Brown & Brown
Annual Report 2015

Plain-text annual report

Ready for tomorrow’s risks, today. 2015 Annual Report Every endeavor comes with its own set of risks. Brown & Brown, Inc. 1 2015 Annual Report Are you prepared for what tomorrow might bring? Brown & Brown, Inc. 2 3 2015 Annual Report Our creative solutions prepare you for the expected ... and the unexpected. Brown & Brown, Inc. 4 5 2015 Annual Report We all know that things go wrong sometimes. Helping anticipate and plan for risk is our expertise. Two of the most important attributes a business must have to succeed in challenging conditions are adaptability and focus. In 2015 especially, Brown & Brown demonstrated both. Our decentralized sales and service structure facilitates the agility to adapt to changes in the market. We have a unique ability to not only react to—but anticipate—nuances on both the local and national levels. At the same time our focus never waivers. Every teammate is guided by one principle: Do what’s best for each and every customer. This singular intention has been central to our success for more than 75 years. Brown & Brown, Inc. 6 7 2015 Annual Report L E T T E R T O S H A R E H O L D E R S To our shareholders: 2015 was another year of growth and investment for Brown & Brown, even with a slowly improving economy and continued rate pressure, most notice- ably in coastal property. We grew our business to $1.66 billion in revenue, which is an increase of 5.4% and 2.6% organically over 2014. Our earnings per share were $1.70, which represents a 2.5% increase. Our growth would not be possible with- out the continued progress and development of each team member in our group of just more than 7,800 teammates. Through all the hard work of those teammates, we generated just over $400 million of cash flow, which was redeployed into our Company and back to our shareholders. Last year, we allocated our capital through a mix of hiring new teammates, acquisitions and returns to shareholders through dividends and share repurchases. We constantly review this strategy with an eye towards the long term and how we can deliver shareholder returns. Last year, we made investments in people, acquired $56 million of annualized revenue, bought back $175 million of our stock and paid dividends of $64 million. Our dividend increase last year rep- resents our 22nd consecutive year of dividend J. Powell Brown, CPCU President and Chief Executive Officer increases. As we approach our $2 billion intermedi- ate goal, analytics are essential to forecasting and achieving long-term results. It is essential that we tap the deep pool of information that is dispersed in our 241 locations and use this information to the benefit of our customers. Thus, we will be making incremental investments in technology over the next two to three years with a total estimated cost of $30-$40 million. This is part of our evolution to the next level and beyond. This will give us the ability to leverage our revenues and gain additional insight into our business. We are an organization that grows organically and through acquisitions. When it comes to the acqui- sition process, cultural fit is the most important dynamic, and then the acquisition must make sense financially. If there is not a cultural fit, we do not move forward. In 2012, 2013 and 2014, we purchased about $150 million annualized revenues. In 2015, we acquired companies with $56 million of annualized revenue. Our goal is to acquire firms of all sizes in each of our four segments that fit culturally and make sense financially. 2015 was a year in which we looked at a number of acquisitions that fit culturally, but the economics did not make sense. We are comfortable that this approach will enhance shareholder value for the long run. For the past 12 to 18 months, we have been dis- cussing rate pressure, especially in coastal property areas and the middle market. This is positive for our customers, but puts pressure on several of our pro- grams’ businesses and certain segments of our retail and wholesale businesses. As you may know, it has been 11 years since the last hurricane struck Florida. So long as the sun keeps shining and fair winds keep blowing, property rates in coastal areas will continue to be under pressure. One of the changes we experienced in 2015 was the retirement of Linda Downs. Linda was one of our most valued leaders and closest friends. When she started with Brown & Brown 35 years ago, we were $2 million in revenue. Linda has been instrumental in the Company’s growth and success, and she helped shape who we are today. The recognition we bestow annually to leaders who are integral to the development of rising team- mates will be named the Linda S. Downs Mentor of the Year Award from now moving forward. Brown & Brown’s culture statement is very straightforward— “We are a lean, decentralized, highly competitive, profit oriented sales and service organization comprised of people of the highest integrity and quality, bound together by clearly defined goals and prideful relationships.” This is what drives us each and every day as a team to perform at a higher level and links us with our strategic plan. We strive to: n Exceed customer expectations every time n Increase long-term shareholder value n Recruit, develop and reward our teammates n Grow our business organically and make quality acquisitions that fit culturally n Cultivate and enhance relationships with our carrier partners Thank you for your support of Brown & Brown. Our greatest assets are our teammates, our reputation and our capital. We make investments with this in mind for the long term. We are now approaching our $2 billion intermediate goal that we will attain through profitable organic growth and acquired revenue. There is no timeframe, but when we get there, we will set a new intermediate “stretch” goal. In closing, we are a “three yards and a cloud of dust” company that believes the only constant is change. All of us here at Brown & Brown are excited about 2016 and beyond. Regards, J. Powell Brown, CPCU President and Chief Executive Officer Total Revenues dollars in millions 1,363 1,200 1,014 1,661 1,576 11 12 13 14 15 Net Income Per Share Diluted in dollars 1.70 1.48 1.41 1.26 1.12 11 12 13 14 15 Shareholders’ Equity dollars in millions 2,114 2,150 2,007 1,807 1,644 This letter includes selected references to certain non-GAAP financial measures that are made to provide 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. For reconciliation and other information concerning these non-GAAP financial measures refer to page 88 of the Company’s 2015 Annual Report. 11 12 13 14 15 Brown & Brown, Inc. 8 9 2015 Annual Report R E T A I L Expertise and education support growth of The Joint Corp.’s business. When Brown & Brown first wrote coverage for The Joint Corp., a busi- ness specializing in chiropractic care, it was a startup with 12 locations. Now it’s a publicly traded company with 335 locations nationwide with ever-increasing business and risk complexity. As a result of Brown & Brown’s expertise and educational approach, and ability to manage The Joint’s national expansion and breadth, The Joint named the Com- pany as the required Property and Casualty insurance provider for all franchises. Brown & Brown accom- plished this by holding monthly seminars for new franchise owners to explain why it’s so important to manage risk and why it is imper- ative to buy proper coverage. This approach empowered the franchisees to feel informed and knowledgeable about how to man- age their risks and how what they’re buying will respond in the event of a claim. Brown & Brown originally provided only the Property and Casualty lines of insurance for both the corporate-owned and franchise locations of The Joint. As a result of delivering value-added solutions, Brown & Brown began providing their employee benefits, as well. It is through Brown & Brown’s flexibility, expertise, depth and attention to customer service that the Company is able to tailor solutions for The Joint and our many other customers. Brown & Brown, Inc. 10 11 2015 Annual Report John Richards Chief Executive Officer The Joint Corp. Scottsdale, Arizona Wayne Hubbard, CIC Senior Vice President Property and Casualty Brown & Brown Insurance of Arizona, Inc. Phoenix, Arizona Chris P. Scherzer Senior Vice President Employee Benefits Team Leader Brown & Brown Insurance of Arizona, Inc. Phoenix, Arizona John Esposito, CIC Executive Vice President Brown & Brown Insurance of Arizona, Inc. Phoenix, Arizona R E V I E W O F O P E R A T I O N S The Retail Segment Success under all conditions. The Retail Segment is the largest of Brown & Brown’s four segments and generated approxi- mately 52% of the Company’s total revenues in 2015. In September, the Retail Segment was realigned into several regionalized segments. We believe this realignment will enable the Retail Segment to better focus on the specific needs of each particular region and serve our local customers by being able to adapt to changing market conditions even more quickly. One of the most striking testaments to the strength of our unique culture at Brown & Brown is our ability to succeed in both in good times as well as when circumstances are less than ideal. In 2015, the Retail Segment grew in spite of rate reductions and a slowly improving middle market economy. The success of the Retail Segment is solely the result of the efforts of our teammates. While no one enjoys challenging times, they do show what people are made of, and our teammates perform well under pressure by collaborating and innovating. In the Retail Segment, we continued to deliver great solutions for our customers by leveraging the capabilities of our carrier and wholesale brokerage partners that drove new business to a record high in 2015. Again, this is attributable to the culture of cooperation and self-discipline at Brown & Brown. Our offices did a tremendous job of sharing information and working together to find or create the best solutions for our customers. We believe we are well positioned for 2016. Looking to 2016, the Retail Segment will con- tinue to focus not just on hiring the best people, but also on the training and development of our teammates. Additional priorities include enrich- ing our partnerships with carriers and continuing to develop innovative new products that reduce risk for our customers. Segment Total Revenues dollars in millions 870.3 823.7 737.3 652.1 614.1 Segment Adjusted Operating Profit(1) dollars in millions 257.8 239.4 211.3 197.5 271.2 Segment Adjusted Operating Profit Margin(1) as a percentage 32.2 32.4 32.5 31.3 31.2 11 12 13 14 15 11 12 13 14 15 11 12 13 14 15 Our Retail Office Locations n Arizona n Arkansas n California n Colorado n Connecticut n Delaware n Florida n Georgia n Hawaii n Illinois n Indiana n Kansas n Kentucky n Louisiana n Massachusetts n Michigan n Minnesota n Mississippi n Missouri n Nevada n New Hampshire n New Jersey n New Mexico n New York n Ohio n Oklahoma n Oregon n Pennsylvania n Rhode Island n South Carolina n Tennessee n Texas n Vermont n Virginia n Washington n Wisconsin Outside the U.S. n Bermuda n Cayman Islands Brown & Brown, Inc. 12 13 2015 Annual Report Contribution to Total Revenues 52.4% Contribution to Total Adjusted Operating Profit (1) 50.0% (1) Please see non-GAAP reconciliation on page 88. N A T I O N A L P R O G R A M S Responding to challenges with innovation and determination. The National Programs Segment has always been diversified and innova- tive, and in spite of the challenges the entire industry faced in 2015, the National Programs Segment continued to innovate and expand our program offerings that delivered growth in 2015 and will have a pos- itive impact in 2016 and beyond. To exemplify this innovation, our Arrow- head business in San Diego realized there was an opportunity for our cus- tomers to better manage their coastal property risks. This was specifically in response to a need for broader earthquake coverage in California, hurricane coverage in coastal areas, and coverage for tornadoes in the Midwest. By finding niche markets, following the need and offering innovative solutions, we’ve helped thousands of people manage their risks and provided growth oppor- tunities for our carrier partners. In addition, last year our teammates saw an opportunity to work with our carrier partners and expand coverage for certain commercial customers. In addition to providing coverage for earthquake damage, with our new “all-risk” insurance program, we now have additional capacity to insure customers for a combination of wind damage, fire damage and more. This new “all- risk” program further broadens our capabilities and creates additional solutions for our customers. Crystal Million Vice President – Underwriting and Operations, Personal Property Division Arrowhead General Insurance Agency, Inc. Carlsbad, California Mark Corey President, Personal Property Division Arrowhead General Insurance Agency, Inc. Carlsbad, California Lauri Thum Vice President – Marketing, Personal Property Division Arrowhead General Insurance Agency, Inc. Carlsbad, California Brown & Brown, Inc. 14 15 2015 Annual Report R E V I E W O F O P E R A T I O N S Segment Total Revenues dollars in millions The National Programs Segment Viewing challenges through a lens of finding opportunities. Brown & Brown’s National Programs Segment generated approximately 26% of the Company’s total revenue in 2015. The goal of the National Programs Segment is to be the most efficient and innovative program manager in the specialty insurance market, while providing our teammates, carrier partners and distribution partners with opportunities for growth and enrichment. The importance of Brown & Brown’s unique culture was never more evident than in 2015. Through collaboration, the National Programs Segment was able to grow in spite of a competitive and dynamic market. The challenging market conditions in 2015 sharpened the focus of the National Programs Segment and served as a launching pad for some truly exciting achievements, including the creation of our new “all-risk” insurance program. The new incubation team we created in 2015 is a team designed to collaborate and vet new ideas, products and programs. Again, without the culture of cooperation that exemplifies Brown & Brown, an effort such as this wouldn’t be possible. At Brown & Brown we work together to create innovative, viable solutions for our carrier and distribution partners. The focus has always been, and will continue to be, on our partners and how we can create solutions for our customers. The diversification and specialization of Brown & Brown’s National Programs Segment is aimed at allowing it to achieve good results in the industry. For example, while competition in commercial property insurance was fierce last year, our personal lines grew strongly, bolstered by close relationships with our partners and the introduction of new products. This balanced portfolio of businesses enabled the National Programs Segment to grow in 2015 in spite of rate pressures and economic challenges. Innovation was not only focused on revenue growth, but the National Programs Segment worked tirelessly to further increase the scale of our technology platform and enable continued increasing profitable growth by taking advantage of our leadership position in the marketplace. As a result, the National Programs Segment oper- ates more efficiently than ever and will continue to seek opportunities to capitalize on our scale and standardization. This is critical because while no one can anticipate the direction market con- ditions will go, we believe the National Programs Segment is well prepared to face any challenge. In 2016, the the National Programs Segment’s top priority is to achieve a solid rate of organic growth, capitalize on our new initiatives, and add more talented, hard-working insurance professionals to our team that will enable us to achieve our goals. Segment Adjusted Operating Profit(1) dollars in millions 159.3 Segment Adjusted Operating Profit Margin(1) as a percentage 43.7 37.5 34.8 37.7 37.1 428.7 404.2 152.4 301.4 260.4 169.7 104.9 97.6 74.1 11 12 13 14 15 11 12 13 14 15 11 12 13 14 15 National Programs n AFC Insurance n Allied Protector Plan n American Specialty n Arrowhead General Insurance Agency n Bellingham Underwriters n CalSurance Associates n Clear Risk Solutions n CPA Protector Plan® n Downey Public Risk Underwriters n Florida Intracoastal Underwriters n Ideal Insurance Agency n Irving Weber Associates n Lawyer’s Protector Plan® n OnPoint Underwriting n Optometric Protector Plan® n Parcel Insurance Plan n Proctor Financial n Professional Protector Plan for Dentists n Public Risk Underwriters n Sigma Underwriting Managers n Texas Monarch Management Corporation n TitlePac® n Wright Flood n Wright Public Entity n Wright Specialty n Professional Risk Specialty Group n Professional Services Plans n Public Risk Advisors of New Jersey For additional information on National Programs please visit www.natprograms.com Contribution to Total Revenues 25.9% Contribution to Total Adjusted Operating Profit(1) 28.8% (1) Please see non-GAAP reconciliation on page 88. Brown & Brown, Inc. 16 17 2015 Annual Report W H O L E S A L E B R O K E R A G E New opportunities where there once were none. One especially exciting accom- plishment for Brown & Brown’s Wholesale Brokerage Segment in 2015 was a new opportunity in professional practice coverage for a large law firm. One of our retail agents approached us about this prospect and indicated they didn’t have access to carriers that focus on this type of coverage. We quickly selected one of our top teammates to work on designing a solution for both the agent and the customer. We analyzed the expiring policy, risk profile, and the customer’s risk retention appetite, then worked with our vast group of carrier partners to secure coverage that would manage the risks and provide the customer with a cost-effective solution. It was only through our innovation and deep carrier rela- tions that we were able to win the business. Through this creativity, it has opened up other potential leads for more large law firms. Debbie Elliot Professional Liability Broker Hull & Company, Inc. Denver, Colorado Brown & Brown, Inc. 18 19 2015 Annual Report R E V I E W O F O P E R A T I O N S The Wholesale Brokerage Segment The loyalty of our teammates is a testament to our culture. The Wholesale Brokerage Segment of Brown & Brown generated approximately 13% of the Company’s revenue in 2015. In spite of enormous rate pressure on coastal properties, the entire team rallied in 2015 and made it possible for the Wholesale Brokerage Segment to deliver 5.9% organic growth. The Wholesale Brokerage Segment, like other areas of the Company, is a highly diverse business, which we believe enables