10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 001-13619

 

 

BROWN & BROWN, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Florida

(State or other jurisdiction of

incorporation or organization)

  LOGO  

59-0864469

(I.R.S. Employer

Identification Number)

   

 

220 South Ridgewood Avenue, Daytona

Beach, FL

 

32114

(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (386) 252-9601

Registrant’s Website: www.bbinsurance.com

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

COMMON STOCK, $0.10 PAR VALUE   NEW YORK STOCK EXCHANGE

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

NOTE: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer     x    Accelerated filer     ¨
Non-accelerated filer     ¨ (Do not check if a smaller reporting company)    Smaller reporting company     ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

The aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the price at which the stock was last sold on June 30, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter) was $3,374,535,891.

The number of outstanding shares of the registrant’s Common Stock, $0.10 par value, as of February 19, 2015 was 143,520,097.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Brown & Brown, Inc.’s Proxy Statement for the 2015 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.

 

 

 


Table of Contents

BROWN & BROWN, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

INDEX

 

     Page No.  

Part I

     

Item 1.

   Business      3   

Item 1A.

   Risk Factors      11   

Item 1B.

   Unresolved Staff Comments      20   

Item 2.

   Properties      21   

Item 3.

   Legal Proceedings      21   

Item 4.

   Mine Safety Disclosures      21   

Part II

     

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     21   

Item 6.

   Selected Financial Data      25   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      26   

Item 7A.

   Quantitative and Qualitative Disclosures about Market Risk      45   

Item 8.

   Financial Statements and Supplementary Data      46   

Item 9.

   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      80   

Item 9A.

   Controls and Procedures      80   

Item 9B.

   Other Information      83   

Part III

     

Item 10.

   Directors, Executive Officers and Corporate Governance      83   

Item 11.

   Executive Compensation      83   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      83   

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      83   

Item 14.

   Principal Accounting Fees and Services      83   

Part IV

     

Item 15.

   Exhibits, Financial Statement Schedules      84   

Signatures

     87   

Exhibit Index

  


Table of Contents

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 on 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 I, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:

 

    Future prospects;

 

    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 California, Florida, Georgia, Illinois, Indiana, Kansas, Massachusetts, Michigan, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Texas, Virginia and Washington, because a significant portion of business written by us is for customers located in these states;

 

    The integration of our operations with those of businesses or assets we have acquired, including our May 2014 acquisition of The Wright Insurance Group, LLC (“Wright”), or may acquire in the future, and the failure to realize the expected benefits of such acquisitions and integration;

 

    Our ability to attract, retain and enhance qualified personnel;

 

    Competition from others in the insurance agency, wholesale brokerage, insurance programs and service business;

 

    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;

 

    Exposure units, and premium rates set by insurance companies which have traditionally varied and are difficult to predict;

 

    Our ability to forecast liquidity needs through at least the end of 2015;

 

    Our ability to renew or replace expiring leases;

 

    Outcomes of existing or future legal proceedings and governmental investigations, as well as future regulatory actions and conditions in the states in which we conduct our business;

 

    Policy cancellations, which can be unpredictable;

 

    Potential changes to the tax rate that would affect the value of deferred tax assets and liabilities;

 

    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 apply technology in providing improved value for our customers 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.

 

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Assumptions as to any of the foregoing and all statements are not based on 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 on 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.

 

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PART I

 

ITEM 1. Business.

General

Brown & Brown is a diversified insurance agency, wholesale brokerage, insurance programs and service organization with origins dating from 1939, headquartered in Daytona Beach, Florida. We market and sell to our customers insurance products and services, primarily in the property, casualty and employee benefits areas. As an agent and broker, we do not assume underwriting risks with the exception of the activity in Wright, which was acquired in May 2014. We provide our customers with quality, non-investment insurance contracts, as well as other targeted, customized risk management products and services. Within Wright, we operate a write-your-own flood insurance carrier, Wright National Flood Insurance Company (“WNFIC”), which is a Wright subsidiary. WNFIC’s entire business consists of policies written pursuant to the National Flood Insurance Program (“NFIP”), the program administered by the Federal Emergency Management Agency (“FEMA”) and excess flood insurance policies which are fully reinsured substantially eliminating WNFIC’s exposure to underwriting risk, given that these policies are backed by either FEMA or a reinsurance carrier with an AM Best Company rating of “A” or better.

The Company is compensated for our services primarily by commissions paid by insurance companies and to a lesser extent, by fees paid directly by customers for certain services. Commission revenues are usually a percentage of the premium paid by the insured and generally depend upon the type of insurance, the particular insurance company and the nature of the services provided by us. In some cases, we share commissions with other agents or brokers who have acted jointly with us in a transaction. We may also receive from an insurance company a “profit-sharing contingent commission,” which is a profit-sharing commission based primarily on underwriting results, but may also contain considerations for volume, growth and/or retention. Fee revenues are 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 catastrophe claims adjusting services, (2) our National Programs and Wholesale Brokerage Segments, which earn fees primarily for the issuing of insurance policies on behalf of insurance carriers, and (3) our Retail Segment for fees received in lieu of commissions, primarily since our July 1, 2013 acquisition of Beecher Carlson Holdings, Inc. (“Beecher Carlson”) which services many larger fee-based accounts. The amount of our revenues from commissions and fees is a function of, among other factors, continued new business production, retention of existing customers, acquisitions and fluctuations in insurance premium rates and “insurable exposure units,” which are units that insurance companies use to measure or express insurance exposed to risk (such as property values, sales and payroll levels) to determine what premium to charge the insured. Insurance companies establish these premium rates based upon many factors, including reinsurance rates paid by such insurance companies, none of which we control.

As of December 31, 2014, our activities were conducted in 232 locations in 41 states as follows, as well as in London, England, Hamilton, Bermuda, and George Town, Cayman Islands:

 

Florida 41 Oklahoma 5 Missouri   2   
California 24 Connecticut 4 New Hampshire   2   
New York 17 Minnesota 4 Delaware   1   
Texas 13 Virginia 4 Maryland   1   
Washington 12 Arizona 3 Mississippi   1   
Georgia 11 Arkansas 3 Montana   1   
New Jersey 10 Kentucky 3 Nevada   1   
Louisiana 7 Indiana 3 North Carolina   1   
Pennsylvania 7 New Mexico 3 Rhode Island   1   
Illinois 7 Ohio 3 Utah   1   
Colorado 6 South Carolina 3 Vermont   1   
Massachusetts 6 Tennessee 3 West Virginia   1   
Oregon 6 Hawaii 2 Wisconsin   1   
Michigan 5 Kansas 2

 

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Industry Overview

Premium pricing within the property and casualty insurance underwriting (risk-bearing) industry has historically been cyclical in nature, and has varied widely based on market conditions. For example, in late 2003, after three years of a “hard” market in which premium rates were stable or increasing, the insurance industry experienced the return of a “soft” market, characterized by flat or reduced premium rates in many lines and geographic areas. In 2004, as general premium rates continued to moderate, the southeastern United States experienced the worst hurricane season since 1992 (when Hurricane Andrew hit south Florida), and the following year brought that region the worst hurricane season ever recorded. As a result of the significant losses incurred by insurance companies due to these hurricanes, property and casualty insurance premium rates increased on coastal property, primarily in the southeastern United States, in 2006, while otherwise generally declining during 2006 and 2007.

To counter the higher property insurance rates in Florida, the State of Florida directed its property “insurer of last resort,” “Citizens Property Insurance Corporation” (“Citizens”), to significantly reduce its rates beginning in January 2007 and extending through January 1, 2010. As a result, several of our Florida-based operations lost significant amounts of revenue to Citizens in this period. Since that time, Citizens’ impact on our operations has declined each year as Citizens has slowly increased its rates in an effort to reduce its insured exposures. Our commission revenues from Citizens for 2014, 2013 and 2012 were approximately $3.8 million, $5.7 million, and $6.4 million, respectively.

Although property and casualty insurance premium rates generally continued to decline from 2008 through 2011 in most lines of coverage, the rates of decline were slowing. However, from the second half of 2008 through 2011, insurable exposure units, such as sales and payroll expenditures, decreased significantly, primarily in the southeastern and western regions of the United States, due to the economic recession, and this decrease had a greater adverse impact on our commissions and fees revenue than did declining insurance premium rates in this period.

From the first quarter of 2012 through 2013, insurance premium rates gradually increased for most lines of coverage, and insurable exposure units began to flatten and in certain cases, increase. As a result, in 2012, the Company achieved positive internal organic core commissions and fees revenue growth for the first time since 2006. In 2013, these rate and exposure unit increases, along with new business growth, generated positive internal organic revenue growth for each of our four reportable business segments in each quarter, with the single exception of the fourth quarter for our Services Segment, which experienced a record fourth quarter in 2012 as a result of the significant flood claims activity from Superstorm Sandy that was not replicated in 2013.

During 2014, changes in rates and exposure units varied by geography and line of business with rates and units for employee benefits increasing as a result of general improvements in the economy. We have experienced a downward trend in coverage for employers with less than 50 employees, due to the implementation of the Affordable Care Act that has driven more employees to state healthcare exchanges. Rates for property and casualty coverage were under pressure, especially in the coastal areas, as a long period without significant storm activity and low interest rates have driven significant loss reserves and alternative capital sources.

SEGMENT INFORMATION

Our business is divided into four reportable segments: (1) the Retail Segment; (2) the National Programs Segment; (3) the Wholesale Brokerage Segment; and (4) the Services Segment. The Retail Segment provides a broad range of insurance products and services to commercial, public and quasi-public entities, and to professional and individual customers. The National Programs Segment provides professional liability and related package products for certain professionals delivered through nationwide networks of independent agents and also through our Brown & Brown retail offices, markets targeted products and services designed for specific industries, trade groups, public and quasi-public entities, and market niches and provides flood coverage. The Wholesale Brokerage Segment markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers. 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 catastrophe claims adjusting services.

 

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The following table summarizes (1) the commissions and fees revenue generated by each of our reportable operating segments for 2014, 2013 and, 2012, and (2) the percentage of our total commissions and fees revenue represented by each segment for each such period:

 

(in thousands, except percentages)    2014     %     2013     %     2012     %  

Retail Segment

   $ 809,880        51.7   $ 725,159        53.5   $ 639,708        53.7

National Programs Segment

     387,858        24.7     291,014        21.5     251,929        21.2

Wholesale Brokerage Segment

     234,294        14.9     209,493        15.4     182,822        15.4

Services Segment

     136,482        8.7     131,033        9.7     116,247        9.8

Other

     (1,054     (0.0 )%      (1,196     (0.1 )%      (1,625     (0.1 )% 
  

 

 

     

 

 

     

 

 

   

Total

$ 1,567,460      100.0 $ 1,355,503      100.0 $ 1,189,081      100.0
  

 

 

     

 

 

     

 

 

   

We conduct all of our operations within the United States of America, except for one wholesale brokerage operation based in London, England, and retail operations based in Hamilton, Bermuda and George Town, Cayman Islands. These operations generated $13.3 million, $12.2 million and $9.7 million of revenues for the years ended December 31, 2014, 2013 and 2012, respectively. We do not have any material foreign long-lived assets.

See Note 15 to the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional segment financial data relating to our business.

Retail Segment

As of December 31, 2014, our Retail Segment employed 3,684 people. Our retail insurance agency business provides a broad range of insurance products and services to commercial, public and quasi-public entity, professional and individual customers. The categories of insurance we principally sell include: property insurance relating to physical damage to property and resultant interruption of business or extra expense caused by fire, windstorm or other perils; casualty insurance relating to legal liabilities, workers’ compensation, commercial and private passenger automobile coverages; and fidelity and surety bonds. We also sell and service group and individual life, accident, disability, health, hospitalization, medical and dental insurance.

No material part of our retail business is attributable to a single customer or a few customers. During 2014, commissions and fees from our largest single Retail Segment customer represented less than four tenths of one percent (0.4%) of the Retail Segment’s total commissions and fees revenue.

In connection with the selling and marketing of insurance coverages, we provide a broad range of related services to our customers, such as risk management and loss control surveys and analysis, consultation in connection with placing insurance coverages and claims processing.

National Programs Segment

As of December 31, 2014, our National Programs Segment employed 1,750 people. Our National Programs Segment can be grouped into five broad categories; (1) Professional Programs; (2) Arrowhead Insurance Programs; (3) Commercial Programs; (4) Public Entity-Related Programs; and (5) the National Flood Program:

Professional Programs. Professional Programs provide professional liability and related package insurance products tailored to the needs of specific professional groups. Professional Programs negotiates policy forms and coverage options with their specific insurance carriers. Securing endorsements of these products from a professional association or sponsoring company is also an integral part of their function. Professional Programs affiliate with professional groups, including but not limited to, dentists, oral surgeons, hygienists, lawyers, CPA’s, optometrists, opticians, ophthalmologists, insurance agents, financial advisors, registered representatives, securities broker-dealers, benefit administrators, real estate brokers, real estate title agents and escrow agents. In addition, Professional Programs encompasses supplementary insurance related products to include weddings, events, medical facilities and cyber liability.

 

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Below are brief descriptions of the Professional programs.

 

    Allied Protector Plan®: Allied Protector Plan® (“APP®”) specializes in customized professional liability and business insurance programs for individual practitioners and businesses in the healthcare industry. The APP program offers liability insurance coverage for, among others, dental hygienists and dental assistants, home health agencies, physical therapy clinics, and medical directors. Also available through the APP program is cyber/data breach insurance offering a solution to privacy breaches and information security exposures tailored to the needs of healthcare organizations.

 

    Certified Public Accountants: The CPA Protector Plan® is a specialty insurance program offering comprehensive professional liability insurance solutions and risk management services to CPA practitioners and their firms nationwide. Optional coverage enhancements allow the insured to round out their policy and coverage needs, including: Employment Practices Liability, Employee Dishonesty, Non-Profit Directors and Officers, as well as Network Security and Privacy Protection Coverage.

 

    Dentists: First initiated in 1969, the Professional Protector Plan® (“PPP®”) for Dentists provides dental professionals insurance products including professional and general liability, property, employment practices liability, workers’ compensation, claims and risk management. The PPP recognized the importance of policyholder and customer service and developed a customized, proprietary, web-based rating and policy issuance system which in turn provides a seamless policy delivery resource and access to policy information on a real time basis. Obtaining endorsements from state and local dental societies and associations plays an integral role in the PPP partnership. The PPP is offered in all 50 states, the District of Columbia, Puerto Rico and the Virgin Islands.

 

    Financial Professionals: CalSurance® and CITA Insurance Services® have specialized in this niche since 1980 and offer professional liability programs designed for insurance agents, financial advisors, registered representatives, securities broker-dealers, benefit administrators, real estate brokers and real estate title agents. An important aspect of CalSurance is Lancer Claims Services, which provides specialty claims administration for insurance companies underwriting CalSurance product lines.

 

    Lawyers: The Lawyer’s Protector Plan® (“LPP®”), for over 30 years, has been providing professional liability insurance with a niche focus on law firms with 1-20 attorneys. The LPP program handles all aspects of insurance operations including underwriting, distribution management, policy issuance and claims. The LPP is offered in 44 states and the District of Columbia.

 

    Optometrists, Opticians, and Ophthalmologists: Since 1973 the Optometric Protector Plan® (“OPP®”), has continually provided professional liability, general liability, property, workers’ compensation insurance and risk management programs for eye care professionals nationwide. Our carrier partners offer specialty insurance products tailored to the eye care profession, and our agents and brokers are chosen for their expertise. The OPP is offered in all 50 states and the District of Columbia. Through our strategic carrier partnerships, we have diversified our demographic and also offer professional liability coverage to Chiropractors, Podiatrists and Physicians nationwide.

 

    Professional Risk Specialty Group: Professional Risk Specialty Group (“PRSG”) has been providing Errors & Omissions/Professional Liability/Malpractice Insurance for over 22 years both in a direct retail sales and brokering capacity. PRSG has been an exclusive State Administrator for a Lawyers Professional Liability Program since 1994 in Florida, Louisiana, and Puerto Rico, as well as state appointments in 23 other states. The admitted Lawyers Program focuses on 1-19 attorney firms and the non-admitted program is for firms with 20+ attorneys and is available for primary or excess coverage. PRSG is also involved in direct sales and brokering for other professional lines, such as Accountants, Architects & Engineers, Medical Malpractice, Directors & Officers, Employment Practices Liability, Title Agency E&O and Miscellaneous E&O.

 

    Real Estate Title Professionals: TitlePac® provides professional liability products and services designed for real estate title agents and escrow agents in 47 states and the District of Columbia.

 

    Wedding Protector Plan® and Protector Plan® for Events provide an online wedding/private event cancellation and postponement insurance policy that offers financial protection if certain unfortunate, unforeseen events should occur during the period leading up to and including the wedding/event date. Liability and liquor liability is available as an option. Both the Wedding Protector Plan and Protector Plan for Events are offered in 47 states.

 

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The Professional Protector Plan® for Dentists and the Lawyer’s Protector Plan® are marketed and sold primarily through a national network of independent agencies and also through our Brown & Brown retail offices; however, certain professional liability programs, CalSurance® and TitlePac®, are principally marketed and sold directly to our insured customers. Under our agency agreements with the insurance companies that underwrite these programs, we often have authority to bind coverages (subject to established guidelines), to bill and collect premiums and, in some cases, to adjust claims. For the programs that we market through independent agencies, we receive a wholesale commission or “override,” which is then shared with these independent agencies.

Arrowhead Programs. Arrowhead is a Managing General Agent (“MGA”), General Agent (“GA”), and Program Administrator (“PA”) to the property and casualty insurance industry. Arrowhead acts as a virtual insurer providing outsourced product development, marketing, underwriting, actuarial, compliance and claims and other administrative services to insurance carrier partners. As an MGA, Arrowhead has the authority to underwrite, bind insurance carriers, issue policies, collect premiums and provide administrative and claims services.

Below are brief descriptions of the Arrowhead Programs:

 

    Architects and Engineering, operating as Arrowhead Design Insurance (“ADI”), is a leading writer of professional liability insurance for architects, engineers and environmental consultants. ADI is a national program writing in all 50 states.

 

    Automotive Aftermarket is a new program launched in 2012 in conjunction with Zurich American Insurance Company’s transfer of selected assets and employees to Arrowhead. The Automotive Aftermarket program writes commercial package insurance for non-dealership automotive services such as auto recyclers, brake shops, equipment dealers, mechanical repairs, oil and lube shops, parts retailers and wholesalers, tire retailers and wholesalers and transmission mechanics.

 

    Commercial is a program that offers three distinct products to commercial operations, primarily in California: commercial auto, commercial package and general liability.

 

    Earthquake and DIC is a Differences-in-Conditions (“DIC”) Program, writing notably earthquake, flood, and the “All Risk” insurance coverages to commercial property owners. The Earthquake and DIC program writes insurance on both a primary and excess layer basis.

 

    Marine is a national program manager and wholesale producer of marine insurance products including yachts and high performance boats, small boats, commercial marine and marine artisan contractors.

 

    OnPoint is an MGA with underwriting programs for tribal nations, manufactured housing, contractors’ equipment and various affinity programs. The largest program is the Tribal business, which provides tailored risk management and insurance solutions for U.S. tribal nations.

 

    Personal Property provides a variety of coverages for homeowners and renters in numerous states.

 

    Real Estate Errors & Omissions writes errors and omissions insurance for small to medium-sized residential real estate agents and brokers in California. Coverage includes real estate brokerage, property management, escrow, appraisal, leasing and consulting services.

 

    Residential Earthquake specializes in monoline residential earthquake coverage for California home and condominium owners.

 

    Wheels provides private passenger automobile and motorcycle coverage for a range of drivers. Arrowhead’s auto program offers two personal auto coverage types: one traditional non-standard auto product offering minimum state required liability limits and another targeting full coverage, multi-vehicle risks. The auto product is written in several states including California, Georgia, Michigan, and Alabama.

 

    Workers’ Compensation provides workers’ compensation insurance coverage primarily for California-based insureds. Arrowhead’s workers’ compensation program targets industry segments such as agriculture, contractors, food services, horticulture and manufacturing.

Commercial Programs. Commercial Programs markets targeted products and services to specific industries, trade groups, and market niches. Most of these products and services are marketed and sold primarily through independent agents, including certain of our retail offices. However, a number of these products and services are also marketed and sold directly to insured customers. Under agency agreements with the insurance companies that underwrite these programs, we often have authority to bind coverages (subject to established guidelines), to bill and collect premiums and, in some cases, to adjust claims.

 

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    Acumen RE Management Corporation (“Acumen RE”) has been active in the facultative reinsurance casualty market since 1993, providing outsourced technical expertise in workers’ compensation, general liability and professional liability (directors and officers along with errors and omissions) reinsurance accounts. Acumen RE’s territory encompasses the entire United States, and this entity accesses insureds via approved reinsurance intermediaries strategically located throughout the country.

 

    AFC Insurance, Inc. (“AFC”)(“Humanity Plus Program”) is a Program Administrator specializing in niche Property & Casualty products for a wide range of For-Profit and Nonprofit Human & Social Service organizations. Eligible risks include Addiction Treatment Centers, Adult Day Care Centers, Group Homes, Services for the Developmentally Disabled and more. AFC’s nationwide comprehensive program offers all lines of coverage. AFC also has a separate program for independent pizza/deli restaurants.

 

    American Specialty Insurance & Risk Services, Inc. provides insurance and risk management services for customers in professional sports, motor sports, amateur sports, and the entertainment industry.

 

    Fabricare: Irving Weber Associates, Inc. (“IWA”) has specialized in this niche since 1946, providing package insurance including workers’ compensation to dry cleaners, linen supply and uniform rental operations. IWA also offers insurance programs for independent grocery stores and restaurants.

 

    Florida Intracoastal Underwriters, Limited Company (“FIU”) is a managing general agency that specializes in providing insurance coverage for coastal and inland high-value condominiums and apartments. FIU has developed a specialty insurance facility to support the underwriting activities associated with these risks.

 

    Industry Consulting Group, Inc. (“ICG”) is a complete property tax service provider, and works with Proctor Financial, Inc., one of our subsidiaries, in providing solutions to the financial institutions industry. ICG provides a full range of property tax processing solutions, property valuations and appeals, and other services to the real estate, oil and gas, and financial institution industries. ICG features full electronic interfaces, sophisticated and flexible reporting and systems that are customized to individual specifications. This business was sold effective November 30, 2014.

 

    Parcel Insurance Plan® is a specialty insurance agency providing insurance coverage to commercial and private shippers for small packages and parcels with insured values of less than $25,000 each.

 

    Proctor Financial, Inc. (“Proctor”) provides insurance programs and compliance solutions for financial institutions that service mortgage loans. Proctor’s products include lender-placed hazard and flood insurance, full insurance outsourcing, mortgage impairment, and blanket equity insurance. Proctor acts as a wholesaler and writes surplus lines property business for its financial institution customers. Proctor receives payments for insurance compliance tracking as well as commissions on lender-placed insurance.

 

    Railroad Protector Plan® (“RRPP®”) provides insurance products for contractors, manufacturers and wholesalers supporting the railroad industry (not the railroads) in 47 states. The RRPP insurance coverages include general liability, property, commercial auto, umbrella and inland marine.

 

    Towing Operators Protector Plan® (“TOPP®”) serves 21 states providing insurance coverage including general liability, commercial auto, garage keeper’s legal liability, property and motor truck cargo coverage.

 

    Wright Specialty Insurance Agency, LLC provides insurance products for specialty programs such as food, grocery, and franchise programs that are offered throughout the U.S.

Public Entity-Related Programs. Public Entity-Related Programs administers various insurance trusts specifically created for cities, counties, municipalities, school boards, special taxing districts and quasi-governmental agencies. These insurance coverages can range from providing fully insured programs to establishing risk retention insurance pools to excess and facultative specific coverages.

 

    Public Risk Underwriters of Indiana, LLC, dba Downey Insurance is a program administrator of insurance trusts offering tailored property and casualty insurance products, risk management consulting, third-party administration and related services designed for cities, counties, municipalities, schools, special taxing districts, and other public entities in the State of Indiana.

 

    Public Risk Underwriters of The Northwest, Inc., dba Canfield & Associates is a program administrator of insurance trusts offering tailored property and casualty insurance products, risk management consulting, third-party administration and related services designed for cities, counties, municipalities, school boards and non-profit organizations in the State of Washington.

 

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    Public Risk Underwriters of Illinois, LLC, dba Ideal Insurance Agency is a program administrator offering tailored property and casualty insurance products, risk management consulting, third-party administration and related services designed for municipalities, schools, fire districts and other public entities in the State of Illinois.

