THEPOWER
OFWE
346942 Brown & Brown AR_FC_2-5.indd 1
3/21/19 8:09 PM
H
T
EPOWER O
FWE
DRIVES OUR PERFORMANCE
For Our Customers
We are dedicated to making a positive difference in the lives of our customers by helping to protect
what they value most.
We craft insurance
differently by using
our experience, carrier
relationships, and
principled customer focus
to deliver superior service
and solutions.
For Our Teammates
We think of ourselves as a team, so we have teammates—not employees. We strive to attract people
who are competitive, driven, and disciplined. Built on meritocracy, our unique Company culture
rewards self-starters and those who are committed to doing what is best for our customers.
We are a team with grit,
focus, and drive. We are
a team that supports the
communities in which we
live, work, and play.
2
ThE POWER OF WE DRIVES OUR PERFORMANCE
For Our Investors and Shareholders
$100 invested in Brown & Brown stock in 1993 when we began our journey as a
public company would be worth $3,361 as of December 31, 2018.
SHARE PRICE GROWTH
$3,361
In This Report
04
Message from
Our CEO
$3,600
$3,100
$2,600
$2,100
$1,600
$1,100
$600
$100
$100
1993
1998
2003
2008
2013
2018
Source: JP Morgan
For Our Communities
Brown & Brown has a long-standing history of dedication to the people and
communities we serve.
We actively support
more than 975
organizations in our
local communities.
06
Performance
08
Who We Are
10
What We Do
12
Review of
Operations
16
Leadership
Overview
18
Brown & Brown
At-A-Glance
19
Communities
21
2018 Financial
Review
3
2018 ANNUAL REPORT MESSAGE FROM
MESSAGE FROM
OUR CEO
OUR CEO
2018 was a record year
for Brown & Brown, and
we are proud of our
overall performance.
We crossed our $2 billion interim
revenue goal and had the largest
acquisition revenue year in our
history closing 23 transactions with
annual revenues of approximately
$323 million, including acquisitions
in all four of our business segments.
For the year, our revenues grew
7.1% to over $2 billion and 2.4%
organically(1). Each of our segments
performed well in 2018, despite
a drop in revenues within our
National Programs Segment that was
associated with the hurricanes in late
2017. During the year, we continued
our investment in teammates,
technology, and launching new
capabilities. All will ultimately benefit
the experience of our customers,
carrier partners, and teammates.
These investments will support our
profitable growth in the future. For
2018, we increased our dividend
for the 25th year in a row and grew
our operating cash flow 28.4% to
$568 million. We are proud to deliver
another year of industry-leading
financial metrics.
So, why is Brown & Brown different
from other firms? It comes down
to culture and character. We have
teammates, not employees. We
think of ourselves as groups of
high-performing athletic teams.
We have leaders, not managers.
Leaders inspire and connect with
teammates. Together, we create
lasting and trusted relationships
with our customers. Our culture is
characterized by accountability,
performance, and ownership. More
than 60% of teammates invest
in our company, thereby tightly
aligning our interests with those of
our shareholders.
The theme of this year’s Annual
Report is The Power of WE—a
phrase we have been using for
many years. It means the shared
experiences of our team are more
impactful than the experience or
talent of any one individual. We strive
to tap the collective talents of our
team to benefit our customers. This
philosophy is further supported by
the fact that we are a meritocracy—
whereby teammates rise based on
(1) Organic revenue growth is a non-GAAP financial measure and is referenced to provide an additional meaningful method of evaluating our operating
performance from period to period on a basis that may not be otherwise on a GAAP basis. For other information concerning organic revenue growth and to
a reconciliation to the most closely comparable GAAP measure, refer to pages 23 and 30-31 of this Annual Report, respectively.
4
MESSAGE FROM OUR CEO
“So, why is Brown & Brown different than other firms? It comes down
to culture and character. We have teammates, not employees. We
think of ourselves as groups of high-performing athletic teams. We
have leaders, not managers.”
– J. Powell Brown
their ability. As we continue to grow,
we remain focused on the personal
side of our business. We are in the
people recruiting and enhancing
business, and our success is tied
to our teammates’ well-being. We
stress the three most important
things in our lives—our health, our
families, and our team.
The landscape of our industry
continues to evolve. Alternative
capital and InsurTech are common
topics of discussion. InsurTech is
focused on streamlining highly
repeatable tasks and improving the
customer experience. We continue
to follow this area closely and have
implemented several emerging
technologies in our company. There
is an enormous amount of alternative
capital available. That capital is
positioned for risk-bearing and the
purchase of distribution networks
that will force a historically inefficient
industry to evolve. Our ability to
underwrite, loss control, and pay
claims in our National Programs
Segment is one area where we can,
and have, put alternative capital to
use for the benefit of our customers.
Our investments in technology and
partnering with risk bearers enable
us to develop more innovative
solutions for our customers.
We are “a forever company.” We
make long-term investments to
benefit our stakeholders. Our top
and bottom line growth provides
stability and confidence for our
teammates, and new and improved
capabilities benefit our customers.
Our commitment to improved
technology enables us to trade
better with our insurance companies,
and our long-term growth of cash
flow and earnings helps drive value
for our shareholders. We have and
will continue to create shareholder
value over the long term by investing
in our teammates, making the right
acquisitions, and returning capital to
shareholders through dividends and
periodic share repurchases.
We are excited about our future
and have set our next intermediate
revenue goal of $4 billion. Success
will be achieved by continuing our
disciplined acquisition strategy,
recruiting and retaining the best
teammates, and always keeping the
customer as our number one focus.
To our teammates, thank you for
everything you do to make this
mission possible. To our customers,
thank you for having confidence
in our ability to help protect your
assets and employees. To our
trading partners, thank you for your
collaboration and the trust you place
in us. Finally, to our shareholders,
thank you for your continued belief
in our team.
Cheers,
J. Powell Brown, CPCU
President & Chief Executive Officer
The Power of WE®, A Meritocracy®, and A Forever Company® are registered trademarks of Brown & Brown, Inc. in the United States.
5
2018 ANNUAL REPORT PERFORMANCE
Focused on Growth and Success
Principled customer focus is at the core of the Brown & Brown culture. An entrepreneurial
spirit is valued and encouraged, which empowers teammates to do what it takes to provide
best-in-class customer service and solutions.
We understand that the only constant is change, and we are dedicated to looking ahead for
opportunities to best serve our customers in an ever-changing industry.
TOTAL REVENUES
2018 REVENUE BY SEGMENT
I
S
N
O
L
L
M
N
I
I
S
R
A
L
L
O
D
1,576
1,661
1,767
1,881
2,000
1,500
1,000
500
0
2,014
9% Services
14% Wholesale
Brokerage
25% National
Programs
2014
2015
2016
2017
2018
52% Retail
EBITDAC (1)
EBITDAC MARGIN (1)
I
S
N
O
L
L
M
N
I
I
S
R
A
L
L
O
D
553
580
605
615
482
800
600
400
200
0
E
G
A
T
N
E
C
R
E
P
50
40
30
20
10
0
30.6
33.3
32.8
32.2
30.6
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
(1) EBITDAC and EBITDAC Margin are non-GAAP financial measures and are referenced to provide additional meaningful methods of evaluating our operating
performance from period to period on a basis that may not be otherwise on a GAAP basis. For other information concerning EBITDAC and EBITDAC Margin
and to reconciliations to the most closely comparable GAAP measures, refer to pages 23 and 83 of this Annual Report, respectively.
6
PERFORMAnCE
Capital Allocation
Acquisitions
Our capital allocation strategy is based
on the philosophy of investing to optimize
returns and minimize debt. We strategically
deploy capital to invest internally, return
capital to shareholders, and acquire firms,
while maintaining a conservative debt profile.
2018 was a banner year with $323 million in
annual acquired revenue and the addition
of 1,100+ talented teammates across all
segments. We remain prepared to deploy
our capital when acquisitions fit culturally and
when terms make sense financially.
2018 USES OF CASH
2018 ANNUAL ACQUIRED REVENUE
4% Capital
expenditures
81% Acquisitions
8% Share
repurchases
7% Dividends
$289M
Retail
$13M
National
Programs
23 AGENCY
ACQUISITIONS
$323M REVENUE
$17M
Services
$4M
Wholesale
Brokerage
DIVIDENDS PER SHARE
2018 STAND-ALONE ACQUISITIONS
0.21
0.23
0.25
0.28
S
R
A
L
L
O
D
0.40
0.30
0.20
0.10
0
2014
2015
2016
2017
2018
Automotive Development Group
0.31
Dealer Associates
Finance & Insurance Resources
Hays Companies
Health Special Risk
Professional Disability Associates
Rodman Insurance Agency
Servco Insurance Services
We are proud to have delivered 25 years of
consecutive dividend increases.
Hays Companies marks the largest acquisition by
revenue in our Company’s history.
7
2018 ANNUAL REPORT
WHO WE ARE
We have always looked
for driven, disciplined
individuals who embrace
our culture. The Power
of BE is a set of powerful
behaviors, skills, and
characteristics that create a
link between what we do as
a company and how we do
it–our cultural DnA.
BE Customer Focused
Build strong relationships.
BE Smart
Make decisions that propel us forward.
BE Clear
Use a concise message that resonates.
BE A Winner
Consistently achieve results.
BE Gritty
Have courage & determination.
BE Trustworthy
Build trust through authenticity.
BE A Mentor
Support growth & development.
BE The Link
Create teammate connections & energy.
BE A Talent Magnet
Attract the brightest & best talent.
BE A Futurist
Create innovative ways to be successful.
8
79
years of dogged discipline
60%+
teammate shareholders
Our Culture
Brown & Brown is built on integrity,
innovation, superior capabilities,
and discipline.
Since our beginning, we have known
that doing the best for our customers
requires constant persistence and
vision. The cheetah, which represents
vision, swiftness, strength, and agility,
embodies our Company culture and has
served as a symbol for Brown & Brown
since the 1980s.
Ownership Mindset
We strive to provide opportunities for
teammates to have ownership in our
Company and create personal wealth.
Our teammates can share in ownership
of Brown & Brown, Inc. through our
Employee Stock Purchase Plan (ESPP),
our 401(k), and long-term equity grants.
Over 60% of our teammates invest in
our Company.
WHO WE ARE
291
locations
$113,000+
foundation funds dispersed
9,500+
teammates
A Big Company That
Doesn’t Act Like One
Thanks to our lean, decentralized
sales and service model, rigid rules
and bureaucratic interference are
minimized, helping to drive new and
innovative solutions for our customers.
Brown & Brown provides the
personalized, dedicated service
desired from a local agency, while
leveraging the exceptional capabilities
and peace-of-mind protection
expected from a top ten brokerage.
Our vision, speed, and agility allows
us to thrive in the competitive,
ever-changing insurance industry.
Health, Family,
Business
We encourage a healthy work-life
balance. Personal health and
well-being of our teammates and their
families comes first.
The Brown & Brown Disaster Relief
Foundation was established to help our
own and others impacted by natural
disasters and emergency hardship.
Being a Brown & Brown teammate
means stepping up to help others in
times of need.
We believe that when we, as an
organization, collectively value and
support these priorities, our Company
will continue to be driven by a positive,
engaged, and productive team.
Teammate-Driven
Success
Every successful team thrives on
diversity of talent, experience,
and character.
We operate as a meritocracy,
meaning we promote and reward
individual initiative. Our continued
success depends on the effective
recruitment and enhancement of the
most qualified teammates.
Our teammates are our greatest
resource.
9
2018 ANNUAL REPORT WHAT WE DO
Retail
National Programs
ACCOMPLISHMENTS
LOCATIONS
ACCOMPLISHMENTS
LOCATIONS
Enhanced customer
relationships
Developed proprietary
products
Acquired many
high-quality firms
Heightened teammate
collaboration
Evolved technology platforms
Expanded carrier
relationships
Added key leaders
Rolled out core
commercial program
Launched new
product offerings
InsurTech proof of
concepts
States with Brown & Brown Retail offices; Additional locations in Grand Cayman & Bermuda
States with Brown & Brown National Programs offices; Additional location in Ontario, Canada
CONTRIBUTION TO
TOTAL REVENUE
CONTRIBUTION TO
TOTAL EBITDAC(1)
CONTRIBUTION TO
TOTAL REVENUE
CONTRIBUTION TO
TOTAL EBITDAC(1)
52%
50%
25%
29%
SEGMENT TOTAL REVENUES
SEGMENT TOTAL REVENUES
1,200
800
400
0
I
S
N
O
L
L
M
N
I
I
S
R
A
L
L
O
D
824
870
917
943
1,043
2014
2015
2016
2017
2018
I
S
N
O
L
L
M
N
I
I
S
R
A
L
L
O
D
600
400
200
0
404
429
449
480
494
2014
2015
2016
2017
2018
(1) EBITDAC is a non-GAAP financial measure and is referenced to provide an additional meaningful method of evaluating our operating performance from
period to period on a basis that may not be otherwise on a GAAP basis. For other information concerning EBITDAC and to a reconciliation to the most
closely comparable GAAP measure, refer to pages 23 and 83 of this Annual Report, respectively.
10
WHAT WE DO
Wholesale Brokerage
Services
ACCOMPLISHMENTS
LOCATIONS
ACCOMPLISHMENTS
LOCATIONS
Rolled out property
binding authority
Expanded carrier
relationships
Acquired workers'
compensation business
Grew geographic footprint
Expanded talent
development program
Invested in innovation
& technology
Focused on teammate
development & retention
Improved collaboration
& efficiency
Enhanced customer
experience
Acquired additional capabilities
States with Brown & Brown Wholesale Brokerage offices; Additional location in London, England
States with Brown & Brown Services offices
CONTRIBUTION TO
TOTAL REVENUE
CONTRIBUTION TO
TOTAL EBITDAC(1)
CONTRIBUTION TO
TOTAL REVENUE
CONTRIBUTION TO
TOTAL EBITDAC(1)
14%
15%
9%
7%
SEGMENT TOTAL REVENUES
SEGMENT TOTAL REVENUES
I
S
N
O
L
L
M
N
I
I
S
R
A
L
L
O
D
300
200
100
0
212
217
243
272
287
2014
2015
2016
2017
2018
I
S
N
O
L
L
M
N
I
I
S
R
A
L
L
O
D
300
200
100
0
137
145
156
165
189
2014
2015
2016
2017
2018
(1) EBITDAC is a non-GAAP financial measure and is referenced to provide an additional meaningful method of evaluating our operating performance from
period to period on a basis that may not be otherwise on a GAAP basis. For other information concerning EBITDAC and to a reconciliation to the most
closely comparable GAAP measure, refer to pages 23 and 83 of this Annual Report, respectively.
11
2018 ANNUAL REPORT
Review of Operations
RETAIL
Pictured here are teammates from Strategic Benefit Advisors in Southborough, Massachusetts.
The success of our Retail Segment in
2018 was driven by our best-in-class
solutions and service, delivering
organic revenue growth(1) of 3.0%.
With an average annual customer
retention rate of more than 95%,
Strategic Benefit Advisors (SBA)
is an exceptional example of our
customer-centric culture. Customer
feedback is a hallmark of this
employee benefits advisory firm; and
is sought, analyzed, and acted upon
every day. SBA’s passion for listening
and responding to customers’ needs
is the foundation for their outstanding
customer retention rate and a
key driver of their success. SBA’s
team is composed of experienced
advisors and a deep bench of subject
matter experts–from actuaries to
physician specialists. Using their
extensive knowledge of the benefits
marketplace, their relationships with
supplier partners, and their expertise
in healthcare delivery models, SBA’s
advisors create tailored solutions
for each customer’s unique benefits
requirements. The result is a suite
of healthcare and group benefits
programs that effectively and
efficiently serve each customer’s
specific needs. SBA’s passion for
ongoing feedback allows them to
continuously improve the quality,
effectiveness, and breadth of their
offerings. It is a crucial element of their
commitment to their customers.
In 2019, our Retail Segment will
continue to focus on building
collaborative teams, investing
in customer-centric technology
platforms, delivering market-driven
solutions to keep our customers
ahead of industry trends, and
acquiring companies to create
additional growth.
(1) Organic revenue is a non-GAAP financial measure and is referenced to provide an additional meaningful method of evaluating our operating performance
from period to period on a basis that may not be otherwise on a GAAP basis. For other information concerning organic revenue growth and to a
reconciliation to the most closely comparable GAAP measure, refer to pages 23 and 30-31 of this Annual Report, respectively.
12
Review of Operations
NATIONAL PROGRAMS
The impact of non-recurring revenue
associated with the 2017 storm
season resulted in organic revenue
growth(1) of (0.9%) for our National
Programs Segment in 2018.
Arrowhead General Insurance Agency’s
Special Risk division (commercial and
residential earthquake) exemplifies
underwriting expertise and strong
carrier relationships.
Arrowhead’s Commercial Earthquake
program is one of the largest writers
of standalone commercial earthquake
policies in the United States and offers
the highest commercial earthquake
policy limits in California, Oregon,
and Washington.
The team developed an innovative
policy across multiple carriers,
eliminating the cost and inefficiency of
issuing separate policies. This creative
approach helped drive strong growth
in 2018. They also worked with multiple
carrier partners to consolidate separate
claims administration functions into
a single source within our American
Claims Management business. This
change led to greater efficiency and
speed of claims administration.
Arrowhead’s Residential Earthquake
program has a deeply-ingrained
culture of customer engagement—the
bedrock of its success—evidenced by
the 1,000+ independent agents that
distribute its industry-leading offerings.
The team’s technical and product
expertise is a key contributor to their
strong carrier relationships, allowing
them to offer expanded coverage
options through the automated
Arrowhead Exchange portal. This
application provides access to
fast and accurate quotes and swift
underwriting response time for agents.
National Programs is committed
to teammate engagement and
development as a key piece of our
growth strategy, and we will continue
to evaluate and explore new product
ideas, acquisitions, partnerships, and
InsurTech applications. Teammates
from the National Programs Segment
work every day to create better
outcomes for our customers.
(1) Organic revenue is a non-GAAP financial measure and is referenced to provide an additional meaningful method of evaluating our operating performance from
period to period on a basis that may not be otherwise on a GAAP basis. For other information concerning organic revenue growth and to a reconciliation to the
most closely comparable GAAP measure, refer to pages 23 and 30-31 of this Annual Report, respectively.
Pictured here are teammates from Arrowhead’s Special Risk division in San Diego, California.
2018 ANNUAL REPORT
13
Review of Operations
WHOLESALE BROKERAGE
2018 was another banner year for
the Wholesale Brokerage Segment
with 5.7% organic revenue growth(1),
powered by the diversification of our
product mix.
The extraordinary success of Procor
Solutions + Consulting’s (Procor) risk
management and claims advisory
business demonstrates the quality
of this segment’s growth. Since
its inception in 2013, Procor has
grown organically to become one
of the leading performers within the
Wholesale Brokerage Segment.
Procor exemplifies “Insurance in
Action”—helping customers protect
their people, property, and profits
and become more resilient to a
catastrophe or disaster. A premier
provider of complex property damage
and business interruption claims
consulting services, Procor helped
customers finalize and collect claims
in excess of $1 billion in 2018 with
exceptional revenue growth. But
Procor’s services go beyond helping
businesses navigate insurance,
manage business interruption risk,
maximize valuations, and manage
claims after an event. What sets Procor
apart is its extensive pre-loss planning
expertise—helping customers
understand what their risks are, how
to value them, and how to carefully
plan for business continuity. Procor’s
commitment to excellence permeates
every corner of their operation.
From the many awards earned by
its teammates in 2018, to its office
strategically located in Brooklyn’s
“Tech Triangle,” Procor’s technology
solutions make it easier to engage in
disaster planning.
This dedication to customer and
operational excellence is shared
across the Wholesale Brokerage
Segment. As we focus in 2019
on expanding the breadth and
geographic footprint of our business,
this commitment will be a key enabler
to capture additional profitable
growth opportunities.
(1) Organic revenue is a non-GAAP financial measure and is referenced to provide an additional meaningful method of evaluating our operating performance
from period to period on a basis that may not be otherwise on a GAAP basis. For other information concerning organic revenue growth and to a
reconciliation to the most closely comparable GAAP measure, refer to pages 23 and 30-31 of this Annual Report, respectively.
14
Pictured here are teammates from Procor Solutions + Consulting in Brooklyn, New York.
Review of Operations
SERVICES
Pictured here are teammates from USIS in Orlando, Florida.
Our commitment to excellence in
customer service and innovation
was evident in our Services
Segment in 2018, which delivered
organic revenue growth(1) of 3.4%.
“Service Beyond the Contract”
is the motto of USIS, a leader in
third-party claims administration
and management for workers’
compensation and liability claims.
Using the skills and expertise of its
subject matter experts and software
developers, USIS closely manages
the needs and challenges facing
its customers to create innovative
programs with custom services.
These tailor-made solutions reduce
cost, increase efficiency, and
improve quality of service for injured
employees. This extraordinary
customer focus allowed USIS to
turn the insolvency of a workers’
compensation insurance company
into a winning situation. In early 2018,
the Florida Workers’ Compensation
Insurance Guaranty Association
(FWCIGA) turned to USIS to create
a program to quickly and efficiently
administer more than 2,200
workers’ compensation claims in
receivership. Within weeks, USIS’s
team of specially trained adjusters
and nurses coordinated and
reinstated medical care for injured
employees, resumed the payment of
lost wage benefits, and paid medical
providers overdue amounts. Under
USIS’s program, 55% of claims were
resolved within the first 12 months.
Injured employees received the
care and financial support they were
due, medical providers received
the reimbursement they were
owed, and FWCIGA’s exposure was
minimized—all while contributing to
USIS’s growth.
In 2019, the Services Segment will
carry forward this deep-rooted
dedication to customer focus as
we collaborate to seek new ways
to deliver more innovative and
responsive products and services to
drive customer acquisition, retention,
and growth.
(1) Organic revenue is a non-GAAP financial measure and is referenced to provide an additional meaningful method of evaluating our operating performance
from period to period on a basis that may not be otherwise on a GAAP basis. For other information concerning organic revenue growth and to a
reconciliation to the most closely comparable GAAP measure, refer to pages 23 and 30-31 of this Annual Report, respectively.
15
2018 ANNUAL REPORT
LEADERSHIP OVERVIEW
J. POWELL BROWN, CPCU
President &
Chief Executive Officer
R. ANDREW WATTS
Executive Vice President,
Chief Financial Officer &
Treasurer
J. SCOTT PENNY, CIC
Executive Vice President &
Chief Acquisitions Officer
ROBERT W. LLOYD, ESQ., CPCU, CIC
Executive Vice President,
General Counsel
& Secretary
JULIE K. RYAN
Executive Vice President &
Chief People Officer
RICHARD A. FREEBOURN, SR.,
CPCU, CIC
Senior Vice President–
Internal Operations
ANTHONY T. STRIANESE
Executive Vice President &
President–Wholesale
Brokerage Division
CHRIS L. WALKER
Executive Vice President &
President–National
Programs Division
J. NEAL ABERNATHY
Senior Vice President
JOHN R. BERNER
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 Division
KATHY H. COLANGELO, CIC, ASLI
Senior Vice President
16
MICHAEL J. EGAN
Senior Vice President & Regional
President—Retail Division
JOHN M. ESPOSITO, CIC
Senior Vice President & Regional
President —Retail Division
JOSEPH S. FAILLA
Senior Vice President
JAMES C. HAYS
Vice Chairman
THOMAS K. HUVAL, CIC
Senior Vice President & Regional
President—Retail Division
MICHAEL L. KEEBY, CIC
Senior Vice President & Regional
President—Retail Division
RICHARD A. KNUDSON, CIC
Senior Vice President & Regional
President—Retail Division
DONALD M. MCGOWAN, JR.
Senior Vice President & Regional
President—Retail Division
B. CARL OWEN, JR.
Senior Vice President &
Chief Information Officer
PAUL F. ROGERS
Senior Vice President & Regional
President—Retail Division
H. VAUGHN STOLL
Senior Vice President
LEADERSHIP OVERVIEW
Board of Directors
Left to right:
SAMUEL P. BELL, III, ESQ.
Former Of Counsel Buchanan
Ingersoll & Rooney PC
Committees: Acquisition,
Compensation
JAMES S. HUNT
Former Executive Vice President &
Chief Financial Officer, Walt Disney
Parks and Resorts Worldwide
Committees: Acquisition, Audit (Chair),
Compensation
THEODORE J. HOEPNER
Former Vice Chairman, SunTrust Bank
Holding Company
Committees: Audit, Compensation
BRADLEY CURREY, JR.
Former Chairman & Chief Executive
Officer, Rock-Tenn Company
Committee: Nominating/Corporate
Governance
CHILTON D. VARNER, ESQ.
Senior Counsel, King & Spalding LLP
Committee: Nominating/Corporate
Governance
WENDELL S. REILLY
Managing Partner,
Grapevine Partners, LLC
Lead Director
H. PALMER PROCTOR, JR.
President & Chief Executive Officer/
Director, Fidelity Bank
Committees: Acquisition (Chair),
Compensation
HUGH M. BROWN
Founder and former President &
Chief Executive Officer, BAMSI, Inc.
Committee: Nominating/Corporate
Governance (Chair)
Committees: Acquisition, Audit,
Nominating/Corporate Governance
J. HYATT BROWN, CPCU, CLU
Chairman, Brown & Brown, Inc.
J. POWELL BROWN, CPCU
President & Chief Executive Officer,
Brown & Brown, Inc.
TONI JENNINGS
Chairman, Jack Jennings & Sons;
Former Lieutenant Governor,
State of Florida
Committees: Audit,
Compensation (Chair)
TIMOTHY R. M. MAIN
Global Head of Financial Institutional
Group, Barclays Plc
Committee: Acquisition
JAMES C. HAYS
Vice Chairman, Brown & Brown, Inc.
LAWRENCE L. GELLERSTEDT, III
Chairman of the Board &
Chief Executive Officer, Cousins
Properties Incorporated
17
2018 ANNUAL REPORT BROWN & BROWN
AT-A-GLANCE
Retail
National Programs
From large multinational organizations to small businesses and
personal insurance, Brown & Brown’s Retail Segment develops
comprehensive insurance solutions to fit the needs of our
customers. Our customers’ exposures are unique and deserve
equally unique options that provide appropriate coverage to reduce
risk. Utilizing our unparalleled expertise and market strength, we are
focused on protecting what our customers value most.
Teams within Brown & Brown’s National Programs Segment
specialize in the development and management of insurance
program business, often designed for niche, underserved markets.
We offer program management expertise for insurance carrier
partners across numerous lines of business. By remaining vigilant
of emerging insurance exposures and needs, we are leaders in
the design of cutting-edge products and programs.
• Public Risk
Underwriters
of Illinois
• Public Risk
Underwriters
of Indiana
• Public Risk
Underwriters of
New Jersey
• Sigma Underwriting
Managers
• TitlePac
• Wright Flood
• Wright Public Entity
• Wright Specialty
• Optometric
Protector Plan
• Parcel
Insurance Plan
• Physicians
Protector Plan
• Proctor Financial
• Professional
Protector Plan
for Dentists
• Professional Risk
Specialty Group
• Professional
Services Plans
• Protect One for
Professionals
• Public Risk
Underwriters
of Florida
• Allied Protector Plan
• American Specialty
• Arrowhead General
Insurance Agency
• Automotive
Aftermarket
• Bellingham
Underwriters
• CalSurance
Associates
• Clear Risk Solutions
• Florida Intracoastal
Underwriters
• Health Special Risk
• Irving Weber
Associates
• Lawyer’s
Protector Plan
Services
Partnering with insurance companies and self-insured entities,
Brown & Brown’s Services Segment provides third-party claims
administration and ancillary services such as surveillance and
special investigation services. Our expertise across diverse lines
of business includes workers’ compensation, professional liability,
auto, general liability, flood, and Social Security disability insurance
advocacy. Our seasoned team prides itself on being nimble and
ready to tailor solutions to meet each customer’s unique needs.
