Brown & Brown (BRO) 10-K risk factor changes: FY2014 vs FY2013

CURRENT U.S. ECONOMIC CONDITIONS AND THE SHIFT AWAY FROM TRADITIONAL INSURANCE MARKETS MAY CONTINUE TO [removed: ADVERSLY] [added: ADVERSELY] AFFECT OUR BUSINESS.

In 2012, the economic conditions in the middle-market economy appeared to stabilize, and a gradual improvement continued through [removed: 2013.][added: 2013 and 2014.]

Integrated, acquired businesses may not achieve levels of [removed: revenues, profitability,] [added: revenues] or [removed: productivity] [added: profitability] comparable to our existing operations, or otherwise perform as expected.

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; unanticipated problems or legal liabilities; estimation of the acquisition earn-out payables; and tax and accounting issues, some or [added: all of which could have a material adverse effect on the results of our operations, financial condition and cash flows.]

[removed: Traditionally, we have maintained] [added: We maintain] cash and investment balances, including restricted cash held in premium trust accounts, at various depository institutions in amounts that are significantly in excess of the limits insured by the FDIC.

OUR BUSINESS, AND THEREFORE OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION, MAY BE ADVERSELY AFFECTED BY [removed: THE] FURTHER [removed: DISRUPTION] [added: CHANGES] IN THE U.S.-BASED CREDIT [removed: MARKETS AND BY FURTHER INSTABILITY OF FINANCIAL SYSTEMS.][added: MARKETS.]

Although we are not currently experiencing any limitation of access to our revolving credit facility (which matures in [removed: 2016)] [added: 2019)] 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.

[removed: Continued adverse] [added: Tightening] conditions in the credit markets in future years could adversely affect the availability and terms of future borrowings or renewals or [removed: refinancings.][added: refinancing.]

Our results of operations depend on the continued capacity of insurance carriers to underwrite risk and provide coverage, which depends in turn on [added: those] insurance companies’ ability to procure reinsurance.

This could harm our margins and profitability if we are unable to increase [removed: prices] [added: revenues] or cut costs enough to offset the effects of inflation on our cost base.

As of the date of the filing of our Annual Report on Form 10-K for the [removed: 2013] [added: 2014] fiscal year, we have [removed: $2,006,173,000] [added: $2,460,610,929] of goodwill recorded on our Consolidated Balance Sheet.

We completed our most recent evaluation of impairment for goodwill as of November 30, [removed: 2013] [added: 2014] and determined that the fair value of goodwill exceeded the carrying value of such assets.

See [removed: Notes] [added: Note] 1—“Summary of Significant Accounting Policies” and Note 3—“Goodwill” to the Consolidated Financial Statements and “Management’s Report on Internal Control Over Financial Reporting.”

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, [removed: 2013, 2012] [added: 2014, 2013] and [removed: 2011.][added: 2012.]

For the year ended December 31, [removed: 2013,] [added: 2014,] no insurance company accounted for more than [removed: 8.0%] [added: 7.0%] of our total core commissions.

For the year ended December 31, [removed: 2012] [added: 2013] and [removed: 2011,] [added: 2012,] approximately [removed: 5.0%] [added: 8.0%] and [removed: 5.2%] [added: 5.0% respectively,] of our total core commissions [removed: was] [added: were] derived from insurance policies underwritten by one insurance [removed: company, respectively.][added: company.]

BECAUSE OUR BUSINESS IS HIGHLY CONCENTRATED IN CALIFORNIA, FLORIDA, GEORGIA, [added: ILLINOIS,] INDIANA, KANSAS, MASSACHUSETTS, MICHIGAN, NEW JERSEY, NEW YORK, [added: NORTH CAROLINA,] OREGON, PENNSYLVANIA, TEXAS, VIRGINIA AND WASHINGTON, ADVERSE ECONOMIC [removed: CONDITIONS] [added: CONDITIONS, NATURAL DISASTERS,] OR REGULATORY CHANGES IN THESE STATES COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.

A significant portion of our business is concentrated in California, Florida, Georgia, [added: Illinois,] Indiana, Kansas, Massachusetts, Michigan, New Jersey, New York, [added: North Carolina,] Oregon, Pennsylvania, Texas, Virginia and Washington.

For the years ended December 31, [removed: 2013, 2012] [added: 2014, 2013] and [removed: 2011,] [added: 2012,] we derived [removed: $1,123.7] [added: $1,361.5] million or [removed: 82.9%, $976.7] [added: 86.4%, $1,163.8] million or [removed: 82.1%] [added: 85.4%] and [removed: $803.5 million,] [added: $1,016.5 million] or [removed: 79.9%,] [added: 84.8%,] of our [removed: commissions and fees,] [added: revenues,] respectively, from our operations located in these states.

WE HAVE [removed: EXPANDED OUR] 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.

In addition, [removed: as] and to the extent that banks, securities firms 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 [removed: intermediaries, than we currently offer.][added: intermediary services.]

Further, we have no control over the ability of insurance companies to estimate loss reserves, which affects our ability to make profit-sharing [added: calculations.]

Our commission income (including profit-sharing contingent commissions and override [removed: commissions but excluding fees)] [added: commissions)] can vary quarterly or annually due to the timing of policy renewals and the net effect of new and lost business production.

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 [added: forecast these revenues and therefore] budget for significant future expenditures.

We are susceptible to losses and interruptions caused by hurricanes [removed: (including] [added: (particularly] in Florida, where our headquarters are [removed: located),] [added: located and we maintain several offices),] earthquakes (including California, where we maintain a relatively large number of offices), power shortages, telecommunications failures, water shortages, floods, fire, extreme weather conditions, geopolitical events such as terrorist acts and other natural or manmade disasters.

At December 31, [removed: 2013,] [added: 2014,] our executive officers, directors and certain of their family members collectively beneficially owned approximately [removed: 18.3%] [added: 17.8%] of our outstanding common stock, of which J.

Barrett Brown, one of our [removed: Regional] [added: Senior] Vice Presidents, beneficially owned approximately [removed: 16.4%.][added: 16.0%.]

Also, as [removed: global warming] [added: climate change] issues become more prevalent, the U.S. and foreign governments are beginning to respond to these issues.

This increasing governmental focus on [removed: global warming] [added: climate change] may result in new environmental regulations that may negatively affect us and our customers.

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, 2014, 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, including the notes, 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, the Credit Facility requires 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 limits our management’s discretion in operating our business and could prevent us from engaging in certain potentially beneficial activities.

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 have operations in the United Kingdom, Hamilton, Bermuda and George Town, Cayman Islands.

WE CANNOT ACCURATELY FORECAST OUR COMMISSION REVENUES BECAUSE OUR COMMISSIONS DEPEND ON PREMIUM RATES CHARGED BY INSURANCE COMPANIES, WHICH HISTORICALLY HAVE VARIED AND, AS A RESULT, HAVE BEEN DIFFICULT TO PREDICT.

We are primarily engaged in the insurance agency, wholesale brokerage, and insurance programs business, and derive revenues principally from commissions paid by insurance companies.

Commissions are based upon a percentage of premiums paid by customers for insurance products.

The amount of such commissions is therefore highly dependent on premium rates charged by insurance companies.

We do not determine insurance premiums.

Premium rates are determined by insurance companies based on a fluctuating market.

Historically, property and casualty premiums have been cyclical in nature and have varied widely based on market conditions.

As traditional risk-bearing insurance companies continue to outsource the production of premium revenue to non-affiliated brokers or agents such as us, those insurance companies may seek to further reduce their expenses by reducing the commission rates payable to those insurance agents or brokers.

The reduction of these commission rates, along with general volatility and/or declines in premiums, may significantly affect our profitability.

Because we do not determine the timing or extent of premium pricing changes, we cannot accurately forecast our commission revenues, including whether they will significantly decline.

As a result, we may have to adjust our budgets for future acquisitions, capital expenditures, dividend payments, loan repayments and other expenditures to account for unexpected changes in revenues, and any decreases in premium rates may adversely affect the results of our operations.

all of which could have a material adverse effect on the results of our operations, financial condition and cash flows.

While we began in the Fall of 2008 re-focusing our investment and cash management strategy by moving more of our cash into non-interest bearing accounts (which were FDIC-insured until December 31, 2012, and not subject to any limits) and money market accounts (a portion of which became FDIC insured in the Fall of 2008), we still maintain cash and investment balances in excess of the current limits insured by FDIC.

As the credit crisis persists, the financial strength of some depository institutions has diminished and this trend may continue.

The disruption in the U.S.-based credit markets, the repricing of credit risk and the deterioration of the financial and real estate markets over the past few years have created increasingly difficult conditions for financial institutions and certain insurance companies.

These conditions include significant losses, greater volatility, significantly less liquidity, widening of credit spreads and a lack of price transparency in certain markets.

While these conditions have somewhat abated since the Fall of 2008, it is difficult to predict when these conditions will completely end and the extent to which our markets, products and business will be adversely affected.

The unprecedented disruptions in the credit and financial markets had a significant material adverse impact on a number of financial institutions and limited access to capital and credit for many companies.

In 2008, we expanded our operations to the United Kingdom.

In addition, we acquired retail operations based in Hamilton, Bermuda and George Town, Cayman Islands in July 2013 as part of the Beecher Carlson transaction.

Because relationships between insurance intermediaries and insurance companies or customers are often local or regional in nature, this potential competitive disadvantage is particularly pronounced outside of Florida.

PROFIT-SHARING CONTINGENT COMMISSIONS AND OVERRIDE COMMISSIONS PAID BY INSURANCE COMPANIES ARE LESS PREDICTABLE THAN USUAL, WHICH IMPAIRS OUR ABILITY TO PREDICT THE AMOUNT OF SUCH COMMISSIONS THAT WE WILL RECEIVE.

We derive a portion of our revenues from profit-sharing contingent commissions and override commissions paid by insurance companies.

calculations.

In addition, we may not be able to develop and implement new technologies as quickly as our competitors.

WE ARE SUBJECT TO RISKS ASSOCIATED WITH NATURAL DISASTERS AND GLOBAL EVENTS.

Our operations may be subject to natural disasters or other business disruptions, which could seriously harm our results of operation and increase our costs and expenses.

We are a diversified insurance agency, wholesale brokerage, insurance programs and services organization headquartered in Daytona [removed: Beach and Tampa,] [added: Beach,] Florida.

We [removed: attempt to] foster a strong, decentralized sales culture with a goal of consistent, sustained growth over the long term.

We increased revenues every year from 1993 to [removed: 2013,] [added: 2014,] with the exception of 2009, when our revenues dropped 1.0%.

Our revenues grew from $95.6 million in 1993 to [removed: $1.4] [added: $1.6] billion in [removed: 2013,] [added: 2014,] reflecting a compound annual growth rate of 14.2%.

In the same [removed: 20] [added: 21] year period, we increased net income from [removed: $8.0] [added: $8.1] million to [removed: $217.1] [added: $206.9] million in [removed: 2013,] [added: 2014,] a compound annual growth rate of [removed: 17.9%.][added: 16.7%.]

The continued declining exposure units during [removed: 2011 and] 2010 [added: and 2011] had a greater negative impact on our commissions and fees revenues than declining insurance premium rates.

