Edgar Filing: BROWN & BROWN, INC.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended September 30, 2018



¨	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				59-0864469
(State or other jurisdiction of incorporation or organization)				(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

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 ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ý No ¨

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



Large accelerated filer	ý	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	¨

Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

The number of shares of the Registrant’s common stock, $0.10 par value, outstanding as of November 2, 2018 was 279,210,227.

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BROWN & BROWN, INC.

INDEX




		PAGE NO.
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017	5
	Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	6
	Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2018 and 2017	7
	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	44

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 6.	Exhibits	47

SIGNATURE		48

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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 Quarterly Report on Form 10-Q and the reports, statements, information and announcements incorporated by reference into this report are based upon reasonable assumptions within the bounds of our knowledge of our business, a number of factors could cause actual results to differ materially from those expressed in any forward-looking statements, whether oral or written, made by us or on our behalf. Many of these factors have previously been identified in filings or statements made by us or on our behalf. Important factors which could cause our actual results to differ materially from the forward-looking statements in this report include but are not limited to the following items, in addition to those matters described in Part I, Item 2 “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;


•	Premium rates set by insurance companies and insurable exposure units, which have traditionally varied and are difficult to predict;


•	Future regulatory actions and conditions in the states in which we conduct our business;


•	The occurrence of adverse economic conditions, an adverse regulatory climate, or a disaster in Arizona, California, Florida, Georgia, Illinois, Indiana, Kentucky, Massachusetts, Michigan, 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;


•	Our ability to attract, retain and enhance qualified personnel and to maintain our corporate culture;


•	Competition from others in or entering into the insurance agency, wholesale brokerage, insurance programs and related service business;


•	Disintermediation within the insurance industry, including increased competition from insurance companies, technology companies and the financial services industry, as well as the shift away from traditional insurance markets;


•	The integration of our operations with those of businesses or assets we have acquired or may acquire in the future and the failure to realize the expected benefits of such integration;


•	Risks that could negatively affect our acquisition strategy, including continuing consolidation among insurance intermediaries and the increasing presence of private equity investors driving up valuations;


•	Our ability to forecast liquidity needs through at least the end of 2019;


•	Our ability to renew or replace expiring leases;


•	Outcomes of existing or future legal proceedings and governmental investigations;


•	Policy cancellations and renewal terms, which can be unpredictable;


•	Potential changes to the tax rate that would affect the value of deferred tax assets and liabilities and the impact on income available for investment or distributable to shareholders;


•	The inherent uncertainty in making estimates, judgments, and assumptions in the preparation of financial statements in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”);


•	Our ability to effectively utilize technology to provide improved value for our customers or carrier partners as well as applying effective internal controls and efficiencies in operations; and


•	Other risks and uncertainties as may be detailed from time to time in our public announcements and Securities and Exchange Commission (“SEC”) filings.

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Assumptions as to any of the foregoing and all statements are not based upon historical fact, but rather reflect our current expectations concerning future results and events. Forward-looking statements that we make or that are made by others on our behalf are based upon a knowledge of our business and the environment in which we operate, but because of the factors listed above, among others, actual results may differ from those in the forward-looking statements. Consequently, these cautionary statements qualify all of the forward-looking statements we make herein. We cannot assure you that the results or developments anticipated by us will be realized or, even if substantially realized, that those results or developments will result in the expected consequences for us or affect us, our business or our operations in the way we expect. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of their dates. We assume no obligation to update any of the forward-looking statements.

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PART I — FINANCIAL INFORMATION

ITEM 1 — Financial Statements (Unaudited)

BROWN & BROWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)



(in thousands, except per share data)	For the three months ended September 30,						For the nine months ended September 30,
	2018			2017			2018			2017
REVENUES
Commissions and fees	$	529,813		$	474,609		$	1,502,219		$	1,383,899
Investment income	719			491			2,051			1,085
Other income, net	318			546			1,228			22,047
Total revenues	530,850			475,646			1,505,498			1,407,031
EXPENSES
Employee compensation and benefits	268,045			246,062			790,902			736,445
Other operating expenses	83,697			72,058			243,704			210,289
(Gain)/loss on disposal	1,106			(1,902		)	(1,544		)	(1,993		)
Amortization	21,637			21,435			62,961			64,402
Depreciation	5,259			5,489			16,410			17,242
Interest	8,963			9,393			28,686			28,949
Change in estimated acquisition earn-out payables	(357		)	(1,308		)	2,528			8,309
Total expenses	388,350			351,227			1,143,647			1,063,643
Income before income taxes	142,500			124,419			361,851			343,388
Income taxes	36,447			48,506			91,048			131,263
Net income	$	106,053		$	75,913		$	270,803		$	212,125
Net income per share:
Basic	$	0.38		$	0.27		$	0.98		$	0.76
Diluted	$	0.38		$	0.27		$	0.96		$	0.74
Dividends declared per share	$	0.075		$	0.068		$	0.225		$	0.203

See accompanying Notes to Condensed Consolidated Financial Statements.

