Business Combinations

9 Months Ended

Sep. 30, 2022

NOTE 5 Business Combinations

During the nine months ended September 30, 2022, Brown & Brown acquired all of the stock of seven insurance intermediaries, assets and assumed certain liabilities of ten insurance intermediaries, and four books of business (customer accounts) for a total of 21 acquisitions. Additionally, adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last 12 months as permitted by Accounting Standards Codification Topic 805 — Business Combinations (“ASC 805”). Such adjustments are presented in the “Other” category within the following two tables. The recorded purchase price for all acquisitions includes an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations will be recorded in the Condensed Consolidated Statements of Income when incurred.

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

Based on the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company’s Condensed Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period, as defined in ASC 805. For the nine months ended September 30, 2022, adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $0.4 million. These measurement period adjustments have been reflected as current period adjustments in the nine months ended September 30, 2022 in accordance with the guidance in ASU 2015-16 “Business Combinations.” The measurement period adjustments primarily impacted goodwill, with no effect on earnings or cash in the current period.

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. Cash paid for 21 acquisitions was $2,504.7 million during the nine months ended September 30, 2022. 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 millions)
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
Orchid Intermediate Holdings, L.P. (Orchid)	National Programs	March 31, 2022	$	476.2	$	—	$	—	$	10.8	$	487.0	$	20.0
GRP (Jersey) Holdco Limited (GRP)	Retail National Programs Wholesale	July 1, 2022		1,839.8		14.7		—		—		1,854.5		—
First Insurance Solutions Ltd. (First)	Retail	July 8, 2022		13.0		—		1.4		8.3		22.7		8.4
BdB Holdings Limited (BdB)	Wholesale	August 1, 2022		75.3		—		—		11.4		86.7		36.3
Smithwick & Mariners Insurance, Inc. (Smithwick)	Retail	September 1, 2022		23.2		—		1.0		1.6		25.8		6.5
VistaNational Insurance Group, Inc. (VistaNational)	Retail	September 1, 2022		26.7		—		0.8		1.1		28.6		3.0
Other	Various	Various		50.5		—		1.4		8.9		60.8		17.9
Total			$	2,504.7	$	14.7	$	4.6	$	42.1	$	2,566.1	$	92.1

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 millions)	Orchid			GRP			First			BdB			Smithwick			VistaNational			Other (1)			Total
Cash and equivalents	$	3.2		$	80.3		$	2.4		$	15.8		$	—		$	—		$	0.3		$	102.0
Fiduciary cash		40.5			457.5			1.4			13.6			—			—			—			513.0
Fiduciary receivables		12.5			127.4			—			21.6			—			—			—			161.5
Other current assets		0.1			86.9			1.0			5.1			0.2			1.4			(9.2	)		85.5
Fixed assets		1.8			17.9			—			0.6			—			0.1			5.3			25.7
Goodwill		400.5			1,365.1			12.9			53.7			20.5			21.2			48.3			1,922.2
Purchased customer accounts and other		119.2			490.7			6.9			16.0			6.7			6.1			15.7			661.3
Non-compete agreements		—			—			—			0.3			0.1			0.1			0.7			1.2
Operating lease right-of-use assets		6.0			18.7			—			—			—			—			—			24.7
Other assets		1.9			8.8			—			3.1			—			—			0.2			14.0
Total assets acquired		585.7			2,653.3			24.6			129.8			27.5			28.9			61.3			3,511.1
Fiduciary liabilities		(53.0	)		(584.9	)		(1.4	)		(35.2	)		—			—			—			(674.5	)
Other current liabilities		(9.5	)		(62.3	)		(0.5	)		(2.1	)		(1.7	)		(0.3	)		(0.5	)		(76.9	)
Deferred income tax, net		(30.2	)		(122.5	)		—			(4.0	)		—			—			—			(156.7	)
Operating lease liabilities		(6.0	)		(18.7	)		—			—			—			—			—			(24.7	)
Other long-term liabilities		—			(10.4	)		—			(1.8	)		—			—			—			(12.2	)
Total liabilities assumed		(98.7	)		(798.8	)		(1.9	)		(43.1	)		(1.7	)		(0.3	)		(0.5	)		(945.0	)
Net assets acquired	$	487.0		$	1,854.5		$	22.7		$	86.7		$	25.8		$	28.6		$	60.8		$	2,566.1

(1)

The other column represents current year acquisitions with total net assets acquired of less than $20.0 million and adjustments from prior year acquisitions that were made within the permitted measurement period.

