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

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

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General

The following discussion should be read in conjunction with our Consolidated Financial Statements and the related Notes to those Consolidated Financial Statements included elsewhere in this Annual Report.

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

The volume of business from new and existing customers, fluctuations in insurable exposure units and changes in general economic and competitive conditions all affect our revenues. For example, level rates of inflation or a general decline in economic activity could limit increases in the values of insurable exposure units. Conversely, the increasing costs of litigation settlements and awards have caused some customers to seek higher levels of insurance coverage. Historically, our revenues have typically grown as a result of our focus on net new business growth and acquisitions.

We foster a strong, decentralized sales culture with a goal of consistent, sustained growth over the long term.

We increased revenues every year from 1993 to 2014, with the exception of 2009, when our revenues dropped 1.0%. Our revenues grew from $95.6 million in 1993 to $1.6 billion in 2014, reflecting a compound annual growth rate of 14.2%. In the same 21 year period, we increased net income from $8.1 million to $206.9 million in 2014, a compound annual growth rate of 16.7%.

The years 2007 through 2011 posed significant challenges for us and for our industry in the form of a prevailing decline in insurance premium rates, commonly referred to as a “soft market” and increased significant governmental involvement in the Florida insurance marketplace which resulted in a substantial loss of revenues for us. Additionally, beginning in the second half of 2008 and throughout 2011, there was a general decline in insurable exposure units as the consequence of the general weakening of the economy in the United States. As a result, from the first quarter of 2007 through the fourth quarter of 2011 we experienced negative internal revenue growth each quarter. The continued declining exposure units during 2010 and 2011 had a greater negative impact on our commissions and fees revenues than declining insurance premium rates.

Beginning in the first quarter of 2012, many insurance premium rates began to slightly increase. Additionally, in the second quarter of 2012, the general declines in insurable exposure units started to flatten and these exposures units subsequently began to gradually increase during the year. As a result, we recorded positive internal revenue growth for each quarter of 2012 for each of our four segments with two exceptions; the first quarter for the Retail Segment and the third quarter for the National Programs Segment, in which declines of only 0.7% and 3.3%, respectively, were experienced.

This growth trend has continued into 2014 with our consolidated internal revenue growth rate of 2.0%. Additionally, each of our four segments recorded positive internal revenue growth for each quarter in 2014 except for the Services Segment in the first quarter. The decline in the core organic commissions and fees revenues in the first quarter of 2014 for the Services Segment was the result of the significant revenue recorded at our Colonial Claims operation in the first quarter of 2013 attributable to Superstorm Sandy, for which no comparable revenues occurred in the first quarter of 2014. In the first quarter of 2013, Colonial Claims earned claims fees of $16.2 million as a direct result of the continued significant claims activity from Superstorm Sandy.

We also earn “profit-sharing contingent commissions,” which are profit-sharing commissions based primarily on underwriting results, but which may also reflect considerations for volume, growth and/or retention. These commissions are primarily received in the first and second quarters of each year, based on the aforementioned considerations for the prior year(s). Over the last three years, profit-sharing contingent commissions have averaged approximately 4.3% of the previous year’s total commissions and fees revenue. Profit-sharing contingent commissions are included in our total commissions and fees in the Consolidated Statements of Income in the year received. The term “core commissions and fees” excludes profit-sharing contingent commissions and guaranteed supplemental commissions, and therefore represents the revenues earned directly from specific insurance policies sold, and specific fee-based services rendered. In contrast, the term “core organic commissions and fees” is our core commissions and fees 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). “Core organic commissions and fees” are reported in this manner in order to express the current year’s core commissions and fees on a comparable basis with the prior year’s core commissions and fees. The resulting net change reflects the aggregate changes attributable to (i) net new and lost accounts, (ii) net changes in our clients’ exposure units, and (iii) net changes in insurance premium rates.