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BROWN & BROWN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



(in thousands, except per share data)	September 30, 2018			December 31, 2017
ASSETS
Current Assets:
Cash and cash equivalents	$	422,971		$	573,383
Restricted cash and investments	301,716			250,705
Short-term investments	12,843			24,965
Premiums, commissions and fees receivable	736,378			546,402
Reinsurance recoverable	98,516			477,820
Prepaid reinsurance premiums	344,955			321,017
Other current assets	95,799			47,864
Total current assets	2,013,178			2,242,156
Fixed assets, net	89,772			77,086
Goodwill	2,929,634			2,716,079
Amortizable intangible assets, net	680,226			641,005
Investments	17,152			13,949
Other assets	72,844			57,275
Total assets	$	5,802,806		$	5,747,550
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Premiums payable to insurance companies	$	732,550		$	685,163
Losses and loss adjustment reserve	98,475			476,721
Unearned premiums	344,955			321,017
Premium deposits and credits due customers	107,788			91,648
Accounts payable	84,228			64,177
Accrued expenses and other liabilities	234,731			228,748
Current portion of long-term debt	30,000			120,000
Total current liabilities	1,632,727			1,987,474
Long-term debt less unamortized discount and debt issuance costs	832,361			856,141
Deferred income taxes, net	284,330			256,185
Other liabilities	113,980			65,051
Shareholders’ Equity:
Common stock, par value $0.10 per share; authorized 560,000 shares; issued 290,109 shares and outstanding 279,222 shares at 2018, issued 286,929 shares and outstanding 276,210 shares at 2017 - in thousands. 2017 share amounts restated for the 2-for-1 stock split effective March 28, 2018	29,011			28,692
Additional paid-in capital	525,465			483,730
Treasury stock, at cost at 10,887 shares at 2018 and 10,719 shares at 2017, respectively - in thousands.	(397,572		)	(386,322		)
Retained earnings	2,782,504			2,456,599
Total shareholders’ equity	2,939,408			2,582,699
Total liabilities and shareholders’ equity	$	5,802,806		$	5,747,550

See accompanying Notes to Condensed Consolidated Financial Statements.

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BROWN & BROWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



	Nine months ended September 30,
(in thousands)	2018			2017
Cash flows from operating activities:
Net income	$	270,803		$	212,125
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization	62,961			64,402
Depreciation	16,410			17,242
Non-cash stock-based compensation	23,522			22,362
Change in estimated acquisition earn-out payables	2,528			8,309
Deferred income taxes	(16,416		)	23,941
Amortization of debt discount	118			119
Amortization and disposal of deferred financing costs	1,102			1,309
Accretion of discounts and premiums, investment	(4		)	20
Net gain on sales of investments, fixed assets and customer accounts	(1,259		)	(1,739		)
Payments on acquisition earn-outs in excess of original estimated payables	(11,775		)	(13,800		)
Changes in operating assets and liabilities, net of effect from acquisitions and divestitures:
Premiums, commissions and fees receivable (increase)	(24,560		)	(23,350		)
Reinsurance recoverables decrease/(increase)	379,304			(2,082,203		)
Prepaid reinsurance premiums (increase)	(23,938		)	(23,585		)
Other assets (increase)	(9,052		)	(5,314		)
Premiums payable to insurance companies increase	19,179			5,585
Premium deposits and credits due customers increase	16,089			14,030
Losses and loss adjustment reserve (decrease)/increase	(378,246		)	2,082,203
Unearned premiums increase	23,938			23,585
Accounts payable increase	27,817			22,113
Accrued expenses and other liabilities (decrease)/increase	(21,465		)	1,018
Other liabilities (decrease)	(1,539		)	(34,802		)
Net cash provided by operating activities	355,517			313,570
Cash flows from investing activities:
Additions to fixed assets	(28,859		)	(12,897		)
Payments for businesses acquired, net of cash acquired	(254,836		)	(26,478		)
Proceeds from sales of fixed assets and customer accounts	3,338			4,085
Purchases of investments	(8,897		)	(10,393		)
Proceeds from sales of investments	17,551			5,178
Net cash used in investing activities	(271,703		)	(40,505		)
Cash flows from financing activities:
Payments on acquisition earn-outs	(13,337		)	(25,488		)
Payments on long-term debt	(115,000		)	(91,750		)
Deferred debt issuance costs	—			(2,809		)
Issuances of common stock for employee stock benefit plans	19,406			17,387
Repurchase shares to fund tax withholdings for non-cash stock-based compensation	(11,928		)	(6,791		)
Purchase of treasury stock	(11,250		)	(57,389		)
Settlement (prepayment) of accelerated share repurchase program	11,250			(7,500		)
Cash dividends paid	(62,356		)	(56,801		)
Net cash used in financing activities	(183,215		)	(231,141		)
Net (decrease)/increase in cash and cash equivalents inclusive of restricted cash	(99,401		)	41,924
Cash and cash equivalents inclusive of restricted cash at beginning of period	824,088			781,283
Cash and cash equivalents inclusive of restricted cash at end of period	$	724,687		$	823,207

