted cash and investments
|
265,637
|
|
|
229,753
|
|
|
Short-term investments
|
15,048
|
|
|
13,734
|
|
|
Premiums, commissions and fees receivable
|
502,482
|
|
|
433,885
|
|
|
Reinsurance recoverable
|
78,083
|
|
|
31,968
|
|
|
Prepaid reinsurance premiums
|
308,661
|
|
|
309,643
|
|
|
Deferred income taxes
|
24,609
|
|
|
24,635
|
|
|
Other current assets
|
50,571
|
|
|
50,351
|
|
|
Total current assets
|
1,760,737
|
|
|
1,537,389
|
|
|
Fixed assets, net
|
75,807
|
|
|
81,753
|
|
|
Goodwill
|
2,675,402
|
|
|
2,586,683
|
|
|
Amortizable intangible assets, net
|
707,454
|
|
|
744,680
|
|
|
Investments
|
23,048
|
|
|
18,092
|
|
|
Other assets
|
44,895
|
|
|
35,882
|
|
|
Total assets
|
$
|
5,287,343
|
|
|
$
|
5,004,479
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
Premiums payable to insurance companies
|
$
|
647,564
|
|
|
$
|
574,736
|
|
|
Losses and loss adjustment reserve
|
78,083
|
|
|
31,968
|
|
|
Unearned premiums
|
308,661
|
|
|
309,643
|
|
|
Premium deposits and credits due customers
|
83,765
|
|
|
83,098
|
|
|
Accounts payable
|
69,595
|
|
|
63,910
|
|
|
Accrued expenses and other liabilities
|
201,989
|
|
|
192,067
|
|
|
Current portion of long-term debt
|
55,500
|
|
|
73,125
|
|
|
Total current liabilities
|
1,445,157
|
|
|
1,328,547
|
|
|
Long-term debt less unamortized discount and debt issuance costs
|
1,018,372
|
|
|
1,071,618
|
|
|
Deferred income taxes, net
|
382,295
|
|
|
360,949
|
|
|
Other liabilities
|
81,308
|
|
|
93,589
|
|
|
Commitments and contingencies (Note 13)
|
|
|
|
|
Shareholders’ Equity:
|
|
|
|
|
Common stock, par value $0.10 per share; authorized 280,000 shares; issued 148,107 shares and outstanding 140,104 shares at 2016, issued 146,415 shares and outstanding 138,985 shares at 2015
|
14,811
|
|
|
14,642
|
|
|
Additional paid-in capital
|
468,443
|
|
|
426,498
|
|
|
Treasury stock, at cost 8,003 and 7,430 shares at 2016 and 2015, respectively
|
(257,683
|
)
|
|
(238,775
|
)
|
|
Retained earnings
|
2,134,640
|
|
|
1,947,411
|
|
|
Total shareholders’ equity
|
2,360,211
|
|
|
2,149,776
|
|
|
Total liabilities and shareholders’ equity
|
$
|
5,287,343
|
|
|
$
|
5,004,479
|
|
See accompanying notes to Consolidated Financial Statements.
BROWN & BROWN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
Shares
|
|
Par Value
|
|
Additional Paid-In Capital
|
|
Treasury Stock
|
|
Retained Earnings
|
|
Total
|
|
Balance at January 1, 2014
|
145,419
|
|
$
|
14,542
|
|
|
$
|
371,960
|
|
|
$
|
—
|
|
|
$
|
1,620,639
|
|
|
$
|
2,007,141
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
206,896
|
|
|
206,896
|
|
|
Common stock issued for employee stock benefit plans
|
442
|
|
44
|
|
|
30,405
|
|
|
|
|
|
|
|
|
30,449
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
(75,025
|
)
|
|
|
|
(75,025
|
)
|
|
Income tax benefit from exercise of stock benefit plans
|
|
|
|
|
|
3,298
|
|
|
|
|
|
|
|
|
3,298
|
|
|
Common stock issued to directors
|
10
|
|
1
|
|
|
319
|
|
|
|
|
|
|
|
|
320
|
|
|
Cash dividends paid ($0.37 per share)
|
|
|
|
|
|
|
|
|
|
|
(59,334
|
)
|
|
(59,334
|
)
|
|
Balance at December 31, 2014
|
145,871
|
|
14,587
|
|
|
405,982
|
|
|
(75,025
|
)
|
|
1,768,201
|
|
|
2,113,745
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
243,318
|
|
|
243,318
|
|
|
Common stock issued for employee stock benefit plans
|
528
|
|
53
|
|
|
27,992
|
|
|
|
|
|
|
|
|
28,045
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
(11,250
|
)
|
|
(163,750
|
)
|
|
|
|
(175,000
|
)
|
|
Income tax benefit from exercise of stock benefit plans
|
|
|
|
|
|
3,276
|
|
|
|
|
|
|
|
|
3,276
|
|
|
Common stock issued to directors
|
16
|
|
2
|
|
|
498
|
|
|
|
|
|
|
|
|
500
|
|
|
Cash dividends paid ($0.41 per share)
|
|
|
|
|
|
|
|
|
|
|
(64,108
|
)
|
|
(64,108
|
)
|
|
Balance at December 31, 2015
|
146,415
|
|
14,642
|
|
|
426,498
|
|
|
(238,775
|
)
|
|
1,947,411
|
|
|
2,149,776
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
257,491
|
|
|
257,491
|
|
|
Common stock issued for employee stock benefit plans
|
1,675
|
|
167
|
|
|
22,851
|
|
|
|
|
|
|
|
|
23,018
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
11,250
|
|
|
(18,908
|
)
|
|
|
|
(7,658
|
)
|
|
Income tax benefit from exercise of stock benefit plans
|
|
|
|
|
|
7,346
|
|
|
|
|
|
|
|
|
7,346
|
|
|
Common stock issued to directors
|
17
|
|
2
|
|
|
498
|
|
|
|
|
|
|
|
|
500
|
|
|
Cash dividends paid ($0.50 per share)
|
|
|
|
|
|
|
|
|
|
|
(70,262
|
)
|
|
(70,262
|
)
|
|
Balance at December 31, 2016
|
148,107
|
|
$
|
14,811
|
|
|
$
|
468,443
|
|
|
$
|
(257,683
|
)
|
|
$
|
2,134,640
|
|
|
$
|
2,360,211
|
|
See accompanying notes to Consolidated Financial Statements.
BROWN & BROWN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
2016
|
|
2015
|
|
2014
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
$
|
257,491
|
|
|
$
|
243,318
|
|
|
$
|
206,896
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Amortization
|
86,663
|
|
|
87,421
|
|
|
82,941
|
|
|
Depreciation
|
21,003
|
|
|
20,890
|
|
|
20,895
|
|
|
Non-cash stock-based compensation
|
16,052
|
|
|
15,513
|
|
|
19,363
|
|
|
Change in estimated acquisition earn-out payables
|
9,185
|
|
|
3,003
|
|
|
9,938
|
|
|
Deferred income taxes
|
18,163
|
|
|
22,696
|
|
|
7,369
|
|
|
Amortization of debt discount
|
165
|
|
|
157
|
|
|
46
|
|
|
Amortization and disposal of deferred financing costs
|
1,597
|
|
|
—
|
|
|
—
|
|
|
Accretion of discounts and premiums, investments
|
39
|
|
|
—
|
|
|
—
|
|
|
Income tax benefit from exercise of shares from the stock benefit plans
|
(7,346
|
)
|
|
(3,276
|
)
|
|
(3,298
|
)
|
|
Loss/(gain) on sales of investments, fixed assets and customer accounts
|
596
|
|
|
(107
|
)
|
|
42,465
|
|
|
Payments on acquisition earn-outs in excess of original estimated payables
|
(3,904
|
)
|
|
(11,383
|
)
|
|
(2,539
|
)
|
|
Changes in operating assets and liabilities, net of effect from acquisitions and divestitures:
|
|
|
|
|
|
|
Restricted cash and investments (increase) decrease
|
(35,884
|
)
|
|
30,016
|
|
|
(9,760
|
)
|
|
Premiums, commissions and fees receivable (increase)
|
(63,550
|
)
|
|
(7,163
|
)
|
|
(11,160
|
)
|
|
Reinsurance recoverables (increase) decrease
|
(46,115
|
)
|
|
(18,940
|
)
|
|
12,210
|
|
|
Prepaid reinsurance premiums decrease (increase)
|
982
|
|
|
10,943
|
|
|
(31,573
|
)
|
|
Other assets (increase)
|
(4,718
|
)
|
|
(5,318
|
)
|
|
(12,564
|
)
|
|
Premiums payable to insurance companies decrease
|
66,084
|
|
|
542
|
|
|
8,164
|
|
|
Premium deposits and credits due customers increase (decrease)
|
527
|
|
|
(2,973
|
)
|
|
2,323
|
|
|
Losses and loss adjustment reserve increase (decrease)
|
46,115
|
|
|
18,940
|
|
|
(12,210
|
)
|
|
Unearned premiums (decrease) increase
|
(982
|
)
|
|
(10,943
|
)
|
|
31,573
|
|
|
Accounts payable increase
|
30,174
|
|
|
34,206
|
|
|
36,949
|
|
|
Accrued expenses and other liabilities increase
|
8,670
|
|
|
8,204
|
|
|
11,718
|
|
|
Other liabilities (decrease)
|
(25,849
|
)
|
|
(23,898
|
)
|
|
(24,727
|
)
|
|
Net cash provided by operating activities
|
375,158
|
|
|
411,848
|
|
|
385,019
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Additions to fixed assets
|
(17,765
|
)
|
|
(18,375
|
)
|
|
(24,923
|
)
|
|
Payments for businesses acquired, net of cash acquired
|
(122,622
|
)
|
|
(136,000
|
)
|
|
(696,486
|
)
|
|
Proceeds from sales of fixed assets and customer accounts
|
4,957
|
|
|
10,576
|
|
|
13,631
|
|
|
Purchases of investments
|
(25,872
|
)
|
|
(22,766
|
)
|
|
(17,813
|
)
|
|
Proceeds from sales of investments
|
18,890
|
|
|
21,928
|
|
|
18,278
|
|
|
Net cash used in investing activities
|
(142,412
|
)
|
|
(144,637
|
)
|
|
(707,313
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Payments on acquisition earn-outs
|
(24,309
|
)
|
|
(25,415
|
)
|
|
(9,530
|
)
|
|
Proceeds from long-term debt
|
—
|
|
|
—
|
|
|
1,048,425
|
|
|
Payments on long-term debt
|
(73,125
|
)
|
|
(45,625
|
)
|
|
(330,000
|
)
|
|
Borrowings on revolving credit facilities
|
—
|
|
|
—
|
|
|
475,000
|
|
|
Payments on revolving credit facilities
|
—
|
|
|
—
|
|
|
(475,000
|
)
|
|
Income tax benefit from exercise of shares from the stock benefit plans
|
7,346
|
|
|
3,276
|
|
|
3,298
|
|
|
Issuances of common stock for employee stock benefit plans
|
15,983
|
|
|
15,890
|
|
|
14,808
|
|
|
Repurchase of stock benefit plan shares for employees to fund tax withholdings
|
(8,495
|
)
|
|
(2,857
|
)
|
|
(3,252
|
)
|
|
Purchase of treasury stock
|
(18,908
|
)
|
|
(163,750
|
)
|
|
(75,025
|
)
|
|
Settlement (prepayment) of accelerated share repurchase program
|
11,250
|
|
|
(11,250
|
)
|
|
—
|
|
|
Cash dividends paid
|
(70,262
|
)
|
|
(64,108
|
)
|
|
(59,334
|
)
|
|
Net cash (used in) provided by financing activities
|
(160,520
|
)
|
|
(293,839
|
)
|
|
589,390
|
|
|
Net increase (decrease) in cash and cash equivalents
|
72,226
|
|
|
(26,628
|
)
|
|
267,096
|
|
|
Cash and cash equivalents at beginning of period
|
443,420
|
|
|
470,048
|
|
|
202,952
|
|
|
Cash and cash equivalents at end of period
|
$
|
515,646
|
|
|
$
|
443,420
|
|
|
$
|
470,048
|
|
See accompanying notes to Consolidated Financial Statements.