Certain insurance companies offer guaranteed fixed-base agreements, referred to as “Guaranteed Supplemental Commissions” (“GSCs”) in lieu of profit –sharing contingent commissions. Since GSCs are not subject to the uncertainty of loss ratios, they are accrued throughout the year based on actual premiums written. As of December 31, 2014, we had $7.6 million of GSC revenue accrued and had earned $9.9 million of GSCs during 2014, most of which will be collected in the first quarter of 2015. For the twelve-month periods ended December 31, 2014, 2013 and 2012, we earned GSCs of $9.9 million, $8.3 million and $9.1 million, respectively.

Fee revenues relate to fees negotiated in lieu of commissions, which are recognized as services are rendered. Fee revenues have historically been generated primarily by: (1) our Services Segment, which provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare set-aside services, Social Security disability and Medicare benefits advocacy services, and catastrophe claims adjusting services, and (2) our National Programs and Wholesale Brokerage Segments, which earn fees primarily for the issuance of insurance policies on behalf of insurance companies. These services are provided over a period of time, typically one year. 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 Segment for 2014 have increased by $44.8 million to $117.8 million. 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. Fee revenues, on a consolidated basis, as a percentage of our total commissions and fees, represented 30.6% in 2014, 26.6% in 2013 and 21.7% in 2012.

Historically, investment income has consisted primarily of interest earnings on premiums and advance premiums collected and held in a fiduciary capacity before being remitted to insurance companies. Our policy is to invest available funds in high-quality, short-term fixed income investment securities. As a result of the bank liquidity and solvency issues in the United States in the last quarter of 2008, we moved substantial amounts of our cash into non-interest bearing checking accounts so that they would be fully insured by the Federal Deposit Insurance Corporation (“FDIC”) or into money-market investment funds (a portion of which is FDIC insured) of SunTrust and Wells Fargo, two large national banks. Effective January 1, 2013, the FDIC ceased providing insurance guarantees on non-interest bearing checking accounts and since that time we have invested in both interest bearing and non-interest bearing checking accounts. Investment income also includes gains and losses realized from the sale of investments. Other income primarily reflects net gains on sales of customer accounts and fixed assets, but will also include sub-rental income, legal settlements and other miscellaneous income.

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.

Current Year Company Overview

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 6.7% in 2013, and 2.0% in 2014.

The net growth in core organic commissions and fees in 2014 of $25.6 million is significantly less than the comparable growth in 2013 of $75.6 million, similar to the core organic commissions and fees in 2012 of $24.9 million and significantly better than the net lost revenues of $21.5 million in 2011. 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 growth in the core organic commissions and fees revenue for 2014 is principally attributable to new business and increasing insurance exposure units as a result of a gradually improving U.S. economy.

Income before income taxes in 2014 decreased over 2013 by 5.0%, or $17.9 million, to $339.7 million. 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. Income before income taxes related to new acquisitions was $37.5 million, and therefore, income before income taxes from offices that existed in the same time periods of 2014 and 2013 (including the new acquisitions that “folded in” to those offices) decreased by $55.4 million. 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.

Acquisitions

Approximately 37,500 independent insurance agencies are estimated to be operating currently in the United States. Part of our continuing business strategy is to attract high-quality insurance intermediaries to join our operations. From 1993 through 2014, we acquired 459 insurance intermediary operations, excluding acquired books of business (customer accounts).

We continue to acquire insurance operations that we believe are strategic in growing our business Segments. In each of the last two years, we completed ten acquisitions in 2014 with estimated revenues of $159.5 million, and nine acquisitions in 2013 with estimated revenues of $142.8 million.

A summary of our acquisitions over the last three years is as follows (in millions, except for number of acquisitions):


	Number of Acquisitions				Estimated Annual Revenues		Net Cash Paid		Notes Issued		Other Payable		Recorded Earn-out Payable		Net Assets Acquired
	Asset		Stock
2014		9		1	$	159.5	$	721.9	$	—	$	1.9	$	33.2	$	757.0
2013		8		1	$	142.8	$	408.1	$	—	$	0.5	$	5.1	$	413.7
2012		19		1	$	149.6	$	483.9	$	0.1	$	25.4	$	21.5	$	530.9

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. Wright’s operations include a national flood insurance program, government-sponsored insurance programs and proprietary national and regional programs.

