false FY 0000079282 --12-31 Large Accelerated Filer P5Y P15Y P14Y10M24D P4Y7M6D P4Y6M P6Y 0000079282 2019-01-01 2019-12-31 xbrli:shares 0000079282 2020-02-20 iso4217:USD 0000079282 2019-06-30 0000079282 2018-01-01 2018-12-31 0000079282 2017-01-01 2017-12-31 iso4217:USD xbrli:shares 0000079282 2019-12-31 0000079282 2018-12-31 0000079282 us-gaap:CommonStockMember 2016-12-31 0000079282 us-gaap:AdditionalPaidInCapitalMember 2016-12-31 0000079282 us-gaap:TreasuryStockMember 2016-12-31 0000079282 us-gaap:RetainedEarningsMember 2016-12-31 0000079282 2016-12-31 0000079282 us-gaap:RetainedEarningsMember 2017-01-01 2017-12-31 0000079282 us-gaap:AdditionalPaidInCapitalMember 2017-01-01 2017-12-31 0000079282 us-gaap:CommonStockMember 2017-01-01 2017-12-31 0000079282 us-gaap:TreasuryStockMember 2017-01-01 2017-12-31 0000079282 us-gaap:CommonStockMember 2017-12-31 0000079282 us-gaap:AdditionalPaidInCapitalMember 2017-12-31 0000079282 us-gaap:TreasuryStockMember 2017-12-31 0000079282 us-gaap:RetainedEarningsMember 2017-12-31 0000079282 2017-12-31 0000079282 us-gaap:RetainedEarningsMember 2018-01-01 2018-12-31 0000079282 us-gaap:AdditionalPaidInCapitalMember 2018-01-01 2018-12-31 0000079282 us-gaap:CommonStockMember 2018-01-01 2018-12-31 0000079282 us-gaap:TreasuryStockMember 2018-01-01 2018-12-31 0000079282 us-gaap:CommonStockMember 2018-12-31 0000079282 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 0000079282 us-gaap:TreasuryStockMember 2018-12-31 0000079282 us-gaap:RetainedEarningsMember 2018-12-31 0000079282 us-gaap:RetainedEarningsMember 2019-01-01 2019-12-31 0000079282 us-gaap:AdditionalPaidInCapitalMember 2019-01-01 2019-12-31 0000079282 us-gaap:CommonStockMember 2019-01-01 2019-12-31 0000079282 us-gaap:TreasuryStockMember 2019-01-01 2019-12-31 0000079282 us-gaap:CommonStockMember 2019-12-31 0000079282 us-gaap:AdditionalPaidInCapitalMember 2019-12-31 0000079282 us-gaap:TreasuryStockMember 2019-12-31 0000079282 us-gaap:RetainedEarningsMember 2019-12-31 0000079282 bro:AccountingStandardUpdateTopic606AndTopic340Member 2019-01-01 2019-12-31 0000079282 bro:TwoThousandAndTenStockIncentivePlanMember 2019-01-01 2019-12-31 bro:Segment 0000079282 us-gaap:AccountingStandardsUpdate201602Member 2019-01-01 0000079282 2019-01-01 0000079282 us-gaap:RetainedEarningsMember 2018-01-01 0000079282 us-gaap:AccountingStandardsUpdate201409Member bro:IncentiveCommissionRevenueMember us-gaap:DifferenceBetweenRevenueGuidanceInEffectBeforeAndAfterTopic606Member 2018-01-01 2018-12-31 0000079282 us-gaap:AccountingStandardsUpdate201409Member bro:ProfitSharingContingentCommissionRevenueMember us-gaap:DifferenceBetweenRevenueGuidanceInEffectBeforeAndAfterTopic606Member 2018-01-01 2018-12-31 0000079282 bro:FeeRevenueMember us-gaap:AccountingStandardsUpdate201409Member us-gaap:DifferenceBetweenRevenueGuidanceInEffectBeforeAndAfterTopic606Member 2018-01-01 2018-12-31 0000079282 bro:FeeRevenueMember us-gaap:AccountingStandardsUpdate201409Member bro:ServicesMember us-gaap:DifferenceBetweenRevenueGuidanceInEffectBeforeAndAfterTopic606Member 2018-01-01 2018-12-31 0000079282 bro:FeeRevenueMember us-gaap:AccountingStandardsUpdate201409Member us-gaap:CorporateNonSegmentMember us-gaap:DifferenceBetweenRevenueGuidanceInEffectBeforeAndAfterTopic606Member 2018-01-01 2018-12-31 0000079282 bro:CosttoObtainMember 2018-12-31 0000079282 bro:CosttoObtainMember 2018-01-01 2018-12-31 0000079282 bro:CosttoFulfillMember 2018-01-01 0000079282 bro:CosttoFulfillMember 2018-01-01 2018-12-31 0000079282 2018-01-01 0000079282 us-gaap:AccountingStandardsUpdate201409Member us-gaap:PremiumsReceivableMember 2017-12-31 0000079282 us-gaap:AccountingStandardsUpdate201409Member us-gaap:OtherCurrentAssetsMember 2017-12-31 0000079282 us-gaap:AccountingStandardsUpdate201409Member bro:PremiumsPayableMember 2017-12-31 0000079282 us-gaap:AccountingStandardsUpdate201409Member us-gaap:AccountsPayableMember 2017-12-31 0000079282 us-gaap:AccountingStandardsUpdate201409Member us-gaap:AccruedLiabilitiesMember 2017-12-31 0000079282 us-gaap:AccountingStandardsUpdate201409Member us-gaap:DeferredIncomeTaxChargesMember 2017-12-31 0000079282 us-gaap:AccountingStandardsUpdate201409Member us-gaap:RetainedEarningsMember 2017-12-31 0000079282 bro:EmployeeCompensationandBenefitsMember 2018-01-01 2018-12-31 0000079282 us-gaap:OperatingExpenseMember 2018-01-01 2018-12-31 0000079282 bro:IncomeTaxExpenseMember 2018-01-01 2018-12-31 0000079282 us-gaap:CalculatedUnderRevenueGuidanceInEffectBeforeTopic606Member 2018-01-01 2018-12-31 0000079282 srt:MinimumMember 2019-01-01 2019-12-31 0000079282 srt:MaximumMember 2019-01-01 2019-12-31 xbrli:pure 0000079282 us-gaap:RetailMember bro:CoreCommissionRevenueMember 2019-01-01 2019-12-31 0000079282 bro:NationalProgramsMember bro:CoreCommissionRevenueMember 2019-01-01 2019-12-31 0000079282 bro:WholesaleBrokerageMember bro:CoreCommissionRevenueMember 2019-01-01 2019-12-31 0000079282 us-gaap:RetailMember bro:FeeRevenueMember 2019-01-01 2019-12-31 0000079282 bro:NationalProgramsMember bro:FeeRevenueMember 2019-01-01 2019-12-31 0000079282 bro:WholesaleBrokerageMember bro:FeeRevenueMember 2019-01-01 2019-12-31 0000079282 bro:ServicesMember bro:FeeRevenueMember 2019-01-01 2019-12-31 0000079282 us-gaap:RetailMember bro:IncentiveCommissionRevenueMember 2019-01-01 2019-12-31 0000079282 bro:NationalProgramsMember bro:IncentiveCommissionRevenueMember 2019-01-01 2019-12-31 0000079282 bro:WholesaleBrokerageMember bro:IncentiveCommissionRevenueMember 2019-01-01 2019-12-31 0000079282 us-gaap:RetailMember bro:ProfitSharingContingentCommissionRevenueMember 2019-01-01 2019-12-31 0000079282 bro:NationalProgramsMember bro:ProfitSharingContingentCommissionRevenueMember 2019-01-01 2019-12-31 0000079282 bro:WholesaleBrokerageMember bro:ProfitSharingContingentCommissionRevenueMember 2019-01-01 2019-12-31 0000079282 us-gaap:RetailMember bro:GuaranteedSupplementalCommissionRevenueMember 2019-01-01 2019-12-31 0000079282 bro:NationalProgramsMember bro:GuaranteedSupplementalCommissionRevenueMember 2019-01-01 2019-12-31 0000079282 bro:WholesaleBrokerageMember bro:GuaranteedSupplementalCommissionRevenueMember 2019-01-01 2019-12-31 0000079282 us-gaap:RetailMember us-gaap:OperatingSegmentsMember 2019-01-01 2019-12-31 0000079282 bro:NationalProgramsMember us-gaap:OperatingSegmentsMember 2019-01-01 2019-12-31 0000079282 bro:WholesaleBrokerageMember us-gaap:OperatingSegmentsMember 2019-01-01 2019-12-31 0000079282 bro:ServicesMember us-gaap:OperatingSegmentsMember 2019-01-01 2019-12-31 0000079282 bro:CoreCommissionRevenueMember us-gaap:CorporateNonSegmentMember 2019-01-01 2019-12-31 0000079282 bro:FeeRevenueMember us-gaap:CorporateNonSegmentMember 2019-01-01 2019-12-31 0000079282 bro:IncentiveCommissionRevenueMember us-gaap:CorporateNonSegmentMember 2019-01-01 2019-12-31 0000079282 us-gaap:CorporateNonSegmentMember 2019-01-01 2019-12-31 0000079282 bro:CoreCommissionRevenueMember 2019-01-01 2019-12-31 0000079282 bro:FeeRevenueMember 2019-01-01 2019-12-31 0000079282 bro:IncentiveCommissionRevenueMember 2019-01-01 2019-12-31 0000079282 bro:ProfitSharingContingentCommissionRevenueMember 2019-01-01 2019-12-31 0000079282 bro:GuaranteedSupplementalCommissionRevenueMember 2019-01-01 2019-12-31 0000079282 us-gaap:RetailMember bro:CoreCommissionRevenueMember 2018-01-01 2018-12-31 0000079282 bro:NationalProgramsMember bro:CoreCommissionRevenueMember 2018-01-01 2018-12-31 0000079282 bro:WholesaleBrokerageMember bro:CoreCommissionRevenueMember 2018-01-01 2018-12-31 0000079282 us-gaap:RetailMember bro:FeeRevenueMember 2018-01-01 2018-12-31 0000079282 bro:NationalProgramsMember bro:FeeRevenueMember 2018-01-01 2018-12-31 0000079282 bro:WholesaleBrokerageMember bro:FeeRevenueMember 2018-01-01 2018-12-31 0000079282 bro:ServicesMember bro:FeeRevenueMember 2018-01-01 2018-12-31 0000079282 us-gaap:RetailMember bro:IncentiveCommissionRevenueMember 2018-01-01 2018-12-31 0000079282 bro:NationalProgramsMember bro:IncentiveCommissionRevenueMember 2018-01-01 2018-12-31 0000079282 bro:WholesaleBrokerageMember bro:IncentiveCommissionRevenueMember 2018-01-01 2018-12-31 0000079282 us-gaap:RetailMember bro:ProfitSharingContingentCommissionRevenueMember 2018-01-01 2018-12-31 0000079282 bro:NationalProgramsMember bro:ProfitSharingContingentCommissionRevenueMember 2018-01-01 2018-12-31 0000079282 bro:WholesaleBrokerageMember bro:ProfitSharingContingentCommissionRevenueMember 2018-01-01 2018-12-31 0000079282 us-gaap:RetailMember bro:GuaranteedSupplementalCommissionRevenueMember 2018-01-01 2018-12-31 0000079282 bro:NationalProgramsMember bro:GuaranteedSupplementalCommissionRevenueMember 2018-01-01 2018-12-31 0000079282 bro:WholesaleBrokerageMember bro:GuaranteedSupplementalCommissionRevenueMember 2018-01-01 2018-12-31 0000079282 us-gaap:RetailMember us-gaap:OperatingSegmentsMember 2018-01-01 2018-12-31 0000079282 bro:NationalProgramsMember us-gaap:OperatingSegmentsMember 2018-01-01 2018-12-31 0000079282 bro:WholesaleBrokerageMember us-gaap:OperatingSegmentsMember 2018-01-01 2018-12-31 0000079282 bro:ServicesMember us-gaap:OperatingSegmentsMember 2018-01-01 2018-12-31 0000079282 bro:CoreCommissionRevenueMember us-gaap:CorporateNonSegmentMember 2018-01-01 2018-12-31 0000079282 bro:FeeRevenueMember us-gaap:CorporateNonSegmentMember 2018-01-01 2018-12-31 0000079282 bro:IncentiveCommissionRevenueMember us-gaap:CorporateNonSegmentMember 2018-01-01 2018-12-31 0000079282 us-gaap:CorporateNonSegmentMember 2018-01-01 2018-12-31 0000079282 bro:CoreCommissionRevenueMember 2018-01-01 2018-12-31 0000079282 bro:FeeRevenueMember 2018-01-01 2018-12-31 0000079282 bro:IncentiveCommissionRevenueMember 2018-01-01 2018-12-31 0000079282 bro:ProfitSharingContingentCommissionRevenueMember 2018-01-01 2018-12-31 0000079282 bro:GuaranteedSupplementalCommissionRevenueMember 2018-01-01 2018-12-31 0000079282 bro:TwoThousandNineteenAcquisitionMember 2019-12-31 0000079282 bro:TwoThousandEighteenAcquisitionMember 2018-12-31 0000079282 bro:CosttoObtainMember 2019-12-31 0000079282 bro:CosttoObtainMember 2019-01-01 2019-12-31 0000079282 bro:CosttoFulfillMember 2019-12-31 0000079282 bro:CosttoFulfillMember 2018-12-31 0000079282 bro:CosttoFulfillMember 2019-01-01 2019-12-31 bro:Acquisition 0000079282 bro:AssetAcquisitionsMember 2019-01-01 2019-12-31 0000079282 bro:StockAcquisitionsMember 2019-01-01 2019-12-31 0000079282 bro:BookofBusinessPurchasesMember 2019-01-01 2019-12-31 0000079282 bro:SmithInsuranceIncMember us-gaap:RetailMember 2019-01-01 2019-12-31 0000079282 bro:DonaldPPipinoCompanyMember us-gaap:RetailMember 2019-01-01 2019-12-31 0000079282 bro:AGAEnterprisesLLCDBCossioInsuranceAgencyMember us-gaap:RetailMember 2019-01-01 2019-12-31 0000079282 bro:MedvalLLCMember bro:ServicesMember 2019-01-01 2019-12-31 0000079282 bro:UnitedDevelopmentSystemsIncMember us-gaap:RetailMember 2019-01-01 2019-12-31 0000079282 bro:TwinbrookInsuranceAgencyIncMember us-gaap:RetailMember 2019-01-01 2019-12-31 0000079282 bro:InnovativeRiskSolutionsIncMember us-gaap:RetailMember 2019-01-01 2019-12-31 0000079282 bro:WBRInsuranceAgencyLLCMember us-gaap:RetailMember 2019-01-01 2019-12-31 0000079282 bro:WestRidgeInsuranceAgencyIncMember us-gaap:RetailMember 2019-01-01 2019-12-31 0000079282 bro:CKPInsuranceLLCMember us-gaap:RetailMember 2019-01-01 2019-12-31 0000079282 bro:PooleProfessionalLtdInsuranceAgentsAndBrokersEtAlMember us-gaap:RetailMember 2019-01-01 2019-12-31 0000079282 bro:VerHagenGlendenningAndWalkerLimitedLiabilityPartnershipMember us-gaap:RetailMember 2019-01-01 2019-12-31 0000079282 bro:OtherAcquisitionsMember bro:VariousMember 2019-01-01 2019-12-31 0000079282 bro:SmithInsuranceIncMember us-gaap:RetailMember 2019-12-31 0000079282 bro:DonaldPPipinoCompanyMember us-gaap:RetailMember 2019-12-31 0000079282 bro:AGAEnterprisesLLCDBCossioInsuranceAgencyMember us-gaap:RetailMember 2019-12-31 0000079282 bro:MedvalLLCMember bro:ServicesMember 2019-12-31 0000079282 bro:UnitedDevelopmentSystemsIncMember us-gaap:RetailMember 2019-12-31 0000079282 bro:TwinbrookInsuranceAgencyIncMember us-gaap:RetailMember 2019-12-31 0000079282 bro:InnovativeRiskSolutionsIncMember us-gaap:RetailMember 2019-12-31 0000079282 bro:WBRInsuranceAgencyLLCMember us-gaap:RetailMember 2019-12-31 0000079282 bro:WestRidgeInsuranceAgencyIncMember us-gaap:RetailMember 2019-12-31 0000079282 bro:CKPInsuranceLLCMember us-gaap:RetailMember 2019-12-31 0000079282 bro:PooleProfessionalLtdInsuranceAgentsAndBrokersEtAlMember us-gaap:RetailMember 2019-12-31 0000079282 bro:VerHagenGlendenningAndWalkerLimitedLiabilityPartnershipMember us-gaap:RetailMember 2019-12-31 0000079282 bro:OtherAcquisitionsMember bro:VariousMember 2019-12-31 0000079282 bro:MedvalLLCMember 2019-12-31 0000079282 bro:SmithInsuranceIncMember 2019-12-31 0000079282 bro:DonaldPPipinoCompanyMember 2019-12-31 0000079282 bro:CossioInsuranceAgencyMember 2019-12-31 0000079282 bro:UnitedDevelopmentSystemsIncMember 2019-12-31 0000079282 bro:TwinbrookInsuranceAgencyIncMember 2019-12-31 0000079282 bro:InnovativeRiskSolutionsIncMember 2019-12-31 0000079282 bro:WBRInsuranceAgencyLLCMember 2019-12-31 0000079282 bro:WestRidgeInsuranceAgencyIncMember 2019-12-31 0000079282 bro:CKPInsuranceLLCMember 2019-12-31 0000079282 bro:SmithInsuranceIncMember us-gaap:CustomerListsMember 2019-12-31 0000079282 bro:DonaldPPipinoCompanyMember us-gaap:CustomerListsMember 2019-12-31 0000079282 bro:CossioInsuranceAgencyMember us-gaap:CustomerListsMember 2019-12-31 0000079282 bro:MedvalLLCMember us-gaap:CustomerListsMember 2019-12-31 0000079282 bro:UnitedDevelopmentSystemsIncMember us-gaap:CustomerListsMember 2019-12-31 0000079282 bro:TwinbrookInsuranceAgencyIncMember us-gaap:CustomerListsMember 2019-12-31 0000079282 bro:InnovativeRiskSolutionsIncMember us-gaap:CustomerListsMember 2019-12-31 0000079282 bro:WBRInsuranceAgencyLLCMember us-gaap:CustomerListsMember 2019-12-31 0000079282 bro:WestRidgeInsuranceAgencyIncMember us-gaap:CustomerListsMember 2019-12-31 0000079282 bro:CKPInsuranceLLCMember us-gaap:CustomerListsMember 2019-12-31 0000079282 bro:SmithInsuranceIncMember us-gaap:NoncompeteAgreementsMember 2019-12-31 0000079282 bro:DonaldPPipinoCompanyMember us-gaap:NoncompeteAgreementsMember 2019-12-31 0000079282 bro:CossioInsuranceAgencyMember us-gaap:NoncompeteAgreementsMember 2019-12-31 0000079282 bro:MedvalLLCMember us-gaap:NoncompeteAgreementsMember 2019-12-31 0000079282 bro:UnitedDevelopmentSystemsIncMember us-gaap:NoncompeteAgreementsMember 2019-12-31 0000079282 bro:TwinbrookInsuranceAgencyIncMember us-gaap:NoncompeteAgreementsMember 2019-12-31 0000079282 bro:InnovativeRiskSolutionsIncMember us-gaap:NoncompeteAgreementsMember 2019-12-31 0000079282 bro:WBRInsuranceAgencyLLCMember us-gaap:NoncompeteAgreementsMember 2019-12-31 0000079282 bro:WestRidgeInsuranceAgencyIncMember us-gaap:NoncompeteAgreementsMember 2019-12-31 0000079282 bro:CKPInsuranceLLCMember us-gaap:NoncompeteAgreementsMember 2019-12-31 0000079282 bro:PooleProfessionalLimitedMember 2019-12-31 0000079282 bro:VerHagenGlendenningAndWalkerLimitedLiabilityPartnershipMember 2019-12-31 0000079282 bro:OtherAcquisitionAdjustmentsMember 2019-12-31 0000079282 us-gaap:CustomerListsMember bro:PooleProfessionalLimitedMember 2019-12-31 0000079282 us-gaap:CustomerListsMember bro:VerHagenGlendenningAndWalkerLimitedLiabilityPartnershipMember 2019-12-31 0000079282 us-gaap:CustomerListsMember bro:OtherAcquisitionAdjustmentsMember 2019-12-31 0000079282 us-gaap:CustomerListsMember 2019-12-31 0000079282 us-gaap:NoncompeteAgreementsMember bro:PooleProfessionalLimitedMember 2019-12-31 0000079282 us-gaap:NoncompeteAgreementsMember bro:VerHagenGlendenningAndWalkerLimitedLiabilityPartnershipMember 2019-12-31 0000079282 us-gaap:NoncompeteAgreementsMember bro:OtherAcquisitionAdjustmentsMember 2019-12-31 0000079282 us-gaap:NoncompeteAgreementsMember 2019-12-31 0000079282 us-gaap:CustomerRelationshipsMember 2019-01-01 2019-12-31 0000079282 us-gaap:NoncompeteAgreementsMember 2019-01-01 2019-12-31 0000079282 us-gaap:RetailMember 2019-01-01 2019-12-31 0000079282 bro:NationalProgramsMember 2019-01-01 2019-12-31 0000079282 bro:WholesaleBrokerageMember 2019-01-01 2019-12-31 0000079282 bro:ServicesMember 2019-01-01 2019-12-31 0000079282 bro:TwoThousandNineteenAcquisitionMember 2019-01-01 2019-12-31 0000079282 bro:TwoThousandNineteenAcquisitionMember 2018-01-01 2018-12-31 0000079282 bro:AssetAcquisitionsMember 2018-01-01 2018-12-31 0000079282 bro:StockAcquisitionsMember 2018-01-01 2018-12-31 0000079282 bro:BookofBusinessPurchasesMember 2018-01-01 2018-12-31 0000079282 bro:OpusMember us-gaap:RetailMember 2018-01-01 2018-12-31 0000079282 bro:KerxtonMember us-gaap:RetailMember 2018-01-01 2018-12-31 0000079282 bro:ADGMember us-gaap:RetailMember 2018-01-01 2018-12-31 0000079282 bro:ServcoMember us-gaap:RetailMember 2018-01-01 2018-12-31 0000079282 bro:TowerHillMember bro:NationalProgramsMember 2018-01-01 2018-12-31 0000079282 bro:HSRMember bro:NationalProgramsMember 2018-01-01 2018-12-31 0000079282 bro:PDAMember bro:ServicesMember 2018-01-01 2018-12-31 0000079282 bro:FIMember us-gaap:RetailMember 2018-01-01 2018-12-31 0000079282 bro:RodmanMember us-gaap:RetailMember 2018-01-01 2018-12-31 0000079282 bro:HaysMember us-gaap:RetailMember 2018-01-01 2018-12-31 0000079282 bro:DealerAssociatesMember us-gaap:RetailMember 2018-01-01 2018-12-31 0000079282 bro:OtherAcquisitionsMember bro:VariousMember 2018-01-01 2018-12-31 0000079282 bro:OpusMember us-gaap:RetailMember 2018-12-31 0000079282 bro:KerxtonMember us-gaap:RetailMember 2018-12-31 0000079282 bro:ADGMember us-gaap:RetailMember 2018-12-31 0000079282 bro:ServcoMember us-gaap:RetailMember 2018-12-31 0000079282 bro:TowerHillMember bro:NationalProgramsMember 2018-12-31 0000079282 bro:HSRMember bro:NationalProgramsMember 2018-12-31 0000079282 bro:PDAMember bro:ServicesMember 2018-12-31 0000079282 bro:FIMember us-gaap:RetailMember 2018-12-31 0000079282 bro:RodmanMember us-gaap:RetailMember 2018-12-31 0000079282 bro:HaysMember us-gaap:RetailMember 2018-12-31 0000079282 bro:DealerAssociatesMember us-gaap:RetailMember 2018-12-31 0000079282 bro:OtherAcquisitionsMember bro:VariousMember 2018-12-31 0000079282 bro:ServcoMember 2018-12-31 0000079282 bro:HSRMember 2018-12-31 0000079282 bro:PDAMember 2018-12-31 0000079282 bro:OpusMember 2018-12-31 0000079282 bro:KerxtonMember 2018-12-31 0000079282 bro:ADGMember 2018-12-31 0000079282 bro:FIMember 2018-12-31 0000079282 bro:RodmanMember 2018-12-31 0000079282 bro:HaysMember 2018-12-31 0000079282 us-gaap:CustomerListsMember bro:OpusMember 2018-12-31 0000079282 us-gaap:CustomerListsMember bro:KerxtonMember 2018-12-31 0000079282 us-gaap:CustomerListsMember bro:ADGMember 2018-12-31 0000079282 us-gaap:CustomerListsMember bro:ServcoMember 2018-12-31 0000079282 us-gaap:CustomerListsMember bro:TowerHillMember 2018-12-31 0000079282 us-gaap:CustomerListsMember bro:HSRMember 2018-12-31 0000079282 us-gaap:CustomerListsMember bro:PDAMember 2018-12-31 0000079282 us-gaap:CustomerListsMember bro:FIMember 2018-12-31 0000079282 us-gaap:CustomerListsMember bro:RodmanMember 2018-12-31 0000079282 us-gaap:CustomerListsMember bro:HaysMember 2018-12-31 0000079282 us-gaap:NoncompeteAgreementsMember bro:OpusMember 2018-12-31 0000079282 us-gaap:NoncompeteAgreementsMember bro:KerxtonMember 2018-12-31 0000079282 us-gaap:NoncompeteAgreementsMember bro:ADGMember 2018-12-31 0000079282 us-gaap:NoncompeteAgreementsMember bro:ServcoMember 2018-12-31 0000079282 us-gaap:NoncompeteAgreementsMember bro:TowerHillMember 2018-12-31 0000079282 us-gaap:NoncompeteAgreementsMember bro:HSRMember 2018-12-31 0000079282 us-gaap:NoncompeteAgreementsMember bro:PDAMember 2018-12-31 0000079282 us-gaap:NoncompeteAgreementsMember bro:FIMember 2018-12-31 0000079282 us-gaap:NoncompeteAgreementsMember bro:RodmanMember 2018-12-31 0000079282 us-gaap:NoncompeteAgreementsMember bro:HaysMember 2018-12-31 0000079282 bro:TowerHillMember 2018-12-31 0000079282 bro:DealerAssociatesMember 2018-12-31 0000079282 bro:OtherAcquisitionsMember 2018-12-31 0000079282 us-gaap:CustomerListsMember bro:DealerAssociatesMember 2018-12-31 0000079282 us-gaap:CustomerListsMember bro:OtherAcquisitionsMember 2018-12-31 0000079282 us-gaap:CustomerListsMember 2018-12-31 0000079282 us-gaap:NoncompeteAgreementsMember bro:DealerAssociatesMember 2018-12-31 0000079282 us-gaap:NoncompeteAgreementsMember bro:OtherAcquisitionsMember 2018-12-31 0000079282 us-gaap:NoncompeteAgreementsMember 2018-12-31 0000079282 us-gaap:CustomerRelationshipsMember 2018-01-01 2018-12-31 0000079282 us-gaap:NoncompeteAgreementsMember 2018-01-01 2018-12-31 0000079282 us-gaap:RetailMember 2018-01-01 2018-12-31 0000079282 bro:NationalProgramsMember 2018-01-01 2018-12-31 0000079282 bro:WholesaleBrokerageMember 2018-01-01 2018-12-31 0000079282 bro:ServicesMember 2018-01-01 2018-12-31 0000079282 bro:TwoThousandEighteenAcquisitionMember 2018-01-01 2018-12-31 0000079282 bro:TwoThousandEighteenAcquisitionMember 2017-01-01 2017-12-31 0000079282 bro:AssetAcquisitionsMember 2017-01-01 2017-12-31 0000079282 bro:BookofBusinessPurchasesMember 2017-01-01 2017-12-31 0000079282 bro:OtherAcquisitionsMember bro:VariousMember 2017-01-01 2017-12-31 0000079282 bro:OtherAcquisitionsMember bro:VariousMember 2017-12-31 0000079282 us-gaap:CustomerListsMember 2017-12-31 0000079282 us-gaap:NoncompeteAgreementsMember 2017-12-31 0000079282 us-gaap:CustomerRelationshipsMember 2017-01-01 2017-12-31 0000079282 us-gaap:NoncompeteAgreementsMember 2017-01-01 2017-12-31 0000079282 us-gaap:RetailMember 2017-01-01 2017-12-31 0000079282 bro:NationalProgramsMember 2017-01-01 2017-12-31 0000079282 bro:WholesaleBrokerageMember 2017-01-01 2017-12-31 0000079282 bro:ServicesMember 2017-01-01 2017-12-31 0000079282 bro:TwoThousandSeventeenAcquisitionMember 2017-01-01 2017-12-31 0000079282 bro:TwoThousandSeventeenAcquisitionMember 2016-01-01 2016-12-31 0000079282 us-gaap:AccountsPayableMember 2019-12-31 0000079282 us-gaap:OtherNoncurrentLiabilitiesMember 2019-12-31 0000079282 us-gaap:AccountsPayableMember 2018-12-31 0000079282 us-gaap:OtherNoncurrentLiabilitiesMember 2018-12-31 0000079282 us-gaap:AccountsPayableMember 2017-12-31 0000079282 us-gaap:OtherNoncurrentLiabilitiesMember 2017-12-31 0000079282 us-gaap:RetailMember 2017-12-31 0000079282 bro:NationalProgramsMember 2017-12-31 0000079282 bro:WholesaleBrokerageMember 2017-12-31 0000079282 bro:ServicesMember 2017-12-31 0000079282 us-gaap:RetailMember 2018-12-31 0000079282 bro:NationalProgramsMember 2018-12-31 0000079282 bro:WholesaleBrokerageMember 2018-12-31 0000079282 bro:ServicesMember 2018-12-31 0000079282 us-gaap:RetailMember 2019-12-31 0000079282 bro:NationalProgramsMember 2019-12-31 0000079282 bro:WholesaleBrokerageMember 2019-12-31 0000079282 bro:ServicesMember 2019-12-31 0000079282 us-gaap:CustomerRelationshipsMember 2019-12-31 0000079282 us-gaap:CustomerRelationshipsMember 2018-12-31 0000079282 us-gaap:USTreasurySecuritiesMember 2019-12-31 0000079282 us-gaap:CorporateDebtSecuritiesMember 2019-12-31 0000079282 us-gaap:USTreasurySecuritiesMember us-gaap:ShortTermInvestmentsMember 2019-12-31 0000079282 us-gaap:USTreasurySecuritiesMember us-gaap:BankTimeDepositsMember 2019-12-31 bro:Security 0000079282 us-gaap:USTreasurySecuritiesMember 2018-12-31 0000079282 us-gaap:CorporateDebtSecuritiesMember 2018-12-31 0000079282 us-gaap:FurnitureAndFixturesMember 2019-12-31 0000079282 us-gaap:FurnitureAndFixturesMember 2018-12-31 0000079282 us-gaap:LeaseholdImprovementsMember 2019-12-31 0000079282 us-gaap:LeaseholdImprovementsMember 2018-12-31 0000079282 us-gaap:LandBuildingsAndImprovementsMember 2019-12-31 0000079282 us-gaap:LandBuildingsAndImprovementsMember 2018-12-31 0000079282 bro:FiveYearTermLoanFacilityExpiresInTwoThousandTwentyTwoMember 2019-12-31 0000079282 bro:FiveYearTermLoanFacilityExpiresInTwoThousandTwentyTwoMember 2018-12-31 0000079282 bro:FiveYearTermLoanFacilityExpiresInTwoThousandTwentyThreeMember 2019-12-31 0000079282 bro:FiveYearTermLoanFacilityExpiresInTwoThousandTwentyThreeMember 2018-12-31 0000079282 bro:FourPointTwoZeroZeroPercentSeniorNotesDueTwoThousandTwentyFourMember 2019-12-31 0000079282 bro:FourPointTwoZeroZeroPercentSeniorNotesDueTwoThousandTwentyFourMember 2018-12-31 0000079282 bro:FourPointFiveZeroZeroPercentSeniorNotesDueTwoThousandTwentyNineMember 2019-12-31 0000079282 bro:FiveYearRevolvingLoanFacilityExpiresInTwoThousandTwentyTwoMember 2019-12-31 0000079282 bro:FiveYearRevolvingLoanFacilityExpiresInTwoThousandTwentyTwoMember 2018-12-31 0000079282 bro:FourPointFiveZeroZeroPercentSeniorNotesDueTwoThousandTwentyNineMember 2019-01-01 2019-12-31 0000079282 bro:FourPointTwoZeroZeroPercentSeniorNotesDueTwoThousandTwentyFourMember 2019-01-01 2019-12-31 0000079282 bro:FourPointTwoZeroZeroPercentSeniorNotesDueTwoThousandTwentyFourMember 2018-01-01 2018-12-31 0000079282 bro:FiveYearTermLoanFacilityExpiresInTwoThousandTwentyTwoMember 2019-01-01 2019-12-31 0000079282 bro:FiveYearTermLoanFacilityExpiresInTwoThousandTwentyTwoMember 2018-01-01 2018-12-31 0000079282 bro:FiveYearRevolvingLoanFacilityExpiresInTwoThousandTwentyTwoMember 2018-01-01 2018-12-31 0000079282 bro:FiveYearTermLoanFacilityExpiresInTwoThousandTwentyThreeMember 2019-01-01 2019-12-31 0000079282 bro:FiveYearTermLoanFacilityExpiresInTwoThousandTwentyThreeMember 2018-01-01 2018-12-31 0000079282 bro:FiveYearTermLoanFacilityExpiresInTwoThousandTwentyTwoMember srt:MaximumMember us-gaap:LondonInterbankOfferedRateLIBORMember 2019-01-01 2019-12-31 0000079282 bro:FiveYearTermLoanFacilityExpiresInTwoThousandTwentyTwoMember srt:MaximumMember us-gaap:LondonInterbankOfferedRateLIBORMember 2018-01-01 2018-12-31 0000079282 bro:FiveYearRevolvingLoanFacilityExpiresInTwoThousandTwentyTwoMember srt:MaximumMember us-gaap:LondonInterbankOfferedRateLIBORMember 2018-01-01 2018-12-31 0000079282 bro:FiveYearTermLoanFacilityExpiresInTwoThousandTwentyThreeMember srt:MaximumMember us-gaap:LondonInterbankOfferedRateLIBORMember 2019-01-01 2019-12-31 0000079282 bro:FiveYearTermLoanFacilityExpiresInTwoThousandTwentyThreeMember srt:MaximumMember us-gaap:LondonInterbankOfferedRateLIBORMember 2018-01-01 2018-12-31 0000079282 bro:FiveYearRevolvingLoanFacilityExpiresInTwoThousandTwentyTwoMember srt:MaximumMember 2018-01-01 2018-12-31 0000079282 2014-04-17 0000079282 2017-06-28 0000079282 bro:TermLoanMember 2018-10-01 2018-12-31 0000079282 2018-10-01 2018-12-31 0000079282 2017-04-01 2017-06-30 0000079282 2018-11-15 0000079282 us-gaap:RevolvingCreditFacilityMember 2019-12-31 0000079282 bro:UnsecuredSeniorNotesMember 2014-09-18 0000079282 us-gaap:RevolvingCreditFacilityMember 2014-09-18 0000079282 bro:UnsecuredSeniorNotesMember 2019-12-31 0000079282 bro:UnsecuredSeniorNotesMember 2018-12-31 0000079282 bro:TermLoanMember srt:MinimumMember 2018-12-21 0000079282 bro:TermLoanMember srt:MaximumMember 2018-12-21 0000079282 bro:TermLoanMember 2018-12-21 2018-12-21 0000079282 bro:TermLoanMember 2018-12-21 0000079282 2018-12-21 2018-12-21 0000079282 bro:TermLoanMember 2019-12-31 0000079282 bro:TermLoanMember 2018-12-31 0000079282 bro:FourPointFiveZeroZeroPercentSeniorNotesDueTwoThousandTwentyNineMember 2019-03-11 0000079282 bro:UnsecuredSeniorNotesMember 2019-03-11 0000079282 bro:UnsecuredSeniorNotesMember 2019-03-31 0000079282 us-gaap:LongTermDebtMember us-gaap:LondonInterbankOfferedRateLIBORMember 2019-12-31 0000079282 us-gaap:RevolvingCreditFacilityMember us-gaap:LondonInterbankOfferedRateLIBORMember 2019-12-31 0000079282 bro:TermLoanMember us-gaap:LondonInterbankOfferedRateLIBORMember 2019-12-31 0000079282 bro:TaxCutsandJobsAct2017Member 2017-01-01 2017-12-31 0000079282 bro:TaxCutsandJobsAct2017Member 2017-12-31 0000079282 bro:TaxCutsandJobsAct2017Member 2018-01-01 2018-12-31 0000079282 2016-01-01 2016-12-31 0000079282 us-gaap:AccountingStandardsUpdate201409Member 2019-12-31 0000079282 us-gaap:AccountingStandardsUpdate201409Member 2018-12-31 bro:Day 0000079282 2009-07-01 2009-07-31 0000079282 bro:PerformanceStockPlanMember 2016-12-31 0000079282 bro:PerformanceStockPlanMember 2017-01-01 2017-12-31 0000079282 bro:PerformanceStockPlanMember 2017-12-31 0000079282 bro:PerformanceStockPlanMember 2018-01-01 2018-12-31 0000079282 bro:PerformanceStockPlanMember 2018-12-31 0000079282 bro:PerformanceStockPlanMember 2019-01-01 2019-12-31 0000079282 bro:PerformanceStockPlanMember 2019-12-31 0000079282 bro:TwoThousandAndNineteenStockIncentivePlanMember 2019-05-01 0000079282 bro:TwoThousandTenAndTwoThousandNineteenStockIncentivePlanMember srt:MinimumMember 2019-01-01 2019-12-31 0000079282 bro:TwoThousandTenAndTwoThousandNineteenStockIncentivePlanMember srt:MaximumMember 2019-01-01 2019-12-31 0000079282 bro:TwoThousandTenAndTwoThousandNineteenStockIncentivePlanMember srt:MinimumMember 2016-01-01 2016-12-31 0000079282 bro:TwoThousandTenAndTwoThousandNineteenStockIncentivePlanMember srt:MaximumMember 2016-01-01 2016-12-31 0000079282 bro:TwoThousandTenAndTwoThousandNineteenStockIncentivePlanMember srt:MinimumMember 2015-01-01 2015-12-31 0000079282 bro:TwoThousandTenAndTwoThousandNineteenStockIncentivePlanMember srt:MaximumMember 2015-01-01 2015-12-31 0000079282 bro:TwoThousandAndTenStockIncentivePlanMember 2017-01-01 2017-12-31 0000079282 bro:TwoThousandAndTenStockIncentivePlanMember 2018-01-01 2018-12-31 0000079282 bro:TwoThousandTenAndTwoThousandNineteenStockIncentivePlanMember 2016-12-31 0000079282 bro:TwoThousandTenAndTwoThousandNineteenStockIncentivePlanMember 2017-01-01 2017-12-31 0000079282 bro:TwoThousandTenAndTwoThousandNineteenStockIncentivePlanMember 2017-12-31 0000079282 bro:TwoThousandTenAndTwoThousandNineteenStockIncentivePlanMember 2018-01-01 2018-12-31 0000079282 bro:TwoThousandTenAndTwoThousandNineteenStockIncentivePlanMember 2018-12-31 0000079282 bro:TwoThousandTenAndTwoThousandNineteenStockIncentivePlanMember 2019-01-01 2019-12-31 0000079282 bro:TwoThousandTenAndTwoThousandNineteenStockIncentivePlanMember 2019-12-31 0000079282 bro:TwoThousandTenAndTwoThousandNineteenStockIncentivePlanMember srt:MaximumMember 2017-01-01 2017-12-31 0000079282 bro:TwoThousandTenAndTwoThousandNineteenStockIncentivePlanMember srt:MinimumMember 2017-01-01 2017-12-31 0000079282 bro:TwoThousandTenAndTwoThousandNineteenStockIncentivePlanMember srt:MaximumMember 2018-01-01 2018-12-31 0000079282 bro:TwoThousandTenAndTwoThousandNineteenStockIncentivePlanMember srt:MinimumMember 2018-01-01 2018-12-31 0000079282 bro:TimeBasedMember bro:TwoThousandAndTenStockIncentivePlanMember 2019-01-01 2019-12-31 0000079282 bro:TimeBasedMember bro:TwoThousandAndTenStockIncentivePlanMember 2018-01-01 2018-12-31 0000079282 bro:TimeBasedMember bro:TwoThousandAndTenStockIncentivePlanMember 2017-01-01 2017-12-31 0000079282 bro:PerfomanceBasedMember bro:TwoThousandAndTenStockIncentivePlanMember 2019-01-01 2019-12-31 0000079282 bro:PerfomanceBasedMember bro:TwoThousandAndTenStockIncentivePlanMember 2018-01-01 2018-12-31 0000079282 bro:PerfomanceBasedMember bro:TwoThousandAndTenStockIncentivePlanMember 2017-01-01 2017-12-31 0000079282 us-gaap:PerformanceSharesMember bro:TwoThousandAndTenStockIncentivePlanMember 2019-01-01 2019-12-31 0000079282 us-gaap:PerformanceSharesMember bro:TwoThousandAndTenStockIncentivePlanMember 2018-01-01 2018-12-31 0000079282 us-gaap:PerformanceSharesMember bro:TwoThousandAndTenStockIncentivePlanMember 2017-01-01 2017-12-31 0000079282 bro:TwoThousandAndTenStockIncentivePlanMember 2019-12-31 0000079282 bro:TwoThousandAndTenStockIncentivePlanMember srt:MaximumMember 2019-01-01 2019-12-31 0000079282 bro:TwoThousandAndTenStockIncentivePlanMember srt:MinimumMember 2019-01-01 2019-12-31 0000079282 bro:TwoThousandAndTenStockIncentivePlanMember 2018-12-31 0000079282 bro:TwoThousandAndTenStockIncentivePlanMember srt:MaximumMember 2018-01-01 2018-12-31 0000079282 bro:TwoThousandAndTenStockIncentivePlanMember srt:MinimumMember 2018-01-01 2018-12-31 0000079282 bro:TwoThousandAndTenStockIncentivePlanMember 2017-12-31 0000079282 bro:TwoThousandAndTenStockIncentivePlanMember srt:MaximumMember 2017-01-01 2017-12-31 0000079282 bro:TwoThousandAndTenStockIncentivePlanMember srt:MinimumMember 2017-01-01 2017-12-31 0000079282 bro:TwoThousandAndNineteenStockIncentivePlanMember 2019-12-31 0000079282 us-gaap:EmployeeStockMember 2019-12-31 0000079282 us-gaap:EmployeeStockMember 2019-01-01 2019-12-31 0000079282 us-gaap:EmployeeStockMember 2019-08-31 0000079282 us-gaap:EmployeeStockMember 2018-08-31 0000079282 us-gaap:EmployeeStockMember 2017-08-31 0000079282 us-gaap:EmployeeStockMember 2019-07-31 0000079282 us-gaap:EmployeeStockMember 2018-07-31 0000079282 us-gaap:EmployeeStockMember 2017-07-31 0000079282 us-gaap:EmployeeStockMember 2018-12-31 0000079282 us-gaap:EmployeeStockMember 2017-12-31 0000079282 us-gaap:EmployeeStockMember 2018-01-01 2018-12-31 0000079282 us-gaap:EmployeeStockMember 2017-01-01 2017-12-31 0000079282 bro:FutureLeaseAgreementMember 2019-12-31 0000079282 2019-01-01 2019-03-31 0000079282 2019-04-01 2019-06-30 0000079282 2019-07-01 2019-09-30 0000079282 2019-10-01 2019-12-31 0000079282 2018-01-01 2018-03-31 0000079282 2018-04-01 2018-06-30 0000079282 2018-07-01 2018-09-30 0000079282 bro:LondonBermudaAndCaymanIslandsOperationsMember 2019-01-01 2019-12-31 0000079282 bro:LondonBermudaAndCaymanIslandsOperationsMember 2018-01-01 2018-12-31 0000079282 bro:LondonBermudaAndCaymanIslandsOperationsMember 2017-01-01 2017-12-31 0000079282 us-gaap:MaterialReconcilingItemsMember 2019-01-01 2019-12-31 0000079282 us-gaap:RetailMember us-gaap:OperatingSegmentsMember 2019-12-31 0000079282 bro:NationalProgramsMember us-gaap:OperatingSegmentsMember 2019-12-31 0000079282 bro:WholesaleBrokerageMember us-gaap:OperatingSegmentsMember 2019-12-31 0000079282 bro:ServicesMember us-gaap:OperatingSegmentsMember 2019-12-31 0000079282 us-gaap:MaterialReconcilingItemsMember 2019-12-31 0000079282 us-gaap:MaterialReconcilingItemsMember 2018-01-01 2018-12-31 0000079282 us-gaap:RetailMember us-gaap:OperatingSegmentsMember 2018-12-31 0000079282 bro:NationalProgramsMember us-gaap:OperatingSegmentsMember 2018-12-31 0000079282 bro:WholesaleBrokerageMember us-gaap:OperatingSegmentsMember 2018-12-31 0000079282 bro:ServicesMember us-gaap:OperatingSegmentsMember 2018-12-31 0000079282 us-gaap:MaterialReconcilingItemsMember 2018-12-31 0000079282 us-gaap:RetailMember us-gaap:OperatingSegmentsMember 2017-01-01 2017-12-31 0000079282 bro:NationalProgramsMember us-gaap:OperatingSegmentsMember 2017-01-01 2017-12-31 0000079282 bro:WholesaleBrokerageMember us-gaap:OperatingSegmentsMember 2017-01-01 2017-12-31 0000079282 bro:ServicesMember us-gaap:OperatingSegmentsMember 2017-01-01 2017-12-31 0000079282 us-gaap:MaterialReconcilingItemsMember 2017-01-01 2017-12-31 0000079282 us-gaap:RetailMember us-gaap:OperatingSegmentsMember 2017-12-31 0000079282 bro:NationalProgramsMember us-gaap:OperatingSegmentsMember 2017-12-31 0000079282 bro:WholesaleBrokerageMember us-gaap:OperatingSegmentsMember 2017-12-31 0000079282 bro:ServicesMember us-gaap:OperatingSegmentsMember 2017-12-31 0000079282 us-gaap:MaterialReconcilingItemsMember 2017-12-31 0000079282 bro:WrightNationalFloodInsuranceCompanyMember 2019-12-31 0000079282 bro:WrightNationalFloodInsuranceCompanyMember 2019-09-30 0000079282 bro:WrightNationalFloodInsuranceCompanyMember 2019-01-01 2019-12-31 0000079282 bro:WrightNationalFloodInsuranceCompanyMember 2018-01-01 2018-12-31 bro:Reinsurer 0000079282 bro:WrightNationalFloodInsuranceCompanyMember 2018-12-31 0000079282 bro:WrightNationalFloodInsuranceCompanyMember srt:ScenarioForecastMember 2020-12-31 0000079282 srt:MaximumMember 2019-12-31 0000079282 srt:MaximumMember 2019-05-01 0000079282 bro:AcceleratedShareRepurchaseAgreementMember 2017-12-31 0000079282 bro:AcceleratedShareRepurchaseAgreementMember 2019-12-31 0000079282 bro:AcceleratedShareRepurchaseAgreementMember 2017-01-01 2017-12-31 0000079282 bro:AcceleratedShareRepurchaseAgreementMember 2019-01-01 2019-12-31 0000079282 bro:AcceleratedShareRepurchaseAgreementMember 2018-12-31 0000079282 2014-01-01 2019-12-31 0000079282 bro:AcceleratedShareRepurchaseAgreementMember 2018-01-01 2018-12-31 0000079282 bro:AcceleratedShareRepurchaseAgreementMember 2019-05-17 2019-05-17