us to be successful even when we face challenges on a number of fronts. In 2015, our property brokerage business was challenged by declining property rates, but our team looked for opportunities and worked tremendously hard to make progress in other areas. Because of our expertise and strong carrier relationships, the Wholesale Brokerage Segment created new opportunities in the area of professional practice liability coverage. It’s this type of collaboration and tireless determination that exemplifies both the Wholesale Brokerage Segment and the entire Company. A huge testament to the importance of the culture at Brown & Brown is the loyalty and determination of our teammates. When times are tough, our team doesn’t give up. They keep pushing forward to find new opportunities and solve risk management challenges for our customers every day. That leads to our top priority in 2016: hiring, training and mentoring even more new team- mates. It’s important to remember that the effort doesn’t stop with hiring. Brown & Brown has an excellent training program and is also fortunate we have numerous teammates throughout the Company who make it a point to seek out and mentor new talent. Many of our seasoned brokers have newer brokers with them every day in order to help develop their skills and become highly successful. It is this type of one-on-one attention and education that makes a real differ- ence in developing tomorrow’s leaders. Another top priority for 2016 is expanding our capabilities geographically and serving some of the markets that we do not fully support today. This effort will be led by a number of our top lead- ers, and we are excited about our potential for growth as we expand our geographic footprint. Regardless of what 2016 brings, we believe the Wholesale Brokerage Segment will continue to innovate, endure and thrive. Thanks to the loyalty, creativity and determination of our teammates and our willingness to present our customers with effective solutions, we believe we are positioned for continued growth and success. Segment Total Revenues dollars in millions 217.0 211.9 193.7 168.2 161.9 Segment Adjusted Operating Profit(1) dollars in millions 78.3 72.7 65.2 51.9 54.6 Segment Adjusted Operating Profit Margin(1) as a percentage 34.3 36.1 32.1 32.5 33.7 11 12 13 14 15 11 12 13 14 15 11 12 13 14 15 Wholesale Brokerage Segment n APEX Insurance Services n Halcyon Underwriters n Summit Risk Services n Big Sky Underwriters n Braishfield Associates n Hull & Company n MacDuff Underwriters n Combined Group Insurance n Mile High Markets Services n Decus Insurance Brokers n ECC Insurance Brokers n Graham Rogers n National Risk Solutions n Peachtree Special Risk Brokers n Procor Solutions + Consulting n Public Risk Underwriters of Texas n Texas Security General Insurance Agency Contribution to Total Revenues 13.1% Contribution to Total Adjusted Operating Profit(1) 14.2% (1) Please see non-GAAP reconciliation on page 88. Brown & Brown, Inc. 20 21 2015 Annual Report S E R V I C E S Results come from perseverance and cooperation. The Services Segment is particularly proud of the difference it made for Columbus Consolidated Govern- ment in Georgia. Brown & Brown first approached Columbus several years ago, and reconnected with the new risk manager in late 2012 to discuss their Columbus Consolidated Government Contract for Workers’ Compensation and Medical Care Organization TPA services. Colum- bus had been in a risk pool for several years and was looking for a more customized solution. Our teammates listened to the issues presented by the risk manager and then began the process to create a better alternative. Brown & Brown’s USIS business assembled a team of subject matter experts from across Brown & Brown, including USIS, AmeriSys and Apex as well as external partners in order to provide a new solution using a Med- ical Care Organization model as the key differentiator for managing risks and costs. With the risk manager’s leadership, the council decided that the USIS/AmeriSys option was the best choice for Columbus. It was only through our capabilities and inno- vation that we were able to create a new and creative solution for this customer that has saved Columbus over half a million dollars annually. Ron Warble Executive Vice President USIS/AmeriSys Orlando, Florida Michael White Director of Brokerage Apex Insurance Services Norcross, Georgia Brown & Brown, Inc. 22 23 2015 Annual Report Segment Total Revenues dollars in millions 131.5 136.6 145.4 117.5 Segment Adjusted Operating Profit(1) dollars in millions 41.2 31.2 30.7 31.7 Segment Adjusted Operating Profit Margin(1) as a percentage 30.4 31.3 26.5 22.5 21.8 65.8 20.0 11 12 13 14 15 11 12 13 14 15 11 12 13 14 15 Services Segment n The Advocator Group n American Claims Management n Insurance Claims Adjusters n NuQuest n Preferred Government Claims Services n Protocols n United Self Insured Services R E V I E W O F O P E R A T I O N S The Services Segment Planting seeds and nurturing them to growth. In 2015, the Services Segment of Brown & Brown was responsible for generating approx- imately 9% of the Company’s revenue and delivering 7% organic growth. The Services Segment generates its revenues differently than the Company’s other segments. Much of its revenue is derived from fees paid for services, so the Segment generally doesn’t feel the direct impact of rate pressures to the same degree as our other segments. In the Services Segment, our customers are municipalities, self-insured companies and insurance carriers, with the latter impacted mostly by premium rates. The Services Segment had an exciting year. For this Segment, 2015 was a year of planting seeds and generating new ideas. It’s been tremen- dously exciting to see which of those seeds germinated and grew. In spite of challenges pre- sented by the economy, we were able to write new business and develop new solutions. Many of our offices rose to the challenges presented and had a really good year. Our success in Columbus County, Georgia, is just one example of what can be accomplished by working together, being resourceful and focus- ing on customers’ success. It can’t be stressed enough that at Brown & Brown, the culture is everything. Our Company is infused with a “get it done” attitude that drives success and allows us to overcome almost any obstacle. Further, our decentralized sales and service model enables our offices to respond and make decisions on a local level and is a critical component of our success. Looking ahead to 2016, the adjective “exciting” continues to be an appropriate descriptor for the Services Segment. To be successful in 2016, first the Services Segment will continue making changes and implementing strategies quickly and nimbly as conditions evolve. Given the ingenuity, perseverance and resource- fulness the Services Segment demonstrated in 2015, there’s every reason to believe we can achieve this in 2016. Success breeds success. With our unique culture, Brown & Brown attracts and retains individuals who are driven by results and are focused on delivering solutions for our customers. Regardless of what the market does, the Services Segment will maintain its unwavering focus on providing excellent service and solutions for our customers. Brown & Brown, Inc. 24 25 2015 Annual Report Contribution to Total Revenues 8.8% Contribution to Total Adjusted Operating Profit(1) 5.7% (1) Please see non-GAAP reconciliation on page 88. L E A D E R S H I P O V E R V I E W B O A R D O F D I R E C T O R S J. Powell Brown, CPCU President & Chief Executive Officer R. Andrew Watts Executive Vice President, Treasurer & Chief Financial Officer Richard A. Freebourn, Sr., CPCU, CIC Executive Vice President – Internal Operations & People Officer Robert W. Lloyd, Esq., CIC Executive Vice President, Secretary & General Counsel Charles H. Lydecker, CPCU, CIC, AIM Executive Vice President; Regional President – Retail Segment J. Scott Penny, CIC Chief Acquisitions Officer Anthony T. Strianese President – Wholesale Brokerage Segment Chris L. Walker President – National Programs Segment J. Neal Abernathy Senior Vice President Sam R. Boone, Jr. Senior Vice President Steve M. Boyd Senior Vice President P. Barrett Brown Senior Vice President; Regional President – Retail Segment Left to right: Samuel P. Bell, III, Esq. Of Counsel to the law firm of Buchanan Ingersoll & Rooney PC Bradley Currey, Jr. Former Chairman & Chief Executive Officer, Rock-Tenn Company Toni Jennings Chairman, Jack Jennings & Sons; Former Lieutenant Governor, State of Florida Acquisition Committee; Compensation Committee Nominating/Corporate Governance Committee Audit Committee; Compensation Committee, Chair James S. Hunt Former Executive Vice President and Chief Financial Officer, Walt Disney Parks and Resorts Worldwide Acquisition Committee; Audit Committee, Chair; Compensation Committee Theodore J. Hoepner Former Vice Chairman, SunTrust Bank Holding Company Chilton D. Varner, Esq. Partner, King & Spalding LLP H. Palmer Proctor, Jr. President/Director, Fidelity Bank Nominating/Corporate Governance Committee Acquisition Committee, Chair; Compensation Committee Wendell S. Reilly Managing Partner, Grapevine Partners, LLC Lead Director; Nominating/Corporate Governance Committee, Chair Hugh M. Brown Founder and former President & Chief Executive Officer, BAMSI, Inc. Acquisition Committee; Audit Committee; Nominating/Corporate Governance Committee Timothy R. M. Main Managing Director, Evercore Group LLC Acquisition Committee Kathy H. Colangelo CIC, ASLI Senior Vice President Steve Denton Senior Vice President; Regional President – Retail Segment Anthony M. Grippa Senior Vice President; Regional President – Retail Segment Thomas K. Huval, CIC Senior Vice President; Regional President – Retail Segment Audit Committee; Compensation Committee J. Hyatt Brown, CPCU, CLU Chairman, Brown & Brown, Inc. J. Powell Brown, CPCU President & Chief Executive Officer, Brown & Brown, Inc. Richard A. Knudson, CIC Senior Vice President; Regional President – Retail Segment Brown & Brown, Inc. 26 27 2015 Annual Report C O M M U N I T Y I N V O LV E M E N T The honor to serve our communities We value the communities we serve and find every opportunity to give back. Each year we contribute millions of dollars to non-profit organizations in our communities. Below is a sample of some of the organizations we supported in 2015: AccessCNY Achieve Allie’s Friends American Cancer Society American Diabetes Association American Heart Association American Lebanese Syrian Associated Charities American Red Cross Aspire – Massachusetts General Hospital Barbara Bush Foundation – Annual Celebration of Reading Basis Schools Better Housing Coalition Bighorn Golf Club Charities Bivona Child Advocacy Center BJ’s Wholesale Club Charitable Foundation The Bottom Line Boys & Girls Club Boy Scouts of America Broward County Outreach Center Cal State Fullerton Philanthropic Foundation Camp Boggy Creek Catskill Area Hospice and Palliative Care Central City Concern Center for Family Services Children’s Cancer Association Christel House Crouse Health Foundation Cumberland County Guidance Center Development at Schechter Westchester Doug Flutie, Jr. Foundation for Autism Education Foundation of Lake County Elwyn Foundation Embassy of Hope Embry Riddle Father Lopez Catholic High School FCCA First Call For Help of Broward – 2-1-1 Broward The First Tee Florida Hospital Foundation Florida Lions Conklin Centers Florida Southwest State College Florida Southwestern University Footlocker Foundation Florida State University Gamma Iota Sigma Glens Falls Hospital Greater New York Councils Halifax Health Foundation Holy Redeemer Health System Hospice by the Bay Horizon House Humane Society I Have A Dream Foundation International Rhett Syndrome The Jason Ritchie Hockey Foundation Jesuit High School Foundation Joliet Catholic Academy Junior Achievement Juvenile Diabetes Research Foundation Larc’s Acadian Village Lee Memorial Health Foundation Lifepath Foundation Lighthouse Louisiana Make-A-Wish Mary McLeod Bethune MEHTA Milagros para Ninos Miss Tampa Crown Scholarship Mount Sinai Medical Center Museum of Arts and Sciences The NASCAR Foundation Nathan Adelson Hospice National Black McDonald’s Franchisee Foundation National Multiple Sclerosis Society New York Police and Fire Widows’ and Children’s Benefit Fund Niagara Falls Memorial Medical NY Schools Insurance Foundation Oakland Zoo PBA Piscataway Township Education Foundation Pooch & Poodle Rescue Portland State University R’Club Child Care RFK Children’s Action Corps Rochester General Hospital Foundation Rome Memorial Hospital Foundation Ronald McDonald House Rotary Club Saint Francis Hospice and Cancer Research Schweiger Memorial Scholarship Fund Southeastern Guide Dog Association Special Olympics St. Mary’s Academy St. Matthews House Step Up For Students Temple University University of Central Florida University of Florida University of Georgia Union for Reform Judaism United Way UR Medicine Valley Health Services Vincent DePaul Foundation Voices For Children Foundation Volunteer New York Walker Home and School WeSNIP Whirlpool Collective Impact WSCFF Benevolent Fund YCS Foundation YMCA Youth About Business 2015 Financial Review 30 Management’s Discussion and Analysis of Financial Condition and Results of Operations 51 Consolidated Statements of Income 52 Consolidated Balance Sheets 53 Consolidated Statements of Shareholders’ Equity 54 Consolidated Statements of Cash Flows 55 Notes To Consolidated Financial Statements 88 GAAP Reconciliation—Income Before Income Taxes to Operating Profit and Adjusted Operating Profit 89 Reports of Independent Registered Public Accounting Firm 91 Management’s Report on Internal Control Over Financial Reporting 92 Performance Graph Brown & Brown, Inc. 28 29 2015 Annual Report General The following discussion should be read in conjunction with our Consolidated Financial Statements and the related Notes to those Financial Statements and “Information Regarding Non-GAPP Measures” with regard to important information on non-GAAP financial measures, all contained in our discussion and analysis included elsewhere in this Annual Report. We are a diversified insurance agency, wholesale brokerage, insurance programs and services organization headquar- tered 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 2015, with the exception of 2009, when our revenues dropped 1.0%. Our revenues grew from $95.6 million in 1993 to $1.7 billion in 2015, reflecting a compound annual growth rate of 13.9%. In the same 22-year period, we increased net income from $8.1 million to $243.3 million in 2015, a compound annual growth rate of 16.7%. 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, the increasing costs of litigation settlements and awards have caused 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 acquisi- tions. We foster a strong, decentralized sales and service culture with the goal of consistent, sustained growth over the long term. 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. The term “core organic commissions and fees” 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). “Core organic commissions and fees”, a non-GAAP measure, are 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 clients’ exposure units, and (iii) net changes in insurance premium rates or the commission rate paid to us by our carrier partners. 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 on the aforementioned considerations for the prior year(s). Over the last three years, profit-sharing contingent commissions have averaged approximately 4.0% 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 on actual premiums written. For the twelve-month period ending December 31, 2015, we had earned $10.0 million of GSCs, of which $7.6 million remained accrued at December 31, 2015 as most of this will be collected in the first quarter of 2016. For the twelve-month periods ended December 31, 2015, 2014, and 2013, we earned $10.0 million, $9.9 million and $8.3 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. These services are provided over a period of time, typically one year. Fee revenues, on a consolidated basis, as a percentage of our total commissions and fees, represented 30.6% in 2015, 30.6% in 2014 and 26.6% in 2013. Additionally, our profit-sharing contingent commissions and GSCs for the year ended December 31, 2015 decreased by $5.8 million over 2014 primarily as a result of increased loss ratios in our National Programs and Wholesale Brokerage Segment. Other income decreased by $5.0 million primarily as a result of a reduction in the gains on the sale of books of business when compared to 2014 and the change in where this activity is presented in the financial statements as described in the results of operations section as described later in this document. For the years ended December 31, 2015 and 2014, our consolidated internal revenue growth rate was 2.6% and 2.0% respectively. Additionally, each of our four segments recorded positive internal revenue growth for the year ended December 31, 2015. In the event that the gradual increases in insurable exposure units that occurred in the past few years continues through 2016 and premium rate changes are similar with 2015, we believe we will continue to see positive quarterly internal revenue growth rates in 2016. 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 year ended December 31, 2015 increased over 2014 by $62.8 million, primarily as a result of acquisitions completed in the past twelve months and net new business, partially offset by the incremental interest expense associated with our inaugural public debt offering completed in 2014 along with incremental investments in revenue producing teammates. 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 core commissions and fees, core organic commissions and fees, and our internal growth rate, which is the growth rate of our core organic commissions and fees, and adjusted calculations of core commissions and fees, core organic commissions and fees and our internal growth rate after adjusting for the significant revenue recorded at our Colonial Claims operation in the first half of 2013 attributable to Superstorm Sandy. These measures are not in accor- dance with, or an alternative to (including any adjusted internal growth rate) the GAAP information provided in this Annual Report on Form 10-K. 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. 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. This supple- mental financial information should be considered in addition to, not in lieu of, our Consolidated Financial Statements. 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 2015, we acquired 472 insurance intermediary operations, excluding acquired books of business (customer accounts). 