• The Advocator Group
• American Claims Management
• Insurance Claims Adjusters
• NuQuest
• Preferred Government
Claims Services
• Professional Disability Associates
• Protect Professionals
Claims Management
• USIS
• Arizona
• Arkansas
• California
• Colorado
• Connecticut
• Delaware
• Florida
• Georgia
• Hawaii
• Illinois
• Indiana
• Iowa
• Kansas
• Kentucky
• Louisiana
• Maryland
• Massachusetts
• Michigan
• Minnesota
• Mississippi
• Missouri
• Nevada
• New Hampshire
• New Jersey
• New Mexico
• New York
• Ohio
• Oklahoma
• Oregon
• Pennsylvania
• Rhode Island
• South Carolina
• Tennessee
• Texas
• Utah
• Vermont
• Virginia
• Washington
• Wisconsin
Outside U.S.:
• Bermuda
• Cayman Islands
Wholesale Brokerage
Specializing in placing unique and complex accounts, brokers in
Brown & Brown’s Wholesale Brokerage Segment are insurance
product and program specialists with access to an extensive
network of insurance companies offering excess and surplus lines
coverages. We offer a distinct value proposition to retail partners:
exceptional coverage expertise across a wide range of property
and casualty lines of business and access to well-established
insurance company relationships often unavailable to retail
agencies on a direct basis.
• APEX Insurance Services
• Big Sky Underwriters
• Braishfield Associates
• Bridge Specialty Underwriting
• Combined Group
Insurance Services
• Decus Insurance Brokers
• ECC Insurance Brokers
• Graham Rogers
• Halcyon Underwriters
• Hull & Company
• MacDuff Underwriters
• Morstan General Agency
• National Risk Solutions
• Peachtree Special Risk Brokers
• Procor Solutions + Consulting
• Public Risk Underwriters of Texas
• Texas Security General
Insurance Agency
18
Find your solution at bbinsurance.com/locations
COMMUNITIES
Dedicated to the
People and
Communities
We Serve
For 79 years, Brown & Brown has
demonstrated a Culture of Caring
through dedication to the people
and communities we serve. With
more than 9,500 teammates
in approximately 291 locations,
we actively support more than
975 organizations in the many local
communities in which we live, work,
and play. Brown & Brown is proud to
support multiple non-profit groups
and other organizations nationwide,
including the American Cancer
Society, American Red Cross, Big
Brothers Big Sisters of America,
Habitat for Humanity, Make-A-Wish,
Special Olympics, St. Jude Children’s
Research Hospital, Wounded Warrior
Project, and the United Way.
We proudly support conservation
efforts to protect the cheetah, our
Company symbol, through the
Cheetah Conservation Fund and the
Ann Van Dyk Cheetah Centre.
Servant leadership helps to build a
better organization, and our team
is passionate about giving back to
our communities and serving those
in need.
19
2018 ANNUAL REPORT Disclosure Regarding Forward-Looking Statements
Brown & Brown, Inc., together with its subsidiaries (collectively, “we,” “Brown & Brown” or the “Company”), makes “forward-looking statements” within the “safe
harbor” provision of the Private Securities Litigation Reform Act of 1995, as amended, throughout this report and in the documents we incorporate by reference
into this report. You can identify these statements by forward-looking words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “estimate,”
“plan” and “continue” or similar words. We have based these statements on our current expectations about potential future events. Although we believe the
expectations expressed in the forward-looking statements included in this Form 10-K and the reports, statements, information and announcements incorporated
by reference into this report are based upon reasonable assumptions within the bounds of our knowledge of our business, a number of factors could cause
actual results to differ materially from those expressed in any forward-looking statements, whether oral or written, made by us or on our behalf. Many of these
factors have previously been identified in filings or statements made by us or on our behalf. Important factors which could cause our actual results to differ
materially from the forward-looking statements in this report include but are not limited to the following items, in addition to those matters described in Part I, Item
1A “Risk Factors” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:
• Future prospects;
• Premium rates set by insurance companies and insurable exposure units, which have traditionally varied and are difficult to predict;
• Material adverse changes in economic conditions in the markets we serve and in the general economy;
• Future regulatory actions and conditions in the states in which we conduct our business;
• The occurrence of adverse economic conditions, an adverse regulatory climate, or a disaster in Arizona, California, Florida, Georgia, Illinois, Indiana,
Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Texas, Virginia, Washington and Wisconsin,
because a significant portion of business written by us is for customers located in these states;
• Our ability to attract, retain and enhance qualified personnel and to maintain our corporate culture;
• Competition from others in or entering into the insurance agency, wholesale brokerage, insurance programs and related service business;
• Disintermediation within the insurance industry, including increased competition from insurance companies, technology companies and the financial services
industry, as well as the shift away from traditional insurance markets;
• The integration of our operations with those of businesses or assets we have acquired, including our November 2018 acquisition of The Hays Group, Inc.
and certain of its affiliates, or may acquire in the future and the failure to realize the expected benefits of such integration;
• Risks that could negatively affect our acquisition strategy, including continuing consolidation among insurance intermediaries and the increasing presence of
private equity investors driving up valuations;
• Our ability to forecast liquidity needs through at least the end of 2019;
• Our ability to renew or replace expiring leases;
• Outcomes of existing or future legal proceedings and governmental investigations;
• Policy cancellations and renewal terms, which can be unpredictable;
• Potential changes to the tax rate that would affect the value of deferred tax assets and liabilities and the impact on income available for investment or
distribution to shareholders;
• The inherent uncertainty in making estimates, judgments, and assumptions in the preparation of financial statements in accordance with generally accepted
accounting principles in the United States of America (“U.S. GAAP”);
• Our ability to effectively utilize technology to provide improved value for our customers or carrier partners as well as applying effective internal controls and
efficiencies in operations; and
• Other risks and uncertainties as may be detailed from time to time in our public announcements and Securities and Exchange Commission (“SEC”) filings.
Assumptions as to any of the foregoing and all statements are not based upon historical fact, but rather reflect our current expectations concerning future
results and events. Forward-looking statements that we make or that are made by others on our behalf are based upon a knowledge of our business and the
environment in which we operate, but because of the factors listed above, among others, actual results may differ from those in the forward-looking statements.
Consequently, these cautionary statements qualify all of the forward-looking statements we make herein. We cannot assure you that the results or developments
anticipated by us will be realized or, even if substantially realized, that those results or developments will result in the expected consequences for us or affect us,
our business or our operations in the way we expect. We caution readers not to place undue reliance on these forward-looking statements, which speak only as
of their dates. We assume no obligation to update any of the forward-looking statements.
20
2018
Financial
Review
22
45
46
47
48
49
83
84
87
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
GAAP Reconciliation—Income Before Income Taxes to EBITDAC
and Income Before Income Taxes Margin to EBITDAC Margin
Report of Independent Registered Public Accounting Firm
Management’s Report on Internal Control Over
Financial Reporting
88
Performance Graph
21
2018 ANNUAL REPORT General
The following discussion should be read in conjunction with our Consolidated Financial Statements and the related Notes
to those Financial Statements included elsewhere in this Annual Report on Form 10-K. In addition, please see “Information
Regarding Non-GAAP Measures” below, regarding important information on non-GAAP financial measures contained in our
discussion and analysis.
We are a diversified insurance agency, wholesale brokerage, insurance programs and services organization headquartered
in Daytona Beach, Florida. As an insurance intermediary, our principal sources of revenue are commissions paid by insurance
companies and, to a lesser extent, fees paid directly by customers. Commission revenues generally represent a percentage
of the premium paid by an insured and are affected by fluctuations in both premium rate levels charged by insurance
companies and the insureds’ underlying “insurable exposure units,” which are units that insurance companies use to measure
or express insurance exposed to risk (such as property values, or sales and payroll levels) to determine what premium to
charge the insured. Insurance companies establish these premium rates based upon many factors, including loss experience,
risk profile and reinsurance rates paid by such insurance companies, none of which we control.
We have increased revenues every year from 1993 to 2018, with the exception of 2009, when our revenues dropped 1.0%. Our
revenues grew from $95.6 million in 1993 to $2.0 billion in 2018, reflecting a compound annual growth rate of 13.0%. In the same
25-year period, we increased net income from $8.1 million to $344.3 million in 2018, a compound annual growth rate of 16.2%.
The volume of business from new and existing customers, fluctuations in insurable exposure units, changes in premium rate
levels, changes in general economic and competitive conditions, and the occurrence of catastrophic weather events all affect
our revenues. For example, level rates of inflation or a general decline in economic activity could limit increases in the values
of insurable exposure units. Conversely, increasing costs of litigation settlements and awards could cause some customers
to seek higher levels of insurance coverage. Historically, our revenues have typically grown as a result of our focus on net
new business growth and acquisitions. We foster a strong, decentralized sales and service culture with the goal of consistent,
sustained growth over the long-term.
The term “Organic Revenue,” a non-GAAP measure, is our core commissions and fees less (i) the core commissions and fees
earned for the first twelve months by newly-acquired operations, (ii) divested business (core commissions and fees generated
from offices, books of business or niches sold or terminated during the comparable period), and (iii) the impact of the adoption
of Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” and Accounting Standards
Codification Topic 340 – Other Assets and Deferred Cost (the “New Revenue Standard”) effective January 1, 2018. The term
“core commissions and fees” excludes profit-sharing contingent commissions and guaranteed supplemental commissions,
and therefore represents the revenues earned directly from specific insurance policies sold, and specific fee-based services
rendered. “Organic Revenue” is reported in this manner in order to express the current year’s core commissions and fees on
a comparable basis with the prior year’s core commissions and fees. The resulting net change reflects the aggregate changes
attributable to (i) net new and lost accounts, (ii) net changes in our customers’ exposure units, (iii) net changes in insurance
premium rates or the commission rate paid to us by our carrier partners, (iv) the net change in fees paid to us by our customers
and (v) fees earned based upon claim processing volumes within our Services Segment. Organic Revenue is reported in
“Results of Operations” and in “Results of Operations - Segment Information” of this Form 10-K.
We also earn “profit-sharing contingent commissions,” which are commissions based primarily on underwriting results,
but which may also reflect considerations for volume, growth and/or retention. These commissions which are included in
our commissions and fees in the Consolidated Statement of Income, are accrued throughout the year based on actual
premiums written and are primarily received in the first and second quarters of each year, based upon the aforementioned
considerations for the prior year(s). Prior to the adoption of the New Revenue Standard, these commissions were recorded to
income when received. Over the last three years, profit-sharing contingent commissions have averaged approximately 3.1% of
the previous year’s commissions and fees revenue.
22
MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESUlTS OF OPERATIONS (CONT'D.)
Certain insurance companies offer guaranteed fixed-base agreements, referred to as “Guaranteed Supplemental Commissions”
(“GSCs”) in lieu of profit-sharing contingent commissions. GSCs are accrued throughout the year based upon actual premiums
written. For the year ended December 31, 2018, we had earned $ 10.0 million of GSCs, of which $8.9 million remained
accrued at December 31, 2018 as most of this will be collected over the first and second quarters of 2019. For the years ended
December 31, 2018, 2017, and 2016, we earned $10.0 million, $10.4 million and $11.5 million, respectively, from GSCs.
Combined, our profit-sharing contingent commissions and GSCs for the year ended December 31, 2018 increased by $3.3 million over
2017 primarily as a result of an increase in profit-sharing contingent commissions and GSCs in the National Programs Segments. Other
income decreased by $20.8 million primarily as a result of a legal settlement recognized in the first quarter of 2017.
Fee revenues primarily relate to services other than securing coverage for our customers, as well as fees negotiated in lieu of
commissions, and are recognized as performance obligations are satisfied. 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.
Fee revenues as a percentage of our total commissions and fees, represented 19.8% in 2018, 31.5% in 2017, and 31.3% in 2016.
For the years ended December 31, 2018 and 2017, our commissions and fees growth rate was 8.2% and 5.4%, respectively,
and our consolidated Organic Revenue growth rate was 2.4% and 4.4%, respectively. In the event that the gradual increases
in insurable exposure units that occurred in the past few years continues through 2019 and premium rate changes are similar
with 2018, we believe we will continue to see positive quarterly Organic Revenue growth rates in 2019.
Historically, investment income has consisted primarily of interest earnings on operating cash and where permitted, 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, 2018 increased over 2017 by $12.7 million, primarily as a result
of net new business and acquisitions completed in the past twelve months offset by lower weather related claims processing
revenues in 2018 and a legal settlement recorded in the first quarter of 2017.
Information Regarding Non-GAAP Measures
In the discussion and analysis of our results of operations, in addition to reporting financial results in accordance with
generally accepted accounting principles (“GAAP”), we provide references to the following non-GAAP financial measures
as defined in Regulation G of SEC rules: Organic Revenue, Organic Revenue growth, EBITDAC and EBITDAC Margin. We
view these non-GAAP financial measures as important indicators when assessing and evaluating our performance on a
consolidated basis and for each of our segments because they allow us to determine a more comparable, but non-GAAP,
measurement of revenue growth and operating performance that is associated with the revenue sources that were a part
of our business in both the current and prior year. We believe that Organic Revenue provides a meaningful representation
of our operating performance and view Organic Revenue growth as an important indicator when assessing and evaluating
the performance of our four segments. Organic Revenue can be expressed as a dollar amount or a percentage rate when
describing Organic Revenue growth. We also use Organic Revenue growth and EBITDAC Margin for incentive compensation
determinations for executive officers and other key employees. We view EBITDAC and EBITDAC Margin as important
indicators of operating performance, because they allow us to determine more comparable, but non-GAAP, measurements
of our operating margins in a meaningful and consistent manner by removing the significant non-cash items of depreciation,
amortization and the change in estimated acquisition earn-out payables, and also interest expense and taxes, which are
reflective of investment and financing activities, not operating performance.
These measures are not in accordance with, or an alternative to the GAAP information provided in this Annual Report on
Form 10-K. We present such non-GAAP supplemental financial information because we believe such information is of interest
to the investment community and because we believe they 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.
We believe these non-GAAP financial measures improve the comparability of results between periods by eliminating the
impact of certain items that have a high degree of variability. Our industry peers may provide similar supplemental non-GAAP
23
2018 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESUlTS OF OPERATIONS (CONT'D.)
information with respect to one or more of these measures, although they may not use the same or comparable terminology
and may not make identical adjustments. This supplemental financial information should be considered in addition to, not in
lieu of, our Consolidated Financial Statements.
Tabular reconciliations of this supplemental non-GAAP financial information to our most comparable GAAP information are
contained in this Annual Report on Form 10-K under “Results of Operation–Segment Information.”
Acquisitions
Part of our business strategy is to attract high-quality insurance intermediaries to join our operations. From 1993 through the
fourth quarter of 2018, we acquired 513 insurance intermediary operations, excluding acquired books of business (customer
accounts). During the year ended December 31, 2018, the Company acquired the assets and assumed certain liabilities
of twenty insurance intermediaries, all of the stock of three insurance intermediaries and one book of business (customer
accounts). Collectively, these acquired businesses had annualized revenues of approximately $323.2 million.
On November 15, 2018, we completed the acquisition of certain assets and assumption of certain liabilities of The Hays
Group, Inc. and certain of its affiliates (collectively, “Hays”). At closing, we delivered a payment of $705 million, consisting of
$605 million in cash and the issuance to certain key owners of Hays of 3,376,103 shares of our common stock for a total value
of $ 100.0 million. In addition, the Company may pay additional consideration to Hays in the form of earn-out payments in the
aggregate amount of up to $25.0 million in cash over three years, which is subject to certain conditions and the successful
achievement of average annual EBITDA compound annual growth rate targets for the acquired business during 2019,
2020 and 2021. Hays was founded in 1994 providing employee benefits, property & casualty, and personal lines insurance
and has grown to be the 22nd largest U.S. broker as measured by Business Insurance magazine. With headquarters in
Minneapolis, Hays operates across twenty-one states, increasing our presence in the mid-west. This transaction was initially
funded through utilization of the Company’s revolving line of credit within our credit facility, details of which can be found in
“Management’s Discussion and Analysis of Financial Condition”, “Results of Operations” and Note 9 “long-Term Debt” in the
“Notes to Consolidated Financial Statements”.
Critical Accounting Policies
Our Consolidated Financial Statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
We continually evaluate our estimates, which are based upon historical experience and on assumptions that we believe to be
reasonable under the circumstances. These estimates form the basis for our judgments about the carrying values of our assets and
liabilities, of which values are not readily apparent from other sources. Actual results may differ from these estimates.
We believe that of our significant accounting and reporting policies, the more critical policies include our accounting for
revenue recognition, business combinations, and purchase price allocations, intangible asset impairments, non-cash
stock-based compensation, and reserves for litigation. In particular, the accounting for these areas requires significant use
of judgment to be made by management. Different assumptions in the application of these policies could result in material
changes in our consolidated financial position or consolidated results of operations. Refer to Note 1 “Summary of Significant
Accounting Policies” in the “Notes to Consolidated Financial Statements” for a discussion of the impacts for adopting
Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606).
Revenue Recognition
The majority of our revenue is commissions derived from our performance as agents and brokers, acting on behalf of
insurance carriers to sell products to customers that are seeking to transfer risk, and conversely, acting on behalf of those
customers in negotiating with insurance carriers seeking to acquire risk in exchange for premiums. In these arrangements our
performance obligation is complete upon the effective date of the bound policy, as such that is when the associated revenue
is recognized. Where the Company’s performance obligations have been completed, but the final amount of compensation
is unknown due to variable factors, we estimate the amount of such compensation. We recognize subsequent commission
adjustments upon our receipt of additional information or final settlement, whichever occurs first.
To a lesser extent, the Company earns revenues in the form of fees. like commissions, fees paid to us in lieu of commission, are
recognized upon the effective date of the bound policy. When we are paid a fee for service, however, the associated revenue is
recognized over a period of time that coincides with when the customer simultaneously receives and consumes the benefit of our
work, which characterizes most of our claims processing arrangements and various services performed in our employee benefits
practices. Other fees are typically recognized upon the completion of the delivery of the agreed-upon services to the customer.
24
MANAGEMENT'S DISCUSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESUlTS OF OPERATIONS (CONT'D.)
Management determines a policy cancellation reserve based upon historical cancellation experience adjusted in accordance
with known circumstances.
Please see Note 2 “Revenues” in the “Notes to Consolidated Financial Statements” for additional information regarding the
nature and timing of our revenues.
Business Combinations and Purchase Price Allocations
We have acquired significant intangible assets through acquisitions of businesses. These assets generally consist of
purchased customer accounts, non-compete agreements, and the excess of purchase prices over the fair value of identifiable
net assets acquired (goodwill). The determination of estimated useful lives and the allocation of purchase price to intangible
assets requires significant judgment and affects the amount of future amortization and possible impairment charges.
All of our business combinations initiated after June 30, 2001 have been accounted for using the acquisition method. In
connection with these acquisitions, we record the estimated value of the net tangible assets purchased and the value of
the identifiable intangible assets purchased, which typically consist of purchased customer accounts and non-compete
agreements. Purchased customer accounts include the physical records and files obtained from acquired businesses that
contain information about insurance policies, customers and other matters essential to policy renewals. However, they
primarily represent the present value of the underlying cash flows expected to be received over the estimated future renewal
periods of the insurance policies comprising those purchased customer accounts. The valuation of purchased customer
accounts involves significant estimates and assumptions concerning matters such as cancellation frequency, expenses
and discount rates. Any change in these assumptions could affect the carrying value of purchased customer accounts.
Non-compete agreements are valued based upon their duration and any unique features of the particular agreements.
Purchased customer accounts and non-compete agreements are amortized on a straight-line basis over the related
estimated lives and contract periods, which range from 3 to 15 years. The excess of the purchase price of an acquisition over
the fair value of the identifiable tangible and intangible assets is assigned to goodwill and is not amortized.
Acquisition purchase prices are typically based upon a multiple of average annual operating profit and/or core revenue
earned over a one to three-year period within a minimum and maximum price range. The recorded purchase prices for all
acquisitions include an estimation of the fair value of liabilities associated with any potential earn-out provisions, where an
earn-out is part of the negotiated transaction. Subsequent changes in the fair value of earn-out obligations are recorded in
the Consolidated Statement of Income when changes to the expected performance of the associated business are realized.
The fair value of earn-out obligations is based upon the present value of the expected future payments to be made to the
sellers of the acquired businesses in accordance with the provisions contained in the respective purchase agreements. In
determining fair value, the acquired business’s future performance is estimated using financial projections developed by
management for the acquired business, and this estimate reflects market participant assumptions regarding revenue growth
and/or profitability. The expected future payments are estimated on the basis of the earn-out formula and performance
targets specified in each purchase agreement compared to the associated financial projections. These estimates are then
discounted to a present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted
earn-out payments will be made.
Intangible Assets Impairment
Goodwill is subject to at least an annual assessment for impairment measured by a fair-value-based test. Amortizable
intangible assets are amortized over their useful lives and are subject to an impairment review based upon an estimate of the
undiscounted future cash flows resulting from the use of the assets. To determine if there is potential impairment of goodwill, we
compare the fair value of each reporting unit with its carrying value. If the fair value of the reporting unit is less than its carrying
value, an impairment loss would be recorded to the extent that the fair value of the goodwill within the reporting unit is less
than its carrying value. Fair value is estimated based upon multiples of earnings before interest, income taxes, depreciation,
amortization, and change in estimated acquisition earn-out payables (“EBITDAC”), or on a discounted cash flow basis.
Management assesses the recoverability of our goodwill and our amortizable intangibles and other long-lived assets annually
and whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.
Any of the following factors, if present, may trigger an impairment review: (i) a significant underperformance relative to
historical or projected future operating results, (ii) a significant negative industry or economic trend, and (iii) a significant
decline in our market capitalization. If the recoverability of these assets is unlikely because of the existence of one or more
25
2018 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESUlTS OF OPERATIONS (CONT'D.)
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, 2018 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, 2018, 2017 and 2016.
Non-Cash Stock-Based Compensation
We grant non-vested stock awards to our employees, with the related compensation expense recognized in the financial
statements over the associated service period based upon the grant-date fair value of those awards.
During the first quarter of 2017, the performance conditions for 326,808 shares of the Company’s common stock granted
under the Company’s Stock Incentive Plan were determined by the Compensation Committee to have been satisfied relative
to performance-based grants issued in 2012. These grants had a performance measurement period that concluded on
December 31, 2016. The vesting condition for these grants requires continuous employment for a period of up to ten years
from the January 2012 grant date in order for the awarded shares to become fully vested and nonforfeitable. As a result of the
awarding of these shares, the grantees will be eligible to receive payments of dividends and exercise voting privileges after
the awarding date, and the awarded shares will be included as issued and outstanding common stock shares and included in
the calculation of basic and diluted net income per share where the net income attributable to unvested awarded stock plans
is excluded from the total net income attributable to common shares.
During the first quarter of 2018, the performance conditions for 260,344 shares of the Company’s common stock granted
under the Company’s Stock Incentive Plan were determined by the Compensation Committee to have been satisfied
relative to performance-based grants issued in 2013. These grants had a performance measurement period that concluded
on December 31, 2017. The vesting condition for these grants requires continuous employment for a period of up to ten
years from the January 2013 grant date in order for the awarded shares to become fully vested and nonforfeitable. During
the third quarter of 2018, the performance conditions for 2,229,561 shares of the Company’s common stock granted under
the Company’s Stock Incentive Plan were determined by the Compensation Committee to have been satisfied relative to
performance-based grants issued in July 2013. These grants had a performance measurement period that concluded on
June 30, 2018. The vesting condition for these grants requires continuous employment for a period of up to seven years
from the July 2013 grant date in order for the awarded shares to become fully vested and nonforfeitable. As a result of the
awarding of these shares, the grantees will be eligible to receive payments of dividends and exercise voting privileges after
the awarding date, and the awarded shares will be included as issued and outstanding common stock shares and included
in the calculation of basic and in diluted net income per share where the net income attributable to unvested awarded stock
plans is excluded from the total net income attributable to common shares.
During the first quarter of 2019, the performance conditions for approximately 2.0 million shares of the Company’s common
stock granted under the Company’s Stock Incentive Plan were determined by the Compensation Committee to have been
satisfied relative to performance-based grants issued in 2014 and 2016. These grants had a performance measurement
period that concluded on December 31, 2018. The vesting condition for these grants requires continuous employment for a
period of up to seven years from the 2014 grant date and five years from the 2016 grant date in order for the awarded shares
to become fully vested and nonforfeitable. As a result of the awarding of these shares, the grantees will be eligible to receive
payments of dividends and exercise voting privileges after the awarding date, and the awarded shares will be included as
issued and outstanding common stock shares and included in the calculation of basic and diluted net income per share.
Litigation and Claims
We are subject to numerous litigation claims that arise in the ordinary course of business. If it is probable that a liability has
been incurred at the date of the financial statements and the amount of the loss is estimable, an accrual for the costs to resolve
these claims is recorded in accrued expenses in the accompanying Consolidated Financial Statements. 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.
26
MANAGEMENT'S DISCUSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESUlTS OF OPERATIONS (CONT'D.)
Results of Operations for the Years Ended
December 31, 2018, 2017, and 2016
The following discussion and analysis regarding results of operations and liquidity and capital resources should be
considered in conjunction with the accompanying Consolidated Financial Statements and related Notes.
Financial information relating to our Consolidated Financial Results is as follows:
(in thousands, except percentages)
REVENUES
Core commissions and fees
Profit-sharing contingent commissions
Guaranteed supplemental commissions
Commissions and fees
Investment income
Other income, net
Total revenues
EXPENSES
Employee compensation and benefits
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
2018
%
Change
2017
%
Change
2016
$ 1,944,021
55,875
9,961
2,009,857
2,746
1,643
2,014,246
1,068,914
332,118
(2,175)
86,544
22,834
40,580
2,969
1,551,784
462,462
118,207
8.3%
7.1%
(3.9)%
8.2%
68.9%
(92.7)%
7.1%
7.5%
17.2%
0.8%
1.3%
0.6%
5.9%
(67.7)%
8.4%
2.8%
136.0%
$ 1,794,714
52,186
10,370
1,857,270
1,626
22,451
1,881,347
994,652
283,470
(2,157)
85,446
22,698
38,316
9,200
1,431,625
449,722
50,092
$ 344,255
(13.8)%
$ 399,630
5.7%
(3.4)%
(9.7)%
5.4%
11.7%
NMF
6.5%
7.5%
7.8%
67.1%
(1.4)%
8.1%
(3.0)%
0.2%
6.6%
6.2%
(69.8)%
55.2%
$ 1,697,308
54,000
11,479
1,762,787
1,456
2,386
1,766,629
925,217
262,872
(1,291)
86,663
21,003
39,481
9,185
1,343,130
423,499
166,008
$ 257,491
Income Before Income Taxes Margin
23.0%
23.9%
24.0%
EBITDAC(1)
EBITDAC Margin(1)
Organic Revenue growth rate(1)
Employee compensation and benefits relative to
total revenues
Other operating expenses relative to total revenues
Capital expenditures
Total assets at December 31
(1) A non-GAAP measure
NMF = Not a meaningful figure
615,389
1.7%
605,382
4.4%
579,831
30.6%
2.4%
53.1%
16.5%
32.2%
4.4%
52.9%
15.1%
32.8%
3.0%
52.4%
14.9%
$
41,520
$6,688,668
71.6%
16.4%
$
24,192
$5,747,550
36.2%
9.2%
$
17,765
$5,262,734
27
2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESUlTS OF OPERATIONS (CONT'D.)
Commissions and Fees
Commissions and fees, including profit-sharing contingent commissions and GSCs for 2018, increased $152.6 million to
$2,009.9 million, or 8.2% over 2017. Core commissions and fees in 2018 increased $149.3 million, of which $ 91.2 million
represented core commissions and fees from acquisitions that had no comparable revenues in 2017; approximately
$43.5 million represented net new and renewal business; approximately $16.1 million related to the impact of the adoption
of the New Revenue Standard; which was offset by $1.5 million related to commissions and fees revenue from businesses
divested in 2017 and 2018, which reflected an Organic Revenue growth rate of 2.4%. Profit-sharing contingent commissions
and GSCs for 2018 increased by $3.3 million, or 5.2%, compared to the same period in 2017. The net increase of $3.3 million
was mainly driven by an increase in profit-sharing contingent commissions and GSCs in the National Programs Segment.