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

FORM 10-K 

 

 

 

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

For the fiscal year ended December 31, 2019

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

 

 

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

Registrant’s Website: www.bbinsurance.com

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

COMMON STOCK, $0.10 PAR VALUE

BRO

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      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  

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      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      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 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

 

  

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  

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, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter) was $7,853,765,460.

The number of shares of the Registrant’s common stock, $0.10 par value, outstanding as of February 20, 2020 was 281,552,678.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Brown & Brown, Inc.’s Proxy Statement for the 2020 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, 2019

INDEX 

 

 

 

 

 

 

 

 

 

PAGE

NO.

 

 

Part I

5

 

 

 

Item 1.

Business

5

Item 1A.

Risk Factors

11

Item 1B.

Unresolved Staff Comments

20

Item 2.

Properties

20

Item 3.

Legal Proceedings

20

Item 4.

Mine Safety Disclosures

21

 

 

 

Part II

22

 

 

 

Item 5.

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

22

Item 6.

Selected Financial Data

24

Item 7.

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

25

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

42

Item 8.

Financial Statements and Supplementary Data

44

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

84

Item 9A.

Controls and Procedures

84

Item 9B.

Other Information

84

 

 

 

Part III

85

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

85

Item 11.

Executive Compensation

86

Item 12.

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

86

Item 13.

Certain Relationships and Related Transactions, and Director Independence

87

Item 14.

Principal Accounting Fees and Services

87

 

 

Part IV

88

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

88

Item 16.

Form 10-K Summary

89

 

 

Signatures

90

 

2


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 upon reasonable assumptions within the bounds of our knowledge of our business, a number of factors could cause actual results to differ materially from those expressed in any forward-looking statements, whether oral or written, made by us or on our behalf. Many of these factors have previously been identified in filings or statements made by us or on our behalf. Important factors which could cause our actual results to differ materially from the forward-looking statements in this report include but are not limited to the following items, in addition to those matters described in Part I, Item 1A “Risk Factors” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:

 

The inability to retain or hire qualified employees, as well as the loss of any of our executive officers or other key employees;

 

Acquisition-related risks that could negatively affect the success of our growth strategy, including the possibility that we may not be able successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our operations, and expand into new markets continuing;

 

A cybersecurity attack or any other interruption in information technology and/or data security and/or outsourcing relationships;

 

The requirement for additional resources and time to adequately respond to dynamics resulting from rapid technological change;

 

Changes in data privacy and protection laws and regulations or any failure to comply with such laws and regulations;

 

The loss of any of our insurance company relationships, which could result in additional expense and loss of market share;

 

Adverse economic conditions, natural disasters, or regulatory changes in states where we have a high concentration of our business;

 

The inability to maintain our culture or a change in management, management philosophy or our business strategy;

 

Risks facing us in our Services Segment, including our third-party claims administration operations, that are distinct from those we face in our insurance intermediary operations;

 

Our failure to comply with any covenants contained in our debt agreements;

 

The possibility that covenants in our debt agreements could prevent use from engaging in certain potentially beneficial activities;

 

Changes in estimates, judgments or assumptions used in the preparation of our financial statements;

 

Improper disclosure of confidential information;

 

The limitations of our system of disclosure and internal controls and procedures in preventing errors or fraud, or in informing management of all material information in a timely manner;

 

The potential adverse effect of certain actual or potential claims, regulatory actions or proceedings on our businesses, results of operations, financial condition or liquidity;

 

Changes in the U.S.-based credit markets that might adversely affect our results of operation and financial condition;

 

The significant control certain existing shareholders have over the Company;

 

Risk related to our international operations, which may require more time and expense than our domestic options to achieve or maintain profitability;

 

Risks associated with the current interest rate environment and to the extent we use debt to finance our investments, changes in interest rates will affect our cost of capital and net investment income;

3


Table of Contents

 

 

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;

 

Changes in current U.S. economic conditions;

 

Conditions that result in reduced insurer capacity;

 

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;

 

The possibility that one of the financial institutions we use fails or is taken over by the U.S. Federal Deposit Insurance Corporation (FDIC)

 

Uncertainty in our business practices and compensation arrangements due to potential changes in regulations;

 

Regulatory changes that could reduce our profitability or growth by increasing compliance costs, technology compliance, 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 customers, carriers and third parties.

 

Intangible asset risk, including the possibility that our goodwill may become impaired in the future;

 

A decrease in demand for liability insurance as a result of tort reform litigation;

 

Changes in our credit ratings;

 

Volatility in our stock price; and

 

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

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

4


Table of Contents

 

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 and is headquartered in Daytona Beach, Florida. The Company markets and sells insurance products and services, primarily in the property, casualty and employee benefits areas. We provide our customers with quality, non-investment insurance contracts, as well as other targeted, customized risk management products and services. As an agent and broker, we do not assume underwriting risks with the exception of the activity in The Wright Insurance Group, LLC (“Wright”). Within Wright, we operate a write-your-own flood insurance carrier, Wright National Flood Insurance Company (“WNFIC”). WNFIC’s underwriting business consists entirely of policies written pursuant to the National Flood Insurance Program (“NFIP”), the program administered by the Federal Emergency Management Agency (“FEMA”), and excess flood policies which are fully reinsured, thereby substantially eliminating WNFIC’s exposure to underwriting risk, as 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 its 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 limited 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 other 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. The amount of our revenues from commissions and fees is a function of several factors, including 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 loss experience, risk profile and reinsurance rates paid by such insurance companies, none of which we control.

As of December 31, 2019, our activities were conducted in 311 locations in 44 states as follows, as well as in England, Bermuda, and the Cayman Islands:

 

Florida

52

 

 

Virginia

6

 

Rhode Island

2

California

29

 

 

Arkansas

5

 

Tennessee

2

Texas

20

 

 

Colorado

5

 

Alabama

1

New York

19

 

 

Connecticut

4

 

Delaware

1

Massachusetts

16

 

 

Hawaii

4

 

Iowa

1

Washington

15

 

 

Indiana

4

 

Maine

1

New Jersey

14

 

 

Michigan

4

 

Mississippi

1

Pennsylvania

12

 

 

Wisconsin

4

 

Montana

1

Georgia

10

 

 

Kentucky

3

 

North Carolina

1

Louisiana

10

 

 

Maryland

3

 

New Hampshire

1

Minnesota

9

 

 

New Mexico

3

 

Nevada

1

Oregon

9

 

 

Ohio

3

 

South Dakota

1

Illinois

8

 

 

Oklahoma

3

 

Utah

1

Arizona

7

 

 

South Carolina

3

 

Vermont

 1

Missouri

6

 

 

Kansas

2

 

 

 

 

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 upon market conditions with a “hard” market in which premium rates are increasing or a “soft” market, characterized by stable or declining premium rates in many lines and geographic areas. Premium pricing is influenced by many factors including loss experience, interest rates and the availability of capital being deployed into the insurance market in search of returns.

5


Table of Contents

 

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, and non-insurance risk-mitigating products through our automobile dealer services (“F&I”) businesses. The National Programs Segment, which acts as a managing general agent (“MGA”), provides professional liability and related package products for certain professionals, a range of insurance products for individuals, flood coverage, and targeted products and services designated for specific industries, trade groups, governmental entities and market niches, all of which are delivered through a nationwide network of independent agents, including Brown & Brown retail agents. The Wholesale Brokerage Segment markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers, as well as Brown & Brown retail agents. 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.

The following table summarizes (1) the commissions and fees generated by each of our reportable operating segments for 2019, 2018 and 2017, and (2) the percentage of our total commissions and fees represented by each segment for each such period:

 

(in thousands, except percentages)

 

2019

 

 

%

 

 

2018

 

 

%

 

 

2017

 

 

%

 

Retail Segment

 

$

1,366,016

 

 

 

57.3

%

 

$

1,041,691

 

 

 

51.8

%

 

$

942,247

 

 

 

50.7

%

National Programs Segment

 

 

516,915

 

 

 

21.7

%

 

 

493,878

 

 

 

24.6

%

 

 

479,017

 

 

 

25.8

%

Wholesale Brokerage Segment

 

 

309,426

 

 

 

13.0

%

 

 

286,364

 

 

 

14.2

%

 

 

271,141

 

 

 

14.6

%

Services Segment

 

 

193,641

 

 

 

8.1

%

 

 

189,041

 

 

 

9.4

%

 

 

165,073

 

 

 

8.9

%

Other

 

 

(1,261

)

 

 

(0.1

)%

 

 

(1,117

)

 

 

(0.0

)%

 

 

(208

)

 

 

(0.0

)%

Total

 

$

2,384,737

 

 

 

100.0

%

 

$

2,009,857

 

 

 

100.0

%

 

$

1,857,270

 

 

 

100.0

%

 

We conduct all of our operations within the United States of America, except for one Wholesale Brokerage operation based in England, one National Programs operation in Canada and Retail operations based in Bermuda and The Cayman Islands. These operations generated $17.7 million, $15.2 million and $15.9 million of revenues for the years ended December 31, 2019, 2018 and 2017, respectively. We do not have any material foreign long-lived assets.

See Note 17 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, 2019, our Retail Segment employed 5,406  employees. Our retail insurance agency business provides a broad range of insurance products and services to commercial, public and quasi-public entities, professional and individual customers, and non-insurance risk-mitigating products through our automobile dealer services (“F&I”) businesses. The categories of insurance we principally sell include: commercial packages, group medical, workers’ compensation, property risk and general liability. We also sell and service group and individual life, accident, disability, health, hospitalization, medical, dental and other ancillary insurance products.

No material part of our retail business is attributable to a single customer or a few customers. During 2019, commissions and fees from our largest single Retail Segment customer represented three tenths of one percent (0.3)% of the Retail Segment’s total commissions and fees.

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 strategies, loss control surveys and analysis, consultation in connection with placing insurance coverages and claims processing.

National Programs Segment

As of December 31, 2019, our National Programs Segment employed 2,004 employees. Our National Programs Segment works with over 100 well-capitalized carrier partners, offering over 40 programs, which can be grouped into five broad categories: (1) Professional Programs, (2) Personal Lines 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 negotiate 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, optometrists, opticians, ophthalmologists, insurance agents, financial advisors, registered representatives, securities broker-dealers, benefit administrators, 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.

6


Table of Contents

 

Below are brief descriptions of the Professional Programs:

 

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 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. Also available through the Dentists program is cyber/data breach insurance offering a solution to privacy breaches and information security exposures tailored to the needs of healthcare organizations.

Financial Professionals: CalSurance® and CITA Insurance Services® have specialized since 1980 to 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. A component 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®”) has been providing professional liability insurance for over 30 years with a niche focus on law firms with fewer than 20 attorneys. The LPP program handles all aspects of insurance operations including underwriting, distribution management, policy issuance and claims.

Optometrists, Opticians, and Ophthalmologists: Since 1973 the Optometric Protector Plan® (“OPP®”), provides 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. Through our strategic carrier partnerships, we also offer professional liability coverage to chiropractors, podiatrists and physicians nationwide.

Physicians: The Physicians Protector Plan program provides professional liability insurance solutions for physicians on an admitted basis in several key states. The program offers comprehensive insurance solutions and provides risk management benefits and claims services.

Professional Risk Specialty Group: Professional Risk Specialty Group (“PRSG”) has been providing errors & omissions (“E&O”), professional liability and 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. The admitted Lawyers Professional Liability Program focuses on law firms with fewer than 20 attorneys, and the non-admitted Lawyers Professional Liability Program is for firms with 20 or more attorneys and is available for primary or excess coverage. PRSG is also involved in direct sales and brokering for other professionals, 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.

Wedding Protector Plan® and Protector Plan® for Events: These programs provide an online wedding and private event cancellation and postponement insurance policy that offers financial protection if certain unfortunate or unforeseen events should occur during the period leading up to and including the wedding or event date. Liability and liquor liability are available as options.

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. 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.

Personal Lines Programs. Arrowhead is an MGA, General Agent (“GA”), and Program Administrator (“PA”) to the property and casualty insurance industry. Arrowhead acts as a virtual insurer and can provide 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 Personal Lines Programs:

 

Personal Property: mono-line property coverage for homeowners and renters in numerous states.

Residential Earthquake: specializes in mono-line residential earthquake coverage for home and condominium owners in several states, including California.

7


Table of Contents

 

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 Georgia, Michigan, and Alabama, South Carolina and Tennessee.     

Commercial Programs. Commercial Programs market 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 Segment 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.

Below are brief descriptions of the Commercial Programs:

Affinity programs provide package coverage to booksellers and security alarm installers.

All Risk is a program writing all risks meaning that any risk that the contract does not specifically omit is automatically covered. The coverages usually include commercial earthquake, wind, fire and flood. The All Risk program writes insurance on both primary and excess, shared and layered programs.

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.

Automotive Aftermarket was launched in 2012 and writes commercial package insurance for non-dealership automotive services such as mechanical repair shops, brake shops, transmissions shops, oil and lube shops, parts retailers and wholesalers, tire retailers and wholesalers, and auto recyclers. This program distributes product through a direct sales force, independent agencies and our Retail Segment.

Bellingham Underwriters focuses on the commercial transportation industry and companies that are in the business of supporting the commercial transportation industry. The trucking program is specifically designed to handle all coverages for a truck owner. Other programs include specialty auto, repair services, forest products and commercial ambulance.

Core Commercial targets accounts paying under $100,000 in annual premium, this program offers business owner’s policies (BOPs) and commercial package coverages for a broad range of industries nationwide.

Daily Rental provides loaner car coverage for auto dealerships.

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

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”) 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.

Forestry is a logging equipment specialist for mobile equipment typically to the logging industry in Southeast U.S.

Health Special Risk, Inc. provides accident & health, special events insurance products, and administrative services to licensed agents, brokers, and insurance companies across the U.S.

Manufactured Housing provides package policies in all states for manufactured home communities, including mobile home parks, manufactured home dealers and RV parks.

 

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.

 

Sigma Underwriting Managers is a nationwide wind catastrophic property insurance specialist for commercial and habitational properties and has over 100 years of underwriting experience. The commercial nationwide program is designed to write all types of low-to-medium-hazard properties including adult living facilities, hotels/motels, medical offices, shopping centers, restaurants, warehouses and churches. The Florida habitational property program is a high-valued property program for commercial residential accounts.

8


Table of Contents

 

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

Tribal provides tailored solutions across multiple lines of business to sovereign Indian nations.

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.

 

Wright Specialty Insurance Agency, LLC provides insurance products for specialty industries such as food, grocery, K-12 education and franchise programs that are offered throughout the U.S.

Public Entity-Related Programs. Public Entity-Related Programs administer 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.

Below are brief descriptions of the Public Entity-Related Programs:

 

Public Risk Underwriters of Indiana, LLC: doing business as 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.: doing business as Clear Risk Solutions, 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.

Public Risk Underwriters of Illinois, LLC: doing business as 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 comprising coverages for 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. Operating as Wright Flood, WNFIC is an insurance carrier. This business provides policies written pursuant to the NFIP, the program administered by FEMA, as well as excess flood insurance policies, all of which are fully reinsured, thereby 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. Through Wright National Flood Insurance Services, the Company acts as an MGA, selling private primary flood insurance policies for a carrier partner.

Wholesale Brokerage Segment

At December 31, 2019, our Wholesale Brokerage Segment employed 1,316 employees. Our Wholesale Brokerage Segment markets and sells excess and surplus commercial insurance products and services to retail insurance agencies (including Brown & Brown 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 2019, commissions and fees from our largest Wholesale Brokerage Segment customer represented approximately 1.0% of the Wholesale Brokerage Segment’s total commissions and fees.

9


Table of Contents

 

Services Segment

At December 31, 2019, our Services Segment employed 1,052 employees and provided a wide range of insurance-related services.

Below are brief descriptions of the businesses within the Services Segment.

The Advocator Group, LLC (“The Advocator Group”) and Social Security Advocates for the Disabled LLC (“SSAD”) assist 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. These two businesses work closely with employer sponsored group life, disability and health plan participants to assist disabled individuals 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’s services also include managed care, claim investigations, field adjusting and audit services. Approximately 64% of ACM’s 2019 revenues were derived from various Arrowhead programs in our National Programs Segment, with the remainder generated from third parties.

ICA provides comprehensive claims management solutions for both personal and commercial lines of insurance. ICA is a national service provider for daily claims, catastrophic claims, vendor management, TPA operations and staff augmentation. Additional claims services offered by ICA include first notice of loss, fast track, field appraisals and quality control.

MEDVAL, LLC, provides an end to end solution for Medicare Secondary Payer compliance, including Medicare Set-Aside allocations, conditional payment negotiation and resolution, structured settlements/annuity funding, professional administration, and a post-settlement durable medical equipment and pharmacy program.  MEDVAL’s offerings are all done in-house, and under one umbrella to provide the most consistent and reliable results. 

NuQuest provides a full spectrum of Medicare Secondary Payer statutory compliance services, from Medicare Set-aside 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.

Professional Disability Associates, LLC (“PDA”) is a disability services firm that provides specialty risk resources, including medical, vocational and claim management services to the disability insurance market. PDA has a nationwide physician referral network to address the needs of the industry for claim expertise across multiple specialties. PDA services top disability insurance carriers in the U.S. and Canada, as well as several other insurers, reinsurers, self-insured employers and consulting firms.

Preferred Governmental Claims Solutions (“PGCS”) provides TPA services for government entities and self-funded or fully-insured workers’ compensation and liability plans and trusts. PGCS’ services include claims administration and a dedicated subrogation recovery department.

Protect Professionals Claims Management (“PPCM”) provides TPA services to professional liability insurance markets on a nationwide basis. PPCM’s services include claims adjusting, administration, litigation and data management for professional programs for dentists and lawyers administered by our National Programs Segment.

USIS provides TPA services for insurance entities and self-funded or fully-insured workers’ compensation and liability plans. USIS’s services include claims administration, cost containment consulting, services for secondary disability and subrogation recoveries, and risk management services such as loss control. USIS’s services also include certified and non-certified medical management programs, access to medical networks, case management, and utilization review services certified by URAC, formerly the Utilization Review Accreditation Commission.

In 2019, our four largest contracts represented approximately 20.0% of fees revenues in our Services Segment.

Employees

At December 31, 2019, the Company had 10,083 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 subject to a collective bargaining agreement and we consider our relations with our employees to be good.

10


Table of Contents

 

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 upon innovation, knowledge, terms and conditions of coverage, 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 insurance business. While it is difficult to quantify the impact on our business from individuals purchasing insurance over the Internet, we believe this risk would generally be isolated to personal lines customers with single-line coverage, or small businesses that do not have a complex insurance program, which represent a small portion of our overall Retail Segment.

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 locations in which we conduct business. Regulations and licensing laws vary by individual state and international location and are often complex.

The applicable licensing laws and regulations in all states and international jurisdictions are subject to amendment or reinterpretation by regulatory authorities, and such authorities are vested in most cases with relatively broad discretion as to the granting, revocation, suspension and renewal of licenses. We endeavor to monitor the licensing of our employees, but 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 a particular jurisdiction in addition to being subjected to fines.

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 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 and may be accessed by selecting the “Investor Relations” link and then the “SEC Filings” link.

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, financial condition, results of operations and cash flows are subject to, and could be materially adversely affected by, various risks and uncertainties, including, without limitation, those set forth below, any one of which could cause our actual results to vary materially from recent results or our anticipated future results. We present these risk factors grouped by category, and the risks factors contained in each respective category are presented in order of their relative priority to us.

Risks Related to Our Business

OUR INABILITY TO RETAIN OR HIRE QUALIFIED EMPLOYEES, AS WELL AS THE LOSS OF ANY OF OUR EXECUTIVE OFFICERS OR OTHER KEY EMPLOYEES, 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.

11


Table of Contents

 

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 personnel 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 generally prohibited by contract from soliciting our employees and customers for a two-year period 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 sales and service operating model, the loss of our senior leaders or other key personnel, or our inability to continue to identify, recruit and retain such personnel, could materially and adversely affect our business, results of operations and financial condition.

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

Our growth strategy partially 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 continuously 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 may 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 or lines of business; 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 our results of operations, financial condition and cash flows. Post-acquisition deterioration of operating performance could also result in lower or negative earnings contribution and/or goodwill impairment charges.

A CYBERSECURITY ATTACK, OR ANY OTHER INTERRUPTION IN INFORMATION TECHNOLOGY AND/OR DATA SECURITY AND/OR OUTSOURCING RELATIONSHIPS, COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND REPUTATION.

We rely on information technology and third-party vendors to provide effective and efficient service to our customers, process claims, and timely and accurately report information to carriers and which often involves secure processing of confidential sensitive, proprietary and other types of information. Cybersecurity breaches of any of the systems we rely on may result from circumvention of security systems, denial-of-service attacks or other cyber-attacks, hacking, “phishing” attacks, computer viruses, ransomware, malware, employee or insider error, malfeasance, social engineering, physical breaches or other actions, any of which could expose us to data loss, monetary and reputational damages and significant increases in compliance costs. 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. We have from time to time experienced cybersecurity breaches, such as computer viruses, unauthorized parties gaining access to our information technology systems and similar incidents, which to date have not had a material impact on our business.

Additionally, we are an acquisitive organization and the process of integrating the information systems of the businesses we acquire is complex and exposes us to additional risk as we might not adequately identify weaknesses in the targets’ information systems, which could expose us to unexpected liabilities or make our own systems more vulnerable to attack. In the future, any material breaches of cybersecurity, or media reports of the same, even if untrue, could cause us to experience reputational harm, loss of customers and revenue, loss of proprietary data, regulatory actions and scrutiny, sanctions or other statutory penalties, litigation, liability for failure to safeguard customers’ information or financial losses. Such losses may not be insured against or not fully covered through insurance we maintain.

While we have invested and continue to invest in technology security initiatives, policies and resources and employee training, entirely eliminating all risk of improper access to private information is not possible. The cost and operational consequences of implementing, maintaining and enhancing further system protections measures could increase significantly as cybersecurity threats increase. As these threats evolve, cybersecurity incidents will be more difficult to detect, defend against and remediate. Any of the foregoing may have a material adverse effect on our business, financial condition and reputation.

12


Table of Contents

 

RAPID TECHNOLOGICAL CHANGE MAY REQUIRE ADDITIONAL RESOURCES AND TIME TO ADEQUATELY RESPOND TO DYNAMICS, 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 are continuously 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 effectively maintain 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.

We are currently underway with a multi-year plan to upgrade many of our technology platforms and anticipate investing a total of $30 million to $40 million, which will have an impact on our operating margins and cash flow during this period. We have not determined, however, if additional resources and time for development and implementation may be required, which if required, may result in short-term, unexpected interruptions or impacts to our business, or may result in a competitive disadvantage in price and/or efficiency, as we develop or implement new technologies.

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 regularly, 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.

CHANGES IN DATA PRIVACY AND PROTECTION LAWS AND REGULATIONS, OR ANY FAILURE TO COMPLY WITH SUCH LAWS AND REGULATIONS, COULD ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL RESULTS.

We are subject to a variety of continuously evolving and developing laws and regulations globally regarding privacy, data protection, and data security, including those related to the collection, storage, handling, use, disclosure, transfer, and security of personal data. Significant uncertainty exists as privacy and data protection laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements. These laws apply to transfers of information among our affiliates, as well as to transactions we enter into with third-party vendors. For example, the European Union adopted a comprehensive General Data Privacy Regulation (“GDPR”) in May 2016 that replaced the former EU Data Protection Directive and related country-specific legislation. The GDPR became fully effective in May 2018 and requires companies to satisfy new requirements regarding the handling of personal and sensitive data, including its use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. Failure to comply with GDPR requirements could result in penalties of up to 4% of worldwide revenue. Complying with the enhanced obligations imposed by the GDPR may result in significant costs to our business and require us to revise certain of our business practices. In addition, legislators and regulators in the U.S. have enacted and are proposing new and more robust privacy and cybersecurity laws and regulations in light of the recent broad-based cyber-attacks at a number of companies, including but not limited to the New York State Department of Financial Services Cybersecurity Requirements for Financial Services Companies and the California Consumer Privacy Act of 2018.

These and similar initiatives around the world could increase the cost of developing, implementing or securing our servers and require us to allocate more resources to improved technologies, adding to our IT and compliance costs. In addition, enforcement actions and investigations by regulatory authorities related to data security incidents and privacy violations continue to increase. The enactment of more restrictive laws, rules, regulations or future enforcement actions or investigations could impact us through increased costs or restrictions on our business, and noncompliance could result in regulatory penalties and significant legal liability.

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, 2019, no insurance company accounted for more than 4.0% of our total core commissions. For each of the years ended December 31, 2018 and 2017, approximately 5.0% of our total core commissions was derived from insurance policies underwritten by one insurance company. Should this insurance company seek to terminate its arrangements with us or to otherwise decrease the number of insurance policies underwritten for us, we believe that other insurance companies are available to underwrite the business, although some additional expense and loss of market share could result.

13


Table of Contents

 

BECAUSE OUR BUSINESS IS HIGHLY CONCENTRATED IN ARIZONA, CALIFORNIA, FLORIDA, GEORGIA, ILLINOIS, INDIANA, KENTUCKY, MASSACHUSETTS, MICHIGAN, MINNESOTA, NEW JERSEY, NEW YORK, NORTH CAROLINA, OREGON, PENNSYLVANIA, TEXAS, VIRGINIA, WASHINGTON AND WISCONSIN, 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 Arizona, California, Florida, Georgia, Illinois, Indiana, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Texas, Virginia, Washington and Wisconsin. For the years ended December 31, 2019, 2018 and 2017, we derived $2,106.3 million or 88.1%, $1,976.5 million or 88.6%, and $1,692.6 million or 90.0%, of our annualized revenue, respectively, from our operations located 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 we have 52 offices and our headquarters, as well as in Texas, where we have 20 offices), earthquakes (including in California, where we have 29 offices), power shortages, telecommunications failures, water shortages, floods, fire, extreme weather conditions, geopolitical events such as terrorist acts and other natural or man-made 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.

OUR CORPORATE CULTURE HAS CONTRIBUTED TO OUR SUCCESS, AND IF WE CANNOT MAINTAIN THIS CULTURE, OR IF WE EXPERIENCE A CHANGE IN MANAGEMENT, MANAGEMENT PHILOSOPHY, OR BUSINESS STRATEGY, OUR BUSINESS MAY BE HARMED.

We believe that a significant contributor to our success has been our corporate culture as a lean, decentralized, highly competitive, profit-oriented sales and service organization.  As we grow, including from the integration of employees and businesses acquired in connection with previous or future acquisitions, we may find it difficult to maintain important aspects of our corporate culture, which could negatively affect our profitability and/or our ability to retain and recruit people of the highest integrity and quality who are essential to our future success.  We may face pressure to change our culture as we grow, particularly if we experience difficulties in attracting competent personnel who are willing to embrace our culture.  In addition, as our organization grows and we are required to implement more complex organizational structures, or if we experience a change in management, management philosophy, or business strategy, we may find it increasingly difficult to maintain the beneficial aspects of our corporate culture, such as our decentralized sales and service operating model, which could negatively impact our future success.

We face a variety of risks in our services segement, including our third-party claims administration operations, that are distinct from those we face in our insurance intermediary operations.

Our Services Segment, including our third-party claims administration operations, face a variety of risks distinct from those faced by our insurance intermediary operations, including the risks that:

 

The favorable trend among both insurance companies and self-insured entities toward outsourcing various types of claims administration and risk management services may reverse or slow, causing our revenues or revenue growth to decline;

 

Concentration of large amounts of revenue with certain customers may result in greater exposure to the potential negative effects of lost business due to changes in management at such customers or for other reasons;

 

Contracting terms will become less favorable or the margins on our services may decrease due to increased competition, regulatory constraints, or other developments;

 

Our revenue is impacted by claims volumes, which are dependent upon a number of factors and difficult to forecast accurately;

 

Economic weakness or a slow-down in economic activity could lead to a reduction in the number of claims we process;

 

We may be unable to develop further efficiencies in our claims-handling business and may be unable to obtain or retain certain customers if we fail to make adequate improvements in technology or operations; and

 

Insurance companies or certain large self-insured entities may create in-house servicing capabilities that compete with our services.

If any of these risks materialize, our results of operations and financial condition could be adversely affected.

14


Table of Contents

 

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, 2019, we believe 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, 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, our debt agreements require 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 could limit management’s discretion in operating our business and could prevent us from engaging in certain potentially beneficial activities.

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 FINANCIAL POSITION AND RESULTS OF OPERATIONS AND THEREFORE OUR BUSINESS.

The annual Consolidated Financial Statements 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.

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.

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 fraud. A control system, no matter how well conceived, operated and tested, 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 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.

15


Table of Contents

 

OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY MAY BE MATERIALLY ADVERSELY AFFECTED BY CERTAIN ACTUAL AND POTENTIAL CLAIMS, REGULATORY ACTIONS AND PROCEEDINGS.

We are subject to various actual and potential claims, regulatory actions and other proceedings including those relating 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, of which we cannot, and likely will not be able to, predict the outcome with certainty. 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 customers, 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 upon allegations that our employees or sub-agents 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. Where appropriate, 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, 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.

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 2022) 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.

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

At December 31, 2019, our executive officers, directors and certain of their family members collectively beneficially owned approximately 16.7% of our outstanding common stock, of which J. Hyatt Brown, our Chairman, and his son, J. Powell Brown, our President and Chief Executive Officer, beneficially owned approximately 15.7%. 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 shareholder approval and (3) our affairs and policies.

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, Bermuda, Canada and the 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;

16


Table of Contents

 

 

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;

 

Variations in foreign currency exchange rates;

 

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

 

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

 

Any adverse developments arising out of the exit of the United Kingdom from the European Union, including any related economic downturn in the United Kingdom and any sustained weakness in the British pound’s exchange rate against the U.S. dollar resulting from such exit;

 

Burdens of complying with, and the risk of employees or third parties acting on our behalf violating, anti-corruption laws in foreign countries; 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.

WE ARE SUBJECT TO RISKS ASSOCIATED WITH THE CURRENT INTEREST RATE ENVIRONMENT AND TO THE EXTENT WE USE DEBT TO FINANCE OUR INVESTMENTS, CHANGES IN INTEREST RATES WILL AFFECT OUR COST OF CAPITAL AND NET INVESTMENT INCOME.

As of July 2017, the UK Financial Conduct Authority (“FCA”) has urged banks and institutions to discontinue their use of the London Interbank Overnight Rate (“LIBOR”) benchmark rate for floating rate debt, and other financial instruments tied to the rate after 2021. To help with the transition, the Federal Reserve Board and New York Fed have commissioned the Alternative Reference Rates Committee (“ARRC”), comprised of a diverse set of private-sector entities that have an important presence in markets affected by USD LIBOR and a wide array of official-sector entities, including banking and financial sector regulators, as ex-officio members. The ARRC have recommended the Secured Overnight Financing Rate (“SOFR”) as the best alternative rate to LIBOR post discontinuance and has proposed a transition plan and timeline designed to encourage the adoption of SOFR from LIBOR.

As of December 31, 2019, the Company’s primary exposure are debt instruments referencing LIBOR-based rates which includes the Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) term loan balance of $330.0 million and $100.0 million on the revolving credit facility outstanding and matures in June 2022, as well as the term loan credit agreement (the “Term Loan Credit Agreement”) which had an outstanding balance of $285.0 million and matures in December 2023. As such, any potential effect of any such event on our cost of capital, interest rate exposure and net investment income cannot yet be determined. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market value for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us and could have a material adverse effect on our business, financial condition and results of operations.

The Company is currently evaluating the transition from LIBOR as an interest rate benchmark to other potential alternative reference rates, including but not limited to the SOFR interest rate. Management will continue to actively asses the related opportunities and risks associated with the transition and monitor related proposals and guidance published by ARRC and other alternative-rate initiatives, with an expectation the we will be prepared to for a termination of LIBOR benchmarks after 2021.

Risks Related to Our Industry

OUR CURRENT MARKET SHARE MAY DECREASE AS A RESULT OF 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 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 and the entrance of technology companies into the insurance intermediary business. 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, private equity funds, 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.

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 collaborate and compete in these segments on a fee-for-service basis, we cannot be certain that such alternative markets will provide the same level of insurance coverage or profitability as traditional insurance markets.

17


Table of Contents

 

CURRENT U.S. OR GLOBAL ECONOMIC CONDITIONS MAY ADVERSELY AFFECT OUR BUSINESS.

If economic conditions were to worsen, a number of negative effects on our business could result, including declines in insurable exposure units, declines in insurance premium rates, the financial insolvency of insurance companies, or the reduced ability of customers to pay. Also, if general economic conditions are poor, some of our customers 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 customers are affected by poor economic conditions, but yet remain in existence, they may face liquidity problems or other financial difficulties that 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.

OUR BUSINESS, AND THEREFORE OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION, MAY BE ADVERSELY AFFECTED BY 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 to our customers. We have no control over these matters. To the extent that reinsurance becomes less widely available or significantly more expensive, 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 for our customers may be more expensive or limited.

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, 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 upon increases and decreases associated with the timing of new business, policy renewals and payments from insurance companies 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 generally during the prior year. Over the last three years these commissions generally have been in the range of 3.0% to 3.5% of our previous year’s total core commissions and fees. 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 upon the volume of business that we place with them and are generally paid over the course of the year. Any decrease in their payment to us could adversely affect our results of operations, profitability and our financial condition.

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 numerous 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 or be taken over by the FDIC, our ability to access these funds might be temporarily or permanently limited, and we could face material liquidity problems and potential material financial losses.

OUR BUSINESS PRACTICES AND COMPENSATION ARRANGEMENTS ARE SUBJECT TO UNCERTAINTY DUE TO POTENTIAL CHANGES IN REGULATIONS.

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. 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 legislatures of various states may adopt new laws addressing contingent commission arrangements, including laws prohibiting such

18


Table of Contents

 

arrangements, and addressing disclosure of such arrangements to insureds. Various state departments of insurance may also adopt new regulations addressing these matters which could 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 each of the fifty states of the United States of America and are subject to comprehensive regulation and supervision by government agencies in each of those states. The primary purpose of such regulation and supervision is to provide safeguards for policyholders rather than to protect the interests of our shareholders, and it is difficult to anticipate how changes in such regulation would be implemented and enforced. As a result, such regulation and supervision could reduce our profitability or growth by increasing compliance costs, technology compliance, 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 customers, 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, determining technology and data protection requirements, 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 New York as well as 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 could 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. Certain 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. Other legislative developments that could adversely affect us include: changes in our business compensation model as a result of regulatory developments (for example, the Affordable Care Act); 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 results of operations and financial condition.

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, regulations or interpretations thereof, will not be adopted in the future that could make compliance more difficult or expensive.

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 2019 fiscal year, we have $3,746.1 million of goodwill recorded on our Consolidated Balance Sheets. 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, 2019 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 4-“Goodwill” to the Consolidated Financial Statements and “Management’s Report on Internal Control Over Financial Reporting.”

19


Table of Contents

 

Additionally, the carrying value of amortizable intangible assets attributable to each business or asset group comprising the Company is periodically reviewed by management to determine if there are events or changes in circumstances that would indicate that its carrying amount may not be recoverable. Accordingly, if there are any such circumstances that occur during the year, we assess the carrying value of our 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, 2019, 2018 and 2017.