30 31 Brown & Brown, Inc.2015 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS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 on 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 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, whichever is later. Commission revenues related to installment billings are recog- nized 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 accor- dance 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 purchase 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 agree- ments. 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 on 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 5 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 on a multiple of average annual operating profit earned over a one- to three-year period within a minimum and maximum price range. The recorded purchase prices for all acquisitions consum- mated 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 on 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 businesses 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 on 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 on 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 trends; 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, 2015 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, 2015, 2014 and 2013. Non-Cash Stock-Based Compensation We grant stock options and non-vested stock awards to our employees, and the related compensation expense is required to be 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 are expected to be 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 non-forfeitable. The shares are expected to be awarded during the first quarter of 2016, pursuant to review and certification of the performance measurements against the stated grant targets by the Compensation Committee in accordance with the Stock Incentive Plan. 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. 32 33 Brown & Brown, Inc.2015 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSLitigation 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, 2015, 2014 and 2013 The following discussion and analysis regarding results of operations and liquidity and capital resources should be consid- ered 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) REVENUES 2015 Percent Change 2014 Percent Change 2013 Core commissions and fees $ 1,595,218 6.4 % $ 1,499,903 15.7 % $ 1,295,977 Profit-sharing contingent commissions Guaranteed supplemental commissions Investment income Other income, net Total revenues EXPENSES 51,707 10,026 1,004 2,554 (10.4) % 1.8 % 34.4 % (66.3) % 57,706 12.6 % 51,251 9,851 19.0 % 747 17.1 % 7,589 6.3 % 8,275 638 7,138 1,660,509 5.4 % 1,575,796 15.6 % 1,363,279 Employee compensation and benefits 841,439 6.3 % 791,749 15.9 % Non-cash stock-based compensation 15,513 (19.9)% 19,363 (14.3) % Other operating expenses Loss/(gain) on disposal Amortization Depreciation Interest 251,055 6.7 % 235,328 20.3 % (619) (101.3)% 47,425 — % 87,421 20,890 39,248 5.5 % — % 38.2 % 82,941 22.1 % 20,895 19.5 % 28,408 72.8 % Change in estimated acquisition earn-out payables 3,003 (69.8) % 9,938 NMF(1) 683,000 22,603 195,677 — 67,932 17,485 16,440 2,533 Total expenses 1,257,950 1.8 % 1,236,047 22.9 % 1,005,670 Income before income taxes 402,559 18.5 % 339,749 (5.0) % 357,609 Income taxes NET INCOME 159,241 19.9 % 132,853 (5.4) % 140,497 $ 243,318 17.6 % $ 206,896 (4.7) % $ 217,112 Net internal growth rate—core organic commissions and fees Employee compensation and benefits ratio Other operating expenses ratio Capital expenditures Total assets at December 31 (1) NMF = Not a meaningful figure 2.6 % 50.7 % 15.1 % 2.0 % 50.2 % 14.9 % 6.7 % 50.1 % 14.4 % $ 18,375 $ 5,012,739 $ 24,923 $ 4,956,458 $ 16,366 $ 3,649,508 Commissions and Fees 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 2014. Core commissions and fees revenue for 2015 increased $95.3 million, of which approximately $76.6 million represented core commissions and fees from agencies acquired since 2014 that had no comparable revenues. 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. Commissions and fees, including profit-sharing contingent commissions and GSCs for 2014, increased $212.0 million to $1,567.5 million, or 15.6% over the same period in 2013. Core commissions and fees revenue in 2014 increased $203.9 million, of which approximately $186.8 million represented core commissions and fees from acquisitions that had no comparable revenues in 2013. After accounting for divested business of $8.5 million, the remaining net increase of $25.6 million represented net new business, which reflects an internal growth rate of 2.0% for core organic commissions and fees. Profit- sharing contingent commissions and GSCs for 2014 increased by $8.0 million, or 13.5%, compared to the same period in 2013. The net increase was due primarily to $4.9 million, $1.3 million, and $1.8 million increases in profit-sharing contingent commissions and GSCs in our Retail, National Programs and Wholesale Brokerage Segments, respectively. Investment Income 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. Investment income increased to $0.7 million in 2014, compared with $0.6 million in 2013 mainly due to higher average daily invested balances in 2014 than in 2013. Other Income, Net Other income for 2015 reflected income of $2.6 million, compared with $7.6 million in 2014 and $7.1 million in 2013. Other income in 2015 consisted primarily of legal settlements and also gains and loss on the sale and disposition of fixed assets. In 2014 and 2013, 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. The $5.0 million change in 2015 other income from the comparable period in 2014 was primarily due to prior year book of business sales and to a lesser extent, the change to the presentation of this activity in the financial statements. We recog- nized gains of $0.6 million, $5.3 million and $3.1 million from sales on books of business (customer accounts) in 2015, 2014 and 2013, respectively. Employee Compensation and Benefits Employee compensation and benefits expense increased 6.3%, or $49.7 million, in 2015 over 2014. This increase included $25.8 million of compensation costs related to stand-alone acquisitions that had no comparable costs in the same period of 2014. Therefore, employee compensation and benefits expense attributable to those offices that existed in the same time periods of 2015 and 2014 increased by $23.9 million or 3.2%. 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 50.7% for 2015 as compared to 50.2% for the year ended December 31, 2014. 34 35 Brown & Brown, Inc.2015 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Employee compensation and benefits expense increased, approximately 15.9% or $108.7 million in 2014 over 2013. However, that net increase included $81.0 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 2014 and 2013 increased by $27.7 million. The employee compensation and benefit increases from these offices were primarily related to increases in staff and management salaries of $13.8 million, new salaried producers of $4.8 million, profit center and other related bonuses of $6.7 million, compensation to our commissioned producers of $0.9 million and health insur- ance costs of $4.8 million. These increases were partially offset by net reductions in temporary employees, employer 401(k) plan matching contributions and accrued vacation expense. Employee compensation and benefits expense as a percentage of total revenues was 50.2% as compared to 50.1% for the year ended December 31, 2013. This slight increase was driven by continued investment in new teammates. Non-Cash Stock-Based Compensation The Company has an employee stock purchase plan, grants non-vested stock awards, and to a lesser extent grants stock options under other equity-based plans to its employees. Compensation expense for all share-based awards is recognized in the financial statements based upon the grant-date fair value of those awards. For 2015, 2014 and 2013, the non-cash stock-based compensation expense incorporated the costs related to each of the Company’s four stock-based plans as explained in Note 11 of the Notes to the Consolidated Financial Statements. Non-cash stock-based compensation expense decreased $3.9 million, or 19.9% in 2015 over 2014. The decrease was the result of: (i) older grants attaining the vesting requirements and therefore being fully expensed in prior periods; (ii) some forfeitures driven by certain grants not achieving all vesting requirements; and (iii) underlying participation levels; all of which were partially offset by the additional expense attributable to the new grants issued in 2015. Non-cash stock-based compensation expense decreased $3.2 million, or 14.3% in 2014 over 2013, primarily as a result of forfeitures due to the non-achievement of certain performance criteria, partially offset by an increase associated with new, non-vested stock awards granted on July 1, 2013 under our Stock Incentive Plan (“SIP”). Other Operating Expenses 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. Other operating expenses in 2014 increased $39.7 million, or 20.3%, over 2013, of which $39.0 million was related to acquisitions. Therefore, other operating expenses attributable to offices that existed in the same periods in both 2014 and 2013 (including the new acquisitions that “folded in” to those offices) increased by $0.7 million. The $0.7 million net increase includes increases of $2.0 million related to increased data processing and software licensing expense, $1.2 million related to increased inspection and consulting fees, $0.8 million related to office rent, and $0.9 million related to increased employee sales meeting costs, offset by decreases of $3.0 million for legal claims and litigation expenses, $1.0 million for insurance expenses, and $0.2 million in other various expense decreases. Gain or Loss on Disposal The Company recognized a gain on disposal of $0.6 million in 2015 and a loss on disposal 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 as previously men- tioned, 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. We recognized gains of $0.6 million, $5.3 million and $3.1 million from sales on books of business (customer accounts) in 2015, 2014 and 2013, respectively. Amortization Amortization expense increased $4.5 million, or 5.5%, in 2015, and increased $15.0 million, or 22.1%, in 2014. The increases were due primarily to the amortization of additional intangible assets as the result of acquisitions completed in those years. Depreciation Depreciation expense remained flat in 2015, and increased $3.4 million, or 19.5%, in 2014. The increase in 2014 was due primarily to the addition of fixed assets resulting from acquisitions completed since 2013, while the stable level of expense in 2015 versus 2014 reflected capital additions approximately equal to the value of prior additions that became fully depreciated. Interest Expense Interest expense increased $10.8 million, or 38.2%, in 2015, and $12.0 million, or 72.8% in 2014. These increases were 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 the prior year 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 during September 2014 at a fixed rate of interest of 4.2%. The Credit Facility term loan proceeds replaced pre-exist- ing 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 on 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. 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, 2015, the fair values of the estimated acquisition earn-out payables were re-evaluated and meas- ured 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, 2015, 2014, and 2013 were as follows: (in thousands) 2015 2014 2013 Change in fair value of estimated acquisition earn-out payables $ 2,990 $ 7,375 $ 570 Interest expense accretion 13 2,563 1,963 Net change in earnings from estimated acquisition earn-out payables $ 3,003 $ 9,938 $ 2,533 36 37 Brown & Brown, Inc.2015 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the years ended December 31, 2015, 2014 and 2013, the fair value of estimated earn-out payables was re-evalu- ated and increased by $3.0 million, $7.4 million and $0.6 million, respectively, which resulted in charges to the Consolidated Statement of Income. 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. As of December 31, 2014, the estimated acquisition earn-out payables equaled $75.3 million, of which $26.0 million was recorded as accounts payable and $49.3 million was recorded as other non-current liability. Income Taxes The effective tax rate on income from operations was 39.6% in 2015, 39.1% in 2014, and 39.3% in 2013. The increased effective tax rate was largely the result of more income in states with a higher average effective state income tax rate, which was primarily New York State. 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 in a particular year. 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 internal 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. Segment results for prior periods have been recast to reflect the current year segmental structure. Certain reclassifica- tions 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. The internal growth rates for our core organic commissions and fees for the years ended December 31, 2015, 2014 and 2013 by Segment, are as follows: (in thousands, except percentages) 2015 2014 For the Year Ended December 31, Total Net Total Net Change Growth % Less Acquisition Revenues Internal Net Internal Net Growth $ Growth % Retail(1) $ 836,123 $ 789,503 $ 46,620 5.9 % $ 35,644 $ 10,976 National Programs Wholesale Brokerage Services Total core commissions 412,885 200,835 145,375 367,672 187,257 136,135 45,213 13,578 9,240 12.3 % 7.3 % 6.8 % 38,519 2,469 — 6,694 11,109 9,240 1.4 % 1.8 % 5.9 % 6.8 % and fees $ 1,595,218 $ 1,480,567 $ 114,651 7.7 % $ 76,632 $ 38,019 2.6 % The reconciliation of the above internal growth schedule to the total commissions and fees included in the Consolidated Statement of Income for the years ended December 31, 2015, and 2014, is as follows: (in thousands) Total core commissions and fees Profit-sharing contingent commissions Guaranteed supplemental commissions Divested business Total commissions and fees For the Year Ended December 31, 2015 2014 $ 1,595,218 $ 1,480,567 51,707 10,026 — 57,706 9,851 19,336 $ 1,656,951 $ 1,567,460 (in thousands, except percentages) 2014 2013 For the Year Ended December 31, Total Net Total Net Change Growth % Less Acquisition Revenues Internal Net Internal Net Growth $ Growth % Retail (1) $ 792,794 $ 701,211 $ 91,583 13.1 % $ 77,315 $ 14,268 National Programs Wholesale Brokerage Services Total core commissions 376,483 194,144 136,482 277,082 177,725 131,502 99,401 16,419 4,980 35.9 % 9.2 % 3.8 % 93,803 68 5,598 16,351 15,599 (10,619) (8.1) % 2.0 % 2.0 % 9.2 % and fees $ 1,499,903 $ 1,287,520 $ 212,383 16.5 % $ 186,785 Less Superstorm Sandy $ — $ (18,275) $ 18,275 100.0 % $ — $ $ 25,598 2.0 % 18,275 100.0 % Total core commissions and fees less Superstorm Sandy $ 1,499,903 $ 1,269,245 $ 230,658 18.2 % $ 186,785 $ 43,873 3.5 % There would be a 3.5% Internal Net 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. The reconciliation of the above internal growth schedule to the total commissions and fees included in the Consolidated Statement of Income for the years ended December 31, 2014 and 2013, is as follows: (in thousands) Total core commissions and fees Profit-sharing contingent commissions Guaranteed supplemental commissions Divested business Total commissions and fees For the Year Ended December 31, 2014 2013 $ 1,499,903 $ 1,287,520 57,706 9,851 — 51,251 8,275 8,457 $ 1,567,460 $ 1,355,503 38 39 Brown & Brown, Inc.2015 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except percentages) 2013 2012 For the Year Ended December 31, Total Net Total Net Change Growth % Less Acquisition Revenues Internal Net Internal Net Growth $ Growth % Retail(1) $ 706,525 $ 619,057 $ 87,468 14.1 % $ 79,455 $ 8,013 National Programs Wholesale Brokerage Services Total core commissions 280,695 177,725 131,032 240,550 152,961 116,247 40,145 24,764 14,785 16.7 % 16.2 % 12.7 % 7,099 4,332 657 33,046 20,432 14,128 1.3 % 13.7 % 13.4 % 12.2 % and fees $ 1,295,977 $ 1,128,815 $ 167,162 14.8 % $ 91,543 $ 75,619 6.7 % The reconciliation of the above internal growth schedule to the total commissions and fees included in the Consolidated Statement of Income for the years ended December 31, 2013 and 2012, is as follows: (in thousands) Total core commissions and fees Profit-sharing contingent commissions Guaranteed supplemental commissions Divested business Total commissions and fees For the Year Ended December 31, 2013 2012 $ 1,295,977 $ 1,128,815 51,251 8,275 — 43,683 9,146 7,437 $ 1,355,503 $ 1,189,081 (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. 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 87.0% 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 compen- sation, 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) Revenues 2015 Percent Change 2014 Percent Change 2013 Core commissions and fees $ 837,420 5.5 % $ 793,865 12.2 % $ 707,721 Profit-sharing contingent commissions Guaranteed supplemental commissions Investment income Other income, net Total revenues Expenses 22,051 8,291 2.0 % 7.3 % 21,616 23.2 % 7,730 12.9 % 87 29.9 % 67 (18.3) % 2,497 NMF(1) 408 (92.1)% 17,544 6,849 82 5,153 870,346 5.7 % 823,686 11.7 % 737,349 Employee compensation and benefits 445,242 7.1 % 415,876 13.0 % Non-cash stock-based compensation 12,109 (25.7) % 16,293 58.5 % Other operating expenses Loss/(gain) on disposal Amortization Depreciation Interest 137,519 (1,207) 45,145 6,558 41,036 2.9 % — % 5.1 % 1.7 % (5.7) % 133,682 11.9 % — — % 42,935 11.5 % 6,449 9.8 % 43,502 25.5 % 368,164 10,281 119,489 — 38,523 5,874 34,658 Change in estimated acquisition earn-out payables 2,006 (73.1)% 7,458 NMF(1) (1,427) Total expenses 688,408 3.3 % 666,195 15.7 % 575,562 Income before income taxes $ 181,938 15.5 % $ 157,491 (2.7)% $ 161,787 Net internal growth rate—core organic commissions and fees Employee compensation and benefits ratio Other operating expenses ratio Capital expenditures Total assets at December 31 (1) NMF = Not a meaningful figure 1.4 % 51.2 % 15.8 % 2.0 % 50.5 % 16.2 % 1.3 % 49.9 % 16.2 % $ 6,797 $ 3,507,476 $ 6,873 $ 3,229,484 $ 6,886 $ 3,012,688 40 41 Brown & Brown, Inc.2015 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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) approxi- mately $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 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 internal 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) termi- nated 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 imple- mentation 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; (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. The Retail Segment’s total revenues in 2014, increased 11.7%, or $86.3 million, over the same period in 2013, to $823.7 million. Profit-sharing contingent commissions and GSCs in 2014 increased 20.3%, or $5.0 million, over 2013, to $29.3 million, primarily due to improved loss ratios resulting in increased profitability for insurance companies in 2013. The $86.1 million increase in core commissions and fees revenue was driven by the following: (i) approximately $77.3 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2013; (ii) $14.3 million related to net new business; and (iii) an offsetting decrease of $5.5 million related to commissions and fees revenue recorded from business divested in the last year. The Retail Segment’s internal growth rate for core organic commissions and fees revenue was 2.0% for 2014, and was driven by net new customers, increasing insurable exposure units in certain areas of the United States, and was partially offset by continued pressure on property and casualty rates, especially in coastal areas. Income before income taxes for 2014, decreased 2.7%, or $4.3 million, over the same period in 2013, to $157.5 million. This decrease was primarily due to a higher interest charge of $8.8 million corresponding to capital utilized for acquisitions in 2014 and $8.9 million related to the year-on-year changes in the estimated earn-out payable. The underlying increase was driven by net new business, acquired business and increased profit-sharing contingent commissions and GSCs. Non- cash stock-based compensation increased $6.0 million, or 58.5%, for 2014 over the same period in 2013, as the cost of grants to employees for the purpose of driving performance were realized. 