See accompanying Notes to Condensed Consolidated Financial Statements. Refer to Note 9 for the reconciliations of cash and cash equivalents inclusive of restricted cash.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1· Nature of Operations

Brown & Brown, Inc., a Florida corporation, and its subsidiaries (collectively, “Brown & Brown” or the “Company”) is a diversified insurance agency, wholesale brokerage, insurance programs and services organization that markets and sells to its customers, insurance products and services, primarily in the property, casualty and employee benefits areas. Brown & Brown’s business is divided into four reportable segments: the Retail Segment provides a broad range of insurance products and services to commercial, public and quasi-public entities, professional and individual customers; the National Programs Segment, acting as a managing general agent (“MGA”), provides professional liability and related package products for certain professionals, a range of insurance products for individuals, flood coverage, and targeted products and services designated for specific industries, trade groups, governmental entities and market niches, all of which are delivered through nationwide networks of independent agents, including Brown & Brown retail agents; the Wholesale Brokerage Segment markets and sells excess and surplus commercial insurance, primarily through independent agents and brokers, including Brown & Brown Retail offices; and the Services Segment provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare benefits advocacy services, and claims adjusting services.

NOTE 2· Basis of Financial Reporting

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of recurring accruals) necessary for a fair presentation have been included. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the Notes thereto set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

The preparation of these financial statements in conformity with 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 Condensed Consolidated Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which provides guidance for accounting for leases. Under ASU 2016-02, the Company will be required to recognize the assets and liabilities for the rights and obligations created by leased assets with initial maturities greater than one year. In July 2018, the FASB also issued ASU 2018-10 and ASU 2018-11 related to Topic 842. ASU 2018-10 narrows certain aspects of the guidance issued in the amendments within ASU 2016-02. ASU 2018-11 provides entities with an additional transition method to adopt ASU 2016-02. Under this new transition method, an entity initially applies ASU 2016-02 at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU 2016-02, along with ASU 2018-10 and ASU 2018-11, will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company continues to evaluate the impact of this pronouncement with the principal impact expected to be that the present value of the remaining lease payments will be presented as a liability on the balance sheet as well as an asset of similar value representing the “Right of Use” for those leased properties. The Company plans to adopt Topic 842 under the transition method provided by ASU 2018-11. The undiscounted contractual cash payments remaining on leased properties were $210.4 million as of December 31, 2017 as indicated in Note 13 of the Company's Form 10-K and $209.8 million as of September 30, 2018 as detailed in the Liquidity and Capital Resources section of this Quarterly Report on Form 10-Q.

In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which provides guidance for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact of this pronouncement.

Recently Adopted Accounting Standards

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)" (“ASU 2016-15”), which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified and applies to all entities, required to present a statement of cash flows under Topic 230. ASU 2016-15 became effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 with early adoption permitted. The Company adopted

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ASU 2016-15 effective January 1, 2018 and has determined there is no impact on the Company’s Statement of Cash Flows. The Company already presented cash paid on contingent consideration in business combination as prescribed by ASU 2016-15 and does not, at this time, engage in the other activities being addressed in this ASU.