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.

Risks Related to Investing in our Securities

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.

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; changes to the tax code; 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.

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 311 locations. Our operating leases expire on various dates and generally contain renewal options and rent escalation clauses based upon increases in the lessors’ operating expenses and other charges. We expect that most leases will be renewed or replaced upon expiration. We own several contiguous parcels of land totaling over thirteen acres in Daytona Beach, Florida, located approximately a mile from our current executive offices, on which we have initiated a project to build a new office tower to hold our executive offices and certain other business operations with capacity for up to 1,000 employees and room for additional expansion through construction of additional office space at this location. 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 15 to the Consolidated Financial Statements for additional information on our lease commitments.

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.

20


Table of Contents

 

ITEM 4. Mine Safety Disclosures.

Not applicable.

21


Table of Contents

 

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.”

On February 20, 2020, there were 281,552,678 shares of our common stock outstanding, held by approximately 1,390 shareholders of record.

Sales of Unregistered Securities

We did not sell any unregistered securities during 2019.

Issuer Purchases of Equity Securities

Under the authorization from the Company’s Board of Directors, shares may be purchased from time to time, at the Company’s discretion and subject to the availability of stock, market conditions, the trading price of the stock, alternative uses for capital, the Company’s financial performance and other potential factors. These purchases may be carried out through open market purchases, block trades, accelerated share repurchase plans of up to $100.0 million each (unless otherwise approved by the Board of Directors), negotiated private transactions or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Exchange Act.

During 2019, the Company repurchased 1,654,513 shares at an average price per share of $35.46 for a total cost of $58.7 million. At December 31, 2019, the remaining amount authorized by our Board of Directors for share repurchases was $461.3 million. Under the authorized repurchase programs, the Company has repurchased a total of approximately 15.5 million shares for an aggregate cost of approximately $536.2 million between 2014 and 2019.

The following table presents information with respect to our purchases of our common stock during the three months ended December 31, 2019.

 

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, 2019 to October 31, 2019

 

 

814,173

 

 

$

35.59

 

 

 

812,933

 

 

$

461,282,789

 

November 1, 2019 to November 30, 2019

 

 

1,160

 

 

 

37.88

 

 

 

 

 

 

461,282,789

 

December 1, 2019 to December 31, 2019

 

 

1,113

 

 

 

38.62

 

 

 

 

 

 

461,282,789

 

Total

 

 

816,446

 

 

$

35.59

 

 

 

812,933

 

 

$

461,282,789

 

 

(1)

Of the shares reported in this column, 812,933 shares were purchased in open market transactions. All other shares reported in this column are attributable to shares withheld for taxes in connection with the vesting of restricted shares awarded under our Performance Stock Plan and 2010 Stock Incentive Plan.

Performance Graph

The following graph is a comparison of five-year cumulative total shareholder returns for our common stock as compared with the cumulative total shareholder return for the NYSE Composite Index, and a group of peer insurance broker and agency companies (Aon plc, Arthur J. Gallagher & Co, Marsh & McLennan Companies, and Willis Towers Watson Public Limited Company). The returns of each company have been weighted according to such companies’ respective stock market capitalizations as of December 31, 2014 for the purposes of arriving at a peer group average. The total return calculations are based upon an assumed $100 investment on December 31, 2014, with all dividends reinvested.

 

 

 

12/14

 

 

12/15

 

 

12/16

 

 

12/17

 

 

12/18

 

 

12/19

 

Brown & Brown, Inc.

 

 

100.00

 

 

 

117.76

 

 

 

162.40

 

 

 

175.68

 

 

 

206.91

 

 

 

285.13

 

NYSE Composite

 

 

100.00

 

 

 

96.03

 

 

 

107.62

 

 

 

127.96

 

 

 

116.72

 

 

 

146.76

 

Peer Group

 

 

100.00

 

 

 

104.96

 

 

 

121.53

 

 

 

147.49

 

 

 

162.17

 

 

 

221.50

 

22


Table of Contents

 

 

23


Table of Contents

 

ITEM 6. Selected Financial Data.

The following selected Consolidated Financial Data for each of the five fiscal years in the period ended December 31, 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

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commissions and fees

 

$

2,384,737

 

 

$

2,009,857

 

 

$

1,857,270

 

 

$

1,762,787

 

 

$

1,656,951

 

Investment income

 

 

5,780

 

 

 

2,746

 

 

 

1,626

 

 

 

1,456

 

 

 

1,004

 

Other income, net

 

 

1,654

 

 

 

1,643

 

 

 

22,451

 

 

 

2,386

 

 

 

2,554

 

Total revenues(1)

 

 

2,392,171

 

 

 

2,014,246

 

 

 

1,881,347

 

 

 

1,766,629

 

 

 

1,660,509

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

 

1,308,165

 

 

 

1,068,914

 

 

 

994,652

 

 

 

925,217

 

 

 

856,952

 

Other operating expenses

 

 

377,089

 

 

 

332,118

 

 

 

283,470

 

 

 

262,872

 

 

 

251,055

 

(Gain)/loss on disposal

 

 

(10,021

)

 

 

(2,175

)

 

 

(2,157

)

 

 

(1,291

)

 

 

(619

)

Amortization

 

 

105,298

 

 

 

86,544

 

 

 

85,446

 

 

 

86,663

 

 

 

87,421

 

Depreciation

 

 

23,417

 

 

 

22,834

 

 

 

22,698

 

 

 

21,003

 

 

 

20,890

 

Interest

 

 

63,660

 

 

 

40,580

 

 

 

38,316

 

 

 

39,481

 

 

 

39,248

 

Change in estimated acquisition earn-out payables

 

 

(1,366

)

 

 

2,969

 

 

 

9,200

 

 

 

9,185

 

 

 

3,003

 

Total expenses

 

 

1,866,242

 

 

 

1,551,784

 

 

 

1,431,625

 

 

 

1,343,130

 

 

 

1,257,950

 

Income before income taxes

 

 

525,929

 

 

 

462,462

 

 

 

449,722

 

 

 

423,499

 

 

 

402,559

 

Income taxes(2)

 

 

127,415

 

 

 

118,207

 

 

 

50,092

 

 

 

166,008

 

 

 

159,241

 

Net income

 

$

398,514

 

 

$

344,255

 

 

$

399,630

 

 

$

257,491

 

 

$

243,318

 

EARNINGS PER SHARE INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share - diluted(3)

 

$

1.40

 

 

$

1.22

 

 

$

1.40

 

 

$

0.91

 

 

$

0.85

 

Weighted average number of shares outstanding - diluted(3)

 

 

274,616

 

 

 

275,521

 

 

 

277,586

 

 

 

275,608

 

 

 

280,224

 

Dividends declared per share(3)

 

$

0.33

 

 

$

0.31

 

 

$

0.28

 

 

$

0.25

 

 

$

0.23

 

YEAR-END FINANCIAL POSITION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets(4)

 

$

7,622,821

 

 

$

6,688,668

 

 

$

5,747,550

 

 

$

5,262,734

 

 

$

4,979,844

 

Long-term debt(5)

 

$

1,500,343

 

 

$

1,456,990

 

 

$

856,141

 

 

$

1,018,372

 

 

$

1,071,618

 

Total shareholders’ equity

 

$

3,350,279

 

 

$

3,000,568

 

 

$

2,582,699

 

 

$

2,360,211

 

 

$

2,149,776

 

Total shares outstanding at year end(3)

 

 

281,655

 

 

 

279,583

 

 

 

276,210

 

 

 

280,208

 

 

 

277,970

 

OTHER INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of full-time equivalent employees at year-end

 

 

10,083

 

 

 

9,590

 

 

 

8,491

 

 

 

8,297

 

 

 

7,807

 

Total revenues per average number of employees(6)

 

$

243,193

 

 

$

222,809

 

 

$

224,130

 

 

$

219,403

 

 

$

215,679

 

Stock price at year-end(3)

 

$

39.48

 

 

$

27.56

 

 

$

25.73

 

 

$

22.43

 

 

$

16.05

 

Stock price earnings multiple at year-end(7)

 

 

28.2

 

 

 

22.6

 

 

 

18.3

 

 

 

24.6

 

 

 

18.9

 

Return on beginning shareholders’ equity(8)

 

 

13

%

 

 

13

%

 

 

17

%

 

 

12

%

 

 

12

%

 

(1)

Years 2017 to 2015 do not reflect the adoption of “Revenue from Contracts with Customers (Topic 606)” (“Topic 606”), ASC Topic 340 - Other Assets and Deferred Cost (“ASC 340”) and ASU 2016-08, “Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)”, which was adopted under the modified retrospective method.

(2)

Years 2017 to 2015 do not reflect the adoption of ASU 2016-09, “Improvements to Employee Share Based Payment Accounting” (“ASU 2016-09”), which was adopted using the prospective method.

(3)

Years 2017 to 2015 reflect the 2-for-1 stock split that occurred on March 28, 2018.    

(4)

All years presented reflect the adoption of ASU No. 2015-17, “Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”).

(5)

Please refer to Part I, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 9 “Long-Term Debt” for more details.

(6)

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.

(7)

Stock price at year-end divided by net income per share diluted.

(8)

Represents net income divided by total shareholders’ equity as of the beginning of the year.

24


Table of Contents

 

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

General

The following discussion should be read in conjunction with our Consolidated Financial Statements and the related Notes to those Financial Statements included elsewhere in this Annual Report on Form 10-K. In addition, please see “Information Regarding Non-GAAP Measures” below, regarding important information on non-GAAP financial measures contained in our discussion and analysis.

We are a diversified insurance agency, wholesale brokerage, insurance programs and services organization headquartered in Daytona Beach, Florida. As an insurance intermediary, our principal sources of revenue are commissions paid by insurance companies and, to a lesser extent, fees paid directly by customers. Commission revenues generally represent a percentage of the premium paid by an insured and are affected by fluctuations in both premium rate levels charged by insurance companies and the insureds’ underlying “insurable exposure units,” which are units that insurance companies use to measure or express insurance exposed to risk (such as property values, or sales and payroll levels) to determine what premium to charge the insured. Insurance companies establish these premium rates based upon many factors, including loss experience, risk profile and reinsurance rates paid by such insurance companies, none of which we control.

We have increased revenues every year from 1993 to 2019, with the exception of 2009, when our revenues declined 1.0%. Our revenues grew from $95.6 million in 1993 to $2.4 billion in 2019, reflecting a compound annual growth rate of 13.2%. In the same 26-year period, we increased net income from $8.1 million to $398.5 million in 2019, a compound annual growth rate of 16.2%.

The volume of business from new and existing customers, fluctuations in insurable exposure units, changes in premium rate levels, changes in general economic and competitive conditions, and the occurrence of catastrophic weather events all affect our revenues. For example, level rates of inflation or a general decline in economic activity could limit increases in the values of insurable exposure units. Conversely, increasing costs of litigation settlements and awards could cause some customers to seek higher levels of insurance coverage. Historically, our revenues have typically grown as a result of our focus on net new business growth and acquisitions. We foster a strong, decentralized sales and service culture that leverages the broad capabilities and scale of our organization, with the goal of consistent, sustained growth over the long-term.

The term “Organic Revenue,” a non-GAAP measure, is our core commissions and fees less: (i) the core commissions and fees earned for the first 12 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), and for the calculation of Organic Revenue growth in 2018 only (iii) the impact of the adoption of Accounting Standards Update No.2014-09, “Revenue from Contracts with Customers (Topic 606)” and Accounting Standards Codification Topic 340 – Other Assets and Deferred Cost (the “New Revenue Standard”) in order to be on a comparable basis with 2017. The term “core commissions and fees” excludes profit-sharing contingent commissions and guaranteed supplemental commissions, and therefore represents the revenues earned directly from specific insurance policies sold, and specific fee-based services rendered. “Organic Revenue” is reported in this manner in order to express the current year’s core commissions and fees on a comparable basis with the prior year’s core commissions and fees. The resulting net change reflects the aggregate changes attributable to: (i) net new and lost accounts, (ii) net changes in our customers’ exposure units, (iii) net changes in insurance premium rates or the commission rate paid to us by our carrier partners, and (iv) the net change in fees paid to us by our customers. Organic Revenue is reported in “Results of Operations” and in “Results of Operations - Segment Information” of this Annual Report on Form 10-K.

We also earn “profit-sharing contingent commissions,” which are commissions based primarily on underwriting results, but which may also reflect considerations for volume, growth and/or retention. These commissions, which are included in our commissions and fees in the Consolidated Statement of Income, are accrued throughout the year based on actual premiums written and are primarily received in the first and second quarters of each year, based upon the aforementioned considerations for the prior year(s). Prior to the adoption of the New Revenue Standard, these commissions were recorded to income when received. As a result of our adoption of the New Revenue Standard these commissions are now accrued based upon the placement of policies during the year and the expected payments to be received. Over the last three years, profit-sharing contingent commissions have averaged approximately 3.0% of commissions and fees revenue.

Certain insurance companies offer guaranteed fixed-base agreements, referred to as “Guaranteed Supplemental Commissions” (“GSCs”) in lieu of profit-sharing contingent commissions. GSCs are accrued throughout the year based upon actual premiums written. For the year ended December 31, 2019, we had earned $23.1 million of GSCs, of which $12.7 million remained accrued at December 31, 2019 and most of this will be collected over the first and second quarters of 2020. For the years ended December 31, 2019 and 2018, we earned $23.1 million and $10.0 million, respectively, from GSCs.

Combined, our profit-sharing contingent commissions and GSCs for the year ended December 31, 2019 increased by $16.4 million over 2018. The net increase of $16.4 million was mainly driven by: (i) a GSC of approximately $9 million recorded in the second quarter of 2019 for the National Programs Segment that will not recur in the future as the associated multi-year contract has ended and (ii) to a lesser extent growth associated with acquisitions completed over the last 12 months.

Fee revenues primarily relate to services other than securing coverage for our customers, as well as fees negotiated in lieu of commissions, and are recognized as performance obligations are satisfied. Fee revenues have historically been generated primarily by: (1) our Services Segment, which provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare benefits advocacy services, and claims adjusting services; (2) our National Programs and Wholesale Brokerage Segments, which earn fees primarily for the issuance of insurance policies on behalf of insurance companies; and (3) our Retail Segment in our

25


Table of Contents

 

large-account customer base, where we primarily earn fees for securing insurance for our customers, and in our automobile dealer services (“F&I”) businesses where we primarily earn fees for assisting our customers with selling warranty and service programs. Fee revenues as a percentage of our total commissions and fees, represented 27.1% in 2019 and 26.3% in 2018.

For the years ended December 31, 2019 and 2018, our commissions and fees growth rate was 18.7% and 8.2%, respectively, and our consolidated Organic Revenue growth rate was 3.6% and 2.4%, respectively. In the event that the gradual increases in insurable exposure units that occurred in the past few years continues through 2020 and premium rate changes are similar with 2019, we believe we will continue to see positive quarterly Organic Revenue growth rates in 2020.

Historically, investment income has consisted primarily of interest earnings on operating cash, and where permitted, on premiums and advance premiums collected and held in a fiduciary capacity before being remitted to insurance companies. Our policy is to invest available funds in high-quality, short-term fixed income investment securities. Investment income also includes gains and losses realized from the sale of investments. Other income primarily reflects legal settlements and other miscellaneous income.

Income before income taxes for the year ended December 31, 2019 increased over 2018 by $63.5 million, primarily as a result of net new business and acquisitions completed since 2018 in addition to leveraging expenses, partially offset by additional interest expense and amortization associated with the acquisitions over the past two years, with the largest being our acquisition of The Hays Group, Inc. and certain of its affiliates (“Hays”).

Information Regarding Non-GAAP Measures

In the discussion and analysis of our results of operations, in addition to reporting financial results in accordance with generally accepted accounting principles (“GAAP”), we provide references to the following non-GAAP financial measures as defined in Regulation G of SEC rules: Organic Revenue, Organic Revenue growth, EBITDAC and EBITDAC Margin. We view these non-GAAP financial measures as important indicators when assessing and evaluating our performance on a consolidated basis and for each of our segments because they allow us to determine a more comparable, but non-GAAP, measurement of revenue growth and operating performance that is associated with the revenue sources that were a part of our business in both the current and prior year. We believe that Organic Revenue provides a meaningful representation of our operating performance and view Organic Revenue growth as an important indicator when assessing and evaluating the performance of our four segments. Organic Revenue can be expressed as a dollar amount or a percentage rate when describing Organic Revenue growth. We also use Organic Revenue growth and EBITDAC Margin for incentive compensation determinations for executive officers and other key employees. We view EBITDAC and EBITDAC Margin as important indicators of operating performance, because they allow us to determine more comparable, but non-GAAP, measurements of our operating margins in a meaningful and consistent manner by removing the significant non-cash items of depreciation, amortization and the change in estimated acquisition earn-out payables, and also interest expense and taxes, which are reflective of investment and financing activities, not operating performance.

These measures are not in accordance with, or an alternative to the GAAP information provided in this Annual Report on Form 10-K. We present such non-GAAP supplemental financial information because we believe such information is of interest to the investment community and because we believe they provide additional meaningful methods of evaluating certain aspects of our operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis. We believe these non-GAAP financial measures improve the comparability of results between periods by eliminating the impact of certain items that have a high degree of variability. Our industry peers may provide similar supplemental non-GAAP information with respect to one or more of these measures, although they may not use the same or comparable terminology and may not make identical adjustments. This supplemental financial information should be considered in addition to, not in lieu of, our Consolidated Financial Statements.

Tabular reconciliations of this supplemental non-GAAP financial information to our most comparable GAAP information are contained in this Annual Report on Form 10-K under “Results of Operation - Segment Information.”

Acquisitions

Part of our business strategy is to attract high-quality insurance intermediaries and service organizations to join our operations. From 1993 through the fourth quarter of 2019, we acquired 536 insurance intermediary operations, excluding acquired books of business (customer accounts).

On November 15, 2018, we completed the acquisition of certain assets and assumption of certain liabilities of Hays. At closing, we delivered a payment of $705 million, consisting of $605 million in cash and the issuance to certain key owners of Hays of 3,376,103 shares of our common stock for a total value of $100.0 million. In addition, the Company may pay additional consideration to Hays in the form of earn-out payments in the aggregate amount of up to $25.0 million in cash over three years, which is subject to certain conditions and the successful achievement of average annual EBITDA targets for the acquired business during 2019, 2020 and 2021. This transaction was initially funded through utilization of the Company’s revolving line of credit within our credit facility, details of which can be found in “Management’s Discussion and Analysis of Financial Condition”, “Results of Operations” and Note 9 “Long-Term Debt” in the “Notes to Consolidated Financial Statements”.

26


Table of Contents

 

Critical Accounting Policies

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

We believe that of our significant accounting and reporting policies, the more critical policies include our accounting for revenue recognition, business combinations and purchase price allocations, intangible asset impairments, non-cash stock-based compensation and reserves for litigation. In particular, the accounting for these areas requires significant use of judgment to be made by management. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or consolidated results of operations. Refer to Note 1 “Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” for a discussion of the impacts for adopting Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” and No. 2016-02, “Leases (Topic 842)”.

Revenue Recognition

The majority of our revenue is commissions derived from our performance as agents and brokers, acting on behalf of insurance carriers to sell products to customers that are seeking to transfer risk, and conversely, acting on behalf of those customers in negotiating with insurance carriers seeking to acquire risk in exchange for premiums. In these arrangements our performance obligation is complete upon the effective date of the bound policy, as such, that is when the associated revenue is recognized. Where the Company’s performance obligations have been completed, but the final amount of compensation is unknown due to variable factors, we estimate the amount of such compensation. We recognize subsequent commission adjustments upon our receipt of additional information or final settlement, whichever occurs first.

To a lesser extent, the Company earns revenues in the form of fees. Like commissions, fees paid to us in lieu of commission, are recognized upon the effective date of the bound policy. When we are paid a fee for service, however, the associated revenue is recognized over a period of time that coincides with when the customer simultaneously receives and consumes the benefit of our work, which characterizes most of our claims processing arrangements and various services performed in our property and casualty, and employee benefits practices. Other fees are typically recognized upon the completion of the delivery of the agreed-upon services to the customer.

Management determines a policy cancellation reserve based upon historical cancellation experience adjusted in accordance with known circumstances.

Please see Note 2 “Revenues” in the “Notes to Consolidated Financial Statements” for additional information regarding the nature and timing of our revenues.

Business Combinations and Purchase Price Allocations

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

All of our business combinations initiated after June 30, 2001 have been accounted for using the acquisition method. In connection with these acquisitions, we record the estimated value of the net tangible assets purchased and the value of the identifiable intangible assets purchased, which typically consist of purchased customer accounts and non-compete agreements. Purchased customer accounts include the physical records and files obtained from acquired businesses that contain information about insurance policies, customers and other matters essential to policy renewals of delivery of services. However, they primarily represent the present value of the underlying cash flows expected to be received over the estimated future renewal periods of the insurance policies comprising those purchased customer accounts. The valuation of purchased customer accounts involves significant estimates and assumptions concerning matters such as cancellation frequency, expenses and discount rates. Any change in these assumptions could affect the carrying value of purchased customer accounts. Non-compete agreements are valued based upon their duration and any unique features of the particular agreements. Purchased customer accounts and non-compete agreements are amortized on a straight-line basis over the related estimated lives and contract periods, which range from 3 to 15 years. The excess of the purchase price of an acquisition over the fair value of the identifiable tangible and intangible assets is assigned to goodwill and is not amortized.

Acquisition purchase prices are typically based upon a multiple of average EBITDA, annual operating profit and/or core revenue earned over a one to three-year period within a minimum and maximum price range. The recorded purchase prices for all acquisitions include an estimation of the fair value of liabilities associated with any potential earn-out provisions, where an earn-out is part of the negotiated transaction. Subsequent changes in the fair value of earn-out obligations are recorded in the Consolidated Statement of Income when changes to the expected performance of the associated business are realized.

27


Table of Contents

 

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

Intangible Assets Impairment

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

Management assesses the recoverability of our goodwill and our amortizable intangibles and other long-lived assets annually and whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Any of the following factors, if present, may trigger an impairment review: (i) a significant underperformance relative to historical or projected future operating results, (ii) a significant negative industry or economic trend, and (iii) a significant decline in our market capitalization. If the recoverability of these assets is unlikely because of the existence of one or more of the above-referenced factors, an impairment analysis is performed. Management must make assumptions regarding estimated future cash flows and other factors to determine the fair value of these assets. If these estimates or related assumptions change in the future, we may be required to revise the assessment and, if appropriate, record an impairment charge. We completed our most recent evaluation of impairment for goodwill as of November 30, 2019 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, 2019 and 2018.

Non-Cash Stock-Based Compensation

We grant non-vested stock awards to our employees, with the related compensation expense recognized in the financial statements over the associated service period based upon the grant-date fair value of those awards. During the performance measurement period, we review the probable outcome of the performance conditions associated with our performance awards and align the expense accruals with the expected performance outcome.

During the first quarter of 2018, the performance conditions for 260,344 shares of the Company’s common stock granted under the Company’s 2010 Stock Incentive Plan (the “2010 SIP”) were determined by the Compensation Committee to have been satisfied relative to performance-based grants issued in 2013. These grants had a performance measurement period that concluded on December 31, 2017.  The vesting condition for these grants requires continuous employment for a period of up to ten years from the January 2013 grant date in order for the awarded shares to become fully vested and nonforfeitable.  During the third quarter of 2018, the performance conditions for 2,229,561 shares of the Company’s common stock granted under the Company’s 2010 SIP were determined by the Compensation Committee to have been satisfied relative to performance-based grants issued in July 2013. These grants had a performance measurement period that concluded on June 30, 2018.  The vesting condition for these grants requires continuous employment for a period of up to seven years from the July 2013 grant date in order for the awarded shares to become fully vested and nonforfeitable. As a result of the awarding of these shares, the grantees will be eligible to receive payments of dividends and exercise voting privileges after the awarding date, and the awarded shares will be included as issued and outstanding common stock shares and included in the calculation of basic and in diluted net income per share, where the net income attributable to unvested awarded stock plans is excluded from the total net income attributable to common shares.

During the first quarter of 2019, the performance conditions for 1,954,983 of the Company’s common stock granted under the Company’s 2010 SIP were determined by the Compensation Committee to have been satisfied relative to performance-based grants issued in 2014 and 2016. These grants had a performance measurement period that concluded on December 31, 2018.  The vesting condition for these grants requires continuous employment for a period of up to seven years from the 2014 grant date and five years from the 2016 grant date in order for the awarded shares to become fully vested and nonforfeitable.  As a result of the awarding of these shares, the grantees will be eligible to receive payments of dividends and exercise voting privileges after the awarding date, and the awarded shares will be included as issued and outstanding common stock shares and included in the calculation of basic and diluted net income per share.

During the first quarter of 2020, the performance conditions for approximately 1.9 million shares of the Company’s common stock granted under the Company’s 2010 SIP were determined by the Compensation Committee to have been satisfied relative to performance-based grants issued in 2015 and 2017. These grants had a performance measurement period that concluded on December 31, 2019.  The vesting condition for these grants requires continuous employment for a period of up to seven years from the 2015 grant date and five years from the 2017 grant date in order for the awarded shares to become fully vested and nonforfeitable.  As a result of the awarding of these shares, the grantees will be eligible to receive payments of dividends and exercise voting privileges after the awarding date, and the awarded shares will be included as issued and outstanding common stock shares and included in the calculation of basic and diluted net income per share.

28


Table of Contents

 

Litigation and Claims

We are subject to numerous litigation claims that arise in the ordinary course of business. If it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss is estimable, an accrual for the costs to resolve these claims is recorded in accrued expenses in the accompanying Consolidated Financial Statements. Professional fees related to these claims are included in other operating expenses in the accompanying Consolidated Statement of Income as incurred. Management, with the assistance of in-house and outside counsel, determines whether it is probable that a liability has been incurred and estimates the amount of loss based upon analysis of individual issues. New developments or changes in settlement strategy in dealing with these matters may significantly affect the required reserves and affect our net income.

 

29


Table of Contents

 

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

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. For a comparison of our results of operations and liquidity and capital resources for the years ended December 31, 2018 and 2017, please see Part II, Item 7 of our Annual Report on Form 10-K filed with the SEC on February 26, 2019.

Financial information relating to our Consolidated Financial Results is as follows:

 

(in thousands, except percentages)

 

2019

 

 

% Change

 

 

2018

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

Core commissions and fees

 

$

2,302,506

 

 

 

18.4

%

 

$

1,944,021

 

Profit-sharing contingent commissions

 

 

59,166

 

 

 

5.9

%

 

 

55,875

 

Guaranteed supplemental commissions

 

 

23,065

 

 

 

131.6

%

 

 

9,961

 

Commissions and fees

 

 

2,384,737

 

 

 

18.7

%

 

 

2,009,857

 

Investment income

 

 

5,780

 

 

 

110.5

%

 

 

2,746

 

Other income, net

 

 

1,654

 

 

 

0.7

%

 

 

1,643

 

Total revenues

 

 

2,392,171

 

 

 

18.8

%

 

 

2,014,246

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

 

1,308,165

 

 

 

22.4

%

 

 

1,068,914

 

Other operating expenses

 

 

377,089

 

 

 

13.5

%

 

 

332,118

 

(Gain)/loss on disposal

 

 

(10,021

)

 

 

360.7

%

 

 

(2,175

)

Amortization

 

 

105,298

 

 

 

21.7

%

 

 

86,544

 

Depreciation

 

 

23,417

 

 

 

2.6

%

 

 

22,834

 

Interest

 

 

63,660

 

 

 

56.9

%

 

 

40,580

 

Change in estimated acquisition earn-out payables

 

 

(1,366

)

 

 

(146.0

)%

 

 

2,969

 

Total expenses

 

 

1,866,242

 

 

 

20.3

%

 

 

1,551,784

 

Income before income taxes

 

 

525,929

 

 

 

13.7

%

 

 

462,462

 

Income taxes

 

 

127,415

 

 

 

7.8

%

 

 

118,207

 

NET INCOME

 

$

398,514

 

 

 

15.8

%

 

$

344,255

 

Income Before Income Taxes Margin (1)

 

 

22.0

%

 

 

 

 

 

 

23.0

%

EBITDAC (2)

 

$

716,938

 

 

 

16.5

%

 

$

615,389

 

EBITDAC Margin (2)

 

 

30.0

%

 

 

 

 

 

 

30.6

%

Organic Revenue growth rate (2)

 

 

3.6

%

 

 

 

 

 

 

2.4

%

Employee compensation and benefits relative

   to total revenues

 

 

54.7

%

 

 

 

 

 

 

53.1

%

Other operating expenses relative to total revenues

 

 

15.8

%

 

 

 

 

 

 

16.5

%

Capital expenditures

 

$

73,108

 

 

 

76.1

%

 

$

41,520

 

Total assets at December 31

 

$

7,622,821

 

 

 

14.0

%

 

$

6,688,668

 

 

(1)

“Income Before Income Taxes Margin” is defined as income before income taxes divided by total revenues

(2)

A non-GAAP measure

Commissions and Fees

Commissions and fees, including profit-sharing contingent commissions and GSCs for 2019, increased $374.9 million to $2,384.7 million, or 18.7% over 2018. Core commissions and fees in 2019 increased $358.5 million, of which $298.3 million represented core commissions and fees from acquisitions that had no comparable revenues in 2018; approximately $70.0 million represented net new and renewal business; which was offset by $9.8 million related to commissions and fees revenue from businesses divested in 2018 and 2019, which reflected an Organic Revenue growth rate of 3.6%. Profit-sharing contingent commissions and GSCs for 2019 increased by $16.4 million, or 24.9%, compared to the same period in 2018. The net increase of $16.4 million was mainly driven by: (i) a GSC of approximately $9 million recorded in the second quarter of 2019 for the National Programs Segment that will not recur in the future as the associated multi-year contract has ended and (ii) the remainder primarily from growth associated with acquisitions completed over the last 12 months.

Investment Income

Investment income increased to $5.8 million in 2019, compared with $2.7 million in 2018. The increase was due to additional interest income driven by higher interest rates and cash management activities to earn a higher yield on excess cash balances.

30


Table of Contents

 

Other Income, Net

Other income for 2019 was $1.7 million, compared with $1.6 million in 2018. Other income consists primarily of legal settlements and other miscellaneous income.

Employee Compensation and Benefits

Employee compensation and benefits expense increased 22.4%, or $239.3 million, in 2019 compared to 2018. This increase included $164.4 million of compensation costs related to stand-alone acquisitions that had no comparable costs in the same period of 2018. Therefore, employee compensation and benefits expense attributable to those offices that existed in the same time periods of 2019 and 2018 increased by $74.8 million or 7.2%. This underlying employee compensation and benefits expense increase was primarily related to (i) an increase in teammates for certain of our higher growth businesses; (ii) an increase in bonus expense driven by the attainment of various revenue and profit targets within our businesses; (ii) increased producer commissions due to higher revenue; (iii) an increase in staff salaries attributable to salary inflation; (iv) the increase in the value of deferred compensation liabilities driven by changes in the market prices of our employees' investment elections, which was substantially offset by other operating expenses; and (v) an increase in non-cash stock-based compensation expense due to the better-than-expected Company performance related to our equity compensation plan and teammate retention. Employee compensation and benefits expense as a percentage of total revenues was 54.7% for 2019 as compared to 53.1% for the year ended December 31, 2018.

Other Operating Expenses

Other operating expenses represented 15.8% of total revenues for 2019 as compared to 16.5% for the year ended December 31, 2018. Other operating expenses for 2019 increased $45.0 million, or 13.5%, over the same period of 2018. The net increase included: (i) $56.5 million of other operating expenses related to stand-alone acquisitions that had no comparable costs in the same period of 2018; (ii) increased expenses associated with information technology items related to data processing and value-added consulting services; partially offset by (iii) the increase in the value of corporate-owned life insurance policies associated with our deferred compensation plan, which was substantially offset by increases in the value of liabilities in the Company’s deferred compensation plan recognized as expense in employee compensation and benefits.

Gain or Loss on Disposal

The Company recognized gains on disposal of $10.0 million in 2019 and $2.2 million in 2018. The change in the gain on disposal was due to activity associated with book of business sales. Although we are not in the business of selling customer accounts, we periodically sell an office or a book of business (one or more customer accounts) that we believe does not produce reasonable margins or demonstrate a potential for growth, or because doing so is in the Company’s best interest.

Amortization

Amortization expense for 2019 increased $18.8 million to $105.3 million, or 21.7% over 2018. The increase reflects the amortization of new intangible assets from recently acquired businesses, partially offset by certain intangible assets becoming fully amortized.

Depreciation

Depreciation expense for 2019 increased $0.6 million to $23.4 million, or 2.6% over 2018. The increase was due primarily to the addition of fixed assets resulting from capital projects related to our multi-year technology investment program and other business initiatives, net additions of fixed assets resulting from recent acquisitions, partially offset by fixed assets which became fully depreciated.

Interest Expense

Interest expense for 2019 increased $23.1 million to $63.7 million, or 56.9%, over 2018. The increase was due to the debt issued as a result of acquisitions over the past two years, with the largest being our acquisition of Hays, and to a lesser extent a rise in interest rates associated with our outstanding floating rate debt balances.

Change in Estimated Acquisition Earn-Out Payables

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

31


Table of Contents

 

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, 2019, the fair values of the estimated acquisition earn-out payables were re-evaluated and measured at fair value on a recurring basis using unobservable inputs (Level 3) as defined in ASC 820-Fair Value Measurement. The resulting net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the years ended December 31, 2019 and 2018 were as follows:

 

(in thousands)

 

2019

 

 

2018

 

Change in fair value of estimated acquisition earn-out payables

 

$

(7,298

)

 

$

603

 

Interest expense accretion

 

 

5,932

 

 

 

2,366

 

Net change in earnings from estimated acquisition

   earn-out payables

 

$

(1,366

)

 

$

2,969

 

 

For the years ended December 31, 2019 and 2018, the fair value of estimated earn-out payables was re-evaluated and decreased by $7.3 million for 2019 and increased by $0.6 million for 2018, which resulted in a credit, net of interest expense accretion, to the Consolidated Statement of Income for 2019 and net charges for 2018.

As of December 31, 2019, the estimated acquisition earn-out payables equaled $161.5 million, of which $17.9 million was recorded as accounts payable and $143.6 million was recorded as other non-current liability. As of December 31, 2018, the estimated acquisition earn-out payables equaled $89.9 million, of which $21.1 million was recorded as accounts payable and $68.8 million was recorded as other non-current liability.

Income Taxes

The effective tax rate on income from operations was 24.2% in 2019 and 25.6% in 2018. The Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”) made changes to the U.S. tax code that affected our income tax rate beginning in 2017. The Tax Reform Act reduced the U.S. federal corporate income tax rate from 35.0% to 21.0% and requires companies to pay a one-time transition tax on certain unrepatriated earnings from foreign subsidiaries that is payable over eight years. The Tax Reform Act also established new tax laws that became effective January 1, 2018. The 2018 and 2019 effective tax rates reflect the reduction in the federal corporate income tax rate. The reduction in the effective tax rate in 2019 as compared to 2018 was driven by changes in our state tax footprint and corresponding apportionment as well as changes to tax rates in certain states.  The effective tax rates for 2018 and 2019 reflect the adoption of FASB Accounting Standards Update 2016-09, “Improvements to Employee Share Based Payment Accounting” (“ASU 2016-09”) in the first quarter of 2017. ASU 2016-09, which requires upon vesting of stock-based compensation that any tax implications be treated as a discrete credit to the income tax expense in the quarter of vesting, amends guidance issued in ASC Topic 718, Compensation - Stock Compensation.

32


Table of Contents

 

RESULTS OF OPERATIONS — SEGMENT INFORMATION

As discussed in Note 17 “Segment Information” of the Notes to Consolidated Financial Statements, we operate four reportable segments: Retail, National Programs, Wholesale Brokerage and Services. On a segmented basis, changes in amortization, depreciation and interest expenses generally result from activity associated with acquisitions. Likewise, other income in each segment reflects net gains primarily from legal settlements and miscellaneous income. As such, in evaluating the operational efficiency of a segment, management focuses on the Organic Revenue growth rate of core commissions and fees, the ratio of total employee compensation and benefits to total revenues, and the ratio of other operating expenses to total revenues.

 

The reconciliation of total commissions and fees to Organic Revenue for the year ended December 31, 2019, by Segment, are as follows:

2019

 

Retail(1)

 

 

National Programs

 

 

Wholesale Brokerage

 

 

Services

 

 

Total

 

(in thousands, except percentages)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Commissions and fees

 

$

1,364,755

 

 

$

1,040,574

 

 

$

516,915

 

 

$

493,878

 

 

$

309,426

 

 

$

286,364

 

 

$

193,641

 

 

$

189,041

 

 

$

2,384,737

 

 

$

2,009,857

 

Total change

 

$

324,181

 

 

 

 

 

 

$

23,037

 

 

 

 

 

 

$

23,062

 

 

 

 

 

 

$

4,600

 

 

 

 

 

 

$

374,880

 

 

 

 

 

Total growth %

 

 

31.2

%

 

 

 

 

 

 

4.7

%

 

 

 

 

 

 

8.1

%

 

 

 

 

 

 

2.4

%

 

 

 

 

 

 

18.7

%

 

 

 

 

Profit-sharing contingent

   commissions

 

 

(34,150

)

 

 

(24,517

)

 

 

(17,517

)

 

 

(23,896

)

 

 

(7,499

)

 

 

(7,462

)

 

 

 

 

 

 

 

 

(59,166

)

 

 

(55,875

)

GSCs

 

 

(11,056

)

 

 

(8,535

)

 

 

(10,566

)

 

 

(76

)

 

 

(1,443

)

 

 

(1,350

)

 

 

 

 

 

 

 

 

(23,065

)

 

 

(9,961

)

Core commissions and fees

 

$

1,319,549

 

 

$

1,007,522

 

 

$

488,832

 

 

$

469,906

 

 

$

300,484

 

 

$

277,552

 

 

$

193,641

 

 

$

189,041

 

 

$

2,302,506

 

 

$

1,944,021

 

Acquisition revenues

 

 

(272,383

)

 

 

 

 

 

(5,721

)

 

 

 

 

 

(3,628

)

 

 

 

 

 

(16,541

)

 

 

 

 

 

(298,273

)

 

 

 

Divested business

 

 

 

 

 

(7,743

)

 

 

 

 

 

(790

)

 

 

 

 

 

(1,268

)

 

 

 

 

 

 

 

 

 

 

 

(9,801

)

Organic Revenue(2)

 

$

1,047,166

 

 

$

999,779

 

 

$

483,111

 

 

$

469,116

 

 

$

296,856

 

 

$

276,284

 

 

$

177,100

 

 

$

189,041

 

 

$

2,004,233

 

 

$

1,934,220

 

Organic Revenue growth(2)

 

$

47,387

 

 

 

 

 

 

$

13,995

 

 

 

 

 

 

$

20,572

 

 

 

 

 

 

$

(11,941

)

 

 

 

 

 

$

70,013

 

 

 

 

 

Organic Revenue growth %(2)

 

 

4.7

%

 

 

 

 

 

 

3.0

%

 

 

 

 

 

 

7.4

%

 

 

 

 

 

 

(6.3

)%

 

 

 

 

 

 

3.6

%

 

 

 

 

 

 

 

 

(1)

The Retail Segment includes commissions and fees reported in the “Other” column of the Segment Information in Note 17 of the Notes to the Consolidated Financial Statements, which includes corporate and consolidation items.

 

(2)

A non-GAAP financial measure.

 

The reconciliation of total commissions and fees to Organic Revenue for the year ended December 31, 2018, by Segment, are as follows:

 

2018

 

Retail(1)

 

 

National Programs

 

 

Wholesale Brokerage

 

 

Services

 

 

Total

 

(in thousands, except percentages)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Commissions and fees

 

$

1,040,574

 

 

$

942,039

 

 

$

493,878

 

 

$

479,017

 

 

$

286,364

 

 

$

271,141

 

 

$

189,041

 

 

$

165,073

 

 

$

2,009,857

 

 

$

1,857,270

 

Total change

 

$

98,535

 

 

 

 

 

 

$

14,861

 

 

 

 

 

 

$

15,223

 

 

 

 

 

 

$

23,968

 

 

 

 

 

 

$

152,587

 

 

 

 

 

Total growth %

 

 

10.5

%

 

 

 

 

 

 

3.1

%

 

 

 

 

 

 

5.6

%

 

 

 

 

 

 

14.5

%

 

 

 

 

 

 

8.2

%

 

 

 

 

Profit-sharing contingent

   commissions

 

 

(24,517

)

 

 

(23,377

)

 

 

(23,896

)

 

 

(20,123

)

 

 

(7,462

)

 

 

(8,686

)

 

 

 

 

 

 

 

 

(55,875

)

 

 

(52,186

)

GSCs

 

 

(8,535

)

 

 

(9,108

)

 

 

(76

)

 

 

(31

)

 

 

(1,350

)

 

 

(1,231

)

 

 

 

 

 

 

 

 

(9,961

)

 

 

(10,370

)

Core commissions and fees

 

$

1,007,522

 

 

$

909,554

 

 

$

469,906

 

 

$

458,863

 

 

$

277,552

 

 

$

261,224

 

 

$

189,041

 

 

$

165,073

 

 

$

1,944,021

 

 

$

1,794,714

 

New Revenue Standard

 

 

1,254

 

 

 

 

 

 

(7,973

)

 

 

 

 

 

935

 

 

 

 

 

 

(10,307

)

 

 

 

 

 

(16,091

)

 

 

 

Acquisition revenues

 

 

(73,405

)

 

 

 

 

 

(7,289

)

 

 

 

 

 

(2,514

)

 

 

 

 

 

(7,969

)

 

 

 

 

 

(91,177

)

 

 

 

Divested business

 

 

 

 

 

(1,270

)

 

 

 

 

 

(114

)

 

 

 

 

 

(106

)

 

 

 

 

 

 

 

 

 

 

 

(1,490

)

Organic Revenue(2)

 

$

935,371

 

 

$

908,284

 

 

$

454,644

 

 

$

458,749

 

 

$

275,973

 

 

$

261,118

 

 

$

170,765

 

 

$

165,073

 

 

$

1,836,753

 

 

$

1,793,224

 

Organic Revenue growth(2)

 

$

27,087

 

 

 

 

 

 

$

(4,105

)

 

 

 

 

 

$

14,855

 

 

 

 

 

 

$

5,692

 

 

 

 

 

 

$

43,529

 

 

 

 

 

Organic Revenue growth %(2)

 

 

3.0

%

 

 

 

 

 

 

(0.9

)%

 

 

 

 

 

 

5.7

%

 

 

 

 

 

 

3.4

%

 

 

 

 

 

 

2.4

%

 

 

 

 

 

 

(1)

The Retail Segment includes commissions and fees reported in the “Other” column of the Segment Information in Note 17 of the Notes to the Consolidated Financial Statements, which includes corporate and consolidation items.