The weighted average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 14.3 years; and non-compete agreements, 4.2 years.

Goodwill of $1,922.2 million, which is net of any opening balance sheet adjustments within the allowable measurement period, was allocated to the Retail, National Programs, and Wholesale Brokerage Segments in the amounts of $1,389.0 million, $427.8 million, and $105.4 million, respectively. Of the total goodwill of $1,922.2 million, the amount currently deductible for income tax purposes is $70.7 million. Of the remaining $1,851.5 million of goodwill, $1,846.5 million relates to goodwill that will not be deductible for income tax purposes and $5.0 million relates to recorded earn-out payables which will not be deductible for income tax purposes until it is earned and paid.

For the acquisitions completed during 2022, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues from the acquisitions completed through September 30, 2022, included in the Condensed Consolidated Statement of Income for the nine months ended September 30, 2022, was $116.9 million. The income before income taxes from the acquisitions completed through September 30, 2022, included in the Condensed Consolidated Statement of Income for the nine months ended September 30, 2022, was $7.5 million. If the acquisitions had occurred as of the beginning of the respective periods, the Company’s estimated results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.


(UNAUDITED)	Three months ended September 30,				Nine months ended September 30,
(in millions, except per share data)	2022		2021		2022		2021
Total revenues	$	931.1	$	879.1	$	2,873.6	$	2,641.1
Income before income taxes	$	218.9	$	193.4	$	696.0	$	613.1
Net income	$	161.8	$	144.1	$	537.5	$	478.5
Net income per share:
Basic	$	0.57	$	0.51	$	1.90	$	1.69
Diluted	$	0.57	$	0.51	$	1.89	$	1.69
Weighted average number of shares outstanding:
Basic		277.8		276.5		277.5		276.1
Diluted		278.7		277.8		278.7		277.4

As of September 30, 2022 and 2021, the fair values of the estimated acquisition earn-out payables were re-evaluated and measured at fair value on a recurring basis using unobservable inputs (Level 3) as defined in ASC 820- Fair Value Measurement. The resulting additions, payments, and net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the three and nine months ended September 30, 2022 and 2021, were as follows:


	Three months ended September 30,						Nine months ended September 30,
(in millions)	2022			2021			2022			2021
Balance as of the beginning of the period	$	232.9		$	242.0		$	291.0		$	258.9
Additions to estimated acquisition earn-out payables		25.2			—			42.1			25.2
Assumed acquisition earn-out payables		34.8			—			34.8			—
Payments for estimated acquisition earn-out payables		(10.6	)		(1.9	)		(77.1	)		(41.8	)
Subtotal		282.3			240.1			290.8			242.3
Net change in earnings from estimated acquisition earn-out payables:
Change in fair value on estimated acquisition earn-out payables		(28.5	)		21.8			(38.1	)		15.8
Interest expense accretion		1.9			1.3			5.0			4.8
Net change in earnings from estimated acquisition earn-out payables		(26.6	)		23.1			(33.1	)		20.6
Foreign currency translation adjustments during the year		(5.8	)		(0.3	)		(7.8	)		—
Balance as of September 30,	$	249.9		$	262.9		$	249.9		$	262.9

Of the $249.9 million estimated acquisition earn-out payables as of September 30, 2022, $100.5 million was recorded as accounts payable and $149.4 million was recorded as other non-current liabilities. As of September 30, 2022, the maximum future acquisition contingency payments related to all acquisitions was $550.3 million, inclusive of the $249.9 million estimated acquisition earn-out payables as of September 30, 2022. Four of the estimated acquisition earn-out payables assumed in connection with the acquisition of GRP included provisions with no maximum potential earn-out amount. The amount recorded for these acquisitions as of September 30, 2022 is $2.8 million. The Company deems a significant increase to this amount to be unlikely. Included within the additions to estimated acquisition earn-out payables are any adjustments to opening balance sheet items within the allowable measurement period, which may therefore differ from previously reported amounts.