BROWN & BROWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1· Summary of Significant Accounting Policies
Nature of Operations
Brown & Brown, Inc., a Florida corporation, and its subsidiaries (collectively, “Brown & Brown” or the “Company”) is a diversified insurance agency, wholesale brokerage, insurance programs and services organization that markets and sells to its customers, insurance products and services, primarily in the property and casualty area. Brown & Brown’s business is divided into
four
reportable segments: the Retail Segment provides a broad range of insurance products and services to commercial, public entity, professional and individual customers; the National Programs Segment, acting as a managing general agent (“MGA”), provides professional liability and related package products for certain professionals, a range of insurance products for individuals, flood coverage, and targeted products and services designated for specific industries, trade groups, governmental entities and market niches, all of which are delivered through nationwide networks of independent agents, and Brown & Brown retail agents; the Wholesale Brokerage Segment markets and sells excess and surplus commercial insurance, primarily through independent agents and brokers, as well as Brown & Brown Retail offices; and the Services Segment provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare benefits advocacy services, and claims adjusting services.
Recently Issued Accounting Pronouncements
In November 2016, the Financial Accountings Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18, “Statement of Cash Flows (Topic 230)”: Restricted Cash (“ASU 2016-18”), which requires that the Statement of Cash Flows explain the changes during the period of cash and cash equivalents inclusive of amounts categorized as Restricted Cash. As such, upon adoption, the Company’s Statement of Cash Flows will show the sources and uses of cash that explain the movement in the balance of cash and cash equivalents, inclusive of restricted cash, over the period presented. ASU 2016-18 is effective for periods beginning after December 15, 2017.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230)": Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) ("ASU 2016-15"), which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified and applies to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230. ASU 2016-15 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and early adoption is permitted. The Company has evaluated the impact of ASU 2016-15 and has determined the impact to be immaterial. The Company already presents cash paid on contingent consideration in business combination as prescribed by ASU 2016-15 and does not, at this time, engage in the other activities being addressed.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share Based Payment Accounting" ("ASU 2016-09"), which amends guidance issued in Accounting Standards Codification ("ASC") Topic 718, Compensation - Stock Compensation. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The Company has evaluated the impact of adoption of the ASU on its Consolidated Financial Statements. The principal impact will be that the tax benefit or expense from stock compensation will be presented in the income tax line of the Statement of Income rather than the current presentation as a component of equity on the Balance Sheet. Also the tax benefit or expense will be presented as activity in Cash Flow from Operating Activity rather than the current presentation as Cash Flow from Financing Activity in the Statement of Cash Flows. The Company will also continue to estimate forfeitures of stock grants as allowed by ASU 2016-09.
In March 2016, the FASB issued ASU 2016-08, "Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)" ("ASU 2016-08") to clarify certain aspects of the principal-versus-agent guidance included in the new revenue standard ASU 2014-09 "Revenue from Contracts with Customers" ("ASU 2014-09"). The FASB issued the ASU in response to concerns identified by stakeholders, including those related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. ASU 2016-08 is effective contemporaneous with ASU 2014-09 beginning January 1, 2018. The impact of ASU 2016-08 is currently being evaluated along with ASU 2014-09. At this point in our evaluation the potential impact would be limited to the claims administering activities within our Services Segment and therefore not material to the Company.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which provides guidance for accounting for leases. Under ASU 2016-02, the Company will be required to recognize the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company continues to evaluate the impact of this pronouncement with the principal impact being that the present
value of the remaining lease payments be presented as a liability on the Balance Sheet as well as an asset of similar value representing the “Right of Use” for those leased properties. As detailed in Note 13, the undiscounted contractual cash payments remaining on leased properties is $213 million as of December 31, 2016.
In November 2015, FASB issued ASU No. 2015-17, “Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”), which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as a single non-current item on the balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016 with early adoption permitted as of the beginning of any interim or annual reporting period. The Company plans to adopt ASU 2015-17 in the first quarter of 2017. This is not expected to have a material impact on our Consolidated Financial Statements other than reclassifying current deferred tax assets and liabilities to non-current in the balance sheet.
In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets, and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the current guidance. Specifically in situations where multiple performance obligations exist within the contract, the use of estimates is required to allocate the transaction price to each separate performance obligation. Historically 70% or more of the Company’s revenue is in the form of commissions paid by insurance carriers. Commission are earned upon the effective date of bound coverage and no significant performance obligation remains in those arrangements after coverage is bound. The Company is currently evaluating the approximately 30% of revenue earned in the form of fees against the requirements of this pronouncement. Fees are predominantly in our National Programs and Services Segments, and to a lesser extent in the large accounts business within our Retail Segment. At the conclusion of this evaluation it may be determined that fee revenue from certain agreements will be recognized in earlier periods under the new guidance in comparison to our current accounting policies and others will be recognized in later periods. Based upon the work completed to date, management does not expect the overall impact to be significant.
ASU 2014-09 is effective for the Company beginning January 1, 2018, after FASB voted to delay the effective date by one year. At that time, the Company may adopt the new standard under the full retrospective approach or the modified retrospective approach.
We do not anticipate a material change in our internal control framework necessitated by the adoption of ASU 2014-09.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of Brown & Brown, Inc. and its subsidiaries. All significant intercompany account balances and transactions have been eliminated in the Consolidated Financial Statements.
Segment results for prior periods have been recast to reflect the current year segmental structure. Certain reclassifications have been made to the prior year amounts reported in this Annual Report on Form 10-K in order to conform to the current year presentation.
Revenue Recognition
Commission revenues are recognized as of the effective date of the insurance policy or the date on which the policy premium is processed into our systems and invoiced to the customer, whichever is later. Commission revenues related to installment billings are recognized on the latter of effective or invoiced date, with the exception of our Arrowhead business which follows a policy of recognizing on the latter of effective or processed date into our systems, regardless of the billing arrangement. Management determines the policy cancellation reserve based upon historical cancellation experience adjusted for any known circumstances. Subsequent commission adjustments are recognized upon our receipt of notification from insurance companies concerning matters necessitating such adjustments. Profit-sharing contingent commissions are recognized when determinable, which is generally when such commissions are received from insurance companies, or when we receive formal notification of the amount of such payments. Fee revenues and commissions for workers’ compensation programs are recognized as services are rendered.
Use of Estimates
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosures of contingent assets and liabilities, at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents principally consist of demand deposits with financial institutions and highly liquid investments with quoted market prices having maturities of three months or less when purchased.
Restricted Cash and Investments, and Premiums, Commissions and Fees Receivable
In our capacity as an insurance agent or broker, the Company typically collects premiums from insureds and, after deducting its authorized commissions, remits the net premiums to the appropriate insurance company or companies. Accordingly, as reported in the Consolidated Balance Sheets, “premiums” are receivable from insureds. Unremitted net insurance premiums are held in a fiduciary capacity until Brown & Brown disburses them. Where allowed by law, Brown & Brown invests these unremitted funds only in cash, money market accounts, tax-free variable-rate demand bonds and commercial paper held for a short term. In certain states in which Brown & Brown operates, the use and investment alternatives for these funds are regulated and restricted by various state laws and agencies. These restricted funds are reported as restricted cash and investments on the Consolidated Balance Sheets. The interest income earned on these unremitted funds, where allowed by state law, is reported as investment income in the Consolidated Statement of Income.
In other circumstances, the insurance companies collect the premiums directly from the insureds and remit the applicable commissions to Brown & Brown. Accordingly, as reported in the Consolidated Balance Sheets, “commissions” are receivables from insurance companies. “Fees” are primarily receivables due from customers.
Investments
Certificates of deposit, and other securities, having maturities of more than three months when purchased are reported at cost and are adjusted for other-than-temporary market value declines. The Company’s investment holdings include U.S. Government securities, municipal bonds, domestic corporate and foreign corporate bonds as well as short-duration fixed income funds. Investments within the portfolio or funds are held as available for sale and are carried at their fair value. Any gain/loss applicable from the fair value change is recorded, net of tax, as other comprehensive income within the equity section of the Consolidated Balance Sheet. Realized gains and losses are reported on the Consolidated Statement of Income, with the cost of securities sold determined on a specific identification basis.
Fixed Assets
Fixed assets, including leasehold improvements, are carried at cost, less accumulated depreciation and amortization. Expenditures for improvements are capitalized, and expenditures for maintenance and repairs are expensed to operations as incurred. Upon sale or retirement, the cost and related accumulated depreciation and amortization are removed from the accounts and the resulting gain or loss, if any, is reflected in other income. Depreciation has been determined using the straight-line method over the estimated useful lives of the related assets, which range from
three
to
15
years. Leasehold improvements are amortized on the straight-line method over the shorter of the useful life of the improvement or the term of the related lease.
Goodwill and Amortizable Intangible Assets
All of our business combinations initiated after June 30, 2001 are accounted for using the aquisition method. Acquisition purchase prices are typically based upon a multiple of average annual operating profit earned over a
three
-year period within a minimum and maximum price range. 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 the fair value of earn-out obligations are 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 contained in the respective purchase agreements. In determining fair value, the acquired business’ future performance is estimated using financial projections developed by management for the acquired business and this estimate 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 estimates 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.
Amortizable intangible assets are stated at cost, less accumulated amortization, and consist of purchased customer accounts and non-compete agreements. Purchased customer accounts and non-compete agreements are amortized on a straight-line basis over the related estimated lives and contract periods, which range from
3
to
15
years. Purchased customer accounts primarily consist of records and files that contain information about insurance policies and the related insured parties that are essential to policy renewals.
The excess of the purchase price of an acquisition over the fair value of the identifiable tangible and amortizable intangible assets is assigned to goodwill. While goodwill is not amortizable, it is subject to assessment at least annually, and more frequently in the presence of certain circumstances, for impairment by application of a fair value-based test. The Company compares the fair value of each reporting unit with its carrying amount to determine if there is potential impairment of goodwill. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value.
Fair value is estimated based upon multiples of earnings before interest, income taxes, depreciation, amortization and change in estimated acquisition earn-out payables (“EBITDAC”), or on a discounted cash flow basis. Brown & Brown completed its most recent annual assessment as of November 30, 2016 and determined that the fair value of goodwill exceeded the carrying value of such assets. In addition, as of December 31, 2016, there are no accumulated impairment losses.
The carrying value of amortizable intangible assets attributable to each business or asset group comprising Brown & Brown is periodically reviewed by management to determine if there are events or changes in circumstances that would indicate that its carrying amount may not be recoverable. Accordingly, if there are any such changes in circumstances during the year, Brown & Brown assesses the carrying value of its amortizable intangible assets by considering the estimated future undiscounted cash flows generated by the corresponding business or asset group. Any impairment identified through this assessment may require that the carrying value of related amortizable intangible assets be adjusted. There were no impairments recorded for the years ended December 31, 2016, 2015 and 2014.
Income Taxes
Brown & Brown records income tax expense using the asset-and-liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and the income tax bases of Brown & Brown’s assets and liabilities.
Brown & Brown files a consolidated federal income tax return and has elected to file consolidated returns in certain states. Deferred income taxes are provided for in the Consolidated Financial Statements and relate principally to expenses charged to income for financial reporting purposes in one period and deducted for income tax purposes in other periods.