Commissions and fees, including profit-sharing contingent commissions and GSCs for 2017, increased $94.5 million to
$1,857.3 million, or 5.4% over 2016. Core commissions and fees in 2017 increased $97.4 million, of which approximately
$27.7 million represented core commissions and fees from agencies acquired since 2016 that had no comparable revenues.
After accounting for divested business of $4.9 million, the remaining net increase of $74.6 million represented net new
business, which reflected an Organic Revenue growth rate of 4.4% for core commissions and fees. Profit-sharing contingent
commissions and GSCs for 2017 decreased by $2.9 million, or 4.5%, compared to the same period in 2016. The net decrease
of $2.9 million was mainly driven by a decrease in profit-sharing contingent commissions and GSCs in the Retail and
Wholesale Brokerage Segments, as a result of increased loss ratios and lower premium rates, which was partially offset by an
increase in profit-sharing contingent commissions and GSCs in the National Programs Segment.
Investment Income
Investment income increased to $2.7 million in 2018, compared with $1.6 million in 2017 and increased to $1.6 million in 2017,
compared with $1.5 million in 2016. The increases in both years were due to additional interest income driven by higher
interest rates and cash management activities to earn a higher yield on excess cash balances.
Other Income, Net
Other income for 2018 was $1.6 million, compared with $22.4 million in 2017 and $2.4 million in 2016. Other income consists
primarily of legal settlements and other miscellaneous income. In 2017, $20.0 million of other income was recognized as a
result of a legal settlement with AssuredPartners.
Employee Compensation and Benefits
Employee compensation and benefits expense increased 7.5%, or $74.3 million, in 2018 over 2017. This increase included
$34.8 million of compensation costs related to stand-alone acquisitions that had no comparable costs in the same period of
2017. Therefore, employee compensation and benefits expense attributable to those offices that existed in the same time
periods of 2018 and 2017 increased by $39.5 million or 3.9%. This underlying employee compensation and benefits expense
increase was primarily related to (i) an increase in staff salaries attributable to salary inflation, higher volumes in portions of our
business and the mix of business across the company; (ii) increased producer commissions due to higher revenue; partially
offset by (iii) a decrease of approximately $8.8 million in commission expense as a result of the adoption of the New Revenue
Standard which requires the deferral of incremental costs to obtain a customer contract, and (iv) the increase in the value of
corporate-owned life insurance policies associated with our deferred compensation plan which is substantially offset in other
operating expenses. Employee compensation and benefits expense as a percentage of total revenues was 53.1% for 2018 as
compared to 52.9% for the year ended December 31, 2017.
Employee compensation and benefits expense increased 7.5%, or $69.4 million, in 2017 over 2016. This increase included
$11.1 million of compensation costs related to stand-alone acquisitions that had no comparable costs in the same period of
2016. Therefore, employee compensation and benefits expense attributable to those offices that existed in the same time
periods of 2017 and 2016 increased by $58.3 million or 6.4%. This underlying employee compensation and benefits expense
increase was primarily related to (i) higher bonuses due to increased revenue and operating profit as well as the additional
cost associated with the Retail Segment’s performance incentive plan introduced in 2017, (ii) an increase in producer
commissions driven by new and renewed business, (iii) an increase in non-cash stock-based compensation expense due
to forfeiture credits recognized in 2016, and (iv) increased staff salaries attributable to salary inflation and higher volumes in
portions of our business. Employee compensation and benefits expense as a percentage of total revenues was 52.9% for
2017 as compared to 52.4% for the year ended December 31, 2016.
28
MANAGEMENT'S DISCUSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESUlTS OF OPERATIONS (CONT'D.)
Other Operating Expenses
Other operating expenses in 2018 increased 17.2%, or $48.6 million, over 2017, of which $14.0 million was related to
acquisitions that had no comparable costs in the same period of 2017. The other operating expenses for those offices that
existed in the same periods in both 2018 and 2017 increased by $34.7 million or 6.6%, which was primarily attributable to
(i) additional expenses associated with our investment in information technology and higher value-added consulting services;
(ii) an increase of approximately $10.5 million for costs that had previously been reported on a net basis as contra-revenue
prior to the adoption of the New Revenue Standard ; (iii) the increase in the value of corporate-owned life insurance policies
associated with our deferred compensation plan which was substantially offset by employee compensation and benefits and
partially offset by (iv) the benefits from our strategic purchasing program. Other operating expenses as a percentage of total
revenues was 16.5% in 2018 as compared to 15.1% for the year ended December 31, 2017.
Other operating expenses in 2017 increased 7.8%, or $20.6 million, over 2016, of which $3.3 million was related to
acquisitions that had no comparable costs in the same period of 2016. The other operating expenses for those offices that
existed in the same periods in both 2017 and 2016, increased by $17.3 million or 6.6%, which was primarily attributable to
(i) higher data processing costs related to our multi-year technology investment program, (ii) the receipt of certain premium tax
refunds by our National Flood Program business in 2016, and (iii) professional fees at our National Programs Division. Other
operating expenses as a percentage of total revenues was 15.1% in 2017 and 14.9% in 2016.
Gain or Loss on Disposal
The Company recognized gains on disposal of $2.2 million in 2018 and 2017 and $1.3 million in 2016. The change in the gain
on disposal was due to activity associated with book of business sales. 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.
Amortization
Amortization expense increased $1.1 million, or 1.3%, in 2018, and decreased $ 1.2 million, or 1.4%, in 2017. The increase in 2018
is a result of the addition of intangibles associated with newly acquired businesses and the decrease in 2017 is a result of
certain intangibles becoming fully amortized or otherwise written off as part of disposed businesses, which was partially offset
by the amortization of new intangibles from recently acquired businesses.
Depreciation
Depreciation expense increased $0.1 million, or 0.6%, in 2018, and increased $1.7 million, or 8.1% in 2017 as compared to
2016. These increases are due primarily to the addition of fixed assets resulting from capital projects related to our multi-year
technology investment program and other business initiatives.
Interest Expense
Interest expense increased $2.3 million, or 5.9%, in 2018 from 2017, and decreased $1.2 million, or 3.0% in 2017 from 2016.
The increase in 2018 was due primarily to the additional debt added in the fourth quarter with increased payments for newly
acquired businesses, as well as increased interest rate exposure on the Company’s floating rate notes. The decrease in 2017
was due primarily to having less total debt outstanding.
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.
29
2018 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESUlTS OF OPERATIONS (CONT'D.)
As of December 31, 2018, the fair values of the estimated acquisition earn-out payables were re-evaluated and measured
at fair value on a recurring basis using unobservable inputs (level 3) as defined in ASC 820-Fair Value Measurement.
The resulting net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the
years ended December 31, 2018, 2017, and 2016 were as follows:
(in thousands)
Change in fair value of estimated acquisition earn-out payables
Interest expense accretion
Net change in earnings from estimated acquisition earn-out payables
2018
2017
2016
$ 603
$ 6,874
$ 6,338
2,366
2,326
2,847
$2,969
$9,200
$9,185
For the years ended December 31, 2018, 2017, and 2016, the fair value of estimated earn-out payables was re-evaluated and
increased by $0.6 million, $6.9 million and $6.3 million, respectively, which resulted in charges to the Consolidated Statement
of Income.
As of December 31, 2018, the estimated acquisition earn-out payables equaled $89.9 million, of which $21.1 million was
recorded as accounts payable and $68.8 million was recorded as other non-current liability. As of December 31, 2017, the
estimated acquisition earn-out payables equaled $36.2 million, of which $25.1 million was recorded as accounts payable and
$11.1 million was recorded as other non-current liability.
Income Taxes
The effective tax rate on income from operations was 25.6% in 2018, 11.1% in 2017, and 39.2% in 2016. The Tax Cuts and Jobs
Act of 2017 (the “Tax Reform Act”) makes changes to the U.S. tax code that affected our income tax rate in 2017 and 2018.
The Tax Reform Act reduces the U.S. federal corporate income tax rate from 35.0% to 21.0% and requires companies to pay
a one-time transition tax on certain unrepatriated earnings from foreign subsidiaries that is payable over eight years. The
Tax Reform Act also establishes new tax laws that became effective January 1, 2018. The 2018 effective tax rate reflects the
reduction in the federal corporate income tax rate. The 2017 effective tax rate reflects the revaluation of deferred tax liabilities
as described in Part II, Note 10 “Income Taxes,” in addition to adoption of FASB Accounting Standards Update 2016-09,
“Improvements to Employee Share Based Payment Accounting” (“ASU 2016-09”) in the first quarter of 2017. ASU 2016-09,
which requires upon vesting of stock-based compensation, any tax implications be treated as a discrete credit to the income
tax expense in the quarter of vesting, amends guidance issued in ASC Topic 718, Compensation - Stock Compensation.
Results of Operations—Segment Information
As discussed in Note 16 “Segment Information” of the Notes to Consolidated Financial Statements, we operate four reportable
segments: Retail, National Programs, Wholesale Brokerage and Services. On a segmented basis, changes in amortization,
depreciation and interest expenses generally result from activity associated with acquisitions. 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 focuses on the Organic Revenue growth rate of core commissions and fees, the ratio of
total employee compensation and benefits to total revenues, and the ratio of other operating expenses to total revenues.
The reconciliation of total commissions and fees, included in the Consolidated Statement of Income, to Organic Revenue for
the years ended December 31, 2018 and 2017 is as follows:
(in thousands)
Commissions and fees
Profit-sharing contingent commissions
Guaranteed supplemental commissions
Core commissions and fees
New Revenue Standard impact on core commissions and fees
Acquisition revenues
Divested businesses
Organic Revenue
30
Year Ended December 31,
2018
2017
$ 2,009,857
$ 1,857,270
(55,875)
(9,961)
(52,186)
(10,370)
1,944,021
1,794,714
(16,091)
(91,177)
—
—
—
(1,490)
$1,836,753
$1,793,224
MANAGEMENT'S DISCUSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESUlTS OF OPERATIONS (CONT'D.)
The reconciliation of total commissions and fees to Organic Revenue for the year ended December 31, 2018, by Segment, are
as follows:
2018
Retail(1)
National Programs
Wholesale Brokerage
Services
Total
(in thousands,
except percentages)
Commissions
and fees
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
$1,040,574
$ 942,039
$ 493,878
$ 479,017
$ 286,364
$271,141
$189,041
$165,073 $2,009,857
$1,857,270
Total change
$
98,535
$ 14,861
10.5%
3.1%
$ 15,223
5.6%
$ 23,968
14.5%
$ 152,587
8.2%
Total growth %
Profit-sharing
contingent
commissions
GSCs
Core commissions
and fees
New
Revenue Standard
(24,517)
(23,377)
(23,896)
(20,123)
(7,462)
(8,535)
(9,108)
(76)
(31)
(1,350)
(8,686)
(1,231)
—
—
—
—
(55,875)
(52,186)
(9,961)
(10,370)
$1,007,522
$ 909,554
$ 469,906
$ 458,863
$ 277,552
$261,224
$189,041
$165,073 $1,944,021
$1,794,714
Acquisition revenues
(73,405)
1,254
—
—
(7,973)
(7,289)
—
—
935
(2,514)
—
—
(10,307)
(7,969)
Divested business
—
(1,270)
—
(114)
—
(106)
—
—
—
—
(16,091)
(91,177)
—
—
—
(1,490)
Organic Revenue(2)
$ 935,371
$ 908,284
$ 454,644
$ 458,749
$ 275,973
$261,118
$170,765
$165,073 $1,836,753
$1,793,224
Organic
Revenue growth(2)
Organic Revenue
growth %(2)
$
27,087
$ (4,105)
$ 14,855
$
5,692
$
43,529
3.0%
(0.9)%
5.7%
3.4%
2.4%
(1) The Retail Segment includes commissions and fees reported in the “Other” column of the Segment Information in Note 16 of the Notes to the Consolidated
Financial Statements, which includes corporate and consolidation items.
(2) A non-GAAP financial measure.
The reconciliation of total commissions and fees, included in the Consolidated Statement of Income, to Organic Revenue for
the years ended December 31, 2017 and 2016, is as follows:
(in thousands)
Commissions and fees
Profit-sharing contingent commissions
Guaranteed supplemental commissions
Core commissions and fees
Acquisition revenues
Divested businesses
Organic Revenue
Year Ended December 31,
2017
2016
$ 1,857,270
$ 1,762,787
(52,186)
(10,370)
(54,000)
(11,479)
1,794,714
1,697,308
(27,739)
—
—
(4,912)
$1,766,975
$1,692,396
31
2018 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESUlTS OF OPERATIONS (CONT'D.)
The reconciliation of total commissions and fees to Organic Revenue for the year ended December 31, 2017, by Segment, are
as follows:
2017
Retail(1)
National Programs
Wholesale Brokerage
Services
Total
(in thousands,
except percentages)
Commissions
and fees
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
$ 942,039
$ 916,084
$ 479,017
$ 447,808
$ 271,141
$ 242,813
$ 165,073
$156,082 $1,857,270
$1,762,787
Total change
$ 25,955
$ 31,209
$ 28,328
Total growth %
2.8%
7.0%
11.7%
$
8,991
5.8%
$
94,483
5.4%
Profit-sharing
contingent
commissions
GSCs
Core commissions
and fees
(23,377)
(25,207)
(20,123)
(17,306)
(8,686)
(11,487)
(9,108)
(9,787)
(31)
(23)
(1,231)
(1,669)
—
—
—
—
(52,186)
(54,000)
(10,370)
(11,479)
$ 909,554
$ 881,090
$ 458,863
$ 430,479
$ 261,224
$ 229,657
$ 165,073
$156,082 $1,794,714
$1,697,308
Acquisition revenues
(8,151)
—
(2,296)
—
(16,442)
Divested business
—
(4,838)
—
(277)
—
—
—
(850)
—
—
203
(27,739)
—
—
(4,912)
Organic Revenue(2)
$ 901,403
$ 876,252
$ 456,567
$ 430,202
$ 244,782
$ 229,657
$ 164,223
$156,285 $1,766,975
$1,692,396
Organic
Revenue growth(2)
Organic Revenue
growth %(2)
$ 25,151
$ 26,365
$ 15,125
$
7,938
$
74,579
2.9%
6.1%
6.6%
5.1%
4.4%
(1) The Retail Segment includes commissions and fees reported in the “Other” column of the Segment Information in Note 16 of the Notes to the Consolidated
Financial Statements, which includes corporate and consolidation items.
(2) A non-GAAP financial measure.
The reconciliation of total commissions and fees, included in the Consolidated Statement of Income, to Organic Revenue for
the years ended December 31, 2016 and 2015, is as follows:
(in thousands)
Commissions and fees
Profit-sharing contingent commissions
Guaranteed supplemental commissions
Core commissions and fees
Acquisition revenues
Divested businesses
Organic Revenue
Year Ended December 31,
2016
2015
$1,762,787
$1,656,951
(54,000)
(11,479)
(51,707)
(10,026)
1,697,308
1,595,218
(61,713)
—
—
(6,669)
$1,635,595
$1,588,549
32
MANAGEMENT'S DISCUSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESUlTS OF OPERATIONS (CONT'D.)
The reconciliation of total commissions and fees to Organic Revenue for the year ended December 31, 2016, by Segment, are
as follows:
2016
Retail(1)
National Programs
Wholesale Brokerage
Services
Total
(in thousands,
except percentages)
Commissions
and fees
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
$ 916,084
$ 866,465
$ 447,808
$ 428,473
$ 242,813
$ 216,638
$156,082
$145,375
$1,762,787
$1,656,951
Total change
$ 49,619
Total growth %
5.7%
$ 19,335
4.5%
$ 26,175
12.1%
$ 10,707
7.4%
$ 105,836
6.4%
Profit-sharing
contingent
commissions
GSCs
Core commissions
and fees
Acquisition
revenues
(25,207)
(22,051)
(17,306)
(15,558)
(11,487)
(14,098)
(9,787)
(8,291)
(23)
(30)
(1,669)
(1,705)
—
—
—
—
(54,000)
(51,707)
(11,479)
(10,026)
$ 881,090
$ 836,123
$ 430,479
$ 412,885
$ 229,657
$ 200,835
$156,082
$145,375
$1,697,308
$1,595,218
(31,151)
—
(1,680)
—
(20,164)
Divested business
—
(1,926)
—
(1,296)
—
—
—
(8,718)
—
(61,713)
—
—
(3,447)
—
(6,669)
Organic Revenue(2)
$ 849,939
$ 834,197
$ 428,799
$ 411,589
$ 209,493
$ 200,835
$147,364
$141,928
$1,635,595
$1,588,549
Organic Revenue
growth(2)
Organic Revenue
growth %(2)
$ 15,742
$ 17,210
$
8,658
$
5,436
$
47,046
1.9%
4.2%
4.3%
3.8%
3.0%
(1) The Retail Segment includes commissions and fees reported in the “Other” column of the Segment Information in Note 16 of the Notes to the Consolidated
Financial Statements, which includes corporate and consolidation items.
(2) A non-GAAP financial measure.
The reconciliation of income before incomes taxes, included in the Consolidated Statement of Income, to EBITDAC, a
non-GAAP measure, and Income Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, for the year ended
December 31, 2018, is as follows:
(in thousands)
Retail
National
Programs
Wholesale
Brokerage
Services
Other
Total
Income before income taxes
$ 217,845
$117,375
$70,171
$34,508
$ 22,563
$ 462,462
Income Before Income Taxes Margin
20.9%
23.7%
24.4%
18.2%
Amortization
Depreciation
Interest
44,386
5,289
35,969
25,954
5,486
26,181
11,391
1,628
5,254
4,813
1,558
2,869
NMF
—
8,873
(29,693)
23.0%
86,544
22,834
40,580
Change in estimated acquisition
earn-out payables
EBITDAC
EBITDAC Margin
NMF = Not a meaningful figure
1,081
875
815
198
—
2,969
$ 304,570
$175,871
$89,259
$43,946
$ 1,743
$ 615,389
29.2%
35.6%
31.1%
23.2%
NMF
30.6%
33
2018 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESUlTS OF OPERATIONS (CONT'D.)
The reconciliation of income before incomes taxes, included in the Consolidated Statement of Income, to EBITDAC, a
non-GAAP measure, and Income Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, for the year ended
December 31, 2017, is as follows:
(in thousands)
Retail
National
Programs
Wholesale
Brokerage
Services
Other
Total
Income before income taxes
$196,616
$109,961
$68,844
$30,498
$ 43,803
$ 449,722
Income Before Income Taxes Margin
20.8%
22.9%
25.3%
18.4%
Amortization
Depreciation
Interest
42,164
5,210
31,133
27,277
6,325
35,561
11,456
1,885
6,263
4,548
1,600
3,522
NMF
1
7,678
(38,163)
23.9%
85,446
22,698
38,316
Change in estimated acquisition
earn-out payables
EBITDAC
EBITDAC Margin
NMF = Not a meaningful figure
8,087
786
327
—
—
9,200
$283,210
$179,910
$88,775
$40,168
$ 13,319
$ 605,382
30.0%
37.5%
32.7%
24.3%
NMF
32.2%
The reconciliation of income before incomes taxes, included in the Consolidated Statement of Income, to EBITDAC, a
non-GAAP measure, and Income Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, for the year ended
December 31, 2016, is as follows:
(in thousands)
Retail
National
Programs
Wholesale
Brokerage
Services
Other
Total
Income before income taxes
$188,001
$ 91,762
$62,623
$24,338
$ 56,775
$ 423,499
Income Before Income Taxes Margin
20.5%
20.5%
25.8%
15.6%
Amortization
Depreciation
Interest
43,447
6,191
38,216
27,920
7,868
45,738
10,801
1,975
3,976
4,485
1,881
4,950
NMF
10
3,088
(53,399)
24.0%
86,663
21,003
39,481
Change in estimated acquisition
earn-out payables
EBITDAC
EBITDAC Margin
NMF = Not a meaningful figure
10,253
207
(274)
(1,001)
—
9,185
$286,108
$173,495
$79,101
$34,653
$ 6,474
$ 579,831
31.2%
38.7%
32.5%
22.2%
NMF
32.8%
34
MANAGEMENT'S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS (CONT'D.)
Retail Segment
The Retail Segment provides a broad range of insurance products and services to commercial, public and quasi-public,
professional and individual insured customers. Approximately 85.9% of the Retail Segment’s commissions and fees revenue
is commission based. Because most of our other operating expenses are not correlated to changes in commissions
on insurance premiums, a significant portion of any fluctuation in the commissions we receive, net of related producer
compensation and cost to fulfill expense deferrals and releases as required by the New Revenue Standard, will result in a
similar fluctuation in our income before income taxes, unless we make incremental investments or modifications to the costs
in the organization.
Financial information relating to our Retail Segment is as follows:
(in thousands, except percentages)
2018
% Change
2017
% Change
2016
REVENUES
Core commissions and fees
$ 1,008,639
10.9 %
$ 909,762
3.2 %
$ 881,729
Profit-sharing contingent commissions
Guaranteed supplemental commissions
Commissions and fees
Investment income
Other income, net
Total revenues
EXPENSES
Employee compensation and benefits
Other operating expenses
(Gain)/loss on disposal
Amortization
Depreciation
Interest
Change in estimated acquisition earn-out payables
Total expenses
Income before income taxes
Income Before Income Taxes Margin(1)
EBITDAC(1)
EBITDAC Margin(1)
Organic Revenue growth rate(1)
Employee compensation and benefits relative to
total revenues
Other operating expenses relative to total revenues
Capital expenditures
Total assets at December 31
(1) A non-GAAP measure
NMF = Not a meaningful figure
24,517
8,535
1,041,691
2
1,070
1,042,763
570,222
169,104
(1,133)
44,386
5,289
35,969
1,081
824,918
$ 217,845
20.9%
4.9 %
(6.3)%
10.6 %
(75.0)%
(11.2)%
10.5 %
10.6 %
15.0 %
(51.0)%
5.3 %
1.5 %
15.5 %
(86.6)%
10.5 %
10.8 %
23,377
9,108
942,247
8
1,205
943,460
515,477
147,084
(2,311)
42,164
5,210
31,133
8,087
746,844
$ 196,616
20.8%
(7.3)%
(6.9)%
2.8 %
(78.4)%
86.5 %
2.8 %
6.0 %
0.5 %
79.0 %
(3.0)%
(15.8)%
(18.5)%
(21.1)%
2.4 %
4.6 %
25,207
9,787
916,723
37
646
917,406
486,303
146,286
(1,291)
43,447
6,191
38,216
10,253
729,405
$ 188,001
20.5%
304,570
7.5 %
283,210
(1.0)%
286,108
29.2%
3.0%
54.7%
16.2%
30.0%
2.9%
54.6%
15.6%
31.2%
1.9%
53.0%
15.9%
$
6,858
$5,850,045
52.6 %
37.5 %
$
4,494
$4,255,515
(24.5)% $
5,951
10.4 %
$3,854,393
The Retail Segment’s total revenues in 2018 increased 10.5%, or $99.3 million, over the same period in 2017, to $1,042.8 million.
The $98.9 million increase in core commissions and fees was driven by the following: (i) approximately $73.4 million related to the
core commissions and fees from acquisitions that had no comparable revenues in the same period of 2017; (ii) $28.1 million related
to net new and renewal business; offset by (iii) $1.3 million related to the impact of adopting the New Revenue Standard; and (iv) a
decrease of $1.3 million related to commissions and fees from businesses divested in 2017 and 2018. Profit-sharing contingent
commissions and GSCs in 2018 increased 1.7%, or $0.6 million, over 2017, to $33.1 million. The Retail Segment’s growth rate for total
commissions and fees was 10.6% and the Organic Revenue growth rate was 3.0% for 2018. The Organic Revenue growth rate was
driven by increased new business and higher retention across most lines of business the preceding twelve months.
35
2018 ANNUAL REPORT MANAGEMENT'S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS (CONT'D.)
Income before income taxes for 2018 increased 10.8%, or $21.2 million, over the same period in 2017, to $217.8 million. The
primary factors affecting this increase were: (i) the net increase in revenue as described above, (ii) offset by a 10.6%, or
$54.7 million, increase in employee compensation and benefits, due primarily to the year-on-year impact of salary inflation
and additional teammates to support revenue growth, (iii) operating expenses which increased by increased by $22.0 million,
or 15.0%, primarily due to our multi-year technology investment program and increased professional services to support our
customers; (iv) a combined increase in amortization, depreciation and intercompany interest expense of $7.2 million resulting
from our acquisition activity over the past twelve months; offset by (v) a reduction in the change in estimated acquisition
earn-out payables of $7.0 million, or 86.6%, to $1.1 million.
EBITDAC for 2018 increased 7.5%, or $21.4 million, from the same period in 2017, to $304.6 million. EBITDAC Margin for 2018
decreased to 29.2% from 30.0% in the same period in 2017. EBITDAC Margin was impacted by the net increase in revenue as
described above, including the New Revenue Standard, which impacted the EBITDAC Margin by approximately 90 basis points.
The Retail Segment’s total revenues in 2017 increased 2.8%, or $26.1 million, over the same period in 2016, to $943.5 million.
The $28.0 million increase in core commissions and fees was driven by the following: (i) $24.6 million related to net new
business; (ii) approximately $8.2 million related to the core commissions and fees from acquisitions that had no comparable
revenues in the same period of 2016; and (iii) an offsetting decrease of $ 4.8 million related to commissions and fees
from businesses divested in 2016 and 2017. Profit-sharing contingent commissions and GSCs in 2017 decreased 7.2%, or
$2.5 million, over 2016, to $32.5 million. The Retail Segment’s growth rate for total commissions and fees was 2.8%, and the
Organic Revenue growth rate was 2.9% for 2017. The Organic Revenue growth rate was driven by increased new business
and higher retention during the preceding twelve months, along with continued increases in commercial auto and employee
benefits rates and underlying exposure unit values that drive insurance premiums.
Income before income taxes for 2017 increased 4.6%, or $8.6 million, over the same period in 2016, to $196.6 million. The
primary factors affecting this increase were: (i) the net increase in revenue as described above, which was offset by (ii) a
6.0%, or $29.2 million, increase in employee compensation and benefits, due primarily to the year-on-year impact of salary
inflation, additional teammates to support revenue growth and the incremental investment in our performance incentive
plan, (iii) an increase in operating expenses by $0.8 million, or 0.5%, primarily due to our multi-year technology investment
program and increased value-added consulting services to support our customers; offset by (iv) a reduction in the change in
estimated acquisition earn-out payables of $2.2 million, or 21.1%, to $8.1 million, and (v) a combined decrease in amortization,
depreciation and intercompany interest expense of $9.3 million.
EBITDAC for 2017 decreased 1.0%, or $2.9 million, from the same period in 2016, to $283.2 million. EBITDAC Margin for
2017 decreased to 30.0% from 31.2% in the same period in 2016. EBITDAC Margin was impacted by the factors impacting
employee compensation and benefits as well as other operating expenses described above, partially offset by the net
increase in revenue as described above.
36
MANAGEMENT'S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS (CONT'D.)
National Programs Segment
The National Programs Segment manages over 40 programs supported by approximately one hundred 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, Personal lines Programs, Commercial
Programs, Public Entity-Related Programs, and the National Flood Program. The National Programs Segment’s revenue is
primarily commission based.