In March 2016, the FASB issued ASU 2016-08, “Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)” (“ASU 2016-08”) to clarify certain aspects of the principal-versus-agent guidance included in the new revenue standard ASU 2014-09 “Revenue from Contracts with Customers” (“ASU 2014-09”). The FASB issued the ASU in response to concerns identified by stakeholders, including those related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. The Company adopted ASU 2016-08 effective contemporaneously with ASU 2014-09 beginning January 1, 2018. The impact of ASU 2016-08 was limited to the claims administering activities of one of our businesses within our Services Segment and therefore was not material to the net income of the Company.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“Topic 606”), which provides guidance for revenue recognition. Topic 606 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. It supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. The standard’s core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. Effective as of January 1, 2018, the Company adopted ASU 2014–09, and all related amendments, which established Accounting Standards Codification ("ASC") Topic 606. The Company adopted these standards by recognizing the cumulative effect as an adjustment to opening retained earnings at January 1, 2018, under the modified retrospective method for contracts not completed as of the day of adoption. The cumulative impact of adopting Topic 606 on January 1, 2018 was an increase in retained earnings within stockholders’ equity of $117.5 million. Under the modified retrospective method, the Company is not required to restate comparative financial information prior to the adoption of these standards and, therefore, such information presented for the three and nine months ended September 30, 2017 continues to be reported under the Company's previous accounting policies.

The following areas are impacted by the adoption of Topic 606:

Historically, approximately 70% of the Company’s commissions and fees are in the form of commissions paid by insurance carriers. These commissions are earned at a point in time upon the effective date of bound insurance coverage, as no significant performance obligation remains after coverage is bound. If there are other services within the contract, the Company estimates the stand-alone selling price for each separate performance obligation, and the corresponding apportioned revenue is recognized over a period of time as the performance obligations are fulfilled. In situations where multiple performance obligations exist within a contract, the use of estimates is required to allocate the transaction price on a relative stand-alone selling price basis to each separate performance obligation.

Commission revenues - Prior to the adoption of Topic 606, commission revenues, including those billed on an installment basis, were recognized on the latter of the policy effective date or the date that the premium was billed to the client, with the exception of the Company's Arrowhead businesses, which followed a policy of recognizing these revenues on the latter of the policy effective date or processed date in our systems. As a result of the adoption of Topic 606, certain revenues associated with the issuance of policies are now recognized upon the effective date of the associated policy. These commission revenues, including those billed on an installment basis, are now recognized earlier than they had been previously. Revenue is now accrued based upon the completion of the performance obligation, thereby creating a current asset for the unbilled revenue, until such time as an invoice is generated, which typically does not exceed twelve months. The Company does not expect the overall impact of these changes to be significant on a full-year basis, but the timing of recognizing revenue will impact our fiscal quarters when compared to prior years. For the nine months ended September 30, 2018, the adoption of Topic 606 increased base and incentive commissions revenue, as defined in Note 3, by $26.6 million compared to what would have been recognized under the Company's previous accounting policies. Incentive commissions include additional commissions over base commissions received from insurance carriers based on predetermined production levels mutually agreed upon by both parties.

Profit-sharing contingent commissions - Prior to the adoption of Topic 606, revenue that was not fixed and determinable because a contingency existed was not recognized until the contingency was resolved. Under Topic 606, the Company must estimate the amount of consideration that will be received in the coming year such that a significant reversal of revenue is not probable. Profit-sharing contingent commissions represent a form of variable consideration associated with the placement of coverage, for which we earn commissions and fees. In connection with Topic 606, profit-sharing contingent commissions are estimated with a constraint applied and accrued relative to the recognition of the corresponding core commissions. The resulting effect on the timing of recognizing profit-sharing contingent commissions will now more closely follow a similar pattern as our commissions and fees with any true-ups recognized when payments are received or as additional information that affects the estimate becomes available. For the nine months ended September 30, 2018, the adoption of Topic 606 reduced profit-sharing contingent commissions revenue by $6.9 million compared to what would have been recognized under our previous accounting policies.

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Fee revenues - Approximately 30% of the Company’s commissions and fees are in the form of fees, which are predominantly in the Company's National Programs and Services Segments, and to a lesser extent in the large accounts business within the Company's Retail Segment, where the Company receives fees in lieu of a commission. In accordance with Topic 606, fee revenue from certain agreements are recognized in earlier periods and others in later periods as compared to our previous accounting treatment depending on when the services within the contract are satisfied and when we have transferred control of the related services to the customer. The Company does not expect the overall impact of these changes to be significant on a full-year basis, but the timing of recognizing fees revenue will impact our fiscal quarters when compared to prior years. For the nine months ended September 30, 2018, the adoption of Topic 606 increased fees revenue by $5.0 million compared to what would have been recognized under our previous accounting policies.