 

    Public Risk Underwriters of New Jersey, Inc. provides administrative services and insurance procurement for the Statewide Insurance Fund (“Statewide”). Statewide is a municipal joint insurance fund comprised of counties, municipalities, utility authorities, community colleges and emergency services entities in New Jersey.

 

    Public Risk Underwriters of Florida, Inc. is the program administrator for the Preferred Governmental Insurance Trust offering tailored property and casualty insurance products, risk management consulting, third-party administration and related services designed for cities, counties, municipalities, schools, special taxing districts and other public entities in the State of Florida.

 

    Wright Risk Management Company, LLC, is a program administrator for the New York Schools Insurance Reciprocal and the New York Municipal Insurance Reciprocal offering tailored property and casualty insurance products, risk management consulting, third-party administration and related services designed for cities, counties, municipalities, schools, special taxing districts and other public entities in the State of New York.

National Flood Program. Wright, which was acquired in May 2014, operates a flood insurance carrier, WNFIC, which is a Wright subsidiary. WNFIC’s entire business consists of policies written pursuant to the National Flood Insurance Program (“NFIP”), the program administered by FEMA and excess flood insurance policies, which are fully reinsured, substantially eliminating WNFIC’s exposure to underwriting risk, given that these policies are backed by either FEMA or a reinsurance carrier with an AM Best Company rating of “A” or better.

Wholesale Brokerage Segment

At December 31, 2014, our Wholesale Brokerage Segment employed 1,067 people. Our Wholesale Brokerage Segment markets and sells excess and surplus commercial insurance products and services to retail insurance agencies (including our retail offices). The Wholesale Brokerage Segment offices represent various U.S. and U.K. surplus lines insurance companies. Additionally, certain offices are also Lloyd’s of London correspondents. The Wholesale Brokerage Segment also represents admitted insurance companies for purposes of affording access to such companies for smaller agencies that otherwise do not have access to large insurance company representation. Excess and surplus insurance products encompass many insurance coverages, including personal lines, homeowners, yachts, jewelry, commercial property and casualty, commercial automobile, garage, restaurant, builder’s risk and inland marine lines. Difficult-to-insure general liability and products liability coverages are a specialty, as is excess workers’ compensation coverage. Wholesale brokers solicit business through mailings and direct contact with retail agency representatives. During 2014, commissions and fees from our largest Wholesale Brokerage Segment customer represented approximately 0.7% of the Wholesale Brokerage Segment’s total commissions and fees revenue.

Services Segment

At December 31, 2014, our Services Segment employed 895 people and provided a wide-range of insurance-related services.

Below are brief descriptions of the programs offered by the Services Segment.

 

    The Advocator Group assists individuals throughout the United States who are seeking to establish eligibility for coverage under the federal Social Security Disability program and provides health plan selection and enrollment assistance for Medicare beneficiaries. The Advocator Group works closely with employer-sponsored group life, disability and health plan participants to assist disabled employees in receiving the education, advocacy and benefit coordination assistance necessary to achieve the fastest possible benefit approvals. In addition, The Advocator Group also provides second injury fund recovery services to the workers’ compensation insurance market.

 

    American Claims Management (“ACM”) provides third-party administration (“TPA”) services to both the commercial and personal property and casualty insurance markets on a nationwide basis, and provides claims adjusting, administration, subrogation, litigation and data management services to insurance companies, self-insureds, public municipalities, insurance brokers and corporate entities. ACM services also include managed care, claim investigations, field adjusting and audit services. Approximately 71.5% of ACM’s 2014 net revenues were derived from the various Arrowhead programs in our National Programs Segment, with the remainder generated from third parties.

 

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    Colonial Claims provides insurance claims adjusting and related services, including education and training services, throughout the United States. Colonial Claims handles property and casualty insurers’ multi-line and catastrophic claims needs, including auto, earthquake, flood, hail, homeowners and wind claims. Colonial Claims’ adjusters are approved by the NFIP and are certified in each classification of loss, which includes dwelling, mobile home, condominium association, commercial and large losses.

 

    ICA provides comprehensive claims management solutions for both personal and commercial lines of insurance. ICA is a national service provider for daily and catastrophe claims, vendor management, TPA operations and staff augmentation. ICA offers training and educational opportunities to independent adjusters nationwide in ICA’s regional training facilities. Additional claims services offered by ICA include first notice of loss, fast track, field appraisals, quality control and consulting.

 

    NuQuest/Bridge Pointe and Protocols provide a full spectrum of Medicare Secondary Payer (“MSP”) statutory compliance services, from MSA Allocation through Professional Administration to over 250 insurance carriers, third-party administrators, self-insured employers, attorneys, brokers and related claims professionals nationwide. Specialty services include medical projections, life care plans, Medicare set-aside analysis, allocation and administration.

 

    Preferred Governmental Claims Solutions (“PGCS”) provides TPA services for insurance entities and self-funded or fully-insured workers’ compensation and liability plans. PGCS’ services include claims administration, cost containment consulting, services for secondary disability and subrogation recoveries.

 

    USIS provides TPA services for insurance entities and self-funded or fully-insured workers’ compensation and liability plans. USIS’ services include claims administration, access to major reinsurance markets, cost containment consulting, services for secondary disability, and subrogation recoveries and risk management services such as loss control. USIS’ services also include managed care services, including medical networks, case management and utilization review services certified by the American Accreditation Health Care Commission.

In 2014, our three largest workers’ compensation contracts represented approximately 12.3% of our Services Segment’s fees revenues.

Employees

At December 31, 2014, we had 7,591 full-time equivalent employees. We have agreements with our sales employees and certain other employees that include provisions: (1) protecting our confidential information and trade secrets; (2) restricting their ability post-employment to solicit the business of our customers; and (3) preventing the hiring of our employees for a period of time after separation from employment with us. The enforceability of such agreements varies from state to state depending upon applicable law and factual circumstances. The majority of our employment relationships are at-will and terminable by either party at any time; however, the covenants regarding confidential information and non-solicitation of our customers and employees generally extend for a period of at least two years after cessation of employment.

None of our employees are represented by a labor union, and we consider our relations with our employees to be good.

Competition

The insurance intermediary business is highly competitive, and numerous firms actively compete with us for customers and insurance markets. Competition in the insurance business is largely based on innovation, quality of service and price. A number of firms and banks with substantially greater resources and market presence compete with us.

A number of insurance companies directly sell insurance, primarily to individuals, and do not pay commissions to third-party agents and brokers. In addition, the Internet continues to be a source for direct placement of personal lines business. To date, such direct sales efforts have had little effect on our operations, primarily because our Retail Segment is mostly commercially oriented rather than individually oriented.

In addition, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 and regulations enacted thereunder permit banks, securities firms and insurance companies to affiliate. As a result, the financial services industry has experienced and may continue to experience consolidation, which in turn has resulted and could continue to result in increased competition from diversified financial institutions, including competition for acquisition prospects.

 

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Regulation, Licensing and Agency Contracts

We and/or our designated employees must be licensed to act as agents, brokers, intermediaries or third-party administrators by state regulatory authorities in the states in which we conduct business. Regulations and licensing laws vary by individual state and are often complex.

The applicable licensing laws and regulations in all states are subject to amendment or reinterpretation by state regulatory authorities, and such authorities are vested in most cases with relatively broad discretion as to the granting, revocation, suspension and renewal of licenses. The possibility exists that we and/or our employees could be excluded or temporarily suspended from carrying on some or all of our activities in, or could otherwise be subjected to penalties by, a particular state.

Available Information

We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). We make available free of charge on our website, at www.bbinsurance.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act and the rules promulgated thereunder, as soon as reasonably practicable after electronically filing or furnishing such material to the SEC. These documents are posted on our website at www.bbinsurance.com—select the “Investor Relations” link and then the “SEC Filings” link.

Copies of these reports, proxy statements and other information can be read and copied at:

SEC Public Reference Room

100 F Street NE

Washington, D.C. 20549

Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-732-0330. Also, the SEC maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC’s website at www.sec.gov.

The charters of the Audit, Compensation and Nominating/Governance Committees of our Board of Directors as well as our Corporate Governance Principles, Code of Business Conduct and Ethics and Code of Ethics—CEO and Senior Financial Officers (including any amendments to, or waivers of any provision of any of these charters, principles or codes) are also available on our website or upon request. Requests for copies of any of these documents should be directed in writing to: Corporate Secretary, Brown & Brown, Inc., 220 South Ridgewood Avenue, Daytona Beach, Florida 32114, or by telephone to (386)-252-9601.

 

ITEM 1A. Risk Factors

OUR BUSINESS, AND THEREFORE OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION, MAY BE ADVERSELY AFFECTED BY ECONOMIC CONDITIONS THAT RESULT IN REDUCED INSURER CAPACITY.

Our results of operations depend on the continued capacity of insurance carriers to underwrite risk and provide coverage, which depends in turn on those insurance companies’ ability to procure reinsurance. Capacity could also be reduced by insurance companies failing or withdrawing from writing certain coverages that we offer our clients. We have no control over these matters. To the extent that reinsurance becomes less widely available, we may not be able to procure the amount or types of coverage that our customers desire and the coverage we are able to procure may be more expensive or limited.

 

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OUR GROWTH STRATEGY DEPENDS IN PART ON THE ACQUISITION OF OTHER INSURANCE INTERMEDIARIES, WHICH MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS IN THE FUTURE AND WHICH, IF CONSUMMATED, MAY NOT BE ADVANTAGEOUS TO US.

Our growth strategy includes the acquisition of other insurance intermediaries. Our ability to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our operations, and expand into new markets requires us to implement and improve our operations and our financial and management information systems. Integrated, acquired businesses may not achieve levels of revenues or profitability comparable to our existing operations, or otherwise perform as expected. In addition, we compete for acquisition and expansion opportunities with firms and banks that have substantially greater resources than we do. Acquisitions also involve a number of special risks, such as: diversion of management’s attention; difficulties in the integration of acquired operations and retention of personnel; increase in expenses and working capital requirements, which could reduce our return on invested capital; entry into unfamiliar markets; unanticipated problems or legal liabilities; estimation of the acquisition earn-out payables; and tax and accounting issues, some or all of which could have a material adverse effect on the results of our operations, financial condition and cash flows. Post-acquisition deterioration of targets could also result in lower or negative earnings contribution and/or goodwill impairment charges.

INFLATION MAY ADVERSELY AFFECT OUR BUSINESS OPERATIONS IN THE FUTURE.

Given the current macroeconomic environment, it is possible that U.S. government actions, in the form of a monetary stimulus, a fiscal stimulus, or both, to the U.S. economy, could lead to inflationary conditions that would adversely affect our cost base, resulting in an increase in our employee compensation and benefits and our other operating expenses. This could harm our margins and profitability if we are unable to increase revenues or cut costs enough to offset the effects of inflation on our cost base.

BECAUSE OUR BUSINESS IS HIGHLY CONCENTRATED IN CALIFORNIA, FLORIDA, GEORGIA, ILLINOIS, INDIANA, KANSAS, MASSACHUSETTS, MICHIGAN, NEW JERSEY, NEW YORK, NORTH CAROLINA, OREGON, PENNSYLVANIA, TEXAS, VIRGINIA AND WASHINGTON, ADVERSE ECONOMIC CONDITIONS, NATURAL DISASTERS, OR REGULATORY CHANGES IN THESE STATES COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.

A significant portion of our business is concentrated in California, Florida, Georgia, Illinois, Indiana, Kansas, Massachusetts, Michigan, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Texas, Virginia and Washington. For the years ended December 31, 2014, 2013 and 2012, we derived $1,361.5 million or 86.4%, $1,163.8 million or 85.4% and $1,016.5 million or 84.8%, of our revenues, respectively, from our operations located in these states. We believe that these revenues are attributable predominately to customers in these states. We believe the current regulatory environment for insurance intermediaries in these states is no more restrictive than in other states. The insurance business is primarily a state-regulated industry, and therefore, state legislatures may enact laws that adversely affect the insurance industry. Because our business is concentrated in the states identified above, we face greater exposure to unfavorable changes in regulatory conditions in those states than insurance intermediaries whose operations are more diversified through a greater number of states. In addition, the occurrence of adverse economic conditions, natural or other disasters, or other circumstances specific to or otherwise significantly impacting these states could adversely affect our financial condition, results of operations and cash flows. We are susceptible to losses and interruptions caused by hurricanes (particularly in Florida, where our headquarters are located and we maintain several offices), earthquakes (including California, where we maintain a relatively large number of offices), power shortages, telecommunications failures, water shortages, floods, fire, extreme weather conditions, geopolitical events such as terrorist acts and other natural or manmade disasters. Our insurance coverage with respect to natural disasters is limited and is subject to deductibles and coverage limits. Such coverage may not be adequate, or may not continue to be available at commercially reasonable rates and terms.

WE DERIVE A SIGNIFICANT PORTION OF OUR COMMISSION REVENUES FROM A LIMITED NUMBER OF INSURANCE COMPANIES, THE LOSS OF WHICH COULD RESULT IN ADDITIONAL EXPENSE AND LOSS OF MARKET SHARE.

For the year ended December 31, 2014, no insurance company accounted for more than 7.0% of our total core commissions. For the year ended December 31, 2013 and 2012, approximately 8.0% and 5.0% respectively, of our total core commissions were derived from insurance policies underwritten by one insurance company. Should this insurance company seek to terminate their arrangements with us, we believe that other insurance companies are available to underwrite the business, and we could likely move our business to one of these other insurance companies, although some additional expense and loss of market share could possibly result.

 

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OUR CURRENT MARKET SHARE MAY DECREASE AS A RESULT OF INCREASED COMPETITION FROM INSURANCE COMPANIES AND THE FINANCIAL SERVICES INDUSTRY.

The insurance intermediary business is highly competitive and we actively compete with numerous firms for customers and insurance companies, many of which have relationships with insurance companies or have a significant presence in niche insurance markets that may give them an advantage over us. Other competitive concerns may include the quality of our products and services, our pricing and the ability of some of our customers to self-insure. A number of insurance companies are engaged in the direct sale of insurance, primarily to individuals, and do not pay commissions to agents and brokers. In addition, and to the extent that banks, securities firms and insurance companies affiliate, the financial services industry may experience further consolidation, and we therefore may experience increased competition from insurance companies and the financial services industry, as a growing number of larger financial institutions increasingly, and aggressively, offer a wider variety of financial services, including insurance intermediary services.

QUARTERLY AND ANNUAL VARIATIONS IN OUR COMMISSIONS THAT RESULT FROM THE TIMING OF POLICY RENEWALS AND THE NET EFFECT OF NEW AND LOST BUSINESS PRODUCTION MAY HAVE UNEXPECTED EFFECTS ON OUR RESULTS OF OPERATIONS.

Our commission income (including profit-sharing contingent commissions and override commissions) can vary quarterly or annually due to the timing of policy renewals and the net effect of new and lost business production. We do not control the factors that cause these variations. Specifically, customers’ demand for insurance products can influence the timing of renewals, new business and lost business (which includes policies that are not renewed), and cancellations. In addition, as discussed, we rely on insurance companies for the payment of certain commissions. Because these payments are processed internally by these insurance companies, we may not receive a payment that is otherwise expected from a particular insurance company in a particular quarter or year until after the end of that period, which can adversely affect our ability to forecast these revenues and therefore budget for significant future expenditures. Quarterly and annual fluctuations in revenues based on increases and decreases associated with the timing of policy renewals may adversely affect our financial condition, results of operations and cash flows.

Profit-sharing contingent commissions are special revenue-sharing commissions paid by insurance companies based upon the profitability, volume and/or growth of the business placed with such companies during the prior year. We primarily receive these commissions in the first and second quarters of each year. These commissions generally have accounted for 4.3% to 4.4% of our previous year’s total annual revenues over the last three years. Due to, among other things, potentially poor macroeconomic conditions, the inherent uncertainty of loss in our industry and changes in underwriting criteria due in part to the high loss ratios experienced by insurance companies, we cannot predict the payment of these profit-sharing contingent commissions. Further, we have no control over the ability of insurance companies to estimate loss reserves, which affects our ability to make profit-sharing calculations. Override commissions are paid by insurance companies based on the volume of business that we place with them and are generally paid over the course of the year. Because profit-sharing contingent commissions and override commissions materially affect our revenues, any decrease in their payment to us could adversely affect the results of our operations and our financial condition.

CONSOLIDATION IN THE INDUSTRIES THAT WE SERVE COULD ADVERSELY AFFECT OUR BUSINESS.

Companies that we serve may seek to achieve economies of scale and other synergies by combining with or acquiring other companies. If two or more of our current customers merge or consolidate and combine their operations, it may decrease the overall amount of work that we perform for these customers. If one of our current customers merges or consolidates with a company that relies on another provider for its services, we may lose work from that customer or lose the opportunity to gain additional work. The increased market power of larger companies could also increase pricing and competitive pressures on us. Any of these possible results of industry consolidation could adversely affect our business.

WE COULD INCUR SUBSTANTIAL LOSSES FROM OUR CASH AND INVESTMENT ACCOUNTS IF ONE OF THE FINANCIAL INSTITUTIONS THAT WE USE FAILS OR IS TAKEN OVER BY THE U.S. FEDERAL DEPOSIT INSURANCE CORPORATION (“FDIC”).

We maintain cash and investment balances, including restricted cash held in premium trust accounts, at various depository institutions in amounts that are significantly in excess of the limits insured by the FDIC. If one or more of the depository institutions with which we maintain significant cash balances were to fail, our ability to access these funds might be temporarily or permanently limited, and we could face material liquidity problems and potential material financial losses.

 

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OUR BUSINESS PRACTICES AND COMPENSATION ARRANGEMENTS ARE SUBJECT TO UNCERTAINTY DUE TO INVESTIGATIONS BY GOVERNMENTAL AUTHORITIES AND POTENTIAL RELATED PRIVATE LITIGATION.

The business practices and compensation arrangements of the insurance intermediary industry, including our practices and arrangements, are subject to uncertainty due to investigations by various governmental authorities. As disclosed in prior years, certain of our offices are parties to profit-sharing contingent commission agreements with certain insurance companies, including agreements providing for potential payment of revenue-sharing commissions by insurance companies based primarily on the overall profitability of the aggregate business written with those insurance companies and/or additional factors such as retention ratios and the overall volume of business that an office or offices place with those insurance companies. Additionally, to a lesser extent, some of our offices are parties to override commission agreements with certain insurance companies, which provide for commission rates in excess of standard commission rates to be applied to specific lines of business, such as group health business, and which are based primarily on the overall volume of business that such office or offices placed with those insurance companies. The Company has not chosen to discontinue receiving profit-sharing contingent commissions or override commissions. The legislatures of various states may adopt new laws addressing contingent commission arrangements, including laws prohibiting such arrangements, and addressing disclosure of such arrangements to insureds. Various state departments of insurance may also adopt new regulations addressing these matters. While we cannot predict the outcome of the governmental inquiries and investigations into the insurance industry’s commission payment practices or the responses by the market and government regulators, any unfavorable resolution of these matters could adversely affect our results of operations. Further, if such resolution included a material decrease in our profit-sharing contingent commissions and override commissions, it would likely adversely affect our results of operations.

WE COMPETE IN A HIGHLY-REGULATED INDUSTRY, WHICH MAY RESULT IN INCREASED EXPENSES OR RESTRICTIONS ON OUR OPERATIONS.

We conduct business in most states and are subject to comprehensive regulation and supervision by government agencies in the states in which we do business. The primary purpose of such regulation and supervision is to provide safeguards for policyholders rather than to protect the interests of our stockholders. As a result, such regulation and supervision could reduce our profitability or growth by increasing compliance costs, restricting the products or services we may sell, the markets we may enter, the methods by which we may sell our products and services, or the prices we may charge for our services and the form of compensation we may accept from our clients, carriers and third parties. The laws of the various state jurisdictions establish supervisory agencies with broad administrative powers with respect to, among other things, licensing of entities to transact business, licensing of agents, admittance of assets, regulating premium rates, approving policy forms, regulating unfair trade and claims practices, establishing reserve requirements and solvency standards, requiring participation in guarantee funds and shared market mechanisms, and restricting payment of dividends. Also, in response to perceived excessive cost or inadequacy of available insurance, states have from time to time created state insurance funds and assigned risk pools, which compete directly, on a subsidized basis, with private insurance providers. We act as agents and brokers for such state insurance funds and assigned risk pools in California and certain other states. These state funds and pools could choose to reduce the sales or brokerage commissions we receive. Any such reductions, in a state in which we have substantial operations, such as Florida, California or New York, could substantially affect the profitability of our operations in such state, or cause us to change our marketing focus. Further, state insurance regulators and the National Association of Insurance Commissioners continually re-examine existing laws and regulations, and such re-examination may result in the enactment of insurance-related laws and regulations, or the issuance of interpretations thereof, that adversely affect our business. Although we believe that we are in compliance in all material respects with applicable local, state and federal laws, rules and regulations, there can be no assurance that more restrictive laws, rules or regulations will not be adopted in the future that could make compliance more difficult or expensive. Specifically, recently adopted federal financial services modernization legislation could lead to additional federal regulation of the insurance industry in the coming years, which could result in increased expenses or restrictions on our operations.

PROPOSED TORT REFORM LEGISLATION, IF ENACTED, COULD DECREASE DEMAND FOR LIABILITY INSURANCE, THEREBY REDUCING OUR COMMISSION REVENUES.

Legislation concerning tort reform has been considered, from time to time, in the United States Congress and in several state legislatures. Among the provisions considered in such legislation have been limitations on damage awards, including punitive damages, and various restrictions applicable to class action lawsuits. Enactment of these or similar provisions by Congress, or by states in which we sell insurance, could reduce the demand for liability insurance policies or lead to a decrease in policy limits of such policies sold, thereby reducing our commission revenues.

 

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CHANGES IN LAWS AND REGULATIONS MAY INCREASE OUR COSTS.

The Sarbanes-Oxley Act of 2002, as amended (“Sarbanes-Oxley”) and the Dodd-Frank Act enacted in 2010 have required changes in some of our corporate governance, securities disclosure and compliance practices. In response to the requirements of these Acts, the SEC and the New York Stock Exchange have promulgated and will likely continue to promulgate new rules on a variety of subjects. These developments have increased (and may increase in the future) our compliance costs, may make it more difficult and more expensive for us to obtain director and officer liability insurance, and may make it more difficult for us to attract and retain qualified members of our Board of Directors or qualified executive officers.

From time to time new regulations are enacted, or existing requirements are changed, and it is difficult to anticipate how such regulations and changes will be implemented and enforced. We continue to evaluate the necessary steps for compliance with regulations as they are enacted. Legislative developments that could adversely affect us include: changes in our business compensation model as a result of regulatory developments (for example, the 2010 Health Care Reform Legislation); and federal and state governments establishing programs to provide health insurance or, in certain cases, property insurance in catastrophe-prone areas or other alternative market types of coverage, that compete with, or completely replace, insurance products offered by insurance carriers. Also, as climate change issues become more prevalent, the U.S. and foreign governments are beginning to respond to these issues. This increasing governmental focus on climate change may result in new environmental regulations that may negatively affect us and our customers. This could cause us to incur additional direct costs in complying with any new environmental regulations, as well as increased indirect costs resulting from our customers incurring additional compliance costs that get passed on to us. These costs may adversely impact our operations and financial condition.

HEALTHCARE REFORM AND INCREASED COSTS OF CURRENT EMPLOYEES’ MEDICAL AND OTHER BENEFITS COULD HAVE A MATERIALLY ADVERSE EFFECT ON OUR BUSINESS.

Our profitability is affected by the cost of current employees’ medical and other benefits. In recent years, we have experienced significant increases in these costs as a result of economic factors beyond our control. Although we have actively sought to contain increases in these costs, there can be no assurance we will succeed in limiting future cost increases, and continued upward pressure in these costs could reduce our profitability.

In addition, we believe that increased health care costs resulting from the 2010 health care reform bill could have a material adverse impact on our business, cash flows, financial condition or results of operations.

WE ARE SUBJECT TO LITIGATION WHICH, IF DETERMINED UNFAVORABLY TO US, COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS OR FINANCIAL CONDITION.

We are and may be subject to a number of claims, regulatory actions and other proceedings that arise in the ordinary course of business. We cannot, and likely will not be able to, predict the outcome of these claims, actions and proceedings with certainty. An adverse outcome in connection with one or more of these matters could have a material adverse effect on our business, results of operations or financial condition in any given quarterly or annual period. In addition, regardless of monetary costs, these matters could have a material adverse effect on our reputation and cause harm to our carrier, customer or employee relationships, or divert personnel and management resources.