 

(2)

A non-GAAP financial measure.

33


Table of Contents

 

The reconciliation of income before incomes taxes, included in the Consolidated Statement of Income, to EBITDAC, a non-GAAP measure, and Income Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, for the year ended December 31, 2019, is as follows:

 

(in thousands)

 

Retail

 

 

National

Programs

 

 

Wholesale

Brokerage

 

 

Services

 

 

Other

 

 

Total

 

Income before income taxes

 

$

222,875

 

 

$

143,737

 

 

$

82,739

 

 

$

40,337

 

 

$

36,241

 

 

$

525,929

 

Income Before Income Taxes Margin

 

 

16.3

%

 

 

27.7

%

 

 

26.7

%

 

 

20.8

%

 

NMF

 

 

 

22.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

 

63,146

 

 

 

25,482

 

 

 

11,191

 

 

 

5,479

 

 

 

 

 

 

105,298

 

Depreciation

 

 

7,390

 

 

 

6,791

 

 

 

1,674

 

 

 

1,229

 

 

 

6,333

 

 

 

23,417

 

Interest

 

 

87,295

 

 

 

16,690

 

 

 

4,756

 

 

 

4,404

 

 

 

(49,485

)

 

 

63,660

 

Change in estimated acquisition

   earn-out payables

 

 

8,004

 

 

 

(751

)

 

 

(4

)

 

 

(8,615

)

 

 

 

 

 

(1,366

)

EBITDAC

 

$

388,710

 

 

$

191,949

 

 

$

100,356

 

 

$

42,834

 

 

$

(6,911

)

 

$

716,938

 

EBITDAC Margin

 

 

28.4

%

 

 

37.0

%

 

 

32.4

%

 

 

22.1

%

 

NMF

 

 

 

30.0

%

 

NMF = Not a meaningful figure

The reconciliation of income before incomes taxes, included in the Consolidated Statement of Income, to EBITDAC, a non-GAAP measure, and Income Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, for the year ended December 31, 2018, is as follows:

 

(in thousands)

 

Retail

 

 

National

Programs

 

 

Wholesale

Brokerage

 

 

Services

 

 

Other

 

 

Total

 

Income before income taxes

 

$

217,845

 

 

$

117,375

 

 

$

70,171

 

 

$

34,508

 

 

$

22,563

 

 

$

462,462

 

Income Before Income Taxes Margin

 

 

20.9

%

 

 

23.7

%

 

 

24.4

%

 

 

18.2

%

 

NMF

 

 

 

23.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

 

44,386

 

 

 

25,954

 

 

 

11,391

 

 

 

4,813

 

 

 

 

 

 

86,544

 

Depreciation

 

 

5,289

 

 

 

5,486

 

 

 

1,628

 

 

 

1,558

 

 

 

8,873

 

 

 

22,834

 

Interest

 

 

35,969

 

 

 

26,181

 

 

 

5,254

 

 

 

2,869

 

 

 

(29,693

)

 

 

40,580

 

Change in estimated acquisition

   earn-out payables

 

 

1,081

 

 

 

875

 

 

 

815

 

 

 

198

 

 

 

 

 

 

2,969

 

EBITDAC

 

$

304,570

 

 

$

175,871

 

 

$

89,259

 

 

$

43,946

 

 

$

1,743

 

 

$

615,389

 

EBITDAC Margin

 

 

29.2

%

 

 

35.6

%

 

 

31.1

%

 

 

23.2

%

 

NMF

 

 

 

30.6

%

 

NMF = Not a meaningful figure

34


Table of Contents

 

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, and non-insurance risk-mitigating products through our automobile dealer services (“F&I”) businesses. Approximately 81.7% of the Retail Segment’s commissions and fees revenue is commission based. Because most of our other operating expenses are not correlated to changes in commissions on insurance premiums, a significant portion of any fluctuation in the commissions we receive, net of related producer compensation and cost to fulfill expense deferrals and releases as required by the New Revenue Standard, will result in a similar fluctuation in our income before income taxes, unless we make incremental investments or modifications to the costs in the organization.

Financial information relating to our Retail Segment is as follows:

 

(in thousands, except percentages)

 

2019

 

 

% Change

 

 

2018

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

Core commissions and fees

 

$

1,320,810

 

 

 

30.9

%

 

$

1,008,639

 

Profit-sharing contingent commissions

 

 

34,150

 

 

 

39.3

%

 

 

24,517

 

Guaranteed supplemental commissions

 

 

11,056

 

 

 

29.5

%

 

 

8,535

 

Commissions and fees

 

 

1,366,016

 

 

 

31.1

%

 

 

1,041,691

 

Investment income

 

 

149

 

 

NMF

 

 

 

2

 

Other income, net

 

 

1,096

 

 

 

2.4

%

 

 

1,070

 

Total revenues

 

 

1,367,261

 

 

 

31.1

%

 

 

1,042,763

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

 

760,208

 

 

 

33.3

%

 

 

570,222

 

Other operating expenses

 

 

228,256

 

 

 

35.0

%

 

 

169,104

 

(Gain)/loss on disposal

 

 

(9,913

)

 

NMF

 

 

 

(1,133

)

Amortization

 

 

63,146

 

 

 

42.3

%

 

 

44,386

 

Depreciation

 

 

7,390

 

 

 

39.7

%

 

 

5,289

 

Interest

 

 

87,295

 

 

 

142.7

%

 

 

35,969

 

Change in estimated acquisition earn-out payables

 

 

8,004

 

 

NMF

 

 

 

1,081

 

Total expenses

 

 

1,144,386

 

 

 

38.7

%

 

 

824,918

 

Income before income taxes

 

$

222,875

 

 

 

2.3

%

 

$

217,845

 

Income Before Income Taxes Margin (1)

 

 

16.3

%

 

 

 

 

 

 

20.9

%

EBITDAC (2)

 

 

388,710

 

 

 

27.6

%

 

 

304,570

 

EBITDAC Margin (2)

 

 

28.4

%

 

 

 

 

 

 

29.2

%

Organic Revenue growth rate (2)

 

 

4.7

%

 

 

 

 

 

 

3.0

%

Employee compensation and benefits relative to total revenues

 

 

55.6

%

 

 

 

 

 

 

54.7

%

Other operating expenses relative to total revenues

 

 

16.7

%

 

 

 

 

 

 

16.2

%

Capital expenditures

 

$

12,497

 

 

 

82.2

%

 

$

6,858

 

Total assets at December 31

 

$

6,413,459

 

 

 

9.6

%

 

$

5,850,045

 

 

(1)

“Income Before Income Taxes Margin” is defined as income before income taxes divided by total revenues

(2)

A non-GAAP measure

NMF = Not a meaningful figure

The Retail Segment’s total revenues in 2019 increased 31.1%, or $324.5 million, over the same period in 2018, to $1,367.3 million. The $312.2 million increase in core commissions and fees was driven by the following: (i) approximately $272.4 million related to the core commissions and fees from acquisitions that had no comparable revenues in the same period of 2018; (ii) $47.4 million related to net new and renewal business; offset by (iii) a decrease of $7.7 million related to commissions and fees from businesses or books of business divested in 2018 and 2019. Profit-sharing contingent commissions and GSCs in 2019 increased 36.8%, or $12.2 million, over 2018, to $45.2 million primarily from acquisitions completed in 2018 and 2019. The Retail Segment’s growth rate for total commissions and fees was 31.1% and the Organic Revenue growth rate was 4.7% for 2019. The Organic Revenue growth rate was driven by increased new business, higher customer retention and increasing premium rates across most lines of business over the preceding 12 months.

Income before income taxes for 2019 increased 2.3%, or $5.0 million, over the same period in 2018, to $222.9 million. The primary factors affecting this increase were: (i) the net increase in revenue as described above, (ii) offset by a 33.3%, or $190.0 million, increase in employee compensation and benefits, due primarily to the year-on-year impact of acquisitions, salary inflation and additional teammates to support revenue growth, (iii) a combined increase in amortization, depreciation and intercompany interest expense of $72.2 million resulting from our acquisition activity in 2019 and 2018; (iv) other operating expenses which increased by $59.2 million, or 35.0%, due to the impact of our multi-year technology investment program and increased professional services to support our customers and acquisitions; (v) an increase in the change in

35


Table of Contents

 

estimated acquisition earn-out payables of $6.9 million, to $8.0 million; partially offset by, (vi) an increase in the gain on disposal associated with the sale of certain books of business.

EBITDAC for 2019 increased 27.6%, or $84.1 million, from the same period in 2018, to $388.7 million. EBITDAC Margin for 2019 decreased to 28.4% from 29.2% in the same period in 2018. The decrease in EBITDAC Margin was primarily driven by: (i) the acquisition of  Hays, which had a lower operating margin than the segmental average; partially offset by, (ii) the net increase in revenue excluding Hays; (iii) higher profit-sharing contingent commissions and supplemental commissions; and (iv) an increase in the gain on disposal associated with the sale of certain books of business.

36


Table of Contents

 

National Programs Segment

The National Programs Segment manages over 40 programs supported by approximately 100 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 offer targeted products and services designed for specific industries, trade groups, professions, public entities and market niches and are generally distributed through a nationwide network of independent agents and Brown & Brown retail agents. The National Programs Segment operations can be grouped into five broad categories: Professional Programs, Personal Lines Programs, Commercial Programs, Public Entity-Related Programs and the National Flood Program. The National Programs Segment’s revenue is primarily commission based.

Financial information relating to our National Programs Segment is as follows:

 

(in thousands, except percentages)

 

2019

 

 

% Change

 

 

2018

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

Core commissions and fees

 

$

488,832

 

 

 

4.0

%

 

$

469,906

 

Profit-sharing contingent commissions

 

 

17,517

 

 

 

(26.7

)%

 

 

23,896

 

Guaranteed supplemental commissions

 

 

10,566

 

 

NMF

 

 

 

76

 

Commissions and fees

 

 

516,915

 

 

 

4.7

%

 

 

493,878

 

Investment income

 

 

1,397

 

 

 

176.1

%

 

 

506

 

Other income, net

 

 

72

 

 

 

(8.9

)%

 

 

79

 

Total revenues

 

 

518,384

 

 

 

4.8

%

 

 

494,463

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

 

221,425

 

 

 

1.0

%

 

 

219,166

 

Other operating expenses

 

 

105,118

 

 

 

7.3

%

 

 

98,012

 

(Gain)/loss on disposal

 

 

(108

)

 

 

(107.6

)%

 

 

1,414

 

Amortization

 

 

25,482

 

 

 

(1.8

)%

 

 

25,954

 

Depreciation

 

 

6,791

 

 

 

23.8

%

 

 

5,486

 

Interest

 

 

16,690

 

 

 

(36.3

)%

 

 

26,181

 

Change in estimated acquisition earn-out payables

 

 

(751

)

 

 

(185.8

)%

 

 

875

 

Total expenses

 

 

374,647

 

 

 

(0.6

)%

 

 

377,088

 

Income before income taxes

 

$

143,737

 

 

 

22.5

%

 

$

117,375

 

Income Before Income Taxes Margin (1)

 

 

27.7

%

 

 

 

 

 

 

23.7

%

EBITDAC (2)

 

 

191,949

 

 

 

9.1

%

 

 

175,871

 

EBITDAC Margin (2)

 

 

37.0

%

 

 

 

 

 

 

35.6

%

Organic Revenue growth rate (2)

 

 

3.0

%

 

 

 

 

 

 

(0.9

)%

Employee compensation and benefits relative to total revenues

 

 

42.7

%

 

 

 

 

 

 

44.3

%

Other operating expenses relative to total revenues

 

 

20.3

%

 

 

 

 

 

 

19.8

%

Capital expenditures

 

$

10,365

 

 

 

(16.4

)%

 

$

12,391

 

Total assets at December 31

 

$

3,110,368

 

 

 

5.8

%

 

$

2,940,097

 

 

(1)

“Income Before Income Taxes Margin” is defined as income before income taxes divided by total revenues

(2)

A non-GAAP measure

NMF = Not a meaningful figure

The National Programs Segment’s total revenues in 2019 increased 4.8%, or $23.9 million, over 2018, to a total $518.4 million. The $18.9 million increase in core commissions and fees was driven by the following: (i) $14.0 million related to net new and renewal business; (ii) an increase of approximately $5.7 million related to core commissions and fees from acquisitions that had no comparable revenues in 2018; offset by (iii) a decrease of $0.8 million related to commissions and fees recorded in 2018 from businesses since divested. Profit-sharing contingent commissions and GSCs were $28.1 million in 2019, which was an increase of $4.1 million over 2018, which was primarily driven by a non-recurring GSC received from one of our partners in the second quarter of 2019.

The National Programs Segment’s growth rate for total commissions and fees was 4.7% and the Organic Revenue growth rate was 3.0% for 2019. The total commissions and fees growth was mainly due to a new acquisition, strong growth in our earthquake programs, sports and entertainment program, wind programs and a non-recurring GSC received from one of our partners in the second quarter of 2019. The Organic Revenue growth rate increase was driven by net new business, growth in renewals and higher premium rates in a number of our programs compared to the prior year.

37


Table of Contents

 

Income before income taxes for 2019 increased 22.5%, or $26.4 million, from the same period in 2018, to $143.7 million. The increase was the result of a decline in intercompany interest expense of $9.5 million, growth and related scaling of a number of our programs and a non-recurring GSC received from one of our partners in the second quarter of 2019.

EBITDAC for 2019 increased 9.1%, or $16.1 million, from the same period in 2018, to $191.9 million. EBITDAC Margin for 2019 increased to 37.0% from 35.6% in the same period in 2018. The increase in EBITDAC Margin was related to (i) growth in a number or our programs; and (ii) a non-recurring GSC received from one of our partners in the second quarter of 2019.

38


Table of Contents

 

Wholesale Brokerage Segment

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

Financial information relating to our Wholesale Brokerage Segment is as follows:

(in thousands, except percentages)

 

2019

 

 

% Change

 

 

2018

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

Core commissions and fees

 

$

300,484

 

 

 

8.3

%

 

$

277,552

 

Profit-sharing contingent commissions

 

 

7,499

 

 

 

0.5

%

 

 

7,462

 

Guaranteed supplemental commissions

 

 

1,443

 

 

 

6.9

%

 

 

1,350

 

Commissions and fees

 

 

309,426

 

 

 

8.1

%

 

 

286,364

 

Investment income

 

 

178

 

 

 

7.9

%

 

 

165

 

Other income, net

 

 

483

 

 

 

(0.4

)%

 

 

485

 

Total revenues

 

 

310,087

 

 

 

8.0

%

 

 

287,014

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

 

157,924

 

 

 

7.0

%

 

 

147,571

 

Other operating expenses

 

 

51,807

 

 

 

3.2

%

 

 

50,177

 

(Gain)/loss on disposal

 

 

 

 

 

(100.0

)%

 

 

7

 

Amortization

 

 

11,191

 

 

 

(1.8

)%

 

 

11,391

 

Depreciation

 

 

1,674

 

 

 

2.8

%

 

 

1,628

 

Interest

 

 

4,756

 

 

 

(9.5

)%

 

 

5,254

 

Change in estimated acquisition earn-out payables

 

 

(4

)

 

 

(100.5

)%

 

 

815

 

Total expenses

 

 

227,348

 

 

 

4.8

%

 

 

216,843

 

Income before income taxes

 

$

82,739

 

 

 

17.9

%

 

$

70,171

 

Income Before Income Taxes Margin (1)

 

 

26.7

%

 

 

 

 

 

 

24.4

%

EBITDAC (2)

 

 

100,356

 

 

 

12.4

%

 

 

89,259

 

EBITDAC Margin (2)

 

 

32.4

%

 

 

 

 

 

 

31.1

%

Organic Revenue growth rate (2)

 

 

7.4

%

 

 

 

 

 

 

5.7

%

Employee compensation and benefits relative to total revenues

 

 

50.9

%

 

 

 

 

 

 

51.4

%

Other operating expenses relative to total revenues

 

 

16.7

%

 

 

 

 

 

 

17.5

%

Capital expenditures

 

$

6,171

 

 

 

145.1

%

 

$

2,518

 

Total assets at December 31

 

$

1,390,250

 

 

 

8.3

%

 

$

1,283,877

 

 

 

(1)

“Income Before Income Taxes Margin” is defined as income before income taxes divided by total revenues

(2)

A non-GAAP measure

NMF = Not a meaningful figure

The Wholesale Brokerage Segment’s total revenues for 2019 increased 8.0%, or $23.1 million, over 2018, to $310.1 million. The $22.9 million increase in core commissions and fees was driven by the following: (i) $20.6 million related to net new and renewal business; (ii) $3.6 million related to the core commissions and fees from acquisitions that had no comparable revenues in 2018; which was offset by (iii) a decrease of $1.3 million related to commissions and fees recorded in 2018 from businesses since divested. Profit-sharing contingent commissions and GSCs for 2019 increased $0.1 million over 2018, to $8.9 million. The Wholesale Brokerage Segment’s growth rate for total commissions and fees was 8.1%, and the Organic Revenue growth rate was 7.4% for 2019. The Organic Revenue growth rate was driven by net new business, a modest increase in exposure units, as well as increased rates seen across most lines of business.

Income before income taxes for 2019 increased 17.9%, or $12.6 million, over 2018, to $82.7 million, primarily due to the following: (i) the net increase in revenue as described above, (ii) a decrease in intercompany interest expense, (iii) a decrease in change in estimated acquisition earn-out payables, which was offset by (iv) an increase in employee compensation and benefits of $10.4 million, related to additional teammates to support increased transaction volumes, compensation increases for existing teammates, and additional non-cash stock-based compensation expense; and (iii) a net $1.6 million increase in other operating expenses, primarily related intercompany technology charges.

EBITDAC for 2019 increased 12.4%, or $11.1 million, from the same period in 2018, to $100.4 million. EBITDAC Margin for 2019 increased to 32.4% from 31.1% in the same period in 2018. The increase in EBITDAC Margin was primarily driven by Organic Revenue growth as described above. This was partially offset by the intercompany technology charges and increased employee compensation and non-cash stock-based compensation costs.

39


Table of Contents

 

Services Segment

The Services Segment provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas. The Services Segment also provides Medicare Set-aside account services, Social Security disability and Medicare benefits advocacy services, and claims adjusting services.

Unlike the other segments, nearly all of the Services Segment’s revenue is generated from fees, which are not significantly affected by fluctuations in general insurance premiums.

Financial information relating to our Services Segment is as follows:

 

(in thousands, except percentages)

 

2019

 

 

% Change

 

 

2018

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

Core commissions and fees

 

$

193,641

 

 

 

2.4

%

 

$

189,041

 

Profit-sharing contingent commissions

 

 

 

 

 

 

 

 

 

Guaranteed supplemental commissions

 

 

 

 

 

 

 

 

 

Commissions and fees

 

 

193,641

 

 

 

2.4

%

 

 

189,041

 

Investment income

 

 

139

 

 

 

(32.2

)%

 

 

205

 

Other income, net

 

 

1

 

 

 

 

 

 

 

Total revenues

 

 

193,781

 

 

 

2.4

%

 

 

189,246

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

 

91,514

 

 

 

6.5

%

 

 

85,930

 

Other operating expenses

 

 

59,433

 

 

 

(3.9

)%

 

 

61,833

 

(Gain)/loss on disposal

 

 

 

 

 

(100.0

)%

 

 

(2,463

)

Amortization

 

 

5,479

 

 

 

13.8

%

 

 

4,813

 

Depreciation

 

 

1,229

 

 

 

(21.1

)%

 

 

1,558

 

Interest

 

 

4,404

 

 

 

53.5

%

 

 

2,869

 

Change in estimated acquisition earn-out payables

 

 

(8,615

)

 

NMF

 

 

 

198

 

Total expenses

 

 

153,444

 

 

 

(0.8

)%

 

 

154,738

 

Income before income taxes

 

$

40,337

 

 

 

16.9

%

 

$

34,508

 

Income Before Income Taxes Margin (1)

 

 

20.8

%

 

 

 

 

 

 

18.2

%

EBITDAC (2)

 

 

42,834

 

 

 

(2.5

)%

 

 

43,946

 

EBITDAC Margin (2)

 

 

22.1

%

 

 

 

 

 

 

23.2

%

Organic Revenue growth rate (2)

 

 

(6.3

)%

 

 

 

 

 

 

3.4

%

Employee compensation and benefits relative to total revenues

 

 

47.2

%

 

 

 

 

 

 

45.4

%

Other operating expenses relative to total revenues

 

 

30.7

%

 

 

 

 

 

 

32.7

%

Capital expenditures

 

$

804

 

 

 

(47.3

)%

 

$

1,525

 

Total assets at December 31

 

$

481,336

 

 

 

2.1

%

 

$

471,572

 

 

(1)

“Income Before Income Taxes Margin” is defined as income before income taxes divided by total revenues

(2)

A non-GAAP measure

NMF = Not a meaningful figure

The Services Segment’s total revenues for 2019 increased 2.4%, or $4.5 million, over 2018, to $193.8 million. The $4.6 million increase in core commissions and fees was driven primarily by the following: (i) $16.5 million related to the core commissions and fees from acquisitions that had no comparable revenues in the same period of 2018; offset by (ii) a decrease of $11.9 million related to net new and renewal business that was driven by lower weather-related and general property claims activity. The Services Segment’s growth rate for total commissions and fees was 2.4%, and Organic Revenue declined 6.3% in 2019. The Organic Revenue decline was realized primarily in our Social Security advocacy and property claims businesses.

Income before income taxes for 2019 increased 16.9%, or $5.8 million, over 2018, to $40.3 million due to a combination of: (i) the change in estimated acquisition earn-out payables partially offset by (ii) higher intercompany interest charges due to businesses acquired during 2019 and (iii) a decline in other operating expenses driven by management of our costs.

EBITDAC for 2019 decreased 2.5%, or $1.1 million, over the same period in 2018, to $42.8 million. EBITDAC Margin for 2019 decreased to 22.1% from 23.2% in the same period in 2018. The decrease in EBITDAC Margin was due the decline in Organic Revenue.

40


Table of Contents

 

Other

As discussed in Note 17 of the Notes to Consolidated Financial Statements, the “Other” column in the Segment Information table includes any income and expenses not allocated to reportable segments, and corporate-related items, including the intercompany interest expense charges to reporting segments.

LIQUIDITY AND CAPITAL RESOURCES

The Company seeks to maintain a conservative balance sheet and liquidity profile. Our capital requirements to operate as an insurance intermediary are low and we have been able to grow and invest in our business principally through cash that has been generated from operations. We have the ability to utilize our revolving credit facility (the “Revolving Credit Facility”), which currently provides access to up to $700.0 million in available cash, and we believe that we have access to additional funds, if needed, through the capital markets to obtain further debt financing under the current market conditions. The Company believes that its existing cash, cash equivalents, short-term investment portfolio and funds generated from operations, together with the funds available under the Revolving Credit Facility, will be sufficient to satisfy our normal liquidity needs, including principal payments on our long-term debt, for at least the next 12 months.

Our cash and cash equivalents of $542.2 million at December 31, 2019 reflected an increase of $103.2 million from the $439.0 million balance at December 31, 2018. During 2019, $678.2 million of cash was generated from operating activities, representing an increase of 19.5%. During this period, $353.0 million of cash was used for new acquisitions, $9.9 million was used for acquisition earn-out payments, $73.1 million was used to purchase additional fixed assets, $91.3 million was used for payment of dividends, $38.7 million was used for share repurchases and $50.0 million was used to pay outstanding principal balances owed on long-term debt.

We hold approximately $21.3 million in cash outside of the U.S., which we currently have no plans to repatriate in the near future.

Our cash and cash equivalents of $439.0 million at December 31, 2018 reflected a decrease of $134.4 million from the $573.4 million balance at December 31, 2017. During 2018, $567.5 million of cash was generated from operating activities, representing an increase of 28.4%. During this period, $923.9 million of cash was used for new acquisitions, $26.6 million was used for acquisition earn-out payments, $41.5 million was used to purchase additional fixed assets, $84.7 million was used for payment of dividends, $100.0 million was used for share repurchases and $120.0 million was used to pay outstanding principal balances owed on long-term debt.

Our ratio of current assets to current liabilities (the “current ratio”) was 1.22 at both December 31, 2019 and 2018.

Contractual Cash Obligations

As of December 31, 2019, our contractual cash obligations were as follows:

 

 

 

Payments Due by Period

 

(in thousands)

 

Total

 

 

Less Than

1 Year

 

 

1-3 Years

 

 

4-5 Years

 

 

After 5

Years

 

Long-term debt

 

$

1,565,000

 

 

$

55,000

 

 

$

450,000

 

 

$

710,000

 

 

$

350,000

 

Other liabilities(1)

 

 

73,382

 

 

 

3,290

 

 

 

6,072

 

 

 

5,051

 

 

 

58,969

 

Operating leases(3)

 

 

245,919

 

 

 

49,405

 

 

 

85,193

 

 

 

57,743

 

 

 

53,578

 

Interest obligations

 

 

313,326

 

 

 

62,061

 

 

 

110,984

 

 

 

74,000

 

 

 

66,281

 

Unrecognized tax benefits

 

 

1,127

 

 

 

 

 

 

1,127

 

 

 

 

 

 

 

Maximum future acquisition contingency payments(2)

 

 

328,655

 

 

 

44,146

 

 

 

277,532

 

 

 

6,977

 

 

 

 

Total contractual cash obligations

 

$

2,527,409

 

 

$

213,902

 

 

$

930,908

 

 

$

853,771

 

 

$

528,828

 

 

 

 

(1)

Includes the current portion of other long-term liabilities.

 

(2)

Includes $161.5 million of current and non-current estimated earn-out payables.

(3)

Includes $5.8 million of future lease commitments not reflected on the balance sheet.

 

Debt

Total debt at December 31, 2019 was $1,555.3 million net of unamortized discount and debt issuance costs, which was an increase of $48.4 million compared to December 31, 2018. The increase includes (i) a drawdown on the Revolving Credit Facility of $100.0 million on August 9, 2019 in connection with the acquisition of CKP Insurance, LLC and various other acquisitions closed in the third quarter of 2019, (ii) the repayment of principal of $50.0 million for scheduled principal amortization balances related to our various existing floating rate debt term notes, (iii) amortization of discounted debt related to our various unsecured Senior Notes, and debt issuance cost amortization of $2.1 million, offset by (iv) additional discount to par and aggregate debt issuance costs of $3.7 million related to the issuance of the Company's 4.500% Senior Notes due 2029 as of December 31, 2019.

41


Table of Contents

 

On March 11, 2019, the Company completed the issuance of $350.0 million aggregate principal amount of the Company's 4.500% Senior Notes due 2029. The Senior Notes were given investment grade ratings of BBB-/Baa3 with a stable outlook. The notes are subject to certain covenant restrictions which are customary for credit-rated obligations. At the time of funding, the proceeds were offered at a discount to the notional amount which also excluded an underwriting fee discount. The net proceeds received from the issuance were used to repay a portion of the outstanding balance of $350.0 million on the Revolving Credit Facility, utilized in connection with financing related to our acquisition of Hays, and for other general corporate purposes. As of December 31, 2019, there was an outstanding debt balance of $350.0 million exclusive of the associated discount balance.

Total debt at December 31, 2018 was $1,507.0 million net of unamortized discount and debt issuance costs, which was an increase of $530.8 million compared to December 31, 2017. The increase reflects the addition of $650.0 million in principal balances, total debt repayments of $120.0 million, net of the amortization of discounted debt related to our Senior Notes due 2024, with a fixed interest rate of 4.200% per year and debt issuance cost amortization of $1.6 million. The Company also added $0.8 million in debt issuance costs related to the Term Loan Credit Agreement (as defined below) that was executed in December 2018.

On May 10, 2018, the Company elected to prepay in full the principal balance of $100.0 million from the Series E Senior Notes, which  were issued on September 15, 2011 in connection with the December 22, 2006 Master Shelf and Note Purchase Agreement with a national insurance company. Along with accrued interest of $0.7 million and a prepayment premium of $0.7 million as the notes were to mature on September 15, 2018. This resulted in a net interest expense savings of $0.8 million after deducting the pro-rated interest expense and prepayment premiums paid when compared to holding the note to maturity paying the full semi-annual coupon interest expense of $2.3 million.

The Company borrowed approximately $600.0 million under its Revolving Credit Facility on November 15, 2018 in connection with the closing of the acquisition of certain assets and assumption of certain liabilities of Hays.

On December 21, 2018, the Company borrowed $300.0 million under a term loan credit agreement with Wells Fargo Bank, National Association, as administrative agent, Bank of America, N.A., BMO Harris Bank N.A. and SunTrust Bank as co-syndication agents, and Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, BMO Capital Markets Corp. and SunTrust Robinson Humphrey, Inc. as joint lead arrangers and joint bookrunners (the “Term Loan Credit Agreement”). The Term Loan Credit Agreement provides for an unsecured term loan in the initial amount of $300.0 million, which may, subject to lenders’ discretion, potentially be increased up to an aggregate amount of $450.0 million (the “Term Loan”). The Term Loan is repayable over the five-year term from the effective date of the Term Loan Credit Agreement, which was December 21, 2018. Based on the Company’s net debt leverage ratio or a non-credit enhanced senior unsecured long-term debt rating as determined by Moody’s Investor Service and Standard & Poor’s Rating Service, the current rate of interest on the Term Loan is 1.25% above the adjusted 1-Month London Interbank Offered Rate (“LIBOR”). The Company used $250.0 million of the borrowings to reduce indebtedness under the Revolving Credit Facility.

Off-Balance Sheet Arrangements

Neither we nor our subsidiaries have ever incurred off-balance sheet obligations through the use of, or investment in, off-balance sheet derivative financial instruments or structured finance or special purpose entities organized as corporations, partnerships or limited liability companies or trusts.

For further discussion of our cash management and risk management policies, see “Quantitative and Qualitative Disclosures About Market Risk.”

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign exchange rates and equity prices. We are exposed to market risk through our investments, revolving credit line, term loan agreements and international operations.

Our invested assets are held primarily as cash and cash equivalents, restricted cash, available-for-sale marketable debt securities, non-marketable debt securities, certificates of deposit, U.S. treasury securities, and professionally managed short duration fixed income funds. These investments are subject to interest rate risk. The fair values of our invested assets at December 31, 2019 and December 31, 2018, approximated their respective carrying values due to their short-term duration and therefore, such market risk is not considered to be material.

We do not actively invest or trade in equity securities. In addition, we generally dispose of any significant equity securities received in conjunction with an acquisition shortly after the acquisition date.

As of December 31, 2019, we had $715.0 million of borrowings outstanding under our various credit agreements, all of which bear interest on a floating basis tied to London Interbank Overnight Rate (“LIBOR”) and is therefore subject to changes in the associated interest expense. The effect of an immediate hypothetical 10% change in interest rates would not have a material effect on our Consolidated Financial Statements. As of July 2017, the UK Financial Conduct Authority has urged banks and institutions to discontinue their use of the LIBOR benchmark rate for floating rate debt, and other financial instruments tied to the rate after 2021. The Alternative Reference Rates Committee (“ARRC”) have recommended the Secured Overnight Financing Rate (“SOFR”) as the best alternative rate to LIBOR post discontinuance and has proposed a transition plan and timeline designed to encourage the adoption of SOFR from LIBOR.

42


Table of Contents

 

The Company is currently evaluating the transition from LIBOR as an interest rate benchmark to other potential alternative reference rates, including but not limited to the SOFR interest rate. Management will continue to actively asses the related opportunities and risks associated with the transition and monitor related proposals and guidance published by ARRC and other alternative-rate initiatives, with an expectation the we will be prepared to for a termination of LIBOR benchmarks after 2021.

We are subject to exchange rate risk primarily in our U.K.-based wholesale brokerage business that has a cost base principally denominated in British pounds and a revenue base in several other currencies, but principally in U.S. dollars. Based upon our foreign currency rate exposure as of December 31, 2019, an immediate 10% hypothetical changes of foreign currency exchange rates would not have a material effect on our Consolidated Financial Statements.

43


Table of Contents

 

ITEM 8. Financial Statements and Supplementary Data.

Index to Consolidated Financial Statements

 

 

 

 

 

 

Page No.  

 

 

Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017

45

Consolidated Balance Sheets as of December 31, 2019 and 2018

46

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2019, 2018 and 2017

47

Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017

48

Notes to Consolidated Financial Statements for the years ended December 31, 2019, 2018 and 2017

49

Note 1: Summary of Significant Accounting Policies

49

Note 2: Revenues

57

Note 3: Business Combinations

58

Note 4: Goodwill

65

Note 5: Amortizable Intangible Assets

65

Note 6: Investments

65

Note 7: Fixed Assets

67

Note 8: Accrued Expenses and Other Liabilities

67

Note 9: Long-Term Debt

68

Note 10: Income Taxes

69

Note 11: Employee Savings Plan

71

Note 12: Stock-Based Compensation

71

Note 13: Supplemental Disclosures of Cash Flow Information

74

Note 14: Commitments and Contingencies

75

Note 15: Leases

75

Note 16: Quarterly Operating Results (Unaudited)

77

Note 17: Segment Information

77

Note 18: Insurance Company WNFIC

78

Note 19: Shareholders’ Equity

79

Report of Independent Registered Public Accounting Firm

80

 

44


Table of Contents

 

BROWN & BROWN, INC.

CONSOLIDATED STATEMENTS OF INCOME

 

 

 

For the Year Ended December 31,

 

(in thousands, except per share data)

 

2019

 

 

2018

 

 

2017

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

Commissions and fees

 

$

2,384,737

 

 

$

2,009,857

 

 

$

1,857,270

 

Investment income

 

 

5,780

 

 

 

2,746

 

 

 

1,626

 

Other income, net

 

 

1,654

 

 

 

1,643

 

 

 

22,451

 

Total revenues

 

 

2,392,171

 

 

 

2,014,246

 

 

 

1,881,347

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

 

1,308,165

 

 

 

1,068,914

 

 

 

994,652

 

Other operating expenses

 

 

377,089

 

 

 

332,118

 

 

 

283,470

 

(Gain)/loss on disposal

 

 

(10,021

)

 

 

(2,175

)

 

 

(2,157

)

Amortization

 

 

105,298

 

 

 

86,544

 

 

 

85,446

 

Depreciation

 

 

23,417

 

 

 

22,834

 

 

 

22,698

 

Interest

 

 

63,660

 

 

 

40,580

 

 

 

38,316

 

Change in estimated acquisition earn-out payables

 

 

(1,366

)

 

 

2,969

 

 

 

9,200

 

Total expenses

 

 

1,866,242

 

 

 

1,551,784

 

 

 

1,431,625

 

Income before income taxes

 

 

525,929

 

 

 

462,462

 

 

 

449,722

 

Income taxes

 

 

127,415

 

 

 

118,207

 

 

 

50,092

 

Net income

 

$

398,514

 

 

$

344,255

 

 

$

399,630

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.42

 

 

$

1.24

 

 

$

1.43

 

Diluted

 

$

1.40

 

 

$

1.22

 

 

$

1.40

 

Dividends declared per share

 

$

0.33

 

 

$

0.31

 

 

$

0.28

 

 

See accompanying notes to Consolidated Financial Statements.

45


Table of Contents

 

BROWN & BROWN, INC.

CONSOLIDATED BALANCE SHEETS

 

(in thousands, except per share data)

 

December 31,

2019

 

 

December 31,

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

542,174

 

 

$

438,961

 

Restricted cash and investments

 

 

420,801

 

 

 

338,635

 

Short-term investments

 

 

12,325

 

 

 

12,868

 

Premiums, commissions and fees receivable

 

 

942,834

 

 

 

844,815

 

Reinsurance recoverable

 

 

58,505

 

 

 

65,396

 

Prepaid reinsurance premiums

 

 

366,021

 

 

 

337,920

 

Other current assets

 

 

152,142

 

 

 

128,716

 

Total current assets

 

 

2,494,802

 

 

 

2,167,311

 

Fixed assets, net

 

 

148,627

 

 

 

100,395

 

Operating lease assets

 

 

184,288

 

 

 

 

Goodwill

 

 

3,746,094

 

 

 

3,432,786

 

Amortizable intangible assets, net

 

 

916,768

 

 

 

898,807

 

Investments

 

 

27,378

 

 

 

17,394

 

Other assets

 

 

104,864

 

 

 

71,975

 

Total assets

 

$

7,622,821

 

 

$

6,688,668

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Premiums payable to insurance companies

 

$

1,014,317

 

 

$

857,559

 

Losses and loss adjustment reserve

 

 

58,505

 

 

 

65,212

 

Unearned premiums

 

 

366,021

 

 

 

337,920

 

Premium deposits and credits due customers

 

 

113,841

 

 

 

105,640

 

Accounts payable

 

 

99,960

 

 

 

87,345

 

Accrued expenses and other liabilities

 

 

337,717

 

 

 

279,310

 

Current portion of long-term debt

 

 

55,000

 

 

 

50,000

 

Total current liabilities

 

 

2,045,361

 

 

 

1,782,986

 

Long-term debt less unamortized discount and debt issuance costs

 

 

1,500,343

 

 

 

1,456,990

 

Operating lease liabilities

 

 

167,855

 

 

 

 

Deferred income taxes, net

 

 

328,277

 

 

 

315,732

 

Other liabilities

 

 

230,706

 

 

 

132,392

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

Common stock, par value $0.10 per share; authorized 560,000 shares; issued 297,106

   shares and outstanding 281,655 at 2019, issued 293,380

   shares and outstanding 279,583 shares at 2018 - in thousands.

 

 

29,711

 

 

 

29,338

 

Additional paid-in capital

 

 

716,049

 

 

 

615,180

 

Treasury stock, at cost at 15,451 at 2019 and 13,797 shares at 2018,

   respectively - in thousands

 

 

(536,243

)

 

 

(477,572

)

Retained earnings

 

 

3,140,762

 

 

 

2,833,622

 

Total shareholders’ equity

 

 

3,350,279

 

 

 

3,000,568

 

Total liabilities and shareholders’ equity

 

$

7,622,821

 

 

$

6,688,668

 

 

See accompanying notes to Consolidated Financial Statements.

46


Table of Contents

 

BROWN & BROWN, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share data)

 

Shares

 

 

Par

Value

 

 

Additional

Paid-In

Capital

 

 

Treasury

Stock

 

 

Retained

Earnings

 

 

Total

 

Balance at January 1, 2017

 

 

285,461

 

 

$

28,547

 

 

$

454,707

 

 

$

(257,683

)

 

$

2,134,640

 

 

$

2,360,211

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

399,630

 

 

 

399,630

 

Net unrealized holding (loss) gain on available-for-sale

   securities

 

 

 

 

 

 

 

 

 

 

(47

)

 

 

 

 

 

 

41

 

 

 

(6

)

Common stock issued for employee stock benefit plans

 

 

1,412

 

 

 

140

 

 

 

39,825

 

 

 

 

 

 

 

 

 

 

 

39,965

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

(11,250

)

 

 

(128,639

)

 

 

 

 

 

 

(139,889

)

Common stock issued to directors

 

 

22

 

 

 

2

 

 

 

498

 

 

 

 

 

 

 

 

 

 

 

500

 

Cash dividends paid ($0.28 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(77,712

)

 

 

(77,712

)

Balance at December 31, 2017

 

 

286,895

 

 

 

28,689

 

 

 

483,733

 

 

 

(386,322

)

 

 

2,456,599

 

 

 

2,582,699

 

Adoption of Topic 606 at January 1, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

117,515

 

 

 

117,515

 

Beginning balance after adoption of Topic 606

 

 

286,895

 

 

 

28,689

 

 

 

483,733

 

 

 

(386,322

)

 

 

2,574,114

 

 

 

2,700,214

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

344,255

 

 

 

344,255

 

Net unrealized holding (loss) gain on available-for-sale

   securities

 

 

 

 

 

 

 

 

 

 

(21

)

 

 

 

 

 

 

(57

)

 

 

(78

)

Common stock issued for employee stock benefit plans

 

 

3,096

 

 

 

310

 

 

 

39,857

 

 

 

 

 

 

 

 

 

 

 

40,167

 

Common stock issued for agency acquisitions

 

 

3,376

 

 

 

338

 

 

 

99,662

 

 

 

 

 

 

 

 

 

 

 

100,000

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

(8,750

)

 

 

(91,250

)

 

 

 

 

 

 

(100,000

)

Common stock issued to directors

 

 

13

 

 

 

1

 

 

 

699

 

 

 

 

 

 

 

 

 

 

 

700

 

Cash dividends paid ($0.31 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(84,690

)

 

 

(84,690

)

Balance at December 31, 2018

 

 

293,380

 

 

 

29,338

 

 

 

615,180

 

 

 

(477,572

)

 

 

2,833,622

 

 

 

3,000,568

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

398,514

 

 

 

398,514

 

Net unrealized holding (loss) gain on available-for-sale

   securities

 

 

 

 

 

 

 

 

 

 

182

 

 

 

 

 

 

 

(30

)

 

 

152

 

Common stock issued for employee stock benefit plans

 

 

3,129

 

 

 

313

 

 

 

59,867

 

 

 

 

 

 

 

 

 

 

 

60,180

 

Common stock issued for agency acquisitions

 

 

569

 

 

 

57

 

 

 

19,943

 

 

 

 

 

 

 

 

 

 

 

20,000

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

20,000

 

 

 

(58,671

)

 

 

 

 

 

 

(38,671

)

Common stock issued to directors

 

 

28

 

 

 

3

 

 

 

877

 

 

 

 

 

 

 

 

 

 

 

880

 

Cash dividends paid ($0.33 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(91,344

)

 

 

(91,344

)

Balance at December 31, 2019

 

 

297,106

 

 

$

29,711

 

 

$

716,049

 

 

$

(536,243

)

 

$

3,140,762

 

 

$

3,350,279

 

 

See accompanying notes to Consolidated Financial Statements.