On July 1, 2013, we completed the acquisition of Beecher Carlson, an insurance and risk management broker with operations that include retail brokerage, program management and captive management. The aggregate purchase price for Beecher Carlson was $469.3 million, including $364.3 million of cash payments and the assumption of $105.0 million of liabilities. Beecher Carlson was acquired primarily to expand Brown & Brown’s Retail and National Programs businesses, and to attract and hire high-quality individuals.

On January 9, 2012, we completed the acquisition of Arrowhead General Insurance Agency Superholding Corporation (“Arrowhead”) pursuant to a merger agreement dated December 15, 2011 (the “Merger Agreement”). Under the Merger Agreement, the total cash purchase price of $395.0 million was subject to adjustments for options to purchase shares of Arrowhead’s common stock, working capital, sharing of net operating tax losses, Arrowhead’s preferred stock units, transaction expenses, and closing debt. In addition, within 60 days following the third anniversary of the acquisition’s closing date, we will pay to certain persons who were Arrowhead equityholders as of the closing date additional earn-out payments equal, collectively, to $5.0 million, subject to certain adjustments based on the “cumulative EBITDA” of Arrowhead and all of its subsidiaries, as calculated pursuant to the Merger Agreement, during the final year of the three-year period following the acquisition’s closing date.

Arrowhead is a national insurance program manager and one of the largest managing general agents (“MGAs”) in the property and casualty insurance industry.

Critical Accounting Policies

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

We believe that of our significant accounting and reporting policies, the more critical policies include our accounting for revenue recognition, business combinations and purchase price allocations, intangible asset impairments 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. Refer to Note 1 in the “Notes to Consolidated Financial Statements”.

Revenue Recognition

Commission revenues are recognized as of the effective date of the insurance policy or the date on which the policy premium is processed into our systems, whichever is later. 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. Management determines the policy cancellation reserve based upon historical cancellation experience adjusted in accordance with known circumstances. Subsequent commission adjustments are recognized upon our receipt of notification from insurance companies concerning matters necessitating such adjustments. Profit-sharing contingent commissions are recognized when determinable, which is when such commissions are received from insurance companies, or when we receive formal notification of the amount of such payments. Fee revenues, and commissions for workers’ compensation programs, are recognized as services are rendered.

Business Combinations and Purchase Price Allocations

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

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

Acquisition purchase prices are typically based on a multiple of average annual operating profit earned over a one-to three-year period within a minimum and maximum price range. The recorded purchase prices for all acquisitions consummated after January 1, 2009 include an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations are recorded in the consolidated statement of income when incurred.

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

Intangible Assets Impairment

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

Management assesses the recoverability of our goodwill on an annual basis, and assesses the recoverability of our amortizable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The following factors, if present, may trigger an impairment review: (i) significant underperformance relative to historical or projected future operating results; (ii) significant negative industry or economic trends; (iii) significant decline in our stock price for a sustained period; and (iv) significant decline in our market capitalization. If the recoverability of these assets is unlikely because of the existence of one or more of the above-referenced factors, an impairment analysis is performed. Management must make assumptions regarding estimated future cash flows and other factors to determine the fair value of these assets. If these estimates or related assumptions change in the future, we may be required to revise the assessment and, if appropriate, record an impairment charge. We completed our most recent evaluation of impairment for goodwill as of November 30, 2014 and determined that the fair value of goodwill exceeded the carrying value of such assets. Additionally, there have been no impairments recorded for amortizable intangible assets for the years ended December 31, 2014, 2013 and 2012.

Non-Cash Stock-Based Compensation

We grant stock options and non-vested stock awards to our employees, and the related compensation expense is required to be recognized in the financial statements based upon the grant-date fair value of those awards.

Litigation Claims

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

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. 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. These are detailed in Note 1 to the Financial Statements under “Summary of Significant Accounting Policies”.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

The following discussion and analysis regarding results of operations and liquidity and capital resources should be considered in conjunction with the accompanying Consolidated Financial Statements and related Notes.