Financial information relating to our National Programs Segment is as follows:
(in thousands, except percentages)
2018
% Change
2017
% Change
2016
REVENUES
Core commissions and fees
$ 469,906
2.4 %
$ 458,863
6.6 %
$ 430,479
Profit-sharing contingent commissions
Guaranteed supplemental commissions
Commissions and fees
Investment income
Other income, net
Total revenues
EXPENSES
Employee compensation and benefits
Other operating expenses
(Gain)/loss on disposal
Amortization
Depreciation
Interest
Change in estimated acquisition earn-out payables
Total expenses
Income before income taxes
Income Before Income Taxes Margin(1)
EBITDAC(1)
EBITDAC Margin(1)
Organic Revenue growth rate(1)
Employee compensation and benefits relative to
total revenues
Other operating expenses relative to total revenues
23,896
76
493,878
506
79
494,463
219,166
98,012
1,414
25,954
5,486
26,181
875
377,088
$ 117,375
23.7 %
18.7 %
145.2 %
3.1 %
31.8 %
(80.8)%
3.1 %
8.6 %
— %
NMF
(4.9)%
(13.3)%
(26.4)%
11.3 %
2.0 %
6.7 %
20,123
31
479,017
384
412
479,813
201,816
97,988
99
27,277
6,325
35,561
786
369,852
16.3 %
34.8 %
7.0 %
(38.9)%
NMF
7.0 %
5.6 %
16.9 %
— %
(2.3)%
(19.6)%
(22.3)%
NMF
3.7 %
17,306
23
447,808
628
80
448,516
191,199
83,822
—
27,920
7,868
45,738
207
356,754
$ 109,961
19.8 %
$
91,762
22.9%
20.5%
175,871
(2.2)%
179,910
3.7 %
173,495
35.6 %
(0.9)%
44.3 %
19.8 %
37.5%
6.1%
42.1%
20.4%
38.7%
4.2%
42.6%
18.7%
Capital expenditures
$
12,391
108.7 %
$
5,936
(14.9)%
$
6,977
Total assets at December 31
$2,940,097
(10.0)%
$3,267,486
20.5 %
$2,711,378
(1) A non-GAAP measure
NMF = Not a meaningful figure
37
2018 ANNUAL REPORT MANAGEMENT'S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS (CONT'D.)
The National Programs Segment’s total revenues in 2018 increased 3.1%, or $ 14.7 million, over 2017, to a total $494.5 million.
The $11.0 million increase in core commissions and fees was driven by the following: (i) $ 7.9 million related to the impact of
adopting the New Revenue Standard; (ii) an increase of approximately $7.3 million related to core commissions and fees from
acquisitions that had no comparable revenues in 2017; which was offset by (iii) $4.1 million related to net new and renewal
business, which was impacted by lower weather related claims revenue as compared to the prior year; and (iv) a decrease
of $0.1 million related to commissions and fees recorded in 2017 from businesses since divested. Profit-sharing contingent
commissions and GSCs were $24.0 million in 2018, which was an increase of $3.8 million over 2017, which was primarily
driven by the improved loss experience of our carrier partners.
The National Programs Segment’s growth rate for total commissions and fees was 3.1% and the Organic Revenue growth rate
was (0.9)% for 2018. The total commissions and fees growth was mainly due to recognizing a full year of revenues for our
core commercial program, new acquisitions, strong growth in our earthquake programs, increased profit-sharing contingent
commissions and a non-recurring adjustment of approximately $8.0 million relating to the New Revenue Standard with an
offset for the lower weather-related claims revenue. The Organic Revenue growth rate decline was driven substantially by
lower flood claims revenue as compared to the prior year.
Income before income taxes for 2018 increased 6.7%, or $ 7.4 million, from the same period in 2017, to $ 117.4 million. The
increase was the result of a lower intercompany interest charge of $9.4 million, growth in a number of our programs, and was
offset by the investment in our core commercial program, and lower weather-related claims revenue.
EBITDAC for 2018 decreased 2.2%, or $4.0 million, from the same period in 2017, to $175.9 million. EBITDAC Margin for 2018
decreased to 35.6% from 37.5% in the same period in 2017. The decrease in EBITDAC Margin was related to (i) increased
employee compensation and benefits primarily driven by the investment in our core commercial program; (ii) a decrease
in weather-related claims revenue compared to the prior year which has a margin higher than the average margin of the
National Programs Segment; partially offset by (iii) the total revenue growth.
The National Programs Segment’s total revenues in 2017 increased 7.0%, or $31.3 million, over 2016, to a total of $479.8 million.
The $28.4 million increase in core commissions and fees was driven by the following: (i) $ 26.4 million related to net new
business; (ii) an increase of approximately $2.3 million related to core commissions and fees from acquisitions that had no
comparable revenues in 2016; and which was offset by (iii) a decrease of $0.3 million related to commissions and fees recorded
in 2016 from businesses since divested. Profit-sharing contingent commissions and GSCs were $20.2 million in 2017, which was
an increase of $2.8 million over 2016, which was primarily driven by the improved loss experience of our carrier partners.
The National Programs Segment’s growth rate for total commissions and fees was 7.0% and the Organic Revenue growth
rate was 6.1% for 2017. This Organic Revenue growth rate was mainly due to increased flood claims revenues and our new
core commercial program with QBE. Growth in these businesses was partially offset by certain programs that have been
affected by certain carriers changing their risk appetite for new or existing programs or lower premium rates for certain lines
of business.
Income before income taxes for 2017 increased 19.8%, or $18.2 million, from the same period in 2016, to $110.0 million. The
increase was the result of a lower intercompany interest charge of $10.2 million, along with leveraging revenue growth
of $31.3 million.
EBITDAC for 2017 increased 3.7%, or $6.4 million, from the same period in 2016, to $179.9 million. EBITDAC Margin for 2017
decreased to 37.5% from 38.7% in the same period in 2016. The decrease in EBITDAC Margin was related to (i) the investment
in our new core commercial program; which was partially offset by (ii) increased flood claims processing revenue which has a
higher than average margin.
38
MANAGEMENT'S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS (CONT'D.)
Wholesale Brokerage Segment
The Wholesale Brokerage Segment markets and sells excess and surplus commercial and personal lines insurance, primarily
through independent agents and brokers, including Brown & Brown retail agents. 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)
2018
% Change
2017
% Change
2016
REVENUES
Core commissions and fees
$ 277,552
6.3 %
$ 261,224
13.7 %
$ 229,657
Profit-sharing contingent commissions
Guaranteed supplemental commissions
Commissions and fees
Investment income
Other income, net
Total revenues
EXPENSES
Employee compensation and benefits
Other operating expenses
(Gain)/loss on disposal
Amortization
Depreciation
Interest
Change in estimated acquisition earn-out payables
Total expenses
Income before income taxes
Income Before Income Taxes Margin(1)
EBITDAC(1)
EBITDAC Margin(1)
Organic Revenue growth rate(1)
Employee compensation and benefits relative to
total revenues
Other operating expenses relative to total revenues
7,462
1,350
286,364
165
485
287,014
147,571
50,177
7
11,391
1,628
5,254
815
216,843
$
70,171
24.4%
(14.1)%
9.7 %
5.6 %
— %
(18.6)%
5.6 %
6.7 %
12.3 %
— %
(0.6)%
(13.6)%
(16.1)%
NMF
6.9 %
1.9 %
8,686
1,231
271,141
—
596
271,737
138,297
44,665
—
11,456
1,885
6,263
327
202,893
(24.4)%
(26.2)%
11.7 %
(100.0)%
108.4 %
11.8 %
13.5 %
6.0 %
— %
6.1 %
(4.6)%
57.5 %
NMF
12.4 %
11,487
1,669
242,813
4
286
243,103
121,863
42,139
—
10,801
1,975
3,976
(274)
180,480
$
68,844
9.9 %
$
62,623
25.3%
25.8%
89,259
0.5 %
88,775
12.2 %
79,101
31.1%
5.7%
51.4%
17.5%
32.7%
6.6%
50.9%
16.4%
32.5%
4.3%
50.1%
17.3%
Capital expenditures
Total assets at December 31
$
2,518
$1,283,877
37.1 %
$
1,836
41.1 %
$
1,301
1.9 %
$1,260,239
13.7 %
$1,108,829
(1) A non-GAAP measure
NMF = Not a meaningful figure
The Wholesale Brokerage Segment’s total revenues for 2018 increased 5.6%, or $15.3 million, over 2017, to $287.0 million.
The $16.3 million increase in core commissions and fees was driven by the following: (i) $14.9 million related to net new
and renewal business; (ii) $2.5 million related to the core commissions and fees from acquisitions that had no comparable
revenues in 2017; which was offset by (iii) a decrease of $ 0.9 million related to the impact of adopting the New Revenue
Standard; and (iv) a decrease of $0.1 million related to commissions and fees recorded in 2017 from businesses since
divested. Profit-sharing contingent commissions and GSCs for 2018 decreased $1.1 million over 2017, to $8.8 million. This
decrease was driven by higher loss ratios experienced for several carriers due to losses associated with 2017 weather-
related events. The Wholesale Brokerage Segment’s growth rate for total commissions and fees was 5.6%, and the Organic
Revenue growth rate was 5.7% for 2018. The Organic Revenue growth rate was driven by net new business and modest
increases in exposure units that were partially offset by slightly decreasing rates.
39
2018 ANNUAL REPORT MANAGEMENT'S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS (CONT'D.)
Income before income taxes for 2018 increased 1.9%, or $ 1.3 million, over 2017, to $ 70.2 million, primarily due to the
following: (i) the net increase in revenue as described above, which was offset by (ii) an increase in employee compensation
and benefits of $9.3 million, related to additional teammates to support increased transaction volumes, compensation
increases for existing teammates, and additional non-cash stock-based compensation expense; (iii) a decrease in profit from
lower profit-sharing contingent commissions and GSCs; and (iv) a net $5.5 million increase in operating expenses, primarily
related to intercompany technology charges that had no comparable expenses in the same period of 2017.
EBITDAC for 2018 increased 0.5%, or $0.5 million, from the same period in 2017, to $89.3 million. EBITDAC Margin for 2018
decreased to 31.1% from 32.7% in the same period in 2017. The decrease in EBITDAC Margin was primarily driven by the net
decrease in profit-sharing contingent commissions as described above and to a lesser extent the intercompany technology
charges and increased non-cash stock-based compensation costs, which more than offset margin expansion from leveraging
of Organic Revenue growth.
The Wholesale Brokerage Segment’s total revenues for 2017 increased 11.8%, or $28.6 million, over 2016, to $271.7 million.
The $31.6 million net increase in core commissions and fees was driven by the following: (i) $16.5 million related to the core
commissions and fees from acquisitions that had no comparable revenues in 2016; and (ii) $15.1 million related to net new
business. Profit-sharing contingent commissions and GSCs for 2017 decreased $3.2 million over 2016, to $9.9 million. This
decrease was driven by higher loss ratios experienced for several carriers, and partially offset by profit-sharing contingent
commissions received from acquisitions that had no comparable profit-sharing contingent commissions in 2016. The Wholesale
Brokerage Segment’s growth rate for total commissions and fees was 11.7%, and the Organic Revenue growth rate was 6.6% for
2017, which were driven by net new business and modest increases in exposure units that were partially offset by significant
contraction in insurance premium rates for catastrophe-prone properties during the first half of the year, which moderated in the
latter part of the year.
Income before income taxes for 2017, increased 9.9%, or $6.2 million, over 2016, to $68.8 million, primarily due to the
following: (i) the net increase in revenue as described above, offset by (ii) an increase in employee compensation and
benefits of $16.4 million, of which $10.4 million was related to acquisitions that had no comparable compensation and benefits
in the same period of 2016, with the remainder related to additional teammates to support increased transaction volumes and
compensation increases for existing teammates, (iii) a decrease in profit from lower profit-sharing contingent commissions
and GSCs, (iv) a net $2.5 million increase in operating expenses, of which $3.1 million was related to acquisitions that had
no comparable expenses in the same period of 2016 and (v) higher intercompany interest charges related to acquisitions
completed in the previous year.
EBITDAC for 2017 increased 12.2%, or $9.7 million, from the same period in 2016, to $88.8 million. EBITDAC Margin for 2017
increased to 32.7% from 32.5% in the same period in 2016. The increase in EBITDAC Margin was primarily driven by: (i) growth
of core commissions and fees of 13.7%; and (ii) improving the EBITDAC Margin of a business acquired in 2016, which were
partially offset by (iii) the net decrease in profit-sharing contingent commissions as a result of higher loss ratios.
40
MANAGEMENT'S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS (CONT'D.)
Services Segment
The Services Segment provides insurance-related services, including third-party claims administration and comprehensive
medical utilization management services in both the workers’ compensation and all-lines liability arenas. The Services
Segment also provides Medicare Set-aside account services, Social Security disability and Medicare benefits advocacy
services, and claims adjusting services.
unlike the other segments, nearly all of the Services Segment’s revenue is generated from fees, which are not significantly
affected by fluctuations in general insurance premiums.
Financial information relating to our Services Segment is as follows:
(in thousands, except percentages)
2018
% Change
2017
% Change
2016
REVENUES
Core commissions and fees
$ 189,041
14.5 %
$ 165,073
5.8 %
$ 156,082
Profit-sharing contingent commissions
Guaranteed supplemental commissions
Commissions and fees
Investment income
Other income, net
Total revenues
EXPENSES
Employee compensation and benefits
Other operating expenses
(Gain)/loss on disposal
Amortization
Depreciation
Interest
Change in estimated acquisition earn-out payables
Total expenses
Income before income taxes
Income Before Income Taxes Margin(1)
EBITDAC(1)
EBITDAC Margin(1)
Organic Revenue growth rate(1)
Employee compensation and benefits relative to
total revenues
Other operating expenses relative to total revenues
Capital expenditures
Total assets at December 31
(1) A non-GAAP measure
NMF = Not a meaningful figure
—
—
189,041
205
—
— %
— %
14.5 %
(31.4)%
— %
—
—
165,073
299
—
189,246
14.4 %
165,372
85,930
61,833
(2,463)
4,813
1,558
2,869
198
154,738
$ 34,508
18.2%
6.2 %
39.9 %
NMF
5.8 %
(2.6)%
(18.5)%
— %
14.7 %
13.1 %
80,944
44,205
55
4,548
1,600
3,522
—
134,874
$ 30,498
18.4%
— %
— %
5.8 %
5.7 %
— %
5.8 %
2.7 %
3.0 %
— %
1.4 %
(14.9)%
(28.8)%
—
—
156,082
283
—
156,365
78,804
42,908
—
4,485
1,881
4,950
(100.0)%
(1,001)
2.2 %
132,027
25.3 %
$ 24,338
15.6%
43,946
9.4 %
40,168
15.9 %
34,653
23.2%
3.4%
45.4%
32.7%
24.3%
5.1%
48.9%
26.7%
22.2%
3.8%
50.4%
27.4%
$
1,525
$ 471,572
47.6 %
18.1 %
$
1,033
$399,240
57.5 %
$
656
7.4 %
$371,645
The Services Segment’s total revenues for 2018 increased 14.4%, or $23.9 million, over 2017, to $189.2 million. The $24.0 million
increase in core commissions and fees was driven primarily by the following: (i) $10.3 million related to the impact of adopting
the New Revenue Standard; (ii) $8.0 million related to the core commissions and fees from acquisitions that had no comparable
revenues in the same period of 2017; and (iii) $5.7 million related to net new and renewal business. The Services Segment’s
growth rate for total commissions and fees was 14.5%, and the Organic Revenue growth rate was 3.4% for 2018. The Organic
Revenue growth rate was driven by growth across multiple businesses.
41
2018 ANNUAL REPORT MANAGEMENT'S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS (CONT'D.)
Income before income taxes for 2018 increased 13.1%, or $ 4.0 million, over 2017, to $34.5 million due to a combination of:
(i) Organic Revenue growth; and (ii) lower intercompany interest charges, which were partially offset by (iii) the growth in other
operating expenses associated with the New Revenue Standard and professional fees to support Organic Revenue growth.
EBITDAC for 2018 increased 9.4%, or $3.8 million, over the same period in 2017, to $43.9 million. EBITDAC Margin for 2018
decreased to 23.2% from 24.3% in the same period in 2017. The decrease in EBITDAC Margin was due to the impact of the
New Revenue Standard, which resulting in recording $10.0 million of incremental year on year revenues and expenses which
therefore compresses margins, along with higher non-cash stock-based compensation costs, and costs associated with
onboarding new customers.
The Services Segment’s total revenues for 2017 increased 5.8%, or $9.0 million, over 2016, to $165.4 million. The $9.0 million
increase in core commissions and fees was driven primarily by the following: (i) $7.9 million related to net new business;
(ii) $0.9 million related to the core commissions and fees from acquisitions that had no comparable revenues in the same
period of 2016; and (iii) an increase of $0.2 million related to commissions and fees recorded in 2016 from business since
divested. The Services Segment’s growth rate for total commissions and fees was 5.8% and the Organic Revenue growth rate
was 5.1% for 2017, primarily driven by our claims offices that handle catastrophe claims.
Income before income taxes for 2017 increased 25.3%, or $ 6.2 million, over 2016, to $ 30.5 million due to a combination
of: (i) new business realized across most of our businesses, (ii) our claims offices that handled catastrophe claims, (iii) the
continued efficient operation of our businesses, and (iv) lower intercompany interest charges.
EBITDAC for 2017 increased 15.9%, or $5.5 million, over the same period in 2016, to $40.2 million. EBITDAC Margin for 2017
increased to 24.3% from 22.2% in the same period in 2016. The increase in EBITDAC Margin was due to net increase in
revenue as described above and effective control of expenses.
Other
As discussed in Note 16 of the Notes to Consolidated Financial Statements, the “Other” column in the Segment Information
table includes any income and expenses not allocated to reportable segments, and corporate-related items, including the
intercompany interest expense charges to reporting segments.
Liquidity and Capital Resources
The Company seeks to maintain a conservative balance sheet and liquidity profile. Our capital requirements to operate as
an insurance intermediary are low and we have been able to grow and invest in our business principally through cash that
has been generated from operations. We have the ability to utilize our revolving credit facility (the “Facility”), which provides
up to $800.0 million in available cash, and we believe that we have access to additional funds, if needed, through the capital
markets to obtain further debt financing under the current market conditions. The Company believes that its existing cash,
cash equivalents, short-term investment portfolio and funds generated from operations, together with the funds available
under the Facility, will be sufficient to satisfy our normal liquidity needs, including principal payments on our long-term debt,
for at least the next twelve months.
Our cash and cash equivalents of $439.0 million at December 31, 2018 reflected a decrease of $134.4 million from the
$573.4 million balance at December 31, 2017. During 2018, $ 567.5 million of cash was generated from operating activities,
representing an increase of 28.4%. During this period, $923.9 million of cash was used for acquisitions, $26.6 million was
used for acquisition earn-out payments, $ 41.5 million was used to purchase additional fixed assets, $84.7 million was used
for payment of dividends, $100.0 million was used for share repurchases, and $120.0 million was used to pay outstanding
principal balances owed on long-term debt.
We hold approximately $19.8 million in cash outside of the u.S., which we currently have no plans to repatriate in the near future.
Our cash and cash equivalents of $573.4 million at December 31, 2017 reflected an increase of $57.8 million from the $515.6 million
balance at December 31, 2016. During 2017, $442.0 million of cash was generated from operating activities, representing an increase
of 7.5%. During this period, $41.5 million of cash was used for acquisitions, $ 43.8 million was used for acquisition earn-out payments,
$24.2 million was used to purchase additional fixed assets, $77.7 million was used for payment of dividends, $139.9 million was used
for share repurchases, and $96.8 million was used to pay outstanding principal balances owed on long-term debt.
42
MANAGEMENT'S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS (CONT'D.)
Our cash and cash equivalents of $515.6 million at December 31, 2016 reflected an increase of $72.2 million from the
$443.4 million balance at December 31, 2015. During 2016, $411.0 million of cash was generated from operating activities.
During this period, $122.6 million of cash was used for acquisitions, $28.2 million was used for acquisition earn-out payments,
$17.8 million was used for additions to fixed assets, $70.3 million was used for payment of dividends, $7.7 million was used for
share repurchases, and $73.1 million was used to pay outstanding principal balances owed on long-term debt.
Our ratio of current assets to current liabilities (the “current ratio”) was 1.22 and 1.13 at December 31, 2018 and 2017, respectively.
Contractual Cash Obligations
As of December 31, 2018, our contractual cash obligations were as follows:
(in thousands)
long-term debt
Other liabilities(1)
Operating leases
Interest obligations
unrecognized tax benefits
Payments Due by Period
Total
Less Than 1 Year
1-3 Years
4-5 Years
After 5 Years
$1,515,000
$ 50,000
$125,000
$840,000
$500,000
53,187
210,010
251,053
1,639
4,907
48,292
57,848
5,570
78,353
109,532
—
1,639
2,470
47,016
68,798
—
—
40,240
36,349
14,875
—
—
Maximum future acquisition contingency payments(2)
198,627
43,184
155,443
Total contractual cash obligations
$2,229,516
$204,231
$475,537
$958,284
$591,464
(1)
Includes the current portion of other long-term liabilities.
(2)
Includes $89.9 million of current and non-current estimated earn-out payables.
Debt
Total debt at December 31, 2018 was $1,507.0 million net of unamortized discount and debt issuance costs, which was an
increase of $530.8 million compared to December 31, 2017. The increase reflects the addition of $650.0 million in principal
balances, total debt repayments of $120.0 million, net of the amortization of discounted debt related to our Senior Notes due
2024, with a fixed interest rate of 4.200% per year and debt issuance cost amortization of $1.6 million. The Company also
added $0.8 million in debt issuance costs related to the Term loan Credit Agreement (as defined below) that was executed in
December 2018.
On May 10, 2018, the Company elected to prepay in full the principal balance of $100.0 million from the Series E Senior Notes, along
with accrued interest of $0.7 million and a prepayment premium of $0.7 million as the notes were to mature on September 15, 2018.
This resulted in a net interest expense savings of $0.8 million after deducting the pro-rated interest expense and prepayment
premiums paid when compared to holding the note to maturity paying the full semi-annual coupon interest expense of $2.3 million.
On June 28, 2017, the Company entered into an amended and restated credit agreement (the “Amended and Restated Credit
Agreement”) with the lenders named therein, JPMorgan Chase Bank, N.A. as administrative agent and certain other banks as
co-syndication agents and co-documentation agents. The Amended and Restated Credit Agreement amended and restated
the credit agreement dated April 17, 2014, among such parties. The Amended and Restated Credit Agreement extends the
applicable maturity date of the Facility of $800.0 million to June 28, 2022 and re-evidences the unsecured term loans in the
amount of $400.0 million, while also extending the applicable maturity date to June 28, 2022.
The Company borrowed approximately $600.0 million under its Revolving Credit Facility on November 15, 2018 in connection
with the closing of the acquisition of certain assets and assumption of certain liabilities of Hays.
43
2018 ANNUAL REPORT MANAGEMENT'S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS (CONT'D.)
On December 21, 2018, the Company borrowed $300.0 million under a term loan credit agreement with Wells Fargo
Bank, National Association, as administrative agent, Bank of America, N.A., BMO Harris Bank N.A. and SunTrust Bank as
co-syndication agents, and Wells Fargo Securities, llC, Merrill lynch, Pierce, Fenner & Smith Incorporated, BMO Capital
Markets Corp. and SunTrust Robinson Humphrey, Inc. as joint lead arrangers and joint bookrunners (the “Term loan Credit
Agreement”). The Term loan Credit Agreement provides for an unsecured term loan in the initial amount of $300.0 million,
which may, subject to lenders’ discretion, potentially be increased up to an aggregate amount of $450.0 million (the “Term
loan”). The Term loan is repayable over the five-year term from the effective date of the Term loan Credit Agreement,
which was December 21, 2018. Based on the Company’s net debt leverage ratio or a non-credit enhanced senior unsecured
long-term debt rating as determined by Moody’s Investor Service and Standard & Poor’s Rating Service, the current rate of
interest on the Term loan is 1.25% above the adjusted 1-Month london Interbank Offered Rate (“lIBOR”). The Company used
$250.0 million of the borrowings to reduce indebtedness under the Facility.
Total debt at December 31, 2017 was $976.1 million net of unamortized discount and debt issuance costs, which was a
decrease of $97.7 million compared to December 31, 2016. The decrease reflects the repayment of $96.8 million in principal,
related to our credit agreements, repayment of the $0.5 million in a short-term note payable related to the 2016 acquisition
of Social Security Advocates for the Disabled, llC (“SSAD”), net of the amortization of discounted debt related to our Senior
Notes due 2024, with a fixed interest rate of 4.200% per year and debt issuance cost amortization of $1.9 million. The
Company also added $2.8 million in debt issuance costs related to the Amended and Restated Credit Agreement (as defined
below) that was executed in June 2017.
Off-Balance Sheet Arrangements
Neither we nor our subsidiaries have ever incurred off-balance sheet obligations through the use of, or investment in, off-
balance sheet derivative financial instruments or structured finance or special purpose entities organized as corporations,
partnerships or limited liability companies or trusts.
For further discussion of our cash management and risk management policies, see “Quantitative and Qualitative Disclosures
About Market Risk.”
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign
exchange rates and equity prices. We are exposed to market risk through our investments, revolving credit line, term loan
agreements and international operations.
Our invested assets are held primarily as cash and cash equivalents, restricted cash, available-for-sale marketable debt
securities, non-marketable debt securities, certificates of deposit, u.S. treasury securities, and professionally managed short
duration fixed income funds. These investments are subject to interest rate risk. The fair values of our invested assets at
December 31, 2018 and December 31, 2017, 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, 2018, we had $1,015.0 million of borrowings outstanding under our various credit agreements, all of
which bear interest on a floating basis tied to lIBOR and is therefore subject to changes in the associated interest expense.
The effect of an immediate hypothetical 10% change in interest rates would not have a material effect on our Consolidated
Financial Statements.
We are subject to exchange rate risk primarily in our u.K.-based wholesale brokerage business that has a cost base
principally denominated in British pounds and a revenue base in several other currencies, but principally in u.S. dollars.
Based upon our foreign currency rate exposure as of December 31, 2018, an immediate 10% hypothetical changes of foreign
currency exchange rates would not have a material effect on our Consolidated Financial Statements.
44
BROWN & BROWN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
REVENUES
Commissions and fees
Investment income
Other income, net
Total revenues
EXPENSES
Employee compensation and benefits
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
Net income per share:
Basic
Diluted
Dividends declared per share
See accompanying notes to Consolidated Financial Statements.
For the year ended December 31,
2018
2017
2016
$ 2,009,857
$ 1,857,270
$ 1,762,787
2,746
1,643
1,626
22,451
1,456
2,386
2,014,246
1,881,347
1,766,629
1,068,914
332,118
(2,175)
86,544
22,834
40,580
2,969
994,652
283,470
(2,157)
85,446
22,698
38,316
9,200
925,217
262,872
(1,291)
86,663
21,003
39,481
9,185
1,551,784
1,431,625
1,343,130
462,462
449,722
118,207
50,092
423,499
166,008
$ 344,255
$ 399,630
$ 257,491
$
$
$
1.24
1.22
0.31
$
$
$
1.43
1.40
0.28
$
$
$
0.92
0.91
0.25
45
2018 ANNUAL REPORT BROWN & BROWN, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31, 2018
December 31, 2017
ASSETS
Current Assets:
Cash and cash equivalents
Restricted cash and investments
Short-term investments
Premiums, commissions and fees receivable
Reinsurance recoverable
Prepaid reinsurance premiums
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 less unamortized discount and debt issuance costs
Deferred income taxes, net
Other liabilities
Shareholders’ Equity:
Common stock, par value $0.10 per share; authorized 560,000 shares; issued 293,380
shares and outstanding 279,583 shares at 2018, issued 286,929 shares and outstanding
276,210 shares at 2017–in thousands. 2017 share amounts reflect the 2-for-1 stock split
effective March 28, 2018
Additional paid-in capital
Treasury stock, at cost at 13,797 and 10,719 shares at 2018 and 2017,
respectively–in thousands
Retained earnings
Total shareholders’ equity
$ 438,961
$ 573,383
338,635
12,868
844,815
65,396
337,920
128,716
2,167,311
100,395
3,432,786
898,807
17,394
71,975
250,705
24,965
546,402
477,820
321,017
47,864
2,242,156
77,086
2,716,079
641,005
13,949
57,275
$6,688,668
$5,747,550
$ 857,559
$ 685,163
65,212
337,920
105,640
87,345
279,310
50,000
1,782,986
1,456,990
315,732
132,392
29,338
615,180
(477,572)
2,833,622
3,000,568
476,721
321,017
91,648
64,177
228,748
120,000
1,987,474
856,141
256,185
65,051
28,689
483,733
(386,322)
2,456,599
2,582,699
Total liabilities and shareholders’ equity
$6,688,668
$5,747,550
See accompanying notes to Consolidated Financial Statements.