While we currently have insurance coverage for some of these potential liabilities, other potential liabilities may not be covered by insurance, insurers may dispute coverage or the amount of our insurance may not be enough to cover the damages awarded. In addition, some types of damages, like punitive damages, may not be covered by insurance. Insurance coverage for all or some forms of liability may become unavailable or prohibitively expensive in the future.

OUR BUSINESS, AND THEREFORE OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION, MAY BE ADVERSELY AFFECTED BY FURTHER CHANGES IN THE U.S.-BASED CREDIT MARKETS.

Although we are not currently experiencing any limitation of access to our revolving credit facility (which matures in 2019) and are not aware of any issues impacting the ability or willingness of our lenders under such facility to honor their commitments to extend us credit, the failure of a lender could adversely affect our ability to borrow on that facility, which over time could negatively impact our ability to consummate significant acquisitions or make other significant capital expenditures. Tightening conditions in the credit markets in future years could adversely affect the availability and terms of future borrowings or renewals or refinancing.

We also have a significant amount of trade accounts receivable from some insurance companies with which we place insurance. If those insurance companies were to experience liquidity problems or other financial difficulties, we could encounter delays or defaults in payments owed to us, which could have a significant adverse impact on our financial condition and results of operations.

 

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IF WE FAIL TO COMPLY WITH THE COVENANTS CONTAINED IN CERTAIN OF OUR AGREEMENTS, OUR LIQUIDITY, RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED.

The credit agreements that govern our debt contain various covenants and other limitations with which we must comply. At December 31, 2014, we were in compliance with the financial covenants and other limitations contained in each of these agreements. However, failure to comply with material provisions of our covenants in these agreements or other credit or similar agreements to which we may become a party could result in a default, rendering them unavailable to us and causing a material adverse effect on our liquidity, results of operations and financial condition. In the event of certain defaults, the lenders thereunder would not be required to lend any additional amounts to or purchase any additional notes from us and could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be due and payable. If the indebtedness under these agreements or our other indebtedness, including the notes, were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full.

CERTAIN OF OUR AGREEMENTS CONTAIN VARIOUS COVENANTS THAT LIMIT THE DISCRETION OF OUR MANAGEMENT IN OPERATING OUR BUSINESS AND COULD PREVENT US FROM ENGAGING IN CERTAIN POTENTIALLY BENEFICIAL ACTIVITIES.

The restrictive covenants in our debt agreements may impact how we operate our business and prevent us from engaging in certain potentially beneficial activities. In particular, among other covenants, the Credit Facility requires us to maintain a minimum ratio of consolidated EBITDA (earnings before interest, taxes, depreciation and amortization), adjusted for certain transaction-related items (“Consolidated EBITDA”), to consolidated interest expense and a maximum ratio of consolidated net indebtedness to Consolidated EBITDA. Our compliance with these covenants limits our management’s discretion in operating our business and could prevent us from engaging in certain potentially beneficial activities.

OUR CREDIT RATINGS ARE SUBJECT TO CHANGE.

Our credit ratings are an assessment by rating agencies of our ability to pay our debts when due. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of our securities. Agency ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing agency. Each agency’s rating should be evaluated independently of any other agency’s rating.

OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION OR LIQUIDITY MAY BE MATERIALLY ADVERSELY AFFECTED BY ERRORS AND OMISSIONS AND THE OUTCOME OF CERTAIN ACTUAL AND POTENTIAL CLAIMS, LAWSUITS AND PROCEEDINGS.

We are subject to various actual and potential claims, lawsuits and other proceedings relating principally to alleged errors and omissions in connection with the placement or servicing of insurance and/or the provision of services in the ordinary course of business. Because we often assist customers with matters involving substantial amounts of money, including the placement of insurance and the handling of related claims that customers may assert, errors and omissions claims against us may arise alleging potential liability for all or part of the amounts in question. Also, the failure of an insurer with whom we place business could result in errors and omissions claims against us by our clients, which could adversely affect our results of operations and financial condition. Claimants may seek large damage awards, and these claims may involve potentially significant legal costs, including punitive damages. Such claims, lawsuits and other proceedings could, for example, include claims for damages based on allegations that our employees or sub-agents improperly failed to procure coverage, report claims on behalf of customers, provide insurance companies with complete and accurate information relating to the risks being insured or appropriately apply funds that we hold for our customers on a fiduciary basis. In addition, given the long-tail nature of professional liability claims, errors and omissions matters can relate to matters dating back many years. We have established provisions against these potential matters that we believe to be adequate in the light of current information and legal advice, and we adjust such provisions from time to time according to developments.

While most of the errors and omissions claims made against us (subject to our self-insured deductibles) have been covered by our professional indemnity insurance, our business, results of operations, financial condition and liquidity may be adversely affected if, in the future, our insurance coverage proves to be inadequate or unavailable, or if there is an increase in liabilities for which we self-insure. Our ability to obtain professional indemnity insurance in the amounts and with the deductibles we desire in the future may be adversely impacted by general developments in the market for such insurance or our own claims experience. In addition, claims, lawsuits and other proceedings may harm our reputation or divert management resources away from operating our business.

 

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WE HAVE OPERATIONS INTERNATIONALLY, WHICH MAY RESULT IN A NUMBER OF ADDITIONAL RISKS AND REQUIRE MORE MANAGEMENT TIME AND EXPENSE THAN OUR DOMESTIC OPERATIONS TO ACHIEVE OR MAINTAIN PROFITABILITY.

We have operations in the United Kingdom, Hamilton, Bermuda and George Town, Cayman Islands. In the future, we intend to continue to consider additional international expansion opportunities. Our international operations may be subject to a number of risks, including:

 

    Difficulties in staffing and managing foreign operations;

 

    Less flexible employee relationships, which may make it difficult and expensive to terminate employees and which limits our ability to prohibit employees from competing with us after their employment ceases;

 

    Political and economic instability (including acts of terrorism and outbreaks of war);

 

    Coordinating our communications and logistics across geographic distances and multiple time zones;

 

    Unexpected changes in regulatory requirements and laws;

 

    Adverse trade policies, and adverse changes to any of the policies of either the U.S. or any of the foreign jurisdictions in which we operate;

 

    Adverse changes in tax rates;

 

    Legal or political constraints on our ability to maintain or increase prices;

 

    Governmental restrictions on the transfer of funds to us from our operations outside the United States; and

 

    Burdens of complying with a wide variety of labor practices and foreign laws, including those relating to export and import duties, environmental policies and privacy issues.

OUR INABILITY TO RETAIN OR HIRE QUALIFIED EMPLOYEES, AS WELL AS THE LOSS OF ANY OF OUR EXECUTIVE OFFICERS, COULD NEGATIVELY IMPACT OUR ABILITY TO RETAIN EXISTING BUSINESS AND GENERATE NEW BUSINESS.

Our success depends on our ability to attract and retain skilled and experienced personnel. There is significant competition from within the insurance industry and from businesses outside the industry for exceptional employees, especially in key positions. If we are not able to successfully attract, retain and motivate our employees, our business, financial results and reputation could be materially and adversely affected.

Losing employees who manage or support substantial customer relationships or possess substantial experience or expertise could adversely affect our ability to secure and complete customer engagements, which would adversely affect our results of operations. Also, if any of our key professionals were to join an existing competitor or form a competing company, some of our customers could choose to use the services of that competitor instead of our services. While our key personnel are prohibited by contract from soliciting our employees and customers for a period of years following separation from employment with us, they are not prohibited from competing with us.

In addition, we could be adversely affected if we fail to adequately plan for the succession of our Senior Leaders and key executives. While we have succession plans in place and we have employment arrangements with certain key executives, these do not guarantee that the services of these executives will continue to be available to us. Although we operate with a decentralized management system, the loss of our senior managers or other key personnel, or our inability to continue to identify, recruit and retain such personnel, could materially and adversely affect our business, operating results and financial condition.

WE ARE EXPOSED TO INTANGIBLE ASSET RISK; SPECIFICALLY, OUR GOODWILL MAY BECOME IMPAIRED IN THE FUTURE.

As of the date of the filing of our Annual Report on Form 10-K for the 2014 fiscal year, we have $2,460,610,929 of goodwill recorded on our Consolidated Balance Sheet. We perform a goodwill impairment test on an annual basis and whenever events or changes in circumstances indicate that the carrying value of our goodwill may not be recoverable from estimated future cash flows. We completed our most recent evaluation of impairment for goodwill as of November 30, 2014 and determined that the fair value of goodwill exceeded the carrying value of such assets. A significant and sustained decline in our stock price and market capitalization, a significant decline in our expected future cash flows, a significant adverse change in the business climate or slower growth rates could result in the need to perform an additional impairment analysis prior to the next annual goodwill impairment test. If we were to conclude that a future write-down of our goodwill is necessary, we would then record the appropriate charge, which could result in material charges that are adverse to our operating results and financial position. See Note 1—“Summary of Significant Accounting Policies” and Note 3—“Goodwill” to the Consolidated Financial Statements and “Management’s Report on Internal Control Over Financial Reporting.”

 

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Additionally, the carrying value of amortizable intangible assets attributable to each business or asset group comprising Brown & Brown is periodically reviewed by management to determine if there are events or changes in circumstances that would indicate that its carrying amount may not be recoverable. Accordingly, if there are any such circumstances that occur during the year, Brown & Brown assesses the carrying value of its amortizable intangible assets by considering the estimated future undiscounted cash flows generated by the corresponding business or asset group. Any impairment identified through this assessment may require that the carrying value of related amortizable intangible assets be adjusted; however, no impairments have been recorded for the years ended December 31, 2014, 2013 and 2012.

CURRENT U.S. ECONOMIC CONDITIONS AND THE SHIFT AWAY FROM TRADITIONAL INSURANCE MARKETS MAY CONTINUE TO ADVERSELY AFFECT OUR BUSINESS.

From late 2007 through 2011, global consumer confidence had eroded amidst concerns over declining asset values, volatility in energy costs, geopolitical issues, the availability and cost of credit, high unemployment, and the stability and solvency of financial institutions, financial markets, businesses, and sovereign nations. Those concerns slowed economic growth and resulted in a recession in the United States. Economic conditions had a negative impact on our results of operations during the years 2008 through 2011 due to reduced customer demand. In 2012, the economic conditions in the middle-market economy appeared to stabilize, and a gradual improvement continued through 2013 and 2014. However, if these economic conditions worsen, a number of negative effects on our business could result, including declines in values of insurable exposure units, declines in insurance premium rates, and the financial insolvency, or reduced ability to pay, of certain of our customers. Also, if general economic conditions are poor, some of our clients may cease operations completely or be acquired by other companies, which could have an adverse effect on our results of operations and financial condition. If these clients are affected by poor economic conditions but yet remain in existence, they may face liquidity problems or other financial difficulties which could result in delays or defaults in payments owed to us, which could have a significant adverse impact on our consolidated financial condition and results of operations. Any of these effects could decrease our net revenues and profitability.

In addition, there has been an increase in alternative insurance markets, such as self-insurance, captives, risk retention groups and non-insurance capital markets. While we compete in these segments on a fee-for-service basis, we cannot be certain that such alternative markets will provide the same level of profitability as traditional insurance markets.

THERE ARE INHERENT UNCERTAINTIES INVOLVED IN ESTIMATES, JUDGMENTS AND ASSUMPTIONS USED IN THE PREPARATION OF FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GAAP. ANY CHANGES IN ESTIMATES, JUDGMENTS AND ASSUMPTIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS.

The consolidated and Condensed Consolidated Financial Statements included in the periodic reports we file with the SEC are prepared in accordance with U.S. GAAP. The preparation of financial statements in accordance with U.S. GAAP involves making estimates, judgments and assumptions that affect reported amounts of assets (including intangible assets), liabilities and related reserves, revenues, expenses and income. Estimates, judgments and assumptions are inherently subject to change in the future, and any such changes could result in corresponding changes to the amounts of assets, liabilities, revenues, expenses and income, and could have a material adverse effect on our financial position, results of operations and cash flows.

WE HAVE NOT DETERMINED THE AMOUNT OF RESOURCES AND THE TIME THAT MAY BE NECESSARY TO ADEQUATELY RESPOND TO RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY, WHICH MAY ADVERSELY AFFECT OUR BUSINESS AND OPERATING RESULTS.

Frequent technological changes, new products and services and evolving industry standards are influencing the insurance business. The Internet, for example, is increasingly used to securely transmit benefits and related information to customers and to facilitate business-to-business information exchange and transactions. We believe that the development and implementation of new technologies will require additional investment of our capital resources in the future. We have not determined, however, the amount of resources and the time that this development and implementation may require, which may result in short-term, unexpected interruptions to our business, or may result in a competitive disadvantage in price and/or efficiency, as we develop or implement new technologies.

 

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OUR ABILITY TO CONDUCT BUSINESS WOULD BE NEGATIVELY IMPACTED IN THE EVENT OF AN INTERRUPTION IN INFORMATION TECHNOLOGY AND/OR DATA SECURITY AND/OR OUTSOURCING RELATIONSHIPS.

Our business relies on information systems to provide effective and efficient service to our customers, process claims, and timely and accurately report results to carriers. An interruption of our access to, or an inability to access, our information technology, telecommunications or other systems could significantly impair our ability to perform such functions on a timely basis. If sustained or repeated, such a business interruption, system failure or service denial could result in a deterioration of our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or perform other necessary business functions.

Computer viruses, hackers and other external hazards could expose our data systems to security breaches. These increased risks, and expanding regulatory requirements regarding data security, could expose us to data loss, monetary and reputational damages and significant increases in compliance costs. While we have taken, and continue to take, actions to protect the security and privacy of our information, entirely eliminating all risk of improper access to private information is not possible.

We are taking steps to upgrade and expand our information systems capabilities. Maintaining, protecting and enhancing these capabilities to keep pace with evolving industry and regulatory standards, and changing customer preferences, requires an ongoing commitment of significant resources. If the information we rely upon to run our businesses was found to be inaccurate or unreliable or if we fail to maintain effectively our information systems and data integrity, we could experience operational disruptions, regulatory or other legal problems, increases in operating expenses, loss of existing customers, difficulty in attracting new customers, or suffer other adverse consequences.

Our technological development projects may not deliver the benefits we expect once they are completed, or may be replaced or become obsolete more quickly than expected, which could result in the accelerated recognition of expenses. If we do not effectively and efficiently manage and upgrade our technology portfolio, or if the costs of doing so are higher than we expect, our ability to provide competitive services to new and existing customers in a cost-effective manner and our ability to implement our strategic initiatives could be adversely impacted.

IMPROPER DISCLOSURE OF CONFIDENTIAL INFORMATION COULD NEGATIVELY IMPACT OUR BUSINESS.

We are responsible for maintaining the security and privacy of our customers’ confidential and proprietary information and the personal data of their employees. We have put in place policies, procedures and technological safeguards designed to protect the security and privacy of this information, however, we cannot guarantee that this information will not be improperly disclosed or accessed. Disclosure of this information could harm our reputation and subject us to liability under our contracts and laws that protect personal data, resulting in increased costs or loss of revenues.

Further, privacy laws and regulations are continuously changing and often are inconsistent among the states in which we operate. Our failure to adhere to or successfully implement procedures to respond to these requirements could result in legal liability or impairment to our reputation.

CERTAIN OF OUR EXISTING STOCKHOLDERS HAVE SIGNIFICANT CONTROL OF THE COMPANY.

At December 31, 2014, our executive officers, directors and certain of their family members collectively beneficially owned approximately 17.8% of our outstanding common stock, of which J. Hyatt Brown, our Chairman, and his family members, which include his sons, J. Powell Brown, our President and Chief Executive Officer and P. Barrett Brown, one of our Senior Vice Presidents, beneficially owned approximately 16.0%. As a result, our executive officers, directors and certain of their family members have significant influence over (1) the election of our Board of Directors, (2) the approval or disapproval of any other matters requiring stockholder approval, and (3) our affairs and policies.

 

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DUE TO INHERENT LIMITATIONS, THERE CAN BE NO ASSURANCE THAT OUR SYSTEM OF DISCLOSURE AND INTERNAL CONTROLS AND PROCEDURES WILL BE SUCCESSFUL IN PREVENTING ALL ERRORS OR FRAUD, OR IN INFORMING MANAGEMENT OF ALL MATERIAL INFORMATION IN A TIMELY MANNER.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and internal controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system reflects that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur simply because of error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of a control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

IF WE RECEIVE OTHER THAN AN UNQUALIFIED OPINION ON THE ADEQUACY OF OUR INTERNAL CONTROL OVER FINANCIAL REPORTING AS OF DECEMBER 31, 2014 AND FUTURE YEAR-ENDS AS REQUIRED BY SECTION 404 OF SARBANES-OXLEY, INVESTORS COULD LOSE CONFIDENCE IN THE RELIABILITY OF OUR FINANCIAL STATEMENTS, WHICH COULD RESULT IN A DECREASE IN THE VALUE OF OUR SHARES.

As directed by Section 404 of Sarbanes-Oxley, the SEC adopted rules requiring public companies to include an annual report on internal control over financial reporting on Form 10-K that contains an assessment by management of the effectiveness of our internal control over financial reporting. We continuously conduct a rigorous review of our internal control over financial reporting in order to assure compliance with the Section 404 requirements. However, if our independent auditors interpret the Section 404 requirements and the related rules and regulations differently than we do, or if our independent auditors are not satisfied with our internal control over financial reporting or with the level at which it is documented, operated or reviewed, they may issue a report other than an unqualified opinion. A report other than an unqualified opinion could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

WE MAY EXPERIENCE VOLATILITY IN OUR STOCK PRICE THAT COULD AFFECT YOUR INVESTMENT.

The market price of our common stock may be subject to significant fluctuations in response to various factors, including: quarterly fluctuations in our operating results; changes in securities analysts’ estimates of our future earnings; changes in securities analysts’ predictions regarding the short-term and long-term future of our industry; and our loss of significant customers or significant business developments relating to us or our competitors. Our common stock’s market price also may be affected by our ability to meet stock analysts’ earnings and other expectations. Any failure to meet such expectations, even if minor, could cause the market price of our common stock to decline. In addition, stock markets have generally experienced a high level of price and volume volatility, and the market prices of equity securities of many listed companies have experienced wide price fluctuations not necessarily related to the operating performance of such companies. These broad market fluctuations may adversely affect our common stock’s market price. In the past, securities class action lawsuits frequently have been instituted against companies following periods of volatility in the market price of such companies’ securities. If any such litigation is initiated against us, it could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

ITEM 1B. Unresolved Staff Comments.

None.

 

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ITEM 2. Properties.

We lease our executive offices, which are located at 220 South Ridgewood Avenue, Daytona Beach, Florida 32114. We lease offices at each of our 235 locations, with the exception of Jamestown, New York, where we own the building in which our office is located. We also own an airplane hangar in Daytona Beach, Florida, which sits upon land leased from Volusia Country, Florida. There are no outstanding mortgages on our owned properties. Our operating leases expire on various dates. These leases generally contain renewal options and rent escalation clauses based on increases in the lessors’ operating expenses and other charges. We expect that most leases will be renewed or replaced upon expiration. We believe that our facilities are suitable and adequate for present purposes, and that the productive capacity in such facilities is substantially being utilized. From time to time, we may have unused space and seek to sublet such space to third parties, depending on the demand for office space in the locations involved. In the future, we may need to purchase, build or lease additional facilities to meet the requirements projected in our long-term business plan. See Note 13 to the Consolidated Financial Statements for additional information on our lease commitments.

 

ITEM 3. Legal Proceedings.

We are subject to numerous litigation claims that arise in the ordinary course of business. We do not believe any of these are, or are likely to become, material to our business.

 

ITEM 4. Mine Safety Disclosures.

Not applicable.

PART II

 

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “BRO.” The table below sets forth, for the quarterly periods indicated, the intra-day high and low sales prices for our common stock as reported on the NYSE Composite Tape, and the cash dividends declared on our common stock.

 

     High      Low      Cash
Dividends
Per
Common
Share
 

2013

        

First Quarter

   $ 32.08       $ 25.31       $ 0.09   

Second Quarter

   $ 33.24       $ 30.00       $ 0.09   

Third Quarter

   $ 35.13       $ 30.55       $ 0.09   

Fourth Quarter

   $ 33.69       $ 27.76       $ 0.10   

2014

        

First Quarter

   $ 32.88       $ 27.77       $ 0.10   

Second Quarter

   $ 31.29       $ 28.27       $ 0.10   

Third Quarter

   $ 33.46       $ 30.02       $ 0.10   

Fourth Quarter

   $ 33.40       $ 30.96       $ 0.11   

On February 19, 2015, there were 143,520,097 shares of our common stock outstanding, held by approximately 1,178 shareholders of record.

We intend to continue to pay quarterly dividends, subject to continued capital availability and determination by our Board of Directors that cash dividends continue to be in the best interests of our stockholders. Our dividend policy may be affected by, among other items, our views on potential future capital requirements, including those relating to the creation and expansion of sales distribution channels and investments and acquisitions, legal risks, stock repurchase programs and challenges to our business model.

 

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Equity Compensation Plan Information

The following table sets forth information as of December 31, 2014, with respect to compensation plans under which the Company’s equity securities are authorized for issuance:

 

Plan Category

  Number of securities
to be issued upon
exercise of
outstanding options,
warrants
and rights(a)(1)
    Weighted-average
exercise price of
outstanding
options,
warrants and
rights(b)(2)
    Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected
in column (a))(c)(3)
 

Equity compensation plans approved by shareholders:

     

Brown & Brown, Inc. 2000 Incentive Stock Option Plan

    470,356      $ 18.57        —    

Brown & Brown, Inc. 2010 Stock Incentive Plan

    N/A        N/A        2,309,929   

Brown & Brown, Inc. 1990 Employee Stock Purchase Plan

    N/A        N/A        734,317   

Brown & Brown, Inc. Performance Stock Plan

    N/A        N/A        —    
 

 

 

     

 

 

 

Total

  470,356    $ 18.57      3,044,246   
 

 

 

     

 

 

 

Equity compensation plans not approved by shareholders

  —        —        —    
 

 

 

     

 

 

 

 

(1) In addition to the number of securities listed in this column, 2,964,103 shares are issuable upon the vesting of restricted stock granted under the Brown & Brown, Inc. Performance Stock Plan and the Brown & Brown, Inc. 2010 Stock Incentive Plan, which represents the maximum number of shares that can vest based on the achievement of certain performance criteria.
(2) The weighted-average exercise price excludes outstanding restricted stock as there is no exercise price associated with these equity awards.
(3) All of the shares available for future issuance under the Brown & Brown, Inc. 2000 Incentive Stock Option Plan, the Brown & Brown, Inc. Performance Stock Plan, and the Brown & Brown, Inc. 2010 Stock Incentive Plan may be issued in connection with options, warrants, rights, restricted stock, or other stock-based awards.

Sales of Unregistered Securities

We did not sell any unregistered securities during 2014.

Issuer Purchases of Equity Securities

On July 18, 2014, our Board of Directors approved a common stock repurchase plan to authorize the repurchase of up to $200.0 million worth of shares of the Company’s common stock during the period running from the July 18, 2014 approval date to December 31, 2015. As of December 31, 2014, we have repurchased $50.0 million worth of shares of our common stock under the repurchase plan.

 

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The following table presents information with respect to our purchases of our common stock during the three months ended December 31, 2014.

 

Period

   Total Number of
Shares
Purchased(1)
     Average
Price Paid
per Share
     Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
     Approximate
Dollar Value of
Shares that May
Yet Be
Purchased Under
the Plans or
Programs
 

October 1, 2014 to October 31, 2014

     246,740       $ 30.49         246,000       $ 150,000,000   

November 1, 2014 to November 30, 2014

     —           —           —        $ —    

December 1, 2014 to December 31, 2014

     4,701       $ 32.50         —        $ —    
  

 

 

       

 

 

    

 

 

 

Total

  251,441    $ 30.53      246,000    $ 150,000,000   
  

 

 

       

 

 

    

 

 

 

 

(1) With the exception of the 246,000 shares purchased in October 2014 as part of the final settlement of an accelerated share repurchase program initiated in September 2014, all of the shares reported above as purchased are attributable to shares withheld for employees’ payroll taxes and withholding taxes pertaining to the vesting of restricted shares awarded under our Performance Stock Plan and Incentive Stock Option Plan.