As a result, we recorded positive internal revenue growth for each quarter of 2012 for each of our four [removed: divisions] [added: segments] with two exceptions; the first quarter for the Retail [removed: Division] [added: Segment] and the third quarter for the National Programs [removed: Division,] [added: Segment,] in which declines of only 0.7% and 3.3%, respectively, were experienced.

This growth trend has continued into [removed: 2013] [added: 2014] with our consolidated internal revenue growth rate of [removed: 6.7%.][added: 2.0%.]

Additionally, each of our four [removed: divisions] [added: segments] recorded positive internal revenue growth for each quarter in [removed: 2013] [added: 2014] except for the Services [removed: Division] [added: Segment] in the [removed: fourth] [added: first] quarter.

The decline in the core organic commissions and fees revenues in the [removed: fourth] [added: first] quarter of [removed: 2013] [added: 2014] for the Services [removed: Division] [added: Segment] was the result of the significant revenue recorded at our Colonial Claims operation in the [removed: fourth] [added: first] quarter of [removed: 2012] [added: 2013] attributable to Superstorm [removed: Sandy] [added: Sandy,] for which no comparable revenues occurred in the [removed: fourth] [added: first] quarter of [removed: 2013.][added: 2014.]

In the first quarter of 2013, Colonial Claims earned claims fees of [removed: $17.2] [added: $16.2] million as a direct result of the continued significant claims activity from Superstorm Sandy.

Over the last three years, profit-sharing contingent commissions have averaged approximately [removed: 4.4%] [added: 4.3%] of the previous year’s total commissions and fees revenue.

Profit-sharing contingent commissions are [removed: typically] included in our total commissions and fees in the Consolidated Statements of Income in the year received.

[added: In contrast, the term “core organic commissions and fees” is our] core commissions and fees [added: less (i) the core commissions and fees] earned for the first twelve 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).

[removed: Beginning a few years ago, five to six national] [added: Certain] insurance companies [removed: replaced their loss-ratio based profit-sharing contingent commission agreements with a new] [added: offer] guaranteed fixed-base agreements, referred to as “Guaranteed Supplemental Commissions” [removed: (“GSCs”).][added: (“GSCs”) in lieu of profit –sharing contingent commissions.]

As of December 31, [removed: 2013,] [added: 2014,] we [added: had $7.6 million of GSC revenue] accrued and [added: had] earned [removed: $8.3] [added: $9.9] million of GSCs during [removed: 2013,] [added: 2014,] most of which will be collected in the first quarter of [removed: 2014.][added: 2015.]

For the twelve-month periods ended December 31, [removed: 2013, 2012] [added: 2014, 2013] and [removed: 2011,] [added: 2012,] we earned [removed: $8.3] [added: GSCs of $9.9] million, [removed: $9.1] [added: $8.3] million and [removed: $12.1] [added: $9.1] million, [removed: respectively, of GSCs.][added: respectively.]

Fee revenues have historically been generated primarily by: (1) our Services [removed: Division,] [added: 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 catastrophe claims adjusting services, and (2) our National Programs and Wholesale Brokerage [removed: Divisions,] [added: Segments,] which earn fees primarily for the issuance of insurance policies on behalf of insurance companies.

However, in conjunction with our July 1, 2013 acquisition of Beecher Carlson, which has a primary focus on large retail customers that generally pay us fees directly, the fee revenues in our Retail [removed: Division] [added: Segment] for [removed: 2013] [added: 2014] have increased by [removed: nearly $40.0] [added: $44.8] million to [removed: $73.0] [added: $117.8] million.

Fee revenues, on a consolidated basis, as a percentage of our total commissions and fees, represented [removed: 26.6%] [added: 30.6%] in [removed: 2013, 21.7%] [added: 2014, 26.6%] in [removed: 2012] [added: 2013] and [removed: 16.4%] [added: 21.7%] in [removed: 2011.][added: 2012.]

[removed: 2013] [added: 2014] was a strong year for revenue growth and continued the positive trends that began in 2012.

After the five-year period extending from 2007 to 2011, in which we experienced negative internal growth in our core organic commissions and fees revenue which we believe was a direct result of the general weakness of the economy, we achieved a positive internal revenue growth of [removed: 2.6%] [added: 6.7%] in [removed: 2012,] [added: 2013,] and [removed: 6.7%] [added: 2.0%] in [removed: 2013.][added: 2014.]

The net growth in core organic commissions and fees in [removed: 2013] [added: 2014] of [removed: $75.6] [added: $25.6] million is [removed: a significant improvement over] [added: significantly less than] the comparable growth in [added: 2013 of $75.6 million, similar to the core organic commissions and fees in] 2012 of $24.9 million and [added: significantly better than] the net lost revenues of $21.5 million in 2011.

[removed: Of] [added: However, it should be noted that of] the $75.6 million growth in the 2013 core organic commissions and fees, $38.1 million was generated by two new programs at our Arrowhead operation, the automobile aftermarket program and the non-standard auto program, and from our Colonial Claims operation as a result of the significant claims activity attributable to Superstorm Sandy.

The [removed: remaining] growth in the core organic commissions and fees revenue [added: for 2014] is principally attributable to [removed: rising insurance premium rates,] [added: new business] and increasing insurance exposure units as a result of a gradually improving [removed: U. S.] [added: U.S.] economy.

We continue to [removed: be successful in acquiring] [added: acquire] insurance operations that we believe are strategic in growing our business [removed: Divisions.][added: Segments.]

In each of the last two years, we completed [removed: acquisitions with aggregate revenues in excess of $142.8 million: nine] [added: ten] acquisitions in [removed: 2013] [added: 2014] with estimated revenues of [removed: $142.8] [added: $159.5] million, and [removed: 20] [added: nine] acquisitions in [removed: 2012] [added: 2013] with estimated revenues of [removed: $149.6] [added: $142.8] million.

Income before income taxes in [removed: 2013 increased] [added: 2014 decreased] over [removed: 2012] [added: 2013] by [removed: 17.3%,] [added: 5.0%,] or [removed: $52.8] [added: $17.9] million, to [removed: $357.6] [added: $339.7] million.

[removed: However, that net increase of $52.8 million includes $14.3 million of income] [added: Income] before income taxes related to new acquisitions [removed: that were stand-alone offices,] [added: was $37.5 million,] and therefore, income before income taxes from offices that existed in the same time periods of [removed: 2013] [added: 2014] and [removed: 2012] [added: 2013] (including the [added: new acquisitions that “folded in” to those offices) decreased by $55.4 million.]

Therefore, [removed: excluding these items, income before income taxes] [added: employee compensation and benefits] from those offices that existed in the same time periods of [removed: 2013] [added: 2014] and [removed: 2012] [added: 2013] (including the new acquisitions that “folded in” to those offices) increased by [removed: $37.7] [added: $27.7] million.

Approximately [removed: 38,500] [added: 37,500] independent insurance agencies are estimated to be operating currently in the United States.

From 1993 through [removed: 2013,] [added: 2014,] we acquired [removed: 449] [added: 459] insurance intermediary operations, excluding acquired books of business (customer accounts).

| | | Number of Acquisitions | | | | | | | | Estimated Annual [added: Revenues] | | | | Net Cash [added: Paid] | | | | Notes [added: Issued] | | | | Other [removed: | | | | Liabilities] [added: Payable] | | | | Recorded Earn-out [added: Payable] | | | | [removed: Aggregate Purchase] [added: Net Assets Acquired] | | |

| 2013 | | | 8 | | | | 1 | | | $ | 142.8 | | | $ | 408.1 | | | $ | — | | | $ | 0.5 | | | $ | [removed: 106.1 | | | $ |] 5.1 | | | $ | [removed: 519.8] [added: 413.7] | |

| 2012 | | | 19 | | | | 1 | | | $ | 149.6 | | | $ | 483.9 | | | $ | 0.1 | | | $ | 25.4 | | | $ | [removed: 136.7 | | | $ |] 21.5 | | | $ | [removed: 667.6] [added: 530.9] | |

On July 1, 2013, we completed the acquisition of Beecher [removed: Carlson Holdings, Inc. (“Beecher Carlson”),] [added: Carlson,] an insurance and risk management broker with operations that include retail brokerage, program management and captive management.

Commission revenues are recognized as of the effective date of the insurance policy or the date on which the policy premium is [removed: billed to the customer,] [added: processed into our systems,] whichever is later.

Fee [removed: revenues] [added: revenues, and commissions for workers’ compensation programs,] are recognized as services are rendered.

[added: 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, [removed: 2013] [added: 2014] and determined that the fair value of goodwill exceeded the carrying value of such assets.

Also, with the acquisition of Wright, which primarily receives income in the form of fees, fee revenue in our National Programs Segment increased $81.9 million to $152.8 million.

Information Regarding Non-GAAP Measures

In the discussion and analysis of our results of operations that follows, in addition to reporting financial results in accordance with GAAP, as noted above, we provide information regarding core commissions and fees, core organic commissions and fees, and our internal growth rate, which is the growth rate of our core organic commissions and fees.

These measures are not in accordance with, or an alternative to (including any adjusted internal growth rate), the GAAP information provided in this annual report on Form 10-K.

Tabular reconciliations of this supplemental non-GAAP financial information to our most comparable GAAP information is contained in this Form 10-K.

We present such non-GAAP supplemental financial information, as we believe such information provides 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.

This supplemental financial information should be considered in addition to, not in lieu of, our condensed consolidated financial statements.

However, that net decrease includes a $47.4 million pretax loss on disposal of certain assets of Axiom Re, LP (“Axiom Re”).

This office sale was effective December 31, 2014 and represents part of our strategic plan to exit the reinsurance business.

The loss associated with this sale resulted in a $0.21 reduction to earnings per share.

The net decrease of $55.4 million related primarily to net new business off-set by the $47.4 million loss on the sale of Axiom Re, along with the decrease in revenue associated with claims from Superstorm Sandy received in 2013 with no comparable revenues in 2014, $27.7 million of higher compensation and benefits costs, increased interest costs of $12.0 million relating to additional debt used to fund acquisition activity in 2014, and $7.5 million from the change in estimated earn-out payables.

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | Asset | | | | Stock | | | | | | | | | | | | | | | | | | | | | | | | | | |

| 2014 | | | 9 | | | | 1 | | | $ | 159.5 | | | $ | 721.9 | | | $ | — | | | $ | 1.9 | | | $ | 33.2 | | | $ | 757.0 | |

On May 1, 2014, we completed the acquisition of Wright which was previously announced January 15, 2014.

Wright has estimated annualized revenues of $120.0 million.

The total cash paid for Wright was $609.2 million.

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 and reserves for litigation.

In particular, the accounting for these areas requires significant judgments 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.

Commission revenues related to installment billings are recognized on the later of the date effective or invoiced, with the exception of our Arrowhead business which follows a policy of recognizing on the later of the date effective or processed into our systems regardless of the billing arrangement.

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”) which changes the criteria for reporting discontinued operations and enhances disclosures in this area.

Under the new guidance, the disposal of a component or group of components of an entity should be reported as a discontinued operation if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.