Net Income Per Share
Basic EPS is computed based upon the weighted-average number of common shares (including participating securities) issued and outstanding during the period. Diluted EPS is computed based upon the weighted-average number of common shares issued and outstanding plus equivalent shares, assuming the exercise of stock options. The dilutive effect of stock options is computed by application of the treasury-stock method. The following is a reconciliation between basic and diluted weighted-average shares outstanding for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
2016
|
|
2015
|
|
2014
|
|
Net income
|
$
|
257,491
|
|
|
$
|
243,318
|
|
|
$
|
206,896
|
|
|
Net income attributable to unvested awarded performance stock
|
(6,705
|
)
|
|
(5,695
|
)
|
|
(5,186
|
)
|
|
Net income attributable to common shares
|
$
|
250,786
|
|
|
$
|
237,623
|
|
|
$
|
201,710
|
|
|
Weighted-average number of common shares outstanding – basic
|
139,779
|
|
|
141,113
|
|
|
144,568
|
|
|
Less unvested awarded performance stock included in weighted-average number of common shares outstanding – basic
|
(3,640
|
)
|
|
(3,303
|
)
|
|
(3,624
|
)
|
|
Weighted-average number of common shares outstanding for basic earnings per common share
|
136,139
|
|
|
137,810
|
|
|
140,944
|
|
|
Dilutive effect of stock options
|
1,665
|
|
|
2,302
|
|
|
1,947
|
|
|
Weighted-average number of shares outstanding – diluted
|
137,804
|
|
|
140,112
|
|
|
142,891
|
|
|
Net income per share:
|
|
|
|
|
|
|
Basic
|
$
|
1.84
|
|
|
$
|
1.72
|
|
|
$
|
1.43
|
|
|
Diluted
|
$
|
1.82
|
|
|
$
|
1.70
|
|
|
$
|
1.41
|
|
Fair Value of Financial Instruments
The carrying amounts of Brown & Brown’s financial assets and liabilities, including cash and cash equivalents; restricted cash and short-term investments; investments; premiums, commissions and fees receivable; reinsurance recoverable; prepaid reinsurance premiums; premiums payable to insurance companies; losses and loss adjustment reserve; unearned premium; premium deposits and credits due customers and accounts payable, at
December 31, 2016
and
2015
, approximate fair value because of the short-term maturity of these instruments. The carrying amount of Brown & Brown’s long-term debt approximates fair value at
December 31, 2016
and
2015
as our fixed-rate borrowings of
$598.8 million
approximate their values using market quotes of notes with the similar terms as ours, which we deem a close approximation of current market rates. The estimated fair value of the
$481.3 million
remaining on the term loan under our Credit Facility (as defined below) approximates the carrying value due to the variable interest rate based upon adjusted LIBOR. See Note 2 to our Consolidated Financial Statements for the fair values related to the establishment of intangible assets and the establishment and adjustment of earn-out payables. See Note 5 for information on the fair value of investments and Note 8 for information on the fair value of long-term debt.
Stock-Based Compensation
The Company granted stock options and grants non-vested stock awards to its employees, officers and directors. The Company uses the modified-prospective method to account for share-based payments. Under the modified-prospective method, compensation cost is recognized for all share-based payments granted on or after January 1, 2006 and for all awards granted to employees prior to January 1, 2006 that remained unvested on that date. The Company uses the alternative-transition method to account for the income tax effects of payments made related to stock-based compensation.
The Company uses the Black-Scholes valuation model for valuing all stock options and shares purchased under the Employee Stock Purchase Plan (the “ESPP”). Compensation for non-vested stock awards is measured at fair value on the grant date based upon the number of shares expected to vest. Compensation cost for all awards is recognized in earnings, net of estimated forfeitures, on a straight-line basis over the requisite service period.
Reinsurance
The Company protects itself from claims-related losses by reinsuring all claims risk exposure. The only line of insurance the Company underwrites is flood insurance associated with the Wright National Flood Insurance Company (“WNFIC”), which is part of our National Programs Segment. However, all exposure is reinsured with the Federal Emergency Management Agency (“FEMA”) for basic admitted policies conforming to the National Flood Insurance Program. For excess flood insurance policies, all exposure is reinsured with a reinsurance carrier with an AM Best Company rating of “A” or better. Reinsurance does not legally discharge the ceding insurer from the primary liability for the full amount due under the reinsured policies. Reinsurance premiums, commissions, expense reimbursement and reserves related to ceded business are accounted for on a basis consistent with the accounting for the original policies issued and the terms of reinsurance contracts. Premiums earned and losses and loss adjustment expenses incurred are reported net of reinsurance amounts. Other underwriting expenses are shown net of earned ceding commission income. The liabilities for unpaid losses and loss adjustment expenses and unearned premiums are reported gross of ceded reinsurance recoverable.
Balances due from reinsurers on unpaid losses and loss adjustment expenses, including an estimate of such recoverables related to reserves for incurred but not reported (“IBNR”) losses, are reported as assets and are included in reinsurance recoverable even though amounts due on unpaid loss and loss adjustment expense are not recoverable from the reinsurer until such losses are paid. The Company does not believe it is exposed to any material credit risk through its reinsurance as the reinsurer is FEMA for basic admitted flood policies and a national reinsurance carrier for excess flood policies, which has an AM Best Company rating of “A” or better. Historically, no amounts due from reinsurance carriers have been written off as uncollectible.
Unpaid Losses and Loss Adjustment Reserve
Unpaid losses and loss adjustment reserve include amounts determined on individual claims and other estimates based upon the past experience of WNFIC and the policyholders for IBNR claims, less anticipated salvage and subrogation recoverable. The methods of making such estimates and for establishing the resulting reserves are continually reviewed and updated, and any adjustments resulting therefrom are reflected in operations currently.
WNFIC engages the services of outside actuarial consulting firms (the “Actuaries”) to assist on an annual basis to render an opinion on the sufficiency of the Company’s estimates for unpaid losses and related loss adjustment reserve. The Actuaries utilize both industry experience and the Company’s own experience to develop estimates of those amounts as of year-end. These estimated liabilities are subject to the impact of future changes in claim severity, frequency and other factors. In spite of the variability inherent in such estimates, management believes that the liabilities for unpaid losses and related loss adjustment reserve is adequate.
Premiums
Premiums are recognized as income over the coverage period of the related policies. Unearned premiums represent the portion of premiums written that relate to the unexpired terms of the policies in force and are determined on a daily pro rata basis. The income is recorded to the commissions and fees line of the income statement.
NOTE 2· Business Combinations
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 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, 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. These measurement period adjustments have been reflected as current period adjustments for the
year ended
December 31, 2016
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
$124.7 million
and $
136.0 million
in the years ended
December 31, 2016
and
2015
, respectively. We completed
eight
acquisitions (excluding book of business purchases) during the
year ended
December 31, 2016
. We completed
thirteen
acquisitions (excluding book of business purchases) in the
twelve
-month period ended
December 31, 2015
.
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 Accounting Standards Codification Topic 805 —
Business Combinations
(“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
|
|
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 (Wright)
|
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 intercompany 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
|
|
As of December 31, 2016, the maximum future contingency payments related to all acquisitions totaled
$117.2 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, 2016
, 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, 2016
,
2015
and
2014
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(in thousands)
|
2016
|
|
2015
|
|
2014
|
|
Balance as of the beginning of the period
|
$
|
78,387
|
|
|
$
|
75,283
|
|
|
$
|
43,058
|
|
|
Additions to estimated acquisition earn-out payables
|
4,462
|
|
|
36,899
|
|
|
34,356
|
|
|
Payments for estimated acquisition earn-out payables
|
(28,213
|
)
|
|
(36,798
|
)
|
|
(12,069
|
)
|
|
Subtotal
|
54,636
|
|
|
75,384
|
|
|
65,345
|
|
|
Net change in earnings from estimated acquisition earn-out payables:
|
|
|
|
|
|
|
Change in fair value on estimated acquisition earn-out payables
|
6,338
|
|
|
13
|
|
|
7,375
|
|
|
Interest expense accretion
|
2,847
|
|
|
2,990
|
|
|
2,563
|
|
|
Net change in earnings from estimated acquisition earn-out payables
|
9,185
|
|
|
3,003
|
|
|
9,938
|
|
|
Balance as of December 31,
|
$
|
63,821
|
|
|
$
|
78,387
|
|
|
$
|
75,283
|
|
Of the
$63.8 million
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. 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
$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. 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.
NOTE 3· Goodwill
The changes in the carrying value of goodwill by reportable segment for the years ended
December 31,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Retail
|
|
National
Programs
|
|
Wholesale
Brokerage
|
|
Services
|
|
Total
|
|
Balance as of January 1, 2015
|
$
|
1,231,869
|
|
|
$
|
886,095
|
|
|
$
|
222,356
|
|
|
$
|
120,291
|
|
|
$
|
2,460,611
|
|
|
Goodwill of acquired businesses
|
113,767
|
|
|
18,009
|
|
|
4,605
|
|
|
—
|
|
|
136,381
|
|
|
Goodwill disposed of relating to sales of businesses
|
—
|
|
|
(2,238
|
)
|
|
—
|
|
|
(8,071
|
)
|
|
(10,309
|
)
|
|
Balance as of December 31, 2015
|
$
|
1,345,636
|
|
|
$
|
901,866
|
|
|
$
|
226,961
|
|
|
$
|
112,220
|
|
|
$
|
2,586,683
|
|
|
Goodwill of acquired businesses
|
13,117
|
|
|
(1
|
)
|
|
57,908
|
|
|
22,352
|
|
|
93,376
|
|
|
Goodwill of transferred businesses
|
571
|
|
|
(571
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Goodwill disposed of relating to sales of businesses
|
(4,657
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,657
|
)
|
|
Balance as of December 31, 2016
|
$
|
1,354,667
|
|
|
$
|
901,294
|
|
|
$
|
284,869
|
|
|
$
|
134,572
|
|
|
$
|
2,675,402
|
|
NOTE 4· Amortizable Intangible Assets
Amortizable intangible assets at
December 31, 2016
and
2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
(in thousands)
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Weighted
Average
Life in
Years
(1)
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Weighted
Average
Life in
Years
(1)
|
|
Purchased customer accounts
|
$
|
1,447,680
|
|
|
$
|
(741,770
|
)
|
|
$
|
705,910
|
|
|
15.0
|
|
$
|
1,398,986
|
|
|
$
|
(656,799
|
)
|
|
$
|
742,187
|
|
|
15.0
|
|
Non-compete agreements
|
29,668
|
|
|
(28,124
|
)
|
|
1,544
|
|
|
6.8
|
|
29,440
|
|
|
(26,947
|
)
|
|
2,493
|
|
|
6.8
|
|
Total
|
$
|
1,477,348
|
|
|
$
|
(769,894
|
)
|
|
$
|
707,454
|
|
|
|
|
$
|
1,428,426
|
|
|
$
|
(683,746
|
)
|
|
$
|
744,680
|
|
|
|
|
|
|
|
(1)
|
Weighted-average life calculated as of the date of acquisition.
|
Amortization expense for amortizable intangible assets for the years ending December 31,
2017
,
2018
,
2019
,
2020
and
2021
is estimated to be
$84.9 million
,
$79.6 million
,
$75.1 million
,
$67.8 million
, and
$64.5 million
, respectively.
NOTE 5· Investments
At
December 31, 2016
, the Company’s amortized cost and fair values of fixed maturity securities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized
Losses
|
|
Fair Value
|
|
U.S. Treasury securities, obligations of
U.S. Government agencies and Municipals
|
$
|
26,280
|
|
|
$
|
11
|
|
|
$
|
(59
|
)
|
|
$
|
26,232
|
|
|
Corporate debt
|
2,358
|
|
|
13
|
|
|
(1
|
)
|
|
2,370
|
|
|
Total
|
$
|
28,638
|
|
|
$
|
24
|
|
|
$
|
(60
|
)
|
|
$
|
28,602
|
|
At
December 31, 2016
, the Company held
$26.28 million
in fixed income securities composed of U.S Treasury securities, securities issued by U.S. Government agencies and Municipalities, and
$2.4 million
issued by corporations with investment grade ratings. Of the total,
$5.6 million
is classified as short-term investments on the Consolidated Balance Sheet as maturities are less than one year in duration. Additionally, the Company holds
$9.5 million
in short-term investments which are related to time deposits held with various financial institutions.
For securities in a loss position, the following table shows the investments’ gross unrealized loss and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
U.S. Treasury securities, obligations of U.S. Government agencies and Municipals
|
$
|
14,663
|
|
|
$
|
(59
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,663
|
|
|
$
|
(59
|
)
|
|
Foreign Government
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Corporate debt
|
1,001
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
1,001
|
|
|
(1
|
)
|
|
Total
|
$
|
15,664
|
|
|
$
|
(60
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,664
|
|
|
$
|
(60
|
)
|
The unrealized losses from corporate issuers were caused by interest rate increases. At
December 31, 2016
, the Company had
20
securities in an unrealized loss position. The corporate securities are highly rated securities with no indicators of potential impairment. Based upon the ability and intent of the Company to hold these investments until recovery of fair value, which may be maturity, the bonds were not considered to be other-than-temporarily impaired at
December 31, 2016
.