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 commis- sion-based. Financial information relating to our National Programs Segment is as follows: (in thousands, except percentages) Revenues 2015 Percent Change 2014 Percent Change 2013 Core commissions and fees $ 412,885 9.7 % $ 376,483 34.1 % $ 280,695 Profit-sharing contingent commissions 15,558 (25.3) % 20,822 6.3 % 19,590 Guaranteed supplemental commissions Investment income Other income, net Total revenues Expenses Employee compensation and benefits Non-cash stock-based compensation Other operating expenses Loss/(gain) on disposal Amortization Depreciation Interest 30 210 51 42.9 % 28.0 % (99.2) % 21 164 NMF(1) NMF(1) (23) 19 6,749 NMF(1) 1,091 428,734 6.1 % 404,239 34.1 % 301,372 178,185 4,669 86,157 458 28,479 7,250 55,705 6.1 % NMF(1) 9.4 % — % 13.3 % (7.1) % 12.2 % 168,018 22.9 % 136,748 1,387 (72.6) % 78,744 44.0 % — — % 25,129 68.1 % 7,805 42.1 % 49,663 106.8 % 5,060 54,690 — 14,953 5,492 24,014 Change in estimated acquisition earn-out payables 158 (49.8) % 315 (139.0)% (808) Total expenses 361,061 9.1 % 331,061 37.9 % 240,149 Income before income taxes $ 67,673 (7.5) % $ 73,178 19.5 % $ 61,223 Net internal growth rate—core organic commissions and fees Employee compensation and benefits ratio Other operating expenses ratio Capital expenditures Total assets at December 31 (1) NMF = Not a meaningful figure 1.8 % 41.6 % 20.1 % 2.0 % 41.6 % 19.5 % 13.7 % 45.4 % 18.1 % $ 6,001 $ 2,505,752 $ 14,133 $ 2,455,749 $ 4,810 $ 1,377,404 42 43 Brown & Brown, Inc.2015 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS National Programs total revenues in 2015, increased 6.1%, or $24.5 million, over 2014, to a total $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 which was a decrease of $5.3 million over 2014, which was primarily driven by the loss experience of our carrier partners. The National Programs Segment’s internal growth rate for core commissions and fees revenue was 1.8% for 2015. This internal 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 clients 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. The National Programs Segment’s total revenues in 2014, increased 34.1%, or $102.9 million, over 2013, to a total of $404.2 million. The $95.8 million increase in core commissions and fees revenue was driven by the following: (i) approxi- mately $93.8 million related to the core commissions and fees revenue from the Wright and Beecher Carlson acquisitions that had no comparable revenues in 2013; (ii) $5.6 million related to net new business; and (iii) an offsetting decrease of $3.6 million in books of business that were disposed or transferred to other segments. Profit-sharing contingent commis- sions and GSCs were $20.8 million in 2014 which was an increase of $1.3 million from the same period of 2013. This increase was due primarily to a $0.5 million increase in profit-sharing contingent commissions received by Florida Intracoastal Underwriters, Limited Company, and a $0.8 million increase in profit-sharing contingent commissions received by Proctor Financial, Inc. Other income increased by approximately $5.7 million primarily due to the gain recognized on the sale of Industry Consulting Group, Inc. (“ICG”) of $6.0 million. Income before income taxes for 2014, increased 19.5%, or $12.0 million, from the same period in 2013, to $73.2 million. The increase in income before taxes was due to net new business growth noted above, revenues and operating profits derived from Wright, the gain on the sale of ICG, and a non-cash stock-based compensation decrease of $3.7 million primarily related to partial SIP grant forfeitures associated with Arrowhead. The $12.0 million increase was partially offset by an increase in the inter-company interest expense charge related to Wright. Wholesale Brokerage Segment The Wholesale Brokerage Segment markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers. 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) Revenues 2015 Percent Change 2014 Percent Change 2013 Core commissions and fees $ 200,835 3.4 % $ 194,144 9.2 % $ 177,725 Profit-sharing contingent commissions 14,098 (7.7) % 15,268 8.2 % Guaranteed supplemental commissions 1,705 (18.8) % 2,100 44.9 % Investment income Other income, net Total revenues Expenses Employee compensation and benefits Non-cash stock-based compensation Other operating expenses Loss/(gain) on disposal Amortization Depreciation Interest Change in estimated acquisition earn-out payables 150 208 NMF(1) (44.2) % 26 18.2 % 373 (6.0) % 216,996 2.4 % 211,911 9.4 % 193,710 101,590 3,102 34,379 1.7 % 2.0 % (5.1) % (385) NMF(1) 9,739 2,142 891 830 (9.0) % (13.3) % (31.1) % (67.5) % 99,918 9.3 % 3,041 32.5 % 36,234 47,425 10,703 2,470 4.2 % — % (0.1) % (7.6) % 1,294 (44.1) % 2,550 28.4 % 91,449 2,295 34,770 — 10,719 2,674 2,316 1,986 14,117 1,449 22 397 Total expenses 152,288 (25.2) % 203,635 39.3 % 146,209 Income before income taxes $ 64,708 NMF(1) $ 8,276 (82.6) % $ 47,501 Net internal growth rate—core organic commissions and fees Employee compensation and benefits ratio Other operating expenses ratio Capital expenditures Total assets at December 31 (1) NMF = Not a meaningful figure 5.9 % 46.8 % 15.8 % 9.2 % 47.2 % 17.1 % 13.4 % 47.2 % 17.9 % $ 3,084 $ 895,782 $ $ 1,526 857,804 $ $ 1,825 865,731 44 45 Brown & Brown, Inc.2015 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Wholesale Brokerage Segment’s total revenues for 2015, increased 2.4%, or $5.1 million, over 2014, to $217.0 mil- lion. 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 compara- ble 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 internal 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 follow- ing: (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. The Wholesale Brokerage Segment’s total revenues for 2014, increased 9.4%, or $18.2 million, over 2013, to $211.9 mil- lion. Profit-sharing contingent commissions and GSCs for 2014 increased $1.8 million over 2013, to $17.4 million. The $16.4 million net increase in core commissions and fees revenue was driven by the following: (i) $16.4 million related to net new business; (ii) $0.1 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in 2013; and (iii) an offsetting decrease of $0.1 million related to commissions and fees revenue recorded in 2013 from businesses divested in the past year. As such, the Wholesale Brokerage Segment’s internal growth rate for core organic commissions and fees revenue was 9.2% for 2014. Income before income taxes for 2014, decreased 82.6%, or $39.2 million, over 2013, to $8.3 million. This decrease included a $47.4 million net loss on the disposal of the Axiom Re business. Effective December 31, 2014, the Company sold certain assets of the Axiom Re business as part of the strategic plan to exit the reinsurance brokerage market. Axiom Re had annual revenues of approximately $6.9 million in 2014. The underlying performance of this segment was driven by new business growth and to a lesser extent an increase in profit-sharing contingent commissions. 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 signifi- cantly affected by fluctuations in general insurance premiums. Financial information relating to our Services Segment is as follows: (in thousands, except percentages) Revenues 2015 Percent Change 2014 Percent Change 2013 Core commissions and fees $ 145,375 6.5 % $ 136,482 4.2 % $ 131,032 Profit-sharing contingent commissions Guaranteed supplemental commissions Investment income Other income, net Total revenues Expenses — — 42 (52) — % — % NMF(1) NMF(1) — — 3 — % — % 200.0 % — — 1 73 (84.0) % 456 145,365 6.4 % 136,558 3.9 % 131,489 Employee compensation and benefits 76,249 5.1 % 72,583 18.6 % Non-cash stock-based compensation 845 185.5 % 296 (71.2) % Other operating expenses Loss/(gain) on disposal Amortization Depreciation Interest 36,057 12.1 % 32,168 14.7 % 515 4,019 1,988 5,970 — % (2.8) % (10.2) % (22.2) % — — % 4,135 11.8 % 2,213 36.4 % 7,678 4.9 % Change in estimated acquisition earn-out payables 9 (102.3) % (385) (113.8) % 61,193 1,027 28,053 — 3,698 1,623 7,322 2,782 Total expenses 125,652 5.9 % 118,688 12.3 % 105,698 Income before income taxes $ 19,713 10.3 % $ 17,870 (30.7) % $ 25,791 Net internal growth rate—core organic commissions and fees Employee compensation and benefits ratio Other operating expenses ratio Capital expenditures Total assets at December 31 (1) NMF = Not a meaningful figure 6.8 % 52.5 % 24.8 % (8.1)% 53.2 % 23.6 % 12.2 % 46.5 % 21.3 % $ 1,088 $ 285,459 $ $ 1,210 296,034 $ $ 1,811 277,652 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 clients and growth in several of our claims processing units related to new client relationships. The Services Segment’s internal growth rate for core commissions and fees revenue was 6.8% for 2015. 46 47 Brown & Brown, Inc.2015 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S Income before income taxes for 2015 increased 10.3%, or $1.8 million, over 2014, to $19.7 million due to a combina- On May 1, 2014, we completed the acquisition of Wright for a total cash purchase price of $609.2 million, subject to tion of: (i) internal 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. The Services Segment’s total revenues for 2014 increased 3.9%, or $5.1 million, over 2013, to $136.6 million. The $5.5 million increase in core commissions and fees revenue consisted of the following: (i) an increase of approximately $15.6 million related to the core commissions and fees revenue from the acquisition of ICA, that had no comparable revenues in the same period of 2013; (ii) net new business of $7.7 million; (iii) offset by a reduction of $18.3 million due to the significant flood claims processed in 2013 resulting from Superstorm Sandy in 2012 with no comparable storm in 2013 and (iv) $0.4 million of net sold books of business. As such, the Services Segment’s internal growth rate for core commis- sions and fees revenue was (8.1)% for 2014 and excluding the impact of Superstorm Sandy internal growth would have been 6.8% in 2014. Income before income taxes for 2014 decreased 30.7%, or $7.9 million, over the same period in 2013, to $17.9 million due to the reduction in Superstorm Sandy related revenues and corresponding operating profit partially offset by the increase associated with net new and acquired business. 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 inter-company interest expense charges to reporting segments. Liquidity and Capital Resources The Company strives 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 facilities, which provide up to $825.0 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 facilities, 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 $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, $25.4 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. We hold approximately $17.2 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 $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, $9.5 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. certain adjustments. We financed the acquisition through various modified and new credit facilities. Our cash and cash equivalents of $203.0 million at December 31, 2013 reflected a decrease of $16.9 million from the $219.8 million balance at December 31, 2012. During 2013, $389.4 million of cash was generated from operating activities. During this period, $367.7 million of cash was used for acquisitions, $15.5 million was used for acquisition earn-out payments, $16.4 million was used for additions to fixed assets, $53.5 million was used for payment of dividends, and $30.0 million was provided from proceeds received on new long-term debt. On July 1, 2013, we completed the acquisition of Beecher Carlson for a total cash purchase price of $364.2 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 1.16 and 1.24 at December 31, 2015 and 2014, respectively. Contractual Cash Obligations As of December 31, 2015, our contractual cash obligations were as follows: (in thousands) Long-term debt Other liabilities (1) Operating leases Interest obligations Unrecognized tax benefits Maximum future acquisition contingency payments(2) Total contractual cash obligations Payments Due by Period Total Less Than 1 Year 1-3 Years 4-5 Years After 5 Years $ 1,154,375 $ 73,125 $ 210,000 $ 371,250 $ 500,000 60,516 195,272 227,332 584 20,065 40,900 37,182 — 15,794 68,721 67,343 584 1,098 47,245 44,932 — 137,365 34,467 85,815 17,083 23,559 38,406 77,875 — — $ 1,775,444 $ 205,739 $ 448,257 $ 481,608 $ 639,840 (1) Includes the current portion of other long-term liabilities. (2) Includes $78.4 million of current and non-current estimated earn-out payables resulting from acquisitions consummated after January 1, 2009. Debt 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 4.20% 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 is $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 due in 2016. During 2015, the $25.0 million of 5.66% 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. 48 49 Brown & Brown, Inc.2015 Annual Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E 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 corpora- tions, 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.” 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, 2015 and December 31, 2014, 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, 2015 we had $529.4 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 on our foreign currency rate exposure as of December 31, 2015, an immediate 10% hypothetical changes of foreign currency exchange rates would not have a material effect on our Consolidated Financial Statements. (in thousands, except per share data) Revenues Commissions and fees Investment income Other income, net Total revenues Expenses Employee compensation and benefits Non-cash stock-based compensation Other operating expenses Loss/(gain) on disposal Amortization Depreciation Interest Change in estimated acquisition earn-out payables Total expenses Income before income taxes Income taxes Net income Net income per share: Basic Diluted Dividends declared per share See accompanying notes to Consolidated Financial Statements. Year Ended December 31, 2015 2014 2013 $ 1,656,951 1,004 2,554 $ 1,567,460 747 7,589 $ 1,355,503 638 7,138 1,660,509 1,575,796 1,363,279 841,439 15,513 251,055 (619) 87,421 20,890 39,248 3,003 791,749 19,363 235,328 47,425 82,941 20,895 28,408 9,938 683,000 22,603 195,677 — 67,932 17,485 16,440 2,533 1,257,950 1,236,047 1,005,670 402,559 159,241 339,749 132,853 357,609 140,497 $ 243,318 $ 206,896 $ 217,112 $ $ $ 1.72 1.70 0.45 $ $ $ 1.43 1.41 0.41 $ $ $ 1.50 1.48 0.37 50 51 Brown & Brown, Inc.2015 Annual Report C O N S O L I D A T E D B A L A N C E S H E E T S C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y (in thousands, except per share data) Assets Current Assets: Cash and cash equivalents Restricted cash and investments Short-term investments Premiums, commissions and fees receivable Reinsurance recoverable Prepaid reinsurance premiums Deferred income taxes Other current assets Total current assets Fixed assets, net Goodwill Amortizable intangible assets, net Investments Other assets Total assets Liabilities And Shareholders’ Equity Current Liabilities: Premiums payable to insurance companies Losses and loss adjustment reserve Unearned premiums Premium deposits and credits due customers Accounts payable Accrued expenses and other liabilities Current portion of long-term debt Total current liabilities Long-term debt Deferred income taxes, net Other liabilities Commitments and contingencies (Note 13) Shareholders’ Equity: Common stock, par value $0.10 per share; authorized 280,000 shares; issued 146,415 shares and outstanding 138,985 shares at 2015, issued 145,871 shares and outstanding 143,486 shares at 2014 Additional paid-in capital Treasury stock, at cost 7,430 and 2,385 shares at 2015 and 2014, respectively Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity See accompanying notes to Consolidated Financial Statements. December 31, De cember 31, 2015 2014 $ 443,420 229,753 13,734 433,885 31,968 309,643 24,635 50,351 1,537,389 81,753 2,586,683 744,680 18,092 44,142 $ 470,048 259,769 11,157 424,547 13,028 320,586 25,431 45,542 1,570,108 84,668 2,460,611 784,642 19,862 36,567 $ 5,012,739 $ 4,956,458 $ 574,736 31,968 309,643 83,098 63,910 192,067 73,125 1,328,547 1,079,878 360,949 93,589 $ 568,184 13,028 320,586 83,313 57,261 181,156 45,625 1,269,153 1,152,846 341,497 79,217 14,642 426,498 (238,775) 1,947,411 14,587 405,982 (75,025) 1,768,201 2,149,776 2,113,745 $ 5,012,739 $ 4,956,458 Common Stock (in thousands, except per share data) Shares Par Value Additional Paid-In Capital Treasury Stock Retained Earnings Total Balance at January 1, 2013 143,878 $ 14,388 $ 335,872 $ — $ 1,457,073 $ 1,807,333 Net income Common stock issued for employee stock benefit plans Income tax benefit from exercise of stock benefit plans Cash dividends paid ($0.37 per share) 1,541 154 33,730 2,358 217,112 217,112 33,884 2,358 (53,546) (53,546) Balance at December 31, 2013 145,419 14,542 371,960 — 1,620,639 2,007,141 Net income Common stock issued for employee stock benefit plans Purchase of treasury stock Income tax benefit from exercise of stock benefit plans Common stock issued to directors Cash dividends paid ($0.41 per share) 442 44 30,405 (75,025) 3,298 10 1 319 206,896 206,896 30,449 (75,025) 3,298 320 (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 Common stock issued for employee stock benefit plans Purchase of treasury stock Income tax benefit from exercise of stock benefit plans Common stock issued to directors Cash dividends paid ($0.45 per share) 528 53 27,992 (11,250) (163,750) 3,276 16 2 498 243,318 243,318 28,045 (175,000) 3,276 500 (64,108) (64,108) Balance at December 31, 2015 146,415 $ 14,642 $ 426,498 $ (238,775) $ 1,947,411 $ 2,149,776 See accompanying notes to Consolidated Financial Statements. 