 

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PERFORMANCE GRAPH

The following graph is a comparison of five-year cumulative total stockholder returns for our common stock as compared with the cumulative total stockholder return for the NYSE Composite Index, and a group of peer insurance broker and agency companies (Aon plc, Arthur J. Gallagher & Co, Marsh & McLennan Companies, and Willis Group Holdings plc). The returns of each company have been weighted according to such companies’ respective stock market capitalizations as of December 31, 2009 for the purposes of arriving at a peer group average. The total return calculations are based upon an assumed $100 investment on December 31, 2009, with all dividends reinvested.

 

     12/09      12/10      12/11      12/12      12/13      12/14  

Brown & Brown, Inc.

     100.00         135.33         129.79         148.04         184.72         196.27   

NYSE Composite

     100.00         113.76         109.70         127.54         161.21         172.27   

Peer Group

     100.00         127.85         143.75         159.43         232.33         265.77   

 

LOGO

 

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ITEM 6. Selected Financial Data.

The following selected Consolidated Financial Data for each of the five fiscal years in the period ended December 31, 2014 have been derived from our Consolidated Financial Statements. Such data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of Part II of this Annual Report and with our Consolidated Financial Statements and related Notes thereto in Item 8 of Part II of this Annual Report.

 

    Year Ended December 31  

(in thousands, except per share data, number of employees and

percentages

  2014     2013     2012     2011     2010  

REVENUES

         

Commissions and fees

  $ 1,567,460      $ 1,355,503      $ 1,189,081      $ 1,005,962      $ 966,917   

Investment income

    747        638        797        1,267        1,326   

Other income, net

    7,589        7,138        10,154        6,313        5,249   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  1,575,796      1,363,279      1,200,032      1,013,542      973,492   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

Employee compensation and benefits

  791,749      683,000      608,506      508,675      487,820   

Non-cash stock-based compensation

  19,363      22,603      15,865      11,194      6,845   

Other operating expenses

  235,328      195,677      174,389      144,079      135,851   

Loss on disposal

  47,425      —       —       —       —    

Amortization

  82,941      67,932      63,573      54,755      51,442   

Depreciation

  20,895      17,485      15,373      12,392      12,639   

Interest

  28,408      16,440      16,097      14,132      14,471   

Change in estimated acquisition earn-out payables

  9,938      2,533      1,418      (2,206   (1,674
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

  1,236,047      1,005,670      895,221      743,021      707,394   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

  339,749      357,609      304,811      270,521      266,098   

Income taxes

  132,853      140,497      120,766      106,526      104,346   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

$ 206,896    $ 217,112    $ 184,045    $ 163,995    $ 161,752   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER SHARE INFORMATION

Net income per share — diluted

$ 1.41    $ 1.48    $ 1.26    $ 1.13    $ 1.12   

Weighted average number of shares outstanding — diluted

  142,891      142,624      142,010      140,264      139,318   

Dividends declared per share

$ 0.41    $ 0.37    $ 0.35    $ 0.33    $ 0.31   

YEAR-END FINANCIAL POSITION

Total assets

$ 4,956,458    $ 3,649,508    $ 3,128,058    $ 2,607,011    $ 2,400,814   

Long-term debt(1)

$ 1,152,846    $ 380,000    $ 450,000    $ 250,033    $ 250,067   

Total shareholders’ equity

$ 2,113,745    $ 2,007,141    $ 1,807,333    $ 1,643,963    $ 1,506,344   

Total shares outstanding at year-end

  143,486      145,419      143,878      143,352      142,795   

OTHER INFORMATION

Number of full-time equivalent employees at year-end

  7,591      6,992      6,438      5,557      5,286   

Total revenues per average number of employees(2)

$ 216,114    $ 203,020    $ 191,729 (3)  $ 186,949    $ 185,568   

Stock price at year-end

$ 32.91    $ 31.39    $ 25.46    $ 22.63    $ 23.94   

Stock price earnings multiple at year-end(4)

  23.3      21.2      20.2      20.0      21.4   

Return on beginning shareholders’ equity(5)

  10   12   11   11   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.
(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.

 

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

The following discussion should be read in conjunction with our Consolidated Financial Statements and the related Notes to those Consolidated Financial Statements included elsewhere in this Annual Report.

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 materially 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 reinsurance rates paid by such insurance companies, none of which we control.

The volume of business from new and existing customers, fluctuations in insurable exposure units and changes in general economic and competitive conditions all affect our revenues. For example, level rates of inflation or a general decline in economic activity could limit increases in the values of insurable exposure units. Conversely, the increasing costs of litigation settlements and awards have caused some customers to seek higher levels of insurance coverage. Historically, our revenues have typically grown as a result of our focus on net new business growth and acquisitions.

We foster a strong, decentralized sales culture with a goal of consistent, sustained growth over the long term.

We increased revenues every year from 1993 to 2014, with the exception of 2009, when our revenues dropped 1.0%. Our revenues grew from $95.6 million in 1993 to $1.6 billion in 2014, reflecting a compound annual growth rate of 14.2%. In the same 21 year period, we increased net income from $8.1 million to $206.9 million in 2014, a compound annual growth rate of 16.7%.

The years 2007 through 2011 posed significant challenges for us and for our industry in the form of a prevailing decline in insurance premium rates, commonly referred to as a “soft market” and increased significant governmental involvement in the Florida insurance marketplace which resulted in a substantial loss of revenues for us. Additionally, beginning in the second half of 2008 and throughout 2011, there was a general decline in insurable exposure units as the consequence of the general weakening of the economy in the United States. As a result, from the first quarter of 2007 through the fourth quarter of 2011 we experienced negative internal revenue growth each quarter. The continued declining exposure units during 2010 and 2011 had a greater negative impact on our commissions and fees revenues than declining insurance premium rates.

Beginning in the first quarter of 2012, many insurance premium rates began to slightly increase. Additionally, in the second quarter of 2012, the general declines in insurable exposure units started to flatten and these exposures units subsequently began to gradually increase during the year. As a result, we recorded positive internal revenue growth for each quarter of 2012 for each of our four segments with two exceptions; the first quarter for the Retail Segment and the third quarter for the National Programs Segment, in which declines of only 0.7% and 3.3%, respectively, were experienced.

This growth trend has continued into 2014 with our consolidated internal revenue growth rate of 2.0%. Additionally, each of our four segments recorded positive internal revenue growth for each quarter in 2014 except for the Services Segment in the first quarter. The decline in the core organic commissions and fees revenues in the first quarter of 2014 for the Services Segment was the result of the significant revenue recorded at our Colonial Claims operation in the first quarter of 2013 attributable to Superstorm Sandy, for which no comparable revenues occurred in the first quarter of 2014. In the first quarter of 2013, Colonial Claims earned claims fees of $16.2 million as a direct result of the continued significant claims activity from Superstorm Sandy.

 

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We also earn “profit-sharing contingent commissions,” which are profit-sharing commissions based primarily on underwriting results, but which may also reflect considerations for volume, growth and/or retention. These commissions are primarily received in the first and second quarters of each year, based on the aforementioned considerations for the prior year(s). Over the last three years, profit-sharing contingent commissions have averaged approximately 4.3% of the previous year’s total commissions and fees revenue. Profit-sharing contingent commissions are included in our total commissions and fees in the Consolidated Statements of Income in the year received. 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. In contrast, the term “core organic commissions and fees” is our core commissions and fees less (i) the core commissions and fees earned for the first twelve months by newly-acquired operations and (ii) divested business (core commissions and fees generated from offices, books of business or niches sold or terminated during the comparable period). “Core organic commissions and fees” are reported in this manner in order to express the current year’s core commissions and fees on a comparable basis with the prior year’s core commissions and fees. The resulting net change reflects the aggregate changes attributable to (i) net new and lost accounts, (ii) net changes in our clients’ exposure units, and (iii) net changes in insurance premium rates.

Certain insurance companies offer guaranteed fixed-base agreements, referred to as “Guaranteed Supplemental Commissions” (“GSCs”) in lieu of profit –sharing contingent commissions. Since GSCs are not subject to the uncertainty of loss ratios, they are accrued throughout the year based on actual premiums written. As of December 31, 2014, we had $7.6 million of GSC revenue accrued and had earned $9.9 million of GSCs during 2014, most of which will be collected in the first quarter of 2015. For the twelve-month periods ended December 31, 2014, 2013 and 2012, we earned GSCs of $9.9 million, $8.3 million and $9.1 million, respectively.

Fee revenues relate to fees negotiated in lieu of commissions, which are recognized as services are rendered. Fee revenues have historically been generated primarily by: (1) our Services Segment, which provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare set-aside services, Social Security disability and Medicare benefits advocacy services, and catastrophe claims adjusting services, and (2) our National Programs and Wholesale Brokerage Segments, which earn fees primarily for the issuance of insurance policies on behalf of insurance companies. These services are provided over a period of time, typically one year. However, in conjunction with our July 1, 2013 acquisition of Beecher Carlson, which has a primary focus on large retail customers that generally pay us fees directly, the fee revenues in our Retail Segment for 2014 have increased by $44.8 million to $117.8 million. Also, with the acquisition of Wright, which primarily receives income in the form of fees, fee revenue in our National Programs Segment increased $81.9 million to $152.8 million. Fee revenues, on a consolidated basis, as a percentage of our total commissions and fees, represented 30.6% in 2014, 26.6% in 2013 and 21.7% in 2012.

Historically, investment income has consisted primarily of interest earnings on premiums and advance premiums collected and held in a fiduciary capacity before being remitted to insurance companies. Our policy is to invest available funds in high-quality, short-term fixed income investment securities. As a result of the bank liquidity and solvency issues in the United States in the last quarter of 2008, we moved substantial amounts of our cash into non-interest bearing checking accounts so that they would be fully insured by the Federal Deposit Insurance Corporation (“FDIC”) or into money-market investment funds (a portion of which is FDIC insured) of SunTrust and Wells Fargo, two large national banks. Effective January 1, 2013, the FDIC ceased providing insurance guarantees on non-interest bearing checking accounts and since that time we have invested in both interest bearing and non-interest bearing checking accounts. Investment income also includes gains and losses realized from the sale of investments. Other income primarily reflects net gains on sales of customer accounts and fixed assets, but will also include sub-rental income, legal settlements and other miscellaneous income.

Information Regarding Non-GAAP Measures

In the discussion and analysis of our results of operations that follows, in addition to reporting financial results in accordance with GAAP, as noted above, we provide information regarding core commissions and fees, core organic commissions and fees, and our internal growth rate, which is the growth rate of our core organic commissions and fees. These measures are not in accordance with, or an alternative to (including any adjusted internal growth rate), the GAAP information provided in this annual report on Form 10-K. Tabular reconciliations of this supplemental non-GAAP financial information to our most comparable GAAP information is contained in this Form 10-K. We present such non-GAAP supplemental financial information, as we believe such information provides additional meaningful methods of evaluating certain aspects of our operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis. This supplemental financial information should be considered in addition to, not in lieu of, our condensed consolidated financial statements.

 

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Current Year Company Overview

2014 was a strong year for revenue growth and continued the positive trends that began in 2012. After the five-year period extending from 2007 to 2011, in which we experienced negative internal growth in our core organic commissions and fees revenue which we believe was a direct result of the general weakness of the economy, we achieved a positive internal revenue growth of 6.7% in 2013, and 2.0% in 2014.

The net growth in core organic commissions and fees in 2014 of $25.6 million is significantly less than the comparable growth in 2013 of $75.6 million, similar to the core organic commissions and fees in 2012 of $24.9 million and significantly better than the net lost revenues of $21.5 million in 2011. However, it should be noted that of the $75.6 million growth in the 2013 core organic commissions and fees, $38.1 million was generated by two new programs at our Arrowhead operation, the automobile aftermarket program and the non-standard auto program, and from our Colonial Claims operation as a result of the significant claims activity attributable to Superstorm Sandy. The growth in the core organic commissions and fees revenue for 2014 is principally attributable to new business and increasing insurance exposure units as a result of a gradually improving U.S. economy.

Income before income taxes in 2014 decreased over 2013 by 5.0%, or $17.9 million, to $339.7 million. However, that net decrease includes a $47.4 million pretax loss on disposal of certain assets of Axiom Re, LP (“Axiom Re”). This office sale was effective December 31, 2014 and represents part of our strategic plan to exit the reinsurance business. The loss associated with this sale resulted in a $0.21 reduction to earnings per share. Income before income taxes related to new acquisitions was $37.5 million, and therefore, income before income taxes from offices that existed in the same time periods of 2014 and 2013 (including the new acquisitions that “folded in” to those offices) decreased by $55.4 million. The net decrease of $55.4 million related primarily to net new business off-set by the $47.4 million loss on the sale of Axiom Re, along with the decrease in revenue associated with claims from Superstorm Sandy received in 2013 with no comparable revenues in 2014, $27.7 million of higher compensation and benefits costs, increased interest costs of $12.0 million relating to additional debt used to fund acquisition activity in 2014, and $7.5 million from the change in estimated earn-out payables.

Acquisitions

Approximately 37,500 independent insurance agencies are estimated to be operating currently in the United States. Part of our continuing business strategy is to attract high-quality insurance intermediaries to join our operations. From 1993 through 2014, we acquired 459 insurance intermediary operations, excluding acquired books of business (customer accounts).

We continue to acquire insurance operations that we believe are strategic in growing our business Segments. In each of the last two years, we completed ten acquisitions in 2014 with estimated revenues of $159.5 million, and nine acquisitions in 2013 with estimated revenues of $142.8 million.

A summary of our acquisitions over the last three years is as follows (in millions, except for number of acquisitions):

 

     Number of Acquisitions      Estimated
Annual
Revenues
     Net Cash
Paid
     Notes
Issued
     Other
Payable
     Recorded
Earn-out
Payable
     Net Assets
Acquired
 
     Asset      Stock                    

2014

     9         1       $ 159.5       $ 721.9       $ —        $ 1.9       $ 33.2       $ 757.0   

2013

     8         1       $ 142.8       $ 408.1       $ —        $ 0.5       $ 5.1       $ 413.7   

2012

     19         1       $ 149.6       $ 483.9       $ 0.1       $ 25.4       $ 21.5       $ 530.9   

On May 1, 2014, we completed the acquisition of Wright which was previously announced January 15, 2014. Wright has estimated annualized revenues of $120.0 million. The total cash paid for Wright was $609.2 million. Wright’s operations include a national flood insurance program, government-sponsored insurance programs and proprietary national and regional programs.

On July 1, 2013, we completed the acquisition of Beecher Carlson, an insurance and risk management broker with operations that include retail brokerage, program management and captive management. The aggregate purchase price for Beecher Carlson was $469.3 million, including $364.3 million of cash payments and the assumption of $105.0 million of liabilities. Beecher Carlson was acquired primarily to expand Brown & Brown’s Retail and National Programs businesses, and to attract and hire high-quality individuals.

 

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On January 9, 2012, we completed the acquisition of Arrowhead General Insurance Agency Superholding Corporation (“Arrowhead”) pursuant to a merger agreement dated December 15, 2011 (the “Merger Agreement”). Under the Merger Agreement, the total cash purchase price of $395.0 million was subject to adjustments for options to purchase shares of Arrowhead’s common stock, working capital, sharing of net operating tax losses, Arrowhead’s preferred stock units, transaction expenses, and closing debt. In addition, within 60 days following the third anniversary of the acquisition’s closing date, we will pay to certain persons who were Arrowhead equityholders as of the closing date additional earn-out payments equal, collectively, to $5.0 million, subject to certain adjustments based on the “cumulative EBITDA” of Arrowhead and all of its subsidiaries, as calculated pursuant to the Merger Agreement, during the final year of the three-year period following the acquisition’s closing date.

Arrowhead is a national insurance program manager and one of the largest managing general agents (“MGAs”) in the property and casualty insurance industry.

Critical Accounting Policies

Our Consolidated Financial Statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We continually evaluate our estimates, which are based on historical experience and on assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for our judgments about the carrying values of our assets and liabilities, which values are not readily apparent from other sources. Actual results may differ from these estimates.

We believe that of our significant accounting and reporting policies, the more critical policies include our accounting for revenue recognition, business combinations and purchase price allocations, intangible asset impairments and reserves for litigation. In particular, the accounting for these areas requires significant judgments to be made by management. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or consolidated results of operations. Refer to Note 1 in the “Notes to Consolidated Financial Statements”.

Revenue Recognition

Commission revenues are recognized as of the effective date of the insurance policy or the date on which the policy premium is processed into our systems, whichever is later. Commission revenues related to installment billings are recognized on the later of the date effective or invoiced, with the exception of our Arrowhead business which follows a policy of recognizing on the later of the date effective or processed into our systems regardless of the billing arrangement. Management determines the policy cancellation reserve based upon historical cancellation experience adjusted in accordance with known circumstances. Subsequent commission adjustments are recognized upon our receipt of notification from insurance companies concerning matters necessitating such adjustments. Profit-sharing contingent commissions are recognized when determinable, which is when such commissions are received from insurance companies, or when we receive formal notification of the amount of such payments. Fee revenues, and commissions for workers’ compensation programs, are recognized as services are rendered.

Business Combinations and Purchase Price Allocations

We have acquired significant intangible assets through business acquisitions. These assets consist of purchased customer accounts, non-compete agreements, and the excess of purchase prices over the fair value of identifiable net assets acquired (goodwill). The determination of estimated useful lives and the allocation of purchase price to intangible assets requires significant judgment and affects the amount of future amortization and possible impairment charges.

All of our business combinations initiated after June 30, 2001 have been accounted for using the purchase method. In connection with these acquisitions, we record the estimated value of the net tangible assets purchased and the value of the identifiable intangible assets purchased, which typically consist of purchased customer accounts and non-compete 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 on their duration and any unique features of 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 five 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.

 

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Acquisition purchase prices are typically based on a multiple of average annual operating profit earned over a one-to three-year period within a minimum and maximum price range. The recorded purchase prices for all acquisitions consummated after January 1, 2009 include an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations are recorded in the consolidated statement of income when incurred.

The fair value of earn-out obligations is based on the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions contained in the respective purchase agreements. In determining fair value, the acquired business’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 present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out payments will be made.

Intangible Assets Impairment

Goodwill is subject to at least an annual assessment for impairment measured by a fair-value-based test. Amortizable intangible assets are amortized over their useful lives and are subject to an impairment review based on an estimate of the undiscounted future cash flows resulting from the use of the assets. To determine if there is potential impairment of goodwill, we compare the fair value of each reporting unit with its carrying value. If the fair value of the reporting unit is less than its carrying value, an impairment loss would be recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. Fair value is estimated based on multiples of earnings before interest, income taxes, depreciation, amortization and change in estimated acquisition earn-out payables (“EBITDAC”), or on a discounted cash flow basis.

Management assesses the recoverability of our goodwill on an annual basis, and assesses the recoverability of our amortizable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The following factors, if present, may trigger an impairment review: (i) significant underperformance relative to historical or projected future operating results; (ii) significant negative industry or economic trends; (iii) significant decline in our stock price for a sustained period; and (iv) significant decline in our market capitalization. If the recoverability of these assets is unlikely because of the existence of one or more of the above-referenced factors, an impairment analysis is performed. Management must make assumptions regarding estimated future cash flows and other factors to determine the fair value of these assets. If these estimates or related assumptions change in the future, we may be required to revise the assessment and, if appropriate, record an impairment charge. We completed our most recent evaluation of impairment for goodwill as of November 30, 2014 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, 2014, 2013 and 2012.

Non-Cash Stock-Based Compensation

We grant stock options and non-vested stock awards to our employees, and the related compensation expense is required to be recognized in the financial statements based upon the grant-date fair value of those awards.

Litigation Claims

We are subject to numerous litigation claims that arise in the ordinary course of business. If it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss is estimable, an accrual for the costs to resolve these claims is recorded in accrued expenses in the accompanying Consolidated Balance Sheets. Professional fees related to these claims are included in other operating expenses in the accompanying Consolidated Statements of Income. 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.

 

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New Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”) which changes the criteria for reporting discontinued operations and enhances disclosures in this area. Under the new guidance, the disposal of a component or group of components of an entity should be reported as a discontinued operation if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Disposals of equity method investments, or those reported as held-for-sale, must be presented as a discontinued operation if they meet the new definition. The standard is effective prospectively for all disposals of components (or classification of components as held-for-sale) of an entity that occur within interim and annual periods beginning on or after December 15, 2014. Early adoption is permitted, but only for disposals (or classifications of components as held-for-sale) that have not been reported in financial statements previously issued. Brown & Brown has elected to early adopt this pronouncement and has reported the disposal of the Axiom Re business in accordance with this pronouncement.

In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the Company beginning January 1, 2017 and, at that time the Company may adopt the new standard under the full retrospective approach or the modified retrospective approach. Early adoption is not permitted. The Company is currently evaluating the method and impact the adoption of ASU 2014-09 will have on the Company’s Consolidated Financial Statements.

In August 2014, FASB issued ASU 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern,” (“ASU 2014-15”), which addresses management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted. The Company does not expect to early adopt this guidance and it believes the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.

With the Wright acquisition we now have insurance company operations for which we have adopted accounting policies that were consistent with the accounting policies in place at Wright prior to their acquisition by Brown & Brown. These are detailed in Note 1 to the Financial Statements under “Summary of Significant Accounting Policies”.

 

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RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

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):

 

     2014     Percent
Change
    2013     Percent
Change
    2012  

REVENUES

          

Core commissions and fees

   $ 1,499,903        15.7   $ 1,295,977        14.1   $ 1,136,252   

Profit-sharing contingent commissions

     57,706        12.6     51,251        17.3     43,683   

Guaranteed supplemental commissions

     9,851        19.0     8,275        (9.5 )%      9,146   

Investment income

     747        17.1     638        (19.9 )%      797   

Other income, net

     7,589        6.3     7,138        (29.7 )%      10,154   
  

 

 

     

 

 

     

 

 

 

Total revenues

  1,575,796      15.6   1,363,279      13.6   1,200,032   

EXPENSES

Employee compensation and benefits

  791,749      15.9   683,000      12.2   608,506   

Non-cash stock-based compensation

  19,363      (14.3 )%    22,603      42.5   15,865   

Other operating expenses

  235,328      20.3   195,677      12.2   174,389   

Loss on disposal

  47,425      —      —        —      —     

Amortization

  82,941      22.1   67,932      6.9   63,573   

Depreciation

  20,895      19.5   17,485      13.7   15,373   

Interest

  28,408      72.8   16,440      2.1   16,097   

Change in estimated acquisition earn-out payables

  9,938      NMF (1)    2,533      78.6   1,418   
  

 

 

     

 

 

     

 

 

 

Total expenses

  1,236,047      22.9   1,005,670      12.3   895,221   
  

 

 

     

 

 

     

 

 

 

Income before income taxes

$ 339,749      (5.0 )%  $ 357,609      17.3 $ 304,811   
  

 

 

     

 

 

     

 

 

 

Net internal growth rate — core commissions and fees

  2.0   6.7   2.6

Employee compensation and benefits ratio

  50.2   50.1   50.7

Other operating expenses ratio

  14.9   14.4   14.5

Capital expenditures

$ 24,923    $ 16,366    $ 24,028   

Total assets at December 31

$ 4,956,458    $ 3,649,508    $ 3,128,058   

 

(1) NMF = Not a meaningful figure

Commissions and Fees

Commissions and fees, including profit-sharing contingent commissions and GSCs, increased $212.0 million, or 15.6% in 2014. Profit-sharing contingent commissions and GSCs increased $8.0 million or 13.5% in 2014 to $67.6 million, due primarily to $4.9 million, $1.4 million, and $1.7 million increases in profit-sharing contingent commissions and GSCs in our Retail, National Programs and Wholesale Brokerage Segments, respectively. Core commissions and fees revenue in 2014 increased $203.9 million, of which approximately $186.8 million represented core commissions and fees from acquisitions that had no comparable revenues in 2013. After taking into account divested business of $8.5 million, the remaining net increase of $25.6 million, representing net new business, reflects a 2.0% internal growth rate for core organic commissions and fees.

Commissions and fees, including profit-sharing contingent commissions and GSCs, increased $166.4 million, or 14.0% in 2013. Profit-sharing contingent commissions and GSCs increased $6.7 million or 12.7% in 2013 to $59.5 million, due primarily to $4.7 million, $0.6 million, and $1.3 million increases in profit-sharing contingent commissions and GSCs in our Retail, National Programs and Wholesale Brokerage Divisions, respectively. Core commissions and fees revenue in 2013 increased $159.7 million, of which approximately $91.5 million represented core commissions and fees from acquisitions that had no comparable revenues in 2012. After taking into account divested business of $7.4 million, the remaining net increase of $75.6 million, representing net new business, reflects a 6.7% internal growth rate for core organic commissions and fees.