Financial information relating to our Consolidated Financial Results is as follows (in thousands, except percentages):


	2014			Percent Change			2013			Percent Change			2012
REVENUES
Core commissions and fees	$	1,499,903			15.7	%	$	1,295,977			14.1	%	$	1,136,252
Profit-sharing contingent commissions		57,706			12.6	%		51,251			17.3	%		43,683
Guaranteed supplemental commissions		9,851			19.0	%		8,275			(9.5	)%		9,146
Investment income		747			17.1	%		638			(19.9	)%		797
Other income, net		7,589			6.3	%		7,138			(29.7	)%		10,154

Total revenues		1,575,796			15.6	%		1,363,279			13.6	%		1,200,032
EXPENSES
Employee compensation and benefits		791,749			15.9	%		683,000			12.2	%		608,506
Non-cash stock-based compensation		19,363			(14.3	)%		22,603			42.5	%		15,865
Other operating expenses		235,328			20.3	%		195,677			12.2	%		174,389
Loss on disposal		47,425			—	%		—			—	%		—
Amortization		82,941			22.1	%		67,932			6.9	%		63,573
Depreciation		20,895			19.5	%		17,485			13.7	%		15,373
Interest		28,408			72.8	%		16,440			2.1	%		16,097
Change in estimated acquisition earn-out payables		9,938			NMF	(1)		2,533			78.6	%		1,418

Total expenses		1,236,047			22.9	%		1,005,670			12.3	%		895,221

Income before income taxes	$	339,749			(5.0	)%	$	357,609			17.3	%	$	304,811

Net internal growth rate — core commissions and fees		2.0	%					6.7	%					2.6	%
Employee compensation and benefits ratio		50.2	%					50.1	%					50.7	%
Other operating expenses ratio		14.9	%					14.4	%					14.5	%
Capital expenditures	$	24,923					$	16,366					$	24,028
Total assets at December 31	$	4,956,458					$	3,649,508					$	3,128,058

(1)	NMF = Not a meaningful figure

Commissions and Fees

Commissions and fees, including profit-sharing contingent commissions and GSCs, increased $212.0 million, or 15.6% in 2014. Profit-sharing contingent commissions and GSCs increased $8.0 million or 13.5% in 2014 to $67.6 million, due primarily to $4.9 million, $1.4 million, and $1.7 million increases in profit-sharing contingent commissions and GSCs in our Retail, National Programs and Wholesale Brokerage Segments, respectively. Core commissions and fees revenue in 2014 increased $203.9 million, of which approximately $186.8 million represented core commissions and fees from acquisitions that had no comparable revenues in 2013. After taking into account divested business of $8.5 million, the remaining net increase of $25.6 million, representing net new business, reflects a 2.0% internal growth rate for core organic commissions and fees.

Commissions and fees, including profit-sharing contingent commissions and GSCs, increased $166.4 million, or 14.0% in 2013. Profit-sharing contingent commissions and GSCs increased $6.7 million or 12.7% in 2013 to $59.5 million, due primarily to $4.7 million, $0.6 million, and $1.3 million increases in profit-sharing contingent commissions and GSCs in our Retail, National Programs and Wholesale Brokerage Divisions, respectively. Core commissions and fees revenue in 2013 increased $159.7 million, of which approximately $91.5 million represented core commissions and fees from acquisitions that had no comparable revenues in 2012. After taking into account divested business of $7.4 million, the remaining net increase of $75.6 million, representing net new business, reflects a 6.7% internal growth rate for core organic commissions and fees.

Investment Income

Investment income increased to $0.7 million in 2014, compared with $0.6 million in 2013 mainly due to higher average daily invested balances in 2014 than in 2013. Investment income of $0.6 million in 2013 was down $0.2 million as compared to 2012, mainly due to lower average daily invested balances in 2013 than in 2012.

