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.

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

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Disclosure Regarding Forward-Looking Statements

Brown & Brown, Inc., together with its subsidiaries (collectively, “we,” “Brown & Brown” or the “Company”), makes “forward-looking statements” within the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995, as amended, throughout this report and in the documents we incorporate by reference into this report. You can identify these statements by forward-looking words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “estimate,” “plan” and “continue” or similar words. We have based these statements on our current expectations about potential future events. Although we believe the expectations expressed in the forward-looking statements included in this 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;

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• 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.

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PART I

ITEM 1. Business.

General

Brown & Brown is a diversified insurance agency, wholesale brokerage, insurance programs and service organization with origins dating from 1939 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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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

The credit agreements that govern our debt contain various covenants and other limitations with which we must comply. At December 31, 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.

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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;

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• 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.

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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

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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.”

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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.

ITEM 3. Legal Proceedings.

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

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ITEM 4. Mine Safety Disclosures.

Not applicable.

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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

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ITEM 6. Selected Financial Data.

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

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

General

The following discussion should be read in conjunction with our Consolidated Financial Statements and the related Notes to those 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

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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”.

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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.

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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.

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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.

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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.

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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.

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

As of December 31, 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.

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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

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

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

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

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.

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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.

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Wholesale Brokerage Segment

The Wholesale Brokerage Segment markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers, 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

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.

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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

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

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

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

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

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

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

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 Summary of Significant Accounting Policies

Nature of Operations

Brown & Brown, Inc., a Florida corporation, and its subsidiaries (collectively, “Brown & Brown” or the “Company”) is a diversified insurance agency, wholesale brokerage, insurance programs and 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

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 Company’s 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 Company’s results of operations presented in the Company’s 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.

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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 Company’s 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 Company’s 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.

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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

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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.

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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.

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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.

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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.

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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.

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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

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

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(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

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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

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

(in thousands)	Opus		Kerxton			ADG		Servco			Tower Hill		HSR			PDA			F&I		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

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	$