 

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Investment Income

Investment income increased to $0.7 million in 2014, compared with $0.6 million in 2013 mainly due to higher average daily invested balances in 2014 than in 2013. Investment income of $0.6 million in 2013 was down $0.2 million as compared to 2012, mainly due to lower average daily invested balances in 2013 than in 2012.

Other Income, Net

Other income for 2014 reflected income of $7.6 million, compared with $7.1 million in 2013 and $10.2 million in 2012. We recognized gains of $5.3 million, $3.1 million and $4.3 million from sales on books of business (customer accounts) in 2014, 2013 and 2012, respectively. Although we are not in the business of selling books of business, we periodically will sell an office or a book of business because it does not produce reasonable margins or demonstrate a potential for growth, or for other reasons related to the particular assets in question. Other income also included $1.6 million and $3.6 million in 2013 and 2012, respectively, paid to us in connection with settlements of litigation against former employees for violations of restrictive covenants contained in their employment agreements with us. For 2014, other income from legal settlement was negligible. Additionally, we recognized non-recurring gains, rental income and sales of software services of $0.9 million, $2.4 million and $2.3 million in 2014, 2013 and 2012, respectively.

Employee Compensation and Benefits

Employee compensation and benefits expense increased, approximately 15.9% or $108.7 million in 2014. However, that net increase included $81.0 million of new compensation costs related to new acquisitions that were stand-alone offices. Therefore, employee compensation and benefits from those offices that existed in the same time periods of 2014 and 2013 (including the new acquisitions that “folded in” to those offices) increased by $27.7 million. The employee compensation and benefit increases from these offices were primarily related to increases in staff and management salaries of $13.8 million, new salaried producers of $4.8 million, profit center and other related bonuses of $6.7 million, compensation to our commissioned producers of $0.9 million and health insurance costs of $4.8 million. These increases were partially offset by net reductions in temporary employees, employer 401K plan matching contributions and accrued vacation expense. Employee compensation and benefits expense as a percentage of total revenues was 50.2% as compared to 50.1% for the twelve months ended December 31, 2013. This slight increase is driven by continued investment in new teammates.

Employee compensation and benefits expense increased, approximately 12.2% or $74.5 million in 2013. However, that net increase included $37.6 million of new compensation costs related to new acquisitions that were stand-alone offices. Therefore, employee compensation and benefits from those offices that existed in the same time periods of 2013 and 2012 (including the new acquisitions that “folded in” to those offices) increased by $36.9 million. The employee compensation and benefit increases from these offices were primarily related to increases in staff and management salaries of $16.6 million, new salaried producers of $4.7 million, profit center and other related bonuses of $3.4 million, compensation to our commissioned producers of $5.7 million, health insurance costs of $1.8 million, payroll-related taxes of $3.7 million, and other net expenses of $1.0 million.

Non-Cash Stock-Based Compensation

We have an employee stock purchase plan, and grant stock options and non-vested stock awards to our employees. Compensation expense for all share-based awards is recognized in the financial statements based upon the grant-date fair value of those awards. For 2014, 2013 and 2012, the non-cash stock-based compensation expense incorporates the costs related to each of our four stock-based plans as explained in Note 11 of the Notes to the Consolidated Financial Statements.

Non-cash stock-based compensation decreased 14.3%, or $3.2 million in 2014 over 2013, primarily as a result of forfeitures due to the non-achievement of certain performance criteria, partially offset by an increase associated with new, non-vested stock awards granted on July 1, 2013 under our Stock Incentive Plan (“SIP”).

Non-cash stock-based compensation increased 42.5%, or $6.7 million in 2013 over 2012, primarily as a result of new non-vested stock awards granted on July 1, 2013 under our SIP. Most of these SIP grants will typically vest in four to seven years, subject to the achievement of certain performance criteria by grantees, and the achievement of consolidated earnings per share growth at certain levels by us, over three-to five-year measurement periods. Some SIP grants will vest after five years of service.

 

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Other Operating Expenses

As a percentage of total revenues, other operating expenses represented 14.9% in 2014, 14.4% in 2013, and 14.5% in 2012.

Other operating expenses in 2014 increased $39.7 million over 2013, of which $39.0 million was related to acquisitions. Therefore, other operating expenses attributable to offices that existed in the same periods in both 2014 and 2013 (including the new acquisitions that “folded in” to those offices) increased by $0.7 million. Of the $0.7 million increase, $2.0 million related to increased data processing and software licensing expense, $1.2 million related to increased inspection and consulting fees, $0.8 million related to office rent, and $0.9 million related to increased employee sales meeting costs. These increased costs were partially offset by decreases of $3.0 million for legal claims and litigation expenses, $1.0 million for insurance expenses, and $0.2 million in other various net cost decreases.

Other operating expenses in 2013 increased $21.3 million over 2012, of which $12.5 million was related to acquisitions that joined as stand-alone offices. Therefore, other operating expenses attributable to offices that existed in the same periods in both 2013 and 2012 (including the new acquisitions that “folded in” to those offices) increased by $8.8 million. Of the $8.8 million increase, $2.0 million related to increased data processing and software licensing expense, $2.0 million related to increased inspection and consulting fees, $1.6 million related to increased accounting and advisory fees, $0.9 million related to increased employee sales meeting costs, and $2.9 million related to other various, net cost increases. These increased costs were partially offset by a decrease of $0.6 million for legal claims and litigation expenses.

Loss on Disposal

During 2014 the Company recognized a loss on disposal of $47.4 million as a result of the sale of Axiom Re (Axiom) effective December 31, 2014. The sale is part of the Company’s strategy to exit the reinsurance brokerage business. For the years ended December 31, 2014 and 2013, Axiom recorded a (loss) income before income taxes of ($587,000) and $113,000, respectively, which are included in the Wholesale Brokerage segment. The transaction was recorded in accordance to ASU 2014-08. The Company’s prior non-significant disposals are recorded in the Other income, net in the consolidated statements of income.

Amortization

Amortization expense increased $15.0 million, or 22.1%, in 2014, and $4.4 million, or 6.9%, in 2013. The increases in 2014 and 2013 were due to the amortization of additional intangible assets as a result of acquisitions completed in those years.

Depreciation

Depreciation increased 19.5% to $20.9 million in 2014 and 13.7% to $17.5 million in 2013. The increases in 2014 and 2013 were due primarily to the addition of fixed assets as a result of recent acquisitions.

Interest Expense

Interest expense increased $12.0 million, or 72.8%, in 2014, and $0.3 million, or 2.1%, in 2013. The 2014 increase is primarily due to the increased debt borrowings from the JPMorgan Credit Facility term loan of $550.0 million at adjusted LIBOR rates (as mentioned in Note 8), which helped fund the Wright acquisition, and the $500.0 million Senior Notes due 2024 at an interest rate of 4.200% which were issued during September 2014. The 2013 increases were due primarily to the additional debt borrowed in connection with our acquisition of Beecher Carlson.

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 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 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 entities, usually for periods ranging from one to three years.

 

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The net charge or credit to the Consolidated Statement of Income for the period is the combination of the net change in the estimated acquisition earn-out payables balance, and the interest expense imputed on the outstanding balance of the estimated acquisition earn-out payables.

As of December 31, 2014, 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 (“ASC 820”). The resulting net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the years ended December 31, 2014, 2013, and 2012 were as follows (in thousands):

 

     2014      2013      2012  

Change in fair value on estimated acquisition earn-out payables

   $ 7,375       $ 570       $ (1,051

Interest expense accretion

     2,563         1,963         2,469   
  

 

 

    

 

 

    

 

 

 

Net change in earnings from estimated acquisition earn-out payables

$ 9,938    $ 2,533    $ 1,418   
  

 

 

    

 

 

    

 

 

 

The fair values of the estimated earn-out payables were increased in 2014 and 2013 since certain acquisitions performed at higher levels than estimated in our original projections. Conversely, the fair values of the estimated earn-out payables were reduced in 2012 since certain acquisitions did not perform at the level estimated based on our original projections. An acquisition is considered to be performing well if its operating profit exceeds the level needed to reach the minimum purchase price. However, a reduction in the estimated acquisition earn-out payable can occur even though the acquisition is performing well, if it is not performing at the level contemplated by our original estimate.

As of December 31, 2014, the estimated acquisition earn-out payables equaled $75,283,000, of which $26,018,000 was recorded as accounts payable and $49,265,000 was recorded as an other non-current liability. As of December 31, 2013, the estimated acquisition earn-out payables equaled $43,058,000, of which $6,312,000 was recorded as accounts payable and $36,746,000 was recorded as an other non-current liability. As of December 31, 2012, the estimated acquisition earn-out payables equaled $52,987,000, of which $10,164,000 was recorded as accounts payable and $42,823,000 was recorded as an other non-current liability.

Income Taxes

The effective tax rate on income from operations was 39.1% in 2014, 39.3% in 2013, and 39.6% in 2012. The lower effective annual tax rates are primarily the result of lower average effective state income tax rates, driven by revenue apportionment.

RESULTS OF OPERATIONS — SEGMENT INFORMATION

As discussed in Note 15 of the Notes to Consolidated Financial Statements, we operate four reportable segments: Retail, National Programs, Wholesale Brokerage, and Services Segments. On a segmental basis, increases in amortization, depreciation and interest expenses result from completed acquisitions within a given segment in a particular year. Likewise, other income in each segment primarily reflects net gains on sales of customer accounts and fixed assets. As such, in evaluating the operational efficiency of a segment, management emphasizes the net internal growth rate of core commissions and fees revenue, the gradual improvement of the ratio of total employee compensation and benefits to total revenues, and the gradual improvement of the ratio of other operating expenses to total revenues.

The term “core commissions and fees” excludes profit-sharing contingent commissions and GSCs, and therefore represents the revenues earned directly from specific insurance policies sold, and specific fee-based services rendered. In contrast, the term “core organic commissions and fees” is our core commissions and fees less (i) the core commissions and fees earned for the first twelve months by newly-acquired operations and (ii) divested business (core commissions and fees generated from offices, books of business or niches sold or terminated during the comparable period). Core organic commissions and fees attempts to express the current year’s core commissions and fees on a comparable basis with the prior year’s core commissions and fees. The resulting net change reflects the aggregate changes attributable to (i) net new and lost accounts, (ii) net changes in our clients’ exposure units, and (iii) net changes in insurance premium rates. The net changes in each of these three components can be determined for each of our customers.

 

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The internal growth rates for our core organic commissions and fees for the three years ended December 31, 2014, 2013 and 2012, by Segment, are as follows (in thousands, except percentages):

 

2014

  For the Year
Ended December 31,
    Total Net
Change
    Total Net
Growth %
    Less
Acquisition
Revenues
    Internal
Net
Growth $
    Internal
Net
Growth %
 
    2014     2013            

Retail(1)

  $ 779,480      $ 692,231      $ 87,249        12.6   $ 73,351      $ 13,898        2.0

National Programs

    367,214        268,160        99,054        36.9     93,803        5,251        2.0

Wholesale Brokerage

    216,727        195,626        21,101        10.8     4,032        17,069        8.7

Services

    136,482        131,503        4,979        3.8     15,599        (10,620     (8.1 )% 
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

Total core commissions and fees

$ 1,499,903    $ 1,287,520    $ 212,383      16.5 $ 186,785    $ 25,598      2.0
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

Less Superstorm Sandy

  —        (18,275   18,275      100.0   —        18,275      100.0
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

Total core commissions and fees less Superstorm Sandy

$ 1,499,903    $ 1,269,245    $ 230,658      18.2 $ 186,785    $ 43,873      3.5
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

There would be a 3.5% Internal Net Growth rate when excluding the $18.3 million related to Superstorm Sandy within the Colonial Claims business for the first half of 2013.

The reconciliation of the above internal growth schedule to the total Commissions and Fees included in the Consolidated Statements of Income for the years ended December 31, 2014 and 2013 is as follows (in thousands):

 

     For the Year
Ended December 31,
 
     2014      2013  

Total core commissions and fees

   $ 1,499,903       $ 1,287,520   

Profit-sharing contingent commissions

     57,706         51,251   

Guaranteed supplemental commissions

     9,851         8,275   

Divested business

     —          8,457   
  

 

 

    

 

 

 

Total commissions and fees

$ 1,567,460    $ 1,355,503   
  

 

 

    

 

 

 

 

2013

  For the Year
Ended December 31,
    Total Net
Change
    Total Net
Growth %
    Less
Acquisition
Revenues
    Internal
Net
Growth $
    Internal
Net
Growth %
 
    2013     2012            

Retail(1)

  $ 699,571      $ 611,156      $ 88,415        14.5   $ 79,455      $ 8,960        1.5

National Programs

    271,772        233,261        38,511        16.5     7,099        31,412        13.5

Wholesale Brokerage

    193,601        168,151        25,450        15.1     4,332        21,118        12.6

Services

    131,033        116,247        14,786        12.7     657        14,129        12.2
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

Total core commissions and fees

$ 1,295,977    $ 1,128,815    $ 167,162      14.8 $ 91,543    $ 75,619      6.7
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

The reconciliation of the above internal growth schedule to the total Commissions and Fees included in the Consolidated Statements of Income for the years ended December 31, 2013 and 2012 is as follows (in thousands):

 

     For the Year
Ended December 31,
 
     2013      2012  

Total core commissions and fees

   $ 1,295,977       $ 1,128,815   

Profit-sharing contingent commissions

     51,251         43,683   

Guaranteed supplemental commissions

     8,275         9,146   

Divested business

     —          7,437   
  

 

 

    

 

 

 

Total commissions and fees

$ 1,355,503    $ 1,189,081   
  

 

 

    

 

 

 

 

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2012

  For the Year
Ended December 31,
    Total Net
Change
    Total Net
Growth %
    Less
Acquisition
Revenues
    Internal
Net
Growth $
    Internal
Net
Growth %
 
    2012     2011            

Retail(1)

  $ 618,562      $ 571,129      $ 47,433        8.3   $ 38,734      $ 8,699        1.5

National Programs

    233,261        148,841        84,420        56.7     83,281        1,139        0.8

Wholesale Brokerage

    168,182        155,151        13,031        8.4     3,598        9,433        6.1

Services

    116,247        64,875        51,372        79.2     45,783        5,589        8.6
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

Total core commissions and fees

$ 1,136,252    $ 939,996    $ 196,256      20.9 $ 171,396    $ 24,860      2.6
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

The reconciliation of the above internal growth schedule to the total Commissions and Fees included in the Consolidated Statements of Income for the years ended December 31, 2012 and 2011 is as follows (in thousands):

 

     For the Year
Ended December 31,
 
     2012      2011  

Total core commissions and fees

   $ 1,136,252       $ 939,996   

Profit-sharing contingent commissions

     43,683         43,198   

Guaranteed supplemental commissions

     9,146         12,079   

Divested business

     —          10,689   
  

 

 

    

 

 

 

Total commissions and fees

$ 1,189,081    $ 1,005,962   
  

 

 

    

 

 

 

 

(1) The Retail Segment figures include commissions and fees reported in the “Other” column of the Segment Information in Note 15 of the Notes to the Consolidated Financial Statements, which includes corporate and consolidation items.

Retail Segment

The Retail Segment provides a broad range of insurance products and services to commercial, public and quasi-public, professional and individual insured customers. Approximately 85.5% of the Retail Segment’s commissions and fees revenue is commission-based. Because most of our other operating expenses do not change as premiums fluctuate, we believe that most of any fluctuation in the commissions, net of related compensation, which we receive will be reflected in our pre-tax income, subject to incremental investments in new producers or other investments to help grow the business.

 

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Financial information relating to Brown & Brown’s Retail Segment is as follows (in thousands, except percentages):

 

     2014     Percent
Change
    2013     Percent
Change
    2012  

REVENUES

          

Core commissions and fees

   $ 780,534        11.4   $ 700,767        13.0   $ 619,975   

Profit-sharing contingent commissions

     21,616        23.2     17,543        36.6     12,843   

Guaranteed supplemental commissions

     7,730        12.9     6,849        (0.6 )%      6,890   

Investment income

     67        (18.3 )%      82        (24.1 )%      108   

Other income, net

     (181     NMF (1)      3,083        (33.2 )%      4,613   
  

 

 

     

 

 

     

 

 

 

Total revenues

  809,766      11.2   728,324      13.0   644,429   

EXPENSES

Employee compensation and benefits

  408,686      12.5   363,332      11.3   326,574   

Non-cash stock-based compensation

  11,732      29.6   9,055      59.4   5,680   

Other operating expenses

  130,074      14.9   113,159      14.8   98,532   

Loss on disposal

  —       —     —       —     —    

Amortization

  42,270      11.1   38,052      9.9   34,639   

Depreciation

  6,410      9.6   5,847      12.9   5,181   

Interest

  42,918      24.7   34,407      29.2   26,641   

Change in estimated acquisition earn-out payables

  7,147      NMF (1)    (1,844   NMF (1)    1,968   
  

 

 

     

 

 

     

 

 

 

Total expenses

  649,237      15.5   562,008      12.6   499,215   
  

 

 

     

 

 

     

 

 

 

Income before income taxes

$ 160,529      (3.5 )%  $ 166,316      14.5 $ 145,214   
  

 

 

     

 

 

     

 

 

 

Net internal growth rate — core organic commissions and fees

  2.0   1.5   1.5

Employee compensation and benefits ratio

  50.5   49.9   50.7

Other operating expenses ratio

  16.1   15.5   15.3

Capital expenditures

$ 6,844    $ 6,847    $ 5,732   

Total assets at December 31

$ 3,190,737    $ 2,992,087    $ 2,420,759   

 

(1) NMF = Not a meaningful figure

The Retail Segment’s total revenues in 2014 increased 11.2%, or $81.4 million, over the same period in 2013, to $809.8 million. Profit-sharing contingent commissions and GSCs in 2014 increased $5.0 million, or 20.3%, over 2013, to $29.3 million, primarily due to improved loss ratios resulting in increased profitability for insurance companies in 2013. The $79.8 million net increase in core commissions and fees revenue resulted from the following factors: (i) an increase of approximately $73.4 million related to core commissions and fees revenue from acquisitions that had no comparable revenues in 2013; (ii) a decrease of $7.5 million related to commissions and fees revenue from business divested during 2013 and 2014; and (iii) the remaining net increase of $13.9 million primarily related to net new business. The Retail Segment’s internal growth rate for core organic commissions and fees revenue was 2.0% for 2014, and was driven by net new customers, increasing insurable exposure units in certain areas of the United States, and was partially offset by continued pressure on property and casualty rates, especially in coastal areas.

Income before income taxes for 2014 decreased 3.5%, or $5.8 million, over the same period in 2013, to $160.5 million. This decrease was primarily due to a higher interest charge of $8.5 million corresponding to capital utilized for acquisitions in 2014 and $9.0 million related to the year-on-year changes in the estimated earn-out payable. The underlying increase was driven by net new business, acquired business and increased profit-sharing contingent commissions and GSCs. Non-cash stock-based compensation increased $2.7 million, or 29.6%, for 2014 over the same period in 2013, as the cost of grants to employees for the purpose of driving performance were realized.

The Retail Segment’s total revenues in 2013 increased 13.0%, or $83.9 million, over the same period in 2012, to $728.3 million. Profit-sharing contingent commissions and GSCs in 2013 increased $4.7 million, or 23.6%, over 2012, to $24.4 million, primarily due to improved loss ratios resulting in increased profitability for insurance companies in 2012. The $80.8 million net increase in core commissions and fees revenue resulted from the following factors: (i) an increase of approximately $79.5 million related to core commissions and fees revenue from acquisitions that had no comparable revenues in 2012; (ii) a decrease of $7.5 million related to commissions and fees revenue recorded in 2012 from business divested during 2013; and (iii) the remaining net increase of $9.0 million primarily related to net new business. The Retail Segment’s internal growth rate for core organic commissions and fees revenue was 1.5% for 2013, and was driven by slightly increasing insurable exposure units in most areas of the United States, and slight increases in general insurance premium rates.

 

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Income before income taxes for 2013 increased 14.5%, or $21.1 million, over the same period in 2012, to $166.3 million. This increase was primarily due to net new business, the increase in profit-sharing contingent commissions, and continued improved efficiencies relating to compensation and employee benefits and certain other operating expenses, but which was partially off-set by a $1.5 million reduction in other income primarily due to gains on the sale of books of businesses in 2012. These increases were also enhanced by changes in estimated acquisition earn-out payables of $3.8 million, but partially offset by a net increase in the inter-company interest expense allocation of $7.8 million. The continued improved efficiencies relating to compensation and employee benefits, and certain other operating expenses resulted mainly from such costs increasing at a lower rate than our growth in net new business. However, a portion of the improved ratio of employee compensation and benefits to total revenues was the result of the $6.8 million of bonus compensation related to a special one-time bonus in 2012 which was not repeated in 2013.

National Programs Segment

The Wright Insurance Group acquisition was completed effective May 1, 2014. With the Wright acquisition completed, the National Programs Segment manages over 50 programs with 40 well-capitalized carrier partners. In most cases, the insurance carriers that support the programs have delegated underwriting and, in many instances, claims-handling authority to our programs operations. These programs are generally distributed through nationwide networks 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: Commercial Programs, Professional Programs, Arrowhead Insurance Group Programs, Public Entity-Related Programs, and the National Flood Program. Like the Retail and Wholesale Brokerage Segments, 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):

 

     2014     Percent
Change
    2013     Percent
Change
    2012  

REVENUES

          

Core commissions and fees

   $ 367,214        35.1   $ 271,772        16.5   $ 233,261   

Profit-sharing contingent commissions

     20,623        7.0     19,265        4.7     18,392   

Guaranteed supplemental commissions

     21        NMF (1)      (23     NMF (1)      276   

Investment income

     164        NMF (1)      19        (5.0 )%      20   

Other income, net

     6,767        NMF (1)      1,097        10.4     994   
  

 

 

     

 

 

     

 

 

 

Total revenues

  394,789      35.1   292,130      15.5   252,943   

EXPENSES

Employee compensation and benefits

  163,522      23.0   132,948      20.5   110,362   

Non-cash stock-based compensation

  754      (83.6 )%    4,604      24.2   3,707   

Other operating expenses

  76,833      45.0   53,001      19.8   44,248   

Loss on disposal

  —       —     —       —     —    

Amortization

  24,769      69.7   14,593      4.7   13,936   

Depreciation

  7,699      42.6   5,399      17.4   4,600   

Interest

  49,663      NMF (1)    24,014      (6.5 )%    25,674   

Change in estimated acquisition earn-out payables

  314      NMF (1)    (808   (24.8 )%    (1,075
  

 

 

     

 

 

     

 

 

 

Total expenses

  323,554      38.4   233,751      16.0   201,452   
  

 

 

     

 

 

     

 

 

 

Income before income taxes

$ 71,235      22.0 $ 58,379      13.4 $ 51,491   
  

 

 

     

 

 

     

 

 

 

Net internal growth rate — core organic commissions
and fees

  2.0   13.5   0.8

Employee compensation and benefits ratio

  41.4   45.5   43.6

Other operating expenses ratio

  19.5   18.1   17.5

Capital expenditures

$ 13,739    $ 4,473    $ 9,633   

Total assets at December 31

$ 2,411,839    $ 1,335,911    $ 1,183,191   

 

(1) NMF = Not a meaningful figure

 

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The National Programs Segment’s total revenues in 2014 increased $102.7 million to $394.8 million, a 35.1% increase over 2013. Core commission and fees increased by $95.4 million due to the following factors: (i) an increase of approximately $93.8 million related to core commissions and fees revenue from the Wright and Beecher Carlson acquisitions that had no comparable revenues in 2013; (ii) a decrease of approximately $3.6 million in books of business that were disposed or transferred to other segments; and (iii) the remaining increase of $5.2 million is primarily related to net new business. Profit-sharing contingent commissions and GSCs in 2014 increased $1.4 million over 2013, due primarily to a $0.5 million increase in profit-sharing contingent commissions received by Florida Intracoastal Underwriters, Limited Company (“FIU”), and a $0.8 million increase in profit-sharing contingent commissions received by Proctor Financial, Inc. (“Proctor”). Other income increased by approximately $5.7 million primarily due to the gain recognized on the sale of Industry Consulting Group, Inc. (“ICG”) of $6.0 million.