Other Income, Net

Other income for 2014 reflected income of $7.6 million, compared with $7.1 million in 2013 and $10.2 million in 2012. We recognized gains of $5.3 million, $3.1 million and $4.3 million from sales on books of business (customer accounts) in 2014, 2013 and 2012, respectively. Although we are not in the business of selling books of business, we periodically will sell an office or a book of business because it does not produce reasonable margins or demonstrate a potential for growth, or for other reasons related to the particular assets in question. Other income also included $1.6 million and $3.6 million in 2013 and 2012, respectively, paid to us in connection with settlements of litigation against former employees for violations of restrictive covenants contained in their employment agreements with us. For 2014, other income from legal settlement was negligible. Additionally, we recognized non-recurring gains, rental income and sales of software services of $0.9 million, $2.4 million and $2.3 million in 2014, 2013 and 2012, respectively.

Employee Compensation and Benefits

Employee compensation and benefits expense increased, approximately 15.9% or $108.7 million in 2014. However, that net increase included $81.0 million of new compensation costs related to new acquisitions that were stand-alone offices. Therefore, employee compensation and benefits from those offices that existed in the same time periods of 2014 and 2013 (including the new acquisitions that “folded in” to those offices) increased by $27.7 million. The employee compensation and benefit increases from these offices were primarily related to increases in staff and management salaries of $13.8 million, new salaried producers of $4.8 million, profit center and other related bonuses of $6.7 million, compensation to our commissioned producers of $0.9 million and health insurance costs of $4.8 million. These increases were partially offset by net reductions in temporary employees, employer 401K plan matching contributions and accrued vacation expense. Employee compensation and benefits expense as a percentage of total revenues was 50.2% as compared to 50.1% for the twelve months ended December 31, 2013. This slight increase is driven by continued investment in new teammates.

Employee compensation and benefits expense increased, approximately 12.2% or $74.5 million in 2013. However, that net increase included $37.6 million of new compensation costs related to new acquisitions that were stand-alone offices. Therefore, employee compensation and benefits from those offices that existed in the same time periods of 2013 and 2012 (including the new acquisitions that “folded in” to those offices) increased by $36.9 million. The employee compensation and benefit increases from these offices were primarily related to increases in staff and management salaries of $16.6 million, new salaried producers of $4.7 million, profit center and other related bonuses of $3.4 million, compensation to our commissioned producers of $5.7 million, health insurance costs of $1.8 million, payroll-related taxes of $3.7 million, and other net expenses of $1.0 million.

Non-Cash Stock-Based Compensation

We have an employee stock purchase plan, and grant stock options and non-vested stock awards to our employees. Compensation expense for all share-based awards is recognized in the financial statements based upon the grant-date fair value of those awards. For 2014, 2013 and 2012, the non-cash stock-based compensation expense incorporates the costs related to each of our four stock-based plans as explained in Note 11 of the Notes to the Consolidated Financial Statements.

Non-cash stock-based compensation decreased 14.3%, or $3.2 million in 2014 over 2013, primarily as a result of forfeitures due to the non-achievement of certain performance criteria, partially offset by an increase associated with new, non-vested stock awards granted on July 1, 2013 under our Stock Incentive Plan (“SIP”).

Non-cash stock-based compensation increased 42.5%, or $6.7 million in 2013 over 2012, primarily as a result of new non-vested stock awards granted on July 1, 2013 under our SIP. Most of these SIP grants will typically vest in four to seven 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. Some SIP grants will vest after five years of service.

Other Operating Expenses

As a percentage of total revenues, other operating expenses represented 14.9% in 2014, 14.4% in 2013, and 14.5% in 2012.

Other operating expenses in 2014 increased $39.7 million over 2013, of which $39.0 million was related to acquisitions. Therefore, other operating expenses attributable to offices that existed in the same periods in both 2014 and 2013 (including the new acquisitions that “folded in” to those offices) increased by $0.7 million. Of the $0.7 million increase, $2.0 million related to increased data processing and software licensing expense, $1.2 million related to increased inspection and consulting fees, $0.8 million related to office rent, and $0.9 million related to increased employee sales meeting costs. These increased costs were partially offset by decreases of $3.0 million for legal claims and litigation expenses, $1.0 million for insurance expenses, and $0.2 million in other various net cost decreases.