At
December 31, 2015
, the Company’s amortized cost and fair values of fixed maturity securities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized
Losses
|
|
Fair Value
|
|
U.S. Treasury securities, obligations of
U.S. Government agencies and Municipals
|
$
|
11,876
|
|
|
$
|
6
|
|
|
$
|
(26
|
)
|
|
$
|
11,856
|
|
|
Foreign government
|
50
|
|
|
—
|
|
|
—
|
|
|
50
|
|
|
Corporate debt
|
4,505
|
|
|
7
|
|
|
(16
|
)
|
|
4,496
|
|
|
Short duration fixed income fund
|
1,663
|
|
|
27
|
|
|
—
|
|
|
1,690
|
|
|
Total
|
$
|
18,094
|
|
|
$
|
40
|
|
|
$
|
(42
|
)
|
|
$
|
18,092
|
|
The following table shows the investments’ gross unrealized loss and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
U.S. Treasury securities, obligations of
U.S. Government agencies and Municipals
|
$
|
8,998
|
|
|
$
|
(26
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,998
|
|
|
$
|
(26
|
)
|
|
Foreign Government
|
50
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50
|
|
|
—
|
|
|
Corporate debt
|
2,731
|
|
|
(14
|
)
|
|
284
|
|
|
(2
|
)
|
|
3,015
|
|
|
(16
|
)
|
|
Total
|
$
|
11,779
|
|
|
$
|
(40
|
)
|
|
$
|
284
|
|
|
$
|
(2
|
)
|
|
$
|
12,063
|
|
|
$
|
(42
|
)
|
The unrealized losses in the Company’s investments in U.S. Treasury Securities and obligations of U.S. Government Agencies and bonds from corporate issuers were caused by interest rate increases. At
December 31, 2015
, the Company had
35
securities in an unrealized loss position. The contractual cash flows of the U.S. Treasury Securities and obligations of the U.S. Government agencies investments are either guaranteed by the U.S. Government or an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. The corporate securities are highly rated securities with no indicators of potential impairment. Based upon the ability and intent of the Company to hold these investments until recovery of fair value, which may be maturity, the bonds were not considered to be other-than-temporarily impaired at
December 31, 2015
.
The amortized cost and estimated fair value of the fixed maturity securities at
December 31, 2016
by contractual maturity are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Amortized Cost
|
|
Fair Value
|
|
Years to maturity:
|
|
|
|
|
Due in one year or less
|
$
|
5,551
|
|
|
$
|
5,554
|
|
|
Due after one year through five years
|
22,757
|
|
|
22,708
|
|
|
Due after five years through ten years
|
330
|
|
|
340
|
|
|
Total
|
$
|
28,638
|
|
|
$
|
28,602
|
|
The amortized cost and estimated fair value of the fixed maturity securities at
December 31, 2015
by contractual maturity are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Amortized Cost
|
|
Fair Value
|
|
Years to maturity:
|
|
|
|
|
Due in one year or less
|
$
|
5,726
|
|
|
$
|
5,722
|
|
|
Due after one year through five years
|
12,038
|
|
|
12,041
|
|
|
Due after five years through ten years
|
330
|
|
|
329
|
|
|
Total
|
$
|
18,094
|
|
|
$
|
18,092
|
|
The expected maturities in the foregoing table may differ from the contractual maturities because certain borrowers have the right to call or prepay obligations with or without penalty.
Proceeds from the sales and maturity of the Company’s investment in fixed maturity securities were
$6.0 million
. This along with maturing time deposits and the utilization of funds from a money market account of
$9.1 million
yielded total cash proceeds from the sale of investments of
$18.9 million
in the period of
January 1, 2016
to
December 31, 2016
. These proceeds were used to purchase additional fixed maturity securities. The gains and losses realized on those sales for the period from
January 1, 2016
to
December 31, 2016
were
insignificant
. Additionally, there was a sale of the short-duration fixed income fund which resulted in cash proceeds of
$1.7 million
, as the fund was liquidated in the third quarter of 2016. Gains on this sale were also
insignificant
.
Proceeds from sales of the Company’s investment in fixed maturity securities were
$5.6 million
including maturities for the year ended
December 31, 2015
. The gains and losses realized on those sales for the year ended
December 31, 2015
were
insignificant
.
Realized gains and losses are reported on the Consolidated Statement of Income, with the cost of securities sold determined on a specific identification basis.
At
December 31, 2016
, investments with a fair value of approximately
$4.0 million
were on deposit with state insurance departments to satisfy regulatory requirements.
NOTE 6· Fixed Assets
Fixed assets at
December 31
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2016
|
|
2015
|
|
Furniture, fixtures and equipment
|
$
|
177,823
|
|
|
$
|
169,682
|
|
|
Leasehold improvements
|
33,137
|
|
|
32,132
|
|
|
Land, buildings and improvements
|
3,375
|
|
|
3,370
|
|
|
Total cost
|
214,335
|
|
|
205,184
|
|
|
Less accumulated depreciation and amortization
|
(138,528
|
)
|
|
(123,431
|
)
|
|
Total
|
$
|
75,807
|
|
|
$
|
81,753
|
|
Depreciation and amortization expense for fixed assets amounted to
$21.0 million
in
2016
,
$20.9 million
in
2015
, and
$20.9 million
in
2014
.
NOTE 7· Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities at
December 31
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2016
|
|
2015
|
|
Accrued bonuses
|
$
|
82,438
|
|
|
$
|
76,210
|
|
|
Accrued compensation and benefits
|
45,771
|
|
|
39,366
|
|
|
Accrued rent and vendor expenses
|
28,669
|
|
|
29,225
|
|
|
Reserve for policy cancellations
|
9,567
|
|
|
9,617
|
|
|
Accrued interest
|
6,441
|
|
|
6,375
|
|
|
Other
|
29,103
|
|
|
31,274
|
|
|
Total
|
$
|
201,989
|
|
|
$
|
192,067
|
|
NOTE 8· Long-Term Debt
Long-term debt at
December 31, 2016
and
2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2016
|
|
December 31, 2015
|
|
Current portion of long-term debt:
|
|
|
|
|
Current portion of 5-year term loan facility expires 2019
|
$
|
55,000
|
|
|
$
|
48,125
|
|
|
5.660% senior notes, Series C, semi-annual interest payments, balloon due 2016
|
—
|
|
|
25,000
|
|
|
Short-term promissory note
|
500
|
|
|
—
|
|
|
Total current portion of long-term debt
|
55,500
|
|
|
73,125
|
|
|
Long-term debt:
|
|
|
|
|
Note agreements:
|
|
|
|
|
4.500% senior notes, Series E, quarterly interest payments, balloon due 2018
|
100,000
|
|
|
100,000
|
|
|
4.200% senior notes, semi-annual interest payments, balloon due 2024
|
498,785
|
|
|
498,628
|
|
|
Total notes
|
598,785
|
|
|
598,628
|
|
|
Credit agreements:
|
|
|
|
|
5-year term loan facility, periodic interest and principal payments, LIBOR plus up to 1.750%, expires May 20, 2019
|
426,250
|
|
|
481,250
|
|
|
5-year revolving loan facility, periodic interest payments, currently LIBOR plus up to 1.500%, plus commitment fees up to 0.250%, expires May 20, 2019
|
—
|
|
|
—
|
|
|
Revolving credit loan, quarterly interest payments, LIBOR plus up to 1.400% and availability fee up to 0.250%, expires December 31, 2016
|
—
|
|
|
—
|
|
|
Total credit agreements
|
426,250
|
|
|
481,250
|
|
|
Debt issuance costs (contra)
|
(6,663
|
)
|
|
(8,260
|
)
|
|
Total long-term debt less unamortized discount and debt issuance costs
|
1,018,372
|
|
|
1,071,618
|
|
|
Current portion of long-term debt
|
55,500
|
|
|
73,125
|
|
|
Total debt
|
$
|
1,073,872
|
|
|
$
|
1,144,743
|
|
On December 22, 2006, the Company entered into a Master Shelf and Note Purchase Agreement (the “Master Agreement”) with a national insurance company (the “Purchaser”). The initial issuance of notes under the Master Agreement occurred on December 22, 2006, through the issuance of
$25.0 million
in Series C Senior Notes due December 22, 2016, with a fixed interest rate of
5.660%
per year. On February 1, 2008,
$25.0 million
in Series D Senior Notes due January 15, 2015, with a fixed interest rate of
5.370%
per year, were issued. On September 15, 2011, and pursuant to a Confirmation of Acceptance (the “Confirmation”), dated January 21, 2011, in connection with the Master Agreement,
$100.0 million
in Series E Senior Notes were issued and are due September 15, 2018, with a fixed interest rate of
4.500%
per year. The Series E Senior Notes were issued for the sole purpose of retiring existing senior notes. On January 15, 2015, the Series D Notes were redeemed at maturity using cash proceeds to pay off the principal of
$25.0 million
plus any remaining accrued interest. On December 22, 2016, the Series C Notes were redeemed at maturity using cash proceeds to pay off the principal of
$25.0 million
plus any remaining accrued interest. As of
December 31, 2016
, there was an outstanding debt balance issued under the provisions of the Master Agreement of
$100.0 million
.
On July 1, 2013, in conjunction with the acquisition of Beecher Carlson Holdings, Inc., the Company entered into a revolving loan agreement (the “Wells Fargo Agreement”) with Wells Fargo Bank, N.A. that provided for a
$50.0 million
revolving line of credit (the “Wells Fargo Revolver”). On April 16, 2014, in connection with the signing of the Credit Facility (as defined below) an amendment to the agreement was established to reduce the total revolving loan commitment from
$50.0 million
to
$25.0 million
. The Wells Fargo Revolver may be increased by up to
$50.0 million
(bringing the total amount available to
$75.0 million
). The calculation of interest and fees for the Wells Fargo Agreement is generally based upon the Company’s funded debt-to-EBITDA ratio. Interest is charged at a rate equal to
1.000%
to
1.400%
above LIBOR or
1.000%
below the Base Rate, each as more fully described in the Wells Fargo Agreement. Fees include an up-front fee, an availability fee of
0.175%
to
0.250%
, and a letter of credit margin fee of
1.000%
to
1.400%
. The obligations under the Wells Fargo Revolver are unsecured and the Wells Fargo Agreement includes various covenants, limitations and events of default that are customary for similar facilities for similar borrowers. The maturity date for the Wells Fargo Revolver was
December 31, 2016
. However, on March 14, 2016, the Wells Fargo Revolver was terminated before its maturity date with no fees incurred. There were
no
borrowings against the Wells Fargo Revolver as of
December 31, 2016
or as of December 31,
2015
.
On April 17, 2014, the Company entered into a credit agreement with JPMorgan Chase Bank, N.A. as administrative agent and certain other banks as co-syndication agents and co-documentation agents (the “Credit Agreement”). The Credit Agreement in the amount of
$1,350.0 million
provides for an unsecured revolving credit facility (the “Credit Facility”) in the initial amount of
$800.0 million
and unsecured term
loans in the initial amount of
$550.0 million
, either or both of which may, subject to lenders’ discretion, potentially be increased by up to
$500.0 million
. The Credit Facility was funded on May 20, 2014 in conjunction with the closing of the Wright acquisition, with the
$550.0 million
term loan being funded as well as a drawdown of
$375.0 million
on the revolving loan facility. Use of these proceeds was to retire existing term loan debt and to facilitate the closing of the Wright acquisition as well as other acquisitions. The Credit Facility terminates on May 20, 2019, but either or both of the revolving credit facility and the term loans may be extended for
two
additional
one
-year periods at the Company’s request and at the discretion of the respective lenders. Interest and facility fees in respect to the Credit Facility are based upon the better of the Company’s net debt leverage ratio or a non-credit enhanced senior unsecured long-term debt rating. Based upon the Company’s net debt leverage ratio, the rates of interest charged on the term loan are
1.000%
to
1.750%
, and the revolving loan is
0.850%
to
1.500%
above the adjusted LIBOR rate for outstanding amounts drawn. There are fees included in the facility which include a facility fee based upon the revolving credit commitments of the lenders (whether used or unused) at a rate of
0.150%
to
0.250%
and letter of credit fees based upon the amounts of outstanding secured or unsecured letters of credit. The Credit Facility includes various covenants, limitations and events of default customary for similar facilities for similarly rated borrowers. As of
December 31, 2016
and
2015
, there was an outstanding debt balance issued under the provisions of the Credit Facility in total of
$481.3 million
and
$529.4 million
respectively, with
no
borrowings outstanding relative to the revolving loan. Per the terms of the agreement, scheduled principal payments of
$55.0 million
are due in 2017.