Income before income taxes for 2014 increased 22.0% or $12.9 million over the same period in 2013, to $71.2 million. The increase in income before taxes was due to net new business growth noted above, revenues and operating profits derived from Wright, the gain on the sale of ICG, and a non-cash stock-based compensation decrease of $3.8 million primarily related to partial SIP grant forfeitures associated to Arrowhead. The $71.2 million increase was partially offset by an increase in the intercompany interest expense charge related to Wright.

The National Programs Segment’s total revenues in 2013 increased $39.2 million to $292.1 million, a 15.5% increase over 2012. Profit-sharing contingent commissions and GSCs in 2013 increased $0.6 million over 2012, due primarily to a $3.7 million increase in profit-sharing contingent commissions received by FIU, which was partially offset by a decrease of $3.5 million at Proctor. The $38.5 million net increase in core commissions and fees resulted from the following factors: (i) an increase of approximately $7.1 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in 2012; and (ii) the remaining net increase of $31.4 million primarily related to net new business. Therefore, the National Programs Segment’s internal growth rate for core organic commissions and fees revenue was 13.5% for 2013. Of the $31.4 million of net new business, $27.7 million related to a net increase in commissions and fees revenue from our Arrowhead operations.

Income before income taxes for 2013 increased 13.4% or $6.9 million, over the same period in 2012, to $58.4 million. This net increase was primarily due to the new automobile aftermarket and the non-standard auto programs at our Arrowhead subsidiary. Even though these programs increased the total operating profit dollars for the Segment, the increase in the ratios of employee compensation and benefits, and other operating expenses as a percentage of total revenues over the prior year. This was due to the fact that these programs operated at a higher cost factor than the average program operated in 2012.

 

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Wholesale Brokerage Segment

The Wholesale Brokerage Segment markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers. Like the Retail and National Programs Segments, the Wholesale Brokerage Segment’s revenues are primarily commission-based.

Financial information relating to our Wholesale Brokerage Segment is as follows (in thousands, except percentages):

 

     2014     Percent
Change
    2013     Percent
Change
    2012  

REVENUES

          

Core commissions and fees

   $ 216,727        11.9   $ 193,601        15.1   $ 168,182   

Profit-sharing contingent commissions

     15,467        7.1     14,443        16.0     12,448   

Guaranteed supplemental commissions

     2,100        44.9     1,449        (33.9 )%      2,192   

Investment income

     26        18.2     22        —       22   

Other income, net

     353        (9.9 )%      392        (45.6 )%      721   
  

 

 

     

 

 

     

 

 

 

Total revenues

  234,673      11.8   209,907      14.4   183,565   

EXPENSES

Employee compensation and benefits

  109,951      12.0   98,144      12.4   87,293   

Non-cash stock-based compensation

  2,775      36.1   2,039      53.5   1,328   

Other operating expenses

  38,813      6.1   36,589      9.3   33,486   

Loss on disposal

  47,425      —     —       —     —    

Amortization

  11,729      1.5   11,550      2.4   11,280   

Depreciation

  2,616      (6.4 )%    2,794      2.8   2,718   

Interest

  1,878      (26.8 )%    2,565      (35.5 )%    3,974   

Change in estimated acquisition earn-out payables

  2,862      19.1   2,404      NMF (1)    131   
  

 

 

     

 

 

     

 

 

 

Total expenses

  218,049      39.7   156,085      11.3   140,210   
  

 

 

     

 

 

     

 

 

 

Income before income taxes

$ 16,624      (69.1 )%  $ 53,822      24.1 $ 43,355   
  

 

 

     

 

 

     

 

 

 

Net internal growth rate — core organic commissions and
fees

  8.7   12.6   6.1

Employee compensation and benefits ratio

  46.9   46.8   47.6

Other operating expenses ratio

  16.5   17.4   18.2

Capital expenditures

$ 1,949    $ 1,931    $ 3,383   

Total assets at December 31

$ 940,461    $ 927,825    $ 837,364   

 

(1) NMF = Not a meaningful figure

The Wholesale Brokerage Segment’s total revenues for 2014 increased 11.8%, or $24.8 million, over the same period in 2013, to $234.7 million. Profit-sharing contingent commissions and GSCs for 2014 increased $1.7 million over the same period of 2013. The $23.1 million net increase in core commissions and fees revenue resulted from the following factors: (i) an increase of approximately $4.0 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2013; (ii) an increase of $2.0 million related to net sold and transferred books of business; and (iii) the remaining net increase of $17.1 million primarily related to net new business. As such, the Wholesale Brokerage Segment’s internal growth rate for core organic commissions and fees revenue was 8.7% for 2014.

Income before income taxes for 2014 decreased 69.1%, or $37.2 million over the same period in 2013. This decrease includes a $47.4 million net loss on the disposal of the Axiom Re business. Effective December 31, 2014, the Company sold certain assets of the Axiom Re business as part of the strategic plan to exit the reinsurance brokerage market. Axiom Re had annual revenues of approximately $6.9 million in 2014. The underlying performance of this segment was driven by new business growth and to a lesser extent an increase in profit sharing contingent commissions.

 

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The Wholesale Brokerage Segment’s total revenues for 2013 increased 14.4%, or $26.3 million, over the same period in 2012, to $209.9 million. Profit-sharing contingent commissions and GSCs for 2013 increased $1.3 million over the same period of 2012. The $25.4 million net increase in core commissions and fees revenue resulted from the following factors: (i) an increase of approximately $4.3 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2012; and (ii) the remaining net increase of $21.1 million primarily related to net new business and continued increases in premium rates on many lines of insurance, but primarily on coastal property. As such, the Wholesale Brokerage Segment’s internal growth rate for core organic commissions and fees revenue was 12.6% for 2013.

Income before income taxes for 2013 increased 24.1%, or $10.5 million over the same period in 2012 to $53.8 million, primarily due to net new business, an increase in profit-sharing contingent commissions, and a net reduction in the inter-company interest expense allocation of $1.4 million, but then partially offset by a $2.3 million expense in the form of a change in estimated acquisition earn-out payables.

Services Segment

The Services Segment provides insurance-related services, including third-party claims administration (“TPA”) 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 catastrophe claims adjusting services.

Unlike our other segments, nearly all of the Services Segment’s 2014 commissions and fees revenue was 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):

 

     2014     Percent
Change
    2013     Percent
Change
    2012  

REVENUES

          

Core commissions and fees

   $ 136,482        4.2   $ 131,033        12.7   $ 116,247   

Profit-sharing contingent commissions

     —         —        —         —        —    

Guaranteed supplemental commissions

     —         —        —         —        —    

Investment income

     3        NMF (1)      1        —        1   

Other income, net

     74        (83.7 )%      455        (6.8 )%      488   
  

 

 

     

 

 

     

 

 

 

Total revenues

  136,559      3.9   131,489      12.6   116,736   

EXPENSES

Employee compensation and benefits

  73,590      17.0   62,908      6.2   59,235   

Non-cash stock-based compensation

  (72   NMF (1)    755      26.5   597   

Other operating expenses

  31,877      14.3   27,885      6.5   26,180   

Loss on disposal

  —       —      —       —      —    

Amortization

  4,134      11.8   3,698      0.5   3,680   

Depreciation

  2,213      36.4   1,623      27.0   1,278   

Interest

  7,678      4.9   7,321      (14.9 )%    8,602   

Change in estimated acquisition earn-out payables

  (385   NMF (1)    2,781      NMF (1)    394   
  

 

 

     

 

 

     

 

 

 

Total expenses

  119,035      11.3   106,971      7.0   99,966   
  

 

 

     

 

 

     

 

 

 

Income before income taxes

$ 17,524      (28.5 )%  $ 24,518      46.2 $ 16,770   
  

 

 

     

 

 

     

 

 

 

Net internal growth rate — core organic commissions and fees

  (8.1 )%    12.2   8.6

Employee compensation and benefits ratio

  53.9   47.8   50.7

Other operating expenses ratio

  23.3   21.2   22.4

Capital expenditures

$ 1,210    $ 1,811    $ 2,519   

Total assets at December 31

$ 296,034    $ 277,652    $ 238,430   

 

(1) NMF = Not a meaningful figure

 

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The Services Segment’s total revenues for 2014 increased 3.9%, or $5.1 million, over 2013, to $136.6 million. The $5.4 million net increase in core commissions and fees revenue consisted of the following: (i) an increase of approximately $15.6 million related to the core commissions and fees revenue from the acquisition of ICA, Inc. business, that had no comparable revenues in the same period of 2013; (ii) net new business of $7.7, (iii) offset by a reduction of $18.3 million due to the significant flood claims processed in 2013 resulting from Superstorm Sandy in 2012 with no comparable storm in 2013 and (iv) $0.4 million of net sold books of business. As such, the Services Segment’s internal growth rate for core organic commissions and fees revenue was (8.1)% for 2014 and excluding the impact of Superstorm Sandy internal growth would be 6.8% in 2014.

Income before income taxes in 2014 decreased 28.5%, or $7.0 million, over 2013, to $17.5 million, primarily due to the reduction in Superstorm Sandy related revenues and corresponding operating profit partially offset by the increase associated with net new and acquired business.

The Services Segment’s total revenues for 2013 increased 12.6%, or $14.8 million, over 2012, to $131.5 million. Of the $14.8 million net increase in core commissions and fees revenue: (i) an increase of approximately $0.7 million related to the core commissions and fees revenue from the TPA business acquired as part of the Arrowhead acquisition, that had no comparable revenues in the same period of 2012; and (ii) net new business of $14.1 million, of which $13.0 million was due to our Colonial Claims operation and the impact of the significant flood claims resulting from the 2012 Superstorm Sandy. As such, the Services Segment’s internal growth rate for core organic commissions and fees revenue was 12.2% for 2013.

Income before income taxes in 2013 increased 46.2%, or $7.7 million, over 2012, to $24.5 million, primarily due to net new business from our Colonial Claims operation. Additionally, this net increase was enhanced by a $1.3 million reduction in inter-company interest expense, but partially offset by a $2.4 million expense from changes in estimated earn-out payables.

Other

As discussed in Note 15 of the Notes to Consolidated Financial Statements, the “Other” column in the Segment Information table includes all income and expenses not allocated to reportable segments, as well as corporate-related items, including the inter-company interest expense charges to reporting segments.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents of $470.0 million at December 31, 2014 reflected an increase of $267.1 million from the $203.0 million balance at December 31, 2013. During 2014, $385.0 million of cash was generated from operating activities. During this period, $696.5 million of cash was used for acquisitions, $9.5 million was used for acquisition earn-out payments, $24.9 million was used for additions to fixed assets, $59.3 million was used for payment of dividends, and $718.0 million was provided from proceeds received on net new long-term debt.

We hold approximately $12.4 million in cash outside of the U.S. for which we have no plans to repatriate in the near future.

On May 1, 2014, we completed the acquisition of Wright for a total cash purchase price of $609.2 million, subject to certain adjustments. We financed the acquisition through various modified and new credit facilities.

Our cash and cash equivalents of $203.0 million at December 31, 2013 reflected a decrease of $16.9 million from the $219.8 million balance at December 31, 2012. During 2013, $389.4 million of cash was generated from operating activities. During this period, $367.7 million of cash was used for acquisitions, $15.5 million was used for acquisition earn-out payments, $16.4 million was used for additions to fixed assets, $53.5 million was used for payment of dividends, and $30.0 million was provided from proceeds received on new long-term debt.

On July 1, 2013, we completed the acquisition of Beecher Carlson for a total cash purchase price of $364.2 million, subject to certain adjustments. We financed the acquisition through various modified and new credit facilities.

Our cash and cash equivalents of $219.8 million at December 31, 2012 reflected a decrease of $66.5 million from the $286.3 million balance at December 31, 2011. During 2012, $220.3 million of cash was generated from operating activities. During this period, $425.1 million of cash was used for acquisitions, $13.5 million was used for acquisition earn-out payments, $24.0 million was used for additions to fixed assets, $49.5 million was used for payment of dividends, and $200.0 million was provided from proceeds received on new long-term debt.

 

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On January 9, 2012, we completed the acquisition of Arrowhead for a total cash purchase price of $397.0 million, subject to certain adjustments and potential earn-out payments of up to $5 million in the aggregate following the third anniversary of the acquisition’s closing date. We financed the acquisition through various modified and new credit facilities.

Our ratio of current assets to current liabilities (the “current ratio”) was 1.24 and 1.02 at December 31, 2014 and 2013, respectively.

Contractual Cash Obligations

As of December 31, 2014, our contractual cash obligations were as follows:

 

(in thousands)

   Total      Less Than
1 Year
     1-3 Years      4-5 Years      After 5
Years
 

Long-term debt

   $ 1,200,000       $ 45,625       $ 128,125       $ 526,250       $ 500,000   

Other liabilities

     50,423         20,471         13,520         2,047         14,385   

Operating leases

     182,937         38,458         65,949         41,623         36,907   

Interest obligations

     263,221         37,286         70,994         56,066         98,875   

Unrecognized tax benefits

     113         —          113         —          —    

Maximum future acquisition contingency payments

     130,653         57,390         70,801         2,462         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

$ 1,827,347    $ 199,230    $ 349,502    $ 628,448    $ 650,167   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Debt

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 were to retire existing term loan debt including the JPM Term Loan Agreement, SunTrust Term Loan Agreement and Bank of America Term Loan Agreement in total of $230.0 million (as described above) and to facilitate the closing of the Wright acquisition as well as other acquisitions. The Credit Facility terminates on May 20, 2019, but either or both of the revolving credit facility and the term loans may be extended for two additional one-year periods at the Company’s request and at the discretion of the respective lenders. Interest and facility fees in respect to the Credit Facility are based on the better of the Company’s net debt leverage ratio or a non-credit enhanced senior unsecured long-term debt rating. Based on the Company’s net debt leverage ratio, the rates of interest charged on the term loan and revolving loan are 1.375% and 1.175% respectively in 2014 and above the adjusted LIBOR rate for outstanding amounts drawn. There are fees included in the facility which include a facility fee based on the revolving credit commitments of the lenders (whether used or unused) at a rate of 0.20% and letter of credit fees based on the amounts of outstanding secured or unsecured letters of credit. The Credit Facility includes various covenants, limitations and events of default customary for similar facilities for similarly rated borrowers. As of December 31, 2014, there was an outstanding debt balance issued under the provisions of the Credit Facility in total of $550.0 million with no proceeds outstanding relative to the revolving loan.

In connection with the funding of the Credit Facility on May 20, 2014, the Company retired the JPM term loan of $100.0 million, the SunTrust term loan of $100.0 million and the Bank of America, N.A., $30.0 million term loan, for a total of $230.0 million. The SunTrust revolver was also terminated.

On July 15, 2014, the Company retired the senior notes Series B of $100.0 million which were assigned under the original private placement note agreement from July 2004. Proceeds were drawn from the revolving loan of the Credit Facility to facilitate the payoff of the notes. The $100.0 million proceeds drawn from the revolving Credit Facility used to retire the Series B notes was paid in full in connection with the issuance of the 4.200% senior notes due 2024 on September 18, 2014.

On September 18, 2014, the Company issued $500.0 million of 4.200% unsecured senior notes due in 2024. The senior notes were assigned 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 other general corporate purposes.

 

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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.

We believe that our existing cash, cash equivalents, short-term investment portfolio and funds generated from operations, together with our available funding under our various debt facilities, will be sufficient to satisfy our liquidity needs through at least the end of 2015 including the required principal payments on our long-term debt.

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 and equity prices. We are exposed to market risk through our investments, revolving credit line and term loan agreements.

Our invested assets are held as cash and cash equivalents, restricted cash and investments, available-for-sale equity securities, equity securities and certificates of deposit. These investments are subject to interest rate risk and equity price risk. The fair values of our cash and cash equivalents, restricted cash and investments, and certificates of deposit at December 31, 2014 and 2013 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.

 

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ITEM 8. Financial Statements and Supplementary Data.

Index to Consolidated Financial Statements

 

     Page No.  

Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012

     47   

Consolidated Balance Sheets as of December 31, 2014 and 2013

     48   

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2014, 2013 and 2012

     49   

Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012

     50   

Notes to Consolidated Financial Statements for the years ended December 31, 2014, 2013 and 2012

     51   

Note 1: Summary of Significant Accounting Policies

     51   

Note 2: Business Combinations

     55   

Note 3: Goodwill

     63   

Note 4: Amortizable Intangible Assets

     63   

Note 5: Investments

     63   

Note 6: Fixed Assets

     64   

Note 7: Accrued Expenses and Other Liabilities

     65   

Note 8: Long-Term Debt

     65   

Note 9: Income Taxes

     67   

Note 10: Employee Savings Plan

     69   

Note 11: Stock-Based Compensation

     69   

Note 12: Supplemental Disclosures of Cash Flow Information

     74   

Note 13: Commitments and Contingencies

     74   

Note 14: Quarterly Operating Results (Unaudited)

     75   

Note 15: Segment Information

     76   

Note 16: Losses and Loss Adjustment Reserve

     77   

Note 17: Statutory Financial Information

     77   

Note 18: Subsidiary Dividend Restrictions

     77   

Note 19: Shareholders’ Equity

     78   

Report of Independent Registered Public Accounting Firm

     79   

 

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BROWN & BROWN, INC.

CONSOLIDATED STATEMENTS OF INCOME

 

     Year Ended December 31,  

(in thousands, except per share data)

   2014      2013      2012  

REVENUES

        

Commissions and fees

   $ 1,567,460       $ 1,355,503       $ 1,189,081   

Investment income

     747         638         797   

Other income, net

     7,589         7,138         10,154   
  

 

 

    

 

 

    

 

 

 

Total revenues

  1,575,796      1,363,279      1,200,032   
  

 

 

    

 

 

    

 

 

 

EXPENSES

Employee compensation and benefits

  791,749      683,000      608,506   

Non-cash stock-based compensation

  19,363      22,603      15,865   

Other operating expenses

  235,328      195,677      174,389   

Loss on disposal

  47,425      —       —    

Amortization

  82,941      67,932      63,573   

Depreciation

  20,895      17,485      15,373   

Interest

  28,408      16,440      16,097   

Change in estimated acquisition earn-out payables

  9,938      2,533      1,418   
  

 

 

    

 

 

    

 

 

 

Total expenses

  1,236,047      1,005,670      895,221   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

  339,749      357,609      304,811   

Income taxes

  132,853      140,497      120,766   
  

 

 

    

 

 

    

 

 

 

Net income

$ 206,896    $ 217,112    $ 184,045   
  

 

 

    

 

 

    

 

 

 

Net income per share:

Basic

$ 1.43    $ 1.50    $ 1.28   
  

 

 

    

 

 

    

 

 

 

Diluted

$ 1.41    $ 1.48    $ 1.26   
  

 

 

    

 

 

    

 

 

 

Weighted average number of shares outstanding:

Basic

  140,944      141,033      139,364   
  

 

 

    

 

 

    

 

 

 

Diluted

  142,891      142,624      142,010   
  

 

 

    

 

 

    

 

 

 

Dividends declared per share

$ 0.41    $ 0.37    $ 0.35   
  

 

 

    

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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BROWN & BROWN, INC.

CONSOLIDATED BALANCE SHEETS

 

     At December 31,  

(in thousands, except per share data)

   2014     2013  

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 470,048      $ 202,952   

Restricted cash and investments

     259,769        250,009   

Short-term investments

     11,157        10,624   

Premiums, commissions and fees receivable

     424,547        395,915   

Reinsurance recoverable

     13,028        —    

Prepaid reinsurance premiums

     320,586        —    

Deferred income taxes

     25,431        29,276   

Other current assets

     45,542        39,260   
  

 

 

   

 

 

 

Total current assets

  1,570,108      928,036   

Fixed assets, net

  84,668      74,733   

Goodwill

  2,460,611      2,006,173   

Amortizable intangible assets, net

  784,642      618,888   

Investments

  19,862      16   

Other assets

  36,567      21,662   
  

 

 

   

 

 

 

Total assets

$ 4,956,458    $ 3,649,508   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:

Premiums payable to insurance companies

$ 568,184    $ 534,360   

Losses and loss adjustment reserve

  13,028      —    

Unearned premiums

  320,586      —    

Premium deposits and credits due customers

  83,313      80,959   

Accounts payable

  57,261      34,158   

Accrued expenses and other liabilities

  181,156      157,400   

Current portion of long-term debt

  45,625      100,000   
  

 

 

   

 

 

 

Total current liabilities

  1,269,153      906,877   

Long-term debt

  1,152,846      380,000   

Deferred income taxes, net

  341,497      291,704   

Other liabilities

  79,217      63,786   

Commitments and contingencies (Note 13)

Shareholders’ Equity:

Common stock, par value $0.10 per share; authorized 280,000 shares; issued 145,871
and outstanding 143,486 at 2014; and issued and outstanding 145,419 at 2013

  14,587      14,542   

Additional paid-in capital

  405,982      371,960   

Treasury stock, at cost 2,385 and 0 shares at 2014 and 2013, respectively

  (75,025   —    

Retained earnings

  1,768,201      1,620,639   
  

 

 

   

 

 

 

Total shareholders’ equity

  2,113,745      2,007,141   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

$ 4,956,458    $ 3,649,508   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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BROWN & BROWN, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

     Common Stock      Additional
Paid-In
Capital
     Treasury
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total  

(in thousands, except per share data)

  
Shares
     Par
Value
             

Balance at January 1, 2012

     143,352       $ 14,335       $ 307,059       $ —        $ 1,322,562      $ 7      $ 1,643,963   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income and comprehensive income

  184,045      184,045   

Net unrealized holding gain on available-for-sale securities

  (7   (7

Common stock issued for employee stock benefit plans

  501      50      19,549      19,599   

Income tax benefit from exercise of stock benefit plans

  8,659      8,659   

Common stock issued to directors

  25      3      605      608   

Cash dividends paid ($0.35 per share)

  (49,534   (49,534
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

  143,878      14,388      335,872      —        1,457,073      —       1,807,333   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  217,112      217,112   

Common stock issued for employee stock benefit plans

  1,541      154      33,730      33,884   

Income tax benefit from exercise of stock benefit plans

  2,358      2,358   

Cash dividends paid ($0.37 per share)

  (53,546   (53,546
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

  145,419      14,542      371,960      —        1,620,639      —       2,007,141   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  206,896      206,896   

Common stock issued for employee stock benefit plans

  442      44      30,405      30,449   

Purchase of treasury stock

  (75,025   (75,025

Income tax benefit from exercise of stock benefit plans

  3,298      3,298   

Common stock issued to directors

  10      1      319      320   

Cash dividends paid ($0.41 per share)

  (59,334   (59,334
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

  145,871    $ 14,587    $ 405,982    $ (75,025 $ 1,768,201    $  —     $ 2,113,745   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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BROWN & BROWN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended December 31,  

(in thousands)

   2014     2013     2012  

Cash flows from operating activities:

      

Net income

   $ 206,896      $ 217,112      $ 184,045   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Amortization

     82,941        67,932        63,573   

Depreciation

     20,895        17,485        15,373   

Non-cash stock-based compensation

     19,363        22,603        15,865   

Change in estimated acquisition earn-out payables

     9,938        2,533        1,418   

Deferred income taxes

     7,369        32,247        32,723   

Amortization of debt discount

     46        —         —    

Income tax benefit from exercise of shares from the stock benefit plans

     (3,298     (2,358     (8,659

Loss(gain) on sales of investments, fixed assets and customer accounts

     42,465        (2,806     (4,105

Payments on acquisition earn-outs in excess of original estimated payables

     (2,539     (2,788     (4,086

Changes in operating assets and liabilities, net of effect from acquisitions and divestitures:

      

Restricted cash and investments (increase)

     (9,760     (85,445     (34,029

Premiums, commissions and fees receivable (increase)

     (11,160     (40,729     (11,312

Reinsurance recoverable decrease

     12,210        —         —    

Prepaid reinsurance premiums (increase)

     (31,573     —         —    

Other assets (increase) decrease

     (12,564     (2,583     2,145   

Premiums payable to insurance companies increase (decrease)

     8,164        61,624        (4,651

Premium deposits and credits due customers increase

     2,323        41,049        2,506   

Losses and loss adjustment reserve (decrease)

     (12,210     —         —    

Unearned premiums increase

     31,573        —         —    

Accounts payable increase

     36,949        5,180        36,505   

Accrued expenses and other liabilities increase (decrease)

     11,718        70,872        (43,059

Other liabilities (decrease)

     (24,727     (12,554     (23,937
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

  385,019      389,374      220,315   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

Additions to fixed assets

  (24,923   (16,366   (24,028

Payments for businesses acquired, net of cash acquired

  (696,486   (367,712   (425,054

Proceeds from sales of fixed assets and customer accounts

  13,631      5,886      14,095   

Purchases of investments

  (17,813   (18,102   (11,167

Proceeds from sales of investments

  18,278      15,662      10,654   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

  (707,313   (380,632   (435,500
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

Payments on acquisition earn-outs

  (9,530   (15,491   (13,539

Proceeds from long-term debt

  1,048,425      30,000      200,000   

Payments on long-term debt

  (330,000   (93   (1,227

Borrowings on revolving credit facilities

  475,000      31,863      100,000   

Payments on revolving credit facilities

  (475,000   (31,863   (100,000

Income tax benefit from exercise of shares from the stock benefit plans

  3,298      2,358      8,659   

Issuances of common stock for employee stock benefit plans

  14,808      12,445      13,305   

Repurchase of stock benefit plan shares for employees to fund tax withholdings

  (3,252   (1,284   (8,963

Purchase of treasury stock

  (75,025   —       —    

Cash dividends paid

  (59,334   (53,546   (49,534
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  589,390      (25,611   148,701   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  267,096      (16,869   (66,484

Cash and cash equivalents at beginning of year

  202,952      219,821      286,305   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

$ 470,048    $ 202,952    $ 219,821   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Notes to Consolidated Financial Statements

NOTE 1 Summary of Significant Accounting Policies

Nature of Operations

Brown & Brown, Inc., a Florida corporation, and its subsidiaries (collectively, “Brown & Brown” or the “Company”) is a diversified insurance agency, wholesale brokerage, insurance programs and services organization that markets and sells to its customers insurance products and services, primarily in the property and casualty area. Brown & Brown’s business is divided into four reportable segments: the Retail Segment, which provides a broad range of insurance products and services to commercial, public entity, professional and individual customers; the National Programs Segment, acting as a managing general agent (“MGA”), provides professional liability and related package products for certain professionals, flood coverage, 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 markets; the Wholesale Brokerage Segment, which markets and sells excess and surplus commercial insurance, primarily through independent agents and brokers; and 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 catastrophe claims adjusting services. In addition, as the result of our acquisition of the stock of The Wright Insurance Group, LLC (“Wright”), in May 2014, we own a flood insurance carrier, Wright National Flood Insurance Company (“WNFIC”), that is a Wright subsidiary. This carrier’s business consists of policies written pursuant to the National Flood Insurance Program (“NFIP”), the program administered by the Federal Emergency Management Agency (“FEMA”) and several excess flood insurance policies which are fully reinsured.

New Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”) which changes the criteria for reporting discontinued operations and enhances disclosures in this area. Under the new guidance, the disposal of a component or group of components of an entity should be reported as a discontinued operation if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Disposals of equity method investments, or those reported as held-for-sale, must be presented as a discontinued operation if they meet the new definition. The standard is effective prospectively for all disposals of components (or classification of components as held-for-sale) of an entity that occur within interim and annual periods beginning on or after December 15, 2014. Early adoption is permitted, but only for disposals (or classifications of components as held-for-sale) that have not been reported in financial statements previously issued. Brown & Brown has elected to early adopt this pronouncement and has reported a loss on disposal of $47.4 as a result of the sale of Axiom Re, effective December 31, 2014, in accordance with this pronouncement.

In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the Company beginning January 1, 2017 and, at that time the Company may adopt the new standard under the full retrospective approach or the modified retrospective approach. Early adoption is not permitted. The Company is currently evaluating the method and impact the adoption of ASU 2014-09 will have on the Company’s Consolidated Financial Statements.

In August 2014, FASB issued ASU 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern,” (“ASU 2014-15”), which addresses management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted. The Company does not expect to early adopt this guidance and it believes the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.

 

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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.

Revenue Recognition

Commission revenues are recognized as of the effective date of the insurance policy or the date on which the policy premium is processed into our systems, whichever is later. Commission revenues related to installment billings are recognized on the later of effective or invoiced, with the exception of our Arrowhead business which follows a policy of recognizing on the later of effective or processed into our systems regardless of the billing arrangement. Management determines the policy cancellation reserve based upon historical cancellation experience adjusted in accordance with known circumstances. Subsequent commission adjustments are recognized upon our receipt of notification from insurance companies concerning matters necessitating such adjustments. Profit-sharing contingent commissions are recognized when determinable, which is when such commissions are received from insurance companies, or when we receive formal notification of the amount of such payments. Fee revenues and commissions for workers’ compensation programs are recognized as services are rendered.

Use of Estimates

The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosures of contingent assets and liabilities, at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents principally consist of demand deposits with financial institutions and highly liquid investments with quoted market prices having maturities of three months or less when purchased.

Restricted Cash and Investments, and Premiums, Commissions and Fees Receivable

In its capacity as an insurance agent or broker, Brown & Brown typically collects premiums from insureds and, after deducting its authorized commissions, remits the net premiums to the appropriate insurance company or companies. Accordingly, as reported in the Consolidated Balance Sheets, “premiums” are receivable from insureds. Unremitted net insurance premiums are held in a fiduciary capacity until Brown & Brown disburses them. Brown & Brown invests these unremitted funds only in cash, money market accounts, tax-free variable-rate demand bonds and commercial paper held for a short term. In certain states in which Brown & Brown operates, the use and investment alternatives for these funds are regulated and restricted by various state laws and agencies. These restricted funds are reported as restricted cash and investments on the Consolidated Balance Sheets. The interest income earned on these unremitted funds, where allowed by state law, is reported as investment income in the Consolidated Statements of Income.

In other circumstances, the insurance companies collect the premiums directly from the insureds and remit the applicable commissions to Brown & Brown. Accordingly, as reported in the Consolidated Balance Sheets, “commissions” are receivables from insurance companies. “Fees” are primarily receivables due from customers.

Investments

Certificates of deposit, and other securities, having maturities of more than three months when purchased are reported at cost and are adjusted for other-than-temporary market value declines. During 2014 additional investments were included with the acquisition of Wright. These investments include U.S. Government, Municipal, domestic corporate and foreign corporate bonds as well as short-duration fixed income funds. Investments within the portfolio or funds are held as available for sale and are carried at their fair value. Any gain/loss applicable from the fair value change is recorded as other comprehensive income under the equity section of the consolidated balance sheet. Gains or losses recognized in earnings from the investments are included in investment income in the consolidated statements of income.

 

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Fixed Assets

Fixed assets, including leasehold improvements, are carried at cost, less accumulated depreciation and amortization. Expenditures for improvements are capitalized, and expenditures for maintenance and repairs are expensed to operations as incurred. Upon sale or retirement, the cost and related accumulated depreciation and amortization are removed from the accounts and the resulting gain or loss, if any, is reflected in other income. Depreciation has been determined using the straight-line method over the estimated useful lives of the related assets, which range from three to 15 years. Leasehold improvements are amortized on the straight-line method over the shorter of the useful life of the improvement or the term of the related lease.

Goodwill and Amortizable Intangible Assets

All of our business combinations initiated after June 30, 2001 are accounted for using the purchase method. Acquisition purchase prices are typically based on a multiple of average annual operating profit earned over a one-to three-year period within a minimum and maximum price range. The recorded purchase prices for all acquisitions consummated after January 1, 2009 include an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations are recorded in the Consolidated Statement of Income when incurred.

The fair value of earn-out obligations is based on the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions contained in the respective purchase agreements. In determining fair value, the acquired business’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 present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out payments will be made.

Amortizable intangible assets are stated at cost, less accumulated amortization, and consist of purchased customer accounts and non-compete agreements. Purchased customer accounts and non-compete agreements are amortized on a straight-line basis over the related estimated lives and contract periods, which range from five to 15 years. Purchased customer accounts primarily consist of records and files that contain information about insurance policies and the related insured parties that are essential to policy renewals.

The excess of the purchase price of an acquisition over the fair value of the identifiable tangible and amortizable intangible assets is assigned to goodwill. While goodwill is not amortizable, it is subject to assessment at least annually, and more frequently in the presence of certain circumstances, for impairment by application of a fair value-based test. The Company compares the fair value of each reporting unit with its carrying amount to determine if there is potential 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 on multiples of earnings before interest, income taxes, depreciation, amortization and change in estimated acquisition earn-out payables (“EBITDAC”), or on a discounted cash flow basis. Brown & Brown completed its most recent annual assessment as of November 30, 2014 and determined that the fair value of goodwill exceeded the carrying value of such assets. In addition, as of December 31, 2014, there are no accumulated impairment losses.

The carrying value of amortizable intangible assets attributable to each business or asset group comprising Brown & Brown is periodically reviewed by management to determine if there are events or changes in circumstances that would indicate that its carrying amount may not be recoverable. Accordingly, if there are any such changes in circumstances during the year, Brown & Brown assesses the carrying value of its amortizable intangible assets by considering the estimated future undiscounted cash flows generated by the corresponding business or asset group. Any impairment identified through this assessment may require that the carrying value of related amortizable intangible assets be adjusted. There were no impairments recorded for the years ended December 31, 2014, 2013 and 2012.

Income Taxes

Brown & Brown records income tax expense using the asset-and-liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and the income tax bases of Brown & Brown’s assets and liabilities.

Brown & Brown files a consolidated federal income tax return and has elected to file consolidated returns in certain states. Deferred income taxes are provided for in the Consolidated Financial Statements and relate principally to expenses charged to income for financial reporting purposes in one period and deducted for income tax purposes in other periods.

 

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Net Income Per Share

Effective in 2009, the Company adopted the FASB authoritative guidance that states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share (“EPS”) pursuant to the two-class method. The two-class method determines EPS for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. Performance stock shares granted to employees under the Company’s Performance Stock Plan and under the Company’s Stock Incentive Plan are considered participating securities as they receive non-forfeitable dividend equivalents at the same rate as common stock.

Basic EPS is computed based on the weighted average number of common shares (including participating securities) issued and outstanding during the period. Diluted EPS is computed based on the weighted average number of common shares issued and outstanding plus equivalent shares, assuming the exercise of stock options. The dilutive effect of stock options is computed by application of the treasury-stock method. The following is a reconciliation between basic and diluted weighted average shares outstanding for the years ended December 31:

 

(in thousands, except per share data)

   2014      2013      2012  

Net income

   $ 206,896       $ 217,112       $ 184,045   

Net income attributable to unvested awarded performance stock

     (5,186      (5,446      (5,313
  

 

 

    

 

 

    

 

 

 

Net income attributable to common shares

$ 201,710    $ 211,666    $ 178,732   
  

 

 

    

 

 

    

 

 

 

Weighted average basic number of common shares outstanding

  144,568      144,662      143,507   

Less unvested awarded performance stock included in weighted average basic share outstanding

  (3,624   (3,629   (4,143
  

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding for basic earnings per common share

  140,944      141,033      139,364   

Dilutive effect of stock options

  1,947      1,591      2,646   
  

 

 

    

 

 

    

 

 

 

Weighted average number of shares outstanding

  142,891      142,624      142,010   
  

 

 

    

 

 

    

 

 

 

Net income per share:

Basic

$ 1.43    $ 1.50    $ 1.28   
  

 

 

    

 

 

    

 

 

 

Diluted

$ 1.41    $ 1.48    $ 1.26   
  

 

 

    

 

 

    

 

 

 

Fair Value of Financial Instruments

The carrying amounts of Brown & Brown’s financial assets and liabilities, including cash and cash equivalents; restricted cash and short-term investments; investments; premiums, commissions and fees receivable; reinsurance recoverable; prepaid reinsurance premiums; premiums payable to insurance companies; losses and loss adjustment reserve; unearned premium; premium deposits and credits due customers and accounts payable, at December 31, 2014 and 2013, approximate fair value because of the short-term maturity of these instruments. The carrying amount of Brown & Brown’s long-term debt approximates fair value at December 31, 2014 and 2013 as our fixed-rate borrowings of $650.0 million approximate their values using market quotes of notes with the similar terms as ours, which we deem a close approximation of current market rates. Of the $650.0 million, $25.0 million is related to short-term notes which approximates its carrying value due to its proximity to maturity. The estimated fair value of the $550.0 million term loan under our J.P. Morgan Credit Facility approximates the carrying value due to the variable interest rate based on adjusted LIBOR. See note 2 to our consolidated financial statements for the fair values related to the establishment of intangible assets and the establishment and adjustment of earn-out payables. See note 5 for information on the fair value of investments and note 8 for information on the fair value of long-term debt.

Stock-Based Compensation

The Company granted stock options and grants non-vested stock awards to its employees, officers and directors. The Company uses the modified-prospective method to account for share-based payments. Under the modified-prospective method, compensation cost is recognized for all share-based payments granted on or after January 1, 2006 and for all awards granted to employees prior to January 1, 2006 that remained unvested on that date. The Company uses the alternative-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.

 

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Financial Reporting Related to Insurance Company Operations

Reinsurance

The Company protects itself from claims related losses by reinsuring all claims related risk exposure. The only line of insurance the Company underwrites is flood insurance associated with Wright. However, all exposure is reinsured with FEMA for basic admitted policies conforming to the National Flood Insurance Program. For excess flood insurance policies, all exposure is reinsured with a reinsurance carrier with an AM Best Company rating of “A” or better. Reinsurance does not legally discharge the ceding insurer from the primary liability for the full amount due under the reinsured policies. Reinsurance premiums, commissions, expense reimbursement and related reserves related to ceded business are accounted for on a basis consistent with the accounting for the original policies issued and the terms of reinsurance contracts. Premiums earned and losses and loss adjustment expenses incurred are reported net of reinsurance amounts. Other underwriting expenses are shown net of earned ceding commission income. The liabilities for unpaid losses and loss adjustment expenses and unearned premiums are reported gross of ceded reinsurance recoverable.

Balances due from reinsurers on unpaid losses and loss adjustment expenses, including an estimate of such recoverables related to reserves for incurred but not reported (“IBNR”) losses, are reported as assets and are included in reinsurance recoverable even though amounts due on unpaid loss and loss adjustment expense are not recoverable from the reinsurer until such losses are paid. The Company does not believe it is exposed to any material credit risk through its reinsurance as the reinsurer is FEMA for basic admitted flood policies and a national reinsurance carrier for excess flood policies, which has an AM Best Company rating of “A” or better. Historically, no amounts due from reinsurance carriers have been written off as uncollectible.

Unpaid Losses and Loss Adjustment Reserve

Unpaid losses and loss adjustment reserve include amounts determined on individual claims and other estimates based on the past experience of WNFIC and the policyholders for IBNR claims, less anticipated salvage and subrogation recoverable. The methods of making such estimates and for establishing the resulting reserves are continually reviewed and updated, and any adjustments resulting therefrom are reflected in operations currently.

WNFIC engages the services of outside actuarial consulting firms (the “Actuaries”) to assist on an annual basis to render an opinion on the sufficiency of the Company’s estimates for unpaid losses and related loss adjustment reserve. The Actuaries utilize both industry experience and the Company’s own experience to develop estimates of those amounts as of year-end. These estimated liabilities are subject to the impact of future changes in claim severity, frequency and other factors. In spite of the variability inherent in such estimates, management believes that the liabilities for unpaid losses and related loss adjustment reserve is adequate.

Premiums

Premiums are recognized as income over the coverage period of the related policies. Unearned premiums represent the portion of premiums written that relate to the unexpired terms of the policies in force and are determined on a daily pro rata basis. The income is recorded to the commissions and fees line of the income statement.

NOTE 2 Business Combinations

Acquisitions in 2014

During the year ended December 31, 2014, Brown & Brown acquired the assets and assumed certain liabilities of nine insurance intermediaries, all of the stock of one insurance intermediary that owns an insurance carrier and several 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 Topic 805 — Business Combinations (“ASC 805”). All of these acquisitions were acquired primarily to expand Brown & Brown’s core business and to attract and hire high-quality individuals. The recorded purchase price for all acquisitions consummated after January 1, 2009 included an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations will be recorded in the Consolidated Statement of Income when incurred.

 

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The fair value of earn-out obligations is based on the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions outlined in the respective purchase agreements. In determining fair value, the acquired business’s future performance is estimated using financial projections developed by management for the acquired business and reflects market participant assumptions regarding revenue growth and/or profitability. The expected future payments are estimated on the basis of the earn-out formula and performance targets specified in each purchase agreement compared to the associated financial projections. These payments are then discounted to present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out payments will be made.

Based on the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company’s Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period, as defined in ASC 805. For the year ended December 31, 2014, several adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $26,000 relating to the assumption of certain liabilities.

Cash paid for acquisitions were $721.9 million and $408.1 million in the year ended December 31, 2014 and 2013, respectively. We completed 10 acquisitions (excluding book of business purchases) in the year ended December 31, 2014, with the largest being Wright, which was effective May 1, 2014 and cash paid totaled $609.2 million. We completed 9 acquisitions (excluding book of business purchases) in the twelve-month period ended December 31, 2013, with the largest being Beecher Carlson Holdings, Inc. which was effective July 1, 2013 and cash paid totaled to $364.2 million.

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

 

(in thousands)                                                 

Name

   Business
Segment
     2014
Date of
Acquisition
     Cash
Paid
     Other
Payable
     Recorded
Earn-out
Payable
     Net Assets
Acquired
     Maximum
Potential
Earn-out
Payable
 

The Wright Insurance Group, LLC

    
 
National
Programs
  
  
     May 1       $ 609,183       $ 1,471       $ —         $ 610,654       $ —     

Pacific Resources Benefits Advisors, LLC (“PacRes”)

     Retail         May 1         90,000         —          27,452         117,452         35,000   

Axia Strategies, Inc (“Axia”)

    
 
Wholesale
Brokerage
  
  
     May 1         9,870         —          1,824         11,694         5,200   

Other

     Various         Various         12,798         433         3,953         17,184         9,262   
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 721,851    $ 1,904    $ 33,229    $ 756,984    $ 49,462   
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

(in thousands)

   Wright     PacRes     Axia      Other     Total  

Cash

   $ 25,365      $ —        $ —        $ —       $ 25,365   

Other current assets

     16,474        3,647        101         742        20,964   

Fixed assets

     7,172        53        24         1,724        8,973   

Reinsurance recoverable

     25,238        —          —          —         25,238   

Prepaid reinsurance premiums

     289,013        —          —          —         289,013   

Goodwill

     420,209        76,023        7,276         10,417        513,925   

Purchased customer accounts

     213,677        38,111        4,252         4,384        260,424   

Non-compete agreements

     966        21        41         166        1,194   

Other assets

     20,045        —          —          —         20,045   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total assets acquired

  1,018,159      117,855      11,694      17,433      1,165,141   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other current liabilities

  (14,322   (403   —       (249   (14,974

Losses and loss adjustment reserve

  (25,238   —        —       —       (25,238

Unearned premiums

  (289,013   —        —       —       (289,013

Deferred income taxes, net

  (46,566   —        —       —       (46,566

Other liabilities

  (32,366   —        —       —       (32,366
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities assumed

  (407,505   (403   —       (249   (408,157
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net assets acquired

$ 610,654    $ 117,452    $ 11,694    $ 17,184    $ 756,984   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

The weighted average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15.0 years; and non-compete agreements, 3.4 years.

Goodwill of $513,925,000 was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $86,454,000, $420,037,000, $7,673,000 and ($239,000), respectively. Of the total goodwill of $513,925,000, $141,887,000 is currently deductible for income tax purposes and $338,809,000 is non-deductible. The remaining $33,229,000 relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

The results of operations for the acquisitions completed during 2014 have been combined with those of the Company since the acquisition date. The total revenues and loss before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through December 31, 2014, included in the Consolidated Statement of Income for the year ended December 31, 2014, were $112,247,000 and $(1,307,000), respectively. If the acquisitions had occurred as of the beginning of the respective periods, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.

 

(UNAUDITED)    For the Year Ended
December 31,
 
(in thousands, except per share data)    2014      2013  

Total revenues

   $ 1,630,162       $ 1,520,858   

Income before income taxes

   $ 358,229       $ 409,522   

Net income

   $ 218,150       $ 248,628   

Net income per share:

     

Basic

   $ 1.51       $ 1.72   

Diluted

   $ 1.49       $ 1.70   

Weighted average number of shares outstanding:

     

Basic

     140,944         141,033   

Diluted

     142,891         142,624   

 

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Table of Contents

Acquisitions in 2013

During 2013, Brown & Brown acquired the assets and assumed certain liabilities of eight insurance intermediaries, all of the stock of one insurance intermediary and a book of business (customer accounts). The aggregate purchase price of these acquisitions was $519,794,000, including $408,072,000 of cash payments, the issuance of $552,000 in other payables, the assumption of $106,079,000 of liabilities and $5,091,000 of recorded earn-out payables. All of these acquisitions were acquired primarily to expand Brown & Brown’s core businesses and to attract high-quality personnel. Acquisition purchase prices are typically based on a multiple of average annual operating profit earned over a one-to three-year period within a minimum and maximum price range. The recorded purchase price for all acquisitions consummated after January 1, 2009 included an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations will be recorded in the Consolidated Statement of Income when incurred.

The fair value of earn-out obligations is based on the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions outlined in the respective purchase agreements. In determining fair value, the acquired business’s future performance is estimated using financial projections developed by management for the acquired business and reflects market participant assumptions regarding revenue growth and/or profitability. The expected future payments are estimated on the basis of the earn-out formula and performance targets specified in each purchase agreement compared to the associated financial projections. These payments are then discounted to present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out payments will be made.

Based on the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company’s Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period, as defined in ASC 805.

For 2013, several adjustments were made within the permitted measurement period that resulted in a reduction to the aggregate purchase price of the applicable acquisition of $504,000, including $18,000 of cash payments, an increase of $117,000 in other payables, the assumption of $82,000 of liabilities and the reduction of $721,000 in recorded earn-out payables.

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

 

(in thousands)                                                 

Name

   Business
Segment
     2013
Date of
Acquisition
     Cash
Paid
     Other
Payable
     Recorded
Earn-out
Payable
     Net Assets
Acquired
     Maximum
Potential
Earn-out
Payable
 

The Rollins Agency, Inc.

     Retail         June 1       $ 13,792       $ 50       $ 2,321       $ 16,163       $ 4,300   

Beecher Carlson Holdings, Inc.

    
 
 
Retail;
National
Programs
  
  
  
     July 1         364,256         —          —          364,256         —    

ICA, Inc.

     Services         December 31         19,770         —          727         20,497         5,000   

Other

     Various         Various         10,254         502         2,043         12,799         7,468   
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 408,072    $ 552    $ 5,091    $ 413,715    $ 16,768   
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

(in thousands)

   Rollins     Beecher     ICA      Other     Total  

Cash

   $ —       $ 40,360      $ —        $ —       $ 40,360   

Other current assets

     393        57,632        —          1,573        59,598   

Fixed assets

     30        1,786        75         24        1,915   

Goodwill

     12,697        265,174        12,377         5,696        295,944   

Purchased customer accounts

     3,878        101,565        7,917         5,623        118,983   

Non-compete agreements

     31        2,758        21         76        2,886   

Other assets

     —         —          107         1        108   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total assets acquired

  17,029      469,275      20,497      12,993      519,794   

Other current liabilities

  (866   (80,090   —       (194   (81,150

Deferred income taxes, net

  —       (22,764   —       —       (22,764

Other liabilities

  —       (2,165   —       —       (2,165
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities assumed

  (866   (105,019   —       (194   (106,079
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net assets acquired

$ 16,163    $ 364,256    $ 20,497    $ 12,799    $ 413,715   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

The weighted average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15.0 years; and non-compete agreements, 5.0 years.

Goodwill of $295,944,000 was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $257,196,000, $27,091,000, ($812,000) and $12,469,000, respectively. Of the total goodwill of $295,944,000, $41,663,000 is currently deductible for income tax purposes and $249,190,000 is non-deductible. The remaining $5,091,000 relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

The results of operations for the acquisitions completed during 2013 have been combined with those of the Company since their respective acquisition dates. The total revenues and income before income taxes from the acquisitions completed through December 31, 2013, included in the Consolidated Statement of Income for the year ended December 31, 2013, were $63,797,000 and $872,000, respectively. If the acquisitions had occurred as of the beginning of the period, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.