52 53 Brown & Brown, Inc.2015 Annual Report C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (in thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Amortization Depreciation Non-cash stock-based compensation Change in estimated acquisition earn-out payables Deferred income taxes Amortization of debt discount Income tax benefit from exercise of shares from the stock benefit plans (Gain)/loss on sales of investments, fixed assets and customer accounts Payments on acquisition earn-outs in excess of original estimated payables Changes in operating assets and liabilities, net of effect from acquisitions and divestitures: Restricted cash and investments decrease (increase) Premiums, commissions and fees receivable (increase) Reinsurance recoverables (increase) decrease Prepaid reinsurance premiums decrease (increase) Other assets (increase) Premiums payable to insurance companies decrease Premium deposits and credits due customers (decrease) increase Losses and loss adjustment reserve increase (decrease) Unearned premiums (decrease) increase Accounts payable increase Accrued expenses and other liabilities increase Other liabilities (decrease) Year Ended December 31, 2015 2014 2013 $ 243,318 $ 206,896 $ 217,112 87,421 20,890 15,513 3,003 22,696 157 (3,276) (107) (11,383) 30,016 (7,163) (18,940) 10,943 (5,318) 542 (2,973) 18,940 (10,943) 34,206 8,204 (23,898) 82,941 20,895 19,363 9,938 7,369 46 (3,298) 42,465 (2,539) (9,760) (11,160) 12,210 (31,573) (12,564) 8,164 2,323 (12,210) 31,573 36,949 11,718 (24,727) 67,932 17,485 22,603 2,533 32,247 — (2,358) (2,806) (2,788) (85,445) (40,729) — — (2,583) 61,624 41,049 — — 5,180 70,872 (12,554) Net cash provided by operating activities 411,848 385,019 389,374 Cash flows from investing activities: Additions to fixed assets Payments for businesses acquired, net of cash acquired Proceeds from sales of fixed assets and customer accounts Purchases of investments Proceeds from sales of investments Net cash used in investing activities Cash flows from financing activities: Payments on acquisition earn-outs Proceeds from long-term debt Payments on long-term debt Borrowings on revolving credit facilities Payments on revolving credit facilities Income tax benefit from exercise of shares from the stock benefit plans Issuances of common stock for employee stock benefit plans Repurchase of stock benefit plan shares for employees to fund tax withholdings Purchase of treasury stock Prepayment of accelerated share repurchase program Cash dividends paid Net cash (used in) provided by financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of period (18,375) (136,000) 10,576 (22,766) 21,928 (144,637) (25,415) — (45,625) — — 3,276 15,890 (2,857) (163,750) (11,250) (64,108) (293,839) (26,628) 470,048 (24,923) (696,486) 13,631 (17,813) 18,278 (707,313) (9,530) 1,048,425 (330,000) 475,000 (475,000) 3,298 14,808 (3,252) (75,025) — (59,334) 589,390 267,096 202,952 (16,366) (367,712) 5,886 (18,102) 15,662 (380,632) (15,491) 30,000 (93) 31,863 (31,863) 2,358 12,445 (1,284) — — (53,546) (25,611) (16,869) 219,821 Cash and cash equivalents at end of period $ 443,420 $ 470,048 $ 202,952 See accompanying 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 indepen- dent 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. In addition, as the result of our acquisition of The Wright Insurance Group, LLC (“Wright”) in May 2014, we own a flood insurance carrier, Wright National Flood Insurance Company (“Wright Flood”), that is a Wright subsidiary. Wright Flood’s business consists of policies written pursuant to the National Flood Insurance Program, the program administered by the Federal Emergency Management Agency (“FEMA”), and several excess flood insurance policies, all of which are fully reinsured. Recently Issued Accounting Pronouncements In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 is currently evaluating its leases against the requirements of this pronouncement. 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 September 2015, FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”), which requires that an acquirer recognize adjustments to provi- sional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 is effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2015. The Company has determined that the impact of the adoption of this guidance on the Consolidated Financial Statements would not be material. In August 2015, FASB issued ASU No. 2015-15, “Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”. This standard is in addition to ASU No. 2015-03 and adds SEC paragraphs pursuant to an SEC Staff Announcement that the SEC staff would not object to an entity deferring and presenting debt issuance costs associated with a line-of-credit arrangement as an asset and subsequently amortizing the costs ratably over the term of the arrangement. The Company plans to adopt ASU 2015-03 in the first quarter of 2016. As the Company’s debt issuance costs are not material, implementation of this update is not expected to have a material impact on the Company’s Consolidated Financial Statements. 54 55 Brown & Brown, Inc.2015 Annual Report N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S In April 2015, FASB issued ASU No. 2015-05, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU 2015-05”), which issues guidance on determining whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software. If a cloud computing arrangement does not contain a software license, it should be accounted for as a service contract. This guidance is effective for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years, with early adoption permitted. The Company has to this point not been a party to any material cloud computing arrangements and as such has determined the impact of the adoption of this guidance on the Consolidated Financial Statements to be immaterial. In April 2015, FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, and not recorded as separate assets. This update is effective for reporting periods beginning after December 15, 2015, and is to be applied on a retro- spective basis. The Company plans to adopt ASU 2015-03 in the first quarter of 2016. As the Company’s debt issuance costs are not material, implementation of this update is not expected to have a material impact on the Company’s Consolidated Financial Statements. In August 2014, FASB issued ASU No. 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which addresses management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted. The Company does not expect to early adopt this guidance, and it believes the adoption of this guid- ance will not have an impact on the Consolidated Financial Statements. 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. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effec- tive 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. The Company is currently evaluating its revenue streams against the requirements of this pronouncement. Principles of Consolidation The accompanying Consolidated Financial Statements include the accounts of Brown & Brown, Inc. and its subsidiaries. All significant inter-company 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 reclassifica- tions 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, whichever is later. Commission revenues related to installment billings are recog- nized 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 circum- stances. 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 determin- able, 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 premi- ums 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. As part of the acquisition of Wright in 2014, we acquired additional investments, which include U.S. Government, Municipal, 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 under 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. 56 57 Brown & Brown, Inc.2015 Annual ReportGoodwill and Amortizable Intangible Assets All of our business combinations initiated after June 30, 2001 are accounted for using the purchase method. Acquisition purchase prices are typically based on a multiple of average annual operating profit earned over a one to three year period within a minimum and maximum price range. The recorded purchase 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 on 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 five 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 impair- ment 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 on multiples of earnings before interest, income taxes, depreciation, amortization and change in estimated acquisi- tion earn-out payables (“EBITDAC”), or on a discounted cash flow basis. Brown & Brown completed its most recent annual assessment as of November 30, 2015 and determined that the fair value of goodwill exceeded the carrying value of such assets. In addition, as of December 31, 2015, 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, 2015, 2014 and 2013. 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 tempo- rary 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 on the weighted average number of common shares (including participating securities) issued and outstanding during the period. Diluted EPS is computed based on 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) Net income 2015 2014 2013 $ 243,318 $ 206,896 $ 217,112 Net income attributable to unvested awarded performance stock (5,695) (5,186) (5,446) Net income attributable to common shares $ 237,623 $ 201,710 $ 211,666 Weighted average number of common shares outstanding—basic 141,113 144,568 144,662 Less unvested awarded performance stock included in weighted average number of common shares outstanding—basic Weighted average number of common shares outstanding for basic earnings per common share Dilutive effect of stock options (3,303) (3,624) (3,629) 137,810 140,944 141,033 2,302 1,947 1,591 Weighted average number of shares outstanding—diluted 140,112 142,891 142,624 Net income per share: Basic Diluted $ $ 1.72 1.70 $ $ 1.43 1.41 $ $ 1.50 1.48 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, 2015 and 2014, approxi- mate 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, 2015 and 2014 as our fixed-rate borrowings of $623.6 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. Of the $623.6 million, $25.0 million is related to short-term notes which approximates its carrying value due to its proximity to maturity. The estimated fair value of the $529.4 million remaining on the term loan under our J.P. Morgan Credit Facility approximates the carrying value due to the variable interest rate based on 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-transi- tion 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. 58 59 Brown & Brown, Inc.2015 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Wright. However, all exposure is reinsured with 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 related 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 on 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, 2015, the Company acquired the assets and assumed certain liabilities of thirteen insurance intermediaries and four books of business (customer accounts). Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last twelve months as permitted by Accounting Standards Codification Topic 805 — Business Combinations (“ASC 805”). Such adjustments are presented in the “Other” category within the following two tables. All of these businesses were acquired primarily to expand Brown & Brown’s core business and to attract and hire high-quality individuals. The recorded purchase price for all acquisitions consummated after January 1, 2009 included an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations will be recorded in the Consolidated Statement of Income when incurred. The fair value of earn-out obligations is based on the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions outlined in the respective purchase agreements. In determining fair value, the acquired business’s future performance is estimated using financial projections developed by management for the acquired business and reflects market participant assumptions regarding revenue growth and/or profitability. The expected future payments are estimated on the basis of the earn-out formula and performance targets specified in each purchase agreement compared to the associated financial projections. These payments are then discounted to present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out pay- ments will be made. Based on the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company’s Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period, as defined in ASC 805. For the year ended December 31, 2015, several adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $503,442 relating to the assumption of certain liabilities. Cash paid for acquisitions was $136.0 million and $721.9 million in the twelve-month periods ended December 31, 2015 and 2014, respectively. We completed thirteen acquisitions (excluding book of business purchases) in the twelve- month period ended December 31, 2015. We completed ten acquisitions (excluding book of business purchases) in the twelve-month period ended December 31, 2014. The following table summarizes the purchase price allocation made as of the date of each acquisition for current year acquisitions and significant adjustments made during the measurement period for prior year acquisitions: (in thousands) Name Liberty Insurance Brokers, Inc. and Affiliates (Liberty) Spain Agency, Inc. (Spain) Bellingham Underwriters, Inc. (Bellingham) Fitness Insurance, LLC Business Segment Effective Date of Acquisition Cash Paid Other Payable Recorded Earn-Out Payable Net Assets Acquired Maximum Potential Earn-Out Payable Retail February 1, 2015 $ 12,000 $ — $ 2,981 $ 14,981 $ 3,750 Retail March 1, 2015 20,706 — 2,617 23,323 9,162 National Programs May 1, 2015 9,007 500 3,322 12,829 4,400 (Fitness) Retail June 1, 2015 9,455 — 2,379 11,834 3,500 Strategic Benefit Advisors, Inc. (SBA) Bentrust Financial, Inc. Retail June 1, 2015 49,600 400 13,587 63,587 26,000 (Bentrust) Retail December 1, 2015 10,142 391 319 10,852 2,200 MBA Insurance Agency of Arizona, Inc. (MBA) Smith Insurance, Inc. (Smith) Other Total Retail December 1, 2015 68 8,442 6,063 14,573 9,500 Retail December 1, 2015 Various Various 12,096 12,926 200 95 1,047 4,584 13,343 17,605 6,350 8,212 $ 136,000 $ 10,028 $ 36,899 $ 182,927 $ 73,074 60 61 Brown & Brown, Inc.2015 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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. (in thousands) Liberty Belling- ham Spain Fitness SBA Bentrust MBA Smith Other Total Other current assets $ 2,486 $ 324 $ — $ 9 $ 652 $ — $ — $ — $ 169 $ 3,640 Fixed assets Goodwill Purchased customer accounts Non-compete agreements Other assets 40 50 25 17 41 36 33 73 59 374 10,010 15,748 9,608 8,105 39,859 8,166 13,471 10,374 21,040 136,381 4,506 7,430 3,223 3,715 23,000 2,789 7,338 3,526 (2,135) 53,392 24 — 21 — 21 — — — 21 14 43 — 11 — 31 — 156 — 328 14 (UNAUDITED) (in thousands, except per share data) Total revenues Income before income taxes Net income Net income per share: Basic Diluted Total assets acquired 17,066 23,573 12,877 11,846 63,587 11,034 20,853 14,004 19,289 194,129 Weighted average number of shares outstanding: Other current liabilities Deferred income tax, net Other liabilities Total liabilities assumed (42) — (2,043) (250) (48) (12) — — — — — — (2,085) (250) (48) (12) — — — — (182) (6,280) (504) (4,895) (12,213) — — — — — (157) 2,576 635 2,576 (1,565) (182) (6,280) (661) (1,684) (11,202) Net assets acquired $ 14,981 $ 23,323 $ 12,829 $ 11,834 $ 63,587 $ 10,852 $ 14,573 $ 13,343 $ 17,605 $ 182,927 The weighted average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15 years; and non-compete agreements, 5 years. Goodwill of $136.4 million was allocated to the Retail, National Programs and Wholesale Brokerage Segments in the amounts of $113.8 million, $18.0 million and $4.6 million, respectively. Of the total goodwill of $136.4 million, $91.1 million is currently deductible for income tax purposes and $8.4 million is non-deductible. The remaining $36.9 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid. For the acquisitions completed during 2015, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues from the acquisitions completed through December 31, 2015, included in the Consolidated Statement of Income for the year ended December 31, 2015, were $28.2 million. The income before income taxes, including the inter-company cost of capital charge, from the acquisitions completed through December 31, 2015, included in the Consolidated Statement of Income for the year ended December 31, 2015, was $1.5 million. If the For the Year Ended December 31, 2015 2014 $ 1,688,297 $ 1,630,992 $ 411,497 $ 356,426 $ 248,720 $ 217,053 $ $ 1.76 1.73 $ $ 1.50 1.48 137,810 140,112 140,944 142,891 Basic Diluted 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 adjust- ments 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 assump- tion of certain liabilities. The following table summarizes the purchase price allocation made as of the date of each acquisition for current year acquisitions and significant adjustment made during the measurement period for prior year acquisitions: (in thousands) Name Business Segment Effective Date of Acquisition Cash Paid Other Payable Recorded Earn-Out Payable Net Assets Acquired Maximum Potential Earn-Out Payable The Wright Insurance Group, LLC National Programs May 1, 2014 $ 609,183 $ 1,471 $ — $ 610,654 $ — Pacific Resources Benefits Advisors, LLC (“PacRes”) Axia Strategies, Inc (“Axia”) Other Total Retail May 1, 2014 90,000 Wholesale Brokerage May 1, 2014 Various Various 9,870 12,798 — — 433 27,452 117,452 35,000 1,824 3,953 11,694 17,184 5,200 9,262 $ 721,851 $ 1,904 $ 33,229 $ 756,984 $ 49,462 62 63 Brown & Brown, Inc.2015 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date (UNAUDITED) of each acquisition. (in thousands) Cash Other current assets Fixed assets Reinsurance recoverable Prepaid reinsurance premiums Goodwill Purchased customer accounts Non-compete agreements Other assets Wright PacRes Axia Other Total $ 25,365 $ — $ — $ — $ 25,365 16,474 7,172 25,238 289,013 420,209 213,677 966 20,045 3,647 53 — — 76,023 38,111 21 — 101 24 — — 7,276 4,252 41 — 742 1,724 — — 10,417 4,384 166 — 20,964 8,973 25,238 289,013 513,925 260,424 1,194 20,045 Total assets acquired 1,018,159 117,855 11,694 17,433 1,165,141 Other current liabilities Losses and loss adjustment reserve Unearned premiums Deferred income tax, net Other liabilities Total liabilities assumed (14,322) (25,238) (289,013) (46,566) (32,366) (407,505) (403) — — — — (403) — — — — — — (249) — — — — (14,974) (25,238) (289,013) (46,566) (32,366) (249) (408,157) Net assets acquired $ 610,654 $ 117,452 $ 11,694 $ 17,184 $ 756,984 The weighted average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15 years; and non-compete agreements, 3.4 years. Goodwill of $513.9 million was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $86.4 million, $420.0 million, $7.7 million and $(0.2) million, respectively. Of the total goodwill of $513.9 million, $141.9 million is currently deductible for income tax purposes and $338.8 million is non-deductible. The remaining $33.2 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid. For the acquisitions completed during 2014, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues and income before income taxes, including the inter-company cost of capital, from the acquisitions completed through December 31, 2014, included in the Consolidated Statement of Income for the year ended December 31, 2014, were $112.2 million and $(1.3) million, respectively. If the acquisitions had occurred as of the beginning of the respective periods, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods. (in thousands, except per share data) Total revenues Income before income taxes Net income Net income per share: Basic Diluted Weighted average number of shares outstanding: Basic Diluted For the Year Ended December 31, 2014 2013 $ 1,630,162 $ 1,520,858 $ 358,229 $ 409,522 $ 218,150 $ 248,628 $ $ 1.51 1.49 $ $ 1.72 1.70 140,944 142,891 141,033 142,624 Acquisitions in 2013 During the year ended December 31, 2013, Brown & Brown acquired the assets and assumed certain liabilities of eight insurance intermediaries, all of the stock of one insurance intermediary and one book of business (customer accounts). The cash paid for these acquisitions was $408.1 million. Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last twelve months as permitted by Accounting Standards Codification Topic 805 — Business Combinations (“ASC 805”). Such adjustments are presented in the “Other” category within the following two tables. All of these acquisitions were acquired primarily to expand Brown & Brown’s core business and to attract and hire high-quality individuals. For the year ended December 31, 2013, several adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $504,300 relating to the assump- tion of certain liabilities. The following table summarizes the aggregate purchase price allocation made as of the date of each acquisition for current year acquisitions and adjustment made during the measurement period for prior year acquisitions: (in thousands) Name Business Segment Effective Date of Acquisition Cash Paid Other Payable Recorded Earn-Out Payable Net Assets Acquired Maximum Potential Earn-Out Payable The Rollins Agency, Inc. Retail June 1, 2013 $ 13,792 $ 50 $ 2,321 $ 16,163 $ 4,300 Beecher Carlson Holdings, Inc. ICA, Inc. Other Total Retail; National Programs Services July 1, 2013 364,256 December 31, 2013 Various Various 19,770 10,254 — — 502 — 364,256 — 727 2,043 20,497 12,799 5,000 7,468 $ 408,072 $ 552 $ 5,091 $ 413,715 $ 16,768 64 65 Brown & Brown, Inc.2015 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition. (in thousands) Cash Other current assets Fixed assets Goodwill Purchased customer accounts Non-compete agreements Other assets Total assets acquired Other current liabilities Deferred income tax, net Other liabilities Rollins Beecher $ — $ 40,360 $ 393 30 12,697 3,878 31 — 57,632 1,786 265,174 101,565 2,758 — ICA — — 75 12,377 7,917 21 107 Other Total $ — $ 40,360 1,573 24 5,696 5,623 76 1 59,598 1,915 295,944 118,983 2,886 108 17,029 469,275 20,497 12,993 519,794 (866) — — (80,090) (22,764) (2,165) — — — — (194) — — (81,150) (22,764) (2,165) (194) (106,079) Total liabilities assumed (866) (105,019) Net assets acquired $ 16,163 $ 364,256 $ 20,497 $ 12,799 $ 413,715 The weighted average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15 years; and non-compete agreements, 5 years. Goodwill of $295.9 million was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $257.2 million, $27.1 million, $(0.8) million and $12.4 million, respectively. Of the total goodwill of $295.9 million, $41.6 million is currently deductible for income tax purposes and $249.2 million is non-deductible. The remaining $5.1 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid. For the acquisitions completed during 2013, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues and income before income taxes, including the inter-company cost of capital, from the acquisitions completed through December 31, 2013, included in the Consolidated Statement of Income for the year ended December 31, 2013, were $63.8 million and $0.9 million, respectively. If the acquisitions had occurred as of the beginning of the respective periods, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods. (UNAUDITED) (in thousands, except per share data) Total revenues Income before income taxes Net income Net income per share: Basic Diluted Weighted average number of shares outstanding: Basic Diluted For the Year Ended December 31, 2013 2012 $ 1,439,918 $ 1,329,262 $ 373,175 $ 329,291 $ 226,562 $ 198,826 $ $ 1.57 1.55 $ $ 1.39 1.36 141,033 142,624 139,634 142,010 For acquisitions consummated prior to January 1, 2009, additional consideration paid to sellers as a result of the purchase price earn-out provisions are recorded as adjustments to intangible assets when the contingencies are settled. The net additional consideration paid by the Company in 2015 as a result of those adjustments totaled $0. The net addi- tional consideration paid by the Company in 2014 as a result of these adjustments totaled $26,000, all of which was allocated to goodwill. Of the $26,000 net additional consideration paid, $26,000 was recorded in other payables. As of December 31, 2015, the maximum future contingency payments related to all acquisitions totaled $137.4 million, all of which relates to acquisitions consummated subsequent to January 1, 2009. ASC Topic 805-Business Combinations is the authoritative guidance requiring an acquirer to recognize 100% of the fair values of acquired assets, including goodwill, and assumed liabilities (with only limited exceptions) upon initially obtaining control of an acquired entity. Additionally, the fair value of contingent consideration arrangements (such as earn-out purchase arrangements) at the acquisition date must be included in the purchase price consideration. As a result, the recorded purchase prices for all acquisitions consummated after January 1, 2009 include an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in these earn-out obligations will be recorded in the Consolidated Statement of Income when incurred. Potential earn-out obligations are typically based upon future earnings of the acquired entities, usually between one and three years. As of December 31, 2015, the fair values of the estimated acquisition earn-out payables were re-evaluated and measured at fair value on a recurring basis using unobservable inputs (Level 3) as defined in ASC 820-Fair Value Measurement. The resulting additions, payments, and net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the years ended December 31, 2015, 2014 and 2013 were as follows: (in thousands) For the Year Ended December 31, 2015 2014 2013 Balance as of the beginning of the period $ 75,283 $ 43,058 $ 52,987 Additions to estimated acquisition earn-out payables Payments for estimated acquisition earn-out payables Subtotal Net change in earnings from estimated acquisition earn-out payables: Change in fair value on estimated acquisition earn-out payables Interest expense accretion Net change in earnings from estimated acquisition earn-out payables 36,899 34,356 5,816 (36,798) (12,069) (18,278) 75,384 65,345 40,525 2,990 13 3,003 7,375 2,563 9,938 570 1,963 2,533 Balance as of December 31, $ 78,387 $ 75,283 $ 43,058 Of the $78.4 million estimated acquisition earn-out payables as of December 31, 2015, $25.3 million was recorded as accounts payable and $53.1 million was recorded as other non-current liabilities. Included within additions to estimated acquisition earn-out payables are any adjustments to opening balance sheet items prior to the one-year anniversary date and may therefore differ from previously reported amounts. Of the $75.3 million estimated acquisition earn-out payables as of December 31, 2014, $26.0 million was recorded as accounts payable and $49.3 million was recorded as an other non-current liability. Of the $43.1 million estimated acquisition earn-out payables as of December 31, 2013, $6.3 million was recorded as accounts payable and $36.8 million was recorded as an other non-current liability. 66 67 Brown & Brown, Inc.2015 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2014 $ 1,141,485 $ 475,596 $ 268,562 $ 120,530 $ 2,006,173 Goodwill of acquired businesses 94,080 420,063 47 (239) 513,951 Goodwill disposed of relating to sales of businesses (3,696) (9,564) (46,253) — (59,513) Balance as of December 31, 2014 $ 1,231,869 $ 886,095 $ 222,356 $ 120,291 $ 2,460,611 Goodwill of acquired businesses 113,767 18,009 4,605 — 136,381 For securities in a loss position, the following table shows the investments’ gross unrealized loss and fair value, aggre- gated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2015: Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (in thousands) U.S. Treasury securities, obligations of U.S. Government agencies and Municipals Foreign Government Corporate debt $ 8,998 $ 50 2,731 26 — 14 40 $ $ — — 284 284 $ $ — — 2 2 $ 8,998 $ 50 3,015 $ 12,063 $ 26 — 16 42 Goodwill disposed of relating to sales of businesses — (2,238) — (8,071) (10,309) Total $ 11,779 $ Balance as of December 31, 2015 $ 1,345,636 $ 901,866 $ 226,961 $ 112,220 $ 2,586,683 NOTE 4 Amortizable Intangible Assets Amortizable intangible assets at December 31, 2015 and 2014 consisted of the following: December 31, 2015 December 31, 2014 (in thousands) Gross Carrying Value Accumulated Amortization Weighted- Net Average Life (years)(1) Carrying Value Gross Carrying Value Accumulated Amortization Weighted- Net Average Life (years)(1) Carrying Value Purchased customer accounts $ 1,398,986 $ (656,799) $ 742,187 15.0 $ 1,355,550 $ (574,285) $ 781,265 14.9 Non-compete agreements 29,440 (26,947) 2,493 6.8 29,139 (25,762) 3,377 6.8 Total $ 1,428,426 $ (683,746) $ 744,680 $ 1,384,689 $ (600,047) $ 784,642 (1) Weighted average life calculated as of the date of acquisition. Amortization expense for amortizable intangible assets for the years ending December 31, 2016, 2017, 2018, 2019 and 2020 is estimated to be $84.5 million, $81.6 million, $76.3 million, $71.8 million, and $64.5 million, respectively. NOTE 5 Investments At December 31, 2015, the Company’s amortized cost and fair values of fixed maturity securities are summarized as follows: (in thousands) U.S. Treasury securities, obligations of U.S. Government agencies and Municipals Foreign government Corporate debt Short duration fixed income fund Total Gross Unrealized Gains Gross Unrealized Losses Cost Fair Value $ 11,876 $ 50 4,505 1,663 $ 18,094 $ 6 — 7 27 40 $ (26) $ 11,856 — (16) — 50 4,496 1,690 $ (42) $ 18,092 The unrealized losses from corporate issuers were caused by interest rate increases. At December 31, 2015, the Company had 35 securities in an unrealized loss position. The corporate securities are highly rated securities with no indicators of potential impairment. Based on 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. At December 31, 2014, the Company’s amortized cost and fair values of fixed maturity securities are summarized as follows: (in thousands) U.S. Treasury securities, obligations of U.S. Government agencies and Municipals Foreign government Corporate debt Short duration fixed income fund Total Gross Unrealized Gains Gross Unrealized Losses Cost Fair Value $ 10,774 $ 50 5,854 3,143 $ 19,821 $ 7 — 9 37 53 $ (1) $ 10,780 — (11) — 50 5,852 3,180 $ (12) $ 19,862 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, 2014: Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (in thousands) U.S. Treasury securities, obligations of U.S. Government agencies and Municipals Foreign Government Corporate debt $ 3,994 $ 50 4,439 1 — 11 12 $ $ — — — — $ $ — — — — $ 3,994 $ 50 4,439 $ 8,483 $ 1 — 11 12 Total $ 8,483 $ 68 69 Brown & Brown, Inc.2015 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2014, the Company had 38 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 on the ability and intent of the Company to hold these investments until recovery of fair value, which may be matu- rity, the bonds were not considered to be other-than-temporarily impaired at December 31, 2014. The amortized cost and estimated fair value of the fixed maturity securities at December 31, 2015 by contractual NOTE 6 Fixed Assets Fixed assets at December 31 consisted of the following: (in thousands) Furniture, fixtures and equipment Leasehold improvements Land, buildings and improvements Total cost Less accumulated depreciation and amortization Total 2015 2014 $ 169,682 $ 161,539 32,132 3,370 30,030 3,739 205,184 195,308 (123,431) (110,640) $ 81,753 $ 84,668 Amortized Cost Fair Value $ 5,726 $ 5,722 12,038 330 12,041 329 $ 18,094 $ 18,092 Depreciation and amortization expense for fixed assets amounted to $20.9 million in 2015, $20.9 million in 2014, and $17.5 million in 2013. NOTE 7 Accrued Expenses and Other Liabilities Accrued expenses and other liabilities at December 31 consisted of the following: maturity are set forth below: (in thousands) Years to maturity: Due in one year or less Due after one year through five years Due after five years through ten years Total The amortized cost and estimated fair value of the fixed maturity securities at December 31, 2014 by contractual maturity are set forth below: (in thousands) Years to maturity: Due in one year or less Due after one year through five years Due after five years through ten years Total Amortized Cost Fair Value $ 5,628 $ 5,628 13,863 330 13,897 337 $ 19,821 $ 19,862 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 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. Proceeds from sales of the Company’s investment in fixed maturity securities were $0.2 million including maturities for the year ended December 31, 2014. There were no gains and losses realized on those sales for the year ended to December 31, 2014. 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, 2015, investments with a fair value of approximately $4.0 million were on deposit with state insur- ance departments to satisfy regulatory requirements. (in thousands) Accrued bonuses Accrued compensation and benefits Accrued rent and vendor expenses Reserve for policy cancellations Accrued interest Other Total 2015 2014 $ 76,210 $ 76,891 39,366 29,225 9,617 6,375 31,274 36,241 29,039 9,074 6,527 23,384 $ 192,067 $ 181,156 70 71 Brown & Brown, Inc.2015 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 Long-Term Debt Long-term debt at December 31, 2015 and 2014 consisted of the following: (in thousands) Current portion of long-term debt: December 31, December 31, 2015 2014 Current portion of 5-year term loan facility expires 2019 $ 48,125 $ 20,625 5.370% senior notes, Series D, quarterly interest payments, balloon due 2015 5.660% senior notes, Series C, semi-annual interest payments, balloon due 2016 Total current portion of long-term debt — 25,000 25,000 73,125 — 45,625 Long-term debt: Note agreements: 5.660% senior notes, Series C, semi-annual interest payments, balloon due 2016 4.500% senior notes, Series E, quarterly interest payments, balloon due 2018 4.200% senior notes, semi-annual interest payments, balloon due 2024 Total notes Credit agreements: 5-year term-loan facility, periodic interest and principal payments, currently LIBOR plus up to 1.75%, expires May 20, 2019 5-year revolving-loan facility, periodic interest payments, currently LIBOR plus up to 1.50%, plus commitment fees up to 0.25%, expires May 20, 2019 Revolving credit loan, quarterly interest payments, LIBOR plus up to 1.40% and availability fee up to 0.25%, expires December 31, 2016 Total credit agreements Total long-term debt Current portion of long-term debt Total debt — 100,000 498,628 598,628 25,000 100,000 498,471 623,471 481,250 529,375 — — — — 481,250 529,375 1,079,878 1,152,846 73,125 45,625 $ 1,153,003 $ 1,198,471 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 5.66% per year. On February 1, 2008, $25.0 million in Series D Senior Notes due January 15, 2015, with a fixed interest rate of 5.37% 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 4.50% 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. As of December 31, 2015, there was an outstanding debt balance issued under the provisions of the Master Agreement of $125.0 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”). The maturity date for the Wells Fargo Revolver is December 31, 2016, at which time all outstanding principal and unpaid interest will be due. 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 (bring- ing the total amount available to $75.0 million). The calculation of interest and fees for the Wells Fargo Agreement is generally based on the Company’s funded debt-to-EBITDA ratio. Interest is charged at a rate equal to 1.00% to 1.40% above LIBOR or 1.00% 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 0.25%, and a letter of credit margin fee of 1.00% to 1.40%. 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. There were no borrowings against the Wells Fargo Revolver as of December 31, 2015 and 2014. 