47


Table of Contents

 

BROWN & BROWN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Year Ended December 31,

 

(in thousands)

 

2019

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

398,514

 

 

$

344,255

 

 

$

399,630

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

 

105,298

 

 

 

86,544

 

 

 

85,446

 

Depreciation

 

 

23,417

 

 

 

22,834

 

 

 

22,698

 

Non-cash stock-based compensation

 

 

46,994

 

 

 

33,519

 

 

 

30,631

 

Change in estimated acquisition earn-out payables

 

 

(1,366

)

 

 

2,969

 

 

 

9,200

 

Deferred income taxes

 

 

12,383

 

 

 

15,008

 

 

 

(102,183

)

Amortization of debt discount and disposal of deferred financing costs

 

 

2,054

 

 

 

1,627

 

 

 

1,840

 

Accretion of discounts and premiums, investments

 

 

(5

)

 

 

(10

)

 

 

22

 

(Gain)/loss on sales of investments, fixed assets and customer accounts

 

 

(9,550

)

 

 

(1,934

)

 

 

(1,841

)

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

 

 

(351

)

 

 

(12,538

)

 

 

(14,501

)

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

   divestitures:

 

 

 

 

 

 

 

 

 

 

 

 

Premiums, commissions and fees receivable (increase) decrease

 

 

(86,778

)

 

 

(93,630

)

 

 

(43,306

)

Reinsurance recoverables (increase) decrease

 

 

6,891

 

 

 

412,424

 

 

 

(399,737

)

Prepaid reinsurance premiums (increase) decrease

 

 

(28,101

)

 

 

(16,903

)

 

 

(12,356

)

Other assets (increase) decrease

 

 

(46,520

)

 

 

(22,440

)

 

 

(9,747

)

Premiums payable to insurance companies (increase) decrease

 

 

148,658

 

 

 

141,169

 

 

 

37,380

 

Premium deposits and credits due customers increase (decrease)

 

 

7,820

 

 

 

13,792

 

 

 

7,750

 

Losses and loss adjustment reserve increase (decrease)

 

 

(6,707

)

 

 

(411,509

)

 

 

398,638

 

Unearned premiums increase (decrease)

 

 

28,101

 

 

 

16,903

 

 

 

12,356

 

Accounts payable increase (decrease)

 

 

17,800

 

 

 

21,880

 

 

 

26,798

 

Accrued expenses and other liabilities increase (decrease)

 

 

43,330

 

 

 

22,801

 

 

 

25,509

 

Other liabilities increase (decrease)

 

 

16,298

 

 

 

(9,232

)

 

 

(32,252

)

Net cash provided by operating activities

 

 

678,180

 

 

 

567,529

 

 

 

441,975

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Additions to fixed assets

 

 

(73,108

)

 

 

(41,520

)

 

 

(24,192

)

Payments for businesses acquired, net of cash acquired

 

 

(353,043

)

 

 

(923,874

)

 

 

(41,471

)

Proceeds from sales of fixed assets and customer accounts

 

 

21,592

 

 

 

4,984

 

 

 

4,094

 

Purchases of investments

 

 

(17,520

)

 

 

(9,284

)

 

 

(10,665

)

Proceeds from sales of investments

 

 

8,494

 

 

 

17,923

 

 

 

9,644

 

Net cash used in investing activities

 

 

(413,585

)

 

 

(951,771

)

 

 

(62,590

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Payments on acquisition earn-outs

 

 

(9,566

)

 

 

(14,059

)

 

 

(29,265

)

Proceeds from long-term debt

 

 

350,000

 

 

 

300,000

 

 

 

 

Payments on long-term debt

 

 

(50,000

)

 

 

(120,000

)

 

 

(96,750

)

Deferred debt issuance costs

 

 

(3,701

)

 

 

(778

)

 

 

(2,821

)

Borrowings on revolving credit facilities

 

 

100,000

 

 

 

600,000

 

 

 

 

Payments on revolving credit facilities

 

 

(350,000

)

 

 

(250,000

)

 

 

 

Issuances of common stock for employee stock benefit plans

 

 

24,999

 

 

 

19,432

 

 

 

17,422

 

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

 

 

(10,933

)

 

 

(12,155

)

 

 

(7,565

)

Purchase of treasury stock

 

 

(58,671

)

 

 

(91,250

)

 

 

(128,639

)

Settlement (prepayment) of accelerated share repurchase program

 

 

20,000

 

 

 

(8,750

)

 

 

(11,250

)

Cash dividends paid

 

 

(91,344

)

 

 

(84,690

)

 

 

(77,712

)

Net cash provided by (used in) financing activities

 

 

(79,216

)

 

 

337,750

 

 

 

(336,580

)

Net increase (decrease) in cash and cash equivalents inclusive of

   restricted cash

 

 

185,379

 

 

 

(46,492

)

 

 

42,805

 

Cash and cash equivalents inclusive of restricted cash at beginning of period

 

 

777,596

 

 

 

824,088

 

 

 

781,283

 

Cash and cash equivalents inclusive of restricted cash at end of period

 

$

962,975

 

 

$

777,596

 

 

$

824,088

 

 

See accompanying notes to Consolidated Financial Statements. Refer to Note 13 for reconciliation of cash and cash equivalents inclusive of restricted cash.

48


Table of Contents

 

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 service organization that markets and sells 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, professional and individual insured customers, and non-insurance risk-mitigating products through our automobile dealer services (“F&I”) businesses. The National Programs Segment, which acts as a managing general agent (“MGA”), provides professional liability and related package products for certain professionals, a range of insurance products for individuals, flood coverage, and targeted products and services designated for specific industries, trade groups, governmental entities and market niches, all of which are delivered through a nationwide network of independent agents, including Brown & Brown retail agents. The Wholesale Brokerage Segment markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers, as well as Brown & Brown retail agents. The Services Segment provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare benefits advocacy services and claims adjusting services.

Recently Issued Accounting Pronouncements

In 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 impact of ASU 2018-15 is not expected to be material to the Company.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The new guidance eliminates Step 2 of the goodwill impairment test. The updated guidance requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit to its carrying value, and recognizing a non-cash impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and will be applied prospectively. The Company is currently evaluating the impact of this guidance on future interim or annual goodwill impairment tests performed.

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, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230. ASU 2016-15 became effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 with early adoption permitted. The Company adopted ASU 2016-15 effective January 1, 2018 and has determined there is no impact on the Company’s Statement of Cash Flows. The Company already presented cash paid on contingent consideration in business combination as prescribed by ASU 2016-15 and does not, at this time, engage in the other activities being addressed in this ASU.

In March 2016, the FASB issued ASU 2016-08, “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.

49


Table of Contents

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“Topic 842”), which provides guidance for accounting for leases.  Under Topic 842, all leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases.  Effective as of January 1, 2019, the Company adopted Topic 842, and all related amendments, which established Accounting Standards Codification (“ASC”) Topic 842.  The Company adopted these standards by the recognition of right-of-use assets and related lease liabilities on the balance sheet. As permitted by Topic 842, the Company elected the transition practical expedient to adopt as of January 1, 2019, the date of initial application under the modified retrospective approach for leases existing at that date, with an adjustment to retained earnings. As a result, the Consolidated Balance Sheets at December 31, 2018 was not restated and continues to be reported under ASC Topic 840 (“Topic 840”) which did not require the recognition of operating lease liabilities on the balance sheet, and thus is not comparative.  For the year ended December 31, 2019, all of the Companys leases are classified as operating leases, which are primarily real estate leases for office space.  The expense recognition for operating leases under Topic 842 is substantially consistent with Topic 840, where operating lease charges are recorded entirely in operating expenses.  As a result, there is no significant difference in the Companys results of operations presented in the Companys Condensed Consolidated Statements of Income for each period presented.

The adoption of Topic 842 had a significant impact on the Company’s balance sheet with the recognition of the operating lease right-of-use asset and the liability for operating leases.  Upon adoption, leases that were classified as operating leases under Topic 840 were classified as operating leases under Topic 842.  For the adoption of Topic 842, the Company recorded an adjustment of $202.9 million to operating lease right-of-use asset and the related lease liability, with no impact to retained earnings.  The deferred rent previously accrued under Topic 840 was reclassified to the right-of-use asset upon the adoption of Topic 842.  The lease liability is the present value of the remaining minimum lease payments, determined under Topic 840, discounted using the Company’s incremental borrowing rate at the effective date of January 1, 2019.  As permitted under Topic 842, the Company elected to use the practical expedient that permits the Company to not reassess whether a contract is or contains a lease, the classification of the Company’s existing operating leases, and initial direct costs for any existing leases. The Company did not elect the practical expedient to use hindsight in determining the lease term (when considering lessee options to extend or terminate the lease and to purchase the underlying asset) and in assessing impairment of the Company’s right-of-use assets. The application of the practical expedient did not have a significant impact on the measurement of the operating lease liability.

The impact of the adoption of Topic 842 on the balance sheet at January 1, 2019 was (in thousands):

(in thousands)

 

Balance at

December 31, 2018

 

 

Adjustments due to Topic 842

 

 

Balance at

January 1, 2019

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Other current assets

 

$

128,716

 

 

$

(3,004

)

 

$

125,712

 

Operating lease assets

 

 

 

 

 

178,304

 

 

 

178,304

 

Total Assets

 

 

6,688,668

 

 

 

175,300

 

 

 

6,863,968

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accrued expenses and other liabilities

 

 

279,310

 

 

 

13,836

 

 

 

293,146

 

Operating lease liabilities

 

 

 

 

 

161,464

 

 

 

161,464

 

Total Liabilities

 

 

3,688,100

 

 

 

175,300

 

 

 

3,863,400

 

For contracts entered into on or after the January 1, 2019, at the inception of a contract the Company assesses whether the contract is, or contains, a lease. This assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether the Company has the right to direct the use of the asset. Leases entered into prior to January 1, 2019 are accounted for under Topic 840 and were not reassessed. For real estate leases that contain both lease and non-lease components, the Company elected to account the lease components together with non-lease components (e.g., common-area maintenance).

Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, or the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any one of these criteria. None of the Company’s real estate leases for office space meet the definition of a finance lease. The Company’s policy is to own, rather than lease, equipment.

For leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, less any lease incentives received. The lease liability is initially measured at the present value of the lease payments under the lease. For the Company’s operating leases, the lease payments are discounted using an incremental borrowing rate, which approximates the rate of interest that would be paid on a secured borrowing in an amount equal to the lease payments for the underlying asset under similar terms.

50


Table of Contents

 

Lease payments included in the measurement of the lease liability comprise the following: the fixed noncancelable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early. Some of the Companys real estate leases contain variable lease payments, including payments based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease commencement and based on the minimum amount stated in the lease. Lease components are included in the measurement of the initial lease liability. Additional payments based on the change in an index or rate, or payments based on a change in the Companys portion of the operating expenses, including real estate taxes and insurance, are recorded as a period expense when incurred. Lease modifications result in remeasurement of the right-of-use assets and the lease liability.

Lease expense for operating leases consists of the lease payments, inclusive of lease incentives, plus any initial direct costs, and is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability.

The Company elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a total term of 12 months or less. The effect of short-term leases on the Company’s right-of-use asset and lease liability would not be significant.

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

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

The Company earns commissions and fees paid by insurance carriers for the binding of insurance coverage. These commissions and fees are earned at a point in time upon the effective date of bound insurance coverage, as no performance obligation exists after coverage is bound. If there are other services within the contract, the Company estimates the stand-alone selling price for each separate performance obligation, and the corresponding apportioned revenue is recognized over the period of time in which the customer receives the service, and as the performance obligations are fulfilled and the Company is entitled to that portion of revenue using the output method for the services. In situations where multiple performance obligations exist within a contract, the use of estimates is required to allocate the transaction price on a relative stand-alone selling price basis to each separate performance obligation.

Commission revenues – Prior to the adoption of Topic 606, commission revenues, including those billed on an installment basis, were recognized on the latter of the policy effective date or the date that the premium was billed to the customer, with the exception of the Company’s Arrowhead businesses, which followed a policy of recognizing these revenues on the latter of the policy effective date or processed date in our systems.  As a result of the adoption of Topic 606, commission revenues associated with the issuance of policies are now recognized upon the effective date of the associated policy. The overall impact of these changes are not significant on a full-year basis, but the timing of recognizing revenue has impacted our fiscal quarters when compared to prior years. These commission revenues, including those billed on an installment basis, are now recognized earlier than they had been previously. Revenue is now accrued based upon the completion of the performance obligation, thereby creating a current asset for the unbilled revenue, until such time as an invoice is generated, which typically does not exceed 12 months. For the year ended December 31, 2018, the adoption of Topic 606 increased base and incentive commissions revenue, as defined in Note 2, by $9.9 million compared to what would have been recognized under the Company’s previous accounting policies. Incentive commissions represent a form of variable consideration which includes additional commissions over base commissions received from insurance carriers based on predetermined production levels mutually agreed upon by both parties.

Profit-sharing contingent commissions – Prior to the adoption of Topic 606, revenue that was not fixed and determinable because a contingency existed was not recognized until the contingency was resolved.  Under Topic 606, the Company must estimate the amount of consideration that will be received in the coming year such that a significant reversal of revenue is not probable.  Profit-sharing contingent commissions represent a form of variable consideration associated with the placement of coverage, for which we earn commissions and fees.  In connection with Topic 606, profit-sharing contingent commissions are estimated with a constraint applied and accrued relative to the recognition of the corresponding core commissions.  The resulting effect on the timing of recognizing profit-sharing contingent commissions will now more closely follow a similar pattern as our commissions and fees with any true-ups recognized when payments are received or as additional information that affects the estimate becomes available.  For the year ended December 31, 2018, the adoption of Topic 606 reduced profit-sharing contingent commissions revenue by $2.3 million compared to what would have been recognized under our previous accounting policies.

51


Table of Contents

 

Fee revenues – The Company earns fee revenue related to services other than securing insurance coverage, which are predominantly in the Company’s National Programs and Services Segments, and to a lesser extent in the large accounts businesses within the Company’s Retail Segment, where the Company receives negotiated fees in lieu of a commission. In accordance with Topic 606, fee revenue from fee agreements are recognized in earlier periods and others in later periods as compared to our previous accounting treatment depending on when the services within the contract are satisfied and when we have transferred control of the related services to the customer. The overall impact of these changes is not significant on a full-year basis, but the timing of recognizing fees revenue will impact our fiscal quarters when compared to prior years. For the year ended December 31, 2018, the adoption of Topic 606 increased fees revenue by $6.2 million compared to what would have been recognized under our previous accounting policies, including a one-time $10.5 million increase for revenues within our Services Segment. Excluding this increase, fee revenues would have decreased by $4.3 million.

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

Incremental cost to obtain – The adoption of ASC 340 resulted in the Company deferring certain costs to obtain customer contracts primarily as they relate to commission-based compensation plans in the Retail Segment, in which the Company pays an incremental amount of compensation on new business. These incremental costs are deferred and amortized over a 15-year period, which is consistent with the analysis performed on acquired customer accounts and referenced in Note 5 to the Company’s consolidated financial statements. For incremental costs with an amortization period of less than 12 months, the costs are expensed as incurred. For the year ended December 31, 2018, the Company deferred $13.7 million of incremental cost to obtain customer contracts. The Company expensed $0.5 million of the incremental cost to obtain customer contracts for the year ended December 31, 2018.

Cost to fulfill – The adoption of ASC 340 resulted in the Company deferring certain costs to fulfill contracts and to recognize these costs as the associated performance obligations are fulfilled. In order for contract fulfillment costs to be deferred under ASC 340, the costs must (1) relate directly to a specific contract or anticipated contract, (2) generate or enhance resources that the Company will use in satisfying its obligations under the contract, and (3) be expected to be recovered through sufficient net cash flows from the contract. The Company does not expect the overall impact of these changes to be significant on a full-year basis, but the timing of recognizing these expenses will impact quarterly results compared to prior years as such recognition better aligns with the associated revenue. With the modified retrospective adoption of Topic 606, the Company deferred $52.7 million in contract fulfillment costs on its opening balance sheet on January 1, 2018 based upon the estimated average time spent on policy renewals. For the year ended December 31, 2018, the Company had net expense of $1.3 million related to the release of previously deferred contract fulfillment costs associated with performance obligations that were satisfied in the period, net of current year deferrals for costs incurred that related to performance obligations yet to be fulfilled.

In connection with the implementation of Topic 606 and ASC 340, we modified, and in some instances instituted, additional accounting procedures, processes and internal controls. While the relative impacts of these standards to our revenue and expense streams are significant during a calendar year, we do not view these modifications and additions as a material change in our internal controls over financial reporting on a full year basis.

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

 

(in thousands)

 

Balance 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

 

 

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

52


Table of Contents

 

receivable. The $8.7 million adjustment to accounts payable and the $22.8 million adjustment to accrued expenses and other liabilities consists of commissions payable and deferred revenue, respectively.

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

 

 

 

December 31, 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

 

$

2,009,857

 

 

$

18,399

 

 

$

1,991,458

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

 

1,068,914

 

 

 

(8,835

)

 

 

1,077,749

 

Other operating expenses

 

 

332,118

 

 

 

10,621

 

 

 

321,497

 

Income taxes

 

 

118,207

 

 

 

4,246

 

 

 

113,961

 

Net income

 

$

344,255

 

 

$

12,367

 

 

$

331,888

 

 

Principles of Consolidation

The accompanying Consolidated Financial Statements include the accounts of Brown & Brown, Inc. and its subsidiaries. All significant intercompany account balances and transactions have been eliminated in the Consolidated Financial Statements.

Segment results for prior periods have been recast, where appropriate, to reflect the current year segmental structure. Certain reclassifications have been made to the prior year amounts reported in this Annual Report on Form 10-K in order to conform to the current year presentation.

Revenue Recognition

The Company earns commissions paid by insurance carriers for the binding of insurance coverage. Commissions are earned at a point in time upon the effective date of bound insurance coverage, as no performance obligation exists after coverage is bound. If there are other services within the contract, the Company estimates the stand-alone selling price for each separate performance obligation, and the corresponding apportioned revenue is recognized over a period of time as the performance obligations are fulfilled. The Company earns fee revenue by receiving negotiated fees in lieu of a commission and from services other than securing insurance coverage. Fee revenues from certain agreements are recognized depending on when the services within the contract are satisfied and when we have transferred control of the related services to the customer. In situations where multiple performance obligations exist within a fee contract, the use of estimates is required to allocate the transaction price on a relative stand-alone selling price basis to each separate performance obligation. Incentive commissions represent a form of variable consideration which includes additional commissions over base commissions received from insurance carriers based on predetermined production levels mutually agreed upon by both parties. Profit-sharing contingent commissions represent a form of variable consideration associated with the placement of coverage, for which we earn commissions.  Profit-sharing contingent commissions and incentive commissions are estimated with a constraint applied and accrued relative to the recognition of the corresponding core commissions based on the amount of consideration that will be received in the coming year such that a significant reversal of revenue is not probable. Guaranteed supplemental commissions, a form of variable consideration, represent guaranteed fixed-base agreements in lieu of profit-sharing contingent commissions.

Management determines the policy cancellation reserve based upon historical cancellation experience adjusted for any known circumstances.

Use of Estimates

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

Cash and Cash Equivalents

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

53


Table of Contents

 

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

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

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

Investments

Certificates of deposit, and other securities, having maturities of more than three months when purchased are reported at cost and are adjusted for other-than-temporary market value declines.  The Company’s investment holdings include U.S. Government securities, municipal bonds, domestic corporate and foreign corporate bonds as well as short-duration fixed income funds.  Investments within the portfolio or funds are held as available-for-sale and are carried at their fair value.  Any gain/loss applicable from the fair value change is recorded, net of tax, as other comprehensive income within the equity section of the Consolidated Balance Sheets.  Realized gains and losses are reported on the Consolidated Statement of Income, with the cost of securities sold determined on a specific identification basis.

Fixed Assets

Fixed assets, including leasehold improvements, are carried at cost, less accumulated depreciation and amortization. Expenditures for improvements are capitalized, and expenditures for maintenance and repairs are expensed to operations as incurred. Upon sale or retirement, the cost and related accumulated depreciation and amortization are removed from the accounts and the resulting gain or loss, if any, is reflected in other income. Depreciation has been determined using the straight-line method over the estimated useful lives of the related assets, which range from 3 to 15 years. Leasehold improvements are amortized on the straight-line method over the shorter of the useful life of the improvement or the term of the related lease.

Goodwill and Amortizable Intangible Assets

All of our business combinations initiated after June 30, 2001 are accounted for using the acquisition method. Acquisition purchase prices are typically based upon a multiple of average annual EBITDA, operating profit and/or core revenue earned over a period of 3 years within a minimum and maximum price range. The recorded purchase prices for all acquisitions consummated after January 1, 2009 include an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations are recorded in the Consolidated Statement of Income when incurred.

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

Amortizable intangible assets are stated at cost, less accumulated amortization, and consist of purchased customer accounts and non-compete agreements. Purchased customer accounts and non-compete agreements are amortized on a straight-line basis over the related estimated lives and contract periods, which range from 3 to 15 years. Purchased customer accounts primarily consist of records and files that contain information about insurance policies and the related insured parties that are essential to policy renewals.

54


Table of Contents

 

The excess of the purchase price of an acquisition over the fair value of the identifiable tangible and amortizable intangible assets is assigned to goodwill. While goodwill is not amortizable, it is subject to assessment at least annually, and more frequently in the presence of certain circumstances, for impairment by application of a fair value-based test. The Company compares the fair value of each reporting unit with its carrying amount to determine if there is potential impairment of goodwill. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. Fair value is estimated based upon multiples of earnings before interest, income taxes, depreciation, amortization and change in estimated acquisition earn-out payables (“EBITDAC”), or on a discounted cash flow basis. The Company completed its most recent annual assessment as of November 30, 2019 and determined that the fair value of goodwill significantly exceeded the carrying value of such assets. In addition, as of December 31, 2019, there are no accumulated impairment losses.

The carrying value of amortizable intangible assets attributable to each business or asset group comprising the Company is periodically reviewed by management to determine if there are events or changes in circumstances that would indicate that its carrying amount may not be recoverable. Accordingly, if there are any such changes in circumstances during the year, the Company assesses the carrying value of its amortizable intangible assets by considering the estimated future undiscounted cash flows generated by the corresponding business or asset group. Any impairment identified through this assessment may require that the carrying value of related amortizable intangible assets be adjusted. There were no impairments recorded for the years ended December 31, 2019, 2018 and 2017.

Income Taxes

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

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

Net Income Per Share

Basic net income per share is computed based on the weighted average number of common shares (including participating securities) issued and outstanding during the period. Diluted net income per share is computed based on the weighted average number of common shares issued and outstanding plus equivalent shares, assuming the exercise of stock options. The dilutive effect of stock options is computed by application of the treasury-stock method. The weighted average number of common shares outstanding for 2017 reflects the 2-for-1 stock split that occurred on March 28, 2018.

The following is a reconciliation between basic and diluted weighted average shares outstanding for the years ended December 31:

 

(in thousands, except per share data)

 

2019

 

 

2018

 

 

2017(1)

 

Net income

 

$

398,514

 

 

$

344,255

 

 

$

399,630

 

Net income attributable to unvested awarded

   performance stock

 

 

(12,873

)

 

 

(8,297

)

 

 

(9,746

)

Net income attributable to common shares

 

$

385,641

 

 

$

335,958

 

 

$

389,884

 

Weighted average number of common shares

   outstanding – basic

 

 

281,566

 

 

 

277,663

 

 

 

279,394

 

Less unvested awarded performance stock

   included in weighted average number of

   common shares outstanding – basic

 

 

(9,095

)

 

 

(6,692

)

 

 

(6,814

)

Weighted average number of common

   shares outstanding for basic earnings

   per common share

 

 

272,471

 

 

 

270,971

 

 

 

272,580

 

Dilutive effect of stock options

 

 

2,145

 

 

 

4,550

 

 

 

5,006

 

Weighted average number of shares

   outstanding – diluted

 

 

274,616

 

 

 

275,521

 

 

 

277,586

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.42

 

 

$

1.24

 

 

$

1.43

 

Diluted

 

$

1.40

 

 

$

1.22

 

 

$

1.40

 

 

(1)The weighted average number of common shares outstanding for 2017 reflects the 2-for-1 stock split that occurred on March 28, 2018.

55


Table of Contents

 

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial assets and liabilities, including cash and cash equivalents; restricted cash and short-term investments; investments; premiums, commissions and fees receivable; reinsurance recoverable; prepaid reinsurance premiums; premiums payable to insurance companies; losses and loss adjustment reserve; unearned premium; premium deposits and credits due customers and accounts payable, at December 31, 2019 and 2018, approximate fair value because of the short-term maturity of these instruments. The carrying amount of the Company’s long-term debt approximates fair value at December 31, 2019 and 2018 as our fixed-rate borrowings of $848.7 million approximate their values using market quotes of notes with the similar terms as ours, which we deem a close approximation of current market rates. The estimated fair value of the $715.0 million currently outstanding approximates the carrying value due to the variable interest rate based upon adjusted LIBOR.  See Note 3 to our Consolidated Financial Statements for the fair values related to the establishment of intangible assets and the establishment and adjustment of earn-out payables.  See Note 6 for information on the fair value of investments and Note 9 for information on the fair value of long-term debt.

Non-Cash Stock-Based Compensation

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

The Company uses the Black-Scholes valuation model for valuing all stock options and shares purchased under the Employee Stock Purchase Plan (the “ESPP”). Compensation for non-vested stock awards is measured at fair value on the grant date based upon the number of shares expected to vest. Compensation cost for all awards is recognized in earnings, net of estimated forfeitures, on a straight-line basis over the requisite service period.

Reinsurance

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

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

Unpaid Losses and Loss Adjustment Reserve

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

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

Premiums from WNFIC 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.

56


Table of Contents

 

NOTE 2 Revenues

The following tables present the revenues disaggregated by revenue source:

 

 

 

Twelve months ended December 31, 2019

 

(in thousands)

 

Retail

 

 

National

Programs

 

 

Wholesale

Brokerage

 

 

Services

 

 

Other(8)

 

 

Total

 

Base commissions(1)

 

$

994,170

 

 

$

338,058

 

 

$

242,380

 

 

$

 

 

$

(128

)

 

$

1,574,480

 

Fees(2)

 

 

246,135

 

 

 

151,298

 

 

 

56,852

 

 

 

193,641

 

 

 

(1,160

)

 

 

646,766

 

Incentive commissions(3)

 

 

80,505

 

 

 

(524

)

 

 

1,252

 

 

 

 

 

 

27

 

 

 

81,260

 

Profit-sharing contingent commissions(4)

 

 

34,150

 

 

 

17,517

 

 

 

7,499

 

 

 

 

 

 

 

 

 

59,166

 

Guaranteed supplemental commissions(5)

 

 

11,056

 

 

 

10,566

 

 

 

1,443

 

 

 

 

 

 

 

 

 

23,065

 

Investment income(6)

 

 

149

 

 

 

1,397

 

 

 

178

 

 

 

139

 

 

 

3,917

 

 

 

5,780

 

Other income, net(7)

 

 

1,096

 

 

 

72

 

 

 

483

 

 

 

1

 

 

 

2

 

 

 

1,654

 

Total Revenues

 

$

1,367,261

 

 

$

518,384

 

 

$

310,087

 

 

$

193,781

 

 

$

2,658

 

 

$

2,392,171

 

 

 

 

Twelve months ended December 31, 2018

 

(in thousands)

 

Retail

 

 

National

Programs

 

 

Wholesale

Brokerage

 

 

Services

 

 

Other(8)

 

 

Total

 

Base commissions(1)

 

$

811,820

 

 

$

324,168

 

 

$

226,117

 

 

$

 

 

$

(68

)

 

$

1,362,037

 

Fees(2)

 

 

148,121

 

 

 

144,195

 

 

 

50,571

 

 

 

189,041

 

 

 

(1,090

)

 

 

530,838

 

Incentive commissions(3)

 

 

48,698

 

 

 

1,543

 

 

 

864

 

 

 

 

 

 

41

 

 

 

51,146

 

Profit-sharing contingent commissions(4)

 

 

24,517

 

 

 

23,896

 

 

 

7,462

 

 

 

 

 

 

 

 

 

55,875

 

Guaranteed supplemental commissions(5)

 

 

8,535

 

 

 

76

 

 

 

1,350

 

 

 

 

 

 

 

 

 

9,961

 

Investment income(6)

 

 

2

 

 

 

506

 

 

 

165

 

 

 

205

 

 

 

1,868

 

 

 

2,746

 

Other income, net(7)

 

 

1,070

 

 

 

79

 

 

 

485

 

 

 

 

 

 

9

 

 

 

1,643

 

Total Revenues

 

$

1,042,763

 

 

$

494,463

 

 

$

287,014

 

 

$

189,246

 

 

$

760

 

 

$

2,014,246

 

 

 

(1)

Base commissions generally represent a percentage of the premium paid by an insured and are affected by fluctuations in both premium rate levels charged by insurance companies and the insureds’ underlying “insurable exposure units,” which are units that insurance companies use to measure or express insurance exposed to risk (such as property values, or sales and payroll levels) to determine what premium to charge the insured. Insurance companies establish these premium rates based upon many factors, including loss experience, risk profile and reinsurance rates paid by such insurance companies, none of which we control.

 

(2)

Fee revenues relate to fees for services other than securing coverage for our customers, fees negotiated in lieu of commissions, and automotive finance and insurance products (“F&I”).

 

(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.

(8)

Fees within other reflects the elimination of intercompany revenues.

Contract Assets and Liabilities

The balances of contract assets and contract liabilities arising from contracts with customers as of December 31, 2019 and 2018 were as follows:

 

(in thousands)

 

December 31, 2019

 

 

December 31, 2018

 

Contract assets

 

$

289,609

 

 

$

265,994

 

Contract liabilities

 

$

58,126

 

 

$

53,496

 

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

As of December 31, 2019, deferred revenue consisted of $41.2 million as current portion to be recognized within one year and $16.9 million in long-term to be recognized beyond one year. As of December 31, 2018, deferred revenue consisted of $37.0 million as current portion to be recognized within one year and $16.5 million in long-term deferred revenue to be recognized beyond one year.

57


Table of Contents

 

Contract assets and contract liabilities arising from acquisitions in 2019 were approximately $6.5 million and $9.3 million, respectively. Contract assets and contract liabilities arising from acquisitions in 2018 were approximately $34.3 million and $3.3 million, respectively.

During the twelve months ended December 31, 2019 and 2018, the amount of revenue recognized related to performance obligations satisfied in a previous period, inclusive of changes due to estimates, was approximately $17.2 million and $8.9 million, respectively.

Other Assets and Deferred Cost

Incremental cost to obtain – The Company defers 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. The cost to obtain balance within the Other Assets caption in the Company’s Condensed Consolidated Balance Sheets was $26.9 million and $13.2 million as of December 31, 2019 and December 31, 2018, respectively. For the 12 months ended December 31, 2019, the Company deferred $15.1 million of incremental cost to obtain customer contracts. The Company expensed $1.4 million and $0.5 million of the incremental cost to obtain customer contracts for the 12 months ended December 31, 2019 and December 31, 2018, respectively.

Cost to fulfill - The Company defers certain costs to fulfill contracts and recognizes these costs as the associated performance obligations are fulfilled. The cost to fulfill balance within the other current assets caption in the Company's Condensed Consolidated Balance Sheets was $73.3 million and $69.8 million as of December 31, 2019 and December 31, 2018, respectively. For the 12 months ended December 31, 2019, the Company had a net deferral of $1.0 million related to current year deferrals for costs incurred that relate to performance obligations yet to be fulfilled, net of the expense of previously deferred contract fulfillment costs associated with performance obligations that were satisfied in the period.

NOTE 3  Business Combinations

During the year ended December 31, 2019, the Company acquired the assets and assumed certain liabilities of 22 insurance intermediaries, all the stock of one insurance intermediary and 4 books of businesses (customer accounts). Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last 12 months as permitted by ASC Topic 805 - Business Combinations (“ASC 805”). Such adjustments are presented in the “Other” category within the following two tables. The recorded purchase price for all acquisitions includes an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations will be recorded in the Consolidated Statement of Income when incurred.

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

Based upon the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company’s Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period, as defined in ASC 805. For the year ended December 31, 2019, adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $4.1 million relating to the assumption of certain liabilities. These measurement period adjustments have been reflected as current period adjustments for the year ended December 31, 2019 in accordance with the guidance in ASU 2015-16 “Business Combinations.” The measurement period adjustments impacted goodwill, with no effect on earnings or cash in the current period.

Cash paid for acquisitions was $356.3 million and $934.9 million in the years ended December 31, 2019 and 2018, respectively. We completed 23 acquisitions (excluding book of business purchases) during the year ended December 31, 2019. We completed 23 acquisitions (excluding book of business purchases) during the year ended December 31, 2018.

58


Table of Contents

 

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

 

 

Common

stock issued

 

 

Other

payable

 

 

Recorded

earn-out

payable

 

 

Net assets

acquired

 

 

Maximum

potential earn-

out payable

 

Smith Insurance Associates,

   Inc. (Smith)

 

Retail

 

February 1, 2019

 

$

20,129

 

 

$

 

 

$

 

 

$

2,704

 

 

$

22,833

 

 

$

4,550

 

Donald P. Pipino Company,

   LTD (Pipino)

 

Retail

 

February 1, 2019

 

 

16,420

 

 

 

 

 

 

135

 

 

 

9,821

 

 

 

26,376

 

 

 

12,996

 

AGA Enterprises, LLC d/b/a Cossio Insurance Agency (Cossio)

 

Retail

 

March 1, 2019

 

 

13,990

 

 

 

 

 

 

10

 

 

 

696

 

 

 

14,696

 

 

 

2,000

 

Medval, LLC (Medval)

 

Services

 

March 1, 2019

 

 

29,106

 

 

 

 

 

 

100

 

 

 

1,684

 

 

 

30,890

 

 

 

2,500

 

United Development Systems, Inc. (United)

 

Retail

 

May 1, 2019

 

 

18,987

 

 

 

 

 

 

388

 

 

 

3,268

 

 

 

22,643

 

 

 

8,625

 

Twinbrook Insurance Brokerage, Inc.

   (Twinbrook)

 

Retail

 

June 1, 2019

 

 

26,251

 

 

 

 

 

 

400

 

 

 

1,565

 

 

 

28,216

 

 

 

5,073

 

Innovative Risk Solutions, Inc. (IRS)

 

Retail

 

July 1, 2019

 

 

26,435

 

 

 

 

 

 

2,465

 

 

 

6,109

 

 

 

35,009

 

 

 

9,000

 

WBR Insurance Agency, LLC et al (WBR)

 

Retail

 

August 1, 2019

 

 

10,667

 

 

 

 

 

 

203

 

 

 

2,197

 

 

 

13,067

 

 

 

4,575

 

West Ridge Insurance Agency, Inc. d/b/a Yozell

   Associates (Yozell)

 

Retail

 

August 1, 2019

 

 

13,030

 

 

 

 

 

 

470

 

 

 

768

 

 

 

14,268

 

 

 

6,730

 

CKP Insurance, LLC (CKP)

 

Retail

 

August 1, 2019

 

 

89,190

 

 

 

20,000

 

 

 

4,000

 

 

 

38,093

 

 

 

151,283

 

 

 

76,500

 

Poole Professional Ltd. Insurance Agents and Brokers et al (Poole)

 

Retail

 

October 1, 2019

 

 

32,358

 

 

 

 

 

 

75

 

 

 

4,556

 

 

 

36,989

 

 

 

6,850

 

VerHagen Glendenning & Walker LLP (VGW)

 

Retail

 

October 1, 2019

 

 

23,032

 

 

 

 

 

 

1,498

 

 

 

2,385

 

 

 

26,915

 

 

 

8,170

 

Other

 

Various

 

Various

 

 

36,665

 

 

 

 

 

 

2,391

 

 

 

9,026

 

 

 

48,082

 

 

 

14,454

 

Total

 

 

 

 

 

$

356,260

 

 

$

20,000

 

 

$

12,135

 

 

$

82,872

 

 

$

471,267

 

 

$

162,023

 

 

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)

 

Smith

 

 

Pipino

 

 

Cossio

 

 

Medval

 

 

United

 

 

Twinbrook

 

 

IRS

 

 

WBR

 

 

Yozell

 

 

CKP

 

Cash

 

$

 

 

$

 

 

$

 

 

$

3,217

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Other current assets

 

 

680

 

 

 

819

 

 

 

236

 

 

 

1,708

 

 

 

477

 

 

 

919

 

 

 

1,375

 

 

 

449

 

 

 

1,781

 

 

 

9,170

 

Fixed assets

 

 

39

 

 

 

112

 

 

 

29

 

 

 

50

 

 

 

20

 

 

 

85

 

 

 

11

 

 

 

10

 

 

 

12

 

 

 

193

 

Goodwill

 

 

16,042

 

 

 

16,765

 

 

 

10,010

 

 

 

19,108

 

 

 

15,111

 

 

 

18,935

 

 

 

24,938

 

 

 

9,096

 

 

 

8,904

 

 

 

110,495

 

Purchased customer accounts

 

 

6,500

 

 

 

11,360

 

 

 

4,403

 

 

 

7,300

 

 

 

7,065

 

 

 

8,557

 

 

 

8,800

 

 

 

4,022

 

 

 

3,550

 

 

 

32,274

 

Non-compete agreements

 

 

41

 

 

 

11

 

 

 

21

 

 

 

1

 

 

 

11

 

 

 

12

 

 

 

11

 

 

 

34

 

 

 

21

 

 

 

21

 

Other assets

 

 

 

 

 

772

 

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets acquired

 

 

23,302

 

 

 

29,839

 

 

 

14,699

 

 

 

31,399

 

 

 

22,684

 

 

 

28,508

 

 

 

35,135

 

 

 

13,611

 

 

 

14,268

 

 

 

152,153

 

Other current liabilities

 

 

(469

)

 

 

(3,463

)

 

 

(3

)

 

 

(480

)

 

 

(41

)

 

 

(292

)

 

 

(126

)

 

 

(166

)

 

 

 

 

 

(870

)

Other liabilities

 

 

 

 

 

 

 

 

 

 

 

(29

)

 

 

 

 

 

 

 

 

 

 

 

(378

)

 

 

 

 

 

 

Total liabilities assumed

 

 

(469

)

 

 

(3,463

)

 

 

(3

)

 

 

(509

)

 

 

(41

)

 

 

(292

)

 

 

(126

)

 

 

(544

)

 

 

 

 

 

(870

)

Net assets acquired

 

$

22,833

 

 

$

26,376

 

 

$

14,696

 

 

$

30,890

 

 

$

22,643

 

 

$

28,216

 

 

$

35,009

 

 

$

13,067

 

 

$

14,268

 

 

$

151,283

 

 

59


Table of Contents

 

(in thousands)

 

Poole

 

 

VGW

 

 

Other

 

 

Total

 

Cash

 

$

 

 

$

 

 

$

 

 

$

3,217

 

Other current assets

 

 

938

 

 

 

1,190

 

 

 

(6,786

)

 

 

12,956

 

Fixed assets

 

 

4

 

 

 

20

 

 

 

(130

)

 

 

455

 

Goodwill

 

 

28,233

 

 

 

16,595

 

 

 

34,314

 

 

 

328,546

 

Purchased customer accounts

 

 

10,359

 

 

 

9,092

 

 

 

15,020

 

 

 

128,302

 

Non-compete agreements

 

 

33

 

 

 

34

 

 

 

161

 

 

 

412

 

Other assets

 

 

 

 

 

 

 

 

(732

)

 

 

55

 

Total assets acquired

 

 

39,567

 

 

 

26,931

 

 

 

41,847

 

 

 

473,943

 

Other current liabilities

 

 

(2,578

)

 

 

(16

)

 

 

6,235

 

 

 

(2,269

)

Other liabilities

 

 

 

 

 

 

 

 

 

 

 

(407

)

Total liabilities assumed

 

 

(2,578

)

 

 

(16

)

 

 

6,235

 

 

 

(2,676

)

Net assets acquired

 

$

36,989

 

 

$

26,915

 

 

$

48,082

 

 

$

471,267

 

 

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 $328.5 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 $302.6 million, $0.1 million, $6.5 million and $19.3 million, respectively. Of the total goodwill of $328.5 million, the amount currently deductible for income tax purposes is $245.6 million and the remaining $82.9 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

For the acquisitions completed during 2019, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues from the acquisitions completed through December 31, 2019 included in the Consolidated Statement of Income for the year ended December 31, 2019 were $49.1 million. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through December 31, 2019 included in the Consolidated Statement of Income for the year ended December 31, 2019 was $3.4 million, excluding one acquisition from the third quarter of 2019 which recognizes primarily all of its revenues in the first quarter of each year. 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)

 

Year Ended December 31,

 

(in thousands, except per share data)

 

2019

 

 

2018

 

Total revenues

 

$

2,447,401

 

 

$

2,120,867

 

Income before income taxes

 

$

545,182

 

 

$

496,076

 

Net income

 

$

412,974

 

 

$

369,277

 

Net income per share:

 

 

 

 

 

 

 

 

Basic

 

$

1.47

 

 

$

1.33

 

Diluted

 

$

1.46

 

 

$

1.31

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

272,471

 

 

 

270,971

 

Diluted

 

 

274,616

 

 

 

275,521

 

 

60


Table of Contents

 

Acquisitions in 2018

During the year ended December 31, 2018, the Company acquired the assets and assumed certain liabilities of 20 insurance intermediaries, all the stock of three insurance intermediaries and one book of business (customer accounts). Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last 12 months as permitted by ASC 805. Such adjustments are presented in the “Other” category within the following two tables.