46
BROWN & BROWN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except per share data)
Shares
Par Value
Additional
Paid-In Capital
Treasury
Stock
Retained
Earnings
Total
Balance at January 1, 2016
282,077
$28,209
$412,931
$ (238,775)
$1,947,411
$2,149,776
Common Stock
Net income
Common stock issued for employee stock
benefit plans
Purchase of treasury stock
Income tax benefit from exercise of stock
benefit plans
3,350
334
Common stock issued to directors
34
4
(18,908)
22,684
11,250
7,346
496
257,491
257,491
23,018
(7,658)
7,346
500
Cash dividends paid ($0.25 per share)
(70,262)
(70,262)
Balance at December 31, 2016
285,461
28,547
454,707
(257,683)
2,134,640
2,360,211
399,630
399,630
(47)
41
(6)
Common stock issued to directors
22
2
498
Cash dividends paid ($0.28 per share)
(77,712)
(77,712)
Balance at December 31, 2017
286,895
28,689
483,733
(386,322)
2,456,599
2,582,699
1,412
140
39,825
(11,250)
(128,639)
39,965
(139,889)
500
286,895
28,689
483,733
(386,322)
2,574,114
2,700,214
117,515
117,515
Net income
Net unrealized holding (loss) gain on
available-for-sale securities
Common stock issued for employee stock
benefit plans
Purchase of treasury stock
Adoption of Topic 606 at January 1, 2018
Beginning balance after adoption of
Topic 606
Net income
Net unrealized holding (loss) gain on
available-for-sale securities
Common stock issued for employee stock
benefit plans
Common stock issued for agency acquisitions
Purchase of treasury stock
3,096
3,376
310
338
(21)
39,857
99,662
(8,750)
(91,250)
344,255
344,255
(57)
(78)
40,167
100,000
(100,000)
700
Common stock issued to directors
13
1
699
Cash dividends paid ($0.31 per share)
(84,690)
(84,690)
Balance at December 31, 2018
293,380
$29,338
$615,180
$ (477,572)
$2,833,622
$3,000,568
See accompanying notes to Consolidated Financial Statements.
47
2018 ANNUAL REPORT BROWN & BROWN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(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 and disposal of deferred financing costs
Accretion of discounts and premiums, investments
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:
Premiums, commissions and fees receivable (increase) decrease
Reinsurance recoverables (increase) decrease
Prepaid reinsurance premiums (increase) decrease
Other assets (increase) decrease
Premiums payable to insurance companies (increase) decrease
Premium deposits and credits due customers increase (decrease)
losses and loss adjustment reserve increase (decrease)
unearned premiums increase (decrease)
Accounts payable increase (decrease)
Accrued expenses and other liabilities increase (decrease)
Other liabilities increase (decrease)
Net cash provided by operating activities
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
Deferred debt issuance costs
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
Settlement (prepayment) of accelerated share repurchase program
Cash dividends paid
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents inclusive of restricted cash
Cash and cash equivalents inclusive of restricted cash at beginning of period
Cash and cash equivalents inclusive of restricted cash at end of period
Year Ended December 31,
2018
2017
2016
$ 344,255
$ 399,630
$ 257,491
86,544
22,834
33,519
2,969
15,008
1,627
(10)
—
(1,934)
(12,538)
(93,630)
412,424
(16,903)
(22,440)
141,169
13,792
(411,509)
16,903
21,880
22,801
(9,232)
567,529
(41,520)
(923,874)
4,984
(9,284)
17,923
(951,771)
85,446
22,698
30,631
9,200
(102,183)
1,840
22
—
(1,841)
(14,501)
(43,306)
(399,737)
(12,356)
(9,747)
37,380
7,750
398,638
12,356
26,798
25,509
(32,252)
441,975
(24,192)
(41,471)
4,094
(10,665)
9,644
(62,590)
(14,059)
300,000
(120,000)
(778)
600,000
(250,000)
—
19,432
(12,155)
(91,250)
(8,750)
(84,690)
337,750
(46,492)
824,088
$ 777,596
(29,265)
—
(96,750)
(2,821)
—
—
—
17,422
(7,565)
(128,639)
(11,250)
(77,712)
(336,580)
42,805
781,283
$ 824,088
86,663
21,003
16,052
9,185
18,163
1,762
39
(7,346)
596
(3,904)
(63,550)
(46,115)
982
(4,718)
66,084
527
46,115
(982)
30,174
8,670
(25,849)
411,042
(17,765)
(122,622)
4,957
(25,872)
18,890
(142,412)
(24,309)
—
(73,125)
—
—
—
7,346
15,983
(8,495)
(18,908)
11,250
(70,262)
(160,520)
108,110
673,173
$ 781,283
See accompanying notes to Consolidated Financial Statements. Refer to Note 13 for reconciliation of cash and cash equivalents inclusive of
restricted cash.
48
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, casualty and employee benefits areas.
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 and quasi-public entities, 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
a nationwide network of independent agents, including Brown & Brown retail agents; the Wholesale Brokerage Segment
markets and sells excess and surplus commercial insurance, primarily through a nationwide network of independent agents
and brokers, as well as Brown & Brown Retail offices; and the Services Segment provides insurance-related services,
including third-party claims administration and comprehensive medical utilization management services in both the workers’
compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare
benefits advocacy services, and claims adjusting services.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which provides guidance for
accounting for leases. Under ASU 2016-02, the Company will be required to recognize the assets and liabilities for the rights
and obligations created by leased assets with initial maturities greater than one year. In July 2018, the FASB also issued
ASU 2018-10 and ASU 2018-11 related to Topic 842. ASU 2018-10 narrows certain aspects of the guidance issued in the
amendments within ASU 2016-02. ASU 2018-11 provides entities with an additional transition method to adopt ASU 2016-02.
Under this new transition method, at the adoption date, a company shall recognize a cumulative-effect adjustment to the
opening balance of retained earnings. ASU 2016-02, along with ASU 2018-10 and ASU 2018-11, will take effect for public
companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company
continues to evaluate the impact of this pronouncement with the principal impact expected to be the present value of the
remaining lease payments and will be presented as a liability on the balance sheet as well as an asset of similar value
representing the “Right of Use” for those leased properties. The Company plans to adopt Topic 842 under the transition
method provided by ASU 2018-11. The undiscounted contractual cash payments remaining on leased properties were
$213.2 million as of December 31, 2016, $210.4 million as of December 31, 2017 and $210.0 million as of December 31, 2018
as detailed in Note 14 “Commitments and Contingencies.”
In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,”
which provides guidance for capitalizing implementation costs incurred in a hosting arrangement that is a service contract
with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting
arrangements that include an internal-use software license). ASU 2018-15 will take effect for public companies for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the
impact of this pronouncement.
Recently Adopted Accounting Standards
In November 2016, the Financial Accountings Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18,
“Statement of Cash Flows (Topic 230)”: Restricted Cash (“ASU 2016-18”), which requires that the Statement of Cash Flows
explain the changes during the period of cash and cash equivalents inclusive of amounts categorized as restricted cash.
ASU 2016-18 is effective for periods beginning after December 15, 2017. However, the Company elected to early adopt for the
49
2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reporting period beginning January 1, 2017 under the full retrospective approach for all periods presented. With the adoption
of ASU 2016-18, the change in restricted cash is no longer reflected as a change in operating assets and liabilities, and the
Statement of Cash Flows details the changes in the balance of cash and cash equivalents inclusive of restricted cash. Net cash
provided by operating activities for the year ended December 31, 2016 were previously reported as $375.2 million. With the
retrospective adoption, the net cash provided by operating activities for the year ended December 31, 2016 is now reported
as $411.0 million. The Company reflects cash collected from customers that is payable to insurance companies as restricted
cash if segregation of this cash is required by the state of domicile for the office conducting this transaction or if required by
contract with the relevant insurance company providing coverage. Cash collected from customers that is payable to insurance
companies is reported in cash and cash equivalents if no such restriction is required.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230)”: Classification of Certain Cash Receipts
and Cash Payments (a consensus of the Emerging Issues Task Force) (“ASU 2016-15”), which addresses eight specific cash
flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments
are presented and classified and applies to all entities, including both business entities and not-for-profit entities that are
required to present a statement of cash flows under Topic 230. ASU 2016-15 became effective for public companies for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 with early adoption permitted.
The Company adopted ASU 2016-15 effective January 1, 2018 and has determined there is no impact on the Company’s
Statement of Cash Flows. The Company already presented cash paid on contingent consideration in business combination
as prescribed by ASU 2016-15 and does not, at this time, engage in the other activities being addressed in this ASU.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share Based Payment Accounting” (“ASU 2016-09”),
which amends guidance issued in Accounting Standards Codification (“ASC”) Topic 718, Compensation–Stock Compensation.
ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU
2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early
adoption is permitted. The Company adopted the guidance on January 1, 2017, as required. Prior periods have not been
adjusted, as the guidance was adopted prospectively. The principal impact is that the tax benefit or expense from stock
compensation is now presented in the income tax line of the Statement of Income, whereas the prior treatment was to present
this amount as a component of equity on the Balance Sheet. In addition, the tax benefit or expense is now presented as activity
in Cash Flow from Operating Activity, rather than the prior presentation as Cash Flow from Financing Activity in the Statement of
Cash Flows. The Company also continues to estimate forfeitures of stock grants as allowed by ASU 2016-09.
In March 2016, the FASB issued ASU 2016-08, “Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)”
(“ASU 2016-08”) to clarify certain aspects of the principal-versus-agent guidance included in the new revenue standard
ASU 2014-09 “Revenue from Contracts with Customers” (“ASU 2014-09”). The FASB issued the ASU in response to concerns
identified by stakeholders, including those related to (1) determining the appropriate unit of account under the revenue
standard’s principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in
accordance with the revenue standard’s control principle. The Company adopted ASU 2016-08 effective contemporaneously
with ASU 2014-09 beginning January 1, 2018. The impact of ASU 2016-08 was limited to the claims administering activities of
one of our businesses within our Services Segment and therefore was not material to the net income of the Company.
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
adopted the guidance on January 1, 2017, as required and prior period have been adjusted to reflect this adoption. This
reclassification occurred prior to the passage of the Tax Cuts and Jobs Act of 2017, which had a material impact on the value
of deferred tax items. See Note 10 “Income Taxes” for more information.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“Topic 606”), which
provides guidance for revenue recognition. Topic 606 affects any entity that either enters into contracts with customers to
transfer goods or services. It supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and
most industry-specific guidance. The standard’s core principle is that a company should 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. Effective as of January 1, 2018, the Company adopted ASU 2014–09, and
all related amendments, which established ASC Topic 606. The Company adopted these standards by recognizing the
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cumulative effect as an adjustment to opening retained earnings at January 1, 2018, under the modified retrospective method
for contracts not completed as of the day of adoption. The cumulative impact of adopting Topic 606 on January 1, 2018
was an increase in retained earnings within stockholders’ equity of $117.5 million. Under the modified retrospective method,
the Company was not required to restate comparative financial information prior to the adoption of these standards and,
therefore, such information presented prior to January 1, 2018 continue to be reported under the Company’s previous
accounting policies.
The following areas are impacted by the adoption of Topic 606:
The Company earns commissions and fees paid by insurance carriers for the binding of insurance coverage. These
commissions and fees are earned at a point in time upon the effective date of bound insurance coverage, as no performance
obligation exists after coverage is bound. If there are other services within the contract, the Company estimates the stand-alone
selling price for each separate performance obligation, and the corresponding apportioned revenue is recognized over the
period of time in which the customer receives the service, and as the performance obligations are fulfilled and the Company is
entitled to that portion of revenue using the output method for the services. In situations where multiple performance obligations
exist within a contract, the use of estimates is required to allocate the transaction price on a relative stand-alone selling price
basis to each separate performance obligation.
Commission revenues–Prior to the adoption of Topic 606, commission revenues, including those billed on an installment
basis, were recognized on the latter of the policy effective date or the date that the premium was billed to the client, with the
exception of the Company’s Arrowhead businesses, which followed a policy of recognizing these revenues on the latter of
the policy effective date or processed date in our systems. As a result of the adoption of Topic 606, commission revenues
associated with the issuance of policies are now recognized upon the effective date of the associated policy. The overall
impact of these changes are not significant on a full-year basis, but the timing of recognizing revenue has impacted our fiscal
quarters when compared to prior years. These commission revenues, including those billed on an installment basis, are now
recognized earlier than they had been previously. Revenue is now accrued based upon the completion of the performance
obligation, thereby creating a current asset for the unbilled revenue, until such time as an invoice is generated, which
typically does not exceed twelve months. For the year ended December 31, 2018, the adoption of Topic 606 increased base
and incentive commissions revenue, as defined in Note 2, by $9.9 million compared to what would have been recognized
under the Company’s previous accounting policies. Incentive commissions represent a form of variable consideration
which includes additional commissions over base commissions received from insurance carriers based on predetermined
production levels mutually agreed upon by both parties.
Profit-sharing contingent commissions–Prior to the adoption of Topic 606, revenue that was not fixed and determinable
because a contingency existed was not recognized until the contingency was resolved. Under Topic 606, the Company must
estimate the amount of consideration that will be received in the coming year such that a significant reversal of revenue is not
probable. Profit-sharing contingent commissions represent a form of variable consideration associated with the placement
of coverage, for which we earn commissions and fees. In connection with Topic 606, profit-sharing contingent commissions
are estimated with a constraint applied and accrued relative to the recognition of the corresponding core commissions. The
resulting effect on the timing of recognizing profit-sharing contingent commissions will now more closely follow a similar
pattern as our commissions and fees with any true-ups recognized when payments are received or as additional information
that affects the estimate becomes available. For the year ended December 31, 2018, the adoption of Topic 606 reduced
profit-sharing contingent commissions revenue by $2.3 million compared to what would have been recognized under our
previous accounting policies.
Fee revenues–The Company earns fee revenue related to services other than securing insurance coverage, which are
predominantly in the Company’s National Programs and Services Segments, and to a lesser extent in the large accounts
businesses within the Company’s Retail Segment, where the Company receives negotiated fees in lieu of a commission. In
accordance with Topic 606, fee revenue from fee agreements are recognized in earlier periods and others in later periods as
compared to our previous accounting treatment depending on when the services within the contract are satisfied and when
we have transferred control of the related services to the customer. The overall impact of these changes is not significant
on a full-year basis, but the timing of recognizing fees revenue will impact our fiscal quarters when compared to prior years.
For the year ended December 31, 2018, the adoption of Topic 606 increased fees revenue by $6.2 million compared to
what would have been recognized under our previous accounting policies, including a one-time $10.5 million increase for
revenues within our Services Segment. Excluding this increase, fee revenues would have decreased by $4.3 million.
51
2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additionally, the Company has evaluated ASC Topic 340–Other Assets and Deferred Cost (“ASC 340”) which requires
companies to defer certain incremental cost to obtain customer contracts, and certain costs to fulfill customer contracts.
Incremental cost to obtain–The adoption of ASC 340 resulted in the Company deferring certain costs to obtain customer
contracts primarily as they relate to commission-based compensation plans in the Retail Segment, in which the Company
pays an incremental amount of compensation on new business. These incremental costs are deferred and amortized
over a 15-year period, which is consistent with the analysis performed on acquired customer accounts and referenced in
Note 5 to the Company’s consolidated financial statements. For incremental costs with an amortization period of less than
12 months, the costs are expensed as incurred. For the year ended December 31, 2018, the Company deferred $13.7 million
of incremental cost to obtain customer contracts. The Company expensed $0.5 million of the incremental cost to obtain
customer contracts for the year ended December 31, 2018.
Cost to fulfill–The adoption of ASC 340 resulted in the Company deferring certain costs to fulfill contracts and to recognize
these costs as the associated performance obligations are fulfilled. In order for contract fulfillment costs to be deferred
under ASC 340, the costs must (1) relate directly to a specific contract or anticipated contract, (2) generate or enhance
resources that the Company will use in satisfying its obligations under the contract, and (3) be expected to be recovered
through sufficient net cash flows from the contract. The Company does not expect the overall impact of these changes to be
significant on a full-year basis, but the timing of recognizing these expenses will impact quarterly results compared to prior
years as such recognition better aligns with the associated revenue. With the modified retrospective adoption of Topic 606,
the Company deferred $52.7 million in contract fulfillment costs on its opening balance sheet on January 1, 2018 based upon
the estimated average time spent on policy renewals. For the year ended December 31, 2018, the Company had net expense
of $1.3 million related to the release of previously deferred contract fulfillment costs associated with performance obligations
that were satisfied in the period, net of current year deferrals for costs incurred that related to performance obligations yet to
be fulfilled.
In connection with the implementation of Topic 606 and ASC 340, we modified, and in some instances instituted, additional
accounting procedures, processes and internal controls. While the relative impacts of these standards to our revenue and
expense streams are significant during a calendar year, we do not view these modifications and additions as a material
change in our internal controls over financial reporting on a full year basis.
The cumulative effect of the changes made to our consolidated balance sheet as of January 1, 2018 for the adoption of
Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” and ASC Topic 340–Other
Assets and Deferred Cost (the “New Revenue Standard”):
(in thousands)
Balance Sheet
Assets:
Premiums, commissions and fees receivable
Other current assets
Liabilities:
Premiums payable to insurance companies
Accounts payable
Accrued expenses and other liabilities
Deferred income taxes, net
Shareholders’ Equity:
Retained earnings
Balance at
December 31,
2017
Adjustments
due to the
New Revenue
Standard
Balance at
January 1,
2018
$ 546,402
$153,058
$ 699,460
47,864
52,680
100,544
685,163
64,177
228,748
256,185
12,107
8,747
22,794
44,575
697,270
72,924
251,542
300,760
$2,456,599
$117,515
$2,574,114
The $52.7 million adjustment to other current assets reflects the deferral of certain cost to fulfill contracts. The $12.1 million
adjustment to premiums payable to insurance companies reflects the estimated amount payable to outside brokers on
unbilled premiums, commissions and fees receivable. The $8.7 million adjustment to accounts payable and the $22.8 million
adjustment to accrued expenses and other liabilities consists of commissions payable and deferred revenue, respectively.
52
The following table illustrates the impact of adopting the New Revenue Standard has had on our reported results in the
consolidated statement of income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Statement of Income
Revenues:
Commissions and fees
Expenses:
Employee compensation and benefits
Other operating expenses
Income taxes
Net income
December 31, 2018
Impact of
adopting the
New Revenue
Standard
Balances
without the
New Revenue
Standard
As reported
$2,009,857
$18,399
$1,991,458
1,068,914
332,118
118,207
(8,835)
10,621
4,246
1,077,749
321,497
113,961
$ 344,255
$12,367
$ 331,888
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of Brown & Brown, Inc. and its subsidiaries. All
significant intercompany account balances and transactions have been eliminated in the Consolidated Financial Statements.
Segment results for prior periods have been recast, where appropriate, to reflect the current year segmental structure.
Certain reclassifications have been made to the prior year amounts reported in this Annual Report on Form 10-K in order to
conform to the current year presentation.
Revenue Recognition
The Company earns commissions paid by insurance carriers for the binding of insurance coverage. Commissions are earned
at a point in time upon the effective date of bound insurance coverage, as no performance obligation exists after coverage is
bound. If there are other services within the contract, the Company estimates the stand-alone selling price for each separate
performance obligation, and the corresponding apportioned revenue is recognized over a period of time as the performance
obligations are fulfilled. The Company earns fee revenue by receiving negotiated fees in lieu of a commission and from
services other than securing insurance coverage. Fee revenues from certain agreements are recognized depending on when
the services within the contract are satisfied and when we have transferred control of the related services to the customer. In
situations where multiple performance obligations exist within a fee contract, the use of estimates is required to allocate the
transaction price on a relative stand-alone selling price basis to each separate performance obligation. Incentive commissions
represent a form of variable consideration which includes additional commissions over base commissions received from
insurance carriers based on predetermined production levels mutually agreed upon by both parties. Profit-sharing contingent
commissions represent a form of variable consideration associated with the placement of coverage, for which we earn
commissions. Profit-sharing contingent commissions and incentive commissions are estimated with a constraint applied and
accrued relative to the recognition of the corresponding core commissions based on the amount of consideration that will be
received in the coming year such that a significant reversal of revenue is not probable. Guaranteed supplemental commissions,
a form of variable consideration, represent guaranteed fixed-base agreements in lieu of profit-sharing contingent commissions.
Management determines the policy cancellation reserve based upon historical cancellation experience adjusted for any
known circumstances.
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.
53
2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
the authorized commissions, remits the net premiums to the appropriate insurance company or companies. Accordingly, as
reported in the Consolidated Balance Sheets, premiums are receivable from insureds. Unremitted net insurance premiums
are held in a fiduciary capacity until the Company disburses them. Where allowed by law, the Company 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 the Company 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 the Company. Accordingly, as reported in the Consolidated Balance Sheets, commissions are receivables
from insurance companies. Fees are primarily receivables due from customers.
Investments
Certificates of deposit, and other securities, having maturities of more than three months when purchased are reported at
cost and are adjusted for other-than-temporary market value declines. The Company’s investment holdings include U.S.
Government securities, municipal bonds, domestic corporate and foreign corporate bonds as well as short-duration fixed
income funds. Investments within the portfolio or funds are held as available-for-sale and are carried at their fair value. Any
gain/loss applicable from the fair value change is recorded, net of tax, as other comprehensive income within the equity
section of the Consolidated Balance Sheet. Realized gains and losses are reported on the Consolidated Statement of
Income, with the cost of securities sold determined on a specific identification basis.
Fixed Assets
Fixed assets, including leasehold improvements, are carried at cost, less accumulated depreciation and amortization.
Expenditures for improvements are capitalized, and expenditures for maintenance and repairs are expensed to operations
as incurred. Upon sale or retirement, the cost and related accumulated depreciation and amortization are removed from
the accounts and the resulting gain or loss, if any, is reflected in other income. Depreciation has been determined using
the straight-line method over the estimated useful lives of the related assets, which range from 3 to 15 years. Leasehold
improvements are amortized on the straight-line method over the shorter of the useful life of the improvement or the term of
the related lease.
Goodwill and Amortizable Intangible Assets
All of our business combinations initiated after June 30, 2001 are accounted for using the acquisition method. Acquisition
purchase prices are typically based upon a multiple of average annual operating profit earned over a period of 3 years within
a minimum and maximum price range. The recorded purchase prices for all acquisitions consummated after January 1, 2009
include an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in
the fair value of earn-out obligations are recorded in the Consolidated Statement of Income when incurred.
The fair value of earn-out obligations is based upon the present value of the expected future payments to be made to the
sellers of the acquired businesses in accordance with the provisions contained in the respective purchase agreements.
In determining fair value, the acquired business’ future performance is estimated using financial projections developed by
management for the acquired business and this estimate reflects market participant assumptions regarding revenue growth
and/or profitability. The expected future payments are estimated on the basis of the earn-out formula and performance
targets specified in each purchase agreement compared to the associated financial projections. These estimates are then
discounted to present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out
payments will be made.
Amortizable intangible assets are stated at cost, less accumulated amortization, and consist of purchased customer accounts
and non-compete agreements. Purchased customer accounts and non-compete agreements are amortized on a straight-line
basis over the related estimated lives and contract periods, which range from 3 to 15 years. Purchased customer accounts
primarily consist of records and files that contain information about insurance policies and the related insured parties that are
essential to policy renewals.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The excess of the purchase price of an acquisition over the fair value of the identifiable tangible and amortizable intangible
assets is assigned to goodwill. While goodwill is not amortizable, it is subject to assessment at least annually, and more
frequently in the presence of certain circumstances, for impairment by application of a fair value-based test. The Company
compares the fair value of each reporting unit with its carrying amount to determine if there is potential impairment of
goodwill. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent
that the fair value of the goodwill within the reporting unit is less than its carrying value. Fair value is estimated based upon
multiples of earnings before interest, income taxes, depreciation, amortization and change in estimated acquisition earn-out
payables (“EBITDAC”), or on a discounted cash flow basis. The Company completed its most recent annual assessment as of
November 30, 2018 and determined that the fair value of goodwill significantly exceeded the carrying value of such assets. In
addition, as of December 31, 2018, there are no accumulated impairment losses.
The carrying value of amortizable intangible assets attributable to each business or asset group comprising the Company 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, the
Company 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, 2018, 2017, and 2016.
Income Taxes
The Company records income tax expense using the asset-and-liability method of accounting for deferred income taxes.
Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary
differences between the financial statement carrying values and the income tax bases of the Company’s assets and liabilities.
The Company 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 net income per share is computed based on the weighted average number of common shares (including participating
securities) issued and outstanding during the period. Diluted net income per share 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 weighted average number
of common shares outstanding for 2016 and 2017 reflect the 2-for-1 stock split that occurred on March 28, 2018.
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
Net income attributable to unvested awarded performance stock
Net income attributable to common shares
Weighted average number of common shares outstanding–basic
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
Weighted average number of shares outstanding–diluted
Net income per share:
Basic
Diluted
2018
2017(1)
2016(1)
$ 344,255
$ 399,630
$ 257,491
(8,297)
$335,958
(9,746)
$389,884
(6,705)
$250,786
277,663
279,394
279,558
(6,692)
(6,814)
(7,280)
270,971
4,550
275,521
272,580
5,006
277,586
272,278
3,330
275,608
$
$
1.24
1.22
$
$
1.43
1.40
$
$
0.92
0.91
(1) The weighted average number of common shares outstanding for 2016 and 2017 reflect the 2-for-1 stock split that occurred on March 28, 2018.
55
2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The carrying amounts of the Company’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, 2018 and 2017, approximate fair value
because of the short-term maturity of these instruments. The carrying amount of the Company’s long-term debt approximates
fair value at December 31, 2018 and 2017 as our fixed-rate borrowings of $499.1 million approximate their values using market
quotes of notes with the similar terms as ours, which we deem a close approximation of current market rates. The estimated
fair value of the $1,015.0 million currently outstanding approximates the carrying value due to the variable interest rate based
upon adjusted LIBOR. See Note 3 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 6 for information on the fair value of
investments and Note 9 for information on the fair value of long-term debt.
Stock-Based Compensation
The Company grants non-vested stock awards to its employees and officers and fully vested stock awards to directors. The
Company uses the modified-prospective method to account for share-based payments. Under the modified-prospective
method, compensation cost is recognized for all share-based payments granted on or after January 1, 2006 and for all
awards granted to employees prior to January 1, 2006 that remained unvested on that date. The Company uses the
alternative-transition method to account for the income tax effects of payments made related to stock-based compensation.
The Company uses the Black-Scholes valuation model for valuing all stock options and shares purchased under the
Employee Stock Purchase Plan (the “ESPP”). Compensation for non-vested stock awards is measured at fair value on the
grant date based upon the number of shares expected to vest. Compensation cost for all awards is recognized in earnings,
net of estimated forfeitures, on a straight-line basis over the requisite service period.
Reinsurance
The Company protects itself from claims-related losses by reinsuring all claims risk exposure. The only line of insurance the
Company underwrites is flood insurance associated with the Wright National Flood Insurance Company (“WNFIC”), which is
part of our National Programs Segment. However, all exposure is reinsured with the Federal Emergency Management Agency
(“FEMA”) for basic admitted policies conforming to the National Flood Insurance Program. For excess flood insurance policies,
all exposure is reinsured with a reinsurance carrier with an AM Best Company rating of “A” or better. Reinsurance does not
legally discharge the ceding insurer from the primary liability for the full amount due under the reinsured policies. Reinsurance
premiums, commissions, expense reimbursement and reserves related to ceded business are accounted for on a basis
consistent with the accounting for the original policies issued and the terms of reinsurance contracts. Premiums earned
and losses and loss adjustment expenses incurred are reported net of reinsurance amounts. Other underwriting expenses
are shown net of earned ceding commission income. The liabilities for unpaid losses and loss adjustment expenses and
unearned premiums are reported gross of ceded reinsurance recoverable.