Disposals of equity method investments, or those reported as held-for-sale, must be presented as a discontinued operation if they meet the new definition.

The standard is effective prospectively for all disposals of components (or classification of components as held-for-sale) of an entity that occur within interim and annual periods beginning on or after December 15, 2014.

Early adoption is permitted, but only for disposals (or classifications of components as held-for-sale) that have not been reported in financial statements previously issued.

Brown & Brown has elected to early adopt this pronouncement and has reported the disposal of the Axiom Re business in accordance with this pronouncement.

In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which provides guidance for revenue recognition.

ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance.

The standard’s core principle is that a company will 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.

In doing so, companies will need to use more judgment and make more estimates than under today’s guidance.

These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

ASU 2014-09 is effective for the Company beginning January 1, 2017 and, at that time the Company may adopt the new standard under the full retrospective approach or the modified retrospective approach.

Early adoption is not permitted.

The Company is currently evaluating the method and impact the adoption of ASU 2014-09 will have on the Company’s Consolidated Financial Statements.

In August 2014, FASB issued ASU 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern,” (“ASU 2014-15”), which addresses management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures.

ASU 2014-15 is effective for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted.

The Company does not expect to early adopt this guidance and it believes the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.

With the Wright acquisition we now have insurance company operations for which we have adopted accounting policies that were consistent with the accounting policies in place at Wright prior to their acquisition by Brown & Brown.

In the event that the gradual increases in insurance premium rates and insurable exposure units that occurred in 2013 continue into 2014, we expect to see continued positive quarterly internal revenue growth rates on a year-over-year basis for 2014, excluding the impact relating to our Colonial Claims operation.

Absent another major flooding event, we estimate Colonial Claims revenues for the first quarter of 2014 to be less than $1.0 million.

In contrast, the term “core organic commissions and fees” is our core commissions and fees less (i) the

The net changes in each of these three components can be determined for each of our customers.

However, because our agency management accounting systems do not aggregate such data, it is not reportable.

Core organic commissions and fees can reflect either “positive” growth with a net increase in revenues, or “negative” growth with a net decrease in revenues.

For 2013, only four national insurance companies still used GSCs in lieu of loss-ratio based profit-sharing contingent commissions.

For 2014, we expect the total fees in our Retail Division to be approximately $110.0 million.

For 2014, we are continuing this trend with the announced acquisition of Wright Insurance Group, with estimated annualized revenues of $120.0 million, which is expected to close on or around April 1, 2014.

new acquisitions that “folded in” to those offices) increased by $38.5 million.

The net increase of $38.5 million related primarily to: (1) net new business, (2) a $2.6 million benefit from a change in estimated acquisition earn-out payables, and (3) a one-time $6.8 million bonus earned in 2012 by our Retail Division commissioned producers as a result of a special program for those whose 2012 production exceeded their 2011 production by at least five percent.

These net increases were partially off-set by a $6.6 million increase in non-cash stock-based compensation primarily due to new grants issued in July 2013.

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | Asset | | | | Stock | | | | Revenues | | | | Paid | | | | Issued | | | | Payable | | | | Assumed | | | | Payable | | | | Price | | |

| 2011 | | | 37 | | | | 1 | | | $ | 88.7 | | | $ | 167.4 | | | $ | 1.2 | | | $ | — | | | $ | 15.7 | | | $ | 30.5 | | | $ | 214.8 | |

On January 15, 2014 ,as previously announced, we entered into an agreement to acquire The Wright Insurance Group, LLC (“Wright”), with estimated annualized revenues of $120.0 million.

This transaction is expected to close on or around April 1, 2014.

The total net consideration to be paid for the ownership interests of Wright is $602.5 million in addition to contingent consideration of up to $37.5 million if Wright completes certain agreed-upon acquisitions prior to closing.

The transaction is subject to customary closing conditions, including Hart-Scott-Rodino approval and other related regulatory approvals.

We believe that, of our significant accounting policies (see “Note 1—Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements), the following critical accounting policies may involve a higher degree of judgment and complexity.

Commission revenues related to installment billings at the Company’s subsidiary, Arrowhead, are recorded on the later of the effective date of the policy or the first installment billing.

At those dates, the earnings process has been completed, and we can reliably estimate the impact of policy cancellations for refunds and establish reserves accordingly.

If these estimates or related

Profit-sharing contingent commissions and GSCs decreased $2.4 million or 4.4% in 2012 to $52.8 million, due primarily to $4.1 million and $1.2 million reductions in profit-sharing contingent commissions and GSCs in our Retail and Wholesale Brokerage Divisions, respectively; but these reductions were partially offset by a $3.2 million increase in our National Programs Division.

However, that net increase included $80.9 million of new compensation costs related to new acquisitions that were stand-alone offices, and therefore, employee compensation and benefits from those offices that existed in the same time periods of 2012 and 2011 (including the new acquisitions that “folded in” to those offices) increased by $18.9 million.

We had 6,992 full-time equivalent employees at December 31, 2013, compared with 6,438 at December 31, 2012 and 5,557 at December 31, 2011.

Of the net increase of 554 full-time equivalent employees at December 31, 2013 over the prior year-end, an increase of 374 was attributable to acquisitions, thus reflecting a net increase of 180 employees in the offices existing at both year-ends.

Non-cash stock-based compensation increased 41.7%, or $4.7 million in 2012 over 2011, as a result of new grants under our Stock Incentive Plan (“SIP”).

These SIP grants will typically vest in four to ten years, subject to the achievement of certain performance criteria by grantees, and the achievement of consolidated earnings per share growth at certain levels by us, over three-to five-year measurement periods.

Other operating expenses in 2012 increased $30.3 million over 2011, of which $33.3 million was related to acquisitions that joined as stand-alone offices.

Of the $3.0 million decrease, $2.7 million related to reductions in office rents and related expenses, $2.2 million related to a reduction in legal expenses and $2.0 million related to lower insurance costs.

These cost savings were partially offset by increases of $1.3 million in consulting and inspection services, $1.1 million for litigation reserves, and $1.0 million in employee sales meetings.

Depreciation increased 13.7% in 2013, and 24.1% in 2012.

Core organic commissions and fees reflect either “positive” growth with a net increase in revenues, or “negative” growth with a net decrease in revenues.

| | | 2011 | | | | 2010 | | | | Change | | | | Growth % | | | | Revenues | | | | Growth $ | | | | Growth % | | |

| Retail(1) | | $ | 580,304 | | | $ | 544,004 | | | $ | 36,300 | | | | 6.7 | % | | $ | 57,541 | | | $ | (21,241 | ) | | | (3.9 | )% |

| National Programs | | | 148,842 | | | | 152,209 | | | | (3,367 | ) | | | (2.2 | )% | | | 1,140 | | | | (4,507 | ) | | | (3.0 | )% |

| Wholesale Brokerage | | | 156,664 | | | | 151,822 | | | | 4,842 | | | | 3.2 | % | | | 1,186 | | | | 3,656 | | | | 2.4 | % |

| Services | | | 64,875 | | | | 46,486 | | | | 18,389 | | | | 39.6 | % | | | 17,773 | | | | 616 | | | | 1.3 | % |

The fair values of our cash and cash equivalents, restricted cash and investments, and certificates of deposit at December 31, [removed: 2013] [added: 2014] and [removed: 2012] [added: 2013] approximated their respective carrying values due to their short-term duration and, therefore, such market risk is not considered to be material.

##### [Table of Contents](#toc)

In addition, we generally dispose of equity securities received in conjunction with an acquisition shortly after the acquisition date.

[removed: We are] [added: Brown & Brown is] a diversified insurance agency, wholesale brokerage, insurance programs and service organization with origins dating from 1939, headquartered in Daytona [removed: Beach and Tampa,] [added: Beach,] Florida.

[removed: Instead, we] [added: We] provide our customers with quality, non-investment insurance contracts, as well as other targeted, customized risk management products and services.

[removed: We are] [added: The Company is] compensated for our services primarily by commissions paid by insurance companies and [added: to a lesser extent,] by fees paid [added: directly] by customers for certain services.

Commission [removed: rates] [added: 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.

Fee revenues are generated primarily by: (1) our Services [removed: Division,] [added: 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 catastrophe claims adjusting services, (2) our National Programs and Wholesale Brokerage [removed: Divisions,] [added: Segments,] which earn fees primarily for the issuing of insurance policies on behalf of insurance carriers, and (3) our Retail [removed: Division] [added: Segment] for fees received in lieu of commissions, primarily since our July 1, 2013 acquisition of Beecher Carlson [added: Holdings, Inc. (“Beecher Carlson”)] which services many larger fee-based accounts.

The amount of our revenues from commissions and fees is a function of, among other factors, 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 [removed: levels).][added: levels) to determine what premium to charge the insured.]

As of December 31, [removed: 2013,] [added: 2014,] our activities were conducted in [removed: 245] [added: 232] locations in 41 states as follows, [removed: an office] [added: as well as] in London, England, Hamilton, Bermuda, and George Town, Cayman Islands:

| Florida | | [removed: 40] [added: 41] | | Oklahoma | | [removed: |] 5 | | [removed: | Kansas] [added: Missouri] | | | 2 | |

| Texas | | [removed: 15 |] [added: 13] | [removed: Minnesota] | [added: Virginia] | | 4 | | [removed: |] Maryland | | | 1 | |

In 2004, as general premium rates continued to moderate, the southeastern United States experienced the worst hurricane season since 1992 (when Hurricane Andrew hit south Florida), and the following year brought [removed: this] [added: that] region the worst hurricane season ever recorded.

Our commission revenues from Citizens for [removed: 2013, 2012] [added: 2014, 2013] and [removed: 2011] [added: 2012] were approximately [removed: $5.7] [added: $3.8] million, [removed: $6.4] [added: $5.7] million, and [removed: $7.8] [added: $6.4] million, respectively.

From the first quarter of 2012 through 2013, insurance premium rates gradually increased for most lines of coverage, and insurable exposure units began to flatten and in [removed: many] [added: certain] cases, increase.

As a result, in 2012, [removed: we] [added: the Company] achieved positive internal organic core commissions and fees revenue growth for the first time since 2006.

In 2013, these rate and exposure unit increases, along with [removed: strong] new business growth, generated positive internal organic revenue growth for each of our four reportable business [removed: divisions] [added: segments] in each quarter, with the single exception of the fourth quarter for our Services [removed: Division,] [added: Segment,] which experienced a record fourth quarter in 2012 as a result of the significant flood claims activity from Superstorm Sandy that was not replicated in 2013.

Our business is divided into four reportable [removed: operating] segments: (1) the Retail [removed: Division;] [added: Segment;] (2) the National Programs [removed: Division;] [added: Segment;] (3) the Wholesale Brokerage [removed: Division;] [added: Segment;] and (4) the Services [removed: Division.][added: Segment.]

The Retail [removed: Division] [added: Segment] provides a broad range of insurance products and services to commercial, public [removed: entity,] [added: and quasi-public entities, and to] professional and individual customers.

The National Programs [removed: Division] [added: Segment] provides professional liability and related package products for certain [removed: professionals,] [added: professionals delivered through nationwide networks of independent agents] and [added: also through our Brown & Brown retail offices,] markets targeted products and services [removed: to] [added: designed for] specific industries, trade groups, public [added: and quasi-public] entities, and market [removed: niches.][added: niches and provides flood coverage.]