For the year ended December 31, 2018, several adjustments were made within the permitted measurement period that resulted in an increase in the aggregate purchase price of the affected acquisitions of $21.4 thousand, relating to the assumption of certain liabilities.

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

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Name

 

Business

segment

 

Effective

date of

acquisition

 

Cash

paid

 

 

Common

stock issued

 

 

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

 

 

13,176

 

 

 

 

 

 

1,490

 

 

 

2,080

 

 

 

16,746

 

 

 

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

 

 

76,245

 

 

 

 

 

 

 

 

 

934

 

 

 

77,179

 

 

 

7,000

 

Tower Hill Prime

   Insurance Company

   (Tower Hill)

 

National Programs

 

July 1, 2018

 

 

20,300

 

 

 

 

 

 

 

 

 

1,188

 

 

 

21,488

 

 

 

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

 

Rodman Insurance

   Agency, Inc. (Rodman)

 

Retail

 

November 1, 2018

 

 

31,121

 

 

 

 

 

 

261

 

 

 

3,720

 

 

 

35,102

 

 

 

9,850

 

The Hays Group,

   Inc. et al (Hays)

 

Retail

 

November 16, 2018

 

 

605,000

 

 

 

100,000

 

 

 

 

 

 

19,600

 

 

 

724,600

 

 

 

25,000

 

Dealer Associates,

   Inc. (Dealer)

 

Retail

 

December 1, 2018

 

 

28,825

 

 

 

 

 

 

1,175

 

 

 

3,100

 

 

 

33,100

 

 

 

12,125

 

Other

 

Various

 

Various

 

 

30,293

 

 

 

 

 

 

1,367

 

 

 

5,896

 

 

 

37,556

 

 

 

12,998

 

Total

 

 

 

 

 

$

934,928

 

 

$

100,000

 

 

$

5,462

 

 

$

77,377

 

 

$

1,117,767

 

 

$

147,668

 

 

61


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 and adjustments made during the measurement period of the prior year acquisitions.

 

(in thousands)

 

Opus

 

 

Kerxton

 

 

ADG

 

 

Servco

 

 

Tower Hill

 

 

HSR

 

 

PDA

 

 

F&I

 

 

Rodman

 

 

Hays

 

Cash

 

$

 

 

$

 

 

$

 

 

$

8,188

 

 

$

 

 

$

3,114

 

 

$

(248

)

 

$

 

 

$

 

 

$

 

Other current assets

 

 

1,215

 

 

 

663

 

 

 

1,500

 

 

 

7,769

 

 

 

 

 

 

818

 

 

 

1,762

 

 

 

999

 

 

 

1,062

 

 

 

36,254

 

Fixed assets

 

 

11

 

 

 

10

 

 

 

67

 

 

 

179

 

 

$

 

 

$

124

 

 

$

310

 

 

$

34

 

 

$

45

 

 

$

4,936

 

Goodwill

 

 

16,414

 

 

 

12,423

 

 

 

35,769

 

 

 

54,429

 

 

 

 

 

 

18,737

 

 

 

16,547

 

 

 

36,423

 

 

 

26,572

 

 

 

456,217

 

Purchased customer

   accounts

 

 

5,008

 

 

 

4,712

 

 

 

9,751

 

 

 

16,442

 

 

 

21,468

 

 

 

5,516

 

 

 

7,700

 

 

 

16,611

 

 

 

10,129

 

 

 

218,600

 

Non-compete

   agreements

 

 

21

 

 

 

22

 

 

 

21

 

 

 

1

 

 

 

20

 

 

 

65

 

 

 

82

 

 

 

21

 

 

 

51

 

 

 

2,600

 

Other assets

 

 

315

 

 

 

419

 

 

 

467

 

 

 

1,478

 

 

 

 

 

 

21

 

 

 

6

 

 

 

383

 

 

 

542

 

 

 

13,977

 

Total assets

   acquired

 

 

22,984

 

 

 

18,249

 

 

 

47,575

 

 

 

88,486

 

 

 

21,488

 

 

 

28,395

 

 

 

26,159

 

 

 

54,471

 

 

 

38,401

 

 

 

732,584

 

Other current liabilities

 

 

 

 

 

(1,503

)

 

 

 

 

 

(11,307

)

 

 

 

 

 

(5,930

)

 

 

(1,093

)

 

 

 

 

 

(3,299

)

 

 

(7,984

)

Other liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(342

)

 

 

(223

)

 

 

 

 

 

 

 

 

 

Total liabilities

   assumed

 

 

 

 

 

(1,503

)

 

 

 

 

 

(11,307

)

 

 

 

 

 

(6,272

)

 

 

(1,316

)

 

 

 

 

 

(3,299

)

 

 

(7,984

)

Net assets acquired

 

$

22,984

 

 

$

16,746

 

 

$

47,575

 

 

$

77,179

 

 

$

21,488

 

 

$

22,123

 

 

$

24,843

 

 

$

54,471

 

 

$

35,102

 

 

$

724,600

 

 

(in thousands)

 

Dealer

 

 

Other

 

 

Total

 

Cash

 

$

 

 

$

 

 

$

11,054

 

Other current assets

 

 

552

 

 

 

323

 

 

 

52,917

 

Fixed assets

 

 

13

 

 

 

100

 

 

 

5,829

 

Goodwill

 

 

21,467

 

 

 

22,712

 

 

 

717,710

 

Purchased customer accounts

 

 

10,986

 

 

 

15,085

 

 

 

342,008

 

Non-compete agreements

 

 

21

 

 

 

297

 

 

 

3,222

 

Other assets

 

 

226

 

 

 

754

 

 

 

18,588

 

Total assets acquired

 

 

33,265

 

 

 

39,271

 

 

 

1,151,328

 

Other current liabilities

 

 

(165

)

 

 

(1,715

)

 

 

(32,996

)

Other liabilities

 

 

 

 

 

 

 

 

(565

)

Total liabilities assumed

 

 

(165

)

 

 

(1,715

)

 

 

(33,561

)

Net assets acquired

 

$

33,100

 

 

$

37,556

 

 

$

1,117,767

 

 

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

Goodwill of $717.7 million, which is net of any opening balance sheet adjustments within the allowable measurement period, was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $676.9 million, $18.7 million, $5.5 million and $16.5 million, respectively. Of the total goodwill of $717.7 million, the amount currently deductible for income tax purposes is $640.3 million and the remaining $77.4 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

62


Table of Contents

 

For the acquisitions completed during 2018, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues from the acquisitions completed through December 31, 2018 included in the Consolidated Statement of Income for the year ended December 31, 2018 were $82.4 million. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through December 31, 2018 included in the Consolidated Statement of Income for the year ended December 31, 2018 was $6.3 million. If the acquisitions had occurred as of the beginning of the respective periods, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.

 

(UNAUDITED)

 

Year Ended December 31,

 

(in thousands, except per share data)

 

2018

 

 

2017

 

Total revenues

 

$

2,259,812

 

 

$

2,193,169

 

Income before income taxes

 

$

504,664

 

 

$

503,927

 

Net income

 

$

375,670

 

 

$

447,796

 

Net income per share:

 

 

 

 

 

 

 

 

Basic

 

$

1.35

 

 

$

1.60

 

Diluted

 

$

1.33

 

 

$

1.57

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

270,971

 

 

 

272,580

 

Diluted

 

 

275,521

 

 

 

277,586

 

 

Acquisitions in 2017

During the year ended December 31, 2017, the Company acquired the assets and assumed certain liabilities of 11 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 12 months as permitted by ASC 805. Such adjustments are presented in the “Other” category within the following two tables.

For the year ended December 31, 2017, several adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $1.5 million, relating to the assumption of certain liabilities.

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

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Name

 

Business

segment

 

Effective

date of

acquisition

 

Cash

paid

 

 

Other

payable

 

 

Recorded

earn-out

payable

 

 

Net assets

acquired

 

 

Maximum

potential earn-

out payable

 

Other

 

Various

 

Various

 

$

41,471

 

 

$

11,708

 

 

$

6,921

 

 

$

60,100

 

 

$

27,451

 

Total

 

 

 

 

 

$

41,471

 

 

$

11,708

 

 

$

6,921

 

 

$

60,100

 

 

$

27,451

 

 

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

 

(in thousands)

 

Total

 

Other current assets

 

$

601

 

Fixed assets

 

 

69

 

Goodwill

 

 

42,172

 

Purchased customer accounts

 

 

18,738

 

Non-compete agreements

 

 

721

 

Total assets acquired

 

 

62,301

 

Other current liabilities

 

 

(1,512

)

Deferred income tax, net

 

 

(689

)

Total liabilities assumed

 

 

(2,201

)

Net assets acquired

 

$

60,100

 

 

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 $42.2 million was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $33.1 million, $7.2 million, $1.2 million and $0.7 million, respectively. Of the total goodwill of $42.2 million, $35.3 million is currently deductible for income tax purposes. The remaining $6.9 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

63


Table of Contents

 

For the acquisitions completed during 2017, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues from the acquisitions completed through December 31, 2017 included in the Consolidated Statement of Income for the year ended December 31, 2017 were $7.8 million. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through December 31, 2017 included in the Consolidated Statement of Income for the year ended December 31, 2017 was $2.4 million. If the acquisitions had occurred as of the beginning of the respective periods, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.

 

(UNAUDITED)

 

Year Ended December 31,

 

(in thousands, except per share data)

 

2017

 

 

2016

 

Total revenues

 

$

1,891,701

 

 

$

1,784,776

 

Income before income taxes

 

$

453,397

 

 

$

429,490

 

Net income

 

$

401,908

 

 

$

261,133

 

Net income per share:

 

 

 

 

 

 

 

 

Basic

 

$

1.44

 

 

$

0.93

 

Diluted

 

$

1.41

 

 

$

0.92

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

272,580

 

 

 

272,278

 

Diluted

 

 

277,586

 

 

 

275,608

 

 

 

As of December 31, 2019, the maximum future contingency payments related to all acquisitions totaled $328.7 million, all of which relates to acquisitions consummated subsequent to January 1, 2009.

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

As of December 31, 2019, the fair values of the estimated acquisition earn-out payables were re-evaluated and measured at fair value on a recurring basis using unobservable inputs (Level 3) as defined in ASC 820-Fair Value Measurement. The resulting additions, payments and net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the years ended December 31, 2019, 2018 and 2017 were as follows:

 

 

 

Year Ended December 31,

 

(in thousands)

 

2019

 

 

2018

 

 

2017

 

Balance as of the beginning of the period

 

$

89,924

 

 

$

36,175

 

 

$

63,821

 

Additions to estimated acquisition earn-out payables from new acquisitions

 

 

82,872

 

 

 

77,377

 

 

 

6,920

 

Payments for estimated acquisition earn-out payables

 

 

(9,917

)

 

 

(26,597

)

 

 

(43,766

)

Subtotal

 

 

162,879

 

 

 

86,955

 

 

 

26,975

 

Net change in earnings from estimated acquisition earn-out

   payables:

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value on estimated acquisition earn-out

   payables

 

 

(7,298

)

 

 

603

 

 

 

6,874

 

Interest expense accretion

 

 

5,932

 

 

 

2,366

 

 

 

2,326

 

Net change in earnings from estimated acquisition earn-

   out payables

 

 

(1,366

)

 

 

2,969

 

 

 

9,200

 

Balance as of December 31,

 

$

161,513

 

 

$

89,924

 

 

$

36,175

 

 

Of the $161.5 million of estimated acquisition earn-out payables as of December 31, 2019, $17.9 million was recorded as accounts payable, and $143.6 million was recorded as another non-current liability. Included within additions to estimated acquisition earn-out payables are any adjustments to opening balance sheet items prior to the one-year anniversary date of the acquisition and may therefore differ from previously reported amounts. Of the $89.9 million of estimated acquisition earn-out payables as of December 31, 2018, $21.1 million was recorded as accounts payable, and $68.8 million was recorded as other non-current liabilities. Of the $36.2 million of estimated acquisition earn-out payables as of December 31, 2017, $25.1 million was recorded as accounts payable, and $11.1 million was recorded as other non-current liabilities.

64


Table of Contents

 

NOTE 4  Goodwill

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

 

(in thousands)

 

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

 

 

676,902

 

 

 

18,737

 

 

 

5,524

 

 

 

16,547

 

 

 

717,710

 

Goodwill disposed of relating to sales of businesses

 

 

 

 

 

(1,003

)

 

 

 

 

 

 

 

 

(1,003

)

Balance as of December 31, 2018

 

$

2,063,150

 

 

$

926,206

 

 

$

291,622

 

 

$

151,808

 

 

$

3,432,786

 

Goodwill of acquired businesses

 

 

302,640

 

 

 

74

 

 

 

6,479

 

 

 

19,353

 

 

 

328,546

 

Goodwill disposed of relating to sales of businesses

 

 

(14,499

)

 

 

(739

)

 

 

 

 

 

 

 

 

(15,238

)

Balance as of December 31, 2019

 

$

2,351,291

 

 

$

925,541

 

 

$

298,101

 

 

$

171,161

 

 

$

3,746,094

 

 

NOTE 5 Amortizable Intangible Assets

Amortizable intangible assets at December 31, 2019 and 2018 consisted of the following:

 

 

 

December 31, 2019

 

 

December 31, 2018

 

(in thousands)

 

Gross

carrying

value

 

 

Accumulated

amortization

 

 

Net

carrying

value

 

 

Weighted

average

life in

years(1)

 

 

Gross

carrying

value

 

 

Accumulated

amortization

 

 

Net

carrying

value

 

 

Weighted

average

life in

years(1)

 

Purchased customer accounts

 

$

1,925,326

 

 

$

(1,011,574

)

 

$

913,752

 

 

 

15.0

 

 

$

1,804,404

 

 

$

(909,415

)

 

$

894,989

 

 

 

14.9

 

Non-compete agreements

 

 

33,881

 

 

 

(30,865

)

 

 

3,016

 

 

 

4.6

 

 

 

33,469

 

 

 

(29,651

)

 

 

3,818

 

 

 

4.5

 

Total

 

$

1,959,207

 

 

$

(1,042,439

)

 

$

916,768

 

 

 

 

 

 

$

1,837,873

 

 

$

(939,066

)

 

$

898,807

 

 

 

 

 

 

(1)

Weighted average life calculated as of the date of acquisition.

Amortization expense for amortizable intangible assets for the years ending December 31, 2020, 2021, 2022, 2023 and 2024 is estimated to be $101.2 million, $97.6 million, $93.1 million, $86.2 million and $82.3 million, respectively.

NOTE 6 Investments

At December 31, 2019, 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 Municipalities

 

$

26,487

 

 

$

174

 

 

$

(39

)

 

$

26,622

 

Corporate debt

 

 

5,324

 

 

 

68

 

 

 

(8

)

 

 

5,384

 

Total

 

$

31,811

 

 

$

242

 

 

$

(47

)

 

$

32,006

 

 

At December 31, 2019, the Company held $26.6 million in fixed income securities composed of U.S Treasury securities, securities issued by U.S. Government agencies and municipalities, and $5.4 million issued by corporations with investment-grade ratings. Of the total, $4.6 million is classified as short-term investments on the Consolidated Balance Sheets as maturities are less than one year in duration. Additionally, the Company holds $7.7 million in short-term investments, which are related to time deposits held with various financial institutions.

For securities in a loss position, the following table shows the investments’ gross unrealized loss and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2019:

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

(in thousands)

 

Fair value

 

 

Unrealized

losses

 

 

Fair value

 

 

Unrealized

losses

 

 

Fair value

 

 

Unrealized

losses

 

U.S. Treasury securities, obligations of U.S. Government

   agencies and Municipalities

 

$

 

 

$

 

 

$

7,053

 

 

$

(39

)

 

$

7,053

 

 

$

(39

)

Corporate debt

 

 

 

 

 

 

 

 

998

 

 

 

(8

)

 

 

998

 

 

 

(8

)

Total

 

$

 

 

$

 

 

$

8,051

 

 

$

(47

)

 

$

8,051

 

 

$

(47

)

 

The unrealized losses from corporate issuers were caused by interest rate increases. At December 31, 2019, the Company had 10 securities in an unrealized loss position. The corporate securities are highly rated securities with no indicators of potential impairment. Based upon the

65


Table of Contents

 

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, 2019.

At December 31, 2018, 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 Municipalities

 

$

21,729

 

 

$

7

 

 

$

(222

)

 

$

21,514

 

Corporate debt

 

 

623

 

 

 

 

 

 

 

 

 

623

 

Total

 

$

22,352

 

 

$

7

 

 

$

(222

)

 

$

22,137

 

 

The following table shows the investments’ gross unrealized loss and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2018:

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

(in thousands)

 

Fair value

 

 

Unrealized

losses

 

 

Fair value

 

 

Unrealized

losses

 

 

Fair value

 

 

Unrealized

losses

 

U.S. Treasury securities, obligations of

   U.S. Government agencies and Municipalities

 

$

5,866

 

 

$

(6

)

 

$

12,634

 

 

$

(216

)

 

$

18,500

 

 

$

(222

)

Corporate debt

 

 

457

 

 

 

 

 

 

100

 

 

 

 

 

 

557

 

 

 

 

Total

 

$

6,323

 

 

$

(6

)

 

$

12,734

 

 

$

(216

)

 

$

19,057

 

 

$

(222

)

 

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, 2018, the Company had 20 securities in an unrealized loss position. The contractual cash flows of the U.S. Treasury Securities and obligations of the U.S. Government agencies investments are either guaranteed by the U.S. Government or an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. The corporate securities are highly rated securities with no indicators of potential impairment. Based upon the ability and intent of the Company to hold these investments until recovery of fair value, which may be maturity, the bonds were not considered to be other-than-temporarily impaired at December 31, 2018.

The amortized cost and estimated fair value of the fixed maturity securities at December 31, 2019 by contractual maturity are set forth below:

 

(in thousands)

 

Amortized cost

 

 

Fair value

 

Years to maturity:

 

 

 

 

 

 

 

 

Due in one year or less

 

$

4,616

 

 

$

4,628

 

Due after one year through five years

 

 

27,195

 

 

 

27,378

 

Due after five years through ten years

 

 

 

 

 

 

Total

 

$

31,811

 

 

$

32,006

 

 

The amortized cost and estimated fair value of the fixed maturity securities at December 31, 2018 by contractual maturity are set forth below:

 

(in thousands)

 

Amortized cost

 

 

Fair value

 

Years to maturity:

 

 

 

 

 

 

 

 

Due in one year or less

 

$

4,768

 

 

$

4,743

 

Due after one year through five years

 

 

17,584

 

 

 

17,394

 

Due after five years through ten years

 

 

 

 

 

 

Total

 

$

22,352

 

 

$

22,137

 

 

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

Proceeds from the sales and maturity of the Company’s investment in fixed maturity securities were $5.8 million. This along with maturing time deposits yielded total cash proceeds from the sale of investments of $8.5 million in the period of January 1, 2019 to December 31, 2019. These proceeds, along with other sources of cash were used to purchase an additional $17.5 million of fixed maturity securities and to fund certain general corporate purposes. The gains and losses realized on those sales for the period from January 1, 2019 to December 31, 2019 were insignificant.

66


Table of Contents

 

Proceeds from the sales and maturity of the Company’s investment in fixed maturity securities were $17.1 million for the year ended December 31, 2018. This along with maturing time deposits yielded total cash proceeds from the sale of investments of $17.9 million in the period of January 1, 2018 to December 31, 2018. These proceeds were used to purchase an additional $9.3 million of fixed maturity securities and to fund certain general corporate purposes. The gains and losses realized on those sales for the period from January 1, 2018 to December 31, 2018 were insignificant.

Realized gains and losses are reported on the Consolidated Statement of Income, with the cost of securities sold determined on a specific identification basis.

At December 31, 2019, investments with a fair value of approximately $4.1 million were on deposit with state insurance departments to satisfy regulatory requirements.

NOTE 7  Fixed Assets

Fixed assets at December 31 consisted of the following:

 

(in thousands)

 

2019

 

 

2018

 

Furniture, fixtures and equipment

 

$

231,005

 

 

$

213,928

 

Leasehold improvements

 

 

42,485

 

 

 

39,194

 

Construction in progress

 

 

38,035

 

 

 

7,568

 

Land, buildings and improvements

 

 

8,400

 

 

 

8,185

 

Total cost

 

 

319,925

 

 

 

268,875

 

Less accumulated depreciation and amortization

 

 

(171,298

)

 

 

(168,480

)

Total

 

$

148,627

 

 

$

100,395

 

 

Depreciation and amortization expense for fixed assets amounted to $23.4 million in 2019, $22.8 million in 2018 and $22.7 million in 2017.

Construction in progress reflects expenditures related to the construction of the new headquarters in Daytona Beach, Florida.

NOTE 8 Accrued Expenses and Other Current Liabilities

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

 

(in thousands)

 

2019

 

 

2018

 

Accrued incentive compensation

 

$

144,475

 

 

$

120,228

 

Accrued compensation and benefits

 

 

60,260

 

 

 

51,731

 

Lease liability(1)

 

 

43,415

 

 

 

 

Deferred revenue

 

 

41,180

 

 

 

37,018

 

Reserve for policy cancellations

 

 

18,353

 

 

 

15,197

 

Accrued interest

 

 

10,984

 

 

 

7,669

 

Accrued rent and vendor expenses(1)

 

 

7,422

 

 

 

34,110

 

Other

 

 

11,628

 

 

 

13,357

 

Total

 

$

337,717

 

 

$

279,310

 

 

(1)

The Lease liability is the current portion of the Operating lease liabilities as reflected in the Consolidated Balance Sheets as of December 31, 2019. The accrued rent previously deferred under Topic 840 was reclassified to Operating lease assets upon the adoption of Topic 842 as described in Note 1 “Summary of Significant Accounting Policies”.  

67


Table of Contents

 

NOTE 9 Long-Term Debt

Long-term debt at December 31, 2019 and 2018 consisted of the following:

 

(in thousands)

 

December 31,

2019

 

 

December 31,

2018

 

Current portion of long-term debt:

 

 

 

 

 

 

 

 

Current portion of 5-year term loan facility expires 2022

 

$

40,000

 

 

$

35,000

 

Current portion of 5-year term loan credit agreement

   expires 2023

 

 

15,000

 

 

 

15,000

 

Total current portion of long-term debt

 

 

55,000

 

 

 

50,000

 

Long-term debt:

 

 

 

 

 

 

 

 

Note agreements:

 

 

 

 

 

 

 

 

4.200% Senior Notes, semi-annual interest payments,

   balloon due 2024

 

 

499,259

 

 

 

499,101

 

4.500% Senior Notes, semi-annual interest payments,

   balloon due 2029

 

 

349,484

 

 

 

 

Total notes

 

 

848,743

 

 

 

499,101

 

Credit agreements:

 

 

 

 

 

 

 

 

5-year term loan facility, periodic interest and principal

   payments, LIBOR plus up to 1.750%, expires

   June 28, 2022

 

 

290,000

 

 

 

330,000

 

5-year revolving loan facility, periodic interest payments,

   currently LIBOR plus up to 1.500%, plus commitment

   fees up to 0.250%, expires June 28, 2022

 

 

100,000

 

 

 

350,000

 

5-year term loan facility, periodic interest and principal

   payments, LIBOR plus up to 1.750%, expires

   December 21, 2023

 

 

270,000

 

 

 

285,000

 

Total credit agreements

 

 

660,000

 

 

 

965,000

 

Debt issuance costs (contra)

 

 

(8,400

)

 

 

(7,111

)

Total long-term debt less unamortized discount and

   debt issuance costs

 

 

1,500,343

 

 

 

1,456,990

 

Current portion of long-term debt

 

 

55,000

 

 

 

50,000

 

Total debt

 

$

1,555,343

 

 

$

1,506,990

 

 

On June 28, 2017, the Company entered into an amended and restated credit agreement (the “Amended and Restated Credit Agreement”) with the lenders named therein, JPMorgan Chase Bank, N.A. as administrative agent and certain other banks as co-syndication agents and co-documentation agents. The Amended and Restated Credit Agreement amended and restated the credit agreement dated April 17, 2014, among such parties (the “Original Credit Agreement”). The Amended and Restated Credit Agreement extends the applicable maturity date of the existing revolving credit facility (the “Revolving Credit Facility”) of $800.0 million to June 28, 2022 and re-evidences unsecured term loans at $400.0 million while also extending the applicable maturity date to June 28, 2022. The quarterly term loan principal amortization schedule was reset. At the time of the execution of the Amended and Restated Credit Agreement, $67.5 million of principal from the original unsecured term loans was repaid using operating cash balances, and the Company added an additional $2.8 million in debt issuance costs related to the Revolving Credit Facility to the Condensed Consolidated Balance Sheets. The Company also expensed to the Condensed Consolidated Statements of Income $0.2 million of debt issuance costs related to the Original Credit Agreement due to certain lenders exiting prior to execution of the Amended and Restated Credit Agreement. The Company also carried forward $1.6 million on the Condensed Consolidated Balance Sheets the remaining unamortized portion of the Original Credit Agreement debt issuance costs, which will be amortized over the term of the Amended and Restated Credit Agreement. On December 31, 2019, the Company made a scheduled principal payment of $10.0 million per the terms of the Amended and Restated Credit Agreement. As of December 31, 2019, there was an outstanding debt balance issued under the term loan of the Amended and Restated Credit Agreement of $330.0 million and $100.0 million borrowings outstanding against the Revolving Credit Facility. As of December 31, 2018, there was an outstanding debt balance issued under the term loan of the Amended and Restated Credit Agreement of $365.0 million with $350.0 million in borrowings outstanding against the Revolving Credit Facility. The Company had borrowed approximately $600.0 million under its Revolving Credit Facility on November 15, 2018 in connection with the closing of the acquisition of certain assets and assumption of certain liabilities of The Hays Group, Inc. and certain of its affiliates. Per the terms of the Amended and Restated Credit Agreement, a scheduled principal payment of $10.0 million is due March 31, 2020.

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

68


Table of Contents

 

excluded an underwriting fee discount. The net proceeds received from the issuance were used to repay the outstanding balance of $475.0 million on the Revolving Credit Facility and for other general corporate purposes. As of December 31, 2019 and December 31, 2018, there was an outstanding debt balance of $500.0 million exclusive of the associated discount balance.

On December 21, 2018, the Company entered into a term loan credit agreement (the “Term Loan Credit Agreement”) with the lenders named therein, Wells Fargo Bank, National Association, as administrative agent, and certain other banks as co-syndication agents and as joint lead arrangers and joint bookrunners. The Term Loan Credit Agreement provides for an unsecured term loan in the initial amount of $300.0 million, which may, subject to lenders’ discretion, potentially be increased up to an aggregate amount of $450.0 million (the “Term Loan”). The Term Loan is repayable over the five-year term from the effective date of the Term Loan Credit Agreement, which was December 21, 2018. Based on the Company’s net debt leverage ratio or a non-credit enhanced senior unsecured long-term debt rating as determined by Moody’s Investor Service and Standard & Poor’s Rating Service, the rates of interest charged on the term loan are 1.000% to 1.750%, above the adjusted 1-Month LIBOR rate. On December 21, 2018, the Company borrowed $300.0 million under the Term Loan Credit Agreement and used $250.0 million of the proceeds to reduce indebtedness under the Revolving Credit Facility. As of December 31, 2019, there was an outstanding debt balance issued under the Term Loan of $285.0 million. As of December 31, 2018, there was an outstanding debt balance issued under the Term Loan of $300.0 million. Per the terms of the Term Loan Credit Agreement, a scheduled principal payment of $3.8 million is due March 31, 2020.

On March 11, 2019, the Company completed the issuance of $350.0 million aggregate principal amount of the Company's 4.500% Senior Notes due 2029. The Senior Notes were given investment grade ratings of BBB-/Baa3 with a stable outlook. The notes are subject to certain covenant restrictions, 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 a portion of the outstanding balance of $350.0 million on the Revolving Credit Facility, utilized in connection with the financing related to our acquisition of Hays and for other general corporate purposes. As of December 31, 2019, there was an outstanding debt balance of $350.0 million exclusive of the associated discount balance.

The Amended and Restated Credit Agreement and Term Loan Credit Agreement require the Company to maintain certain financial ratios and comply with certain other covenants. The Company was in compliance with all such covenants as of December 31, 2019 and December 31, 2018.

The 30-day Adjusted LIBOR Rate for the term loan and Revolving Credit Facility of the Amended and Restated Credit Agreement and Term Loan Credit Agreement as of December 31, 2019 was 1.813%, 1.750% and 1.813%, respectively.

Interest paid in 2019, 2018 and 2017 was $58.3 million, $38.0 million, and $36.2 million, respectively.

At December 31, 2019, maturities of long-term debt were $55.0 million in 2020, $70.0 million in 2021, $380.0 million in 2022, $210.0 million in 2023, $500.0 million in 2024 and $350.0 million in 2029.

NOTE 10 Income Taxes

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”). The Tax Reform Act makes changes to the U.S. tax code that affected our income tax rate in 2017. The Tax Reform Act reduces the U.S. federal corporate income tax rate from 35.0% to 21.0% and requires companies to pay a one-time transition tax on certain unrepatriated earnings from foreign subsidiaries. The Tax Reform Act also establishes new tax laws that became effective January 1, 2018.

ASC 740 requires a company to record the effects of a tax law change in the period of enactment, however, shortly after the enactment of the Tax Reform Act, the SEC staff issued SAB 118, which allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.

For 2017, we made a reasonable estimate of the impact of the Tax Reform Act and recorded a one-time credit in our 2017 income tax expense of  $120.9 million, which reflects an estimated reduction in our deferred income tax liabilities of $124.2 million as a result of the maximum federal rate decreasing to 21.0% from 35.0%, which was partially offset by an estimated increase in income tax payable in the amount of $3.3 million as a result of the transition tax on cash and cash equivalent balances related to untaxed accumulated earnings associated with our international operations. During 2018, we made a credit adjustment to the transition tax on untaxed international operations in the amount of $1.6 million. This adjustment was a reduction of income tax expense for 2018 as a result of updated calculations based on the Company’s tax filings for the 2017 year end. As of December 31, 2019, management does not expect any further changes to the amounts previously recorded and adjusted under SAB 118.

69


Table of Contents

 

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

 

(in thousands)

 

2019

 

 

2018

 

 

2017

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

85,507

 

 

$

77,694

 

 

$

129,954

 

State

 

 

28,905

 

 

 

25,096

 

 

 

21,392

 

Foreign

 

 

620

 

 

 

409

 

 

 

929

 

Total current provision

 

 

115,032

 

 

 

103,199

 

 

 

152,275

 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

14,994

 

 

 

8,483

 

 

 

18,999

 

State

 

 

(2,587

)

 

 

6,519

 

 

 

2,984

 

Foreign

 

 

(24

)

 

 

6

 

 

 

 

Tax Reform Act deferred tax revaluation

 

 

 

 

 

 

 

 

(124,166

)

Total deferred provision

 

 

12,383

 

 

 

15,008

 

 

 

(102,183

)

Total tax provision

 

$

127,415

 

 

$

118,207

 

 

$

50,092

 

 

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:

 

 

 

2019

 

 

2018

 

 

2016

 

Federal statutory tax rate

 

 

21.0

%

 

 

21.0

%

 

 

35.0

%

State income taxes, net of federal income tax benefit

 

 

3.8

 

 

 

5.7

 

 

 

3.8

 

Non-deductible employee stock purchase plan expense

 

 

0.3

 

 

 

0.2

 

 

 

0.3

 

Non-deductible meals and entertainment

 

 

0.3

 

 

 

0.3

 

 

 

0.3

 

Non-deductible officers’ compensation

 

 

0.2

 

 

 

0.3

 

 

 

 

Tax Reform Act deferred tax revaluation and transition tax

   impact

 

 

 

 

 

(0.3

)

 

 

(26.9

)

Other, net

 

 

(1.4

)

 

 

(1.6

)

 

 

(1.4

)

Effective tax rate

 

 

24.2

%

 

 

25.6

%

 

 

11.1

%

 

 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the corresponding amounts used for income tax reporting purposes.

Significant components of the Company’s net deferred tax liabilities as of December 31 are as follows:

 

(in thousands)

 

2019

 

 

2018

 

Non-current deferred tax liabilities:

 

 

 

 

 

 

 

 

Intangible assets

 

$

360,660

 

 

$

334,200

 

Fixed assets

 

 

10,325

 

 

 

4,929

 

ASC 842 lease liabilities

 

 

46,188

 

 

 

 

Impact of adoption of ASC 606 revenue recognition

 

 

24,687

 

 

 

29,729

 

Net unrealized holding (loss)/gain on available-for-sale

   securities

 

 

36

 

 

 

(78

)

Total non-current deferred tax liabilities

 

 

441,896

 

 

 

368,780

 

Non-current deferred tax assets:

 

 

 

 

 

 

 

 

Deferred compensation

 

 

52,566

 

 

 

41,293

 

Accruals and reserves

 

 

7,743

 

 

 

10,455

 

ASC 842 ROU asset

 

 

52,185

 

 

 

 

Net operating loss carryforwards and 163(j) disallowed carryforwards

 

 

2,377

 

 

 

2,196

 

Valuation allowance for deferred tax assets

 

 

(1,252

)

 

 

(896

)

Total non-current deferred tax assets

 

 

113,619

 

 

 

53,048

 

Net non-current deferred tax liability

 

$

328,277

 

 

$

315,732

 

 

On adoption of the new Lease Standard ASC 842, the Company has recorded the 2019 lease liabilities of $46.2 million and ROU assets total $52.2 million. In 2018, the accruals and reserves total of $10.5 million includes the net deferred tax assets associated with accrued leases of $3.9 million.

70


Table of Contents

 

Income taxes paid in 2019, 2018 and 2017 were $110.0 million, $110.6 million and $152.0 million, respectively.

At December 31, 2019, the Company had net operating loss carryforwards of $0.1 million and $39.9 million for federal and state income tax reporting purposes, respectively, portions of which expire in the years 2020 through indefinite. The federal carryforward is derived from insurance operations acquired by the Company in 2001. The state carryforward amount is derived from the operating results of certain subsidiaries and from the 2013 stock acquisition of Beecher Carlson Holdings, Inc.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

(in thousands)

 

2019

 

 

2018

 

 

2017

 

Unrecognized tax benefits balance at January 1

 

$

1,639

 

 

$

1,694

 

 

$

750

 

Gross increases for tax positions of prior years

 

 

778

 

 

 

594

 

 

 

1,070

 

Gross decreases for tax positions of prior years

 

 

(791

)

 

 

(5

)

 

 

 

Settlements

 

 

(499

)

 

 

(644

)

 

 

(126

)

Unrecognized tax benefits balance at December 31

 

$

1,127

 

 

$

1,639

 

 

$

1,694

 

 

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2019, 2018 and 2017 the Company had $217,635, $197,205 and $228,608 of accrued interest and penalties related to uncertain tax positions, respectively.

The total amount of unrecognized tax benefits that would affect the Company’s effective tax rate if recognized was $1.1 million as of December 31, 2019, $1.6 million as of December 31, 2018 and $1.7 million as of December 31, 2017. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.

As a result of a 2006 Internal Revenue Service (“IRS”) audit, the Company agreed to accrue at each December 31, for tax purposes only, a known amount of profit-sharing contingent commissions represented by the actual amount of profit-sharing contingent commissions received in the first quarter of the related year, with a true-up adjustment to the actual amount received by the end of the following March. Since this method for tax purposes differed from the method used for book purposes, it resulted in a current deferred tax asset as of December 31, 2017. As of January 1, 2018, pursuant to ASU 606, Revenue Recognition, the deferred tax asset was removed and was included in the Company’s overall beginning retained earnings adjustment per ASC 606. The Company will now follow book treatment for accrued profit-sharing contingent commissions.

The Company is subject to taxation in the United States and various state jurisdictions. The Company is also subject to taxation in the United Kingdom and Canada. In the United States, federal returns for fiscal years 2016 through 2019 remain open and subject to examination by the IRS. The Company files and remits state income taxes in various states where the Company has determined it is required to file state income taxes. The Company’s filings with those states remain open for audit for the fiscal years 2015 through 2019. In the United Kingdom, the Company’s filings remain open for audit for the fiscal years 2018 and 2019. In Canada, the Company’s filings remain open for audit for the fiscal years 2016 through 2019.

During 2017, the Company settled the previously disclosed IRS income tax audit of The Wright Insurance Group for the short period ended May 1, 2014. Pursuant to the agreement in which the Company acquired The Wright Insurance Group, the Company was fully indemnified for all audit-related assessments.

During 2018, the Company settled the previously disclosed State of Massachusetts income tax audit for the fiscal year 2013 through 2014.

During 2019, the Company settled the previously disclosed State of Colorado income tax audit for the fiscal years 2013-2016, the State of Kansas income tax audit for the fiscal years 2014-2016, and the State of New York income tax audit for the fiscal years 2015-2017. In addition, the Company is currently under audit in the states of California, Illinois, and Massachusetts for the fiscal years 2015 through 2017.

In general, it is our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations.

NOTE 11  Employee Savings Plan

The Company has an Employee Savings Plan (401(k)) in which substantially all employees with more than 30 days of service are eligible to participate. Under this plan, the Company makes matching contributions of up to 4.0% of each participant’s annual compensation. Prior to 2014, the Company’s matching contribution was up to 2.5% of each participant’s annual compensation with an additional discretionary profit-sharing contribution each year, which equaled 1.5% of each eligible employee’s compensation. The Company’s contribution expense to the plan totaled $22.8 million in 2019, $22.8 million in 2018 and $19.6 million in 2017.

NOTE 12 Stock-Based Compensation

Performance Stock Plan

In 1996, the Company adopted and the shareholders approved a performance stock plan, under which until the suspension of the plan in 2010, up to 28,800,000 Performance Stock Plan (“PSP”) shares could be granted to key employees contingent on the employees’ future years of

71


Table of Contents

 

service with the Company and other performance-based criteria established by the Compensation Committee of the Company’s Board of Directors. Before participants may take full title to Performance Stock, two vesting conditions must be met. Of the grants currently outstanding, specified portions satisfied the first condition for vesting based upon 20% incremental increases in the 20-trading-day average stock price of Brown & Brown’s common stock from the price on the business day prior to date of grant. Performance Stock that has satisfied the first vesting condition is considered “awarded shares.” Awarded shares are included as issued and outstanding common stock shares and are included in the calculation of basic and diluted net income per share. Dividends are paid on awarded shares and participants may exercise voting privileges on such shares. Awarded shares satisfy the second condition for vesting on the earlier of a participant’s: (i) 15 years of continuous employment with Brown & Brown from the date shares are granted to the participants (or, in the case of the July 2009 grant to Powell Brown, 20 years), (ii) attainment of age 64 (on a prorated basis corresponding to the number of years since the date of grant), or (iii) death or disability. On April 28, 2010, the PSP was suspended and any remaining authorized, but unissued shares, as well as any shares forfeited in the future, will be reserved for issuance under the 2010 Stock Incentive Plan (the “2010 SIP”).

At December 31, 2019, 10,239,624 shares had been granted, net of forfeitures, under the PSP. As of December 31, 2019, 1,051,292 shares had met the first condition of vesting and had been awarded, and 9,188,332 shares had satisfied both conditions of vesting and had been distributed to participants. Of the shares that have not vested as of December 31, 2019, the initial stock prices ranged from $8.30 to $12.84.

The Company uses a path-dependent lattice model to estimate the fair value of PSP grants on the grant date.