Balances due from reinsurers on unpaid losses and loss adjustment expenses, including an estimate of such recoverables related
to reserves for incurred but not reported (“IBNR”) losses, are reported as assets and are included in reinsurance recoverable even
though amounts due on unpaid loss and loss adjustment expense are not recoverable from the reinsurer until such losses are
paid. The Company does not believe it is exposed to any material credit risk through its reinsurance as the reinsurer is FEMA for
basic admitted flood policies and national reinsurance carriers for private 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.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unpaid Losses and Loss Adjustment Reserve
Unpaid losses and loss adjustment reserve include amounts determined on individual claims and other estimates based upon
the past experience of WNFIC and the policyholders for IBNR claims, less anticipated salvage and subrogation recoverable.
The methods of making such estimates and for establishing the resulting reserves are continually reviewed and updated, and
any adjustments resulting therefrom are reflected in operations currently.
WNFIC engages the services of outside actuarial consulting firms (the “Actuaries”) to assist on an annual basis to render an
opinion on the sufficiency of the Company’s estimates for unpaid losses and related loss adjustment reserve. The Actuaries
utilize both industry experience and the Company’s own experience to develop estimates of those amounts as of year-
end. These estimated liabilities are subject to the impact of future changes in claim severity, frequency and other factors. In
spite of the variability inherent in such estimates, management believes that the liabilities for unpaid losses and related loss
adjustment reserve are 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. Revenues
The following table presents the revenues disaggregated by revenue source:
(in thousands)
Base commissions(1)
Fees(2)
Incentive commissions(3)
Profit-sharing contingent commissions(4)
Guaranteed supplemental commissions(5)
Investment income(6)
Other income, net(7)
Total Revenues
Twelve months ended December 31, 2018
Retail
National
Programs
Wholesale
Brokerage
Services
Other
Total
$ 811,820
$324,168
$226,117
$
—
$
(68)
$1,362,037
148,121
144,195
50,571
189,041
(1,090)
48,698
24,517
8,535
2
1,070
1,543
23,896
76
506
79
864
7,462
1,350
165
485
—
—
—
205
—
41
—
—
1,868
9
530,838
51,146
55,875
9,961
2,746
1,643
$1,042,763
$494,463
$287,014
$189,246
$ 760
$2,014,246
(1) Base commissions 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.
(2) Fee revenues relate to fees for services other than securing coverage for our customers and fees negotiated in lieu of commissions.
(3)
Incentive commissions include additional commissions over base commissions received from insurance carriers based on predetermined production levels
mutually agreed upon by both parties.
(4) Profit-sharing contingent commissions are based primarily on underwriting results, but may also reflect considerations for volume, growth and/or retention.
(5) Guaranteed supplemental commissions represent guaranteed fixed-base agreements in lieu of profit-sharing contingent commissions.
(6)
Investment income consists primarily of interest on cash and investments.
(7) Other income consists primarily of legal settlements and other miscellaneous income.
Contract Assets and Liabilities
The balances of contract assets and contract liabilities arising from contracts with customers as of December 31, 2018 and
2017 were as follows:
(in thousands)
Contract assets
Contract liabilities
December 31,
2018
December 31,
2017(1)
$265,994
$ 53,496
$210,323
$ 51,236
(1) The balances as of December 31, 2017 reported in this footnote have been revised to reflect the impact of adopting the New Revenue Standard.
57
2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unbilled receivables (contract assets) arise when the Company recognizes revenue for amounts which have not yet been
billed in our systems. Deferred revenue (contract liabilities) relates to payments received in advance of performance under
the contract before the transfer of a good or service to the customer.
As of December 31, 2018, deferred revenue consisted of $37.0 million as current portion to be recognized within one year
and $16.5 million in long-term to be recognized beyond one year. As of December 31, 2017, deferred revenue consisted
of $44.5 million as current portion to be recognized within one year and $6.7 million in long-term deferred revenue to be
recognized beyond one year.
Contract assets and contract liabilities arising from acquisitions in 2018 were approximately $34.3 million and $3.3 million,
respectively.
During the twelve months ended December 31, 2018, the amount of revenue recognized related to performance obligations
satisfied in a previous period, inclusive of changes due to estimates, was approximately $8.9 million.
NOTE 3. Business Combinations
During the year ended December 31, 2018, the Company acquired the assets and assumed certain liabilities of twenty
insurance intermediaries, all the stock of three insurance intermediaries and one book of business (customer accounts).
Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions
completed within the last twelve months as permitted by ASC Topic 805 - Business Combinations (“ASC 805”). Such
adjustments are presented in the “Other” category within the following two tables. The recorded purchase price for all
acquisitions includes an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent
changes in the fair value of earn-out obligations will be recorded in the Consolidated Statement of Income when incurred.
The fair value of earn-out obligations is based upon the present value of the expected future payments to be made to
the sellers of the acquired businesses in accordance with the provisions outlined in the respective purchase agreements.
In determining fair value, the acquired business’s future performance is estimated using financial projections developed
by management for the acquired business and reflects market participant assumptions regarding revenue growth and/or
profitability. The expected future payments are estimated on the basis of the earn-out formula and performance targets
specified in each purchase agreement compared to the associated financial projections. These payments are then
discounted to present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out
payments will be made.
Based upon the acquisition date and the complexity of the underlying valuation work, certain amounts included in the
Company’s Consolidated Financial Statements may be provisional and thus subject to further adjustments within the
permitted measurement period, as defined in ASC 805. For the year ended December 31, 2018, several adjustments were
made within the permitted measurement period that resulted in an increase in the aggregate purchase price of the affected
acquisitions of $21.4 thousand relating to the assumption of certain liabilities. These measurement period adjustments have
been reflected as current period adjustments for the year ended December 31, 2018 in accordance with the guidance in
ASU 2015-16 “Business Combinations.” The measurement period adjustments impacted goodwill, with no effect on earnings
or cash in the current period.
Cash paid for acquisitions was $ 934.9 million and $41.5 million in the years ended December 31, 2018 and 2017, respectively.
We completed twenty-three acquisitions (excluding book of business purchases) during the year ended December 31, 2018.
We completed eleven acquisitions (excluding book of business purchases) during the year ended December 31, 2017.
58
(in thousands)
Name
Opus Advisory Group,
LLC (Opus)
Kerxton Insurance
Agency, Inc. (Kerxton)
Automotive
Development Group,
LLC (ADG)
Servco Pacific,
Inc. (Servco)
NOTeS TO CONSOLIDATeD FINANCIAL STATeMeNTS
The following table summarizes the purchase price allocations made as of the date of each acquisition for current year
acquisitions and adjustments made during the measurement period for prior year acquisitions. During the measurement
periods, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed
as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date.
These adjustments are made in the period in which the amounts are determined and the current period income effect of such
adjustments will be calculated as if the adjustments had been completed as of the acquisition date.
Business
segment
Effective date
of acquisition Cash paid
Common
Stock Issued
Other
payable
Recorded
earn-out
payable
Net assets
acquired
Maximum
potential earn-
out payable
Retail
February 1, 2018
$ 20,400
$
— $ 200
$ 2,384 $
22,984
$
3,600
Retail
March 1, 2018
13,176
—
1,490
2,080
16,746
2,920
Retail
May 1, 2018
29,471
Retail
June 1, 2018
76,245
Tower Hill Prime
Insurance Company
(Tower Hill)
National
Programs
Health Special Risk,
Inc. (HSR)
National
Programs
July 1, 2018
20,300
July 1, 2018
20,132
Professional Disability
Associates, LLC (PDA)
Finance & Insurance
Resources, Inc. (F&I)
Services
July 1, 2018
15,025
Retail
September 1, 2018
44,940
Rodman Insurance
Agency, Inc. (Rodman) Retail
November 1, 2018
31,121
—
—
—
—
—
—
—
559
17,545
47,575
20,000
—
—
—
—
934
77,179
7,000
1,188
21,488
7,700
1,991
22,123
9,000
9,818
24,843
17,975
410
9,121
54,471
19,500
261
3,720
35,102
9,850
The Hays Group, Inc.
et al (Hays)
Dealer Associates,
Inc. (Dealer)
Other
Total
Retail
November 16, 2018
605,000
100,000
—
19,600
724,600
25,000
Retail
December 1, 2018
Various
Various
28,825
30,293
—
—
1,175
1,367
3,100
5,896
33,100
37,556
12,125
12,998
$ 934,928
$100,000 $5,462
$ 77,377 $1,117,767
$147,668
59
2018 ANNUAL REPORT Other current assets
Fixed assets
Goodwill
Purchased
customer accounts
Non-compete
agreements
Other assets
NOTeS 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 and adjustments made during the measurement period of the prior year acquisitions.
(in thousands)
Opus
Kerxton
ADG
Servco Tower Hill
HSR
PDA
F&I Rodman
Hays
Cash
$
— $
— $
— $ 8,188
1,215
11
663
10
1,500
7,769
67
179
$
$
— $ 3,114 $
(248) $
— $
— $
—
—
818
1,762
999
1,062
36,254
— $
124 $
310 $
34 $
45 $
4,936
16,414
12,423
35,769
54,429
— 18,737
16,547
36,423
26,572
456,217
5,008
4,712
9,751
16,442
21,468
5,516
7,700
16,611
10,129
218,600
21
315
22
419
21
467
1
1,478
20
—
65
21
82
6
21
383
51
542
2,600
13,977
Total assets acquired
22,984
18,249
47,575
88,486
21,488
28,395
26,159
54,471
38,401
732,584
Other current liabilities
Other liabilities
Total liabilities assumed
—
—
—
(1,503)
— (11,307)
—
—
—
(1,503)
— (11,307)
—
—
—
(5,930)
(1,093)
(342)
(223)
(6,272)
(1,316)
—
—
—
(3,299)
(7,984)
—
—
(3,299)
(7,984)
Net assets acquired
$22,984 $16,746 $47,575 $ 77,179
$21,488 $22,123 $24,843 $54,471 $35,102 $724,600
(in thousands)
Cash
Other current assets
Fixed assets
Goodwill
Purchased customer accounts
Non-compete agreements
Other assets
Total assets acquired
Other current liabilities
Other liabilities
Total liabilities assumed
Net assets acquired
Dealer
Other
Total
$
—
552
13
21,467
10,986
21
226
33,265
(165)
—
(165)
$
—
323
100
22,712
15,085
297
754
39,271
(1,715)
—
(1,715)
$
11,054
52,917
5,829
717,710
342,008
3,222
18,588
1,151,328
(32,996)
(565)
(33,561)
$33,100
$ 37,556
$ 1,117,767
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 $717.7 million, which is net of any opening balance sheet adjustments within the allowable measurement period,
was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $676.9
million, $18.7 million, $5.5 million and $16.5 million, respectively. Of the total goodwill of $717.7 million, the amount currently
deductible for income tax purposes is $640.3 million and the remaining $77.4 million relates to the recorded earn-out
payables and will not be deductible until it is earned and paid.
60
NOTeS TO CONSOLIDATeD FINANCIAL STATeMeNTS
For the acquisitions completed during 2018, 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, 2018 included in the
Consolidated Statement of Income for the year ended December 31, 2018 were $82.4 million. The income before income
taxes, including the intercompany cost of capital charge, from the acquisitions completed through December 31, 2018
included in the Consolidated Statement of Income for the year ended December 31, 2018 was $6.3 million. If the acquisitions
had occurred as of the beginning of the respective periods, the Company’s results of operations would be as shown in the
following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would
have occurred had the acquisitions actually been made at the beginning of the respective periods.
(UNAUDITED)
(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
Year Ended December 31,
2018
2017
$2,259,812
$2,193,169
$ 504,664
$ 503,927
$ 375,670
$ 447,796
$
$
1.35
1.33
$
$
1.60
1.57
270,971
275,521
272,580
277,586
Acquisitions in 2017
During the year ended December 31, 2017, the Company acquired the assets and assumed certain liabilities of eleven
insurance intermediaries and one book of business (customer accounts). Additionally, miscellaneous adjustments were
recorded to the purchase price allocation of certain prior acquisitions completed within the last twelve months as permitted
by ASC 805. Such adjustments are presented in the “Other” category within the following two tables.
For the year ended December 31, 2017, several adjustments were made within the permitted measurement period that resulted in a
decrease in the aggregate purchase price of the affected acquisitions of $1.5 million, relating to the assumption of certain liabilities.
The following table summarizes the purchase price allocation made as of the date of each acquisition for current year
acquisitions and significant adjustments made during the measurement period for prior year acquisitions:
(in thousands)
Name
Other
Total
Business
Segment
Effective Date
of Acquisition Cash Paid Other Payable
Recorded
Earn-Out Payable
Net Assets
Acquired
Maximum Potential
Earn-Out Payable
Various
Various
$41,471
$41,471
$11,708
$11,708
$6,921
$60,100
$6,921
$60,100
$27,451
$27,451
61
2018 ANNUAL REPORT NOTeS 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)
Other current assets
Fixed assets
Goodwill
Purchased customer accounts
Non-compete agreements
Total assets acquired
Other current liabilities
Deferred income tax, net
Total liabilities assumed
Net assets acquired
Total
$
601
69
42,172
18,738
721
62,301
(1,512)
(689)
(2,201)
$ 60,100
The weighted average useful lives for the acquired amortizable intangible assets are as follows: purchased customer
accounts, 15.0 years; and non-compete agreements, 5.0 years.
Goodwill of $42.2 million was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the
amounts of $33.1 million, $ 7.2 million, $1.2 million and $0.7 million, respectively. Of the total goodwill of $ 42.2 million, $35.3
million is currently deductible for income tax purposes. The remaining $6.9 million relates to the recorded earn-out payables
and will not be deductible until it is earned and paid.
For the acquisitions completed during 2017, the results of operations since the acquisition dates have been combined with
those of the Company. The total revenues from the acquisitions completed through December 31, 2017 included in the
Consolidated Statement of Income for the year ended December 31, 2017 were $7.8 million. The income before income
taxes, including the intercompany cost of capital charge, from the acquisitions completed through December 31, 2017
included in the Consolidated Statement of Income for the year ended December 31, 2017 was $2.4 million. If the acquisitions
had occurred as of the beginning of the respective periods, the Company’s results of operations would be as shown in the
following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would
have occurred had the acquisitions actually been made at the beginning of the respective periods.
Year Ended December 31,
2017
2016
$1,891,701
$1,784,776
$ 453,397
$ 429,490
$ 401,908
$ 261,133
$
$
1.44
1.41
$
$
0.93
0.92
272,580
277,586
272,278
275,608
(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
62
NOTeS TO CONSOLIDATeD FINANCIAL STATeMeNTS
Acquisitions in 2016
During the year ended December 31, 2016, the Company acquired the assets and assumed certain liabilities of seven insurance
intermediaries, all of the stock of one insurance intermediary and three books of business (customer accounts). Additionally,
miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last
twelve months as permitted by ASC 805. Such adjustments are presented in the “Other” category within the following two tables.
For the year ended December 31, 2016, several adjustments were made within the permitted measurement period that
resulted in a decrease in the aggregate purchase price of the affected acquisitions of $917,497, relating to the assumption of
certain liabilities.
The following table summarizes the purchase price allocation made as of the date of each acquisition for current year
acquisitions and significant adjustments made during the measurement period for prior year acquisitions:
(in thousands)
Name
Social Security
Advocates for
the Disabled
LLC (SSAD)
Business
Segment
Effective Date of
Acquisition
Cash Paid
Note
Payable
Other
Payable
Recorded
Earn-Out
Payable
Net Assets
Acquired
Maximum
Potential Earn-
Out Payable
Services
February 1, 2016 $
32,526
$ 492 $
—
$ 971
$ 33,989
$ 3,500
Morstan General
Agency, Inc. (Morstan)
Wholesale
Brokerage June 1, 2016
Other
Total
Various
Various
66,050
26,140
—
—
10,200
464
3,091
400
79,341
27,004
5,000
7,785
$
124,716
$ 492 $ 10,664
$4,462
$ 140,334
$ 16,285
The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of
each acquisition.
(in thousands)
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
Total liabilities assumed
Net assets acquired
SSAD
Morstan
Other
Total
$ 2,094
$
—
$
—
$
2,094
1,042
307
22,352
13,069
72
—
38,936
(1,717)
(3,230)
(4,947)
2,482
300
51,454
26,481
39
—
80,756
(1,415)
—
1,555
77
19,570
11,075
117
20
32,414
(5,410)
—
5,079
684
93,376
50,625
228
20
152,106
(8,542)
(3,230)
(1,415)
(5,410)
(11,772)
$33,989
$79,341
$27,004
$140,334
The weighted average useful lives for the acquired amortizable intangible assets are as follows: purchased customer
accounts, 15 years; and non-compete agreements, 5 years.
Goodwill of $93.4 million was allocated to the Retail, National Programs, Wholesale Brokerage, and Services Segments in the
amounts of $13.1 million, $(1.2) thousand, $57.9 million and $22.4 million, respectively. Of the total goodwill of $93.4 million,
$88.9 million is currently deductible for income tax purposes. The remaining $4.5 million relates to the recorded earn-out
payables and will not be deductible until it is earned and paid.
63
2018 ANNUAL REPORT NOTeS TO CONSOLIDATeD FINANCIAL STATeMeNTS
For the acquisitions completed during 2016, the results of operations since the acquisition dates have been combined with
those of the Company. The total revenues from the acquisitions completed through December 31, 2016 included in the
Consolidated Statement of Income for the year ended December 31, 2016 were $34.2 million. The income before income
taxes, including the intercompany cost of capital charge, from the acquisitions completed through December 31, 2016
included in the Consolidated Statement of Income for the year ended December 31, 2016 was $4.3 million. If the acquisitions
had occurred as of the beginning of the respective periods, the Company’s results of operations would be as shown in the
following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would
have occurred had the acquisitions actually been made at the beginning of the respective periods.
(UNAUDITED)
(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
Year Ended December 31,
2015
$1,716,592
$ 414,911
$ 250,783
2016
$1,789,790
$ 428,194
$ 260,346
$
$
0.93
0.92
$
$
0.89
0.87
272,278
275,608
275,620
280,224
As of December 31, 2018, the maximum future contingency payments related to all acquisitions totaled $198.6 million, all of
which relates to acquisitions consummated subsequent to January 1, 2009.
ASC 805 is the authoritative guidance requiring an acquirer to recognize 100% of the fair values of acquired assets,
including goodwill, and assumed liabilities (with only limited exceptions) upon initially obtaining control of an acquired
entity. Additionally, the fair value of contingent consideration arrangements (such as earn-out purchase arrangements) at
the acquisition date must be included in the purchase price consideration. As a result, the recorded purchase prices for
all acquisitions consummated after January 1, 2009 include an estimation of the fair value of liabilities associated with any
potential earn-out provisions. Subsequent changes in these earn-out obligations will be recorded in the Consolidated
Statement of Income when incurred. Potential earn-out obligations are typically based upon future earnings of the acquired
entities, usually between one and three years.
As of December 31, 2018, 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, 2018, 2017, and 2016 were as follows:
(in thousands)
Balance as of the beginning of the period
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
Year Ended December 31,
2018
2017
2016
$ 36,175
$ 63,821
$ 78,387
77,377
6,920
(26,597)
(43,766)
86,955
26,975
603
2,366
2,969
6,874
2,326
9,200
4,462
(28,213)
54,636
6,338
2,847
9,185
Balance as of December 31,
$ 89,924
$ 36,175
$ 63,821
Of the $89.9 million of estimated acquisition earn-out payables as of December 31, 2018, $21.1 million was recorded as
accounts payable, and $68.8 million was recorded as another non-current liability. Included within additions to estimated
acquisition earn-out payables are any adjustments to opening balance sheet items prior to the one-year anniversary date
of the acquisition and may therefore differ from previously reported amounts. Of the $36.2 million of estimated acquisition
earn-out payables as of December 31, 2017, $25.1 million was recorded as accounts payable, and $11.1 million was recorded
as other non-current liabilities. Of the $63.8 million of estimated acquisition earn-out payables as of December 31, 2016,
$31.8 million was recorded as accounts payable, and $32.0 million was recorded as other non-current liabilities.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. Goodwill
The changes in the carrying value of goodwill by reportable segment for the years ended December 31, are as follows:
(in thousands)
Balance as of January 1, 2017
Goodwill of acquired businesses
Goodwill disposed of relating to sales of businesses
Retail
National
Programs
Wholesale
Brokerage
Services
Total
$ 1,354,667
$ 901,294
$ 284,869
$ 134,572
$ 2,675,402
33,076
(1,495)
7,178
—
1,229
—
689
—
42,172
(1,495)
Balance as of December 31, 2017
$ 1,386,248
$ 908,472
$ 286,098
$ 135,261
$ 2,716,079
Goodwill of acquired businesses
676,902
18,737
5,524
16,547
717,710
Goodwill disposed of relating to sales of businesses
Balance as of December 31, 2018
—
$2,063,150
(1,003)
$926,206
—
$291,622
—
$151,808
(1,003)
$3,432,786
NOTE 5. Amortizable Intangible Assets
Amortizable intangible assets at December 31, 2018 and 2017 consisted of the following:
December 31, 2018
December 31, 2017
Gross
carrying
value
Accumulated
amortization
Net
carrying
value
Weighted
average
life in
years(1)
Gross
carrying
value
Accumulated
amortization
Net
carrying
value
Weighted
average
life in
years(1)
(in thousands)
Purchased
customer accounts
$ 1,804,404
$ (909,415)
$ 894,989
14.9 $ 1,464,274
$ (824,584) $ 639,690
Non-compete agreements
33,469
(29,651)
3,818
4.5
30,287
(28,972)
1,315
Total
$1,837,873
$(939,066) $898,807
$1,494,561
$(853,556) $641,005
(1) Weighted average life calculated as of the date of acquisition.
15.0
4.6
Amortization expense for amortizable intangible assets for the years ending December 31, 2019, 2020, 2021, 2022, and 2023
is estimated to be $100.4 million, $93.0 million, $89.5 million, $85.0 million, and $78.0 million, respectively.
NOTE 6. Investments
At December 31, 2018, the Company’s amortized cost and fair values of fixed maturity securities are summarized as follows:
(in thousands)
Gross
unrealized
gains
Gross
unrealized
losses
Cost
Fair
value
U.S. Treasury securities, obligations of U.S. Government agencies and Municipalities
$ 21,729
Corporate debt
Total
623
$22,352
$ 7
—
$ 7
$ (222)
$ 21,514
—
623
$(222)
$22,137
At December 31, 2018, the Company held $21.7 million in fixed income securities composed of U.S. Treasury securities,
securities issued by U.S. Government agencies and Municipalities, and $0.6 million issued by corporations with investment-
grade ratings. Of the total, $4.8 million is classified as short-term investments on the Consolidated Balance Sheet as
maturities are less than one year in duration. Additionally, the Company holds $8.1 million in short-term investments, which are
related to time deposits held with various financial institutions.
65
2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For securities in a loss position, the following table shows the investments’ gross unrealized loss and fair value, aggregated
by investment category and length of time that individual securities have been in a continuous unrealized loss position as of
December 31, 2018:
(in thousands)
U.S. Treasury securities, obligations of U.S. Government
agencies and Municipalities
Corporate debt
Total
Less than 12 Months
12 Months or More
Total
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
$ 5,866
457
$6,323
$ (6)
$ 12,634
$ (216)
$ 18,500
$ (222)
—
100
—
557
—
$(6)
$12,734
$(216)
$19,057
$(222)
The unrealized losses from corporate issuers were caused by interest rate increases. At December 31, 2018, the Company
had 20 securities in an unrealized loss position. The corporate securities are highly rated securities with no indicators of
potential impairment. Based upon the ability and intent of the Company to hold these investments until recovery of fair value,
which may be maturity, the bonds were not considered to be other-than-temporarily impaired at December 31, 2018.
At December 31, 2017, 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 Municipalities
Corporate debt
Total
Cost
$ 29,970
1,072
$31,042
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
$ —
12
$12
$ (206)
$ 29,764
—
1,084
$(206)
$30,848
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, 2017:
(in thousands)
U.S. Treasury securities, obligations of U.S.
Government agencies and Municipalities
Corporate debt
Total
Less than 12 Months
12 Months or More
Total
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair value
Unrealized
losses
$ 17,919
$ (157)
$ 11,845
$ (49)
$ 29,764
400
—
—
—
400
$18,319
$(157)
$11,845
$(49)
$30,164
$ (206)
—
$(206)
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, 2017, the Company had 27
securities in an unrealized loss position. The contractual cash flows of the U.S. Treasury Securities and obligations of the U.S.
Government agencies investments are either guaranteed by the U.S. Government or an agency of the U.S. Government.
Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s
investment. The corporate securities are highly rated securities with no indicators of potential impairment. Based upon the
ability and intent of the Company to hold these investments until recovery of fair value, which may be maturity, the bonds
were not considered to be other-than-temporarily impaired at December 31, 2017.
The amortized cost and estimated fair value of the fixed maturity securities at December 31, 2018 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
66
Amortized cost
Fair value
$ 4,768
$ 4,743
17,584
—
$22,352
17,394
—
$22,137
The amortized cost and estimated fair value of the fixed maturity securities at December 31, 2017 by contractual maturity are
set forth below:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
$ 16,934
$ 16,899
13,876
232
$31,042
13,708
241
$30,848
The expected maturities in the foregoing table may differ from the contractual maturities because certain borrowers have the
right to call or prepay obligations with or without penalty.
Proceeds from the sales and maturity of the Company’s investment in fixed maturity securities were $17.1 million. This
along with maturing time deposits yielded total cash proceeds from the sale of investments of $17.9 million in the period of
January 1, 2018 to December 31, 2018. These proceeds were used to purchase an additional $9.3 million of fixed maturity
securities and to fund certain general corporate purposes. The gains and losses realized on those sales for the period from
January 1, 2018 to December 31, 2018 were insignificant.
Proceeds from the sales and maturity of the Company’s investment in fixed maturity securities were $5.8 million for the year
ended December 31, 2017. This along with maturing time deposits yielded total cash proceeds from the sale of investments of
$ 9.6 million in the period of January 1, 2017 to December 31, 2017. These proceeds were used to purchase additional fixed-
maturity securities. The gains and losses realized on those sales for the period from January 1, 2017 to December 31, 2017
were insignificant.
Realized gains and losses are reported on the Consolidated Statement of Income, with the cost of securities sold determined
on a specific identification basis.
At December 31, 2018, investments with a fair value of approximately $4.1 million were on deposit with state insurance
departments to satisfy regulatory requirements.
NOTE 7. Fixed Assets
Fixed assets at December 31 consisted of the following:
(in thousands)
Furniture, fixtures and equipment
Leasehold improvements
Construction in progress
Land, buildings and improvements
Total cost
Less accumulated depreciation and amortization
Total
2018
2017
$ 213,928
$ 190,784
39,194
7,568
8,185
268,875
(168,480)
35,481
—
7,643
233,908
(156,822)
$100,395
$ 77,086
Depreciation and amortization expense for fixed assets amounted to $22.8 million in 2018, $22.7 million in 2017 and
$21.0 million in 2016.