On September 18, 2014, the Company issued
$500.0 million
of
4.200%
unsecured senior notes due in
2024
. The senior notes were given investment grade ratings of BBB-/Baa3 with a stable outlook. The notes are subject to certain covenant restrictions and regulations which are customary for credit rated obligations. At the time of funding, the proceeds were offered at a discount of the original note amount which also excluded an underwriting fee discount. The net proceeds received from the issuance were used to repay the outstanding balance of
$475.0 million
on the revolving Credit Facility and for other general corporate purposes. As of
December 31, 2016
and
2015
, there was an outstanding debt balance of
$500.0 million
exclusive of the associated discount balance.
The Master Agreement, Wells Fargo Agreement and the Credit Agreement all require the Company to maintain certain financial ratios and comply with certain other covenants. The Company was in compliance with all such covenants as of
December 31, 2016
and
2015
.
The 30-day Adjusted LIBOR Rate as of
December 31, 2016
was
0.813%
.
Interest paid in
2016
,
2015
and
2014
was
$37.7 million
,
$37.5 million
, and
$25.1 million
, respectively.
At
December 31, 2016
, maturities of long-term debt were
$55.5 million
in 2017,
$155.0 million
in 2018,
$371.3 million
in 2019, and
$500.0 million
in 2024.
NOTE 9· Income Taxes
Significant components of the provision for income taxes for the years ended
December 31
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2016
|
|
2015
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
126,145
|
|
|
$
|
118,490
|
|
|
$
|
109,893
|
|
|
State
|
21,110
|
|
|
17,625
|
|
|
15,482
|
|
|
Foreign
|
590
|
|
|
430
|
|
|
109
|
|
|
Total current provision
|
147,845
|
|
|
136,545
|
|
|
125,484
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
15,551
|
|
|
18,416
|
|
|
5,987
|
|
|
State
|
2,612
|
|
|
4,280
|
|
|
1,440
|
|
|
Foreign
|
—
|
|
|
—
|
|
|
(58
|
)
|
|
Total deferred provision
|
18,163
|
|
|
22,696
|
|
|
7,369
|
|
|
Total tax provision
|
$
|
166,008
|
|
|
$
|
159,241
|
|
|
$
|
132,853
|
|
A reconciliation of the differences between the effective tax rate and the federal statutory tax rate for the years ended
December 31
is as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Federal statutory tax rate
|
35.0%
|
|
35.0%
|
|
35.0%
|
|
State income taxes, net of federal income tax benefit
|
3.9
|
|
3.9
|
|
3.3
|
|
Non-deductible employee stock purchase plan expense
|
0.3
|
|
0.3
|
|
0.3
|
|
Non-deductible meals and entertainment
|
0.3
|
|
0.3
|
|
0.4
|
|
Other, net
|
(0.3)
|
|
0.1
|
|
0.1
|
|
Effective tax rate
|
39.2%
|
|
39.6%
|
|
39.1%
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the corresponding amounts used for income tax reporting purposes.
Significant components of Brown & Brown’s current deferred tax assets as of
December 31
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2016
|
|
2015
|
|
Current deferred tax assets:
|
|
|
|
|
Deferred profit-sharing contingent commissions
|
$
|
10,567
|
|
|
$
|
9,767
|
|
|
Net operating loss carryforwards
|
10
|
|
|
10
|
|
|
Accruals and reserves
|
14,032
|
|
|
14,858
|
|
|
Total current deferred tax assets
|
$
|
24,609
|
|
|
$
|
24,635
|
|
Significant components of Brown & Brown’s non-current deferred tax liabilities and assets as of
December 31
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2016
|
|
2015
|
|
Non-current deferred tax liabilities:
|
|
|
|
|
Fixed assets
|
$
|
6,425
|
|
|
$
|
8,585
|
|
|
Net unrealized holding (loss)/gain on available-for-sale securities
|
(12
|
)
|
|
(9
|
)
|
|
Intangible assets
|
422,478
|
|
|
393,251
|
|
|
Total non-current deferred tax liabilities
|
428,891
|
|
|
401,827
|
|
|
Non-current deferred tax assets:
|
|
|
|
|
Deferred compensation
|
44,912
|
|
|
38,966
|
|
|
Net operating loss carryforwards
|
2,384
|
|
|
2,518
|
|
|
Valuation allowance for deferred tax assets
|
(700
|
)
|
|
(606
|
)
|
|
Total non-current deferred tax assets
|
46,596
|
|
|
40,878
|
|
|
Net non-current deferred tax liability
|
$
|
382,295
|
|
|
$
|
360,949
|
|
Income taxes paid in
2016
,
2015
and
2014
were
$143.1 million
,
$132.9 million
, and
$118.3 million
respectively.
At
December 31, 2016
, Brown & Brown had net operating loss carryforwards of
$156,435
and
$60.2 million
for federal and state income tax reporting purposes, respectively, portions of which expire in the years
2017
through
2036
. The federal carryforward is derived from insurance operations acquired by Brown & Brown in 2001. The state carryforward amount is derived from the operating results of certain subsidiaries and from the 2013 stock acquisition of Beecher Carlson Holdings, Inc.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2016
|
|
2015
|
|
2014
|
|
Unrecognized tax benefits balance at January 1
|
$
|
584
|
|
|
$
|
113
|
|
|
$
|
391
|
|
|
Gross increases for tax positions of prior years
|
412
|
|
|
773
|
|
|
—
|
|
|
Gross decreases for tax positions of prior years
|
(41
|
)
|
|
—
|
|
|
(21
|
)
|
|
Settlements
|
(205
|
)
|
|
(302
|
)
|
|
(257
|
)
|
|
Unrecognized tax benefits balance at December 31
|
$
|
750
|
|
|
$
|
584
|
|
|
$
|
113
|
|
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of
December 31, 2016
and
2015
, the Company had
$86,191
and
$102,171
of accrued interest and penalties related to uncertain tax positions, respectively.
The total amount of unrecognized tax benefits that would affect the Company’s effective tax rate if recognized was
$750,258
as of
December 31, 2016
and
$583,977
as of
December 31, 2015
. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.
As a result of a 2006 Internal Revenue Service (“IRS”) audit, the Company agreed to accrue at each December 31, for tax purposes only, a known amount of profit-sharing contingent commissions represented by the actual amount of profit-sharing contingent commissions received in the first quarter of the related year, with a true-up adjustment to the actual amount received by the end of the following March. Since this method for tax purposes differs from the method used for book purposes, it will result in a current deferred tax asset as of December 31 each year which will reverse by the following March 31 when the related profit-sharing contingent commissions are recognized for financial accounting purposes.
The Company is subject to taxation in the United States and various state jurisdictions. The Company is also subject to taxation in the United Kingdom. In the United States, federal returns for fiscal years 2013 through 2016 remain open and subject to examination by the IRS. The Company files and remits state income taxes in various states where the Company has determined it is required to file state income taxes. The Company’s filings with those states remain open for audit for the fiscal years 2011 through 2016. In the United Kingdom, the Company’s filings remain open for audit for the fiscal years 2015 and 2016.
The federal income tax returns of The Wright Insurance Group are currently under IRS audit for the short period ended May 1, 2014. Also during 2016, the Company settled the previously disclosed State of Kansas audit for fiscal years 2012 through 2014 in the amount of $204,695. The Company and one of its subsidiaries, The Advocator Group, LLC, is currently under examination by the State of Massachusetts for the fiscal year 2013 through 2014. There are no other federal or state income tax audits as of
December 31, 2016
.
In general, it is our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations. As of December 31, 2016, we have not made a provision for U.S. or additional foreign withholding taxes on approximately
$2.6 million
of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.
NOTE 10· Employee Savings Plan
The Company has an Employee Savings Plan (401(k)) in which substantially all employees with more than
30
days of service are eligible to participate. Under this plan, Brown & Brown makes matching contributions of up to
4.0%
of each participant’s annual compensation. Prior to 2014, the Company’s matching contribution was up to
2.5%
of each participant’s annual compensation with a discretionary profit-sharing contribution each year, which equaled
1.5%
of each eligible employee’s compensation. The Company’s contributions to the plan totaled
$19.3 million
in 2016,
$17.8 million
in 2015, and
$15.8 million
in 2014.
NOTE 11· Stock-Based Compensation
Performance Stock Plan
In 1996, Brown & Brown adopted and the shareholders approved a performance stock plan, under which until the suspension of the plan in 2010, up to
14,400,000
Performance Stock Plan (“PSP”) shares could be granted to key employees contingent on the employees’ future years of service with Brown & Brown and other performance-based criteria established by the Compensation Committee of the Company’s Board of Directors. Before participants may take full title to Performance Stock, two vesting conditions must be met. Of the grants currently outstanding, specified portions satisfied the first condition for vesting based upon
20%
incremental increases in the 20-trading-day average stock price of Brown & Brown’s common stock from the price on the business day prior to date of grant. Performance Stock that has satisfied the first vesting condition is considered “awarded shares.” Awarded shares are included as issued and outstanding common stock shares and are included in the calculation of basic and diluted EPS. Dividends are paid on awarded shares and participants may exercise voting privileges on such shares. Awarded shares satisfy the second condition for vesting on the earlier of a participant’s: (i)
15 years
of continuous employment with Brown & Brown from the date shares are granted to the participants (or, in the case of the
July 2009
grant to
Powell Brown
,
20 years
); (ii)
attainment of age 64
(on a prorated basis corresponding to the number of years since the date of grant); or (iii) death or disability. On April 28, 2010, the PSP was suspended and any remaining authorized, but unissued shares, as well as any shares forfeited in the future, will be reserved for issuance under the 2010 Stock Incentive Plan (the “SIP”).
At
December 31, 2016
,
5,174,190
shares had been granted under the PSP. As of
December 31, 2016
,
1,003,275
shares had met the first condition of vesting and had been awarded, and
4,170,915
shares had satisfied both conditions of vesting and had been distributed to participants. Of the shares that have not vested as of
December 31, 2016
, the initial stock prices ranged from
$13.65
to
$25.68
.
The Company uses a path-dependent lattice model to estimate the fair value of PSP grants on the grant date.
A summary of PSP activity for the years ended
December 31, 2016
,
2015
and
2014
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
Average
Grant
Date Fair
Value
|
|
Granted
Shares
|
|
Awarded
Shares
|
|
Shares Not
Yet
Awarded
|
|
Outstanding at January 1, 2014
|
$
|
8.62
|
|
|
2,371,287
|
|
|
2,295,852
|
|
|
75,435
|
|
|
Granted
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Awarded
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Vested
|
$
|
16.76
|
|
|
(277,009
|
)
|
|
(277,009
|
)
|
|
—
|
|
|
Forfeited
|
$
|
9.75
|
|
|
(165,647
|
)
|
|
(115,630
|
)
|
|
(50,017
|
)
|
|
Outstanding at December 31, 2014
|
$
|
8.71
|
|
|
1,928,631
|
|
|
1,903,213
|
|
|
25,418
|
|
|
Granted
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Awarded
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Vested
|
$
|
5.55
|
|
|
(208,889
|
)
|
|
(208,889
|
)
|
|
—
|
|
|
Forfeited
|
$
|
9.78
|
|
|
(117,528
|
)
|
|
(100,110
|
)
|
|
(17,418
|
)
|
|
Outstanding at December 31, 2015
|
$
|
9.03
|
|
|
1,602,214
|
|
|
1,594,214
|
|
|
8,000
|
|
|
Granted
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Awarded
|
$
|
—
|
|
|
—
|
|
|
4,000
|
|
|
(4,000
|
)
|
|
Vested
|
$
|
6.39
|
|
|
(506,422
|
)
|
|
(506,422
|
)
|
|
—
|
|
|
Forfeited
|
$
|
10.52
|
|
|
(92,517
|
)
|
|
(88,517
|
)
|
|
(4,000
|
)
|
|
Outstanding at December 31, 2016
|
$
|
10.23
|
|
|
1,003,275
|
|
|
1,003,275
|
|
|
—
|
|
The total fair value of PSP grants that vested during each of the years ended
December 31, 2016
,
2015
and
2014
was
$18.1 million
,
$6.8 million
and
$8.4 million
, respectively.