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 on the better of the Company’s net debt leverage ratio or a non-credit enhanced senior unsecured long-term debt rating. Based on the Company’s net debt leverage ratio, the rates of interest charged on the term loan are 1.00% to 1.75%, and the revolving loan is 0.85% to 1.50% above the adjusted LIBOR rate for outstanding amounts drawn. There are fees included in the facility which include a facility fee based on the revolving credit commit- ments of the lenders (whether used or unused) at a rate of 0.15% to 0.25% and letter of credit fees based on 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, 2015 and 2014, there was an outstanding debt balance issued under the provisions of the Credit Facility in total of $529.4 million and $550.0 million respectively, with no borrowings outstanding relative to the revolving loan. Per the terms of the agreement, scheduled principal payments of $48.1 million are due in 2016. On September 18, 2014, the Company issued $500.0 million of 4.20% 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, 2015 and 2014, 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, 2015 and 2014. The 30-day Adjusted LIBOR Rate as of December 31, 2015 was 0.44%. Interest paid in 2015, 2014 and 2013 was $37.5 million, $25.1 million, and $16.5 million, respectively. At December 31, 2015, maturities of long-term debt were $73.1 million in 2016, $55.0 million in 2017, $155.0 million in 2018, $371.3 million in 2019 and $500.0 million in 2024. 72 73 Brown & Brown, Inc.2015 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 Income Taxes Significant components of the provision for income taxes for the years ended December 31 are as follows: (in thousands) Current: Federal State Foreign Total current provision Deferred: Federal State Foreign Total deferred provision Total tax provision 2015 2014 2013 $ 118,490 $ 109,893 $ 94,007 17,625 430 15,482 109 13,438 805 136,545 125,484 108,250 18,416 4,280 — 22,696 5,987 1,440 (58) 7,369 28,469 3,723 55 32,247 $ 159,241 $ 132,853 $ 140,497 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: Federal statutory tax rate State income taxes, net of federal income tax benefit Non-deductible employee stock purchase plan expense Non-deductible meals and entertainment Other, net Effective tax rate 2015 2014 2013 35.0% 35.0% 35.0% 3.9 0.3 0.3 0.1 3.3 0.3 0.4 0.1 3.5 0.3 0.3 0.2 39.6% 39.1% 39.3% Significant components of Brown & Brown’s non-current deferred tax liabilities and assets as of December 31 are as follows: (in thousands) Non-current deferred tax liabilities: Fixed assets Net unrealized holding (loss)/gain on available-for-sale securities Intangible assets Total non-current deferred tax liabilities Non-current deferred tax assets: Deferred compensation Net operating loss carryforwards Valuation allowance for deferred tax assets Total non-current deferred tax assets Net non-current deferred tax liability 2015 2014 $ 8,585 $ 10,368 (9) 393,251 401,827 56 364,938 375,362 38,966 2,518 (606) 40,878 31,580 2,796 (511) 33,865 $ 360,949 $ 341,497 Income taxes paid in 2015, 2014 and 2013 were $132.9 million, $118.3 million, and $110.2 million respectively. At December 31, 2015, Brown & Brown had net operating loss carryforwards of $184,218 and $61,217,003 for federal and state income tax reporting purposes, respectively, portions of which expire in the years 2016 through 2034. 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 Beecher Carlson Holdings, Inc. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: (in thousands) Unrecognized tax benefits balance at January 1 Gross increases for tax positions of prior years Gross decreases for tax positions of prior years 2015 2014 $ 113 773 — (302) $ 391 $ — (21) (257) 2013 294 232 — (135) 391 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and Settlements liabilities for financial reporting purposes and the corresponding amounts used for income tax reporting purposes. Unrecognized tax benefits balance at December 31 $ 584 $ 113 $ Significant components of Brown & Brown’s current deferred tax assets as of December 31 are as follows: (in thousands) Current deferred tax assets: Deferred profit-sharing contingent commissions Net operating loss carryforwards Accruals and reserves Total current deferred tax assets 2015 2014 $ 9,767 $ 10,335 10 14,858 951 14,145 $ 24,635 $ 25,431 The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2015 and 2014, the Company had $102,171 and $65,772 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 $583,977 as of December 31, 2015 and $113,032 as of December 31, 2014. The Company does not expect its unrecog- nized 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. 74 75 Brown & Brown, Inc.2015 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company is subject to taxation in the United States and various state jurisdictions. The Company is also subject to A summary of PSP activity for the years ended December 31, 2015, 2014 and 2013 is as follows: taxation in the United Kingdom. In the United States, federal returns for fiscal years 2012 through 2015 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 2010 through 2015. In the United Kingdom, the Company’s filings remain open for audit for the fiscal years 2014 and 2015. The federal income tax returns of The Wright Insurance Group are currently under IRS audit for the year ended December 31, 2013 and the short period ended May 1, 2014. Also during 2015, the previously disclosed 2013 IRS audit of Beecher Carlson Holding, Inc. was closed with no adjustments. The Company’s 2009 through 2012 State of Oregon tax returns were under audit in 2014. The audit was settled in early 2015 with the State of Oregon for an insignificant amount. The Company is currently under audit in the State of Kansas for fiscal years 2012 through 2014. There are no other federal or state income tax audits as of December 31, 2015. 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 $17.8 million in 2015, $15.8 million in 2014, and $14.8 mil- lion in 2013. 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 suspen- sion 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 estab- lished 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 will satisfy the first condition for vesting based on 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, 2015, 5,266,707 shares had been granted under the PSP. As of December 31, 2015, 8,000 shares had not met the first condition for vesting, 1,594,214 shares had met the first condition of vesting and had been awarded, and 3,664,493 shares had satisfied both conditions of vesting and had been distributed to participants. Of the shares that have not vested as of December 31, 2015, the initial stock prices ranged from $8.75 to $25.68. The Company uses a path-dependent lattice model to estimate the fair value of PSP grants on the grant date. Outstanding at January 1, 2013 Granted Awarded Vested Forfeited Outstanding at December 31, 2013 Granted Awarded Vested Forfeited Outstanding at December 31, 2014 Granted Awarded Vested Forfeited Outstanding at December 31, 2015 Weighted-Average Grant Date Fair Value Granted Shares Awarded Shares Shares Not Yet Awarded $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 8.72 3,691,022 2,394,505 1,296,517 — 10.25 4.01 — — — — 122,021 (122,021) (119,364) (119,364) — 8.73 (1,200,371) (101,310) (1,099,061) 8.62 2,371,287 2,295,852 75,435 — — 16.76 9.75 — — — — (277,009) (277,009) — — — (165,647) (115,630) (50,017) 8.71 1,928,631 1,903,213 25,418 — — 5.55 9.78 — — — — (208,889) (208,889) — — — (117,528) (100,110) (17,418) 9.03 1,602,214 1,594,214 8,000 The total fair value of PSP grants that vested during each of the years ended December 31, 2015, 2014 and 2013 was $6.8 million, $8.4 million and $3.7 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 and/or stock appreciation rights to employees and directors contingent on criteria estab- lished 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. To date, a substantial majority of stock grants to employees under the SIP vest in four-to-ten years, subject to the achievement of certain performance criteria by grantees, and the achievement of consolidated EPS growth at certain levels by the Company, over three-to-five-year measurement periods. 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. 76 77 Brown & Brown, Inc.2015 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. As of December 31, 2014, no shares had met the first condition for vesting. In 2015, 481,166 shares were granted under the SIP. Of the shares granted in 2015, 158,958 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. As of December 31, 2015, no shares had met the first condition for vesting. 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 and 15,700 shares were issued in January 2015. At December 31, 2015, 2,793,832 shares were available for future grants. 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-like 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, 2015, 2014 and 2013 is as follows: Weighted-Average Grant Date Fair Value Granted Shares Awarded Shares Shares Not Yet Awarded Outstanding at January 1, 2013 Granted Awarded Vested Forfeited Outstanding at December 31, 2013 Granted Awarded Vested Forfeited Outstanding at December 31, 2014 Granted Awarded Vested Forfeited Outstanding at December 31, 2015 22.91 3,157,311 37,408 3,119,903 31.95 3,719,974 — 3,719,974 30.71 — — — 966,215 (966,215) — — 23.88 (271,184) (7,906) (263,278) 27.96 6,606,101 995,717 5,610,384 31.02 422,572 113,088 309,484 — — — — — — — — 27.41 (369,626) (47,915) (321,711) 28.19 6,659,047 1,060,890 5,598,157 31.74 481,166 164,646 316,520 — — — — — — — — 26.32 (863,241) (95,542) (767,699) 28.74 6,276,972 1,129,994 5,146,978 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 78 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 5,194,928 were available for future subscriptions as of December 31, 2015. 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 2015 was $6.43. The fair values of an ESPP share option as of the Subscription Periods beginning in August 2014 and 2013, were $6.39 and $8.36, respectively. For the ESPP plan years ended July 31, 2015, 2014 and 2013, the Company issued 539,389, 512,521, and 487,672 shares of common stock, respectively. These shares were issued at an aggregate purchase price of $14.4 million, or $26.62 per share, in 2015, $13.4 million, or $26.16 per share, in 2014, and $10.5 million, or $21.44 per share, in 2013. For the five months ended December 31, 2015, 2014 and 2013 (portions of the 2015-2016, 2014-2015 and 2013- 2014 plan years), 231,803; 235,794; and 222,526 shares of common stock (from authorized but unissued shares), respectively, were subscribed to by ESPP participants for proceeds of approximately $6.8 million, $6.3 million and $5.9 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 incen- tives 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 approxi- mating 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. 79 Brown & Brown, Inc.2015 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of stock option activity for the years ended December 31, 2015, 2014 and 2013 is as follows: Stock Options Outstanding at January 1, 2013 Granted Exercised Forfeited Expired Outstanding at December 31, 2013 Granted Exercised Forfeited Expired Outstanding at December 31, 2014 Granted Exercised Forfeited Expired Outstanding at December 31, 2015 Ending vested and expected to vest at December 31, 2015 Exercisable at December 31, 2015 Exercisable at December 31, 2014 Exercisable at December 31, 2013 Shares Under Option 738,792 — (115,847) — — 622,945 — (106,589) (46,000) — 470,356 — (151,767) (49,000) — 269,589 269,589 164,589 316,356 422,945 Weighted- Average Exercise Weighted- Average Remaining Contractual Price Term (in years) Aggregate Intrinsic Value (in thousands) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 18.39 — 17.56 — — 18.55 — 18.48 18.48 — 18.57 — 18.48 19.36 — 18.48 18.48 18.48 18.48 18.48 4.9 $ 8,891 4.1 $ 7,289 3.1 $ 5,087 2.2 2.2 2.2 3.2 4.2 $ $ $ $ $ 2,395 2,395 2,241 4,565 5,460 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) Stock Incentive Plan Employee Stock Purchase Plan Performance Stock Plan Incentive Stock Option Plan Total 2015 2014 2013 $ 11,111 $ 14,447 $ 15,934 3,430 972 — 2,425 2,354 137 3,538 2,310 821 $ 15,513 $ 19,363 $ 22,603 Summary of Unrecognized Compensation Expense As of December 31, 2015, there was approximately $115.0 million of unrecognized compensation expense related to all non-vested share-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 5.1 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. The following table summarizes information about stock options outstanding at December 31, 2015: (in thousands) Options Outstanding Options Exercisable Cash paid during the period for: Exercise Price $18.48 Totals Weighted- Average Remaining Contractual Life (years) 2.2 2.2 Number Outstanding 269,589 269,589 Weighted- Average Exercise Price $ $ 18.48 18.48 Number Exercisable 164,589 164,589 Weighted- Average Exercise Price $ $ 18.48 18.48 Interest Income taxes (in thousands) The total intrinsic value of options exercised, determined as of the date of exercise, during the years ended December 31, Other payables issued for purchased customer accounts 2015, 2014 and 2013 was $2.2 million, $1.3 million and $1.6 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, 2015, 2014 and 2013, respectively. There are no option shares available for future grant under the ISOP since this plan expired as of December 31, 2008. Estimated acquisition earn-out payables and related charges Notes received on the sale of fixed assets and customer accounts 80 81 Brown & Brown’s significant non-cash investing and financing activities are summarized as follows: For the Year Ended December 31, 2015 2014 2013 $ 37,542 $ 25,115 $ 16,501 $ 132,874 $ 118,290 $ 110,190 For the Year Ended December 31, 2015 10,029 36,899 7,755 $ $ $ 2014 1,930 33,229 6,340 $ $ $ $ $ $ 2013 1,425 5,091 1,108 Brown & Brown, Inc.2015 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2015, the aggregate future minimum lease payments under all non-cancel able lease agreements were as follows: (in thousands) 2016 2017 2018 2019 2020 Thereafter Total minimum future lease payments $ 40,900 37,109 31,612 25,962 21,283 38,406 $ 195,272 Rental expense in 2015, 2014 and 2013 for operating leases totaled $46.0 million, $49.0 million, and $43.0 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 on 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, 2015 and 2014. 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 on the AM Best Company ratings of these third-party insurers, management does not believe there is a substantial risk of an insurer’s material nonperformance 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 2015 and 2014 were as follows: (in thousands, except per share data) 2015 Total revenues Total expenses Income before income taxes Net income Net income per share: Basic Diluted 2014 Total revenues Total expenses Income before income taxes Net income Net income per share: Basic Diluted First Quarter Second Quarter Third Quarter Fourth Quarter $ 404,298 $ 419,447 $ 432,167 $ 404,597 $ 310,520 $ 318,533 $ 319,337 $ 309,560 $ $ $ $ 93,778 $ 100,914 $ 112,830 56,951 $ 61,005 $ 67,427 0.40 0.39 $ $ 0.43 0.43 $ $ 0.48 0.47 $ $ $ $ 95,037 57,935 0.41 0.41 $ 363,594 $ 397,764 $ 421,418 $ 393,020 $ 276,757 $ 295,983 $ 308,733 $ 354,574(1) $ $ $ $ 86,837 $ 101,781 $ 112,685 52,415 $ 61,755 $ 68,331 0.36 0.36 $ $ 0.43 0.42 $ $ 0.47 0.47 $ $ $ $ 38,446(1) 24,395(1) 0.17 0.17 (1) The Company recognized a pre-tax loss on disposal of $47.4 million as a result of the sale of Axiom effective December 31, 2014. The sale was part of the Company’s strategy to exit the reinsurance brokerage business. 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 signifi- cantly 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 custom- ers; (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. 82 83 Brown & Brown, Inc.2015 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $13.4 million, $13.3 million and $12.2 million of total revenues for the years ended December 31, 2015, 2014 and 2013, 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 inter-company interest expense charge to the reporting segment. (in thousands) Total revenues Investment income Amortization Depreciation Interest expense For the year ended December 31, 2013 Retail National Programs Wholesale Brokerage Services Other Total $ 737,349 $ 301,372 $ 193,710 $ 131,489 $ $ $ $ 82 38,523 5,874 34,658 $ $ $ $ $ 19 14,953 5,492 24,014 61,223 $ $ $ $ $ 22 10,719 2,674 2,316 47,501 $ $ $ $ $ 1 3,698 1,623 7,322 25,791 $ $ $ $ $ $ (641) $ 1,363,279 514 39 1,822 (51,870) $ $ $ $ 638 67,932 17,485 16,440 61,307 $ 357,609 Income before income taxes $ 161,787 Total assets $ 3,012,688 $ 1,377,404 $ 865,731 $ 277,652 $ (1,883,967) $ 3,649,508 Segment results for prior periods have been recast to reflect the current year segmental structure. Certain reclassifica- Capital expenditures $ 6,886 $ 4,810 $ 1,825 $ 1,811 $ 1,034 $ 16,366 tions 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, 2015 Retail National Programs Wholesale Brokerage Services Other Total $ 870,346 $ 428,734 $ 216,996 $ 145,365 $ $ $ $ 87 45,145 6,558 41,036 $ $ $ $ $ 210 28,479 7,250 55,705 67,673 $ $ $ $ $ 150 9,739 2,142 891 64,708 $ $ $ $ $ 42 4,019 1,988 5,970 19,713 $ $ $ $ $ $ (932) $ 1,660,509 515 39 2,952 (64,354) $ $ $ $ 1,004 87,421 20,890 39,248 68,527 $ 402,559 Income before income taxes $ 181,938 Total assets $ 3,507,476 $ 2,505,752 $ 895,782 $ 285,459 $ (2,181,730) $ 5,012,739 Capital expenditures $ 6,797 $ 6,001 $ 3,084 $ 1,088 $ 1,405 $ 18,375 For the year ended December 31, 2014 Retail National Programs Wholesale Brokerage Services Other Total $ 823,686 $ 404,239 $ 211,911 $ 136,558 $ $ $ $ 67 42,935 6,449 43,502 $ $ $ $ $ 164 25,129 7,805 49,663 73,178 $ $ $ $ $ 26 10,703 2,470 1,294 8,276 $ $ $ $ $ 3 4,135 2,213 7,678 17,870 $ $ $ $ $ $ (598) $ 1,575,796 487 39 1,958 (73,729) $ $ $ $ 747 82,941 20,895 28,408 82,934 $ 339,749 Income before income taxes $ 157,491 Total assets $ 3,229,484 $ 2,455,749 $ 857,804 $ 296,034 $ (1,882,613) $ 4,956,458 Capital expenditures $ 6,873 $ 14,133 $ 1,526 $ 1,210 $ 1,181 $ 24,923 (in thousands) Total revenues Investment income Amortization Depreciation Interest expense (in thousands) Total revenues Investment income Amortization Depreciation Interest expense NOTE 16 Losses and Loss Adjustment Reserve Although the reinsurers are liable to the Company for amounts reinsured, our subsidiary, Wright Flood 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: (in thousands) Direct premiums Assumed premiums Ceded premiums Net premiums 2015 2014 Written Earned Written Earned $ 599,828 $ 610,753 $ 439,828 $ 408,056 — 18 (1) 199 599,807 610,750 439,819 408,246 $ 21 $ 21 $ 8 $ 8 All premiums written by Wright Flood under the National Flood Insurance Program are 100% ceded to FEMA, for which Wright Flood received a 30.8% expense allowance from January 1, 2015 through September 30, 2015 and 30.9% from October 1, 2015 through December 31, 2015. As of December 31, 2015 and 2014, the Company ceded $598.4 million and $439.1 million of written premiums, respectively. Effective April 1, 2014, Wright Flood is also a party to a quota share agreement whereby it cedes 100% of its gross excess flood premiums, which excludes fees, to Arch Reinsurance Company and receives a 30.5% commission. Wright Flood ceded $1.4 million and $0.8 million for the years ended December 31, 2015 and 2014. No loss data exists on this agreement. Wright Flood also ceded 100%, to Arch Reinsurance Company, 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, 2015, ceded unpaid losses and loss adjustment expenses for Homeowners, Private Passenger Auto Liability and Other Liability Occurrence was $8,698, $16,132 and $4,179, respectively. The incurred but not reported balance was $10,335 for Homeowners, $14,383 for Private Passenger Auto Liability and $8,456 for Other Liability Occurrence. 