67
2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other liabilities at December 31 consisted of the following:
(in thousands)
Accrued incentive compensation
Accrued compensation and benefits
Accrued rent and vendor expenses
Deferred revenue
Reserve for policy cancellations
Accrued interest
Other
Total
2018
2017
$ 120,228
$ 106,923
51,731
34,110
37,018
15,197
7,669
13,357
40,540
30,616
21,921
11,048
6,749
10,951
$279,310
$228,748
NOTE 9. Long-Term Debt
Long-term debt at December 31, 2018 and 2017 consisted of the following:
(in thousands)
Current portion of long-term debt:
December 31, 2018
December 31, 2017
Current portion of 5-year term loan facility expires 2022
4.500% Senior Notes, Series E, quarterly interest payments, balloon due 2018
Current portion of 5-year term loan credit agreement expires 2023
Total current portion of long-term debt
$
35,000
—
15,000
50,000
$ 20,000
100,000
—
120,000
Long-term debt:
Note agreements:
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, LIBOR plus up to
1.750%, expires June 28, 2022
5-year revolving loan facility, periodic interest payments, currently LIBOR plus up to
1.500%, plus commitment fees up to 0.250%, expires June 28, 2022
5-year term loan facility, periodic interest and principal payments, LIBOR plus up to
1.750%, expires December 21, 2023
Total credit agreements
Debt issuance costs (contra)
Total long-term debt less unamortized discount and debt issuance costs
Current portion of long-term debt
Total debt
499,101
499,101
330,000
350,000
$ 285,000
$
498,943
498,943
365,000
—
—
965,000
(7,111)
1,456,990
50,000
$1,506,990
365,000
(7,802)
856,141
120,000
$976,141
On December 22, 2006, the Company entered into a Master Shelf and Note Purchase Agreement (the “Master Agreement”)
with a national insurance company (the “Purchaser”). The initial issuance of notes under the Master Agreement occurred on
December 22, 2006, through the issuance of $25.0 million in Series C Senior Notes due December 22, 2016, with a fixed
interest rate of 5.660% per year. On February 1, 2008, $25.0 million in Series D Senior Notes due January 15, 2015, with a
fixed interest rate of 5.370% per year, were issued. On September 15, 2011, and pursuant to a Confirmation of Acceptance
(the “Confirmation”), dated January 21, 2011, in connection with the Master Agreement, $100.0 million in Series E Senior Notes
were issued and was due September 15, 2018, with a fixed interest rate of 4.500% per year. The Series E Senior Notes were
issued for the sole purpose of retiring existing Senior Notes. On January 15, 2015, the Series D Notes were redeemed at
maturity using cash proceeds to pay off the principal of $25.0 million plus any remaining accrued interest. On December 22,
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2016, the Series C Notes were redeemed at maturity using cash proceeds to pay off the principal of $ 25.0 million plus any
remaining accrued interest. On May 10, 2018, the principal balance of $100.0 million from the Series E Senior Notes was paid
in full, along with accrued interest of $0.7 million and a prepayment premium of $0.7 million. As of December 31, 2018, there
was no outstanding debt balance issued under the provisions of the Master Agreement, which is fully terminated with the
Series E Senior Notes maturing.
On April 17, 2014, the Company entered into a credit agreement with JPMorgan Chase Bank, N.A. as administrative agent and
certain other banks as co-syndication agents and co-documentation agents (the “Credit Agreement”). The Credit Agreement
in the amount of $1,350.0 million provides for an unsecured revolving credit facility (the “Credit Facility”) in the initial amount
of $800.0 million and unsecured term loans in the initial amount of $ 550.0 million, either or both of which may, subject to
lenders’ discretion, potentially be increased by up to $ 500.0 million. The Credit Facility was funded on May 20, 2014 in
conjunction with the closing of the Wright acquisition, with the $550.0 million term loan being funded as well as a drawdown
of $ 375.0 million on the revolving loan facility. Use of these proceeds was to retire existing term loan debt and to facilitate
the closing of the Wright acquisition as well as other acquisitions. The Credit Facility terminates on May 20, 2019, but either or
both of the revolving credit facility and the term loans may be extended for two additional one year periods at the Company’s
request and at the discretion of the respective lenders. Interest and facility fees in respect to the Credit Facility are based
upon the better of the Company’s net debt leverage ratio or a non-credit enhanced senior unsecured long-term debt rating.
Based upon the Company’s net debt leverage ratio, the rates of interest charged on the term loan are 1.000% to 1.750%,
and the revolving loan is 0.850% to 1.500% above the adjusted LIBOR rate for outstanding amounts drawn. There are fees
included in the facility which include a facility fee based upon the revolving credit commitments of the lenders (whether
used or unused) at a rate of 0.150% to 0.250% and letter of credit fees based upon the amounts of outstanding secured or
unsecured letters of credit. The Credit Facility includes various covenants, limitations and events of default customary for
similar facilities for similarly rated borrowers.
On June 28, 2017, the Company entered into an amended and restated credit agreement (the “Amended and Restated Credit
Agreement”) with the lenders named therein, JPMorgan Chase Bank, N.A. as administrative agent and certain other banks as
co-syndication agents and co-documentation agents. The Amended and Restated Credit Agreement amended and restated
the credit agreement dated April 17, 2014, among such parties (the “Original Credit Agreement”). The Amended and Restated
Credit Agreement extends the applicable maturity date of the existing revolving credit facility (the “Facility”) of $800.0 million
to June 28, 2022 and re-evidences unsecured term loans at $ 400.0 million, while also extending the applicable maturity
date to June 28, 2022. The quarterly term loan principal amortization schedule was reset. At the time of the execution of the
Amended and Restated Credit Agreement, $67.5 million of principal from the original unsecured term loans was repaid using
operating cash balances, and the Company added an additional $2.8 million in debt issuance costs related to the Facility
to the Consolidated Balance Sheet. The Company also expensed to the Consolidated Statements of Income $0.2 million
of debt issuance costs related to the Original Credit Agreement due to certain lenders exiting prior to execution of the
Amended and Restated Credit Agreement. The Company also carried forward $1.6 million on the Consolidated Balance
Sheet the remaining unamortized portion of the Original Credit Agreement debt issuance costs, which will be amortized over
the term of the Amended and Restated Credit Agreement. On December 31, 2018, the Company made a scheduled principal
payment of $5.0 million per the terms of the Amended and Restated Credit Agreement. As of December 31, 2018, there was
an outstanding debt balance issued under the term loan of the Amended and Restated Credit Agreement of $365.0 million
with $350.0 million in borrowings outstanding against the Facility. The Company had borrowed approximately $600.0 million
under its Revolving Credit Facility on November 15, 2018 in connection with the closing of the acquisition of certain assets
and assumption of certain liabilities of the Hays Companies. Per the terms of the Amended and Restated Credit Agreement,
a scheduled principal payment of $5.0 million is due March 31, 2019.
On September 18, 2014, the Company issued $500.0 million of 4.200% unsecured Senior Notes due in 2024. The Senior
Notes were given investment grade ratings of BBB-/Baa3 with a stable outlook. The notes are subject to certain covenant
restrictions and regulations which are customary for credit rated obligations. At the time of funding, the proceeds were
offered at a discount of the original note amount which also excluded an underwriting fee discount. The net proceeds
received from the issuance were used to repay the outstanding balance of $475.0 million on the revolving Credit Facility
and for other general corporate purposes. As of December 31, 2018 and 2017, there was an outstanding debt balance of
$500.0 million exclusive of the associated discount balance.
69
2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 21, 2018, the Company entered into a term loan credit agreement (the “Term Loan Credit Agreement”) with
the lenders named therein, Wells Fargo Bank, National Association, as administrative agent, and certain other banks as
co-syndication agents and as joint lead arrangers and joint bookrunners. The Term Loan Credit Agreement provides for an
unsecured term loan in the initial amount of $300.0 million, which may, subject to lenders’ discretion, potentially be increased
up to an aggregate amount of $450.0 million (the “Term Loan”). The Term Loan is repayable over the five-year term from the
effective date of the Term Loan Credit Agreement, which was December 21, 2018.
Based on the Company’s net debt leverage ratio or a non-credit enhanced senior unsecured long-term debt rating as determined
by Moody’s Investor Service and Standard & Poor’s Rating Service, the rates of interest charged on the term loan are 1.00% to
1.75%, above the adjusted 1-Month LIBOR rate. On December 21, 2018, the Company borrowed $ 300.0 million under the Term Loan
Credit Agreement and used $250.0 million of the proceeds to reduce indebtedness under the Company’s Amended and Restated
Credit Agreement, dated June 28, 2017, with the lenders named therein, JPMorgan Chase Bank, N.A., as administrative agent, and
certain other banks as co-syndication agents and co-documentation agents (the “Revolving Credit Facility”). As of December 31,
2018, there was an outstanding debt balance issued under the term loan of the Term Loan Credit Agreement of $300.0 million. Per
the terms of the Term Loan Credit Agreement, a scheduled principal payment of $3.8 million is due March 31, 2019.
The Master Agreement, Amended and Restated Credit Agreement and the Term Loan Credit Agreement 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, 2018 and 2017.
The 30-day Adjusted LIBOR Rate for the term loan and Revolving Credit Facility of the Amended and Restated Credit
Agreement and Term Loan Credit Agreement as of December 31, 2018 was 2.563%, 2.288%, and 2.500%, respectively.
Interest paid in 2018, 2017 and 2016 was $38.0 million, $36.2 million, and $37.7 million, respectively.
At December 31, 2018, maturities of long-term debt were $50.0 million in 2019, $55.0 million in 2020, $70.0 million in 2021,
$630.0 million in 2022, $210.0 million in 2023 and $500.0 million in 2024.
NOTE 10. Income Taxes
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”). The Tax
Reform Act makes changes to the U.S. tax code that affected our income tax rate in 2017. The Tax Reform Act reduces the
U.S. federal corporate income tax rate from 35.0% to 21.0% and requires companies to pay a one-time transition tax on
certain unrepatriated earnings from foreign subsidiaries. The Tax Reform Act also establishes new tax laws that became
effective January 1, 2018.
ASC 740 requires a company to record the effects of a tax law change in the period of enactment, however, shortly after the
enactment of the Tax Reform Act, the SEC staff issued SAB 118, which allows a company to record a provisional amount when
it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting
for the change in the tax law. The measurement period ends when the company has obtained, prepared and analyzed the
information necessary to finalize its accounting, but cannot extend beyond one year.
For 2017, we made a reasonable estimate of the impact of the Tax Reform Act and recorded a one-time credit in our
2017 income tax expense of $ 120.9 million, which reflects an estimated reduction in our deferred income tax liabilities
of $124.2 million as a result of the maximum federal rate decreasing to 21.0% from 35.0%, which was partially offset by an
estimated increase in income tax payable in the amount of $3.3 million as a result of the transition tax on cash and cash
equivalent balances related to untaxed accumulated earnings associated with our international operations. During 2018,
we made a credit adjustment to the transition tax on untaxed international operations in the amount of $1.6 million. This
adjustment was a reduction of income tax expense for 2018 as a result of updated calculations based on the Company’s tax
filings for the 2017 year end. As of December 31, 2018, management does not expect any further changes to the amounts
previously recorded and adjusted under SAB 118.
70
Significant components of the provision for income taxes for the years ended December 31 are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Current:
Federal
State
Foreign
Total current provision
Deferred:
Federal
State
Foreign
Tax Reform Act deferred tax revaluation
Total deferred provision
Total tax provision
2018
2017
2016
$ 77,694
$ 129,954
$ 126,145
25,096
409
21,392
929
21,110
590
103,199
152,275
147,845
8,483
6,519
6
—
18,999
2,984
—
(124,166)
15,551
2,612
—
—
15,008
(102,183)
18,163
$118,207
$ 50,092
$166,008
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
Non-deductible officers’ compensation
Tax Reform Act deferred tax revaluation and transition tax impact
Other, net
Effective tax rate
2018
2017
2016
21.0%
35.0%
35.0%
5.7
0.2
0.3
0.3
(0.3)
(1.6)
3.8
0.3
0.3
—
(26.9)
(1.4)
3.9
0.3
0.3
—
—
(0.3)
25.6%
11.1%
39.2%
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the corresponding amounts used for income tax reporting purposes.
Significant components of the Company’s net deferred tax liabilities as of December 31 are as follows:
(in thousands)
Non-current deferred tax liabilities:
Intangible assets
Fixed assets
Impact of adoption of ASC 606 revenue recognition
Net unrealized holding (loss)/gain on available-for-sale securities
Total non-current deferred tax liabilities
Non-current deferred tax assets:
Deferred compensation
Accruals and reserves
Deferred profit-sharing contingent commissions
Net operating loss carryforwards
Valuation allowance for deferred tax assets
Total non-current deferred tax assets
Net non-current deferred tax liability
2018
2017
$ 334,200
$ 306,351
4,929
29,729
(78)
2,723
—
(6)
368,780
309,068
41,293
10,455
—
2,196
(896)
36,701
7,534
7,107
2,434
(893)
53,048
52,883
$315,732
$256,185
Income taxes paid in 2018, 2017, and 2016 were $110.6 million, $152.0 million, and $143.1 million, respectively.
71
2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2018, the Company had net operating loss carryforwards of $0.1 million and $42.5 million for federal and state
income tax reporting purposes, respectively, portions of which expire in the years 2019 through 2038. The federal carryforward
is derived from insurance operations acquired by the Company in 2001. The state carryforward amount is derived from the
operating results of certain subsidiaries and from the 2013 stock acquisition of Beecher Carlson Holdings, Inc.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in thousands)
Unrecognized tax benefits balance at January 1
Gross increases for tax positions of prior years
Gross decreases for tax positions of prior years
Settlements
Unrecognized tax benefits balance at December 31
2018
2017
$ 1,694
594
(5)
(644)
$ 750
1,070
—
(126)
2016
$ 584
412
(41)
(205)
$1,639
$1,694
$ 750
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31,
2018, 2017, and 2016 the Company had $197,205, $228,608, and $86,191 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 $1.6
million as of December 31, 2018, $ 1.7 million as of December 31, 2017 and $0.8 million as of December 31, 2016. The
Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.
As a result of a 2006 Internal Revenue Service (“IRS”) audit, the Company agreed to accrue at each December 31, for tax
purposes only, a known amount of profit-sharing contingent commissions represented by the actual amount of profit-sharing
contingent commissions received in the first quarter of the related year, with a true-up adjustment to the actual amount
received by the end of the following March. Since this method for tax purposes differed from the method used for book
purposes, it resulted in a current deferred tax asset as of December 31, 2017 and 2016. As of January 1, 2018, pursuant to
ASU 606, Revenue Recognition, the deferred tax asset was removed and was included in the Company’s overall beginning
retained earnings adjustment per ASC 606. The Company will now follow book treatment for accrued profit-sharing
contingent commissions.
The Company is subject to taxation in the United States and various state jurisdictions. The Company is also subject to taxation
in the United Kingdom. In the United States, federal returns for fiscal years 2014 through 2018 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 2012
through 2018. In the United Kingdom, the Company’s filings remain open for audit for the fiscal years 2017 and 2018.
During 2017, the Company settled the previously disclosed IRS income tax audit of The Wright Insurance Group for the short
period ended May 1, 2014. Pursuant to the agreement in which the Company acquired The Wright Insurance Group, the
Company was fully indemnified for all audit-related assessments.
During 2018, the Company settled the previously disclosed State of Massachusetts income tax audit for the fiscal year 2013
through 2014. In addition, the Company is currently under audit in the states of Colorado, Illinois, Kansas, Massachusetts and
New York for the fiscal years 2015 through 2017.
In general, it is our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. 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, the Company 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 an additional discretionary profit-sharing contribution each year, which equaled 1.5% of each eligible
employee’s compensation. The Company’s contribution expense to the plan totaled $22.8 million in 2018, $19.6 million in
2017, and $19.3 million in 2016.
NOTE 12. Stock-Based Compensation
Performance Stock Plan
In 1996, the Company adopted and the shareholders approved a performance stock plan, under which until the suspension
of the plan in 2010, up to 28,800,000 Performance Stock Plan (“PSP”) shares could be granted to key employees contingent
on the employees’ future years of service with the Company and other performance-based criteria established by the
Compensation Committee of the Company’s Board of Directors. Before participants may take full title to Performance Stock,
two vesting conditions must be met. Of the grants currently outstanding, specified portions satisfied the first condition for
vesting based upon 20% incremental increases in the 20-trading-day average stock price of Brown & Brown’s common stock
from the price on the business day prior to date of grant. Performance Stock that has satisfied the first vesting condition
is considered “awarded shares.” Awarded shares are included as issued and outstanding common stock shares and are
included in the calculation of basic and diluted net income per share. 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, 2018, 10,269,384 shares had been granted, net of forfeitures, under the PSP. As of December 31, 2018,
1,196,092 shares had met the first condition of vesting and had been awarded, and 9,073,292 shares had satisfied both
conditions of vesting and had been distributed to participants. Of the shares that have not vested as of December 31, 2018,
the initial stock prices ranged from $8.16 to $12.84.
The Company uses a path-dependent lattice model to estimate the fair value of PSP grants on the grant date.
73
2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of PSP activity for the years ended December 31, 2018, 2017, and 2016 is as follows:
Outstanding at January 1, 2016
Granted
Awarded
Vested
Forfeited
Outstanding at December 31, 2016
Granted
Awarded
Vested
Forfeited
Outstanding at December 31, 2017
Granted
Awarded
Vested
Forfeited
Outstanding at December 31, 2018
Weighted-
average
grant date
fair value
Granted
shares
Awarded
shares
Shares not
yet awarded
$ 4.52
$ —
$ —
$ 3.19
$ 5.26
$ 5.11
$ —
$ —
$ 4.81
$ 5.24
$ 5.16
$ —
$ —
$ 5.53
$ 4.92
$5.03
3,204,428
3,188,428
—
—
—
8,000
(1,012,844)
(1,012,844)
(185,034)
(177,034)
2,006,550
2,006,550
—
—
—
—
(277,602)
(277,602)
(34,472)
(34,472)
1,694,476
1,694,476
—
—
—
—
(453,860)
(453,860)
(44,524)
(44,524)
1,196,092
1,196,092
16,000
—
(8,000)
—
(8,000)
—
—
—
—
—
—
—
—
—
—
—
The total fair value of PSP grants that vested during each of the years ended December 31, 2018, 2017, and 2016 was
$11.9 million, $6.3 million, and $18.1 million, respectively.
Stock Incentive Plan
On April 28, 2010, the shareholders of the Company, Inc. approved the Stock Incentive Plan (“SIP”) that provides for the
granting of stock options, stock, restricted stock units, and/or stock appreciation rights to employees and directors contingent
on criteria established by the Compensation Committee of the Company’s Board of Directors. The principal purpose of the
SIP is to attract, incentivize and retain key employees by offering those persons an opportunity to acquire or increase a
direct proprietary interest in the Company’s operations and future success. The SIP includes a sub-plan applicable to Decus
Insurance Brokers Limited (“Decus”) which, is a subsidiary of Decus Holdings (U.K.) Limited. The shares of stock reserved for
issuance under the SIP are any shares that are authorized for issuance under the PSP and not already subject to grants under
the PSP, and that were outstanding as of April 28, 2010, the date of suspension of the PSP, together with PSP shares and
SIP shares forfeited after that date. As of April 28, 2010, 12,093,536 shares were available for issuance under the PSP, which
were then transferred to the SIP. In addition, in May 2016 and May 2017 our shareholders approved amendments to the SIP to
increase the shares available for issuance by an additional 2,400,000 and 2,600,000, respectively.
The Company has granted stock to our employees in the form of Restricted Stock Awards and Performance Stock Awards
under the SIP. To date, a substantial majority of stock grants to employees under the SIP vest in five to ten years. The
Performance Stock Awards are subject to the achievement of certain performance criteria by grantees, which may include
growth in a defined book of business, Organic Revenue growth and operating profit growth of a profit center, Organic
Revenue growth of the Company and consolidated EPS growth at certain levels of the Company. The performance
measurement period ranges from three to five years. Beginning in 2016, certain Performance Stock Awards have a payout
range between 0% to 200% depending on the achievement against the stated performance target. Prior to 2016, the majority
of the grants had a binary performance measurement criteria that only allowed for 0% or 100% payout.
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 33,720 shares were issued in January 2016, 22,700 shares were issued in January 2017, and 26,620
shares were issued in January 2018.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company uses the closing stock price on the day prior to the grant date to determine the fair value of SIP grants
and then applies an estimated forfeiture factor to estimate the annual expense. Additionally, the Company uses the
path-dependent lattice model to estimate the fair value of grants with PSP-type vesting conditions as of the grant date. SIP
shares that satisfied the first vesting condition for PSP-type grants or the established performance criteria are considered
awarded shares. Awarded shares are included as issued and outstanding common stock shares and are included in the
calculation of basic and diluted net income per share.
A summary of SIP activity for the years ended December 31, 2018, 2017, and 2016 is as follows:
Weighted-
average
grant date
fair value
Granted
shares
Awarded
shares
Shares not
yet awarded
Outstanding at January 1, 2016
$ 14.37
12,553,944
2,259,988
10,293,956
Granted
Awarded
Vested
Forfeited
$ 17.76
$ 12.46
$ 13.66
$ 12.67
1,944,198
365,306
1,578,892(1)
—
2,862,638
(2,862,638)
(333,768)
(333,768)
—
(1,908,262)
(351,576)
(1,556,686)
Outstanding at December 31, 2016
$ 14.98
12,256,112
4,802,588
7,453,524
Granted
Awarded
Vested
Forfeited
$ 20.82
$ 15.72
$ 12.61
$ 14.89
1,392,912
—
241,334
326,808
1,151,578(2)
(326,808)
(484,914)
(484,914)
—
(342,120)
(76,212)
(265,908)
Outstanding at December 31, 2017
$ 15.58
12,821,990
4,809,604
8,012,386
Granted
Awarded
Vested
Forfeited
$ 22.87
$ 15.89
$ 14.09
$ 16.37
1,577,721
454,313
1,123,408(3)
—
2,489,905
(2,489,905)
(933,916)
(933,916)
—
(2,363,420)
(224,587)
(2,138,833)
Outstanding at December 31, 2018
$16.69
11,102,375
6,595,319
4,507,056
(1) Of the 1,578,892 shares of performance-based restricted stock granted in 2016, the payout for 706,264 shares may be increased up to 200% of the target
or decreased to zero, subject to the level of performance attained. The amount reflected in the table includes all restricted stock grants at a target payout
of 100%.
(2) Of the 1,151,578 shares of performance-based restricted stock granted in 2017, the payout for 641,652 shares may be increased up to 200% of the target
or decreased to zero, subject to the level of performance attained. The amount reflected in the table includes all restricted stock grants at a target payout
of 100%.
(3) Of the 1,123,408 shares of performance-based restricted stock granted in 2018, the payout for 576,886 shares may be increased up to 200% of the target
or decreased to zero, subject to the level of performance attained. The amount reflected in the table includes all restricted stock grants at a target payout
of 100%.
The following table sets forth information as of December 31, 2018, 2017 and 2016, with respect to the number of time-based
restricted shares granted and awarded, the number of performance-based restricted shares granted, and the number of
performance-based restricted shares awarded under our Performance Stock Plan and 2010 Stock Incentive Plan:
Year
2018
2017
2016
Time-based
restricted
stock granted
and awarded
454,313
241,334
365,306
Performance-
based restricted
stock granted
Performance-
based restricted
stock awarded
1,123,408(1)
1,151,578(2)
1,578,892(3)
2,489,905
326,808
2,870,638
(1) Of the 1,123,408 shares of performance-based restricted stock granted in 2018, the payout for 576,886 shares may be increased up to 200% of the target
or decreased to zero, subject to the level of performance attained. The amount reflected in the table includes all restricted stock grants at a target payout
of 100%.
(2) Of the 1,151,578 shares of performance-based restricted stock granted in 2017, the payout for 641,652 shares may be increased up to 200% of the target
or decreased to zero, subject to the level of performance attained. The amount reflected in the table includes all restricted stock grants at a target payout
of 100%.
(3) Of the 1,578,892 shares of performance-based restricted stock granted in 2016, the payout for 706,264 shares may be increased up to 200% of the target
or decreased to zero, subject to the level of performance attained. The amount reflected in the table includes all restricted stock grants at a target payout
of 100%.
75
2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2018, 8,697,491 shares were available for future grants. This amount is calculated assuming the maximum
payout for all restricted stock grants.
Employee Stock Purchase Plan
The Company has a shareholder-approved Employee Stock Purchase Plan (“ESPP”) with a total of 34,000,000 authorized
shares of which 7,316,901 were available for future subscriptions as of December 31, 2018. Employees of the Company who
regularly work 20 hours or more per week are eligible to participate in the ESPP. Participants, through payroll deductions,
may allot up to 10% of their compensation towards the purchase of a maximum of $25,000 worth of 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 2018 was $5.88. The
fair values of an ESPP share option as of the Subscription Periods beginning in August 2017 and 2016, were $4.32 and
$3.81, respectively.
For the ESPP plan years ended July 31, 2018, 2017 and 2016, the Company issued 985,601, 1,058,024 and 1,029,330 shares of
common stock, respectively. These shares were issued at an aggregate purchase price of $18.7 million, or $18.96 per share,
in 2018, $16.4 million, or $15.52 per share, in 2017, and $15.0 million, or $14.62 per share, in 2016.
For the five months ended December 31, 2018, 2017 and 2016 (portions of the 2018-2019, 2017-2018 and 2016-2017 plan
years), 402,349, 435,027 and 494,046 shares of common stock (from authorized but unissued shares), respectively, were
subscribed to by ESPP participants for proceeds of approximately $9.9 million, $8.2 million and $7.7 million, respectively.
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
Total
2018
2017
2016
$ 28,027
$ 24,899
$ 11,049
4,744
748
4,025
1,707
3,698
1,305
$33,519
$30,631
$16,052
Summary of Unamortized Compensation Expense
As of December 31, 2018, the Company estimates there to be $97.1 million of unamortized compensation expense related
to all non-vested stock-based compensation arrangements granted under the Company’s stock-based compensation
plans, based upon current projections of grant measurement against performance criteria. That expense is expected to be
recognized over a weighted average period of 3.29 years.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. Supplemental Disclosures of Cash
Flow Information and Non-Cash Financing and
Investing Activities
The Company’s cash paid during the period for interest and income taxes are summarized as follows:
(in thousands)
Cash paid during the period for:
Interest
Income taxes
Year Ended December 31,
2018
2017
2016
$ 38,032
$ 36,172
$ 37,652
$ 110,557
$ 152,024
$ 143,111
The Company’s significant non-cash investing and financing activities are summarized as follows:
(in thousands)
Other payables issued for purchased customer accounts
Estimated acquisition earn-out payables and related charges
Notes payable issued or assumed for purchased customer accounts
Notes received on the sale of fixed assets and customer accounts
Year Ended December 31,
2018
2017
2016
$
5,462
$ 11,708
$ 10,664
$ 77,378
$
$
—
52
$
$
$
6,921
—
—
$
$
$
4,463
492
22
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. The following is a reconciliation of cash and cash equivalents inclusive
of restricted cash as of December 31, 2018, 2017, and 2016.
(in thousands)
Table to reconcile cash and cash equivalents inclusive of restricted cash
Cash and cash equivalents
Restricted cash
Balance as of December 31,
2018
2017
2016
$ 438,961
$ 573,383
338,635
250,705
515,646
265,637
Total cash and cash equivalents inclusive of restricted cash at the end of the period
$777,596
$824,088
781,283
NOTE 14. Commitments and Contingencies
Operating Leases
The Company 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. The Company anticipates that most of these leases
will be renewed or replaced upon expiration. At December 31, 2018, the aggregate future minimum lease payments under all
non-cancelable lease agreements were as follows:
(in thousands)
2019
2020
2021
2022
2023
Thereafter
Total minimum future lease payments
$ 48,292
43,517
34,836
27,035
19,981
36,349
$210,010
Rental expense in 2018, 2017 and 2016 for operating leases totaled $54.6 million, $51.0 million and $49.3 million, respectively.
77
2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Legal Proceedings
The Company records losses for claims in excess of the limits of, or outside the coverage of, applicable insurance at the time
and to the extent they are probable and estimable. In accordance with ASC Topic 450-Contingencies, the Company accrues
anticipated costs of settlement, damages, losses for liability claims and, under certain conditions, costs of defense, based
upon historical experience or to the extent specific losses are probable and estimable. Otherwise, the Company expenses
these costs as incurred. If the best estimate of a probable loss is a range rather than a specific amount, the Company accrues
the amount at the lower end of the range.
The Company’s accruals for legal matters that were probable and estimable were not material at December 31, 2018 and
2017. We continue to assess certain litigation and claims to determine the amounts, if any, that management believes will be
paid as a result of such claims and litigation and, therefore, additional losses may be accrued and paid in the future, which
could adversely impact the Company’s operating results, cash flows and overall liquidity. The Company maintains third-party
insurance policies to provide coverage for certain legal claims, in an effort to mitigate its overall exposure to unanticipated
claims or adverse decisions. However, as (i) one or more of the Company’s insurance carriers could take the position that
portions of these claims are not covered by the Company’s insurance, (ii) to the extent that payments are made to resolve
claims and lawsuits, applicable insurance policy limits are eroded and (iii) the claims and lawsuits relating to these matters are
continuing to develop, it is possible that future results of operations or cash flows for any particular quarterly or annual period
could be materially affected by unfavorable resolutions of these matters. Based upon the AM Best Company ratings of these
third-party insurers, management does not believe there is a substantial risk of an insurer’s material non-performance related
to any current insured claims.