Other operating expenses in 2013 increased $21.3 million over 2012, of which $12.5 million was related to acquisitions that joined as stand-alone offices. Therefore, other operating expenses attributable to offices that existed in the same periods in both 2013 and 2012 (including the new acquisitions that “folded in” to those offices) increased by $8.8 million. Of the $8.8 million increase, $2.0 million related to increased data processing and software licensing expense, $2.0 million related to increased inspection and consulting fees, $1.6 million related to increased accounting and advisory fees, $0.9 million related to increased employee sales meeting costs, and $2.9 million related to other various, net cost increases. These increased costs were partially offset by a decrease of $0.6 million for legal claims and litigation expenses.

Loss on Disposal

During 2014 the Company recognized a loss on disposal of $47.4 million as a result of the sale of Axiom Re (Axiom) effective December 31, 2014. The sale is part of the Company’s strategy to exit the reinsurance brokerage business. For the years ended December 31, 2014 and 2013, Axiom recorded a (loss) income before income taxes of ($587,000) and $113,000, respectively, which are included in the Wholesale Brokerage segment. The transaction was recorded in accordance to ASU 2014-08. The Company’s prior non-significant disposals are recorded in the Other income, net in the consolidated statements of income.

Amortization

Amortization expense increased $15.0 million, or 22.1%, in 2014, and $4.4 million, or 6.9%, in 2013. The increases in 2014 and 2013 were due to the amortization of additional intangible assets as a result of acquisitions completed in those years.

Depreciation

Depreciation increased 19.5% to $20.9 million in 2014 and 13.7% to $17.5 million in 2013. The increases in 2014 and 2013 were due primarily to the addition of fixed assets as a result of recent acquisitions.

Interest Expense

Interest expense increased $12.0 million, or 72.8%, in 2014, and $0.3 million, or 2.1%, in 2013. The 2014 increase is primarily due to the increased debt borrowings from the JPMorgan Credit Facility term loan of $550.0 million at adjusted LIBOR rates (as mentioned in Note 8), which helped fund the Wright acquisition, and the $500.0 million Senior Notes due 2024 at an interest rate of 4.200% which were issued during September 2014. The 2013 increases were due primarily to the additional debt borrowed in connection with our acquisition of Beecher Carlson.

Change in estimated acquisition earn-out payables

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

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

As of December 31, 2014, the fair values of the estimated acquisition earn-out payables were re-evaluated and measured at fair value on a recurring basis using unobservable inputs (Level 3) as defined in ASC 820-Fair Value Measurement (“ASC 820”). The resulting net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the years ended December 31, 2014, 2013, and 2012 were as follows (in thousands):


	2014		2013		2012
Change in fair value on estimated acquisition earn-out payables	$	7,375	$	570	$	(1,051	)
Interest expense accretion		2,563		1,963		2,469

Net change in earnings from estimated acquisition earn-out payables	$	9,938	$	2,533	$	1,418

The fair values of the estimated earn-out payables were increased in 2014 and 2013 since certain acquisitions performed at higher levels than estimated in our original projections. Conversely, the fair values of the estimated earn-out payables were reduced in 2012 since certain acquisitions did not perform at the level estimated based on our original projections. An acquisition is considered to be performing well if its operating profit exceeds the level needed to reach the minimum purchase price. However, a reduction in the estimated acquisition earn-out payable can occur even though the acquisition is performing well, if it is not performing at the level contemplated by our original estimate.

As of December 31, 2014, the estimated acquisition earn-out payables equaled $75,283,000, of which $26,018,000 was recorded as accounts payable and $49,265,000 was recorded as an other non-current liability. As of December 31, 2013, the estimated acquisition earn-out payables equaled $43,058,000, of which $6,312,000 was recorded as accounts payable and $36,746,000 was recorded as an other non-current liability. As of December 31, 2012, the estimated acquisition earn-out payables equaled $52,987,000, of which $10,164,000 was recorded as accounts payable and $42,823,000 was recorded as an other non-current liability.