84 85 Brown & Brown, Inc.2015 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS On November 11, 2015, the Company entered into a third ASR with an investment bank to purchase an aggregate $75 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 $63.75 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. 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. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The reinsurance recoverable balance as of December 31, 2015 was $341.6 million and was comprised of recoverables on unpaid losses and loss expenses of $32.0 million and prepaid reinsurance premiums of $309.6 million. The reinsurance recoverable balance as of December 31, 2014 was $333.6 million that is comprised of recoverables on unpaid losses and loss expenses of $13.0 million and prepaid reinsurance premiums of $320.6 million There was no net activity in the reserve for losses and loss adjustment expense for the years ended December 31, 2015 and 2014, as Wright Flood’s direct premi- ums written were 100% ceded to three reinsurers. The balance of the reserve for losses and loss adjustment expense, excluding related reinsurance recoverable was $32.0 million as of December 31, 2015 and $13.0 million as of December 31, 2014. NOTE 17 Statutory Financial Information Wright Flood maintains minimum amounts of statutory capital and surplus of $7.5 million as required by regulatory authorities. Wright Flood’s statutory capital and surplus exceeded their respective minimum statutory requirements. The statutory capital and surplus of Wright Flood was $15.1 million as of December 31, 2015 and $10.9 million as of December 31, 2014. As of December 31, 2015 and 2014, Wright Flood generated statutory net income of $4.1 million and $2.3 million, respectively. NOTE 18 Subsidiary Dividend Restrictions Under the insurance regulations of Texas, the maximum amount of ordinary dividends that Wright Flood can pay to share- holders in a rolling twelve month period is limited to the greater of 10% of statutory adjusted capital and surplus as shown on Wright Flood’s last annual statement on file with the superintendent of the Texas Department of Insurance or 100% of adjusted net income. As an extraordinary dividend of $7.0 million was paid on May 20, 2014, no ordinary dividend could be paid until May 21, 2015. There was no dividend payout in 2015 and the maximum dividend payout that may be made in 2016 without prior approval is $4.1 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 on 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 addi- tional 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 repur- chase up to $450 million, in the aggregate, of the Company’s outstanding common stock. 86 87 2015 Annual ReportBrown & Brown, Inc.G A A P R E C O N C I L I A T I O N R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M 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, 2015 and 2014, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. 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, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, 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, 2015, 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 25, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting. Certified Public Accountants Miami, Florida February 25, 2016 GAAP Reconciliation—Income Before Income Taxes to Operating Profit and Adjusted Operating Profit (in thousands, except per share data) 2015 2014 2013 2012 2011 Retail Total revenues Income before income taxes Amortization Depreciation Interest Change in estimated acquisition earn-out payables Operating Profit Operating Profit Margin Less non-cash stock-based compensation adjustment $ 870,346 181,938 45,145 6,558 41,036 2,006 $ 276,683 31.8 % (5,524) $ 823,686 157,491 42,935 6,449 43,502 7,458 $ 257,835 $ 737,349 161,787 38,523 5,874 34,658 (1,427) $ 652,064 141,918 35,117 5,209 27,021 1,988 $ 614,093 135,856 33,806 5,064 28,197 (5,415) $ 239,415 $ 211,253 $ 197,508 31.3 % — 32.5 % — 32.4 % — 32.2 % — Adjusted Operating Profit Adjusted Operating Profit Margin $ 271,159 $ 257,835 $ 239,415 $ 211,253 $ 197,508 31.2 % 31.3 % 32.5 % 32.4 % 32.2 % National Programs Total revenues Income before income taxes Amortization Depreciation Interest Change in estimated acquisition earn-out payables Operating Profit Operating Profit Margin Less non-cash stock-based compensation adjustment $ 428,734 67,673 28,479 7,250 55,705 158 $ 159,265 $ 404,239 73,178 25,129 7,805 49,663 315 $ 156,090 $ 301,372 61,223 14,953 5,492 24,014 (808) $ 260,368 53,986 14,296 4,671 25,697 (1,075) $ 169,666 61,980 8,130 2,983 1,548 (508) $ 104,874 $ 97,575 $ 74,133 37.1 % — 38.6 % (3,700) 34.8 % — 37.5 % — 43.7% — Adjusted Operating Profit Adjusted Operating Profit Margin $ 159,265 $ 152,390 $ 104,874 $ 97,575 $ 74,133 37.1 % 37.7 % 34.8 % 37.5 % 43.7 % Wholesale Total revenues Income before income taxes Amortization Depreciation Interest Change in estimated acquisition earn-out payables Operating Profit Operating Profit Margin Less loss on disposal Adjusted Operating Profit Adjusted Operating Profit Margin Services Total revenues Income before income taxes Amortization Depreciation Interest Change in estimated acquisition earn-out payables Operating Profit Operating Profit Margin Less non-cash stock-based compensation adjustment $ 216,996 64,708 9,739 2,142 891 830 $ 78,310 $ 211,911 8,276 10,703 2,470 1,294 2,550 $ 25,293 $ 193,710 47,501 10,719 2,674 2,316 1,986 $ 168,239 37,834 10,441 2,619 3,594 110 $ 65,196 $ 54,598 $ 161,948 31,666 10,239 2,529 6,819 691 $ 51,944 36.1 % — 11.9 % 47,425 33.7 % — 32.5 % — 32.1 % — $ 78,310 $ 72,718 $ 65,196 $ 54,598 $ 51,944 36.1 % 34.3 % 33.7 % 32.5 % 32.1 % $ 145,365 19,713 4,019 1,988 5,970 9 $ 31,699 $ 136,558 17,870 4,135 2,213 7,678 (385) $ 31,511 $ 131,489 25,791 3,698 1,623 7,322 2,782 $ 117,486 17,233 3,680 1,278 8,602 395 $ 65,822 8,099 2,541 591 5,746 3,026 $ 41,216 $ 31,188 $ 20,003 21.8 % — 23.1 % (821) 31.3 % — 26.5 % — 30.4 % — Adjusted Operating Profit Adjusted Operating Profit Margin $ 31,699 $ 30,690 $ 41,216 $ 31,188 $ 20,003 21.8 % 22.5 % 31.3 % 26.5 % 30.4 % GAAP Earnings Per Share Reconciliation to Earnings Per Share—Adjusted GAAP earnings per share—as reported Loss on disposal Non-cash stock based compensation adjustment Change in estimated acquisition earn-out payables Earnings per share—adjusted 2015 (1) 1.70 — (0.03) 0.01 1.67 $ $ 2014 1.41 0.21 (0.03) 0.04 1.63 $ $ $ Change % Change $ $ 0.29 (0.21) — (0.03) 0.04 20.6 % 2.5 % (1) Column does not add, due to the cumulative effect of rounding on individual items 88 89 2015 Annual ReportBrown & Brown, Inc. R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M M A N A G E M E N T ’ S R E P O R T O N I N T E R N A L C O N T R O L O V E R F I N A N C I A L R E P O R T I N G To the Board of Directors and Shareholders of Brown & Brown, Inc. Daytona Beach, Florida We have audited the internal control over financial reporting of Brown & Brown, Inc. and subsidiaries (the “Company”) as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Spain Agency, Inc, Strategic Benefit Advisors, LLC, Bellingham Underwriters, Inc., MBA Insurance Agency of Arizona, Inc. and Smith Insurance, Inc. (collectively the “2015 Excluded Acquisitions”), which were acquired during 2015 and whose financial statements constitute 2.91% of total assets, 1.03% of revenues, and (0.03%) of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2015. Accordingly, our audit did not include the internal control over financial reporting of the 2015 Excluded Acquisitions. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an under- standing of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the com- pany’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and proce- dures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2015 of the Company and our report dated February 25, 2016 expressed an unqualified opinion on those financial statements. Certified Public Accountants Miami, Florida February 25, 2016 The management of Brown & Brown, Inc. and its subsidiaries (“Brown & Brown”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including Brown & Brown’s principal executive officer and principal financial officer, Brown & Brown conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In conducting Brown & Brown’s evaluation of the effectiveness of its internal control over financial reporting, Brown & Brown has excluded the following acquisitions completed during 2015: Spain Agency, Inc, Strategic Benefit Advisors, LLC, Bellingham Underwriters, Inc., MBA Insurance Agency of Arizona, Inc. and Smith Insurance, Inc. (collectively the “2015 Excluded Acquisitions”), which were acquired during 2015 and whose financial statements constitute 2.91% of total assets, 1.03% of revenues, and (0.03%) of net income of the Consolidated Financial Statement amounts as of and for the year ended December 31, 2015. Refer to Note 2 to the Consolidated Financial Statements for further discussion of these acquisitions and their impact on Brown & Brown’s Consolidated Financial Statements. Based on Brown & Brown’s evaluation under the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, management concluded that internal control over financial reporting was effective as of December 31, 2015. Management’s internal control over financial reporting as of December 31, 2015 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein. Brown & Brown, Inc. Daytona Beach, Florida February 25, 2016 J. Powell Brown Chief Executive Officer R. Andrew Watts Executive Vice President, Chief Financial Officer and Treasurer 90 91 Brown & Brown, Inc.2015 Annual Report P E R F O R M A N C E G R A P H S H A R E H O L D E R I N F O R M A T I O N The following graph is a comparison of five-year cumulative total stockholder returns for our common stock as compared with the cumulative total stockholder return for the NYSE Composite Index, and a group of peer insurance broker and agency companies (Aon plc, Arthur J. Gallagher & Co, Marsh & McLennan Companies, and Willis Towers Watson Public Limited Company). The returns of each company have been weighted according to such companies’ respective stock market capitalizations as of December 31, 2010 for the purposes of arriving at a peer group average. The total return calculations are based upon an assumed $100 investment on December 31, 2010, with all dividends reinvested. Brown & Brown, Inc. NYSE Composite Peer Group 12/10 100.00 100.00 100.00 12/11 95.89 96.52 114.10 12/12 109.34 112.00 122.00 12/13 136.39 141.19 174.63 12/14 144.78 150.78 193.51 12/15 143.21 144.91 191.50 Comparison of 5 Year Cumulative Total Return* Among Brown & Brown, Inc., the NYSE Composite Index, and a Peer Group $250 $225 $200 $175 $150 $125 $100 $75 $50 $25 $0 12/10 12/11 12/12 12/13 12/14 12/15 Brown & Brown, Inc. NYSE Composite Peer Group *$100 invested on 12/31/10 in stock or index, including reinvesting of dividends. Fiscal year ending December 31. Corporate Offices 220 South Ridgewood Avenue Daytona Beach, Florida 32114 (386) 252-9601 Outside Counsel Holland & Knight LLP 200 South Orange Avenue Suite 2600 Orlando, Florida 32801 Corporate Information and Shareholder Services The Company has included, as Exhibits 31.1 and 31.2, and 32.1 and 32.2 to its Annual Report on Form 10-K  for the fiscal year 2015 filed with the Securities and  Exchange Commission, certificates of the Chief  Executive Officer and Chief Financial Officer of the   Company certifying the quality of the Company’s pub- lic disclosure. The Company has also submitted to the New York Stock Exchange a certificate from its  Chief Executive Officer certifying that he is not aware  of any violation by the Company of New York Stock  Exchange corporate governance listing standards. A copy of the Company’s 2015 Annual Report on Form 10-K will be furnished without charge to any shareholder who directs a request in writing to: Corporate Secretary Brown & Brown, Inc. 220 South Ridgewood Avenue Daytona Beach, Florida 32114 A reasonable charge will be made for copies of the exhibits to the Form 10-K. Annual Meeting The Annual Meeting of Shareholders of Brown & Brown, Inc. will be held: May 4, 2016 9:00 a.m. (EDT) The Shores Resort 2637 South Atlantic Avenue Daytona Beach, Florida 32118 Transfer Agent and Registrar American Stock Transfer & Trust Company, LLC 6201 15th Ave. Brooklyn, New York 11219 (800) 937-5449 email: info@amstock.com www.amstock.com Independent Registered Public Accounting Firm Deloitte & Touche LLP 333 SE 2nd Avenue Suite 3600 Miami, Florida 33131 Stock Listing The New York Stock Exchange Symbol: BRO On February 22, 2016, there were 138,616,818 shares of our common stock outstanding, held by approximately 1,119 shareholders of record. Market Price of Common Stock 2015 Stock Price Range High Low Cash Dividends per Common Share First Quarter $ 33.34 $ 30.47 $ 0.11 Second Quarter $ 33.81 $ 31.50 $ 0.11 Third Quarter $ 34.59 $ 29.67 $ 0.11 Fourth Quarter $ 33.09 $ 30.39 $ 0.12 2014 First Quarter $ 32.88 $ 27.77 $ 0.10 Second Quarter $ 31.29 $ 28.27 $ 0.10 Third Quarter $ 33.46 $ 30.02 $ 0.10 Fourth Quarter $ 33.40 $ 30.96 $ 0.11 Additional Information Information concerning the services of Brown & Brown, Inc., as well as access to current financial releases, is available at  www.bbinsurance.com. 92 designed and produced by see see eye / Atlanta & San Antonio Brown & Brown, Inc. T E N - Y E A R S T A T I S T I C A L S U M M A R Y (in thousands, except per share data and other information) 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 Year Ended December 31, Revenues Commissions & fees Investment income Other income, net Total revenues Expenses Employee compensation and benefits Non-cash stock-based compensation Other operating expenses (Gain) Loss on disposal Amortization Depreciation Interest Change in estimated acquisition earn-out payables Total expenses Income before income taxes Income taxes Net income $ 1,656,951 $ 1,567,460 $ 1,355,503 $ 1,189,081 $ 1,005,962 $ 966,917 $ 964,863 $ 965,983 $ 914,650 $ 864,663 1,004 2,554 747 7,589 638 7,138 797 10,154 1,267 6,313 1,326 5,249 1,161 1,853 6,079 5,492 30,494 (1) 14,523 11,479 1,862 1,660,509 1,575,796 1,363,279 1,200,032 1,013,542 973,492 967,877 977,554 959,667 878,004 841,439 15,513 251,055 (619) 87,421 20,890 39,248 3,003 791,749 19,363 235,328 47,425 82,941 20,895 28,408 9,938 683,000 22,603 195,677 — 67,932 17,485 16,440 2,533 1,257,950 1,236,047 1,005,670 402,559 159,241 339,749 132,853 357,609 140,497 608,506 15,865 174,389 — 63,573 15,373 16,097 1,418 895,221 304,811 120,766 508,675 11,194 144,079 — 54,755 12,392 14,132 (2,206) 743,021 270,521 106,526 487,820 6,845 135,851 — 51,442 12,639 14,471 (1,674) 707,394 266,098 104,346 484,680 7,358 143,389 — 49,857 13,240 14,599 — 713,123 254,754 101,460 485,783 7,314 137,352 — 46,631 13,286 14,690 — 705,056 272,498 106,374 444,101 5,667 131,371 — 40,436 12,763 13,802 — 648,140 311,527 120,568 404,891 5,416 126,492 — 36,498 11,309 13,357 — 597,963 280,041 107,691 $ 243,318 $ 206,896 $ 217,112 $ 184,045 $ 163,995 $ 161,752 $ 153,294 $ 166,124 $ 190,959 $ 172,350 Employee compensation and benefits as % of total revenue Other operating expenses as % of total revenue 50.7% 15.1% 50.2% 14.9% 50.1% 14.4% 50.7% 14.5% 50.2% 14.2% 50.1% 14.0% 50.1% 14.8% 49.7% 14.1% 46.3% 13.7% 46.1% 14.4% Earnings per Share Information Net income per share—diluted Weighted average number of shares outstanding—diluted Dividends paid per share Year-End Financial Position Total assets Long-term debt Total shareholders’ equity Total shares outstanding Other Information $ $ 1.70 140,112 0.45 $ $ 1.41 142,891 0.41 $ $ 1.48 142,624 0.37 $ $ 1.26 142,010 0.35 $ $ 1.13 140,264 0.33 $ $ 1.12 139,318 0.31 $ $ 1.08 137,507 0.30 $ $ 1.17 136,884 0.29 $ $ 1.35 136,357 0.25 $ $ 1.22 135,886 0.21 $ 5,012,739 $ 4,956,458 $ 3,649,508 $ 3,128,058 $ 2,607,011 $ 2,400,814 $ 2,224,226 $ 2,119,580 $ 1,960,659 $ 1,807,952 $ 1,079,878 $ 1,152,846 (2) $ 380,000 $ 450,000 $ 250,033 $ 250,067 $ 250,209 $ 253,616 $ 227,707 $ 2,149,776 $ 2,113,745 $ 2,007,141 $ 1,807,333 $ 1,643,963 $ 1,506,344 $ 1,369,874 $ 1,241,741 $ 1,097,458 138,985 143,486 145,419 143,878 143,352 142,795 142,076 141,544 140,673 Number of full-time equivalent employees at year-end Total revenues per average number of employees (3) Stock price at year-end Stock price earnings multiple at year-end (5) Return on beginning shareholders’ equity (6) $ $ 7,807 215,679 32.10 18.9 12% $ $ 7,591 216,114 32.91 23.3 10% $ $ 6,992 203,020 31.39 21.2 12% 6,438 5,557 $ $ 191,729 (4) $ 186,949 25.46 $ 22.63 $ $ 20.2 11% 20.0 11% 5,286 185,568 23.94 21.4 12% $ $ 5,206 182,549 17.97 16.6 12% $ $ 5,398 187,181 20.90 17.9 15% $ $ 5,047 196,251 23.50 17.4 21% $ $ $ $ 226,252 929,345 140,016 4,733 189,368 28.21 23.1 23% (1) Includes an $18,664 gain on the sale of our investment in Rock-Tenn Company. (5) Stock price at year-end divided by net income per share-diluted. (2) Represents the incremental new debt associated with the acquisition of Wright and evolution of our capital structure. Please refer to Part I, Item 7 “Management’s (6) Represents net income divided by total shareholders’ equity as of the beginning of the year. Discussion and Analysis of Financial Condition and Results of Operations” and Note 8 “Long-Term Debt” for more details. (3) Represents total revenues divided by the average of the number of full-time equivalent employees at the beginning of the year and the number of full-time Weighted average number of shares outstanding-diluted has been adjusted to give effect for the two-class method of calculating earnings per share as described in Note 1 to the Consolidated Financial Statements. equivalent employees at the end of the year. (4) Of the 881 increase in the number of full-time equivalent employees from 2011 to 2012, 523 employees related to the January 9, 2012 acquisition of Arrowhead, and therefore, are considered to be full-time equivalent as of January 1, 2012. Thus, the average number of full-time equivalent employees for 2012 is considered to be 6,259. 220 South Ridgewood Avenue Daytona Beach, Florida 32114 (386) 252-9601 bbinsurance.com We rise to any challenge. 

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