Additionally, the Company has evaluated ASC Topic 340 - Other Assets and Deferred Cost (“ASC 340”) which requires companies to defer certain incremental cost to obtain customer contracts, and certain costs to fulfill customer contracts.

Incremental cost to obtain - The adoption of ASC 340 resulted in the Company deferring certain costs to obtain customer contracts primarily as they relate to commission-based compensation plans in the Retail Segment, in which the Company pays an incremental amount of compensation on new business. These incremental costs are deferred and amortized over a 15-year period, which is consistent with the analysis performed on acquired customer accounts and referenced in Note 7 to the Company’s condensed consolidated financial statements. For the nine months ended September 30, 2018, the Company deferred $10.3 million of incremental cost to obtain customer contracts. The Company expensed $0.3 million of the incremental cost to obtain customer contracts for the nine months ended September 30, 2018.

Cost to fulfill - The adoption of ASC 340 resulted in the Company deferring certain costs to fulfill contracts and to recognize these costs as the associated performance obligations are fulfilled. In order for contract fulfillment costs to be deferred under ASC 340, the costs must (1) relate directly to a specific contract or anticipated contract, (2) generate or enhance resources that the Company will use in satisfying its obligations under the contract, and (3) be expected to be recovered through sufficient net cash flows from the contract. The Company does not expect the overall impact of these changes to be significant on a full-year basis, but the timing of recognizing these expenses will impact quarterly results compared to prior years as such recognition better aligns with the associated revenue. With the modified retrospective adoption of Topic 606, the Company deferred $52.7 million in contract fulfillment costs on its opening balance sheet on January 1, 2018 based upon the estimated average time spent on policy renewals. For the nine months ended September 30, 2018, the Company had net expense of $3.6 million related to the release of previously deferred contract fulfillment costs associated with performance obligations that were satisfied in the period, net of current year deferrals for costs incurred that related to performance obligations yet to be fulfilled.

In connection with the implementation of this standard, we modified, and in some instances instituted, additional accounting procedures, processes and internal controls. While the relative impacts of this standard to our revenue streams is significant, we do not view these modifications and additions as a material change in our internal controls over financial reporting.

The cumulative effect of the changes made to our unaudited condensed consolidated balance sheet as of January 1, 2018 for the adoption of Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” and Accounting Standards Codification Topic 340 – Other Assets and Deferred Cost (the “New Revenue Standard”):



(in thousands)	Balance at December 31, 2017		Adjustments due to the New Revenue Standard		Balance at January 1, 2018
Balance Sheet
Assets:
Premiums, commissions and fees receivable	$	546,402	$	153,058	$	699,460
Other current assets	47,864		52,680		100,544

Liabilities:
Premiums payable to insurance companies	685,163		12,107		697,270
Accounts payable	64,177		8,747		72,924
Accrued expenses and other liabilities	228,748		22,794		251,542
Deferred income taxes, net	256,185		44,575		300,760

Shareholders' Equity:
Retained earnings	2,456,599		117,515		2,574,114

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The $52.7 million adjustment to other current assets reflects the deferral of certain cost to fulfill contracts. The $12.1 million adjustment to premiums payable to insurance companies reflects the estimated amount payable to outside brokers on unbilled premiums, commissions and fees receivable.

The following table illustrates the impact of adopting the New Revenue Standard has had on our reported results in the unaudited condensed consolidated statement of income.



	Nine months ended September 30, 2018
(in thousands)	As reported		Impact of adopting the New Revenue Standard			Balances without the New Revenue Standard
Statement of Income
Revenues:
Commissions and fees	$	1,502,219	$	24,700		$	1,477,519

Expenses:
Employee compensation and benefits	790,902		(3,396		)	794,298
Other operating expenses	243,704		6,996			236,708
Income taxes	91,048		5,309			85,739

Net income	$	270,803	$	15,791		$	255,012

NOTE 3· Revenues

The following tables present the revenues disaggregated by revenue source:



	Three months ended September 30, 2018
(in thousands)	Retail		National Programs		Wholesale Brokerage		Services		Other			Total
Base commissions⁽¹⁾	$	207,703	$	92,106	$	62,216	$	—	$	(11	)	$	362,014
Fees⁽²⁾	33,915		43,168		13,887		48,054		(360		)	138,664
Incentive commissions⁽³⁾	11,408		287		44		—		16			11,755
Profit-sharing contingent commissions⁽⁴⁾	5,280		7,786		1,261		—		—			14,327
Guaranteed supplemental commissions⁽⁵⁾	2,573		22		458		—		—			3,053
Investment income⁽⁶⁾	1		138		44		51		485			719
Other income, net⁽⁷⁾	207		12		99		—		—			318
Total Revenues	$	261,087	$	143,519	$	78,009	$	48,105	$	130		$	530,850