The Wholesale Brokerage [removed: Division] [added: Segment] markets and sells excess and surplus commercial and personal [added: lines] insurance, [removed: and reinsurance,] primarily through independent agents and brokers.

The Services [removed: Division] [added: Segment] provides [removed: customers with] [added: insurance-related services, including] third-party claims [removed: administration, consulting for the workers’ compensation insurance market,] [added: administration and] comprehensive medical utilization management services in both [added: the] workers’ compensation and all-lines liability arenas, [added: as well as] Medicare [removed: Secondary Payer statute compliance-related] [added: set-aside] services, Social Security disability and Medicare benefits advocacy [removed: services,] [added: services] and catastrophe claims adjusting services.

The following table summarizes (1) the commissions and fees revenue generated by each of our reportable operating segments for [removed: 2013, 2012] [added: 2014, 2013] and, [removed: 2011,] [added: 2012,] and (2) the percentage of our total commissions and fees revenue represented by each segment for each such period:

| _(in thousands, except percentages)_ | | [removed: 2013] [added: 2014] | | | | % | | | | [removed: 2012] [added: 2013] | | | | % | | | | [removed: 2011] [added: 2012] | | | | % | | |

| Retail [removed: Division] [added: Segment] | | $ | [removed: 725,159] [added: 809,880] | | | | [removed: 53.5] [added: 51.7] | % | | $ | [removed: 639,708] [added: 725,159] | | | | [removed: 53.7] [added: 53.5] | % | | $ | [removed: 604,966] [added: 639,708] | | | | [removed: 60.2] [added: 53.7] | % |

| National Programs [removed: Division] [added: Segment] | | | [removed: 291,014] [added: 387,858] | | | | [removed: 21.5] [added: 24.7] | % | | | [removed: 251,929] [added: 291,014] | | | | [removed: 21.2] [added: 21.5] | % | | | [removed: 164,352] [added: 251,929] | | | | [removed: 16.3] [added: 21.2] | % |

| Wholesale Brokerage [removed: Division] [added: Segment] | | | [removed: 209,493] [added: 234,294] | | | | [removed: 15.4] [added: 14.9] | % | | | [removed: 182,822] [added: 209,493] | | | | 15.4 | % | | | [removed: 172,547] [added: 182,822] | | | | [removed: 17.2] [added: 15.4] | % |

| Services [removed: Division] [added: Segment] | | | [removed: 131,033] [added: 136,482] | | | | [removed: 9.7] [added: 8.7] | % | | | [removed: 116,247] [added: 131,033] | | | | [removed: 9.8] [added: 9.7] | % | | | [removed: 64,875] [added: 116,247] | | | | [removed: 6.4] [added: 9.8] | % |

| Other | | | [removed: (1,196] [added: (1,054] | ) | | | [removed: (0.1] [added: (0.0] | )% | | | [removed: (1,625] [added: (1,196] | ) | | | (0.1 | )% | | | [removed: (778] [added: (1,625] | ) | | | (0.1 | )% |

| Total | | $ | [removed: 1,355,503] [added: 1,567,460] | | | | 100.0 | % | | $ | [removed: 1,189,081] [added: 1,355,503] | | | | 100.0 | % | | $ | [removed: 1,005,962] [added: 1,189,081] | | | | 100.0 | % |

We conduct all of our operations within the United States of America, except for one wholesale brokerage operation based in London, England, and retail operations based in Hamilton, Bermuda and George Town, Cayman [removed: Islands that were acquired in July 2013 as part of the Beecher Carlson transaction.][added: Islands.]

These operations [removed: earned $12.2] [added: generated $13.3] million, [removed: $9.7] [added: $12.2] million and [removed: $9.1] [added: $9.7] million of revenues for the years ended December 31, [removed: 2013, 2012] [added: 2014, 2013] and [removed: 2011,] [added: 2012,] respectively.

During [removed: 2013,] [added: 2014,] commissions and fees from our largest single Retail [removed: Division] [added: Segment] customer represented less than [removed: one third] [added: four tenths] of one percent [removed: (0.33%)] [added: (0.4%)] of the Retail [removed: Division’s] [added: Segment’s] total commissions and fees revenue.

National Programs [removed: Division][added: Segment]

Our National Programs [removed: Division] [added: Segment] can be grouped into [removed: four] [added: five] broad categories; (1) Professional Programs; (2) Arrowhead Insurance Programs; (3) Commercial Programs; [removed: and] (4) Public Entity-Related [removed: Programs:][added: Programs; and (5) the National Flood Program:]

Professional Programs negotiates policy forms and coverage options with their specific insurance [removed: carrier.][added: carriers.]

The Professional Protector Plan® for Dentists and the Lawyer’s Protector Plan® are marketed and sold primarily through a national network of independent agencies [removed: including certain of] [added: and also through] our [added: Brown & Brown] retail offices; however, certain professional liability programs, CalSurance® and TitlePac®, are principally marketed and sold directly to our insured customers.

| | • | | _Certified Public Accountants:_ The CPA Protector Plan® is a specialty insurance program offering comprehensive professional liability insurance solutions and risk management services to CPA practitioners and their firms nationwide. Optional coverage enhancements allow [removed: insureds] [added: the insured] to round out their policy and coverage needs, including: Employment Practices Liability, Employee Dishonesty, Non-Profit Directors and Officers, as well as Network Security and Privacy Protection Coverage. |

| | • | | _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, [removed: workers] [added: 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 in turn 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. The PPP is offered in all 50 states, [added: the] District of Columbia, Puerto Rico and the Virgin Islands. |

| | • | | _Lawyers_: The Lawyer’s Protector Plan® (“LPP®”), for [added: over] 30 years, has been providing professional liability insurance with a niche focus on law firms with 1-20 attorneys. The LPP program handles all aspects of insurance operations including underwriting, distribution management, policy issuance and claims. The LPP is offered in 44 [removed: states.] [added: states and the District of Columbia.] |

| | • | | _Optometrists, Opticians, and Ophthalmologists_: Since 1973 the Optometric Protector Plan® (“OPP®”), has continually provided 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. The OPP is offered in all 50 [removed: states.] [added: states and the District of Columbia.] Through our strategic carrier partnerships, we have diversified our demographic and also offer professional liability coverage to Chiropractors, Podiatrists and Physicians nationwide. |

| | • | | _Professional Risk Specialty Group_: Professional Risk Specialty Group (“PRSG”) has been providing Errors & Omissions/Professional Liability/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 in [removed: Florida and] [added: Florida,] Louisiana, [added: and Puerto Rico,] as well as state appointments in 23 other states. The admitted Lawyers Program focuses on 1-19 attorney firms and the non-admitted program is for firms with 20+ attorneys and is available for primary or excess coverage. PRSG is also involved in direct sales and brokering for other professional lines, such as Accountants, Architects & Engineers, Medical Malpractice, Directors & Officers, Employment Practices Liability, Title Agency E&O and Miscellaneous E&O. |

| | • | | _Wedding Protector Plan® and Protector [removed: Plan®_ _for] [added: Plan® for] Events_ provide an online wedding/private event cancellation and postponement insurance policy that offers financial protection if certain unfortunate, unforeseen events should occur during the period leading up to and including the wedding/event date. Liability and liquor liability is available as an option. Both the Wedding Protector Plan and Protector Plan for Events are offered in 47 states. |

As an agent and broker, we do not assume underwriting risks with the exception of the activity in Wright, which was acquired in May 2014.

Within Wright, we operate a write-your-own flood insurance carrier, Wright National Flood Insurance Company (“WNFIC”), which is a Wright subsidiary.

WNFIC’s entire business consists of policies written pursuant to the National Flood Insurance Program (“NFIP”), the program administered by the Federal Emergency Management Agency (“FEMA”) and excess flood insurance policies which are fully reinsured 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.

Insurance companies establish these premium rates based upon many factors, including reinsurance rates paid by such insurance companies, none of which we control.

| | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| California | | 24 | | Connecticut | | 4 | | New Hampshire | | | 2 | |

| New York | | 17 | | Minnesota | | 4 | | Delaware | | | 1 | |

| Washington | | 12 | | Arizona | | 3 | | Mississippi | | | 1 | |

| Georgia | | 11 | | Arkansas | | 3 | | Montana | | | 1 | |

| New Jersey | | 10 | | Kentucky | | 3 | | Nevada | | | 1 | |

| Louisiana | | 7 | | Indiana | | 3 | | North Carolina | | | 1 | |

| Pennsylvania | | 7 | | New Mexico | | 3 | | Rhode Island | | | 1 | |

| Illinois | | 7 | | Ohio | | 3 | | Utah | | | 1 | |

| Colorado | | 6 | | South Carolina | | 3 | | Vermont | | | 1 | |

| Massachusetts | | 6 | | Tennessee | | 3 | | West Virginia | | | 1 | |

| Oregon | | 6 | | Hawaii | | 2 | | Wisconsin | | | 1 | |

| Michigan | | 5 | | Kansas | | 2 | | | | | | |

During 2014, changes in rates and exposure units varied by geography and line of business with rates and units for employee benefits increasing as a result of general improvements in the economy.

We have experienced a downward trend in coverage for employers with less than 50 employees, due to the implementation of the Affordable Care Act that has driven more employees to state healthcare exchanges.

Rates for property and casualty coverage were under pressure, especially in the coastal areas, as a long period without significant storm activity and low interest rates have driven significant loss reserves and alternative capital sources.

Retail Segment

As of December 31, 2014, our Retail Segment employed 3,684 people.

As of December 31, 2014, our National Programs Segment employed 1,750 people.

| | • | | _Wright Specialty Insurance Agency,_ _LLC_ provides insurance products for specialty programs such as food, grocery, and franchise programs that are offered throughout the U.S. |

| | • | | _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._ Wright, which was acquired in May 2014, operates a flood insurance carrier, WNFIC, which is a Wright subsidiary.

WNFIC’s entire business consists of policies written pursuant to the National Flood Insurance Program (“NFIP”), the program administered by FEMA and excess flood insurance policies, which are fully reinsured, 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.

At December 31, 2014, our Wholesale Brokerage Segment employed 1,067 people.

Services Segment

| --- | --- | --- | --- |

| --- | --- | --- | --- |

##### [Table of Contents](#toc)

As an agent and broker, we do not assume underwriting risks.

Commissions are usually a percentage of the premium paid by the insured.

| | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| California | | 25 | | Arizona | | | 4 | | | Missouri | | | 2 | |

| New York | | 17 | | Kentucky | | | 4 | | | New Hampshire | | | 2 | |

| Washington | | 16 | | Michigan | | | 4 | | | Delaware | | | 1 | |

| Georgia | | 11 | | Tennessee | | | 4 | | | Mississippi | | | 1 | |

| New Jersey | | 10 | | Virginia | | | 4 | | | Montana | | | 1 | |

| Oregon | | 8 | | Arkansas | | | 3 | | | Nevada | | | 1 | |

| Colorado | | 7 | | Indiana | | | 3 | | | Rhode Island | | | 1 | |

| Louisiana | | 7 | | New Mexico | | | 3 | | | Utah | | | 1 | |

| Pennsylvania | | 7 | | North Carolina | | | 3 | | | Vermont | | | 1 | |

| Illinois | | 6 | | South Carolina | | | 3 | | | West Virginia | | | 1 | |

| Massachusetts | | 6 | | Ohio | | | 3 | | | Wisconsin | | | 1 | |

| Connecticut | | 5 | | Hawaii | | | 2 | | | | | | | |

If, as expected, this trend continues, the financial impact of Citizens on our business should continue to decrease in 2014.