Income Taxes

The effective tax rate on income from operations was 39.1% in 2014, 39.3% in 2013, and 39.6% in 2012. The lower effective annual tax rates are primarily the result of lower average effective state income tax rates, driven by revenue apportionment.

RESULTS OF OPERATIONS — SEGMENT INFORMATION

As discussed in Note 15 of the Notes to Consolidated Financial Statements, we operate four reportable segments: Retail, National Programs, Wholesale Brokerage, and Services Segments. On a segmental basis, increases in amortization, depreciation and interest expenses result from completed acquisitions within a given segment in a particular year. Likewise, other income in each segment primarily reflects net gains on sales of customer accounts and fixed assets. As such, in evaluating the operational efficiency of a segment, management emphasizes the net internal growth rate of core commissions and fees revenue, the gradual improvement of the ratio of total employee compensation and benefits to total revenues, and the gradual improvement of the ratio of other operating expenses to total revenues.

The term “core commissions and fees” excludes profit-sharing contingent commissions and GSCs, and therefore represents the revenues earned directly from specific insurance policies sold, and specific fee-based services rendered. In contrast, the term “core organic commissions and fees” is our core commissions and fees 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). Core organic commissions and fees attempts to express the current year’s core commissions and fees on a comparable basis with the prior year’s core commissions and fees. The resulting net change reflects the aggregate changes attributable to (i) net new and lost accounts, (ii) net changes in our clients’ exposure units, and (iii) net changes in insurance premium rates. The net changes in each of these three components can be determined for each of our customers.

The internal growth rates for our core organic commissions and fees for the three years ended December 31, 2014, 2013 and 2012, by Segment, are as follows (in thousands, except percentages):


2014	For the Year Ended December 31,					Total Net Change		Total Net Growth %			Less Acquisition Revenues		Internal Net Growth $			Internal Net Growth %
	2014		2013
Retail(1)	$	779,480	$	692,231		$	87,249		12.6	%	$	73,351	$	13,898			2.0	%
National Programs		367,214		268,160			99,054		36.9	%		93,803		5,251			2.0	%
Wholesale Brokerage		216,727		195,626			21,101		10.8	%		4,032		17,069			8.7	%
Services		136,482		131,503			4,979		3.8	%		15,599		(10,620	)		(8.1	)%

Total core commissions and fees	$	1,499,903	$	1,287,520		$	212,383		16.5	%	$	186,785	$	25,598			2.0	%

Less Superstorm Sandy		—		(18,275	)		18,275		100.0	%		—		18,275			100.0	%

Total core commissions and fees less Superstorm Sandy	$	1,499,903	$	1,269,245		$	230,658		18.2	%	$	186,785	$	43,873			3.5	%

There would be a 3.5% Internal Net Growth rate when excluding the $18.3 million related to Superstorm Sandy within the Colonial Claims business for the first half of 2013.

The reconciliation of the above internal growth schedule to the total Commissions and Fees included in the Consolidated Statements of Income for the years ended December 31, 2014 and 2013 is as follows (in thousands):


	For the Year Ended December 31,
	2014		2013
Total core commissions and fees	$	1,499,903	$	1,287,520
Profit-sharing contingent commissions		57,706		51,251
Guaranteed supplemental commissions		9,851		8,275
Divested business		—		8,457

Total commissions and fees	$	1,567,460	$	1,355,503


2013	For the Year Ended December 31,				Total Net Change		Total Net Growth %			Less Acquisition Revenues		Internal Net Growth $		Internal Net Growth %
	2013		2012
Retail(1)	$	699,571	$	611,156	$	88,415		14.5	%	$	79,455	$	8,960		1.5	%
National Programs		271,772		233,261		38,511		16.5	%		7,099		31,412		13.5	%
Wholesale Brokerage		193,601		168,151		25,450		15.1	%		4,332		21,118		12.6	%
Services		131,033		116,247		14,786		12.7	%		657		14,129		12.2	%