Stock Incentive Plan
On
April 28, 2010
, the shareholders of Brown & Brown, Inc. approved the Stock Incentive Plan (“SIP”) that provides for the granting of stock options, stock, restricted stock units, and/or stock appreciation rights to employees and directors contingent on criteria established by the Compensation Committee of the Company’s Board of Directors. The principal purpose of the SIP is to attract, incentivize and retain key employees by offering those persons an opportunity to acquire or increase a direct proprietary interest in the Company’s operations and future success. The SIP includes a sub-plan applicable to Decus Insurance Brokers Limited (“Decus”) which, is a subsidiary of Decus Holdings (U.K.) Limited. The shares of stock reserved for issuance under the SIP are any shares that are authorized for issuance under the PSP and not already subject to grants under the PSP, and that were outstanding as of
April 28, 2010
, the date of suspension of the PSP, together with PSP shares and SIP shares forfeited after that date. As of
April 28, 2010
,
6,046,768
shares were available for issuance under the PSP, which were then transferred to the SIP. In addition, in May 2016 our shareholders approved an amendment to the SIP to increase the shares available for issuance by an additional 1,200,000.
The Company has granted stock grants to our employees in the form of Restricted Stock Awards and Peformance Stock Awards under the SIP. To date, a substantial majority of stock grants to employees under the SIP vest in four to ten years The Performance Stock Awards are subject to the achievement of certain performance criteria by grantees, which may include growth in a defined book of business, organic growth and operating profit growth of a profit center, EBITDA growth, organic growth of the Company and consolidated EPS growth at certain levels of the Company. The performance measurement period ranges from three to five years. Beginning in 2016, certain Performance Stock Awards have a payout range between 0% to 200% depending on the achievement against the stated performance target. Prior to 2016, the majority of the grants had a binary performance measurement criteria that only allowed for 0% or 100% payout.
In
2010
,
187,040
shares were granted under the SIP. This grant was conditioned upon the surrender of 187,040 shares previously granted under the PSP in 2009, which were accordingly treated as forfeited PSP shares. The vesting conditions of this grant were identical to those provided for in connection with the 2009 PSP grant; thus the target stock prices and the periods associated with satisfaction of the first and second conditions of vesting were unchanged. Additionally, grants totaling
5,205
shares were made in
2010
to Decus employees under the SIP sub-plan applicable to Decus.
In
2011
,
2,375,892
shares were granted under the SIP. Of this total,
24,670
shares were granted to Decus employees under the SIP sub-plan applicable to Decus.
In
2012
,
814,545
shares were granted under the SIP, primarily related to the Arrowhead acquisition.
In
2013
,
3,719,974
shares were granted under the SIP. Of the shares granted in
2013
,
891,399
shares will vest upon the grantees’ completion of between
three
and
seven years
of service with the Company, and because grantees have the right to vote the shares and receive dividends immediately after the date of grant these shares are considered awarded and outstanding under the two-class method.
In
2014
,
422,572
shares were granted under the SIP. Of the shares granted in
2014
,
113,088
shares will vest upon the grantees’ completion of between
three
and
six years
of service with the Company, and because grantees have the right to vote the shares and receive dividends immediately after the date of grant these shares are considered awarded and outstanding under the two-class method.
In
2015
,
481,166
shares were granted under the SIP. Of the shares granted in
2015
,
164,646
shares will vest upon the grantees’ completion of between
five
and
seven years
of service with the Company, and because grantees have the right to vote the shares and receive dividends immediately after the date of grant these shares are considered awarded and outstanding under the two-class method.
In
2016
,
972,099
shares were granted under the SIP. Of the shares granted in
2016
,
182,653
shares will vest upon the grantees’ completion of
five years
of service with the Company, and because grantees have the right to vote the shares and receive dividends immediately after the date of grant these shares are considered awarded and outstanding under the two-class method.
Additionally, non-employee members of the Board of Directors received shares annually issued pursuant to the SIP as part of their annual compensation. A total of
36,919
SIP shares were issued to these directors in
2011
and
2012
, of which
11,682
were issued in
January 2011
,
12,627
in
January 2012
, and
12,610
in
December 2012
. The shares issued in December 2012 were issued at that earlier time rather than in January 2013 pursuant to action of the Board of Directors.
No
additional shares were granted or issued to the non-employee members of the Board of Directors in
2013
. A total of
9,870
shares were issued to these directors in
January 2014
,
15,700
shares were issued in
January 2015
and
16,860
shares were issued in
January 2016
.
The following table sets forth information as of
December 31, 2016
,
2015
, and
2014
, with respect to the number of time-based restricted shares granted and awarded, the number of performance-based restricted shares granted, and the number of performance-based restricted shares awarded under our Performance Stock Plan and 2010 Stock Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Time-Based Restricted Stock Granted and Awarded
|
|
Performance-Based Restricted Stock Granted
|
|
Performance-Based Restricted Stock Awarded
|
|
2016
|
|
182,653
|
|
|
789,446
|
|
(1)
|
1,435,319
|
|
|
2015
|
|
164,646
|
|
|
316,520
|
|
|
—
|
|
|
2014
|
|
113,088
|
|
|
309,484
|
|
|
—
|
|
|
|
|
|
(1)
|
Of the 789,446 shares of performance-based restricted stock granted in 2016, the payout for 353,132 shares may be increased up to 200% of the target or decreased to zero, subject to the level of performance attained. The amount reflected in the table includes all restricted stock grants at a target payout of 100%.
|
At
December 31, 2016
,
3,729,566
shares were available for future grants. This amount is calculated assuming the maximum payout for all restricted stock grants. The payout for 321,955 shares of our outstanding performance-based restricted stock grants may be increased up to 200% of the target or decreased to zero, subject to the level of performance attained.
The Company uses the closing stock price on the day prior to the grant date to determine the fair value of SIP grants and then applies an estimated forfeiture factor to estimate the annual expense. Additionally, the Company uses the path-dependent lattice model to estimate the fair value of grants with PSP-type vesting conditions as of the grant date. SIP shares that satisfied the first vesting condition for PSP-type grants or the established performance criteria are considered awarded shares. Awarded shares are included as issued and outstanding common stock shares and are included in the calculation of basic and diluted EPS.
A summary of SIP activity for the years ended
December 31, 2016
,
2015
and
2014
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
Average
Grant
Date Fair
Value
|
|
Granted
Shares
|
|
Awarded
Shares
|
|
Shares Not
Yet
Awarded
|
|
|
Outstanding at January 1, 2014
|
$
|
27.96
|
|
|
6,606,101
|
|
|
995,717
|
|
|
5,610,384
|
|
|
|
Granted
|
$
|
31.02
|
|
|
422,572
|
|
|
113,088
|
|
|
309,484
|
|
|
|
Awarded
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Vested
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Forfeited
|
$
|
27.41
|
|
|
(369,626
|
)
|
|
(47,915
|
)
|
|
(321,711
|
)
|
|
|
Outstanding at December 31, 2014
|
$
|
28.19
|
|
|
6,659,047
|
|
|
1,060,890
|
|
|
5,598,157
|
|
|
|
Granted
|
$
|
31.74
|
|
|
481,166
|
|
|
164,646
|
|
|
316,520
|
|
|
|
Awarded
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Vested
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Forfeited
|
$
|
26.32
|
|
|
(863,241
|
)
|
|
(95,542
|
)
|
|
(767,699
|
)
|
|
|
Outstanding at December 31, 2015
|
$
|
28.74
|
|
|
6,276,972
|
|
|
1,129,994
|
|
|
5,146,978
|
|
|
|
Granted
|
$
|
35.52
|
|
|
972,099
|
|
|
182,653
|
|
|
789,446
|
|
(1)
|
|
Awarded
|
$
|
24.93
|
|
|
—
|
|
|
1,431,319
|
|
|
(1,431,319
|
)
|
|
|
Vested
|
$
|
27.31
|
|
|
(166,884
|
)
|
|
(166,884
|
)
|
|
—
|
|
|
|
Forfeited
|
$
|
25.34
|
|
|
(954,131
|
)
|
|
(175,788
|
)
|
|
(778,343
|
)
|
|
|
Outstanding at December 31, 2016
|
$
|
29.96
|
|
|
6,128,056
|
|
|
2,401,294
|
|
|
3,726,762
|
|
|
|
|
|
|
(1)
|
Of the 789,446 shares of performance-based restricted stock granted in 2016, the payout for 353,132 shares may be increased up to 200% of the target or decreased to zero, subject to the level of performance attained. The amount reflected in the table includes all restricted stock grants at a target payout of 100%.
|
Employee Stock Purchase Plan
The Company has a shareholder-approved Employee Stock Purchase Plan (“ESPP”) with a total of
17,000,000
authorized shares of which
4,680,263
were available for future subscriptions as of
December 31, 2016
. Employees of the Company who regularly work more than
20
hours per week are eligible to participate in the ESPP. Participants, through payroll deductions, may allot up to
10%
of their compensation, up to a maximum of
$25,000
, to purchase Company stock between
August 1st
of each year and the following
July 31st
(the “Subscription Period”) at a cost of
85%
of the lower of the stock price as of the beginning or end of the Subscription Period.
The Company estimates the fair value of an ESPP share option as of the beginning of the Subscription Period as the sum of: (1)
15%
of the quoted market price of the Company’s stock on the day prior to the beginning of the Subscription Period, and (2)
85%
of the value of a one-year stock option on the Company stock using the Black-Scholes option-pricing model. The estimated fair value of an ESPP share option as of the Subscription Period beginning in
August 2016
was
$7.61
. The fair values of an ESPP share option as of the Subscription Periods beginning in
August 2015
and
2014
, were
$6.43
and
$6.39
, respectively.
For the ESPP plan years ended
July 31, 2016
,
2015
and
2014
, the Company issued
514,665
,
539,389
, and
512,521
shares of common stock, respectively. These shares were issued at an aggregate purchase price of
$15.0 million
, or
$29.23
per share, in
2016
,
$14.4 million
, or
$26.62
per share, in
2015
, and
$13.4 million
, or
$26.16
per share, in
2014
.
For the five months ended
December 31, 2016
,
2015
and
2014
(portions of the 2016-2017, 2015-2016 and 2014-2015 plan years),
247,023
;
231,803
; and
235,794
shares of common stock (from authorized but unissued shares), respectively, were subscribed to by ESPP participants for proceeds of approximately
$7.7 million
,
$6.8 million
and
$6.3 million
, respectively.
Incentive Stock Option Plan
On
April 21, 2000
, Brown & Brown adopted, and the shareholders approved, a qualified incentive stock option plan (the “ISOP”) that provides for the granting of stock options to certain key employees for up to
4,800,000
shares of common stock. On
December 31, 2008
, the ISOP expired. The objective of the ISOP was to provide additional performance incentives to grow Brown & Brown’s pre-tax income in excess of
15%
annually. The options were granted at the most recent trading day’s closing market price and vest over a
one
-to-
ten
-year period, with a potential acceleration of the vesting period to
three
-to-
six
years based upon achievement of certain performance goals. All of the options expire
10 years
after the grant date.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options on the grant date. The risk-free interest rate is based upon the U.S. Treasury yield curve on the date of grant with a remaining term approximating the expected term of the option granted. The expected term of the options granted is derived from historical data; grantees are divided into two groups based upon expected exercise behavior and are considered separately for valuation purposes. The expected volatility is based upon the historical volatility of the Company’s common stock over the period of time equivalent to the expected term of the options granted. The dividend yield is based upon the Company’s best estimate of future dividend yield.
