Business Combinations

3 Months Ended

Mar. 31, 2015

Business Combinations [Abstract]

Business Combinations

Business Combinations

During the three months ended March 31, 2015, Brown & Brown acquired the assets and assumed certain liabilities of three insurance intermediaries and two books of business (customer accounts). Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last twelve months as permitted by Accounting Standards Codification Topic 805 — Business Combinations (“ASC 805”). All of these acquisitions were acquired primarily to expand Brown & Brown’s core business and to attract and hire high-quality individuals. The recorded purchase price for all acquisitions consummated after January 1, 2009 included an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations will be recorded in the Condensed Consolidated Statement of Income when incurred.

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

Based on the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company’s Condensed Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period, as defined in ASC 805. For the three months ended March 31, 2015, several adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $634,680 relating to the assumption of certain liabilities.

Cash paid for acquisitions were $36.2 million and $1.0 million in the three-month periods ended March 31, 2015 and 2014, respectively. We completed three acquisitions (excluding book of business purchases) in the three-month period ended March 31, 2015. We completed one acquisition (excluding book of business purchases) in the three-month period ended March 31, 2014.

The following table summarizes the purchase price allocation made as of the date of each acquisition for current year acquisitions and 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
Liberty Insurance Brokers, Inc. and Affiliates (Liberty)	Retail	February 1, 2015	$	12,000	$	—	$	1,436	$	13,436	$	3,750
Spain Agency, Inc.	Retail	March 1, 2015	20,681		—		2,750		23,431		9,162
Other	Various	Various	3,514		5		1,467		4,986		2,000
Total			$	36,195	$	5	$	5,653	$	41,853	$	14,912

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

(in thousands)	Liberty			Spain Agency, Inc.			Other			Total
Other current assets	$	2,437		$	—		$	(445	)	$	1,992
Fixed assets	40			50			18			108
Goodwill	8,689			16,682			4,047			29,418
Purchased customer accounts	4,289			6,715			1,423			12,427
Non-compete agreements	24			21			13			58
Total assets acquired	15,479			23,468			5,056			44,003
Other current liabilities	—			(37		)	(705		)	(742		)
Other liabilities	(2,043		)	—			635			(1,408		)
Total liabilities assumed	(2,043		)	(37		)	(70		)	(2,150		)
Net assets acquired	$	13,436		$	23,431		$	4,986		$	41,853

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 $29,418,000 was allocated to the Retail, National Programs and Wholesale Brokerage Segments in the amounts of $26,461,000, $(194,000) and $3,151,000, respectively. Of the total goodwill of $29,418,000, $23,959,000 is currently deductible for income tax purposes and $(194,000) is non-deductible. The remaining $5,653,000 relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

For the acquisitions completed during 2015, the results of operations since the acquisition date have been combined with those of the Company. The total revenues and income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through March 31, 2015, included in the Condensed Consolidated Statement of Income for the three months ended March 31, 2015, were $1,726,000 and $294,000, respectively. If the acquisitions had occurred as of the beginning of the respective periods, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.

(UNAUDITED)	For the three months   ended March 31,
(in thousands, except per share data)	2015		2014
Total revenues	$	406,379	$	367,131
Income before income taxes	$	94,463	$	87,913
Net income	$	57,367	$	53,064
Net income per share:
Basic	$	0.40	$	0.36
Diluted	$	0.40	$	0.36
Weighted average number of shares outstanding:
Basic	139,360		141,610
Diluted	141,487		143,309

As of March 31, 2015 and 2014, the fair values of the estimated acquisition earn-out payables were re-evaluated and measured at fair value on a recurring basis using unobservable inputs (Level 3) as defined in ASC 820-Fair Value Measurement. The resulting additions, payments, and net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the three months ended March 31, 2015 and 2014, were as follows:

	For the three months   ended March 31,
(in thousands)	2015			2014
Balance as of the beginning of the period	$	75,283		$	43,058
Additions to estimated acquisition earn-out payables	5,653			280
Payments for estimated acquisition earn-out payables	(4,590		)	(615		)
Subtotal	76,346			42,723
Net change in earnings from estimated acquisition earn-out payables:
Change in fair value on estimated acquisition earn-out payables	677			5,603
Interest expense accretion	686			480
Net change in earnings from estimated acquisition earn-out payables	1,363			6,083
Balance as of March 31, 2015	$	77,709		$	48,806

Of the $77.7 million estimated acquisition earn-out payables as of March 31, 2015, $29.3 million was recorded as accounts payable and $48.4 million was recorded as other non-current liabilities.