On the basis of current information, the availability of insurance and legal advice, in management’s opinion, the Company is
not currently involved in any legal proceedings which, individually or in the aggregate, would have a material adverse effect
on its financial condition, operations and/or cash flows.
NOTE 15. Quarterly Operating Results (Unaudited)
Quarterly operating results for 2018 and 2017 were as follows:
(in thousands, except per share data)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2018
Total revenues
Total expenses
Income before income taxes
Net income
Net income per share:
Basic
Diluted
2017
Total revenues
Total expenses
Income before income taxes
Net income
Net income per share:
Basic(1)
Diluted(1)
$501,461
$473,187
$530,850
$508,748
$383,020
$372,277
$388,350
$408,137
$118,441
$100,910
$142,500
$100,611
$ 90,828
$ 73,922
$106,053
$ 73,452
$
$
0.33
0.32
$
$
0.27
0.26
$
$
0.38
0.38
$
$
0.26
0.26
$465,080
$466,305
$475,646
$474,316
$354,113
$358,303
$351,227
$367,982
$110,967
$108,002
$124,419
$106,334
$ 70,110
$ 66,102
$ 75,913
$187,505
$
$
0.25
0.25
$
$
0.24
0.23
$
$
0.27
0.27
$
$
0.68
0.66(2)
(1) 2017 reflects the 2-for-1 stock split that occurred on March 28, 2018.
(2)
Includes $0.43 impact associated with recording impact of the Tax Reform Act.
Quarterly financial results are affected by seasonal variations. The timing of the Company’s policy renewals and acquisitions
may cause revenues, expenses, and net income to vary significantly between quarters.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. Segment Information
Brown & Brown’s business is divided into four reportable segments: (1) the Retail Segment, which provides a broad range of
insurance products and services to commercial, public and quasi-public entities, and to professional and individual customers,
(2) the National Programs Segment, which acts as an MGA, provides professional liability and related package products for
certain professionals, a range of insurance products for individuals, flood coverage, and targeted products and services
designated for specific industries, trade groups, governmental entities and market niches, all of which are delivered through
nationwide networks of independent agents, and Brown & Brown retail agents, (3) the Wholesale Brokerage Segment, which
markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and
brokers, as well as Brown & Brown retail agents, and (4) the Services Segment, which provides insurance-related services,
including third-party claims administration and comprehensive medical utilization management services in both the workers’
compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare
benefits advocacy services and claims adjusting services.
Brown & Brown conducts all of its operations within the United States of America, except for a wholesale brokerage operation
based in London, England, retail operations in Bermuda and the Cayman Islands, and a national programs operation in
Canada. These operations earned $ 15.2 million, $15.9 million, and $ 14.5 million of total revenues for the years ended
December 31, 2018, 2017, and 2016, 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.
79
2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information concerning the Company’s reportable segments is shown in the following table. The “Other”
column includes any income and expenses not allocated to reportable segments and corporate-related items, including the
intercompany interest expense charge to the reporting segment.
Income before income taxes
$ 217,845
$ 117,375
Total assets
Capital expenditures
$5,850,045
$2,940,097
$1,283,877
$471,572
$(3,856,923)
$6,688,668
$
6,858
$
12,391
$
2,518
$ 1,525
$
18,228
$
41,520
(in thousands)
Total revenues
Investment income
Amortization
Depreciation
Interest expense
(in thousands)
Total revenues
Investment income
Amortization
Depreciation
Interest expense
(in thousands)
Total revenues
Investment income
Amortization
Depreciation
Interest expense
Year ended December 31, 2018
Retail
National
Programs
Wholesale
Brokerage
Services
Other
Total
$1,042,763
$ 494,463
$ 287,014
$189,246
$
$
$
$
2
44,386
5,289
35,969
$
$
$
$
506
25,954
5,486
26,181
$
$
$
$
$
165
$
205
11,391
$ 4,813
1,628
$ 1,558
5,254
$ 2,869
70,171
$ 34,508
$
$
$
$
$
$
760
$2,014,246
1,868
—
8,873
(29,693)
$
$
$
$
2,746
86,544
22,834
40,580
22,563
$ 462,462
Year ended December 31, 2017
Retail
National
Programs
Wholesale
Brokerage
Services
Other
Total
$ 943,460
$ 479,813
$ 271,737
$165,372
$
$
$
$
8
42,164
5,210
31,133
$
$
$
$
384
27,277
6,325
35,561
$
$
$
$
$
—
$
299
11,456
$ 4,548
1,885
$ 1,600
6,263
$ 3,522
68,844
$ 30,498
$
$
$
$
$
$
20,965
$1,881,347
935
1
7,678
(38,163)
$
$
$
$
1,626
85,446
22,698
38,316
43,803
$ 449,722
Year ended December 31, 2016
Retail
National
Programs
Wholesale
Brokerage
Services
Other
Total
$ 917,406
$ 448,516
$ 243,103
$156,365
$
$
$
$
37
43,447
6,191
38,216
$
$
$
$
$
628
27,920
7,868
45,738
91,762
$
$
$
$
$
4
$
283
10,801
$ 4,485
1,975
$ 1,881
3,976
$ 4,950
62,623
$ 24,338
$
$
$
$
$
$
1,239
$1,766,629
504
10
3,088
(53,399)
$
$
$
$
1,456
86,663
21,003
39,481
56,775
$ 423,499
Income before income taxes
$ 196,616
$ 109,961
Total assets
Capital expenditures
$4,255,515
$3,267,486
$1,260,239
$399,240
$(3,434,930)
$5,747,550
$
4,494
$
5,936
$
1,836
$ 1,033
$
10,893
$
24,192
Income before income taxes
$ 188,001
Total assets(1)
Capital expenditures
$3,854,393
$2,711,378
$1,108,829
$371,645
$(2,783,511)
$5,262,734
$
5,951
$
6,977
$
1,301
$
656
$
2,880
$
17,765
(1) Total assets have been restated to reflect the adoption of ASU No. 2015-17, “Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes” (“ASU
2015-17”).
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. Reinsurance
Although the reinsurers are liable to the Company for amounts reinsured, our subsidiary, WNFIC remains primarily liable to its
policyholders for the full amount of the policies written whether or not the reinsurers meet their obligations to the Company
when they become due. The effects of reinsurance on premiums written and earned at December 31 are as follows:
(in thousands)
Direct premiums
Assumed premiums
Ceded premiums
Net premiums
2018
2017
Written
Earned
Written
Earned
$619,223
$602,320
$604,623
$592,267
—
—
—
—
619,206
602,303
604,610
592,254
$
17
$
17
$
13
$
13
All premiums written by WNFIC under the National Flood Insurance Program are 100% ceded to FEMA, for which WNFIC
received a 30.9% expense allowance from January 1, 2018 through September 30, 2018. From October 1, 2018 through
December 31, 2018 WNFIC received a 30.0% expense allowance. As of December 31, 2018 and 2017, the Company ceded
$617.2 million and $602.9 million of written premiums, respectively.
Effective April 1, 2014, WNFIC is also a party to a quota share agreement whereby it cedes 100% of its gross private excess
flood premiums, excluding fees, to Arch Reinsurance Company and receives a 30.5% commission. WNFIC ceded $2.0 million
and $1.7 million for the years ended December 31, 2018 and 2017. As of December 31, 2018, WNFIC had $2.3 million in paid
excess flood losses, $99,349 in loss adjustment expenses, case reserves of $0 and incurred but not reported of $0.1 million.
WNFIC also ceded 100%, of the Homeowners, Private Passenger Auto Liability, and Other Liability Occurrence to Stillwater
Insurance Company, formerly known as Fidelity National Insurance Company. This business is in runoff. Therefore, only loss
data still exists on this business. As of December 31, 2018, no ceded unpaid losses and loss adjustment expenses or incurred
but not reported balance for Homeowners, Private Passenger Auto Liability, and Other Liability Occurrence.
As of December 31, 2018, the Consolidated Balance Sheet contained Reinsurance recoverable of $65.4 million and Prepaid
reinsurance premiums of $337.9 million. As of December 31, 2017, the Consolidated Balance Sheet contained reinsurance
recoverable of $477.8 million and prepaid reinsurance premiums of $321.0 million. There was $0.2 million net activity in the
reserve for losses and loss adjustment expense for the year ended December 31, 2018, and $1.1 million net activity in the
reserve for losses and loss adjustment expense for the year ended December 31, 2017, as WNFIC’s direct premiums written
were 100% ceded to two reinsurers. The balance of the reserve for losses and loss adjustment expense, excluding related
reinsurance recoverables was $65.4 million as of December 31, 2018 and $477.8 million as of December 31, 2017.
NOTE 18. Statutory Financial Information
WNFIC maintains capital in excess of minimum statutory amount of $7.5 million as required by regulatory authorities. The
statutory capital and surplus of WNFIC was $19.4 million as of December 31, 2018 and $28.7 million as of December 31, 2017.
As of December 31, 2018 and 2017, WNFIC generated statutory net income of $4.5 million and $4.8 million, respectively.
NOTE 19. Subsidiary Dividend Restrictions
Under the insurance regulations of Texas, where WNFIC in incorporated, the maximum amount of ordinary dividends that
WNFIC can pay to shareholders in a rolling twelve month period is limited to the greater of 10% of statutory adjusted capital
and surplus as shown on WNFIC’s last annual statement on file with the superintendent of the Texas Department of Insurance
or 100% of adjusted net income. There was no dividend payout in 2018 and the maximum dividend payout that may be made
in 2019 without prior approval is $4.5 million.
81
2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. 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, and 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. 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.
On March 28, 2018, we effected a 2-for-1 stock split (the “Stock Split”). As a result of the Stock Split, every share of common
stock outstanding as of close of business on March 14, 2018 received an additional share of common stock, increasing the
number of outstanding shares of common stock from approximately 138 million shares to approximately 276 million shares.
The number of authorized shares of our common stock increased from 280 million shares to 560 million shares. No fractional
shares were issued in connection with the Stock Split. Par value of the Company’s common stock was unchanged as a result
of the Stock Split remaining at $0.10 per share. The number of shares of common stock reserved or subject to outstanding
grants, the exercise or purchase prices applicable to such outstanding grants and subscriptions, and certain grant limitations
under our 1990 Employee Stock Purchase Plan, Performance Stock Plan and 2010 Stock Incentive Plan were adjusted as a
result of the Stock Split, as required under the terms of those plans. Treasury shares were not adjusted for the Stock Split.
All other shares and per share data included within this Annual Report on Form 10-K, including our Consolidated Financial
Statements and related footnotes, have been adjusted to account for the effect of the Stock Split.
On December 12, 2018, the Company entered into accelerated share repurchase agreement ("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 share delivery of 2,910,150 shares of the Company’s common stock with a fair market value of $80.0 million. Upon
maturity of the program, the Company will receive the remaining balance of $20.0 million at settlement.
During 2014, the Company repurchased 2,384,760 shares at an average price per share of $31.46 for a total cost of
$75.0 million under the original share repurchase authorization from the Board of Directors on July 18, 2014. During 2015,
the Company repurchased 5,408,819 shares at an average price per share of $32.35 for a total cost of $175.0 million under
the current share repurchase authorization, while exhausting the previous authorization of $200.0 million from the Board
of Directors in 2014. During 2016, the Company repurchased 209,618 shares at an average price per share of $36.53 for a
total cost of $7.7 million under the current share repurchase authorization. During 2017, the Company repurchased 2,883,349
shares at an average price of $48.51 for a total cost of $139.9 million under the current share repurchase authorization. At
December 31, 2018, the remaining amount authorized by our Board of Directors for share repurchases was $147.5 million.
Under the authorized repurchase programs, the Company has repurchased a total of approximately 13.8 million shares for an
aggregate cost of approximately $477.5 million between 2014 and 2017. The aforementioned share amounts have not been
adjusted for the March 28, 2018 Stock Split, as treasury shares did not participate in this stock split transaction.
82
GAAP RECONCILIATION
INCOME BEFORE INCOME TAXES TO EBITDAC(1) AND INCOME BEFORE INCOME TAXES MARGIN(2) TO EBITDAC MARGIN(3)
Total
Total revenues
2018
2017
2016
2015
2014
2013
2,014,246
1,881,347
1,766,629
1,660,509
1,575,796
1,363,279
Income before income taxes
462,462
449,722
423,499
402,559
339,749
357,609
Income before income taxes margin(2)
23.0%
23.9%
24.0%
24.2%
21.6%
26.2%
Amortization
Depreciation
Interest
86,544
22,834
40,580
85,446
22,698
38,316
86,663
21,003
39,481
87,421
20,890
39,248
82,941
20,895
28,408
67,932
17,485
16,440
Change in estimated acquisition
earn-out payables
EBITDAC(1)
EBITDAC margin(3)
2,969
9,200
9,185
3,003
9,938
2,533
615,389
605,382
579,831
553,121
481,931
461,999
30.6%
32.2%
32.8%
33.3%
30.6%
33.9%
(1)
(2)
(3)
“EBITDAC,” a non-GAAP measure, is defined as income before interest, income taxes, depreciation, amortization and the change in estimated acquisition
earn-out payables.
“Income before income taxes margin” is defined as income before income taxes divided by total revenues.
“EBITDAC margin,” a non-GAAP measure, is defined as EBITDAC divided by total revenues.
83
2018 ANNUAL REPORT REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Brown & Brown, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Brown & Brown, Inc. and subsidiaries (the "Company")
as of December 31, 2018 and 2017, the related consolidated statements of income, shareholders' equity, and cash flows,
for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the
"financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position
of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2018, 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)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on 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, 2019, expressed an unqualified opinion on the Company's internal control
over financial reporting.
Adoption of New Accounting Standards
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting
for revenue from contracts with customers on January 1, 2018, on a modified retrospective basis due to the adoption of
Financial Accounting Standards Board Accounting Standards Codification 606, Revenue from Contracts with Customers, and
related amendments.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Certified Public Accountants
Tampa, Florida
February 25, 2019
We have served as the Company’s auditor since 2002.
84
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Brown & Brown, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Brown & Brown, Inc. and subsidiaries (the “Company”)
as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established
in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our
report dated February 25, 2019, expressed an unqualified opinion on those financial statements and included an explanatory
paragraph regarding the Company’s adoption of Financial Accounting Standards Board Accounting Standards Codification
606, Revenue from Contracts with Customers, and related amendments.
As described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from its
assessment the internal control over financial reporting at the Automotive Development Group, LLC, Servco Pacific Inc., Health
Special Risk, Inc., Professional Disability Associates, LLC, Finance & Insurance Resources Inc., Rodman Insurance Agency, Inc.,
The Hays Group, Inc. et al, and Dealer Associates, Inc. which were acquired in 2018 and whose financial statements constitute
approximately 0.01 percent and 17.55 percent of net and total assets, respectively, 3.18 percent of revenues, and 0.36 percent of
net income of the consolidated financial statement amounts as of and for the year ended December 31, 2018. Accordingly, our
audit did not include the internal control over financial reporting of these acquired entities.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 understanding 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.
85
2018 ANNUAL REPORT Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 procedures
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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Certified Public Accountants
Tampa, Florida
February 25, 2019
86
MANAGEMENT’S REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
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 upon 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 by Brown & Brown during 2018: the Automotive Development Group,
LLC, Servco Pacific Inc., Health Special Risk, Inc., Professional Disability Associates, LLC, Finance & Insurance Resources
Inc., Rodman Insurance Agency, Inc., The Hays Group, Inc. et al, and Dealer Associates, Inc. (collectively the “2018 Excluded
Acquisitions”), which were acquired during 2018 and whose financial statements constitute approximately 0.01% and 17.55%
of net and total assets, respectively, 3.18% of revenues, and 0.36% of net income of the consolidated financial statement
amounts as of and for the year ended December 31, 2018. Refer to Note 3 to the Consolidated Financial Statements for
further discussion of these acquisitions and their impact on Brown & Brown’s Consolidated Financial Statements.
Based upon 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, 2018. Management’s internal control over financial reporting as of
December 31, 2018 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, 2019
J. Powell Brown
Chief Executive Officer
R. Andrew Watts
Executive Vice President, Chief Financial Officer
and Treasurer
87
2018 ANNUAL REPORT PERFORMANCE GRAPH
The following graph is a comparison of five-year cumulative total shareholder returns for our common stock as compared
with the cumulative total shareholder 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, 2013 for the purposes of arriving at a peer group average. The total return calculations are
based upon an assumed $100 investment on December 31, 2013, with all dividends reinvested.
Brown & Brown, Inc.
NYSE Composite
Peer Group
12/13
12/14
12/15
12/16
12/17
12/18
100.00
106.25
105.10
149.02
173.08
187.43
100.00
106.87
102.62
115.02
136.76
124.72
100.00
110.37
109.91
129.81
160.21
172.33
Comparison Of 5 Year Cumulative Total Return*
Among Brown & Brown, Inc., the NYSE Composite Index, and a PeerGroup
$200.00
$180.00
$160.00
$140.00
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
$0.00
12/13
12/14
12/15
12/16
12/17
12/18
Brown & Brown, Inc.
NYSE Composite
Peer Group
*
$100 invested on 12/31/13 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31
88
SHAREHOLDER INFORMATION
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
fiscal year 2018, filed with the Securities and Exchange
Commission, certificates of the Chief Executive Officer and
the Chief Financial Officer of the Company certifying the
Company’s public disclosure is accurate and complete
and that they have established and maintained adequate
internal controls. 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 2018 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 1, 2019
9:00 a.m. (EDT)
Hard Rock Hotel Daytona Beach
918 North 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
201 North Franklin Street
Suite 3600
Tampa, FL 33602
Stock Listing
The New York Stock Exchange Symbol: BRO
On February 21, 2019, there were 279,701,832 shares of
our common stock outstanding, held by approximately 1,311
shareholders of record.
Market Price of Common Stock
2018
Stock Price Range
High
Low
Cash Dividends
per Common Share
First Quarter
26.91
24.71
Second Quarter
28.64
24.34
Third Quarter
31.55
27.53
Fourth Quarter
29.83
25.72
2017
First Quarter
22.89
20.84
Second Quarter
22.29
20.55
Third Quarter
24.49
21.15
Fourth Quarter
26.21
24.04
0.08
0.08
0.08
0.08
0.07
0.07
0.07
0.08
Additional Information
Information concerning the services of Brown & Brown, Inc.,
as well as access to current financial releases, is
available on the Internet. Brown & Brown’s address
is www.bbinsurance.com.
TEN-YEAR STATISTICAL SUMMARY
(in thousands, except per share data,
percentages and Other Information)
Revenues
Commissions & fees
Investment income
Other income, net
Total revenues
Expenses
Compensation and benefits
Other operating expenses
(Gain) Loss on discontinued operations
Amortization expense
Depreciation expense
Interest expense
Change in estimated earn-out payables
Total expenses
Income before income taxes
Income taxes
Net income
Compensation and benefits as % of total revenue
Operating expenses as % of total revenue
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 less unamortized discount and debt issuance costs
Total shareholders' equity
Total shares outstanding
Other Information
Year ended December 31, 2018
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
$ 2,009,857
$ 1,857,270
$ 1,762,787
$ 1,656,951
$ 1,567,460
$ 1,355,503
$ 1,189,081
$ 1,005,962
$ 966,917
$ 964,863
2,746
1,643
1,626
22,451
1,456
2,386
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
2,014,246
1,881,347
1,766,629
1,660,509
1,575,796
1,363,279
1,200,032
1,013,542
973,492
967,877
1,068,914
332,118
(2,175)
86,544
22,834
40,580
2,969
1,551,784
462,462
118,207
994,652
283,470
(2,157)
85,446
22,698
38,316
9,200
925,217
262,872
(1,291)
86,663
21,003
39,481
9,185
856,952
251,055
(619)
87,421
20,890
39,248
3,003
811,112
235,328
47,425
82,941
20,895
28,408
9,938
1,431,625
1,343,130
1,257,950
1,236,047
1,005,670
449,722
50,092
423,499
166,008
402,559
159,241
339,749
132,853
705,603
195,677
—
67,932
17,485
16,440
2,533
357,609
140,497
624,371
174,389
—
63,573
15,373
16,097
1,418
895,221
304,811
120,766
519,869
144,079
—
54,755
12,392
14,132
(2,206)
743,021
270,521
106,526
494,665
135,851
—
51,442
12,639
14,471
(1,674)
707,394
266,098
104,346
492,038
143,389
—
49,857
13,240
14,599
—
713,123
254,754
101,460
$ 344,255
$ 399,630
$ 257,491
$ 243,318
$ 206,896
$ 217,112
$ 184,045
$ 163,995
$ 161,752
$ 153,294
53.1%
16.5%
52.9%
15.1%
52.4%
14.9%
51.6%
15.1%
51.5%
14.9%
51.8%
14.4%
52.0%
14.5%
51.3%
14.2%
50.8%
14.0%
50.8%
14.8%
$
$
1.22
275,521
0.3050
$ 6,688,668
$ 1,456,990
$ 3,000,568
279,583
$
$
1.40
277,586
0.2775
$
$
0.91
275,608
0.2513
$
$
0.85
$
0.71
280,224
285,782
0.2250
$
0.2050
$
$
0.74
285,248
0.1850
$
$
0.63
284,020
0.1725
$
$
0.57
280,528
0.1625
$
$
0.56
278,636
0.1563
$
$
0.54
275,014
0.1513
$ 5,747,550
$ 5,262,734
$ 4,979,844
$ 4,931,027
$ 3,620,232
$ 3,103,650
$ 2,587,148
$2,380,738
$2,212,435
$ 856,141
$ 1,018,372
$ 1,071,618
$ 1,142,948(1)
$ 379,171
$ 449,136
$ 250,033
$ 250,067
$ 250,209
$ 2,582,699
$ 2,360,211
$ 2,149,776
$ 2,113,745
$ 2,007,141
$ 1,807,333
$ 1,643,963
$1,506,344
$1,369,874
276,210
280,208
277,970
286,972
290,838
287,756
286,704
285,590
284,152
Number of full-time equivalent employees at year-end
9,590
8,491
8,297
7,807
7,591
6,992
6,438
5,557
5,286
5,206
Total revenues per average number of employees(2)
$ 222,809
$ 224,137
$ 219,403
$ 215,686
$ 216,114
$ 203,020
$ 191,729(3)
$ 186,949
$ 185,568
$ 182,549
Stock price at year-end
Stock price at year-end
Stock price earnings multiple at year-end(4)
Return on beginning shareholders' equity(5)
$
27.56
$
25.73
$
22.43
$
16.05
$
16.45
$
15.70
$
12.73
$
11.32
$
11.97
$
22.6
13 %
18.3
17 %
24.6
12 %
18.9
12 %
23.3
10 %
21.1
12 %
20.2
11 %
20.0
11 %
21.4
12 %
8.99
16.6
12 %
(1) 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 Discussion and Analysis of Financial Condition and Results of Operations” and Note 8 “Long-Term Debt” for more details.
(2) 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
equivalent employees at the end of the year.
(3) 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.
(in thousands, except per share data,
percentages and Other Information)
Revenues
Commissions & fees
Investment income
Other income, net
Total revenues
Expenses
Compensation and benefits
Other operating expenses
(Gain) Loss on discontinued operations
Amortization expense
Depreciation expense
Interest expense
Change in estimated earn-out payables
Total expenses
Income before income taxes
Income taxes
Net income
Compensation and benefits as % of total revenue
Operating expenses as % of total revenue
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
Total shareholders' equity
Total shares outstanding
Other Information
Stock price at year-end
Stock price at year-end
Stock price earnings multiple at year-end(4)
Return on beginning shareholders' equity(5)
1,068,914
332,118
(2,175)
86,544
22,834
40,580
2,969
1,551,784
462,462
118,207
$
$
1.22
275,521
0.3050
$ 6,688,668
$ 1,456,990
$ 3,000,568
279,583
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
$ 2,009,857
$ 1,857,270
$ 1,762,787
$ 1,656,951
$ 1,567,460
$ 1,355,503
$ 1,189,081
$ 1,005,962
$ 966,917
$ 964,863
2,746
1,643
1,626
22,451
1,456
2,386
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
2,014,246
1,881,347
1,766,629
1,660,509
1,575,796
1,363,279
1,200,032
1,013,542
973,492
967,877
Year ended December 31, 2018
856,952
251,055
(619)
87,421
20,890
39,248
3,003
811,112
235,328
47,425
82,941
20,895
28,408
9,938
705,603
195,677
—
67,932
17,485
16,440
2,533
1,431,625
1,343,130
1,257,950
1,236,047
1,005,670
402,559
159,241
339,749
132,853
357,609
140,497
994,652
283,470
(2,157)
85,446
22,698
38,316
9,200
449,722
50,092
925,217
262,872
(1,291)
86,663
21,003
39,481
9,185
423,499
166,008
624,371
174,389
—
63,573
15,373
16,097
1,418
895,221
304,811
120,766
519,869
144,079
—
54,755
12,392
14,132
(2,206)
743,021
270,521
106,526
494,665
135,851
—
51,442
12,639
14,471
(1,674)
707,394
266,098
104,346
492,038
143,389
—
49,857
13,240
14,599
—
713,123
254,754
101,460
$ 344,255
$ 399,630
$ 257,491
$ 243,318
$ 206,896
$ 217,112
$ 184,045
$ 163,995
$ 161,752
$ 153,294
53.1%
16.5%
52.9%
15.1%
52.4%
14.9%
51.6%
15.1%
51.5%
14.9%
51.8%
14.4%
52.0%
14.5%
51.3%
14.2%
50.8%
14.0%
50.8%
14.8%
$
$
1.40
277,586
0.2775
$
$
0.91
275,608
0.2513
$
$
0.85
$
0.71
280,224
285,782
0.2250
$
0.2050
$
$
0.74
285,248
0.1850
$
$
0.63
284,020
0.1725
$
$
0.57
280,528
0.1625
$
$
0.56
278,636
0.1563
$
$
0.54
275,014
0.1513
Long-term debt less unamortized discount and debt issuance costs
$ 856,141
$ 1,018,372
$ 1,071,618
$ 1,142,948(1)
$ 379,171
$ 449,136
$ 250,033
$ 250,067
$ 250,209
$ 5,747,550
$ 5,262,734
$ 4,979,844
$ 4,931,027
$ 3,620,232
$ 3,103,650
$ 2,587,148
$2,380,738
$2,212,435
$ 2,582,699
$ 2,360,211
$ 2,149,776
$ 2,113,745
$ 2,007,141
$ 1,807,333
$ 1,643,963
$1,506,344
$1,369,874
276,210
280,208
277,970
286,972
290,838
287,756
286,704
285,590
284,152
Number of full-time equivalent employees at year-end
9,590
8,491
8,297
7,807
7,591
6,992
6,438
5,557
5,286
5,206
Total revenues per average number of employees(2)
$ 222,809
$ 224,137
$ 219,403
$ 215,686
$ 216,114
$ 203,020
$ 191,729(3)
$ 186,949
$ 185,568
$ 182,549
$
27.56
$
25.73
$
22.43
$
16.05
$
16.45
$
15.70
$
12.73
$
11.32
$
11.97
$
22.6
13 %
18.3
17 %
24.6
12 %
18.9
12 %
23.3
10 %
21.1
12 %
20.2
11 %
20.0
11 %
21.4
12 %
8.99
16.6
12 %
(4) Stock price at year-end divided by net income per share-diluted.
(5) Represents net income divided by total shareholders’ equity as of the beginning of the year.
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.
.
l
m
o
c
m
a
e
t
e
y
g
r
a
w
w
w
y
b
.
d
e
r
a
p
e
r
P
poised for the future to $4 billion and beyond220 South Ridgewood AvenueDaytona Beach, FL 32114(386) 252-9601bbinsurance.com