We currently expect that property and casualty insurance premium rates and insurable exposure units will generally continue to increase modestly and gradually during 2014, subject to continued improvement in the economic environment.

Retail Division

As of December 31, 2013, our Retail Division employed 3,566 persons.

We believe these services are important factors in securing and retaining customers.

As of December 31, 2013, our National Programs Division employed 1,432 persons.

At December 31, 2013, our Wholesale Brokerage Division employed 1,014 persons.

Services Division

Franklin St, Suite 1900, Tampa, Florida 33602, or by telephone to (813) 222-4277.

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.

See Note 13 to the Consolidated Financial Statements for information regarding our legal proceedings.

For the fiscal year ended December 31, [removed: 2013][added: 2014]

| [added: Florida] (State or other jurisdiction of incorporation or organization) | | [added: ] | [added: | 59-0864469] (I.R.S. Employer Identification Number) | [removed: |]

| 220 South Ridgewood Avenue, Daytona Beach, FL | | [removed: |] 32114 | [removed: |]

| (Address of principal executive offices) | | [removed: |] (Zip Code) | [removed: |]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ [removed: 232.405] [added: 229.405] of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

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, [removed: 2013] [added: 2014] (the last business day of the registrant’s most recently completed second fiscal quarter) was [removed: $3,830,091,657.][added: $3,374,535,891.]

The number of outstanding shares of the registrant’s Common Stock, $0.10 par value, as of February 19, [removed: 2014] [added: 2015] was [removed: 145,433,663.][added: 143,520,097.]

Portions of Brown & Brown, Inc.’s Proxy Statement for the [removed: 2014] [added: 2015] Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.

| Item 1. | | [removed: [Business](#tx633916_2)] [added: [Business](#toc847767_2)] | | | [removed: 2] [added: 3] | |

| Item 1A. | | [Risk [removed: Factors](#tx633916_3)] [added: Factors](#toc847767_3)] | | | [removed: 9] [added: 11] | |

| Item 1B. | | [Unresolved Staff [removed: Comments](#tx633916_4)] [added: Comments](#toc847767_4)] | | | [removed: 18] [added: 20] | |

| Item 2. | | [removed: [Properties](#tx633916_5)] [added: [Properties](#toc847767_5)] | | | [removed: 18] [added: 21] | |

| Item 3. | | [Legal [removed: Proceedings](#tx633916_6)] [added: Proceedings](#toc847767_6)] | | | [removed: 18] [added: 21] | |

| Item 4. | | [Mine Safety [removed: Disclosures](#tx633916_7)] [added: Disclosures](#toc847767_7)] | | | [removed: 18] [added: 21] | |

| Item 5. | | [Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities](#tx633916_9)] [added: Securities](#toc847767_9)] | | | [removed: 18] [added: 21] | |

| Item 6. | | [Selected Financial [removed: Data](#tx633916_10)] [added: Data](#toc847767_10)] | | | [removed: 21] [added: 25] | |

| Item 7. | | [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#tx633916_11)] [added: Operations](#toc847767_11)] | | | [removed: 22] [added: 26] | |

| Item 7A. | | [Quantitative and Qualitative Disclosures about Market [removed: Risk](#tx633916_12)] [added: Risk](#toc847767_12)] | | | [removed: 41] [added: 45] | |

| Item 8. | | [Financial Statements and Supplementary [removed: Data](#tx633916_13)] [added: Data](#toc847767_13)] | | | [removed: 41] [added: 46] | |

| Item 9. | | [Changes in and Disagreements With Accountants on Accounting and Financial [removed: Disclosure](#tx633916_14)] [added: Disclosure](#toc847767_14)] | | | [removed: 73] [added: 80] | |

| Item 9A. | | [Controls and [removed: Procedures](#tx633916_15)] [added: Procedures](#toc847767_15)] | | | [removed: 73] [added: 80] | |

| Item 9B. | | [Other [removed: Information](#tx633916_16)] [added: Information](#toc847767_16)] | | | [removed: 73] [added: 83] | |

| [Part [removed: III](#tx633916_17)] [added: III](#toc847767_17)] | | | | | | |

| Item 10. | | [Directors, Executive Officers and Corporate [removed: Governance](#tx633916_18)] [added: Governance](#toc847767_18)] | | | [removed: 74] [added: 83] | |

| Item 11. | | [Executive [removed: Compensation](#tx633916_19)] [added: Compensation](#toc847767_19)] | | | [removed: 74] [added: 83] | |

| Item 12. | | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder [removed: Matters](#tx633916_20)] [added: Matters](#toc847767_20)] | | | [removed: 74] [added: 83] | |

| Item 13. | | [Certain Relationships and Related Transactions, and Director [removed: Independence](#tx633916_21)] [added: Independence](#toc847767_21)] | | | [removed: 74] [added: 83] | |

| Item 14. | | [Principal Accounting Fees and [removed: Services](#tx633916_22)] [added: Services](#toc847767_22)] | | | [removed: 74] [added: 83] | |

| Item 15. | | [Exhibits, Financial Statement [removed: Schedules](#tx633916_24)] [added: Schedules](#toc847767_24)] | | | [removed: 75] [added: 84] | |

Brown & Brown, Inc., together with its subsidiaries (collectively, “we,” “Brown & Brown” or the “Company”), [removed: make] [added: 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.

We have based these statements on our current expectations about [added: potential] future events.

Important factors which could cause our actual results to differ materially from the forward-looking statements in this report include [added: but are not limited to] the following items, in addition to those matters described in [added: Part I,] Item 1A “Risk Factors” and [added: Part I,] Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:

| | • | | The occurrence of adverse economic conditions, an adverse regulatory climate, or a disaster in California, Florida, Georgia, [added: Illinois,] Indiana, Kansas, Massachusetts, Michigan, New Jersey, New York, [added: North Carolina,] Oregon, Pennsylvania, Texas, Virginia and Washington, because a significant portion of business written by [removed: Brown & Brown] [added: us] is for customers located in these states; |

| | • | | The integration of our operations with those of businesses or assets we have acquired, including our [removed: July 2013] [added: May 2014] acquisition of [removed: Beecher Carlson Holdings, Inc. (“Beecher Carlson”),] [added: The Wright Insurance Group, LLC (“Wright”),] or may acquire in the future, [removed: including the announced acquisition of The Wright Insurance Group, LLC (which is expected to close on April 1, 2014),] and the failure to realize the expected benefits of such [removed: acquisition] [added: acquisitions] and integration; |

| | • | | [removed: Premium rates] [added: Exposure units,] and [removed: exposure units] [added: premium rates] set by insurance companies which have traditionally varied and are difficult to predict; |

| | • | | Our ability to forecast liquidity needs through at least the end of [removed: 2014;] [added: 2015;] |

| | • | | Policy [removed: cancellations] [added: cancellations,] which can be unpredictable; |

Assumptions as to any of the foregoing and all statements [removed: that] are not based on historical [removed: fact] [added: fact,] but rather reflect our current expectations concerning future results and events.

10-K 1 d847767d10k.htm 10-K

| | | | | |

| | | |

| --- | --- | --- |

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

| [Part I](#toc847767_1) | | | | | | |

| [Part II](#toc847767_8) | | | | | | |

| [Part IV](#toc847767_23) | | | | | | |

| [Signatures](#toc847767_25) | | | | | 87 | |

| | • | | Our ability to attract, retain and enhance qualified personnel; |

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

| | • | | Outcomes of existing or future legal proceedings and governmental investigations, as well as future regulatory actions and conditions in the states in which we conduct our business; |

| | • | | Our ability to effectively apply technology in providing improved value for our customers as well as applying effective internal controls and efficiencies in operations; and |

##### [Table of Contents](#toc)

10-K 1 d633916d10k.htm FORM 10K

| Florida | |  | | 59-0864469 |

| [Part I](#tx633916_1) | | | | | | |

| [Part II](#tx633916_8) | | | | | | |

| [Part IV](#tx633916_23) | | | | | | |

| [Signatures](#tx633916_25) | | | | | 78 | |

| | • | | Projections of revenues, income, losses, cash flows, capital expenditures; |

| --- | --- | --- | --- |

| | • | | Plans for future operations; |

| | • | | Expectations of the economic environment; |

| | • | | Outcome of legal proceedings and governmental investigations; |

| | • | | The performance of acquired businesses and its effect on estimated acquisition earn-out payable; and |

##### [Table of Contents](#toc)

We lease our executive offices, which are located at 220 South Ridgewood Avenue, Daytona Beach, Florida [removed: 32114, and 655 N.][added: 32114.]

We lease offices at each of our [removed: 248] [added: 235] locations, with the exception of [removed: Dansville and] Jamestown, New York, where we own the building in which our [removed: offices are] [added: office is] located.

We also own an airplane hangar in Daytona Beach, [added: Florida, which sits upon land leased from Volusia Country,] Florida.

Franklin St, Suite 1900, Tampa, Florida 33602.

On February 19, [removed: 2014,] [added: 2015,] there were [removed: 145,433,663] [added: 143,520,097] shares of our common stock outstanding, held by approximately [removed: 1,204] [added: 1,178] shareholders of record.

On [removed: February 6,] [added: July 18,] 2014, our Board of Directors approved a common stock repurchase plan to authorize the repurchase of up to [removed: $25.0] [added: $200.0] million worth of shares of the Company’s common stock during the [removed: subsequent twenty-four months.][added: period running from the July 18, 2014 approval date to December 31, 2015.]

As of [removed: February 28,] [added: December 31,] 2014, we have [removed: not] repurchased [removed: any] [added: $50.0 million worth of] shares of our common stock under the repurchase plan.

The following table sets forth information as of December 31, [removed: 2013,] [added: 2014,] with respect to compensation plans under which the Company’s equity securities are authorized for issuance:

| Brown & Brown, Inc. 2000 Incentive Stock Option Plan | | | [removed: 622,945] [added: 470,356] | | | $ | [removed: 18.55] [added: 18.57] | | | | — | |

| Brown & Brown, Inc. 2010 Stock Incentive Plan | | | N/A | | | | N/A | | | | [removed: 2,207,098] [added: 2,309,929] | |

| Brown & Brown, Inc. 1990 Employee Stock Purchase Plan | | | N/A | | | | N/A | | | | [removed: 1,246,838] [added: 734,317] | |

| (1) | In addition to the number of securities listed in this column, [removed: 3,291,569] [added: 2,964,103] shares are issuable upon the vesting of restricted stock granted under the Brown & Brown, Inc. Performance Stock Plan and the Brown & Brown, Inc. 2010 Stock Incentive Plan, which represents the maximum number of shares that can vest based on the achievement of certain performance criteria. |

We did not sell any unregistered securities during [removed: 2013.][added: 2014.]