 

(UNAUDITED)    For the Year Ended
December 31,
 
(in thousands, except per share data)    2013      2012  

Total revenues

   $ 1,439,918       $ 1,329,262   

Income before income taxes

   $ 373,175       $ 329,291   

Net income

   $ 226,562       $ 198,826   

Net income per share:

     

Basic

   $ 1.57       $ 1.39   

Diluted

   $ 1.55       $ 1.36   

Weighted average number of shares outstanding:

     

Basic

     141,033         139,634   

Diluted

     142,624         142,010   

 

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Table of Contents

Acquisitions in 2012

During 2012, Brown & Brown acquired the assets and assumed certain liabilities of 19 insurance intermediaries, all of the stock of one insurance intermediary and a book of business (customer accounts). The aggregate purchase price of these acquisitions was $667,586,000, including $483,933,000 of cash payments, the issuance of notes payable of $59,000, the issuance of $25,439,000 in other payables, the assumption of $136,676,000 of liabilities and $21,479,000 of recorded earn-out payables. The ‘other payables’ amount includes $22,061,000 that the Company is obligated to pay all shareholders of Arrowhead on a pro rata basis for certain pre-merger corporate tax refunds and certain estimated potential future income tax credits that were created by net operating loss carryforwards originating from transaction-related tax benefit items. All of these acquisitions were acquired primarily to expand Brown & Brown’s core businesses and to attract high-quality personnel. Acquisition purchase prices are typically based on a multiple of average annual operating profit earned over a one—to three-year period within a minimum and maximum price range. The recorded purchase price for all acquisitions consummated after January 1, 2009 included an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations will be recorded in the Consolidated Statement of Income when incurred.

The fair value of earn-out obligations is based on the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions outlined in the respective purchase agreements. In determining fair value, the acquired business’s future performance is estimated using financial projections developed by management for the acquired business and reflects market participant assumptions regarding revenue growth and/or profitability. The expected future payments are estimated on the basis of the earn-out formula and performance targets specified in each purchase agreement compared to the associated financial projections. These payments are then discounted to present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out payments will be made.

The acquisitions made in 2012 have been accounted for as business combinations and are as follows:

 

(in thousands)                                                        

Name

   Business
Segment
     2012
Date of
Acquisition
     Cash
Paid
     Note
Payable
     Other
Payable
     Recorded
Earn-out
Payable
     Net Assets
Acquired
     Maximum
Potential
Earn-out
Payable
 

Arrowhead General Insurance Agency Superholding Corporation

    
 
 
National
Programs;
Services
  
  
  
     January 9       $ 396,952       $ —        $ 22,061       $ 3,290       $ 422,303       $ 5,000   

Insurcorp & GGM Investments LLC (d/b/a Maalouf Benefit Resources)

     Retail         May 1         15,500         —          900         4,944         21,344         17,000   

Richard W. Endlar Insurance Agency, Inc.

     Retail         May 1         10,825         —          —          2,598         13,423         5,500   

Texas Security General Insurance Agency, Inc.

    
 
Wholesale
Brokerage
  
  
     September 1         14,506         —          2,182         2,124         18,812         7,200   

Behnke & Associates, Inc.

     Retail         December 1         9,213         —          —          1,126         10,339         3,321   

Rowlands & Barranca Agency, Inc.

     Retail         December 1         8,745         —          —          2,401         11,146         4,000   

Other

     Various         Various         28,192         59         296         4,996         33,543         14,149   
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 483,933    $ 59    $ 25,439    $ 21,479    $ 530,910    $ 56,170   
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

(in thousands)

   Arrowhead     Insurcorp     Endlar     Texas Security     Behnke      Rowlands     Other     Total  

Cash

   $ 61,786      $ —       $ —       $ —       $ —        $ —       $ —       $ 61,786   

Other current assets

     69,051        180        305        1,866        —          —         422        71,824   

Fixed assets

     4,629        25        25        45        25         30        158        4,937   

Goodwill

     321,128        14,745        8,044        10,845        6,430         8,363        21,085        390,640   

Purchased customer accounts

     99,675        6,490        5,230        6,229        3,843         3,367        13,112        137,946   

Non-compete agreements

     100        22        11        14        41         21        243        452   

Other assets

     1        —         —         —         —          —         —         1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total assets acquired

  556,370      21,462      13,615      18,999      10,339      11,781      35,020      667,586   

Other current liabilities

  (107,579   (118   (192   (187   —       (635   (1,477   (110,188

Deferred income taxes, net

  (26,488   —       —       —       —       —       —       (26,488
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities assumed

  (134,067   (118   (192   (187   —        (635   (1,477   (136,676
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net assets acquired

$ 422,303    $ 21,344    $ 13,423    $ 18,812    $ 10,339    $ 11,146    $ 33,543    $ 530,910   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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 $390,640,000, was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $57,856,000, $289,378,000, $11,656,000 and $31,750,000, respectively. Of the total goodwill of $390,640,000, $52,730,000 is currently deductible for income tax purposes and $316,431,000 is non-deductible. The remaining $21,479,000 relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

The results of operations for the acquisitions completed during 2012 have been combined with those of the Company since their respective acquisition dates. The total revenues and income before income taxes from the acquisitions completed through December 31, 2012, included in the Consolidated Statement of Income for the year ended December 31, 2012, were $129,472,000 and $898,000, respectively. If the acquisitions had occurred as of the beginning of the period, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.

 

(UNAUDITED)    For the Year Ended
December 31,
 
(in thousands, except per share data)    2012      2011  

Total revenues

   $ 1,230,408       $ 1,163,341   

Income before income taxes

   $ 315,051       $ 313,706   

Net income

   $ 190,228       $ 190,174   

Net income per share:

     

Basic

   $ 1.33       $ 1.33   

Diluted

   $ 1.30       $ 1.31   

Weighted average number of shares outstanding:

     

Basic

     139,364         138,582   

Diluted

     142,010         140,264   

 

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Table of Contents

For acquisitions consummated prior to January 1, 2009, additional consideration paid to sellers as a result of the purchase price earn-out provisions are recorded as adjustments to intangible assets when the contingencies are settled. The net additional consideration paid by the Company in 2014 as a result of those adjustments totaled $26,000, all of which was allocated to goodwill. Of the $26,000 net additional consideration paid, $26,000 was recorded in other payables. The net additional consideration paid by the Company in 2013 as a result of these adjustments totaled $873,000, all of which was allocated to goodwill. Of the $873,000 net additional consideration paid, $873,000 was issued in other payables.

As of December 31, 2014, the maximum future contingency payments related to all acquisitions totaled $130,654,000, all of which relates to acquisitions consummated subsequent to January 1, 2009.

ASC Topic 805—Business Combinations is the authoritative guidance requiring an acquirer to recognize 100% of the fair values of acquired assets, including goodwill, and assumed liabilities (with only limited exceptions) upon initially obtaining control of an acquired entity. Additionally, the fair value of contingent consideration arrangements (such as earn-out purchase arrangements) at the acquisition date must be included in the purchase price consideration. As a result, the recorded purchase prices for all acquisitions consummated after January 1, 2009 include an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in these earn-out obligations will be recorded in the Consolidated Statement of Income when incurred. Potential earn-out obligations are typically based upon future earnings of the acquired entities, usually between one and three years.

As of December 31, 2014, 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. 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, were as follows:

 

     For the Year Ended December 31,  
(in thousands)    2014      2013      2012  

Balance as of the beginning of the period

   $ 43,058       $ 52,987       $ 47,715   

Additions to estimated acquisition earn-out payables

     34,356         5,816         21,479   

Payments for estimated acquisition earn-out payables

     (12,069      (18,278      (17,625
  

 

 

    

 

 

    

 

 

 

Subtotal

  65,345      40,525      51,569   

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

Change in fair value on estimated acquisition earn-out payables

  7,375      570      (1,051

Interest expense accretion

  2,563      1,963      2,469   
  

 

 

    

 

 

    

 

 

 

Net change in earnings from estimated acquisition earn-out payables

  9,938      2,533      1,418   
  

 

 

    

 

 

    

 

 

 

Balance as of December 31

$ 75,283    $ 43,058    $ 52,987   
  

 

 

    

 

 

    

 

 

 

Of the $75,283,000 estimated acquisition earn-out payables as of December 31, 2014, $26,018,000 was recorded as accounts payable and $49,265,000 was recorded as an other non-current liability. Of the $43,058,000 estimated acquisition earn-out payables as of December 31, 2013, $6,312,000 was recorded as accounts payable and $36,746,000 was recorded as an other non-current liability. As of December 31, 2012, the estimated acquisition earn-out payables equaled $52,987,000, of which $10,164,000 was recorded as accounts payable and $42,823,000 was recorded as an other non-current liability.

 

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Table of Contents

NOTE 3 Goodwill

The changes in the carrying value of goodwill by reportable segment for the years ended December 31, are as follows:

 

(in thousands)

   Retail     National
Programs
    Wholesale
Brokerage
    Service     Total  

Balance as of January 1, 2013

   $ 876,219      $ 439,180      $ 288,054      $ 108,061      $ 1,711,514   

Goodwill of acquired businesses

     257,196        27,964        (812     12,469        296,817   

Goodwill disposed of relating to sales of businesses

     (2,158     —         —         —         (2,158
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2013

  1,131,257      467,144      287,242      120,530      2,006,173   

Goodwill of acquired businesses

  86,454      420,063      7,673      (239   513,951   

Goodwill disposed of relating to sales of businesses

  (3,696   (9,564   (46,253   —       (59,513
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2014

$ 1,214,015    $ 877,643    $ 248,662    $ 120,291    $ 2,460,611   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During 2014 we disposed of Axiom Re (“Axiom”) effective December 31, 2014 as part of our strategy to exit the reinsurance brokerage business. For the years ended December 31, 2014 and 2013, Axiom recorded a (loss) income before income taxes of ($587,000) and $113,000, respectively, which are included in the Wholesale Brokerage segment.

NOTE 4 Amortizable Intangible Assets

Amortizable intangible assets at December 31 consisted of the following:

 

     2014      2013  

(in thousands)

   Gross
Carrying
Value
     Accumulated
Amortization
    Net
Carrying
Value
     Weighted
Average
Life
(years)
     Gross
Carrying
Value
     Accumulated
Amortization
    Net
Carrying
Value
     Weighted
Average
Life
(years)
 

Purchased customer accounts

   $ 1,355,550       $ (574,285   $ 781,265         14.9       $ 1,120,719       $ (505,137   $ 615,582         14.9   

Non-compete agreements

     29,139         (25,762     3,377         6.8         28,115         (24,809     3,306         7.0   
  

 

 

    

 

 

   

 

 

       

 

 

    

 

 

   

 

 

    

Total

$ 1,384,689    $ (600,047 $ 784,642    $ 1,148,834    $ (529,946 $ 618,888   
  

 

 

    

 

 

   

 

 

       

 

 

    

 

 

   

 

 

    

Amortization expense recorded for amortizable intangible assets for the years ended December 31, 2014, 2013 and 2012 was $82,941,000, $67,932,000 and $63,573,000, respectively.

Amortization expense for amortizable intangible assets for the years ending December 31, 2015, 2016, 2017, 2018 and 2019 is estimated to be $86,029,000, $81,547,000, $78,640,000, $73,262,000, and $68,722,000, respectively.

NOTE 5 Investments

At December 31, 2014, the Company’s amortized cost and fair values of fixed maturity securities are summarized as follows:

 

(in thousands)    Cost      Gross Unrealized
Gains
     Gross Unrealized
Losses
     Fair
Value
 

U.S. Treasury securities, obligations of U.S. Government agencies and Municipals

   $ 10,774       $ 7       $ (1    $ 10,780   

Foreign government

     50         —           —           50   

Corporate debt

     5,854         9         (11      5,852   

Short duration fixed income fund

     3,143         37         —           3,180   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 19,821    $ 53    $ (12 $ 19,862   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table shows the investments’ gross unrealized loss and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2014.

 

(in thousands)    Less than 12 Months      12 Months or More      Total  
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 

U.S. Treasury securities, obligations of U.S. Government agencies and Municipals

   $ 3,994       $ 1       $ —         $ —         $ 3,994       $ 1   

Foreign Government

     50         —           —           —           50         —     

Corporate debt

     4,439         11         —           —           4,439         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 8,483    $ 12    $ —      $ —      $ 8,483    $ 12   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The unrealized losses in the Company’s investments in U.S. Treasury Securities and obligations of U.S. Government Agencies and bonds from corporate issuers were caused by interest rate increases. At December 31, 2014, the Company had 38 securities in an unrealized loss position. The contractual cash flows of the U.S. Treasury Securities and obligations of the U.S. Government agencies investments are either guaranteed by the U.S. Government or an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. The corporate securities are highly rated securities with no indicators of potential impairment. Based on the ability and intent of the Company to hold these investments until recovery of fair value, which may be maturity, the bonds were not considered to be other-than-temporarily impaired at December 31, 2014.

The amortized cost and estimated fair value of the fixed maturity securities at December 31, 2014 by contractual maturity are set forth below:

 

(in thousands)    Amortized Cost      Fair Value  

Years to maturity:

     

Due in one year or less

   $ 5,628       $ 5,628   

Due after one year through five years

     13,863         13,897   

Due after five years through ten years

     330         337   
  

 

 

    

 

 

 

Total

$ 19,821    $ 19,862   
  

 

 

    

 

 

 

The expected maturities in the foregoing table may differ from the contractual maturities because certain borrowers have the right to call or prepay obligations with or without penalty.

Proceeds from sales of the Company’s investment in fixed maturity securities were $0.2 million including maturities from the year ended December 31, 2014. There were no gains and losses realized on those sales for the year ended December 31, 2014.

Realized gains and losses are reported on the consolidated statements of income, with the cost of securities sold determined on a specific identification basis.

NOTE 6 Fixed Assets

Fixed assets at December 31 consisted of the following:

 

(in thousands)

   2014      2013  

Furniture, fixtures and equipment

   $ 161,539       $ 149,170   

Leasehold improvements

     30,030         21,231   

Land, buildings and improvements

     3,739         3,815   
  

 

 

    

 

 

 

Total cost

  195,308      174,216   

Less accumulated depreciation and amortization

  (110,640   (99,483
  

 

 

    

 

 

 

Total

$ 84,668    $ 74,733   
  

 

 

    

 

 

 

Depreciation and amortization expense for fixed assets amounted to $20,895,000 in 2014, $17,485,000 in 2013, and $15,373,000 in 2012.

 

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NOTE 7 Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities at December 31 consisted of the following:

 

(in thousands)

   2014      2013  

Accrued bonuses

   $ 76,891       $ 70,272   

Accrued compensation and benefits

     36,241         35,145   

Accrued rent and vendor expenses

     29,039         19,235   

Reserve for policy cancellations

     9,074         8,010   

Accrued interest

     6,527         3,324   

Other

     23,384         21,414   
  

 

 

    

 

 

 

Total

$ 181,156    $ 157,400   
  

 

 

    

 

 

 

NOTE 8 Long-Term Debt

Long-term debt at December 31 consisted of the following:

 

(in thousands)    2014      2013  

Current portion of long-term debt:

     

Current portion of 5-year term loan facility expires 2019

   $ 20,625       $ —     

6.080% senior notes, Series B, semi-annual interest payments, balloon due 2014

     —           100,000   

5.370% senior notes, Series D, quarterly interest payments, balloon due 2015

     25,000         —     
  

 

 

    

 

 

 

Total current portion of long-term debt

$ 45,625    $ 100,000   
  

 

 

    

 

 

 

Long-term debt:

Note agreements:

5.370% senior notes, Series D, quarterly interest payments, balloon due 2015

$ —      $ 25,000   

5.660% senior notes, Series C, semi-annual interest payments, balloon due 2016

  25,000      25,000   

4.500% senior notes, Series E, quarterly interest payments, balloon due 2018

  100,000      100,000   

4.200% senior notes, semi-annual interest payments, balloon due 2024

  498,471      —     
  

 

 

    

 

 

 

Total notes

$ 623,471    $ 150,000   
  

 

 

    

 

 

 

Credit agreements:

Periodic payments of interest, LIBOR plus 1.00%, expires December 31, 2016

$ —      $ 100,000   

Quarterly payments of interest, LIBOR plus 1.00%, expires December 31, 2016

  —        100,000   

Periodic payments of interest, LIBOR plus 1.00%, expires December 31, 2016

  —        30,000   

5-year term-loan facility, periodic interest and principal payments, currently LIBOR plus 1.375%, expires May 20, 2019

  529,375      —     

5-year revolving-loan facility, periodic interest payments, currently LIBOR plus 1.175%, plus commitment fees of 0.20%, expires May 20, 2019

  —        —     

Revolving credit loan, quarterly interest payments, LIBOR plus up to 1.40% and availability fee up to 0.25%, expires December 31, 2016

  —        —     
  

 

 

    

 

 

 

Total credit agreements

$ 529,375    $ 230,000   
  

 

 

    

 

 

 

Total long-term debt

$ 1,152,846    $ 380,000   

Current portion of long-term debt

$ 45,625    $ 100,000   
  

 

 

    

 

 

 

Total debt

$ 1,198,471    $ 480,000   
  

 

 

    

 

 

 

In July 2004, the Company completed a private placement of $200.0 million of unsecured senior notes (the “Notes”). The $200.0 million was divided into two series: (1) Series A, which closed on September 15, 2004, for $100.0 million due in 2011 and bore interest at 5.57% per year; and (2) Series B, which closed on July 15, 2004, for $100.0 million due in 2014 and bore interest at 6.08% per year. On September 15, 2011, the $100.0 million of Series A Notes were redeemed on their normal maturity date through use of funds from the Master Agreement (defined below). As of July 15, 2014 the Series B Notes were redeemed at maturity using proceeds from the Credit Facility (defined below).

 

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On December 22, 2006, the Company entered into a Master Shelf and Note Purchase Agreement (the “Master Agreement”) with a national insurance company (the “Purchaser”). The initial issuance of notes under the Master Agreement occurred on December 22, 2006, through the issuance of $25.0 million in Series C Senior Notes due December 22, 2016, with a fixed interest rate of 5.66% per year. On February 1, 2008, $25.0 million in Series D Senior Notes due January 15, 2015, with a fixed interest rate of 5.37% per year, were issued. On September 15, 2011, and pursuant to a Confirmation of Acceptance (the “Confirmation”), dated January 21, 2011, in connection with the Master Agreement, $100.0 million in Series E Senior Notes were issued and are due September 15, 2018, with a fixed interest rate of 4.50% per year. The Series E Senior Notes were issued for the sole purpose of retiring the Series A Senior Notes. As of December 31, 2014 and 2013, there was an outstanding debt balance issued under the provisions of the Master Agreement of $150.0 million. 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 January 9, 2012, the Company entered into: (1) an amended and restated revolving and term loan credit agreement (the “SunTrust Agreement”) with SunTrust Bank (“SunTrust”) that provided for (a) a $100.0 million term loan (the “SunTrust Term Loan”) and (b) a $50.0 million revolving line of credit (the “SunTrust Revolver”) and (2) a $50.0 million promissory note. The maturity date for the SunTrust Term Loan and the SunTrust Revolver was December 31, 2016, at which time all outstanding principal and unpaid interest would have been due. On May 20, 2014, in connection with closing the Wright acquisition and funding of the Credit Facility (as defined below), the SunTrust Term Loan was paid in full using proceeds from the Credit Facility and the SunTrust Revolver was also terminated at that time.

On January 26, 2012, the Company entered into a term loan agreement (the “JPM Agreement”) with JPMorgan that provided for a $100.0 million term loan (the “JPM Term Loan”). The JPM Term Loan was fully funded on January 26, 2012, and provided the financing to fully repay (1) the JPM Bridge Facility and (2) the SunTrust Revolver. As a result of the January 26, 2012 financing and repayments, the JPM Bridge Facility was terminated and the SunTrust Revolver’s amount outstanding was reduced to zero. The maturity date for the JPM Term Loan was December 31, 2016, at which time all outstanding principal and unpaid interest would have been due. On May 20, 2014, in connection with closing the Wright acquisition and funding of the Credit Facility (as defined below), the JPM Term Loan was paid in full and terminated using proceeds from the Credit Facility.

On July 1, 2013, in conjunction with the acquisition of Beecher Carlson Holdings, Inc., the Company entered into: (1) a revolving loan agreement (the “Wells Fargo Agreement”) with Wells Fargo Bank, N.A. that provided for a $50.0 million revolving line of credit (the “Wells Fargo Revolver”) and (2) a term loan agreement (the “Bank of America Agreement”) with Bank of America, N.A. (“Bank of America”) that provided for a $30.0 million term loan (the “Bank of America Term Loan”).

The maturity date for the Wells Fargo Revolver is December 31, 2016, at which time all outstanding principal and unpaid interest will be due. The Wells Fargo Revolver may be increased by up to $50.0 million (bringing the total amount available to $100.0 million). The calculation of interest and fees for the Wells Fargo Agreement is generally based on the Company’s funded debt-to-EBITDA ratio. Interest is charged at a rate equal to 1.00% to 1.40% above LIBOR or 1.00% below the Base Rate, each as more fully described in the Wells Fargo Agreement. Fees include an up-front fee, an availability fee of 0.175% to 0.25%, and a letter of credit margin fee of 1.00% to 1.40%. The obligations under the Wells Fargo Revolver are unsecured and the Wells Fargo Agreement includes various covenants, limitations and events of default that are customary for similar facilities for similar borrowers. As of April 16, 2014, in connection with the signing of the Credit Facility (as defined below) an amendment to the agreement was established to reduce the total revolving loan commitment from $50.0 million to $25.0 million. There were no borrowings against the Wells Fargo Revolver as of December 31, 2014 and 2013.

The maturity date for the Bank of America Term Loan was December 31, 2016, at which time all outstanding principal and unpaid interest would have been due. The Bank of America Term Loan was funded in the amount of $30.0 million on July 1, 2013. On May 20, 2014, in connection with closing the Wright acquisition and funding of the Credit Facility, the term loan was paid in full using proceeds from the Credit Facility (as defined below).

The 30-day Adjusted LIBOR Rate as of December 31, 2014 was 0.19%.

 

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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 were to retire existing term loan debt including the JPM Term Loan Agreement, SunTrust Term Loan Agreement and Bank of America Term Loan Agreement in total of $230.0 million (as described above) and to facilitate the closing of the Wright acquisition as well as other acquisitions. The Credit Facility terminates on May 20, 2019, but either or both of the revolving credit facility and the term loans may be extended for two additional one-year periods at the Company’s request and at the discretion of the respective lenders. Interest and facility fees in respect to the Credit Facility are based on the better of the Company’s net debt leverage ratio or a non-credit enhanced senior unsecured long-term debt rating. Based on the Company’s net debt leverage ratio, the rates of interest charged on the term loan and revolving loan is 1.375% and 1.175% respectively in 2014 and above the adjusted LIBOR rate for outstanding amounts drawn. There are fees included in the facility which include a facility fee based on the revolving credit commitments of the lenders (whether used or unused) at a rate of 0.20% and letter of credit fees based on the amounts of outstanding secured or unsecured letters of credit. The Credit Facility includes various covenants, limitations and events of default customary for similar facilities for similarly rated borrowers. As of December 31, 2014, there was an outstanding debt balance issued under the provisions of the Credit Facility in total of $550.0 million with no proceeds outstanding relative to the revolving loan.

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.

The Notes, the Master Agreement and the Credit Agreement all require the Company to maintain certain financial ratios and comply with certain other covenants. The Company was in compliance with all such covenants as of December 31, 2014 and December 31, 2013.

Interest paid in 2014, 2013 and 2012 was $25,115,000, $16,501,000 and $16,090,000, respectively.

At December 31, 2014, maturities of long-term debt were $45,625,000 in 2015, $73,125,000 in 2016, $55,000,000 in 2017, $155,000,000 in 2018, $371,250,000 in 2019 and $500,000,000 in 2024.

NOTE 9 Income Taxes

Significant components of the provision for income taxes for the years ended December 31 are as follows:

 

(in thousands)

   2014      2013      2012  

Current:

        

Federal

   $ 109,893       $ 94,007       $ 75,522   

State

     15,482         13,438         11,852   

Foreign

     109         805         669   
  

 

 

    

 

 

    

 

 

 

Total current provision

  125,484      108,250      88,043   
  

 

 

    

 

 

    

 

 

 

Deferred:

Federal

  5,987      28,469      27,348   

State

  1,440      3,723      5,375   

Foreign

  (58   55      —    
  

 

 

    

 

 

    

 

 

 

Total deferred provision

  7,369      32,247      32,723   
  

 

 

    

 

 

    

 

 

 

Total tax provision

$ 132,853    $ 140,497    $ 120,766   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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:

 

     2014     2013     2012  

Federal statutory tax rate

     35.0   &n