A summary of stock option activity for the years ended
December 31, 2016
,
2015
and
2014
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Shares
Under
Option
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding at January 1, 2014
|
|
622,945
|
|
|
$
|
18.39
|
|
|
4.1
|
|
$
|
7,289
|
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
(106,589
|
)
|
|
$
|
18.48
|
|
|
|
|
|
|
|
Forfeited
|
|
(46,000
|
)
|
|
$
|
18.48
|
|
|
|
|
|
|
|
Expired
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
470,356
|
|
|
$
|
18.57
|
|
|
3.1
|
|
$
|
5,087
|
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
(151,767
|
)
|
|
$
|
18.48
|
|
|
|
|
|
|
|
Forfeited
|
|
(49,000
|
)
|
|
$
|
19.36
|
|
|
|
|
|
|
|
Expired
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
269,589
|
|
|
$
|
18.48
|
|
|
2.2
|
|
$
|
2,395
|
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
(64,589
|
)
|
|
$
|
18.48
|
|
|
|
|
|
|
|
Forfeited
|
|
(30,000
|
)
|
|
$
|
18.48
|
|
|
|
|
|
|
|
Expired
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
175,000
|
|
|
$
|
18.48
|
|
|
1.2
|
|
$
|
4,616
|
|
|
Ending vested and expected to vest at December 31,
2016
|
|
175,000
|
|
|
$
|
18.48
|
|
|
1.2
|
|
$
|
4,616
|
|
|
Exercisable at December 31, 2016
|
|
175,000
|
|
|
$
|
18.48
|
|
|
1.2
|
|
$
|
4,616
|
|
|
Exercisable at December 31, 2015
|
|
164,589
|
|
|
$
|
18.48
|
|
|
2.2
|
|
$
|
2,241
|
|
|
Exercisable at December 31, 2014
|
|
316,356
|
|
|
$
|
18.48
|
|
|
3.2
|
|
$
|
4,565
|
|
The following table summarizes information about stock options outstanding at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Exercise Price
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
$18.48
|
|
175,000
|
|
|
1.2
|
|
$
|
18.48
|
|
|
175,000
|
|
|
$
|
18.48
|
|
|
Totals
|
|
175,000
|
|
|
1.2
|
|
$
|
18.48
|
|
|
175,000
|
|
|
$
|
18.48
|
|
The total intrinsic value of options exercised, determined as of the date of exercise, during the years ended
December 31, 2016
,
2015
and
2014
was
$1.0 million
,
$2.2 million
and
$1.3 million
, respectively. The total intrinsic value is calculated as the difference between the exercise price of all underlying awards and the quoted market price of the Company’s stock for all in-the-money stock options at
December 31, 2016
,
2015
and
2014
, respectively.
There are
no
option shares available for future grant under the ISOP since this plan expired as of
December 31, 2008
.
Summary of Non-Cash Stock-Based Compensation Expense
The non-cash stock-based compensation expense for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2016
|
|
2015
|
|
2014
|
|
Stock Incentive Plan
|
|
$
|
11,049
|
|
|
$
|
11,111
|
|
|
$
|
14,447
|
|
|
Employee Stock Purchase Plan
|
|
3,698
|
|
|
3,430
|
|
|
2,425
|
|
|
Performance Stock Plan
|
|
1,305
|
|
|
972
|
|
|
2,354
|
|
|
Incentive Stock Option Plan
|
|
—
|
|
|
—
|
|
|
137
|
|
|
Total
|
|
$
|
16,052
|
|
|
$
|
15,513
|
|
|
$
|
19,363
|
|
Summary of Unrecognized Compensation Expense
As of
December 31, 2016
, there was approximately
$92.1 million
of unrecognized compensation expense related to all non-vested stock-based compensation arrangements granted under the Company’s stock-based compensation plans. That expense is expected to be recognized over a weighted-average period of
4.3
years.
NOTE 12· Supplemental Disclosures of Cash Flow Information and Non-Cash Financing and Investing Activities
Our
Restricted Cash balance is comprised of funds held in separate premium trust accounts as required by state law or, in some cases, per agreement with our carrier partners. In the second quarter of
2015
, certain balances that had previously been reported as held in restricted premium trust accounts were reclassified as non-restricted as they were not restricted by state law or by contractual agreement with a carrier. The resulting impact of this change was a reduction in the balance reported on our Consolidated Balance Sheet as Restricted Cash and Investments and a corresponding increase in the balance reported as Cash and Cash Equivalents of approximately
$33.0 million
as of December 31, 2015 as compared to the corresponding account balances as of December 31, 2014 of
$32.2 million
which was reflected as Restricted Cash. While these referenced funds are not restricted, they do represent premium payments from customers to be paid to insurance carriers and this change in classification should not be viewed as a source of operating cash.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(in thousands)
|
2016
|
|
2015
|
|
2014
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
Interest
|
$
|
37,652
|
|
|
$
|
37,542
|
|
|
$
|
25,115
|
|
|
Income taxes
|
$
|
143,111
|
|
|
$
|
132,874
|
|
|
$
|
118,290
|
|
Brown & Brown’s significant non-cash investing and financing activities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(in thousands)
|
2016
|
|
2015
|
|
2014
|
|
Other payables issued for purchased customer accounts
|
$
|
10,664
|
|
|
$
|
10,029
|
|
|
$
|
1,930
|
|
|
Estimated acquisition earn-out payables and related charges
|
$
|
4,463
|
|
|
$
|
36,899
|
|
|
$
|
33,229
|
|
|
Notes payable issued or assumed for purchased customer accounts
|
$
|
492
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Notes received on the sale of fixed assets and customer accounts
|
$
|
22
|
|
|
$
|
7,755
|
|
|
$
|
6,340
|
|
NOTE 13· Commitments and Contingencies
Operating Leases
Brown & Brown leases facilities and certain items of office equipment under non-cancelable operating lease arrangements expiring on various dates through 2042. The facility leases generally contain renewal options and escalation clauses based upon increases in the lessors’ operating expenses and other charges. Brown & Brown anticipates that most of these leases will be renewed or replaced upon expiration. At
December 31, 2016
, the aggregate future minimum lease payments under all non-cancelable lease agreements were as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
2017
|
$
|
42,727
|
|
|
2018
|
39,505
|
|
|
2019
|
34,277
|
|
|
2020
|
29,393
|
|
|
2021
|
22,222
|
|
|
Thereafter
|
45,036
|
|
|
Total minimum future lease payments
|
$
|
213,160
|
|
Rental expense in
2016
,
2015
and
2014
for operating leases totaled
$49.3 million
,
$46.0 million
, and
$49.0 million
, respectively.
Legal Proceedings
The Company records losses for claims in excess of the limits of, or outside the coverage of, applicable insurance at the time and to the extent they are probable and estimable. In accordance with ASC Topic 450-
Contingencies
, the Company accrues anticipated costs of settlement, damages, losses for liability claims and, under certain conditions, costs of defense, based upon historical experience or to the extent specific losses are probable and estimable. Otherwise, the Company expenses these costs as incurred. If the best estimate of a probable loss is a range rather than a specific amount, the Company accrues the amount at the lower end of the range.
The Company’s accruals for legal matters that were probable and estimable were not material at
December 31, 2016
and
2015
. We continue to assess certain litigation and claims to determine the amounts, if any, that management believes will be paid as a result of such claims and litigation and, therefore, additional losses may be accrued and paid in the future, which could adversely impact the Company’s operating results, cash flows and overall liquidity. The Company maintains third-party insurance policies to provide coverage for certain legal claims, in an effort to mitigate its overall exposure to unanticipated claims or adverse decisions. However, as (i) one or more of the Company’s insurance carriers could take the position that portions of these claims are not covered by the Company’s insurance, (ii) to the extent that payments are made to resolve claims and lawsuits, applicable insurance policy limits are eroded and (iii) the claims and lawsuits relating to these matters are continuing to develop, it is possible that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by unfavorable resolutions of these matters. Based upon the AM Best Company ratings of these third-party insurers, management does not believe there is a substantial risk of an insurer’s material non-performance related to any current insured claims.
On the basis of current information, the availability of insurance and legal advice, in management’s opinion, the Company is not currently involved in any legal proceedings which, individually or in the aggregate, would have a material adverse effect on its financial condition, operations and/or cash flows.
NOTE 14· Quarterly Operating Results (Unaudited)
Quarterly operating results for
2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
424,173
|
|
|
$
|
446,518
|
|
|
$
|
462,274
|
|
|
$
|
433,664
|
|
|
Total expenses
|
|
$
|
321,624
|
|
|
$
|
337,441
|
|
|
$
|
345,302
|
|
|
$
|
338,763
|
|
|
Income before income taxes
|
|
$
|
102,549
|
|
|
$
|
109,077
|
|
|
$
|
116,972
|
|
|
$
|
94,901
|
|
|
Net income
|
|
$
|
62,070
|
|
|
$
|
66,250
|
|
|
$
|
71,545
|
|
|
$
|
57,626
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.45
|
|
|
$
|
0.47
|
|
|
$
|
0.51
|
|
|
$
|
0.41
|
|
|
Diluted
|
|
$
|
0.44
|
|
|
$
|
0.47
|
|
|
$
|
0.50
|
|
|
$
|
0.41
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
404,298
|
|
|
$
|
419,447
|
|
|
$
|
432,167
|
|
|
$
|
404,597
|
|
|
Total expenses
|
|
$
|
310,520
|
|
|
$
|
318,533
|
|
|
$
|
319,337
|
|
|
$
|
309,560
|
|
|
Income before income taxes
|
|
$
|
93,778
|
|
|
$
|
100,914
|
|
|
$
|
112,830
|
|
|
$
|
95,037
|
|
|
Net income
|
|
$
|
56,951
|
|
|
$
|
61,005
|
|
|
$
|
67,427
|
|
|
$
|
57,935
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.40
|
|
|
$
|
0.43
|
|
|
$
|
0.48
|
|
|
$
|
0.41
|
|
|
Diluted
|
|
$
|
0.39
|
|
|
$
|
0.43
|
|
|
$
|
0.47
|
|
|
$
|
0.41
|
|
Quarterly financial results are affected by seasonal variations. The timing of the Company’s receipt of profit-sharing contingent commissions, policy renewals and acquisitions may cause revenues, expenses and net income to vary significantly between quarters.
NOTE 15· Segment Information
Brown & Brown’s business is divided into
four
reportable segments: (1) the Retail Segment, which provides a broad range of insurance products and services to commercial, public and quasi-public entities, and to professional and individual customers; (2) the National Programs Segment, which acts as a MGA, provides professional liability and related package products for certain professionals, a range of insurance products for individuals, flood coverage, and targeted products and services designated for specific industries, trade groups, governmental entities and market niches, all of which are delivered through nationwide networks of independent agents, and Brown & Brown retail agents; (3) the Wholesale Brokerage Segment, which markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers, as well as Brown & Brown retail agents; and (4) the Services Segment, which provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare benefits advocacy services and claims adjusting services.
Brown & Brown conducts all of its operations within the United States of America, except for a wholesale brokerage operation based in London, England, and retail operations in Bermuda and the Cayman Islands. These operations earned
$14.5 million
,
$13.4 million
and
$13.3 million
of total revenues for the years ended
December 31, 2016
,
2015
and
2014
, respectively. Long-lived assets held outside of the United States during each of these three years were not material.
The accounting policies of the reportable segments are the same as those described in Note 1. The Company evaluates the performance of its segments based upon revenues and income before income taxes. Inter-segment revenues are eliminated.
Summarized financial information concerning the Company’s reportable segments is shown in the following table. The “Other” column includes any income and expenses not allocated to reportable segments and corporate-related items, including the intercompany interest expense charge to the reporting segment.