The following table presents information with respect to our purchases of our common stock during the three months ended December 31, [removed: 2013.][added: 2014.]

| (1) | [removed: All] [added: With the exception] of the [added: 246,000] shares [added: purchased in October 2014 as part of the final settlement of an accelerated share repurchase program initiated in September 2014, all of the shares] reported above as purchased are attributable to shares withheld for employees’ payroll taxes and withholding taxes pertaining to the vesting of restricted shares awarded under our Performance Stock Plan and Incentive Stock Option Plan. |

The returns of each company have been weighted according to such companies’ respective stock market capitalizations as of December 31, [removed: 2008] [added: 2009] for the purposes of arriving at a peer group average.

The total return calculations are based upon an assumed $100 investment on December 31, [removed: 2008,] [added: 2009,] with all dividends reinvested.

[removed: ][added: ]

| 2014 | | | | | | | | | | | | |

| First Quarter | | $ | 32.88 | | | $ | 27.77 | | | $ | 0.10 | |

| Second Quarter | | $ | 31.29 | | | $ | 28.27 | | | $ | 0.10 | |

| Third Quarter | | $ | 33.46 | | | $ | 30.02 | | | $ | 0.10 | |

| Fourth Quarter | | $ | 33.40 | | | $ | 30.96 | | | $ | 0.11 | |

| Total | | | 470,356 | | | $ | 18.57 | | | | 3,044,246 | |

| October 1, 2014 to October 31, 2014 | | | 246,740 | | | $ | 30.49 | | | | 246,000 | | | $ | 150,000,000 | |

| November 1, 2014 to November 30, 2014 | | | — | | | | — | | | | — | | | $ | — | |

| December 1, 2014 to December 31, 2014 | | | 4,701 | | | $ | 32.50 | | | | — | | | $ | — | |

| Total | | | 251,441 | | | $ | 30.53 | | | | 246,000 | | | $ | 150,000,000 | |

| | | 12/09 | | | | 12/10 | | | | 12/11 | | | | 12/12 | | | | 12/13 | | | | 12/14 | | |

| Brown & Brown, Inc. | | | 100.00 | | | | 135.33 | | | | 129.79 | | | | 148.04 | | | | 184.72 | | | | 196.27 | |

| NYSE Composite | | | 100.00 | | | | 113.76 | | | | 109.70 | | | | 127.54 | | | | 161.21 | | | | 172.27 | |

| Peer Group | | | 100.00 | | | | 127.85 | | | | 143.75 | | | | 159.43 | | | | 232.33 | | | | 265.77 | |

##### [Table of Contents](#toc)

| 2012 | | | | | | | | | | | | |

| First Quarter | | $ | 25.00 | | | $ | 21.85 | | | $ | 0.085 | |

| Second Quarter | | $ | 27.32 | | | $ | 23.42 | | | $ | 0.085 | |

| Third Quarter | | $ | 28.17 | | | $ | 24.71 | | | $ | 0.085 | |

| Fourth Quarter | | $ | 27.31 | | | $ | 24.88 | | | $ | 0.09 | |

| Total | | | 622,945 | | | $ | 18.55 | | | | 3,453,936 | |

| October 1, 2013 to October 31, 2013 | | | — | | | $ | — | | | | — | | | $ | — | |

| November 1, 2013 to November 30, 2013 | | | 95 | | | $ | 31.61 | | | | — | | | $ | — | |

| December 1, 2013 to December 31, 2013 | | | 36,707 | | | $ | 31.05 | | | | — | | | $ | — | |

| Total | | | 36,802 | | | $ | 31.05 | | | | — | | | $ | — | |

| | | YEAR ENDING | | | | | | | | | | | | | | | | | | | | | | |

| COMPANY/INDEX/MARKET | | 12/31/2008 | | | | 12/31/2009 | | | | 12/31/2010 | | | | 12/31/2011 | | | | 12/31/2012 | | | | 12/31/2013 | | |

| Brown & Brown, Inc. | | $ | 100.00 | | | $ | 87.36 | | | $ | 118.22 | | | $ | 113.39 | | | $ | 129.32 | | | $ | 161.37 | |

| NYSE Composite Index | | $ | 100.00 | | | $ | 128.28 | | | $ | 145.46 | | | $ | 139.87 | | | $ | 162.23 | | | $ | 204.87 | |

| Peer Group | | $ | 100.00 | | | $ | 92.45 | | | $ | 117.98 | | | $ | 132.65 | | | $ | 147.18 | | | $ | 214.75 | |

We caution that the stock price performance shown in the graph should not be considered indicative of potential future stock price performance.

The following selected Consolidated Financial Data for each of the five fiscal years in the period ended December 31, [removed: 2013] [added: 2014] have been derived from our Consolidated Financial Statements.

| _(in thousands, except per share data, number of employees [removed: and percentages_] [added: and_ _percentages_] | | [removed: Year Ended December 31] [added: 2014] | | | | [added: 2013] | | | | [added: 2012] | | | | [added: 2011] | | | | [added: 2010] | | |

| Commissions and fees | | $ | [removed: 1,355,503] [added: 1,567,460] | | | $ | [removed: 1,189,081] [added: 1,355,503] | | | $ | [removed: 1,005,962] [added: 1,189,081] | | | $ | [removed: 966,917] [added: 1,005,962] | | | $ | [removed: 964,863] [added: 966,917] | |

| Investment income | | | [removed: 638] [added: 747] | | | | [removed: 797] [added: 638] | | | | [removed: 1,267] [added: 797] | | | | [removed: 1,326] [added: 1,267] | | | | [removed: 1,161] [added: 1,326] | |

| Other income, net | | | [removed: 7,138] [added: 7,589] | | | | [removed: 10,154] [added: 7,138] | | | | [removed: 6,313] [added: 10,154] | | | | [removed: 5,249] [added: 6,313] | | | | [removed: 1,853] [added: 5,249] | |

| Total revenues | | | [removed: 1,363,279] [added: 1,575,796] | | | | [removed: 1,200,032] [added: 1,363,279] | | | | [removed: 1,013,542] [added: 1,200,032] | | | | [removed: 973,492] [added: 1,013,542] | | | | [removed: 967,877] [added: 973,492] | |

| Employee compensation and benefits | | | [removed: 683,000] [added: 791,749] | | | | [removed: 608,506] [added: 683,000] | | | | [removed: 508,675] [added: 608,506] | | | | [removed: 487,820] [added: 508,675] | | | | [removed: 484,680] [added: 487,820] | |

| Non-cash stock-based compensation | | | [removed: 22,603] [added: 19,363] | | | | [removed: 15,865] [added: 22,603] | | | | [removed: 11,194] [added: 15,865] | | | | [removed: 6,845] [added: 11,194] | | | | [removed: 7,358] [added: 6,845] | |

| Other operating expenses | | | [removed: 195,677] [added: 235,328] | | | | [removed: 174,389] [added: 195,677] | | | | [removed: 144,079] [added: 174,389] | | | | [removed: 135,851] [added: 144,079] | | | | [removed: 143,389] [added: 135,851] | |

| Amortization | | | [removed: 67,932] [added: 82,941] | | | | [removed: 63,573] [added: 67,932] | | | | [removed: 54,755] [added: 63,573] | | | | [removed: 51,442] [added: 54,755] | | | | [removed: 49,857] [added: 51,442] | |

| Depreciation | | | [removed: 17,485] [added: 20,895] | | | | [removed: 15,373] [added: 17,485] | | | | [removed: 12,392] [added: 15,373] | | | | [removed: 12,639] [added: 12,392] | | | | [removed: 13,240] [added: 12,639] | |

| Interest | | | [removed: 16,440] [added: 28,408] | | | | [removed: 16,097] [added: 16,440] | | | | [removed: 14,132] [added: 16,097] | | | | [removed: 14,471] [added: 14,132] | | | | [removed: 14,599] [added: 14,471] | |

| Change in estimated acquisition earn-out payables | | | [added: 9,938 | | | |] 2,533 | | | | 1,418 | | | | (2,206 | ) | | | (1,674 | ) | [removed: | | — | |]

| Total expenses | | | [removed: 1,005,670] [added: 1,236,047] | | | | [removed: 895,221] [added: 1,005,670] | | | | [removed: 743,021] [added: 895,221] | | | | [removed: 707,394] [added: 743,021] | | | | [removed: 713,123] [added: 707,394] | |

| Income before income taxes | | | [removed: 357,609] [added: 339,749] | | | | [removed: 304,811] [added: 357,609] | | | | [removed: 270,521] [added: 304,811] | | | | [removed: 266,098] [added: 270,521] | | | | [removed: 254,754] [added: 266,098] | |

| Income taxes | | | [removed: 140,497] [added: 132,853] | | | | [removed: 120,766] [added: 140,497] | | | | [removed: 106,526] [added: 120,766] | | | | [removed: 104,346] [added: 106,526] | | | | [removed: 101,460] [added: 104,346] | |

| Net income | | $ | [removed: 217,112] [added: 206,896] | | | $ | [removed: 184,045] [added: 217,112] | | | $ | [removed: 163,995] [added: 184,045] | | | $ | [removed: 161,752] [added: 163,995] | | | $ | [removed: 153,294] [added: 161,752] | |

| Net income per share — diluted | | $ | [removed: 1.48] [added: 1.41] | | | $ | [removed: 1.26] [added: 1.48] | | | $ | [removed: 1.13] [added: 1.26] | | | $ | [removed: 1.12] [added: 1.13] | | | $ | [removed: 1.08] [added: 1.12] | |

| Weighted average number of shares outstanding — diluted | | | [removed: 142,624] [added: 142,891] | | | | [removed: 142,010] [added: 142,624] | | | | [removed: 140,264] [added: 142,010] | | | | [removed: 139,318] [added: 140,264] | | | | [removed: 137,507] [added: 139,318] | |

| Total assets | | $ | [removed: 3,649,508] [added: 4,956,458] | | | $ | [removed: 3,128,058] [added: 3,649,508] | | | $ | [removed: 2,607,011] [added: 3,128,058] | | | $ | [removed: 2,400,814] [added: 2,607,011] | | | $ | [removed: 2,224,226] [added: 2,400,814] | |

| Long-term [removed: debt] [added: debt(1)] | | $ | [removed: 380,000] [added: 1,152,846] | | | $ | [removed: 450,000] [added: 380,000] | | | $ | [removed: 250,033] [added: 450,000] | | | $ | [removed: 250,067] [added: 250,033] | | | $ | [removed: 250,209] [added: 250,067] | |

| Total shareholders’ equity | | $ | [removed: 2,007,141] [added: 2,113,745] | | | $ | [removed: 1,807,333] [added: 2,007,141] | | | $ | [removed: 1,643,963] [added: 1,807,333] | | | $ | [removed: 1,506,344] [added: 1,643,963] | | | $ | [removed: 1,369,874] [added: 1,506,344] | |

| Total shares outstanding at year-end | | | [removed: 145,419] [added: 143,486] | | | | [removed: 143,878] [added: 145,419] | | | | [removed: 143,352] [added: 143,878] | | | | [removed: 142,795] [added: 143,352] | | | | [removed: 142,076] [added: 142,795] | |