A summary of PSP activity for the years ended December 31, 2019, 2018 and 2017 is as follows:

 

 

 

Weighted-

average grant

date fair value

 

 

Granted

shares

 

 

Awarded

shares

 

 

Shares not

yet awarded

 

Outstanding at January 1, 2017

 

$

5.11

 

 

 

2,006,550

 

 

 

2,006,550

 

 

 

 

Granted

 

$

 

 

 

 

 

 

 

 

 

 

Awarded

 

$

 

 

 

 

 

 

 

 

 

 

Vested

 

$

4.81

 

 

 

(277,602

)

 

 

(277,602

)

 

 

 

Forfeited

 

$

5.24

 

 

 

(34,472

)

 

 

(34,472

)

 

 

 

Outstanding at December 31, 2017

 

$

5.16

 

 

 

1,694,476

 

 

 

1,694,476

 

 

 

 

Granted

 

$

 

 

 

 

 

 

 

 

 

 

Awarded

 

$

 

 

 

 

 

 

 

 

 

 

Vested

 

$

5.53

 

 

 

(453,860

)

 

 

(453,860

)

 

 

 

Forfeited

 

$

4.92

 

 

 

(44,524

)

 

 

(44,524

)

 

 

 

Outstanding at December 31, 2018

 

$

5.03

 

 

 

1,196,092

 

 

 

1,196,092

 

 

 

 

Granted

 

$

 

 

 

 

 

 

 

 

 

 

Awarded

 

$

 

 

 

 

 

 

 

 

 

 

Vested

 

$

5.29

 

 

 

(115,040

)

 

 

(115,040

)

 

 

 

Forfeited

 

$

4.74

 

 

 

(29,760

)

 

 

(29,760

)

 

 

 

Outstanding at December 31, 2019

 

$

5.00

 

 

 

1,051,292

 

 

 

1,051,292

 

 

 

 

 

The total fair value of PSP grants that vested during each of the years ended December 31, 2019, 2018 and 2017 was $3.5 million, $11.9 million and $6.3 million, respectively.

Stock Incentive Plans

On April 28, 2010, the shareholders of the Company, Inc. approved the 2010 Stock Incentive Plan (“2010 SIP”), which was suspended on May 1, 2019. On May 1, 2019, the shareholders of the Company, Inc. approved the 2019 Stock Incentive Plan (“2019 SIP”) that provides for the granting of restricted stock, restricted stock units, stock options, stock appreciation rights, and other stock-based awards to employees and directors contingent on performance-based and/or time-based criteria established by the Compensation Committee of the Company’s Board of Directors. In addition, the 2019 SIP provides for a limited delegation of authority of the Company’s Chief Executive Officer to grant awards to individuals who are not subject to Section 16 of the Securities Exchange Act of 1934. The principal purpose of the 2019 SIP is to attract, incentivize and retain key employees by offering those persons an opportunity to acquire or increase a direct proprietary interest in the Company’s operations and future success. The number of shares of stock reserved for issuance under the 2019 SIP is 2,283,475 shares, plus any shares that are authorized for issuance under the 2010 SIP (described below), and not already subject to grants under the 2010 SIP, and that were outstanding as of May 1, 2019, the date of suspension of the 2010 SIP, together with PSP shares, 2010 SIP shares and 2019 SIP shares forfeited after that date. As of May 1, 2019, 6,957,897 shares were available for issuance under the 2010 SIP, which were then transferred to the 2019 SIP.

The Company has granted stock to our employees in the form of Restricted Stock Awards and Performance Stock Awards under the 2010 SIP and 2019 SIP. To date, a substantial majority of stock grants to employees under these plans vest in five to ten years. The Performance Stock

72


Table of Contents

 

Awards are subject to the achievement of certain performance criteria by grantees, which may include growth in a defined book of business, Organic Revenue growth and operating profit growth of a profit center, Organic Revenue growth of the Company and consolidated diluted net income per share growth at certain levels of the Company. The performance measurement period ranges from three to five years. Beginning in 2016, certain Performance Stock Awards have a payout range between 0% to 200% depending on the achievement against the stated performance target. Prior to 2016, the majority of the grants had a binary performance measurement criteria that only allowed for 0% or 100% payout.

Non-employee members of the Board of Directors received shares annually issued pursuant to the 2010 SIP as part of their annual compensation. A total of 22,700 shares were issued in January 2017, 26,620 shares were issued in January 2018 and 27,885 shares were issued in April 2019.

The Company uses the closing stock price on the day prior to the grant date to determine the fair value of grants under the 2010 SIP and 2019 SIP and then applies an estimated forfeiture factor to estimate the annual expense. Additionally, the Company uses the path-dependent lattice model to estimate the fair value of grants with PSP-type vesting conditions as of the grant date. SIP shares that satisfied the first vesting condition for PSP-type grants or the established performance criteria are considered awarded shares. Awarded shares are included as issued and outstanding common stock shares and are included in the calculation of basic and diluted net income per share.

A summary of 2010 SIP and 2019 SIP activity for the years ended December 31, 2019, 2018 and 2017 is as follows:

 

 

 

Weighted-

average grant

date fair value

 

 

Granted

shares

 

 

Awarded

shares

 

 

Shares not

yet awarded

 

 

Outstanding at January 1, 2017

 

$

14.98

 

 

 

12,256,112

 

 

 

4,802,588

 

 

 

7,453,524

 

 

Granted

 

$

20.82

 

 

 

1,392,912

 

 

 

241,334

 

 

 

1,151,578

 

(1)

Awarded

 

$

15.72

 

 

 

 

 

 

326,808

 

 

 

(326,808

)

 

Vested

 

$

12.61

 

 

 

(484,914

)

 

 

(484,914

)

 

 

 

 

Forfeited

 

$

14.89

 

 

 

(342,120

)

 

 

(76,212

)

 

 

(265,908

)

 

Outstanding at December 31, 2017

 

$

15.58

 

 

 

12,821,990

 

 

 

4,809,604

 

 

 

8,012,386

 

 

Granted

 

$

22.87

 

 

 

1,577,721

 

 

 

454,313

 

 

 

1,123,408

 

(2)

Awarded

 

$

15.89

 

 

 

 

 

 

2,489,905

 

 

 

(2,489,905

)

 

Vested

 

$

14.09

 

 

 

(933,916

)

 

 

(933,916

)

 

 

 

 

Forfeited

 

$

16.37

 

 

 

(2,363,420

)

 

 

(224,587

)

 

 

(2,138,833

)

 

Outstanding at December 31, 2018

 

$

16.69

 

 

 

11,102,375

 

 

 

6,595,319

 

 

 

4,507,056

 

 

Granted

 

$

28.53

 

 

 

1,812,047

 

 

 

797,778

 

 

 

1,014,269

 

(3)

Awarded

 

$

17.26

 

 

 

299,339

 

 

 

1,954,983

 

 

 

(1,655,644

)

 

Vested

 

$

14.29

 

 

 

(1,068,211

)

 

 

(1,068,211

)

 

 

 

 

Forfeited

 

$

19.09

 

 

 

(503,632

)

 

 

(209,293

)

 

 

(294,339

)

 

Outstanding at December 31, 2019

 

$

18.10

 

 

 

11,641,918

 

 

 

8,070,576

 

 

 

3,571,342

 

 

 

 

 

(1)

Of the 1,151,578 shares of performance-based restricted stock granted in 2017, the payout for 641,652 shares may be increased up to 200% of the target or decreased to zero, subject to the level of performance attained. The amount reflected in the table includes all restricted stock grants at a target payout of 100%.

 

(2)

Of the 1,123,408 shares of performance-based restricted stock granted in 2018, the payout for 576,886 shares may be increased up to 200% of the target or decreased to zero, subject to the level of performance attained. The amount reflected in the table includes all restricted stock grants at a target payout of 100%.

(3)

Of the 1,014,269 shares of performance-based restricted stock granted in 2019, the payout for 501,384 shares may be increased up to 200% of the target or decreased to zero, subject to the level of performance attained. The amount reflected in the table includes all restricted stock grants at a target payout of 100%.

 

The following table sets forth information as of December 31, 2019, 2018 and 2017, with respect to the number of time-based restricted shares granted and awarded, the number of performance-based restricted shares granted, and the number of performance-based restricted shares awarded under our Performance Stock Plan and 2010 Stock Incentive Plan:

 

Year

 

Time-based restricted

stock granted and

awarded

 

 

Performance-based

restricted

stock granted

 

 

Performance-based

restricted

stock awarded

 

2019

 

 

797,778

 

 

 

1,014,269

 

(1)

 

1,954,983

 

2018

 

 

454,313

 

 

 

1,123,408

 

(2)

 

2,489,905

 

2017

 

 

241,334

 

 

 

1,151,578

 

(3)

 

326,808

 

 

73


Table of Contents

 

(1)

Of the 1,014,269 shares of performance-based restricted stock granted in 2019, the payout for 501,384 shares may be increased up to 200% of the target or decreased to zero, subject to the level of performance attained. The amount reflected in the table includes all restricted stock grants at a target payout of 100%.

(2)

Of the 1,123,408 shares of performance-based restricted stock granted in 2018, the payout for 576,886 shares may be increased up to 200% of the target or decreased to zero, subject to the level of performance attained. The amount reflected in the table includes all restricted stock grants at a target payout of 100%.

 

(3)

Of the 1,151,578 shares of performance-based restricted stock granted in 2017, the payout for 641,652 shares may be increased up to 200% of the target or decreased to zero, subject to the level of performance attained. The amount reflected in the table includes all restricted stock grants at a target payout of 100%. 

At December 31, 2019, 9,515,603 shares were available for future grants under the 2019 SIP. This amount is calculated assuming the maximum payout for all restricted stock grants. 

Employee Stock Purchase Plan

The Company has a shareholder-approved Employee Stock Purchase Plan (“ESPP”) with a total of 34,000,000 authorized shares of which 6,340,598 were available for future subscriptions as of December 31, 2019. Employees of the Company who regularly work 20 hours or more per week are eligible to participate in the ESPP. Participants, through payroll deductions, may allot up to 10% of their compensation towards the purchase of a maximum of $25,000 worth of Company stock between August 1st of each year and the following July 31st (the “Subscription Period”) at a cost of 85% of the lower of the stock price as of the beginning or end of the Subscription Period.

The Company estimates the fair value of an ESPP share option as of the beginning of the Subscription Period as the sum of: (1) 15% of the quoted market price of the Company’s stock on the day prior to the beginning of the Subscription Period, and (2) 85% of the value of a one-year stock option on the Company stock using the Black-Scholes option-pricing model. The estimated fair value of an ESPP share option as of the Subscription Period beginning in August 2019 was $7.46. The fair values of an ESPP share option as of the Subscription Periods beginning in August 2018 and 2017, were $5.88 and $4.32, respectively.

For the ESPP plan years ended July 31, 2019, 2018 and 2017, the Company issued 976,303, 985,601 and 1,058,024 shares of common stock, respectively. These shares were issued at an aggregate purchase price of $24.0 million, or $24.63 per share, in 2019, $18.7 million, or $18.96 per share, in 2018, and $16.4 million, or $15.52 per share, in 2017.

 For the five months ended December 31, 2019, 2018 and 2017 (portions of the 2019-2020, 2018-2019 and 2017-2018 plan years), 419,446, 402,349 and 435,027 shares of common stock (from authorized but unissued shares), respectively, were subscribed to by ESPP participants for proceeds of approximately $12.8 million, $9.9 million and $8.2 million, respectively.

Summary of Non-Cash Stock-Based Compensation Expense

The non-cash stock-based compensation expense for the years ended December 31 is as follows:

 

(in thousands)

 

2019

 

 

2018

 

 

2017

 

Stock incentive plans

 

$

39,626

 

 

$

28,027

 

 

$

24,899

 

Employee stock purchase plan

 

 

6,504

 

 

 

4,744

 

 

 

4,025

 

Performance stock plan

 

 

864

 

 

 

748

 

 

 

1,707

 

Total

 

$

46,994

 

 

$

33,519

 

 

$

30,631

 

 

Summary of Unamortized Compensation Expense

As of December 31, 2019, the Company estimates there to be $109.7 million of unamortized compensation expense related to all non-vested stock-based compensation arrangements granted under the Company’s stock-based compensation plans, based upon current projections of grant measurement against performance criteria. That expense is expected to be recognized over a weighted average period of 3.27 years.

NOTE 13  Supplemental Disclosures of Cash Flow Information and Non-Cash Financing and Investing Activities

The Company’s cash paid during the period for interest and income taxes are summarized as follows:

 

 

 

Year Ended December 31,

 

(in thousands)

 

2019

 

 

2018

 

 

2017

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

$

58,290

 

 

$

38,032

 

 

$

36,172

 

Income taxes

 

$

110,046

 

 

$

110,557

 

 

$

152,024

 

 

74


Table of Contents

 

The Company’s significant non-cash investing and financing activities are summarized as follows:

 

 

 

Year Ended December 31,

 

(in thousands)

 

2019

 

 

2018

 

 

2017

 

Other payables issued for purchased customer accounts

 

$

12,135

 

 

$

5,462

 

 

$

11,708

 

Estimated acquisition earn-out payables and related charges

 

$

82,872

 

 

$

77,378

 

 

$

6,921

 

Notes received on the sale of fixed assets and customer accounts

 

$

9,903

 

 

$

52

 

 

$

 

 

Our Restricted Cash balance is composed of funds held in separate premium trust accounts as required by state law or, in some cases, per agreement with our carrier partners. The following is a reconciliation of cash and cash equivalents inclusive of restricted cash as of December 31, 2019, 2018 and 2017.

 

 

 

Balance as of December 31,

 

(in thousands)

 

2019

 

 

2018

 

 

2017

 

Table to reconcile cash and cash equivalents inclusive of

   restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

542,174

 

 

$

438,961

 

 

$

573,383

 

Restricted cash

 

 

420,801

 

 

 

338,635

 

 

 

250,705

 

Total cash and cash equivalents inclusive of restricted cash at

   the end of the period

 

$

962,975

 

 

$

777,596

 

 

$

824,088

 

 

NOTE 14 Commitments and Contingencies   

Legal Proceedings

The Company records losses for claims in excess of the limits of, or outside the coverage of, applicable insurance at the time and to the extent they are probable and estimable. In accordance with ASC Topic 450-Contingencies, the Company accrues anticipated costs of settlement, damages, losses for liability claims and, under certain conditions, costs of defense, based upon historical experience or to the extent specific losses are probable and estimable. Otherwise, the Company expenses these costs as incurred. If the best estimate of a probable loss is a range rather than a specific amount, the Company accrues the amount at the lower end of the range.

The Company’s accruals for legal matters that were probable and estimable were not material at December 31, 2019 and 2018. We continue to assess certain litigation and claims to determine the amounts, if any, that management believes will be paid as a result of such claims and litigation and, therefore, additional losses may be accrued and paid in the future, which could adversely impact the Company’s operating results, cash flows and overall liquidity. The Company maintains third-party insurance policies to provide coverage for certain legal claims, in an effort to mitigate its overall exposure to unanticipated claims or adverse decisions. However, as (i) one or more of the Company’s insurance carriers could take the position that portions of these claims are not covered by the Company’s insurance, (ii) to the extent that payments are made to resolve claims and lawsuits, applicable insurance policy limits are eroded and (iii) the claims and lawsuits relating to these matters are continuing to develop, it is possible that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by unfavorable resolutions of these matters. Based upon the AM Best Company ratings of these third-party insurers, management does not believe there is a substantial risk of an insurer’s material non-performance related to any current insured claims.

On the basis of current information, the availability of insurance and legal advice, in management’s opinion, the Company is not currently involved in any legal proceedings which, individually or in the aggregate, would have a material adverse effect on its financial condition, operations and/or cash flows.

NOTE 15  Leases

Substantially all of the Company's operating lease right-of-use assets and operating lease liabilities represent real estate leases for office space used to conduct the Company's business that expire on various dates through 2043. Leases generally contain renewal options and escalation clauses based upon increases in the lessors’ operating expenses and other charges. The Company anticipates that most of these leases will be renewed or replaced upon expiration.

The Company assess at inception of a contract if it contains a lease. This assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether the Company has the right to direct the use of the asset.

Variable lease cost is lease payments that are based on an index or similar rate. They are initially measured using the index or rate in effect at lease commencement and are based on the minimum payments stated in the lease. Additional payments based on the change in an index or rate, or payments based on a change in the Company's portion of the operating expenses, including real estate taxes and insurance, are recorded as a period expense when incurred.

75


Table of Contents

 

The right-of-use asset is initially measured at cost, which is primarily composed of the initial lease liability, plus any initial direct costs incurred, less any lease incentives received. The lease liability is initially measured at the present value of the minimum lease payments through the term of the lease. Minimum lease payments are discounted to present value using the incremental borrowing rate at the lease commencement date, which approximates the rate of interest the Company expects to be paid on a secured borrowing in an amount equal to the lease payments for the underlying asset under similar terms and economic conditions. The balances and classification of operating lease right-of-use assets and operating lease liabilities within the Condensed Consolidated Balance Sheets is as follows:

(in thousands)

 

 

 

December 31, 2019

 

Balance Sheet

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

Operating lease right-of-use assets

 

 

 

 

184,288

 

Total assets

 

Operating lease assets

 

$

184,288

 

Liabilities:

 

 

 

 

 

 

Current operating lease liabilities

 

Accrued expenses and other liabilities

 

 

43,415

 

Non-current operating lease liabilities

 

Operating lease liabilities

 

 

167,855

 

Total liabilities

 

 

 

$

211,270

 

As of December 31, 2019, the Company has entered into future lease agreements expected to commence in 2020 and 2021 consisting of undiscounted lease liabilities of $5.1 million and $0.6 million, respectively.    

The components of lease cost for operating leases for the 12 months ended December 31, 2019 were:

(in thousands)

 

 

 

Twelve Months Ended

December 31, 2019

 

Operating leases:

 

 

 

 

 

 

Lease cost

 

 

 

$

49,872

 

Variable lease cost

 

 

 

 

3,819

 

Short term lease cost

 

 

 

 

267

 

Operating lease cost

 

 

 

$

53,958

 

Sublease income

 

 

 

 

(1,386

)

Total lease cost net

 

 

 

$

52,572

 

The weighted average remaining lease term and the weighted average discount rate for operating leases as of December 31, 2019 were:

Weighted-average remaining lease term

 

 

6.00

 

Weighted-average discount rate

 

 

3.70

 

Maturities of the operating lease liabilities by fiscal year at December 31, 2019 for the Company's operating leases are as follows:

(in thousands)

 

Operating Leases

 

2020

 

$

48,884

 

2021

 

 

45,547

 

2022

 

 

38,056

 

2023

 

 

31,625

 

2024

 

 

24,469

 

Thereafter

 

 

51,571

 

Total undiscounted lease payments

 

 

240,152

 

Less: Imputed interest

 

 

28,882

 

Total minimum future lease payments

 

$

211,270

 

76


Table of Contents

 

At December 31, 2018, the aggregate future minimum lease payments under all non-cancelable lease agreements were as follows:

(in thousands)

 

December 31, 2018

 

2019

 

$

48,292

 

2020

 

 

43,517

 

2021

 

 

34,836

 

2022

 

 

27,035

 

2023

 

 

19,981

 

Thereafter

 

 

36,349

 

Total minimum future lease payments

 

$

210,010

 

Supplemental cash flow information for operating leases:

(in thousands)

  

 

 

Twelve months ended

December 31, 2019

 

Cash paid for amounts included in measurement of liabilities

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

 

 

 

$

51,894

 

Right-of-use assets obtained in exchange for new operating

   liabilities

 

 

 

 

$

46,730

 

 

NOTE 16 Quarterly Operating Results (Unaudited)

Quarterly operating results for 2019 and 2018 were as follows:

 

(in thousands, except per share data)

 

First

Quarter

 

 

Second

Quarter

 

 

Third

Quarter

 

 

Fourth

Quarter

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

619,280

 

 

$

575,219

 

 

$

618,683

 

 

$

578,989

 

Total expenses

 

$

470,760

 

 

$

451,697

 

 

$

466,845

 

 

$

476,940

 

Income before income taxes

 

$

148,520

 

 

$

123,522

 

 

$

151,838

 

 

$

102,049

 

Net income

 

$

113,896

 

 

$

92,593

 

 

$

115,506

 

 

$

76,519

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.41

 

 

$

0.33

 

 

$

0.41

 

 

$

0.27

 

Diluted

 

$

0.40

 

 

$

0.33

 

 

$

0.41

 

 

$

0.27

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

501,461

 

 

$

473,187

 

 

$

530,850

 

 

$

508,748

 

Total expenses

 

$

383,020

 

 

$

372,277

 

 

$

388,350

 

 

$

408,137

 

Income before income taxes

 

$

118,441

 

 

$

100,910

 

 

$

142,500

 

 

$

100,611

 

Net income

 

$

90,828

 

 

$

73,922

 

 

$

106,053

 

 

$

73,452

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.33

 

 

$

0.27

 

 

$

0.38

 

 

$

0.26

 

Diluted

 

$

0.32

 

 

$

0.26

 

 

$

0.38

 

 

$

0.26

 

 

Quarterly financial results are affected by seasonal variations. The timing of the insurance policy renewals sold by the Company and acquisitions may cause revenues, expenses and net income to vary significantly between quarters.

NOTE 17  Segment Information

Brown & Brown’s business is divided into four reportable segments: (1) the Retail Segment, which provides a broad range of insurance products and services to commercial, public and quasi-public entities, and to professional and individual customers, and non-insurance risk-mitigating products through our automobile dealer services (“F&I”) businesses, (2) the National Programs Segment, which acts as an MGA, provides professional liability and related package products for certain professionals, a range of insurance products for individuals, flood coverage, and targeted products and services designated for specific industries, trade groups, governmental entities and market niches, all of which are delivered through nationwide networks of independent agents, and Brown & Brown retail agents, (3) the Wholesale Brokerage Segment, which markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers, as well as Brown & Brown retail agents, and (4) the Services Segment, which provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare benefits advocacy services and claims adjusting services.

77


Table of Contents

 

Brown & Brown conducts all of its operations within the United States of America, except for a wholesale brokerage operation based in London, England, retail operations in Bermuda and the Cayman Islands, and a national programs operation in Canada. These operations earned $17.7 million, $15.2 million and $15.9 million of total revenues for the years ended December 31, 2019, 2018 and 2017, respectively. Long-lived assets held outside of the United States during each of these three years were not material.

The accounting policies of the reportable segments are the same as those described in Note 1. The Company evaluates the performance of its segments based upon revenues and income before income taxes. Inter-segment revenues are eliminated.

Summarized financial information concerning the Company’s reportable segments is shown in the following table. The “Other” column includes any income and expenses not allocated to reportable segments and corporate-related items, including the intercompany interest expense charge to the reporting segment.

 

 

 

Year Ended December 31, 2019

 

(in thousands)

 

Retail

 

 

National

Programs

 

 

Wholesale

Brokerage

 

 

Services

 

 

Other

 

 

Total

 

Total revenues

 

$

1,367,261

 

 

$

518,384

 

 

$

310,087

 

 

$

193,781

 

 

$

2,658

 

 

$

2,392,171

 

Investment income

 

$

149

 

 

$

1,397

 

 

$

178

 

 

$

139

 

 

$

3,917

 

 

$

5,780

 

Amortization

 

$

63,146

 

 

$

25,482

 

 

$

11,191

 

 

$

5,479

 

 

$

 

 

$

105,298

 

Depreciation

 

$

7,390

 

 

$

6,791

 

 

$

1,674

 

 

$

1,229

 

 

$

6,333

 

 

$

23,417

 

Interest expense

 

$

87,295

 

 

$

16,690

 

 

$

4,756

 

 

$

4,404

 

 

$

(49,485

)

 

$

63,660

 

Income before income taxes

 

$

222,875

 

 

$

143,737

 

 

$

82,739

 

 

$

40,337

 

 

$

36,241

 

 

$

525,929

 

Total assets

 

$

6,413,459

 

 

$

3,110,368

 

 

$

1,390,250

 

 

$

481,336

 

 

$

(3,772,592

)

 

$

7,622,821

 

Capital expenditures

 

$

12,497

 

 

$

10,365

 

 

$

6,171

 

 

$

804

 

 

$

43,271

 

 

$

73,108

 

 

 

 

Year Ended December 31, 2018

 

(in thousands)

 

Retail

 

 

National

Programs

 

 

Wholesale

Brokerage

 

 

Services

 

 

Other

 

 

Total

 

Total revenues

 

$

1,042,763

 

 

$

494,463

 

 

$

287,014

 

 

$

189,246

 

 

$

760

 

 

$

2,014,246

 

Investment income

 

$

2

 

 

$

506

 

 

$

165

 

 

$

205

 

 

$

1,868

 

 

$

2,746

 

Amortization

 

$

44,386

 

 

$

25,954

 

 

$

11,391

 

 

$

4,813

 

 

$

 

 

$

86,544

 

Depreciation

 

$

5,289

 

 

$

5,486

 

 

$

1,628

 

 

$

1,558

 

 

$

8,873

 

 

$

22,834

 

Interest expense

 

$

35,969

 

 

$

26,181

 

 

$

5,254

 

 

$

2,869

 

 

$

(29,693

)

 

$

40,580

 

Income before income taxes

 

$

217,845

 

 

$

117,375

 

 

$

70,171

 

 

$

34,508

 

 

$

22,563

 

 

$

462,462

 

Total assets

 

$

5,850,045

 

 

$

2,940,097

 

 

$

1,283,877

 

 

$

471,572

 

 

$

(3,856,923

)

 

$

6,688,668

 

Capital expenditures

 

$

6,858

 

 

$

12,391

 

 

$

2,518

 

 

$

1,525

 

 

$

18,228

 

 

$

41,520

 

 

 

 

Year Ended December 31, 2017

 

(in thousands)

 

Retail

 

 

National

Programs

 

 

Wholesale

Brokerage

 

 

Services

 

 

Other

 

 

Total

 

Total revenues

 

$

943,460

 

 

$

479,813

 

 

$

271,737

 

 

$

165,372

 

 

$

20,965

 

 

$

1,881,347

 

Investment income

 

$

8

 

 

$

384

 

 

$

 

 

$

299

 

 

$

935

 

 

$

1,626

 

Amortization

 

$

42,164

 

 

$

27,277

 

 

$

11,456

 

 

$

4,548

 

 

$

1

 

 

$

85,446

 

Depreciation

 

$

5,210

 

 

$

6,325

 

 

$

1,885

 

 

$

1,600

 

 

$

7,678

 

 

$

22,698

 

Interest expense

 

$

31,133

 

 

$

35,561

 

 

$

6,263

 

 

$

3,522

 

 

$

(38,163

)

 

$

38,316

 

Income before income taxes

 

$

196,616

 

 

$

109,961

 

 

$

68,844

 

 

$

30,498

 

 

$

43,803

 

 

$

449,722

 

Total assets

 

$

4,255,515

 

 

$

3,267,486

 

 

$

1,260,239

 

 

$

399,240

 

 

$

(3,434,930

)

 

$

5,747,550

 

Capital expenditures

 

$

4,494

 

 

$

5,936

 

 

$

1,836

 

 

$

1,033

 

 

$

10,893

 

 

$

24,192

 

 

NOTE 18 Insurance Company WNFIC

Although the reinsurers are liable to the Company for amounts reinsured, our subsidiary, WNFIC remains primarily liable to its policyholders for the full amount of the policies written whether or not the reinsurers meet their obligations to the Company when they become due. The effects of reinsurance on premiums written and earned at December 31 are as follows:

 

 

 

2019

 

 

2018

 

(in thousands)

 

Written

 

 

Earned

 

 

Written

 

 

Earned

 

Direct premiums

 

$

697,072

 

 

$

668,971

 

 

$

619,223

 

 

$

602,320

 

Assumed premiums

 

 

 

 

 

 

 

 

 

 

 

 

Ceded premiums

 

 

697,059

 

 

 

668,958

 

 

 

619,206

 

 

 

602,303

 

Net premiums

 

$

13

 

 

$

13

 

 

$

17

 

 

$

17

 

 

78


Table of Contents

 

All premiums written by WNFIC under the National Flood Insurance Program are 100.0% ceded to FEMA, for which WNFIC received a 30.0% expense allowance from January 1, 2019 through September 30, 2019 and a 30.1% expense allowance from October 1, 2019 through December 31, 2019. As of December 31, 2019 and 2018, the Company ceded $694.9 million and $617.2 million of written premiums, respectively.

As of December 31, 2019, the Consolidated Balance Sheets contained Reinsurance recoverable of $58.5 million and Prepaid reinsurance premiums of $366.0 million. As of December 31, 2018, the Consolidated Balance Sheets contained reinsurance recoverable of $65.4 million and prepaid reinsurance premiums of $337.9 million. There was no net activity in the reserve for losses and loss adjustment expense for the year ended December 31, 2019, and $0.2 million net activity in the reserve for losses and loss adjustment expense for the year ended December 31, 2018, as WNFIC’s direct premiums written were 100.0% ceded to two reinsurers. The balance of the reserve for losses and loss adjustment expense, excluding related reinsurance recoverables was $58.5 million as of December 31, 2019 and $65.4 million as of December 31, 2018.

WNFIC maintains capital in excess of minimum statutory amount of $7.5 million as required by regulatory authorities. The statutory capital and surplus of WNFIC was $29.6 million as of December 31, 2019 and $19.4 million as of December 31, 2018. As of December 31, 2019 and 2018, WNFIC generated statutory net income of $8.1 million and $4.5 million, respectively. The maximum amount of ordinary dividends that WNFIC can pay to shareholders in a rolling 12 month period is limited to the greater of 10.0% of statutory adjusted capital and surplus of 100.0% of adjusted net income. There was no dividend payout in 2018 and 2019 and the maximum dividend payout that may be made in 2020 without prior approval is $8.1 million.

NOTE 19  Shareholders’ Equity

Under the authorization from the Company’s Board of Directors, shares may be purchased from time to time, at the Company’s discretion and subject to the availability of stock, market conditions, the trading price of the stock, alternative uses for capital, the Company’s financial performance and other potential factors. These purchases may be carried out through open market purchases, block trades, accelerated share repurchase plans of up to $100.0 million each (unless otherwise approved by the Board of Directors), negotiated private transactions or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. On May 1, 2019, the Company's Board of Directors authorized the purchasing of up to an additional $372.5 million of the Company's outstanding common stock.

During 2017, the Company repurchased 2,883,349 shares at an average price of $48.51 for a total cost of $139.9 million under the current share repurchase authorization. During 2018, the Company entered into accelerated share repurchase agreement (“ASR”) with an investment bank to purchase an aggregate $100.0 million of the Company’s common stock. As part of the ASR, the company received an initial share delivery of 2,910,150 shares of the Company’s common stock with a fair market value of approximately $80.0 million in 2018. On May 17, 2019, this agreement was completed with the delivery of 566,599 shares of the Company’s common stock. In addition to the settlement of the ASR, during 2019, the Company made share repurchases in the open market of 1,087,914 shares at a total cost of $38.7 million, at an average price of $35.55 per share. At December 31, 2019, the remaining amount authorized by our Board of Directors for share repurchases was approximately $461.3 million. Under the authorized repurchase programs, the Company has repurchased a total of approximately 15.5 million shares for an aggregate cost of approximately $536.2 million between 2014 and 2019. The aforementioned share amounts have not been adjusted for the March 28, 2018 2-for-1 stock split, as treasury shares did not participate in this stock split transaction.

79


Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Brown & Brown, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Brown & Brown, Inc. and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

Adoption of New Accounting Standards

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases on January 1, 2019, on a modified retrospective basis due to the adoption of Financial Accounting Standards Board Accounting Standards Codification 842, Leases, and related amendments.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Earn-out obligation — Refer to Notes 1 (Goodwill and Amortizable Intangible Assets) and 3 (Business Combinations) to the financial statements

Critical Audit Matter Description

The Company’s acquisition purchase price for business combinations is typically based upon a multiple of average annual operating profit and/or revenue earned over a one to three-year period within a minimum and maximum price range. The recorded purchase prices for most acquisitions include an estimation of the fair value of liabilities associated with potential earn-out provisions, when an earn-out obligation is part of the negotiated transaction. The fair value of the earn-out obligations is based upon the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions contained in the respective purchase agreements.  Subsequent changes in the fair value of the earn-out obligations are recorded in the consolidated statement of income when incurred.  

80


Table of Contents

 

In determining fair value of the earn-out obligation, the acquired business’s future performance is estimated using financial projections of future earnings developed by management that are discounted to a present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out obligation will be paid. The earn-out obligation balance was $161.5 million as of December 31, 2019 and the potential maximum earn-out obligation was $328.7 million.  Of the total earn-out obligation balance, $17.9 million is recorded as accounts payable and $143.6 million is recorded as other non-current liability.

We identified the earn-out obligation as a critical audit matter because of the increased auditor judgment and extent of effort required to evaluate whether an adjustment is required for the earn-out obligation in periods after the acquisition.  Specifically, there was a high degree of auditor judgment and an increased extent of effort to audit the reasonableness of management’s assumptions related to projections of future earnings of the acquired businesses.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the forecasted future earnings assumptions used in determining the fair value of the earn-out obligation included the following, among others:

 

We tested the effectiveness of controls over management’s earn-out obligation calculation, including those controls over management’s determination of future earnings.

 

We read the asset/stock purchase agreements and associated addenda and agreed the provisions of the contracts to the earn-out obligation models.

 

We read any post acquisition asset/stock purchase agreements and associated addenda modifications for any additional terms to evaluate the completeness and reasonableness of the models utilized to calculate the earn-out obligation.

 

We evaluated the reasonableness of projections of future earnings for the earn-out obligation models by comparing the projections to historical results and assessing management’s key assumptions.

 

We evaluated management’s ability to accurately forecast future earnings by comparing actual results to management’s historical forecast and forecasted growth rates to that of the overall industry and comparable companies.

 

 

 

/s/ DELOITTE & TOUCHE LLP

Certified Public Accountants

 

Tampa, Florida

February 24, 2020

 

We have served as the Company’s auditor since 2002.

 

81


Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the board of directors of Brown & Brown, Inc.

Opinion on Internal Control over Financial Reporting

We have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 24, 2020, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of Financial Accounting Standards Board Accounting Standards Codification 842, Leases, and related amendments.

As described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at CKP Insurance, LLC, Poole Professional Ltd. Insurance Agents and Brokers et al, Innovative Risk Solutions, Inc., Medval, LLC, Twinbrook Insurance Brokerage, Inc., VerHagen Glendenning & Walker LLP, United Development Systems, Inc., AGA Enterprises, LLC d/b/a Cossio Insurance Agency, West Ridge Insurance Agency, Inc. d/b/a Yozell Associates, and Izzo Insurance Services, Inc. which were acquired in 2019 and whose financial statements constitute approximately (0.26) and 5.20 percent of net and total assets, respectively, 1.13 percent of revenues, and (1.39) percent of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2019. Accordingly, our audit did not include the internal control over financial reporting of these acquired entities.

Basis for Opinion

The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

/s/ DELOITTE & TOUCHE LLP

Certified Public Accountants

 

Tampa, Florida

February 24, 2020

 

 

82


Table of Contents

 

Management’s Report on Internal Control Over Financial Reporting

The management of Brown & Brown, Inc. and its subsidiaries (“Brown & Brown”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including Brown & Brown’s principal executive officer and principal financial officer, Brown & Brown conducted an evaluation of the effectiveness of internal control over financial reporting based upon the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In conducting Brown & Brown’s evaluation of the effectiveness of its internal control over financial reporting, Brown & Brown has excluded the following acquisitions completed by Brown & Brown during 2019: CKP Insurance, LLC, Poole Professional Ltd. Insurance Agents and Brokers et al, Innovative Risk Solutions, Inc., Medval, LLC, Twinbrook Insurance Brokerage, Inc., VerHagen Glendenning & Walker LLP, United Development Systems, Inc., AGA Enterprises, LLC d/b/a Cossio Insurance Agency, West Ridge Insurance Agency, Inc. d/b/a Yozell Associates, and Izzo Insurance Services, Inc. (collectively the “2019 Excluded Acquisitions”), which were acquired during 2019 and whose financial statements constitute approximately (0.26%) and 5.20% of net and total assets, respectively, 1.13% of revenues, and (1.39%) of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2019. Refer to Note 3 to the Consolidated Financial Statements for further discussion of these acquisitions and their impact on Brown & Brown’s Consolidated Financial Statements.

Based upon Brown & Brown’s evaluation under the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, management concluded that internal control over financial reporting was effective as of December 31, 2019. Management’s internal control over financial reporting as of December 31, 2019 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Brown & Brown, Inc.

Daytona Beach, Florida

February 24, 2020

 

 

 

 

 

/s/ J. Powell Brown

 

/s/ R. Andrew Watts

J. Powell Brown

Chief Executive Officer

 

R. Andrew Watts

Executive Vice President, Chief Financial Officer and Treasurer

 

83


Table of Contents

 

ITEM 9. Changes in and Disagreements with Accountants and Financial Disclosure.

There were no changes in or disagreements with accountants on accounting and financial disclosure in 2019.

ITEM 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation (the “Evaluation”) required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15 and 15d-15 under the Exchange Act (“Disclosure Controls”) as of December 31, 2019. Based upon the Evaluation, our CEO and CFO concluded that the design and operation of our Disclosure Controls were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to our senior management, including our CEO and CFO, to allow timely decisions regarding required disclosures.

Changes in Internal Controls

There has not been any change in our internal control over financial reporting identified in connection with the Evaluation that occurred during the quarter ended December 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of Internal Control Over Financial Reporting

Our management, including our CEO and CFO, does not expect that our Disclosure Controls and internal controls will prevent all errors 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 must reflect the fact 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 because of simple 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 the 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 not be detected.

CEO and CFO Certifications

Exhibits 31.1 and 31.2 are the Certifications of the CEO and the CFO, respectively. The Certifications are supplied in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This Item 9A of this Annual Report on Form 10-K contains the information concerning the evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

ITEM 9B. Other Information.

None

84


Table of Contents

 

PART III

ITEM 10. Directors, Executive Officers and Corporate Governance.

Set forth below is certain information concerning our executive officers as of February 24, 2020. All officers hold office for one-year terms or until their successors are elected and qualified.

 

J. Hyatt Brown

Chairman

82

J. Powell Brown

President and Chief Executive Officer

52

P. Barrett Brown

Executive Vice President; President – Retail Segment

47

Robert W. Lloyd

Executive Vice President; Secretary and General Counsel

55

J. Scott Penny

Executive Vice President; Chief Acquisitions Officer

53

Julie K. Ryan

Executive Vice President; Chief People Officer

48

Anthony T. Strianese

Executive Vice President; President - Wholesale Brokerage Segment

58

Chris L. Walker

Executive Vice President; President - National Programs Segment

62

R. Andrew Watts

Executive Vice President; Chief Financial Officer and Treasurer

51

 

J. Hyatt Brown. Mr. Brown was our Chief Executive Officer from 1993 to 2009 and our President from 1993 to December 2002, and served as President and Chief Executive Officer of our predecessor corporation from 1961 to 1993. He was a member of the Florida House of Representatives from 1972 to 1980, and Speaker of the House from 1978 to 1980. Mr. Brown served on the Board of Directors of International Speedway Corporation, a publicly held company, until 2019. Mr. Brown is a member of the Board of Trustees of Stetson University, of which he is a past Chairman, and the Florida Council of 100. Mr. Hyatt Brown’s sons, J. Powell Brown and P. Barrett Brown, are employed by us as President and Chief Executive Officer, and as Executive Vice President and President – Retail Segment, respectively.  His son, J. Powell Brown, has served as a director since October 2007.

J. Powell Brown. Mr. Brown was named Chief Executive Officer in July 2009. He has been our President since January 2007 and was appointed to be a director in October 2007. Prior to 2007, he served as one of our Regional Executive Vice Presidents since 2002. Mr. Brown was previously responsible for overseeing certain or all parts of all of our segments over the years, and worked in various capacities throughout the Company since joining us in 1995. Mr. Brown has served on the Board of Directors of WestRock Company (formerly RockTenn Company), a publicly held company, since January 2010. He is the son of our Chairman, J. Hyatt Brown, and brother of our Executive Vice President and President – Retail Segment, P. Barrett Brown.

P. Barrett Brown. Mr. Brown was appointed as the President of our Retail Segment in January 2020. He previously served as a Senior Vice President from 2014 until January 2020 and as a Regional President in the Retail Segment from September 2015 until January 2020.  Mr. Brown joined the Company in 2000 and has served in various roles, including as the profit center leader and an account executive in our Tampa, Florida retail office, as the profit center leader and an account executive in our Orange, California retail office, and as an account executive in our Phoenix, Arizona retail office.  He has also overseen certain aspects of  “Brown & Brown University,” a training program offering technical and sales courses for new producers, office leaders, and other groups within the organization. He is the son of our Chairman, J. Hyatt Brown, and brother of our President and Chief Executive Officer, J. Powell Brown.

Robert W. Lloyd.  Mr. Lloyd has served as our General Counsel since 2009 and as Executive Vice President and Corporate Secretary since 2014. He previously served as Vice President from 2006 to 2014, Chief Litigation Officer from 2006 until 2009 and as Assistant General Counsel from 2001 until 2006. Prior to that, he worked as sales manager and marketing manager, respectively, in our Daytona Beach, Florida retail office.  While working in a sales role, Mr. Lloyd qualified for the Company’s top producer honors (Tangle B) in 2001. He has also earned his Chartered Property Casualty Underwriter (CPCU) and Certified Insurance Counselor (CIC) designations.  Before joining us, Mr. Lloyd practiced law and served as outside counsel to the Company with the law firm of Cobb & Cole, P.A. in Daytona Beach, Florida.  Mr. Lloyd is a Rotarian; Chairman of the Daytona Beach Regional Chamber of Commerce; a director of the Council on Aging of Volusia County; and a member of the Advisory Board of the Central Florida Council - Boy Scouts of America. In 2019, Mr. Lloyd was appointed by Florida Governor Ron Desantis to the Board of Trustees of Daytona State College.

J. Scott Penny. Mr. Penny has been our Chief Acquisitions Officer since 2011, and he serves as director and as an executive officer for several of our subsidiaries. He served as a Regional President from 2010 to 2014 and Regional Executive Vice President from 2002 to July 2010. From 1999 until January 2003, Mr. Penny served as profit center leader of our Indianapolis, Indiana retail office. Prior to that, Mr. Penny served as profit center leader of our Jacksonville, Florida retail office from 1997 to 1999. From 1989 to 1997, Mr. Penny was employed as an account executive and marketing representative in our Daytona Beach, Florida office.