Segment results for prior periods have been recast to reflect the current year segmental structure. Certain reclassifications
have been made to the prior year amounts reported in this Annual Report on Form 10-K in order to conform to the current year
presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016
|
|
(in thousands)
|
Retail
|
|
National
Programs
|
|
Wholesale
Brokerage
|
|
Services
|
|
Other
|
|
Total
|
|
Total revenues
|
$
|
917,406
|
|
|
$
|
448,516
|
|
|
$
|
243,103
|
|
|
$
|
156,365
|
|
|
$
|
1,239
|
|
|
$
|
1,766,629
|
|
|
Investment income
|
$
|
37
|
|
|
$
|
628
|
|
|
$
|
4
|
|
|
$
|
283
|
|
|
$
|
504
|
|
|
$
|
1,456
|
|
|
Amortization
|
$
|
43,447
|
|
|
$
|
27,920
|
|
|
$
|
10,801
|
|
|
$
|
4,485
|
|
|
$
|
10
|
|
|
$
|
86,663
|
|
|
Depreciation
|
$
|
6,191
|
|
|
$
|
7,868
|
|
|
$
|
1,975
|
|
|
$
|
1,881
|
|
|
$
|
3,088
|
|
|
$
|
21,003
|
|
|
Interest expense
|
$
|
38,216
|
|
|
$
|
45,738
|
|
|
$
|
3,976
|
|
|
$
|
4,950
|
|
|
$
|
(53,399
|
)
|
|
$
|
39,481
|
|
|
Income before income taxes
|
$
|
188,001
|
|
|
$
|
91,762
|
|
|
$
|
62,623
|
|
|
$
|
24,338
|
|
|
$
|
56,775
|
|
|
$
|
423,499
|
|
|
Total assets
|
$
|
3,854,393
|
|
|
$
|
2,711,378
|
|
|
$
|
1,108,829
|
|
|
$
|
371,645
|
|
|
$
|
(2,758,902
|
)
|
|
$
|
5,287,343
|
|
|
Capital expenditures
|
$
|
5,951
|
|
|
$
|
6,977
|
|
|
$
|
1,301
|
|
|
$
|
656
|
|
|
$
|
2,880
|
|
|
$
|
17,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2015
|
|
(in thousands)
|
Retail
|
|
National
Programs
|
|
Wholesale
Brokerage
|
|
Services
|
|
Other
|
|
Total
|
|
Total revenues
|
$
|
870,346
|
|
|
$
|
428,734
|
|
|
$
|
216,996
|
|
|
$
|
145,365
|
|
|
$
|
(932
|
)
|
|
$
|
1,660,509
|
|
|
Investment income
|
$
|
87
|
|
|
$
|
210
|
|
|
$
|
150
|
|
|
$
|
42
|
|
|
$
|
515
|
|
|
$
|
1,004
|
|
|
Amortization
|
$
|
45,145
|
|
|
$
|
28,479
|
|
|
$
|
9,739
|
|
|
$
|
4,019
|
|
|
$
|
39
|
|
|
$
|
87,421
|
|
|
Depreciation
|
$
|
6,558
|
|
|
$
|
7,250
|
|
|
$
|
2,142
|
|
|
$
|
1,988
|
|
|
$
|
2,952
|
|
|
$
|
20,890
|
|
|
Interest expense
|
$
|
41,036
|
|
|
$
|
55,705
|
|
|
$
|
891
|
|
|
$
|
5,970
|
|
|
$
|
(64,354
|
)
|
|
$
|
39,248
|
|
|
Income before income taxes
|
$
|
181,938
|
|
|
$
|
67,673
|
|
|
$
|
64,708
|
|
|
$
|
19,713
|
|
|
$
|
68,527
|
|
|
$
|
402,559
|
|
|
Total assets
|
$
|
3,507,476
|
|
|
$
|
2,505,752
|
|
|
$
|
895,782
|
|
|
$
|
285,459
|
|
|
$
|
(2,189,990
|
)
|
|
$
|
5,004,479
|
|
|
Capital expenditures
|
$
|
6,797
|
|
|
$
|
6,001
|
|
|
$
|
3,084
|
|
|
$
|
1,088
|
|
|
$
|
1,405
|
|
|
$
|
18,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2014
|
|
(in thousands)
|
Retail
|
|
National
Programs
|
|
Wholesale
Brokerage
|
|
Services
|
|
Other
|
|
Total
|
|
Total revenues
|
$
|
823,686
|
|
|
$
|
404,239
|
|
|
$
|
211,911
|
|
|
$
|
136,558
|
|
|
$
|
(598
|
)
|
|
$
|
1,575,796
|
|
|
Investment income
|
$
|
67
|
|
|
$
|
164
|
|
|
$
|
26
|
|
|
$
|
3
|
|
|
$
|
487
|
|
|
$
|
747
|
|
|
Amortization
|
$
|
42,935
|
|
|
$
|
25,129
|
|
|
$
|
10,703
|
|
|
$
|
4,135
|
|
|
$
|
39
|
|
|
$
|
82,941
|
|
|
Depreciation
|
$
|
6,449
|
|
|
$
|
7,805
|
|
|
$
|
2,470
|
|
|
$
|
2,213
|
|
|
$
|
1,958
|
|
|
$
|
20,895
|
|
|
Interest expense
|
$
|
43,502
|
|
|
$
|
49,663
|
|
|
$
|
1,294
|
|
|
$
|
7,678
|
|
|
$
|
(73,729
|
)
|
|
$
|
28,408
|
|
|
Income before income taxes
|
$
|
157,491
|
|
|
$
|
73,178
|
|
|
$
|
8,276
|
|
|
$
|
17,870
|
|
|
$
|
82,934
|
|
|
$
|
339,749
|
|
|
Total assets
|
$
|
3,229,484
|
|
|
$
|
2,455,749
|
|
|
$
|
857,804
|
|
|
$
|
296,034
|
|
|
$
|
(1,892,511
|
)
|
|
$
|
4,946,560
|
|
|
Capital expenditures
|
$
|
6,873
|
|
|
$
|
14,133
|
|
|
$
|
1,526
|
|
|
$
|
1,210
|
|
|
$
|
1,181
|
|
|
$
|
24,923
|
|
NOTE 16· Reinsurance
Although the reinsurers are liable to the Company for amounts reinsured, our subsidiary, WNFIC remains primarily liable to its policyholders for the full amount of the policies written whether or not the reinsurers meet their obligations to the Company when they become due. The effects of reinsurance on premiums written and earned at
December 31
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(in thousands)
|
Written
|
|
Earned
|
|
Written
|
|
Earned
|
|
Direct premiums
|
$
|
591,142
|
|
|
$
|
592,123
|
|
|
$
|
599,828
|
|
|
$
|
610,753
|
|
|
Assumed premiums
|
—
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
Ceded premiums
|
591,124
|
|
|
592,105
|
|
|
599,807
|
|
|
610,750
|
|
|
Net premiums
|
$
|
18
|
|
|
$
|
18
|
|
|
$
|
21
|
|
|
$
|
21
|
|
All premiums written by WNFIC under the National Flood Insurance Program are
100%
ceded to FEMA, for which WNFIC received a
30.9%
expense allowance from January 1, 2016 through December 31, 2016. As of
December 31, 2016
and
2015
, the Company ceded
$589.5 million
and
$598.4 million
of written premiums, respectively.
Effective April 1, 2014, WNFIC is also a party to a quota share agreement whereby it cedes
100%
of its gross excess flood premiums, excluding fees, to Arch Reinsurance Company and receives a
30.5%
commission. WNFIC ceded
$1.6 million
and
$1.4 million
for the years ended
December 31, 2016
and
2015
. No loss data exists on this agreement.
WNFIC also ceded
100%
, of the Homeowners, Private Passenger Auto Liability, and Other Liability Occurrence to Stillwater Insurance Company, formerly known as Fidelity National Insurance Company. This business is in runoff. Therefore, only loss data still exists on this business. As of
December 31, 2016
, ceded unpaid losses and loss adjustment expenses for Homeowners, Private Passenger Auto Liability and Other Liability Occurrence was
$5,262
,
$0
and
$95
, respectively. There was no incurred but not reported balance for Homeowners, Private Passenger Auto Liability and Other Liability Occurrence.
As of
December 31, 2016
the Consolidated Balance Sheet contained Reinsurance recoverable of
$78.1 million
and Prepaid reinsurance premiums of
$308.7 million
. As of
December 31, 2015
the Consolidated Balance Sheet contained reinsurance recoverable of
$32.0 million
and prepaid reinsurance premiums of
$309.6 million
. There was
no
net activity in the reserve for losses and loss adjustment expense for the years ended
December 31, 2016
and
2015
, as WNFIC’s direct premiums written were
100%
ceded to
two
reinsurers. The balance of the reserve for losses and loss adjustment expense, excluding related reinsurance recoverable was
$78.1 million
as of
December 31, 2016
and
$32.0 million
as of
December 31, 2015
.
NOTE 17· Statutory Financial Information
WNFIC maintains capital in excess of minimum statutory amount of
$7.5 million
as required by regulatory authorities. The statutory capital and surplus of WNFIC was
$23.5 million
as of
December 31, 2016
and
$15.1 million
as of
December 31, 2015
. As of
December 31, 2016
and
2015
, WNFIC generated statutory net income of
$8.2 million
and
$4.1 million
, respectively.
NOTE 18· Subsidiary Dividend Restrictions
Under the insurance regulations of Texas, where WNFIC in incorporated, the maximum amount of ordinary dividends that WNFIC can pay to shareholders in a rolling twelve month period is limited to the greater of
10%
of statutory adjusted capital and surplus as shown on WNFIC’s last annual statement on file with the superintendent of the Texas Department of Insurance or
100%
of adjusted net income. There was
no
dividend payout in 2016 and the maximum dividend payout that may be made in 2017 without prior approval is
$8.2 million
.
NOTE 19· Shareholders’ Equity
On July 18, 2014, the Company’s Board of Directors authorized the repurchase of up to
$200.0 million
of its shares of common stock. This was in addition to the
$25.0 million
that was authorized in the first quarter and executed in the second quarter of 2014. On September 2, 2014, the Company entered into an accelerated share repurchase agreement (“ASR”) with an investment bank to purchase an aggregate
$50.0 million
of the Company’s common stock. The total number of shares purchased under the ASR of
1,539,760
was determined upon settlement of the final delivery and was based upon the Company’s volume weighted-average price per its common share over the ASR period less a discount.
On March 5, 2015, the Company entered into an ASR with an investment bank to purchase an aggregate
$100.0 million
of the Company’s common stock. As part of the ASR, the Company received an initial delivery of
2,667,992
shares of the Company’s common stock with a fair market value of approximately
$85.0 million
. On August 6, 2015, the Company was notified by its investment bank that the March 5, 2015 ASR agreement between the Company and the investment bank had been completed in accordance with the terms of the agreement.
The investment bank delivered to the Company an additional
391,637
shares of the Company’s common stock for a total of
3,059,629
shares repurchased under the agreement. The delivery of the remaining
391,637
shares occurred on August 11, 2015. At the conclusion of this contract the Company had authorization for
$50.0 million
of share repurchases under the original Board authorization.
On July 20, 2015, the Company’s Board of Directors authorized the repurchase of up to an additional
$400.0 million
of the Company’s outstanding common stock. With this authorization, the Company had total available approval to repurchase up to
$450.0 million
, in the aggregate, of the Company’s outstanding common stock.
On November 11, 2015, the Company entered into a third ASR with an investment bank to purchase an aggregate
$75.0 million
of the Company’s common stock. The Company received an initial delivery of
1,985,981
shares of the Company’s common stock with a fair market value of approximately
$63.8 million
. On January 6, 2016 this agreement was completed by the investment bank with the delivery of
363,209
shares of the Company’s common stock. After completion of this third ASR, the Company has approval to repurchase up to
$375.0 million
, in the aggregate, of the Company’s outstanding common stock.
Between October 25, 2016 and November 4, 2016, the Company made share repurchases in the open market in total of
209,618
shares at a total cost of
$7.7
million. After completing these open market share repurchases, the Company’s outstanding Board approved share repurchase authorization is
$367.3
million.
Under the authorization from the Company’s Board of Directors, shares may be purchased from time to time, at the Company’s discretion and subject to the availability of stock, market conditions, the trading price of the stock, alternative uses for capital, the Company’s financial performance and other potential factors. These purchases may be carried out through open market purchases, block trades, accelerated share repurchase plans of up to
$100.0 million
each (unless otherwise approved by the Board of Directors), negotiated private transactions or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Brown & Brown, Inc.
Daytona Beach, Florida
We have audited the accompanying consolidated balance sheets of Brown & Brown, Inc. and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Brown & Brown, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria established in
Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting.
|
|
|
|
|
|
|
/s/ DELOITTE & TOUCHE LLP
|
|
Certified Public Accountants
|
|
|
|
Miami, Florida
|
|
February 24, 2017
|