	Nine months ended September 30, 2018
(in thousands)	Retail		National Programs		Wholesale Brokerage		Services		Other			Total
Base commissions⁽¹⁾	$	609,252	$	249,491	$	174,888	$	—	$	(42	)	$	1,033,589
Fees⁽²⁾	94,282		106,839		37,799		137,878		(880		)	375,918
Incentive commissions⁽³⁾	43,356		295		515		—		28			44,194
Profit-sharing contingent commissions⁽⁴⁾	17,879		17,290		4,824		—		—			39,993
Guaranteed supplemental commissions⁽⁵⁾	7,277		75		1,173		—		—			8,525
Investment income⁽⁶⁾	2		384		125		160		1,380			2,051
Other income, net⁽⁷⁾	758		60		401		—		9			1,228
Total Revenues	$	772,806	$	374,434	$	219,725	$	138,038	$	495		$	1,505,498


(1)	Base commissions generally represent a percentage of the premium paid by an insured and are affected by fluctuations in both premium rate levels charged by insurance companies and the insureds’ underlying “insurable exposure units,” which are units that insurance

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companies use to measure or express insurance exposed to risk (such as property values, or sales and payroll levels) to determine what premium to charge the insured. Insurance companies establish these premium rates based upon many factors, including loss experience, risk profile and reinsurance rates paid by such insurance companies, none of which we control.


(2)	Fee revenues relate to fees for services other than securing coverage for our customers and fees negotiated in lieu of commissions.


(3)	Incentive commissions include additional commissions over base commissions received from insurance carriers based on predetermined production levels mutually agreed upon by both parties.


(4)	Profit-sharing contingent commissions are based primarily on underwriting results, but may also reflect considerations for volume, growth and/or retention.


(5)	Guaranteed supplemental commissions represent guaranteed fixed-base agreements in lieu of profit-sharing contingent commissions.


(6)	Investment income consists primarily of interest on cash and investments.


(7)	Other income consists primarily of legal settlements and other miscellaneous income.

Contract Assets and Liabilities

The balances of contract assets and contract liabilities arising from contracts with customers as of September 30, 2018 and December 31, 2017 were as follows:



(in thousands)	September 30, 2018		December 31, 2017⁽¹⁾
Contract assets	$	249,294	$	210,323
Contract liabilities	$	63,611	$	51,236


(1)	The balances as of December 31, 2017 have been revised to reflect the impact of adopting the New Revenue Standard.

Unbilled receivables (contract assets) arise when the Company recognizes revenue for amounts which have not yet been billed in our systems. Deferred revenue (contract liabilities) relates to payments received in advance of performance under the contract before the transfer of a good or service to the customer.

As of September 30, 2018, deferred revenue consisted of $53.9 million as current portion to be recognized within one year and $9.7 million in long term to be recognized beyond one year. As of December 31, 2017, deferred revenue consisted of $44.5 million as current portion to be recognized within one year and $6.7 million in long-term deferred revenue to be recognized beyond one year.

During the nine months ended September 30, 2018, the amount of revenue recognized related to performance obligations satisfied in a previous period, inclusive of changes due to estimates, was approximately $8.1 million.

NOTE 4· Net Income Per Share

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



	For the three months ended September 30,						For the nine months ended September 30,
(in thousands, except per share data)	2018			2017			2018			2017
Net income	$	106,053		$	75,913		$	270,803		$	212,125
Net income attributable to unvested awarded performance stock	(2,716		)	(1,852		)	(6,185		)	(5,181		)
Net income attributable to common shares	$	103,337		$	74,061		$	264,618		$	206,944
Weighted average number of common shares outstanding – basic	278,132			279,512			276,744			280,024
Less unvested awarded performance stock included in weighted average number of common shares outstanding – basic	(7,124		)	(6,820		)	(6,321		)	(6,840		)
Weighted average number of common shares outstanding for basic net income per common share	271,008			272,692			270,423			273,184
Dilutive effect of stock options	4,274			5,094			5,191			4,838
Weighted average number of shares outstanding – diluted	275,282			277,786			275,614			278,022
Net income per share:
Basic	$	0.38		$	0.27		$	0.98		$	0.76
Diluted	$	0.38		$	0.27		$	0.96		$	0.74