| Number of full-time equivalent employees at year-end | | | [removed: 6,992] [added: 7,591] | | | | [removed: 6,438] [added: 6,992] | | | | [removed: 5,557] [added: 6,438] | | | | [removed: 5,286] [added: 5,557] | | | | [removed: 5,206] [added: 5,286] | |

| Total revenues per average number of [removed: employees(1)] [added: employees(2)] | | $ | [removed: 203,020] [added: 216,114] | | | $ | [removed: 191,729] [added: 203,020] | [removed: (2)] | | $ | [removed: 186,949] [added: 191,729] | [added: (3)] | | $ | [removed: 185,568] [added: 186,949] | | | $ | [removed: 182,549] [added: 185,568] | |

| Stock price at year-end | | $ | [removed: 31.39] [added: 32.91] | | | $ | [removed: 25.46] [added: 31.39] | | | $ | [removed: 22.63] [added: 25.46] | | | $ | [removed: 23.94] [added: 22.63] | | | $ | [removed: 17.97] [added: 23.94] | |

| Stock price earnings multiple at [removed: year-end(3)] [added: year-end(4)] | | | [removed: 21.2] [added: 23.3] | | | | [removed: 20.2] [added: 21.2] | | | | [removed: 20.0] [added: 20.2] | | | | [removed: 21.4] [added: 20.0] | | | | [removed: 16.6] [added: 21.4] | |

| Return on beginning shareholders’ [removed: equity(4)] [added: equity(5)] | | | [removed: 12] [added: 10] | % | | | [removed: 11] [added: 12] | % | | | 11 | % | | | [removed: 12] [added: 11] | % | | | 12 | % |

| [removed: (1)] [added: (2)] | 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. |

| [removed: (2)] [added: (3)] | Of the 881 increase in the number of full-time equivalent employees from 2011 to 2012, 523 employees related to the January 9, 2012 acquisition of Arrowhead, and therefore, are considered to be full-time equivalent as of January 1, 2012. Thus, the average number of full-time equivalent employees for 2012 is considered to be 6,259. |

| [removed: (3)] [added: (4)] | Stock price at year-end divided by net income per share-diluted. |

| [removed: (4)] [added: (5)] | Represents net income divided by total shareholders’ equity as of the beginning of the year. |

| | | Year Ended December 31 | | | | | | | | | | | | | | | | | | |

| Loss on disposal | | | 47,425 | | | | — | | | | — | | | | — | | | | — | |

| Dividends declared per share | | $ | 0.41 | | | $ | 0.37 | | | $ | 0.35 | | | $ | 0.33 | | | $ | 0.31 | |

| (1) | Represents the incremental new debt associated with the acquisition of Wright and evolution of our capital structure. Please refer to Part I, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 8 “Long-Term Debt” for more details. |

| --- | --- |

| | 2013 | | | | 2012 | | | | 2011 | | | | 2010 | | | | 2009 | | | |

| Dividends declared per share | | $ | 0.3700 | | | $ | 0.3450 | | | $ | 0.3250 | | | $ | 0.3125 | | | $ | 0.3025 | |

| [Consolidated Statements of Income for the years ended December 31, [removed: 2013, 2012] [added: 2014, 2013] and [removed: 2011](#tx633916_27)] [added: 2012](#tx847767_27)] | | | [removed: 42] [added: 47] | |

| [Consolidated Balance Sheets as of December 31, [removed: 2013] [added: 2014] and [removed: 2012](#tx633916_28)] [added: 2013](#tx847767_28)] | | | [removed: 43] [added: 48] | |

| [Consolidated Statements of Shareholders’ Equity for the years ended December 31, [removed: 2013, 2012] [added: 2014, 2013] and [removed: 2011](#tx633916_29)] [added: 2012](#tx847767_29)] | | | [removed: 44] [added: 49] | |

| [Consolidated Statements of Cash Flows for the years ended December 31, [removed: 2013, 2012] [added: 2014, 2013] and [removed: 2011](#tx633916_30)] [added: 2012](#tx847767_30)] | | | [removed: 45] [added: 50] | |

| [Notes to Consolidated Financial Statements for the years ended December 31, [removed: 2013, 2012] [added: 2014, 2013] and [removed: 2011](#tx633916_31)] [added: 2012](#tx847767_31)] | | | [removed: 46] [added: 51] | |

| [Note 1: Summary of Significant Accounting [removed: Policies](#tx633916_32)] [added: Policies](#tx847767_32)] | | | [removed: 46] [added: 51] | |

| [Note 2: Business [removed: Combinations](#tx633916_33)] [added: Combinations](#tx847767_33)] | | | [removed: 49] [added: 55] | |

| [Note 3: [removed: Goodwill](#tx633916_34)] [added: Goodwill](#tx847767_34)] | | | [removed: 56] [added: 63] | |

| [Note 4: Amortizable Intangible [removed: Assets](#tx633916_35)] [added: Assets](#tx847767_35)] | | | [removed: 57] [added: 63] | |

| [Note 5: [removed: Investments](#tx633916_36)] [added: Investments](#tx847767_36)] | | | [removed: 57] [added: 63] | |

| [Note 6: Fixed [removed: Assets](#tx633916_37)] [added: Assets](#tx847767_37)] | | | [removed: 58] [added: 64] | |

| [Note 7: Accrued Expenses and Other [removed: Liabilities](#tx633916_38)] [added: Liabilities](#tx847767_38)] | | | [removed: 58] [added: 65] | |

| [Note 8: Long-Term [removed: Debt](#tx633916_39)] [added: Debt](#tx847767_39)] | | | [removed: 58] [added: 65] | |

| [Note 9: Income [removed: Taxes](#tx633916_40)] [added: Taxes](#tx847767_40)] | | | [removed: 60] [added: 67] | |

| [Note 10: Employee Savings [removed: Plan](#tx633916_41)] [added: Plan](#tx847767_41)] | | | [removed: 62] [added: 69] | |

| [Note 11: Stock-Based [removed: Compensation](#tx633916_42)] [added: Compensation](#tx847767_42)] | | | [removed: 62] [added: 69] | |

| [Note 12: Supplemental Disclosures of Cash Flow [removed: Information](#tx633916_43)] [added: Information](#tx847767_43)] | | | [removed: 66] [added: 74] | |

| [Note 13: Commitments and [removed: Contingencies](#tx633916_44)] [added: Contingencies](#tx847767_44)] | | | [removed: 67] [added: 74] | |

| [Note 14: Quarterly Operating Results [removed: (Unaudited)](#tx633916_45)] [added: (Unaudited)](#tx847767_45)] | | | [removed: 68] [added: 75] | |

| [Note 15: Segment [removed: Information](#tx633916_46)] [added: Information](#tx847767_46)] | | | [removed: 68] [added: 76] | |

| [removed: [Reports] [added: [Report] of Independent Registered Public Accounting [removed: Firm](#tx633916_48)] [added: Firm](#tx847767_51)] | | | [removed: 70] [added: 79] | |

| _(in thousands, except per share data)_ | | [removed: 2013] [added: 2014] | | | | [removed: 2012] [added: 2013] | | | | [removed: 2011] [added: 2012] | | |

| Commissions and fees | | $ | [removed: 1,355,503] [added: 1,567,460] | | | $ | [removed: 1,189,081] [added: 1,355,503] | | | $ | [removed: 1,005,962] [added: 1,189,081] | |

| Investment income | | | [removed: 638] [added: 747] | | | | [removed: 797] [added: 638] | | | | [removed: 1,267] [added: 797] | |

| Other income, net | | | [removed: 7,138] [added: 7,589] | | | | [removed: 10,154] [added: 7,138] | | | | [removed: 6,313] [added: 10,154] | |

| Total revenues | | | [removed: 1,363,279] [added: 1,575,796] | | | | [removed: 1,200,032] [added: 1,363,279] | | | | [removed: 1,013,542] [added: 1,200,032] | |

| Employee compensation and benefits | | | [removed: 683,000] [added: 791,749] | | | | [removed: 608,506] [added: 683,000] | | | | [removed: 508,675] [added: 608,506] | |

| Non-cash stock-based compensation | | | [removed: 22,603] [added: 19,363] | | | | [removed: 15,865] [added: 22,603] | | | | [removed: 11,194] [added: 15,865] | |

| Other operating expenses | | | [removed: 195,677] [added: 235,328] | | | | [removed: 174,389] [added: 195,677] | | | | [removed: 144,079] [added: 174,389] | |

| Amortization | | | [removed: 67,932] [added: 82,941] | | | | [removed: 63,573] [added: 67,932] | | | | [removed: 54,755] [added: 63,573] | |

| Depreciation | | | [removed: 17,485] [added: 20,895] | | | | [removed: 15,373] [added: 17,485] | | | | [removed: 12,392] [added: 15,373] | |

| Interest | | | [removed: 16,440] [added: 28,408] | | | | [removed: 16,097] [added: 16,440] | | | | [removed: 14,132] [added: 16,097] | |

| Change in estimated acquisition earn-out payables | | | [removed: 2,533] [added: 9,938] | | | | [removed: 1,418] [added: 2,533] | | | | [removed: (2,206] [added: 1,418] | [removed: )] |

| Total expenses | | | [removed: 1,005,670] [added: 1,236,047] | | | | [removed: 895,221] [added: 1,005,670] | | | | [removed: 743,021] [added: 895,221] | |

| Income before income taxes | | | [removed: 357,609] [added: 339,749] | | | | [removed: 304,811] [added: 357,609] | | | | [removed: 270,521] [added: 304,811] | |

| Income taxes | | | [removed: 140,497] [added: 132,853] | | | | [removed: 120,766] [added: 140,497] | | | | [removed: 106,526] [added: 120,766] | |

| Net income | | $ | [removed: 217,112] [added: 206,896] | | | $ | [removed: 184,045] [added: 217,112] | | | $ | [removed: 163,995] [added: 184,045] | |

| Basic | | $ | [removed: 1.50] [added: 1.43] | | | $ | [removed: 1.28] [added: 1.50] | | | $ | [removed: 1.15] [added: 1.28] | |

| Diluted | | $ | [removed: 1.48] [added: 1.41] | | | $ | [removed: 1.26] [added: 1.48] | | | $ | [removed: 1.13] [added: 1.26] | |

| Basic | | | [removed: 141,033] [added: 140,944] | | | | [removed: 139,364] [added: 141,033] | | | | [removed: 138,582] [added: 139,364] | |

| [Note 16: Losses and Loss Adjustment Reserve](#tx847767_47) | | | 77 | |

| [Note 17: Statutory Financial Information](#tx847767_48) | | | 77 | |

| [Note 18: Subsidiary Dividend Restrictions](#tx847767_49) | | | 77 | |

| [Note 19: Shareholders’ Equity](#tx847767_50) | | | 78 | |

| Loss on disposal | | | 47,425 | | | | — | | | | — | |

| Cash and cash equivalents | | $ | 470,048 | | | $ | 202,952 | |

| Reinsurance recoverable | | | 13,028 | | | | — | |

| Prepaid reinsurance premiums | | | 320,586 | | | | — | |

| Investments | | | 19,862 | | | | 16 | |

| Losses and loss adjustment reserve | | | 13,028 | | | | — | |

| Unearned premiums | | | 320,586 | | | | — | |

| Treasury stock, at cost 2,385 and 0 shares at 2014 and 2013, respectively | | | (75,025 | ) | | | — | |