Anthony T. Strianese. Mr. Strianese has served as President of our Wholesale Brokerage Segment since 2014. He served as Regional President from 2012 to 2014 and Regional Executive Vice President from July 2007 to January 2012, and serves as director and as an executive officer for several of our subsidiaries. Mr. Strianese’s responsibilities for our Wholesale Brokerage Segment include oversight of the operations of Peachtree Special Risk Brokers, LLC, Hull & Company, Inc., ECC Insurance Brokers, Inc., MacDuff Underwriters, Inc. and Decus Insurance Brokers Limited, which commenced operations in 2008 in London, England. Additionally, Mr. Strianese is responsible for certain of our public

85


Table of Contents

 

entity operations located in Georgia, Texas and Virginia. Mr. Strianese joined the Company in January 2000 and helped form Peachtree Special Risk Brokers. Prior to joining us, he held leadership positions with The Home Insurance Company and Tri-City Brokers in New York City.

Chris L. Walker. Mr. Walker was appointed President of our National Programs Segment in 2014. He served as Regional Executive Vice President from 2012 to 2014. Mr. Walker is responsible for our National Programs Segment. He has also served as Chief Executive Officer of Arrowhead since 2012. He has been involved with Arrowhead’s business development strategies, product expansion, acquisitions and the overall operations and infrastructure since joining the organization in 2003. Prior to that, he served as Vice Chairman of Aon Re. Mr. Walker’s insurance career began with the reinsurance intermediary E.W. Blanch Co., where he ultimately served as Chairman and CEO of E.W. Blanch Holdings. He previously served as Chairman of the Brokers and Reinsurance Markets Association.

R. Andrew Watts. Mr. Watts joined the Company as Executive Vice President and Treasurer in February 2014, and was appointed Chief Financial Officer effective March 4, 2014. Prior to joining the Company, he had served as Global Head of Customer Administration for Thomson Reuters since 2011, and from 2008 to 2011, he acted as Chief Financial Officer for multiple segments within the Financial and Risk Division of Thomson Reuters. Prior to 2001, Mr. Watts was the Chief Financial Officer and Co-founder of Textera, an internet start-up company, and worked as a Senior Manager with PricewaterhouseCoopers for nine years. Mr. Watts is a Certified Public Accountant (CPA) and holds a Bachelor of Science degree from Illinois State University. He was previously the Chairman of the Board for Surflight Theatre from January 2013 through February 2014 and served on that board from July 2012 until February 2014.  He was previously the Chairman of the Board for Make-A-Wish Foundation of New Jersey from 2005 through 2007 and served on that board from 2000 through 2007.

The additional information required by this item regarding directors and executive officers is incorporated herein by reference to our definitive Proxy Statement to be filed with the SEC in connection with the Annual Meeting of Shareholders to be held in 2020 (the “2020 Proxy Statement”) under the headings “Board and Corporate Governance Matters” and “Other Important Information.” We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, and controller. A copy of our Code of Ethics for our Chief Executive Officer and our Senior Financial Officers and a copy of our Code of Business Conduct and Ethics applicable to all employees are posted on our Internet website, at www.bbinsurance.com, and are also available upon written request directed to Corporate Secretary, 220 Brown & Brown, Inc., South Ridgewood Avenue, Daytona Beach, Florida 32114, or by telephone to (386) 252-9601. Any approved amendments to, or waiver of, any provision of the Code of Business Conduct and Ethics will be posted on our website at the above address.

ITEM 11. Executive Compensation.

The information required by this item is incorporated herein by reference to the 2020 Proxy Statement under the heading “Compensation Matters.”

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters.

Equity Compensation Plan Information

The following table sets forth information as of December 31, 2019, with respect to compensation plans under which the Company’s equity securities are authorized for issuance:

 

 

 

A

 

 

Plan Category

 

Number of securities

remaining available

for future issuance

under equity

compensation plans(1)

 

 

Equity compensation plans approved by shareholders:

 

 

 

 

 

Brown & Brown, Inc. 2019 Stock Incentive Plan

 

 

9,515,603

 

(2)

Brown & Brown, Inc. 2010 Stock Incentive Plan

 

 

 

 

Brown & Brown, Inc. 1990 Employee Stock Purchase Plan

 

 

6,340,598

 

 

Brown & Brown, Inc. Performance Stock Plan

 

 

 

 

Total

 

 

15,856,201

 

 

Equity compensation plans not approved by shareholders

 

 

 

 

 

(1)

All of the shares available for future issuance under the Brown & Brown, Inc. Performance Stock Plan, and the Brown & Brown, Inc. 2019 Stock Incentive Plan may be issued in connection with options, warrants, rights, restricted stock, or other stock-based awards.

(2)

The payout for 1,629,618 shares of our outstanding performance-based restricted stock grants may be increased up to 200% of the target or decreased to zero, subject to the level of performance attained. The amount reflected in the table is calculated assuming the maximum payout for all restricted stock grants.

The information required by this item is incorporated herein by reference to the 2020 Proxy Statement under the heading “Security Ownership of Management and Certain Beneficial Owners.”

86


Table of Contents

 

The information required by this item is incorporated herein by reference to the 2020 Proxy Statement under the headings “Director Independence,” “Related Party Transactions Policy” and “Relationships and Transactions with Affiliated Parties.”

ITEM 14. Principal Accounting Fees and Services.

The information required by this item is incorporated herein by reference to the 2020 Proxy Statement under the heading “Fees Paid to Deloitte & Touche LLP.”

87


Table of Contents

 

PART IV

ITEM 15. Exhibits and Financial Statements Schedules.

The following documents are filed as part of this Report:

1. Financial statements

Reference is made to the information set forth in Part II, Item 8 of this Report, which information is incorporated by reference.

2. Consolidated Financial Statement Schedules.

All required Financial Statement Schedules are included in the Consolidated Financial Statements or the Notes to Consolidated Financial Statements.

3. Exhibits

The following exhibits are filed as a part of this Report:

 

    3.1

 

Articles of Amendment to the Articles of Incorporation (adopted February 26, 2018) (incorporated by reference to Exhibit 3.1 to Form 8-K filed March 29, 2018 and Articles of Amendment to Articles of Incorporation (adopted April 24, 2003) (incorporated by reference to Exhibit 3a to Form 10-Q for the quarter ended March 31, 2003), and Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3a to Form 10-Q for the quarter ended March 31, 1999).

 

 

 

    3.2

 

Bylaws (incorporated by reference to Exhibit 3.2 to Form 8-K filed on October 12, 2016).

 

 

 

    4.1**

 

Description of the Registrant’s capital stock.

 

 

 

    4.2

 

First Supplemental Indenture, dated as of September 18, 2014, between the Registrant and U.S. Bank National Association (incorporated by reference to Exhibit 4.2 to Form 8-K filed on September 18, 2014).

 

 

 

    4.3

 

Form of the Registrant’s 4.200% Notes due 2024 (incorporated by reference to Exhibit 4.3 to Form 8-K filed on September 18, 2014).

 

 

 

    4.4

 

Second Supplemental Indenture, dated as of March 11, 2019, between the Registrant and U.S. Bank National Association (incorporated by reference to Exhibit 4.2 to Form 8-K filed on March 12, 2019).

 

 

 

    4.6

 

Form of Registrant’s 4.500% Notes due 2029 (incorporated by reference to Exhibit 4.3 to Form 8-K filed on March 12, 2019).

 

 

 

  10.1(a)*

 

Employment Agreement, dated and effective as of July 1, 2009 between the Registrant and J. Hyatt Brown (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2009).

 

 

 

  10.1(b)*

 

Executive Employment Agreement, effective as of February 17, 2014, between the Registrant and R. Andrew Watts (incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2014).

 

 

 

  10.1(c)*

 

Form of Employment Agreement (incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2014).

 

 

 

  10.1(d)*

 

Employment Agreement, dated as of January 9, 2012, between the Registrant and Chris L. Walker (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2013).

 

 

 

  10.1(e)*

 

Employment Agreement, dated as of November 16, 2018, between the Registrant and James C. Hays (incorporated by reference to Exhibit 10.1(e) to Form 10-K for the year ended December 31, 2019).

 

 

 

  10.2(a)*

 

Registrant’s Stock Performance Plan (incorporated by reference to Exhibit 4 to Registration Statement No. 333-14925 on Form S-8 filed on October 28, 1996).

 

 

 

  10.2(b)*

 

Registrant’s Stock Performance Plan as amended, effective January 23, 2008 (incorporated by reference to Exhibit 10.6(b) to Form 10-K for the year ended December 31, 2007).

 

 

 

  10.2(c)*

 

Registrant’s Performance Stock Plan as amended, effective July 21, 2009 (incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2009).

 

 

 

  10.3(a)*

 

Registrant’s 2010 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to Form 8-K filed on May 5, 2017).

 

 

 

  10.3(b)*

 

Registrant’s 2019 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed on May 3, 2019).

 

 

 

  10.4(a)*

 

Form of Performance-Based Stock Grant Agreement under 2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.16 to Form 10-K for the year ended December 31, 2010).

88


Table of Contents

 

 

 

 

  10.4(b)*

 

Form of Performance-Triggered Stock Grant Agreement under 2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed on July 8, 2013).

 

 

 

  10.4(c)*

 

Form of Performance Stock Award Agreement under the 2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.5(c) to Form 10-K filed on February 28, 2018).

 

 

 

  10.4(d)*

 

Form of Restricted Stock Award Agreement under the 2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Form 8-K filed on March 23, 2016).

 

 

 

  10.4(e)

 

Form of Director Stock Grant Agreement (incorporated by reference to Exhibit 10.8(e) to Form 10-K filed for the year ended December 31, 2016).

 

 

 

  10.5

 

Amended and Restated Credit Agreement dated as of June 28, 2017, among the Registrant, JPMorgan Chase Bank, N.A., Bank of America, N.A., Royal Bank of Canada and SunTrust Bank (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2017).

 

 

 

  10.6

 

Settlement Agreement, dated March 1, 2017, by and among the Registrant, AssuredPartners, Inc. and certain of its employees and former employees (incorporated by reference to Exhibit 10.1 to the form 10-Q for the quarter ended March 31, 2017).

 

 

 

  10.7*

 

Asset Purchase Agreement, dated as of October 22, 2018, by and among Brown & Brown, Inc., BBHG, Inc., The Hays Group, Inc., The Hays Group Of Wisconsin LLC, The Hays Benefits Group, LLC, PlanIT, LLC, The Hays Benefits Group of Wisconsin, LLC, and The Hays Group of Illinois, LLC, and Claims Management of Missouri, LLC (incorporated by reference to Exhibit 10.9 to Form 10-K for the year ended December 31, 2019).

 

 

 

  10.8*

 

Term Loan Credit Agreement, dated December 21, 2018, by and among the Company, Wells Fargo Bank, National Association, as administrative agent, Bank of America, N.A., BMO Harris Bank N.A. and SunTrust Bank as co-syndication agents, and Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, BMO Capital Markets Corp. and SunTrust Robinson Humphrey, Inc. as joint lead arrangers and joint bookrunners (incorporated by reference to Exhibit 10.10 to Form 10-K for the year ended December 31, 2019).

 

 

 

  21**

 

Subsidiaries of the Registrant.

 

 

 

  23**

 

Consent of Deloitte & Touche LLP.

 

 

 

  24**

 

Powers of Attorney.

 

 

 

  31.1**

 

Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer of the Registrant.

 

 

 

  31.2**

 

Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer of the Registrant.

 

 

 

  32.1**

 

Section 1350 Certification by the Chief Executive Officer of the Registrant.

 

 

 

  32.2**

 

Section 1350 Certification by the Chief Financial Officer of the Registrant.

 

 

 

101.INS

 

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

104

 

Cover Page Interactive Data File for the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, formatted Inline XBRL (included as Exhibit 101).

 

* Management Contract or Compensatory Plan or Arrangement

** Filed herewith

ITEM 16. Form 10-K Summary.

None

89


Table of Contents

 

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

 

 

 

 

BROWN & BROWN, INC.

Registrant

Date: February 24, 2020

 

By:

/s/ J. Powell Brown

 

 

 

J. Powell Brown

 

 

 

President and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

 

Signature

 

Title

 

Date

 

 

 

 

 

/s/ J. Powell Brown

 

Director; President and Chief Executive Officer (Principal Executive Officer)

 

February 24, 2020

J. Powell Brown

 

 

 

 

 

 

 

 

 

/s/ R. Andrew Watts

 

Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

 

February 24, 2020

R. Andrew Watts

 

 

 

 

 

 

 

 

 

*

 

Chairman of the Board

 

February 24, 2020

J. Hyatt Brown

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 24, 2020

Samuel P. Bell, III

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 24, 2020

Hugh M. Brown

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 24, 2020

Bradley Currey, Jr.

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 24, 2020

Lawrence L. Gellerstedt

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 24, 2020

James C. Hays

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 24, 2020

Theodore J. Hoepner

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 24, 2020

James S. Hunt

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 24, 2020

Toni Jennings

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 24, 2020

Timothy R.M. Main

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 24, 2020

H. Palmer Proctor, Jr.

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 24, 2020

Wendell Reilly

 

 

 

 

 

 

 

 

 

*

 

Director

 

February 24, 2020

Chilton D. Varner

 

 

 

 

 

*By:

/s/ Robert W. Lloyd

 

Robert W. Lloyd

Attorney-in-Fact

 

90

 

Exhibit 4.1

DESCRIPTION OF CAPITAL STOCK

The following descriptions of our capital stock and provisions of our Amended and Restated Articles of Incorporation, as amended (our “Articles of Incorporation”), and our By-Laws, as amended and restated (our “By-Laws”), are summaries of their material terms and provisions and are not complete and are subject to, and qualified in their entirety by reference to, each of the items identified below. For a complete description of our capital stock, Articles of Incorporation and By-Laws, please refer to our Articles of Incorporation, By-Laws and the applicable provisions of the Florida Business Corporations Act (the “FBCA”).

All references to “Company”, “we”, “us” and “our” refer to Brown & Brown, Inc.

Our common stock is the only class of our capital stock registered under the Securities Exchange Act of 1934 (the “Exchange Act”), and it is registered under Section 12(b) thereof.

Authorized Capital Stock

Under our Articles of Incorporation, the number of shares of capital stock that we have authority to issue is 560,000,000, par value $.10 per share.

Common Stock

Voting. Each holder of our common stock is entitled to one vote for each share held. Shareholders do not have the right to cumulate their votes in elections of directors. Accordingly, directors are elected by a majority of the votes present in person or represented by proxy at the meeting and actually cast by the shares entitled to vote in uncontested elections. If our Board of Directors (the “Board”) determines that an election is contested, then directors are elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors.

Dividends. Holders of our common stock will be entitled to dividends on a pro rata basis upon declaration of dividends by our Board. Dividends will be payable only out of unreserved and unrestricted surplus that is legally available for the payment of dividends. Dividends that may be declared on our common stock will be paid in an equal amount to the holder of each share. Any determination to declare or pay dividends in the future will be at the discretion of our Board and will depend on our results of operations, financial condition, contractual or legal restrictions and other factors deemed relevant by our Board.

Our common stock is listed on the New York Stock Exchange under the symbol “BRO.”

No Redemption, Conversion or Preemptive Rights

No preemptive rights are conferred upon the holders of such stock and there are no liquidation or conversion rights. There are no redemption or sinking fund provisions and there is no liability to further calls or to assessments by us.


 

Fully Paid and Nonassessable

When we issue shares of our common stock, the shares will be fully paid and nonassessable, which means that the full purchase price of the shares will have been paid and holders of the shares will not be assessed any additional monies for the shares.

No Restrictions on Transfer

Neither our Articles of Incorporation nor our By-Laws contain any restrictions on the transfer of our common stock. In the case of any transfer of our common stock, there may be restrictions imposed by applicable securities laws.

Transfer Agent and Registrar

The Transfer Agent and Registrar for our common stock is American Stock Transfer & Trust Company.

Certain Anti-Takeover Provisions of Our Articles of Incorporation, By-Laws and the FBCA

FBCA

We are subject to certain anti-takeover provisions that apply to public corporations under Florida law. Pursuant to Section 607.0901 of the FBCA, a publicly-held Florida corporation may not engage in a broad range of business combinations or other extraordinary corporate transactions with an “interested shareholder” without the approval of the holders of two-thirds of the voting shares of such corporation (excluding shares held by the interested shareholder) at an annual or special meeting of shareholders, unless:

 

the transaction is approved by a majority of disinterested directors;

 

the interested shareholder has owned (together with affiliates and associates) at least 80% of the corporation’s outstanding voting shares for at least three years preceding the announcement date of any such business combination;

 

the interested shareholder is the beneficial owner (together with affiliates and associates) of at least 90% of the outstanding voting shares of the corporation, exclusive of shares acquired directly from the corporation in a transaction not approved by a majority of the disinterested directors; or

 

the consideration paid to the holders of the corporation’s voting stock is at least equal to certain fair price criteria.

An “interested shareholder” is defined as a person who beneficially owns more than 15% of a corporation’s outstanding voting shares. We have not made an election in our Articles of Incorporation to opt out of Section 607.0901.

In addition, we are subject to Section 607.0902 of the FBCA which prohibits the voting of shares in a publicly-held Florida corporation that are acquired in a “control share acquisition” unless: (1)

2


 

our Board approved such acquisition prior to its consummation; or (2) after such acquisition, in lieu of prior approval by our Board, the holders of a majority of the corporation’s voting shares, exclusive of shares owned by officers of the corporation, employee directors or the acquiring party, approve the granting of voting rights as to the shares acquired in the control share acquisition. A “control share acquisition” is defined as an acquisition that immediately thereafter entitles the acquiring party to exercise or direct the exercise of the voting power of the corporation in an election of directors within any of the following ranges:

 

one-fifth or more, but less than one-third, of all voting power;

 

one-third or more, but less than a majority, of all voting power; or

 

a majority or more of all voting power.

These statutory provisions may prevent takeover attempts that might result in a premium over the market price for shares of our common stock.

Articles of Incorporation and By-Laws

Number of Directors; Removal; Filling of Vacancies

Our Articles of Incorporation and By-Laws provide that our Board shall consist of nine directors, which number may be increased or diminished from time to time by resolution of the Board, but shall never be less than three directors.

Our shareholders may remove from office any director and elect his or her successor at any meeting called for that purpose by vote of a majority of the common stock issued and outstanding. When the office of a director becomes vacant for any reason, the remaining directors may elect a successor by a majority vote.

Shareholder Action

Our By-Laws provide that shareholder action may be taken at an annual or special meeting of shareholders. Special meetings of shareholders may be called only by our President or our Board, whenever he, she or they deem it proper and shall be called by the President or by our Board upon the written request of the shareholders holding a majority of common stock outstanding, subject to certain additional requirements set forth in our By-Laws.

Advance Notice for Shareholder Proposals or Nominations at Meetings

Our By-Laws establish an advance notice procedure for shareholder proposals to be brought before any meeting of shareholders and for nominations by shareholders of candidates for election as directors at meetings at which directors are to be elected. Subject to any other applicable requirements, including Rule 14a-8 under the Exchange Act, only such business may be conducted at an annual meeting of shareholders as has been:

 

specified in the notice of meeting (or in any supplement) given by, or at the direction of, our Board;

3


 

 

be otherwise properly brought before the meeting by, or at the direction of, our Board; or

 

be otherwise properly brought before the annual meeting by any shareholder who is a shareholder of record at the time such notice of meeting is delivered, who is entitled to vote at the meeting and who complies with the notice procedures set forth in Section 1.8 of our By-Laws, including, for any nominations or any other business to be properly brought before an annual meeting by a shareholder under that section, such shareholder must have given timely notice thereof in proper written form to our Secretary.

In addition, for business to be properly brought before an annual meeting by a shareholder, such business much be a proper matter for shareholder action pursuant to our By-Laws and under applicable law.

With respect to a special meeting of the shareholders, only such business may be conducted at the meeting as has been specified in the notice of such special meeting. Nominations of persons for election to the Board may be made at a special meeting of shareholders at which directors are to be elected pursuant to the notice of meeting: (i) by or at the direction of the Board or shareholders pursuant to Section 1.2 of our By-Laws or (ii) provided that the Board (or shareholders pursuant to Section 1.2 of our By-Laws) has determined that directors shall be elected at such meeting, by any shareholder who is a shareholder of record at the time the notice provided for in these By-Laws is delivered to us, who is entitled to vote at the meeting and upon such election and who complies with the notice procedures set forth in Section 1.8 of our By-Laws. At a meeting of shareholders, the chairman of the Board may disregard any nomination or other proposal not made in compliance with the foregoing procedures.

To be timely, a written notice of the intent of a shareholder to make a nomination of a person for election as a director or to bring any other business before an annual meeting must be received by our Secretary at our principal executive offices not earlier than the close of business on the 120th day and not later than the close of business on the 90th day prior to the first anniversary of the date of the preceding year’s annual meeting of shareholders; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to or delayed by more than 60 days after such anniversary date, such advance notice shall be given by the later of:

 

the close of business on the date 90 days prior to the date of the annual meeting; or

 

the close of business on the tenth day following the date that the annual meeting date is first made by us.

If we call a special meeting of shareholders for the purpose of electing directors, notice of nominations must be delivered to our Secretary not later than the close of business on the 90th day prior to the date of such special meeting, or if later, the tenth day following the date on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board to be elected at such meeting.

To be in proper written form, every such notice by a shareholder must set forth as to each matter such shareholder proposes to bring before an annual or special meeting of the shareholders, the following:

4


 

 

as to each person whom the shareholder proposes to nominate for election or reelection as a director (each, a “proposed nominee”):

(i) the name, date of birth, business address and residence address of the proposed nominee;

(ii) the principal occupation or employment of the proposed nominee;

(iii) the class or series and number of shares of our capital stock, if any, which are owned beneficially and of record by the proposed nominee;

(iv) any other information regarding each proposed nominee proposed by such shareholder as would be required to be included in a proxy statement or other filings required to be made in connection with the solicitation of proxies for election of directors pursuant to and in accordance with Section 14(a) of the Securities Exchange Act of 1934;

(v) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among such shareholder and beneficial owner, if any, on whose behalf the nomination is being made, and their respective affiliates and associates, or others acting in concert therewith, on the one hand, and each proposed nominee, and his or her respective affiliates and associates, or others acting in concert therewith, on the other hand; and

(vi) the written consent of each proposed nominee to serve as a director if so elected;

 

as to any other business that the shareholder proposes to bring before an annual meeting:

(i) a description of the matter and the text of the proposal or business (including the text of any resolutions proposed for consideration and, in the event that such business includes a proposal to amend our By-Laws, the text of the proposed amendment);

(ii) the reasons for conducting such business at the annual meeting; and

(iii) any other information relating to such shareholder and beneficial owner, if any, on whose behalf the proposal is being made, required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for the proposal and pursuant to and in accordance with Section 14(a) of the Securities Exchange Act of 1934;

 

as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal of other business is made:

(i) the name and address of such shareholder, as they appear on our stock transfer books, and the name and address of such beneficial owner;

(ii) the class or series and number of shares of our capital stock which are owned beneficially and of record by such shareholder and such beneficial owner;

5


 

(iii) the date or dates upon which such shareholder acquired ownership of such shares;

(iv) documentary evidence for any claim of beneficial ownership;

(v) a representation that the shareholder is a holder of record of our capital stock, entitled to vote at such meeting, and intends to appear in person or by proxy at the meeting to bring such business before the meeting;

(vi) a description of any agreement, arrangement or understanding with respect to such nomination between or among the shareholder and any of its affiliates or associates, and any others (including their names) acting in concert with any of the foregoing;

(vii) a description of any agreement, arrangement or understanding (including any derivative or short positions, profit interests, options, hedging transactions, and borrowed or loaned shares) that has been entered into as of the date of the shareholder’s notice by, or on behalf of, the shareholder or any of its affiliates or associates, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of the shareholder or any of its affiliates or associates with respect to our shares of stock; and

(viii) a representation whether the shareholder intends to deliver a proxy statement and/or form of proxy to holders of at least the percentage of our outstanding capital stock required to approve the nomination or proposal and/or otherwise to solicit proxies from shareholders in support of the nomination or proposal, as applicable.

Exclusive Forum Provision of our By-Laws

Our By-Laws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for certain actions shall be the Seventh Judicial Circuit Court in and for Volusia County, Florida (or, if no state court located within the State of Florida has jurisdiction, the federal district court for the Middle District of Florida). Those actions include: (i) any derivative action or proceeding brought on behalf of us, (ii) any action asserting a claim of breach of fiduciary duty owed by any of our directors or our officers or other employees to us or our shareholders, (iii) any action asserting a claim arising pursuant to any provision of the FBCA or the Articles of Incorporation or By-Laws (as either may be amended from time to time), or (iv) any action asserting a claim governed by the internal affairs doctrine.

Amendments to By-Laws

Our By-Laws may be amended or repealed and additional By-Laws added or adopted by a majority vote of the entire Board so long as the proposed action is not inconsistent with any By-Laws which may have been adopted by any shareholders meeting by a vote of the majority of our issued and outstanding common stock. Our By-Laws may be amended or repealed at any shareholders meeting by a vote of the majority of the issued and outstanding common stock of the Company.

6


 

Amendment of the Articles of Incorporation

Our Articles of Incorporation provide that the Articles of Incorporation may be amended in the manner provided by law. Every amendment shall be approved by our Board, proposed by them to our shareholders, and approved at a shareholders meeting by a majority of the shares entitled to vote thereon, unless all directors and all shareholders sign a written statement manifesting their intention that a certain amendment of our Articles of Incorporation be made.

 

7

Exhibit 21

 

 

 

 

Entity Name

Domestic Jurisdiction

Acumen RE Management Corporation

Delaware

Adeo Solutions, LLC

Massachusetts

Advocate Insurance Services Corp.

Delaware

Advocator Group Holding Company, Inc.

Florida

Aevo Insurance Services, LLC

Florida

AFC Insurance, Inc.

Pennsylvania

AGIA Premium Finance Company, Inc.

California

Allocation Services, Inc.

Florida

American Claims Management - Atlantic Region, LLC

Georgia

American Claims Management, Inc.

California

American Specialty Insurance & Risk Services, Inc.

Indiana

Apex Insurance Agency, LLC

Virginia

Arrowhead General Insurance Agency Holding Corp.

Delaware

Arrowhead General Insurance Agency Superholding Corp.

Delaware

Arrowhead General Insurance Agency, Inc.

Minnesota

Arrowhead Insurance Risk Managers, LLC fka Arrowhead Specialty Underwriting, LLC

Georgia

Arrowhead Online Insurance Services, LLC

California

AVIRS Acquisition, LLC

Pennsylvania

Axiom Re, LP

Florida

Azure International Holding Co.

Delaware

B&B Canada Holdco, Inc.

Delaware

B&B Fitness PG, Inc.

Colorado

B&B Metro Holding, Inc.

New Jersey

B&B PF, LLC

Pennsylvania

B&B Protector Plans, Inc.

Florida

B&B TN Holding Company, Inc.

Delaware

BB FL Holding 2, LLC

Florida

BB FL Holding, LLC

Florida

Beecher Carlson Bermuda, Ltd.

Bermuda

Beecher Carlson Brokerage, Ltd.

Bermuda

Beecher Carlson Cayman, Ltd.

Cayman Islands

Beecher Carlson Holdings, Inc.

Delaware

Beecher Carlson Insurance Services of Colorado, LLC

Colorado

Beecher Carlson Insurance Services, LLC

California

Beecher Carlson of Florida, Inc.

Florida

Benefit Integration Management Services, LLC

Delaware

Bridge Specialty Group, LLC

Florida

Bridge Specialty Wholesale, Inc.

Florida

Brown & Brown Benefit Advisors, Inc.

New Jersey

Brown & Brown Disaster Relief Foundation, Inc.

Florida

Brown & Brown Insurance Agency of Virginia, Inc.

Virginia

Brown & Brown Insurance Brokers of Sacramento, Inc.

California

Brown & Brown Insurance of Arizona, Inc.

Arizona

Brown & Brown Insurance of Georgia, Inc.

Georgia

Brown & Brown Insurance of Nevada, Inc.

Nevada

Brown & Brown Insurance Services of California, Inc.

California

Brown & Brown Lone Star Insurance Services, Inc.

Texas

Brown & Brown Metro, LLC

New Jersey

Brown & Brown NJ Holding Co., Inc.

Florida

Brown & Brown of Arkansas, Inc.

Arkansas

Brown & Brown of Canada, Inc.

Federally Chartered

Brown & Brown of Central Carolina, LLC

North Carolina

Brown & Brown of Central Michigan, Inc.

Michigan


Brown & Brown of Colorado, Inc.

Colorado

Brown & Brown of Connecticut, Inc.

Connecticut

Brown & Brown of Delaware, Inc.

Delaware

Brown & Brown of Detroit, Inc.

Michigan

Brown & Brown of Florida, Inc.

Florida

Brown & Brown of Garden City, Inc.

Florida

Brown & Brown of Illinois, Inc.

Illinois

Brown & Brown of Indiana, LLC

Indiana

Brown & Brown of Iowa, Inc.

Iowa

Brown & Brown of Kentucky, Inc.

Kentucky

Brown & Brown of Lehigh Valley, LP

Pennsylvania

Brown & Brown of Louisiana, LLC

Louisiana

Brown & Brown of Massachusetts, LLC

Massachusetts

Brown & Brown of Michigan, Inc.

Michigan

Brown & Brown of Minnesota, Inc.

Minnesota

Brown & Brown of Mississippi, LLC

Delaware

Brown & Brown of Missouri, Inc.

Missouri

Brown & Brown of Nashville, Inc.

Tennessee

Brown & Brown of New Hampshire, Inc.

New Hampshire

Brown & Brown of New Jersey, LLC

New Jersey

Brown & Brown of New Mexico, Inc.

New Mexico

Brown & Brown of New York, Inc.

New York

Brown & Brown of North Dakota, Inc.

North Dakota

Brown & Brown of Ohio, LLC

Ohio

Brown & Brown of Oklahoma, Inc.

Oklahoma

Brown & Brown of Oregon, LLC

Oregon

Brown & Brown of Pennsylvania, LP

Pennsylvania

Brown & Brown of South Carolina, Inc.

South Carolina

Brown & Brown of Tennessee, Inc.

Tennessee

Brown & Brown of Washington, Inc.

Washington

Brown & Brown of West Virginia, Inc.

West Virginia

Brown & Brown of Wisconsin, Inc.

Wisconsin

Brown & Brown PA Holding Co. 2, LLC

Florida

Brown & Brown PA Holding Co., LLC

Florida

Brown & Brown Pacific Insurance Services, Inc.

Hawaii

Brown & Brown Program Insurance Services, Inc.

California

Brown & Brown Realty Co.

Delaware

Brown & Brown, Inc.

Florida

Brown Holding, Inc.

Illinois

CC Acquisition Corp.

Florida

Decus Holdings (UK) Limited

United Kingdom

Decus Insurance Brokers Limited

United Kingdom

DTBB, LLC

Florida

ECC Insurance Brokers, LLC

Illinois

Elohssa, Inc.

Florida

Fitness Underwriters RPG, Inc.

Virginia

Florida Intracoastal Underwriters, Limited Company

Florida

Hays Companies, Inc.

Florida

Health Special Risk, Inc.

Minnesota

Healthcare Insurance Professionals, Inc.

Texas

Hull & Company of New York, Inc.

New York

Hull & Company, LLC

Florida

ICA, LP

North Carolina

Independent Consulting & Risk Management Services, Inc.

California

Industry Consulting Group, Inc.

Florida

International E & S Insurance Brokers, Inc.

California

Irving Weber Associates, Inc.

New York

MacDuff Underwriters, LLC

Florida


Madoline Corporation

Florida

Marquee Managed Care Solutions, Inc.

California

Medval, LLC

Missouri

Monarch Management Corporation

Kansas

New SSAD Holding, LLC

Delaware

OnPoint Insurance Services, LLC

Delaware

OnPoint Underwriting, Inc.

Delaware

Pacific Resources Benefits Advisors, LLC

Illinois

Peachtree Special Risk Brokers of New York, LLC

New York

Peachtree Special Risk Brokers, LLC

Georgia

PillarRx Consulting, LLC

Florida

Preferred Governmental Claim Solutions, Inc.

Florida

Proctor Financial, Inc.

Michigan

Professional Disability Associates, LLC

Maine

Program Management Services, Inc.

Florida

Public Risk Underwriters Insurance Services of Texas, LLC

Texas

Public Risk Underwriters of Florida, Inc.

Florida

Public Risk Underwriters of Illinois, LLC

Illinois

Public Risk Underwriters of Indiana, LLC

Indiana

Public Risk Underwriters of New Jersey, Inc.

New Jersey

Public Risk Underwriters of The Northwest, Inc.

Washington

Public Risk Underwriters, LLC

Florida

Risk Management Associates, Inc.

Florida

Servco Insurance Services Washington LLC

Delaware

Social Security Advocates for the Disabled, LLC

Delaware

Special Risk Insurance Managers Ltd.

Federally Chartered

Spectrum Wholesale Insurance Services, LLC

Delaware

Superior Recovery Services, Inc.

California

Texas Security General Insurance Agency, LLC

Texas

The Advocator Group, LLC

Florida

The Wright Insurance Group LLC

Delaware

Title Pac, Inc.

Oklahoma

TriCoast Insurance Services, LLC

Georgia

TSG Premium Finance, LLC

Texas

USIS, Inc.

Florida

Valiant Insurance Services, LLC fka Alexander Anthony Insurance, LLC

Utah

Wright Managed Care LLC

New York

Wright National Flood Insurance Company

Texas

Wright National Flood Insurance Services of New York LLC

New York

Wright National Flood Insurance Services, LLC

Delaware

Wright Program Management, LLC

Delaware

Wright Risk Consulting, LLC

Delaware

Wright Risk Management Company, LLC

Delaware

Wright RPG, LLC

Delaware

Wright Specialty Insurance Agency, LLC

Delaware

WRM America Intermediate Holding Co., Inc.

Delaware

YouZoom Insurance Services, Inc.

California

 

 

 

Exhibit 23

 

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in No. 33-41204 on Form S-8, as amended by Amendment No. 1 (Form S-8 No. 333-04888) and in Registration Statement Nos. 333-14925, 333-43018, 333-109322, 333-109327, 333-200146, 333-206518, 333-212110, 333-214720, 333-218011, 333-231464, and 333-231467 on Form S-8 and No. 333-221494 on Form S-3 of our report dated February 24, 2020, relating to the consolidated financial statements of Brown & Brown, Inc. and subsidiaries (“Brown & Brown”) and the effectiveness of Brown & Brown's internal control over financial reporting appearing in this Annual Report on Form 10-K for the year ended December 31, 2019.

 

 

/s/ DELOITTE & TOUCHE LLP

Certified Public Accountants

 

Tampa, Florida

February 24, 2020

Exhibit 24

POWER OF ATTORNEY

 

The undersigned constitutes and appoints Robert W. Lloyd and R. Andrew Watts, or either of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the 2019 Annual Report on Form 10-K for Brown & Brown, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‑in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.

 

 

 

/s/ SAMUEL P. BELL III

 

 

Samuel P. Bell, III

 

 

 

Dated: January 22, 2020

 

 

 


 

POWER OF ATTORNEY

 

The undersigned constitutes and appoints Robert W. Lloyd and R. Andrew Watts, or either of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the 2019 Annual Report on Form 10-K for Brown & Brown, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‑in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.

 

 

/s/ HUGH M. BROWN

 

 

Hugh M. Brown

 

 

 

Dated: January 22, 2020

 

 

 


 

POWER OF ATTORNEY

 

The undersigned constitutes and appoints Robert W. Lloyd and R. Andrew Watts, or either of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the 2019 Annual Report on Form 10-K for Brown & Brown, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‑in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.

 

 

 

/s/ J. HYATT BROWN

 

 

J. Hyatt Brown

 

 

 

Dated: January 22, 2020

 

 

 


 

POWER OF ATTORNEY

 

The undersigned constitutes and appoints Robert W. Lloyd and R. Andrew Watts, or either of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the 2019 Annual Report on Form 10-K for Brown & Brown, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‑in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.

 

 

 

/s/ J. POWELL BROWN

 

 

J. Powell Brown

 

 

 

Dated: January 22, 2020

 

 

 


 

POWER OF ATTORNEY

 

The undersigned constitutes and appoints Robert W. Lloyd and R. Andrew Watts, or either of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the 2019 Annual Report on Form 10-K for Brown & Brown, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‑in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.

 

 

 

/s/ BRADLEY CURREY, JR.

 

 

Bradley Currey, Jr.

 

 

 

Dated: January 22, 2020

 

 

 


 

POWER OF ATTORNEY

 

The undersigned constitutes and appoints Robert W. Lloyd and R. Andrew Watts, or either of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the 2019 Annual Report on Form 10-K for Brown & Brown, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‑in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.

 

 

 

/s/ LAWRENCE L. GELLERSTEDT, III

 

 

Lawrence L. Gellerstedt, III

 

 

 

Dated: January 22, 2020

 

 

 


 

POWER OF ATTORNEY

 

The undersigned constitutes and appoints Robert W. Lloyd and R. Andrew Watts, or either of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the 2019 Annual Report on Form 10-K for Brown & Brown, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‑in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.

 

 

/s/ JAMES HAYS

 

 

James Hays

 

 

 

Dated: January 22, 2020

 

 

 


 

POWER OF ATTORNEY

 

The undersigned constitutes and appoints Robert W. Lloyd and R. Andrew Watts, or either of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the 2019 Annual Report on Form 10-K for Brown & Brown, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‑in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.

 

 

 

/s/ THEODORE J. HOEPNER

 

 

Theodore J. Hoepner

 

 

 

Dated: January 22, 2020

 

 

 


 

POWER OF ATTORNEY

 

The undersigned constitutes and appoints Robert W. Lloyd and R. Andrew Watts, or either of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the 2019 Annual Report on Form 10-K for Brown & Brown, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‑in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.

 

 

/s/ JAMES S. HUNT

 

 

James S. Hunt

 

 

 

Dated: January 22, 2020

 

 

 


 

POWER OF ATTORNEY

 

The undersigned constitutes and appoints Robert W. Lloyd and R. Andrew Watts, or either of them, as her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for her and in her name, place and stead, in any and all capacities, to sign the 2019 Annual Report on Form 10-K for Brown & Brown, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‑in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as she might or could in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.

 

 

/s/ TONI JENNINGS

 

 

Toni Jennings

 

 

 

Dated: January 22, 2020

 

 

 


 

POWER OF ATTORNEY

 

The undersigned constitutes and appoints Robert W. Lloyd and R. Andrew Watts, or either of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the 2019 Annual Report on Form 10-K for Brown & Brown, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‑in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.

 

 

 

/s/ TIMOTHY R.M. MAIN

 

 

Timothy R.M. Main

 

 

 

Dated: January 22, 2020

 

 

 


 

POWER OF ATTORNEY

 

The undersigned constitutes and appoints Robert W. Lloyd and R. Andrew Watts, or either of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the 2019 Annual Report on Form 10-K for Brown & Brown, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‑in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.

 

 

 

/s/ H. PALMER PROCTOR, JR.

 

 

H. Palmer Proctor, Jr.

 

 

 

Dated: January 22, 2020

 

 

 


 

POWER OF ATTORNEY

 

The undersigned constitutes and appoints Robert W. Lloyd and R. Andrew Watts, or either of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the 2019 Annual Report on Form 10-K for Brown & Brown, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‑in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.

 

 

/s/ WENDELL S. REILLY

 

 

Wendell S. Reilly

 

 

 

Dated: January 22, 2020

 

 

 


 

POWER OF ATTORNEY

 

The undersigned constitutes and appoints Robert W. Lloyd and R. Andrew Watts, or either of them, as her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for her and in her name, place and stead, in any and all capacities, to sign the 2019 Annual Report on Form 10-K for Brown & Brown, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‑in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as she might or could in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.

 

 

/s/ CHILTON D. VARNER

 

 

Chilton D. Varner

 

 

 

Dated: January 22, 2020

 

 

 

Exhibit 31.1

CERTIFICATIONS

I, J. Powell Brown, certify that:

1. I have reviewed this annual report on Form 10-K of Brown & Brown, Inc. (Registrant);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: February 24, 2020

 

 

 

 

/s/ J. Powell Brown

J. Powell Brown

President and Chief Executive Officer

 

 

Exhibit 31.2

CERTIFICATIONS

I, R. Andrew Watts, certify that:

1. I have reviewed this annual report on Form 10-K of Brown & Brown, Inc. (Registrant);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: February 24, 2020

 

 

 

 

/s/ R. Andrew Watts

R. Andrew Watts

Executive Vice President,

Chief Financial Officer and Treasurer

 

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Brown & Brown, Inc. (Company) on Form 10-K for the fiscal year ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (Form 10-K), I, J. Powell Brown, President and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. § 78m or § 78o(d)); and

(2) The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: February 24, 2020

 

/s/ J. Powell Brown

J. Powell Brown

President and Chief Executive Officer

 

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Brown & Brown, Inc. (Company) on Form 10-K for the fiscal year ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (Form 10-K), I, R. Andrew Watts, Executive Vice President, Chief Financial Officer and Treasurer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. § 78m or § 78o(d)); and

(2) The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: February 24, 2020

 

/s/ R. Andrew Watts

R. Andrew Watts

Executive Vice President,

Chief Financial Officer and Treasurer