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NOTE 5· Business Combinations

During the nine months ended September 30, 2018, Brown & Brown acquired the assets and assumed certain liabilities of fifteen insurance intermediaries, all of the stock of three insurance intermediaries and one book of business (customer accounts). Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last twelve months as permitted by Accounting Standards Codification Topic 805 — Business Combinations (“ASC 805”). Such adjustments are presented in the “Other” category within the following two tables. The recorded purchase price for all acquisitions includes an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations will be recorded in the Condensed 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 Condensed Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period, as defined in ASC 805. For the nine months ended September 30, 2018, adjustments were made within the permitted measurement period that resulted in an increase in the aggregate purchase price of the affected acquisitions of $21.4 thousand relating to the assumption of certain liabilities. These measurement period adjustments have been reflected as current period adjustments in the nine months ended September 30, 2018 in accordance with the guidance in ASU 2015-16 “Business Combinations.” The measurement period adjustments primarily impacted goodwill, with no effect on earnings or cash in the current period.

Cash paid for acquisitions was $265.9 million in the nine-month period ended September 30, 2018. We completed eighteen acquisitions (excluding book of business purchases) in the nine-month period ended September 30, 2018. We completed six acquisitions (excluding book of business purchases) in the nine-month period ended September 30, 2017.

The following table summarizes the purchase price allocations made as of the date of each acquisition for current year acquisitions and adjustments made during the measurement period for prior year acquisitions. During the measurement periods, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. These adjustments are made in the period in which the amounts are determined and the current period income effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date.



(in thousands)
Name	Business segment	Effective date of acquisition	Cash paid		Other payable		Recorded earn-out payable		Net assets acquired		Maximum potential earn- out payable
Opus Advisory Group, LLC (Opus)	Retail	February 1, 2018	$	20,400	$	200	$	2,384	$	22,984	$	3,600
Kerxton Insurance Agency, Inc. (Kerxton)	Retail	March 1, 2018	13,177		1,490		2,080		16,747		2,920
Automotive Development Group, LLC (ADG)	Retail	May 1, 2018	29,471		559		17,545		47,575		20,000
Servco Pacific, Inc. (Servco)	Retail	June 1, 2018	76,551		—		916		77,467		7,000
Tower Hill Prime Insurance Company (Tower Hill)	National Programs	July 1, 2018	20,300		—		2,628		22,928		7,700
Health Special Risk, Inc. (HSR)	National Programs	July 1, 2018	20,132		—		1,991		22,123		9,000
Professional Disability Associates, LLC (PDA)	Services	July 1, 2018	15,025		—		9,818		24,843		17,975
Finance & Insurance Resources, Inc. (F&I)	Retail	September 1, 2018	44,940		410		9,121		54,471		19,500
Other	Various	Various	25,894		680		5,234		31,808		10,200
Total			$	265,890	$	3,339	$	51,717	$	320,946	$	97,895

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The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition and adjustments made during the measurement period of the prior year acquisitions.



(in thousands)	Opus		Kerxton			ADG		Servco			Tower Hill		HSR			PDA			F&I		Other			Total
Cash	$	—	$	—		$	—	$	8,189		$	—	$	3,114		$	—		$	—	$	—		$	11,303
Other current assets	—		—			1,500		8,075			—		818			1,762			999		253			13,407
Fixed assets	11		10			67		178			$	—	$	124		$	309		$	34	$	99		$	832
Goodwill	17,944		13,417			36,236		53,901			—		18,737			17,273			36,806		20,245			214,559
Purchased customer accounts	5,008		4,712			9,751		16,902			22,928		5,516			7,700			16,611		12,653			101,781
Non-compete agreements	21		22			21		1			—		65			82			21		273			506
Other assets	—		—			—		1,528			—		21			(787		)	—		—			762
Total assets acquired	22,984		18,161			47,575		88,774			22,928		28,395			26,339			54,471		33,523			343,150
Other current liabilities	—		(1,414		)	—		(11,307		)	—		(5,930		)	(1,273		)	—		(1,715		)	(21,639		)
Other liabilities	—		—			—		—			—		(342		)	(223		)	—		—			(565		)
Total liabilities assumed	—		(1,414		)	—		(11,307		)	—		(6,272		)	(1,496		)	—		(1,715		)	(22,204		)
Net assets acquired	$	22,984	$	16,747		$	47,575	$	77,467		$	22,928	$	22,123		$	24,843		$	54,471	$	31,808		$	320,946

The weighted average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15 years; and non-compete agreements, 5 years.