| | | Common Stock | | | | | | | | Additional Paid-In Capital | | | | Treasury Stock | | | | Retained Earnings | | | | Accumulated Other Comprehensive Income | | | | Total | | |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| Net income | | | | | | | | | | | | | | | | | | | 206,896 | | | | | | | | 206,896 | |

| Purchase of treasury stock | | | | | | | | | | | | | | | (75,025 | ) | | | | | | | | | | | (75,025 | ) |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| Balance at December 31, 2014 | | | 145,871 | | | $ | 14,587 | | | $ | 405,982 | | | $ | (75,025 | ) | | $ | 1,768,201 | | | $ | — | | | $ | 2,113,745 | |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| Net income | | $ | 206,896 | | | $ | 217,112 | | | $ | 184,045 | |

| Amortization | | | 82,941 | | | | 67,932 | | | | 63,573 | |

| Depreciation | | | 20,895 | | | | 17,485 | | | | 15,373 | |

| Non-cash stock-based compensation | | | 19,363 | | | | 22,603 | | | | 15,865 | |

| Change in estimated acquisition earn-out payables | | | 9,938 | | | | 2,533 | | | | 1,418 | |

| Amortization of debt discount | | | 46 | | | | — | | | | — | |

| Reinsurance recoverable decrease | | | 12,210 | | | | — | | | | — | |

| Prepaid reinsurance premiums (increase) | | | (31,573 | ) | | | — | | | | — | |

| Losses and loss adjustment reserve (decrease) | | | (12,210 | ) | | | — | | | | — | |

| Unearned premiums increase | | | 31,573 | | | | — | | | | — | |

| Purchase of treasury stock | | | (75,025 | ) | | | — | | | | — | |

In addition, as the result of our acquisition of the stock of The Wright Insurance Group, LLC (“Wright”), in May 2014, we own a flood insurance carrier, Wright National Flood Insurance Company (“WNFIC”), that is a Wright subsidiary.

This carrier’s business consists of policies written pursuant to the National Flood Insurance Program (“NFIP”), the program administered by the Federal Emergency Management Agency (“FEMA”) and several excess flood insurance policies which are fully reinsured.

New Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”) which changes the criteria for reporting discontinued operations and enhances disclosures in this area.

Under the new guidance, the disposal of a component or group of components of an entity should be reported as a discontinued operation if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.

Disposals of equity method investments, or those reported as held-for-sale, must be presented as a discontinued operation if they meet the new definition.

The standard is effective prospectively for all disposals of components (or classification of components as held-for-sale) of an entity that occur within interim and annual periods beginning on or after December 15, 2014.

Early adoption is permitted, but only for disposals (or classifications of components as held-for-sale) that have not been reported in financial statements previously issued.

| | | | | |

| --- | --- | --- | --- | --- |

| [Note 16: Subsequent Event](#tx633916_47) | | | 69 | |

| [Management’s Report on Internal Control Over Financial Reporting](#tx633916_49) | | | 72 | |

| | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | Common Stock | | | | | | | | Additional | | | | | | | | Accumulated Other | | | | | | |

| Balance at January 1, 2011 | | | 142,795 | | | $ | 14,279 | | | $ | 286,997 | | | $ | 1,205,061 | | | $ | 7 | | | $ | 1,506,344 | |

| Net income | | | | | | | | | | | | | | | 163,995 | | | | | | | | 163,995 | |

| Cash and cash equivalents at beginning of year | | | 219,821 | | | | 286,305 | | | | 272,984 | |

Commission revenues related to installment billings at the Company’s subsidiary, Arrowhead General Insurance Agency, Inc. (“Arrowhead”), are recorded on the later of the effective date of the policy or the first installment billing.

At those dates, the earnings process has been completed, and Brown & Brown can reliably estimate the impact of policy cancellations for refunds and establish reserves accordingly.

The policy cancellation reserve was $8,010,000 and $7,174,000 at December 31, 2013 and 2012, respectively, and it is periodically evaluated and adjusted as necessary.

Commission revenues are reported net of commissions paid to sub-brokers or co-brokers.

Fee income is recognized as services are rendered.

The carrying amount of Brown & Brown’s long-term debt approximates fair value at December 31, 2013 and 2012 because the related coupon rate approximates the current market rate.

Acquisitions in 2011

The aggregate purchase price of these acquisitions was $214,822,000, including $167,444,000 of cash payments, the issuance of $1,194,000 in notes payable, the assumption of $15,659,000 of liabilities and $30,525,000 of recorded earn-out payables.

The acquisitions made in 2011 have been accounted for as business combinations and are as follows:

| Balcos Insurance, Inc. | | Retail | | January 1 | | $ | 8,611 | | | $ | — | | | $ | 1,595 | | | $ | 10,206 | | | _$_ | _5,766_ | |

| Associated Insurance Service, Inc. et al. | | Retail | | January 1 | | | 12,000 | | | | — | | | | 1,575 | | | | 13,575 | | | | _6,000_ | |

| United Benefit Services Insurance Agency LLC et al. | | Retail | | February 1 | | | 14,283 | | | | — | | | | 2,590 | | | | 16,873 | | | | _8,442_ | |

| First Horizon Insurance Group, Inc. et al. | | Retail | | April 30 | | | 25,060 | | | | — | | | | — | | | | 25,060 | | | | _—_ | |

| Fitzharris Agency, Inc. et al. | | Retail | | May 1 | | | 6,159 | | | | — | | | | 888 | | | | 7,047 | | | | _3,832_ | |

| Corporate Benefit Consultants, LLC | | Retail | | June 1 | | | 9,000 | | | | — | | | | 2,038 | | | | 11,038 | | | | _4,520_ | |

| Sitzmann, Morris & Lavis Insurance Agency, Inc. et al. | | Retail | | November 1 | | | 40,460 | | | | — | | | | 6,228 | | | | 46,688 | | | | _19,000_ | |

| Snapper Shuler Kenner, Inc. et al. | | Retail | | November 1 | | | 7,493 | | | | — | | | | 1,318 | | | | 8,811 | | | | _3,988_ | |

| Industry Consulting Group, Inc. | | National Programs | | November 1 | | | 9,133 | | | | — | | | | 3,877 | | | | 13,010 | | | | _5,794_ | |

| Colonial Claims Corporation et al. | | Services | | December 23 | | | 9,950 | | | | — | | | | 4,248 | | | | 14,198 | | | | _8,000_ | |

| Other | | Various | | Various | | | 25,295 | | | | 1,194 | | | | 6,168 | | | | 32,657 | | | | _12,865_ | |

| Total | | | | | | $ | 167,444 | | | $ | 1,194 | | | $ | 30,525 | | | $ | 199,163 | | | _$_ | _78,207_ | |

| _(in thousands)_ | | Balcos | | | | AIS | | | | United | | | | FHI | | | | FA | | | | CBC | | |

| Cash | | $ | — | | | $ | — | | | $ | — | | | $ | 5,170 | | | $ | — | | | $ | — | |

| Other current assets | | | 187 | | | | 252 | | | | 438 | | | | 1,640 | | | | 77 | | | | 227 | |

| Fixed assets | | | 20 | | | | 100 | | | | 20 | | | | 134 | | | | 60 | | | | 6 | |

| Goodwill | | | 6,486 | | | | 9,055 | | | | 10,049 | | | | 15,254 | | | | 7,244 | | | | 6,738 | |

| Purchased customer accounts | | | 3,530 | | | | 4,086 | | | | 7,045 | | | | 8,088 | | | | 3,351 | | | | 4,046 | |

| Total assets acquired | | | 10,265 | | | | 13,585 | | | | 17,601 | | | | 30,305 | | | | 10,753 | | | | 11,038 | |

There were no changes in or disagreements with accountants on accounting and financial disclosure in [removed: 2013.][added: 2014.]

We carried out an evaluation required by Rules 13a-15 and 15d-15 under the Exchange Act (the “Evaluation”), under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15 and 15d-15 under the Exchange Act (“Disclosure Controls”) as of December 31, [removed: 2013.][added: 2014.]

In conducting Brown & Brown’s evaluation of the effectiveness of its internal [removed: controls] [added: control] over financial reporting, Brown & Brown has excluded the following acquisitions completed [removed: by Brown & Brown] during [removed: 2013: Beecher Carlson Holdings, Inc.] [added: 2014: Pacific Resources Benefits Advisors, LLC,] and [removed: ICA, Inc.] [added: The Wright Insurance Group, LLC] (collectively the [removed: “2013] [added: “2014] Excluded Acquisitions”), which were acquired during [removed: 2013] [added: 2014] and whose financial statements constitute [removed: 2.6% and 10.8%] [added: 23.5%] of [removed: net and] total assets, [removed: respectively, 3.4%] [added: 6.8%] of revenues, and [removed: 2.2%] [added: (1.8%)] of net income of the consolidated financial statement amounts as of and for the year ended December 31, [removed: 2013.][added: 2014.]

[removed: There has not] [added: Except as described above, there have] been [removed: any] [added: no] change in our internal control over financial reporting identified in connection with the Evaluation that occurred during the quarter ended December 31, [removed: 2013] [added: 2014] that has materially affected, or is reasonably likely to materially affect, those controls.

[removed: We assessed] [added: Our responsibility is to express an opinion on] the [removed: effectiveness of our] [added: Company’s] internal control over financial reporting [removed: as of December 31, 2013.][added: based on our audit.]

[added: Management’s internal control over financial reporting as of December 31, 2014 has been audited by] Deloitte & Touche LLP, an independent registered public accounting firm, [removed: issued an audit report on the effectiveness of our internal control over financial reporting] as [removed: of December 31, 2013,] [added: stated in their report] which is [removed: incorporated herein at Item 8.][added: included herein.]

We are in the process of integrating Pacific Resources Benefits Advisors, LLC, and The Wright Insurance Group, LLC into our overall internal control over financial reporting processes.

##### [Table of Contents](#toc)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Brown & Brown, Inc.

Daytona Beach, Florida

We have audited the internal control over financial reporting of Brown & Brown, Inc. and subsidiaries (the “Company”) as of December 31, 2014, based on criteria established in _Internal Control—Integrated Framework (1992)_ issued by the Committee of Sponsoring Organizations of the Treadway Commission.

As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at The Wright Insurance Group, LLC and Pacific Resources Benefits Advisors, LLC (collectively the “2014 Excluded Acquisitions”), which were acquired during 2014 and whose financial statements constitute 23.5% of total assets, 6.8% of revenues, and (1.8)% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2014.

Accordingly, our audit did not include the internal control over financial reporting of the 2014 Excluded Acquisitions.

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

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

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.

Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in _Internal Control—Integrated Framework (1992)_ issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2014 of the Company and our report dated February 27, 2015 expressed an unqualified opinion on those financial statements.

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| _/s/ DELOITTE & TOUCHE LLP_ |