Goodwill of $214.6 million, which is net of any opening balance sheet adjustments within the allowable measurement period, was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $173.0 million, $18.7 million, $5.5 million and $17.3 million, respectively. Of the total goodwill of $214.6 million, the amount currently deductible for income tax purposes is $162.9 million and the remaining $51.7 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

For the acquisitions completed during 2018, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues from the acquisitions completed through September 30, 2018, included in the Condensed Consolidated Statement of Income for the nine months ended September 30, 2018, was $29.2 million. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through September 30, 2018, included in the Condensed Consolidated Statement of Income for the nine months ended September 30, 2018, was $1.8 million. If the acquisitions had occurred as of the beginning of the respective periods, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.



(UNAUDITED)	Three months ended September 30,				Nine months ended September 30,
(in thousands, except per share data)	2018		2017		2018		2017
Total revenues	$	533,038	$	499,846	$	1,547,556	$	1,477,640
Income before income taxes	$	143,402	$	130,171	$	372,204	$	360,034
Net income	$	106,742	$	79,422	$	278,551	$	222,407
Net income per share:
Basic	$	0.38	$	0.28	$	1.01	$	0.79
Diluted	$	0.38	$	0.28	$	0.99	$	0.78
Weighted average number of shares outstanding:
Basic	271,008		272,692		270,423		273,184
Diluted	275,282		277,786		275,614		278,022

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As of September 30, 2018 and 2017, the fair values of the estimated acquisition earn-out payables were re-evaluated and measured at fair value on a recurring basis using unobservable inputs (Level 3) as defined in ASC 820-Fair Value Measurement. The resulting additions, payments, and net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the three and nine months ended September 30, 2018 and 2017, were as follows:



	Three months ended September 30,						Nine months ended September 30,
(in thousands)	2018			2017			2018			2017
Balance as of the beginning of the period	$	52,540		$	57,943		$	36,175		$	63,821
Additions to estimated acquisition earn-out payables	29,646			1,050			51,717			1,332
Payments for estimated acquisition earn-out payables	(16,521		)	(23,511		)	(25,112		)	(39,288		)
Subtotal	65,665			35,482			62,780			25,865
Net change in earnings from estimated acquisition earn-out payables:
Change in fair value on estimated acquisition earn-out payables	(928		)	(1,784		)	945			6,402
Interest expense accretion	571			476			1,583			1,907
Net change in earnings from estimated acquisition earn-out payables	(357		)	(1,308		)	2,528			8,309
Balance as of September 30,	$	65,308		$	34,174		$	65,308		$	34,174

Of the $65.3 million estimated acquisition earn-out payables as of September 30, 2018, $14.1 million was recorded as accounts payable and $51.2 million was recorded as other non-current liabilities. As of September 30, 2018, the maximum future acquisition contingency payments related to all acquisitions was $151.6 million, inclusive of the $65.3 million estimated acquisition earn-out payables as of September 30, 2018. Included within the additions to estimated acquisition earn-out payables are any adjustments to opening balance sheet items within the allowable measurement period, which may therefore differ from previously reported amounts.

NOTE 6· Goodwill

Goodwill is subject to at least an annual assessment for impairment by applying a fair value-based test. The Company completed its most recent annual assessment as of November 30, 2017, and identified no impairment as a result of the evaluation.

The changes in the carrying value of goodwill by reportable segment for the nine months ended September 30, 2018 are as follows:



(in thousands)	Retail		National Programs			Wholesale Brokerage		Services		Total
Balance as of January 1, 2018	$	1,386,248	$	908,472		$	286,098	$	135,261	$	2,716,079
Goodwill of acquired businesses	173,025		18,737			5,524		17,273		214,559
Goodwill disposed of relating to sales of businesses	—		(1,004		)	—		—		(1,004		)
Balance as of September 30, 2018	$	1,559,273	$	926,205		$	291,622	$	152,534	$	2,929,634

NOTE 7· Amortizable Intangible Assets

Amortizable intangible assets at September 30, 2018 and December 31, 2017 consisted of the following:



	September 30, 2018								December 31, 2017
(in thousands)	Gross carrying value		Accumulated amortization			Net carrying value		Weighted average life (years)⁽¹⁾	Gross carrying value		Accumulated amortization			Net carrying value		Weighted average life (years)⁽¹⁾
Purchased customer accounts	$	1,565,186	$	(886,229	)	$	678,957	15.0	$	1,464,274	$	(824,584	)	$	639,690	15.0
Non-compete agreements	30,753		(