Total core commissions and fees	$	1,295,977	$	1,128,815	$	167,162		14.8	%	$	91,543	$	75,619		6.7	%


	For the Year Ended December 31,
	2013		2012
Total core commissions and fees	$	1,295,977	$	1,128,815
Profit-sharing contingent commissions		51,251		43,683
Guaranteed supplemental commissions		8,275		9,146
Divested business		—		7,437

Total commissions and fees	$	1,355,503	$	1,189,081


2012	For the Year Ended December 31,				Total Net Change		Total Net Growth %			Less Acquisition Revenues		Internal Net Growth $		Internal Net Growth %
	2012		2011
Retail(1)	$	618,562	$	571,129	$	47,433		8.3	%	$	38,734	$	8,699		1.5	%
National Programs		233,261		148,841		84,420		56.7	%		83,281		1,139		0.8	%
Wholesale Brokerage		168,182		155,151		13,031		8.4	%		3,598		9,433		6.1	%
Services		116,247		64,875		51,372		79.2	%		45,783		5,589		8.6	%

Total core commissions and fees	$	1,136,252	$	939,996	$	196,256		20.9	%	$	171,396	$	24,860		2.6	%


	For the Year Ended December 31,
	2012		2011
Total core commissions and fees	$	1,136,252	$	939,996
Profit-sharing contingent commissions		43,683		43,198
Guaranteed supplemental commissions		9,146		12,079
Divested business		—		10,689

Total commissions and fees	$	1,189,081	$	1,005,962

(1)	The Retail Segment figures include commissions and fees reported in the “Other” column of the Segment Information in Note 15 of the Notes to the Consolidated Financial Statements, which includes corporate and consolidation items.

Retail Segment

The Retail Segment provides a broad range of insurance products and services to commercial, public and quasi-public, professional and individual insured customers. Approximately 85.5% of the Retail Segment’s commissions and fees revenue is commission-based. Because most of our other operating expenses do not change as premiums fluctuate, we believe that most of any fluctuation in the commissions, net of related compensation, which we receive will be reflected in our pre-tax income, subject to incremental investments in new producers or other investments to help grow the business.

Financial information relating to Brown & Brown’s Retail Segment is as follows (in thousands, except percentages):


	2014			Percent Change			2013			Percent Change			2012
REVENUES
Core commissions and fees	$	780,534			11.4	%	$	700,767			13.0	%	$	619,975
Profit-sharing contingent commissions		21,616			23.2	%		17,543			36.6	%		12,843
Guaranteed supplemental commissions		7,730			12.9	%		6,849			(0.6	)%		6,890
Investment income		67			(18.3	)%		82			(24.1	)%		108
Other income, net		(181	)		NMF	(1)		3,083			(33.2	)%		4,613

Total revenues		809,766			11.2	%		728,324			13.0	%		644,429
EXPENSES
Employee compensation and benefits		408,686			12.5	%		363,332			11.3	%		326,574
Non-cash stock-based compensation		11,732			29.6	%		9,055			59.4	%		5,680
Other operating expenses		130,074			14.9	%		113,159			14.8	%		98,532
Loss on disposal		—			—	%		—			—	%		—
Amortization		42,270			11.1	%		38,052			9.9	%		34,639
Depreciation		6,410			9.6	%		5,847			12.9	%		5,181
Interest		42,918			24.7	%		34,407			29.2	%		26,641
Change in estimated acquisition earn-out payables		7,147			NMF	(1)		(1,844	)		NMF	(1)		1,968

Total expenses		649,237			15.5	%		562,008			12.6	%		499,215

Income before income taxes	$	160,529			(3.5	)%	$	166,316			14.5	%	$	145,214

Net internal growth rate — core organic commissions and fees		2.0	%					1.5	%					1.5	%
Employee compensation and benefits ratio		50.5	%					49.9	%					50.7	%
Other operating expenses ratio		16.1	%					15.5	%					15.3	%
Capital expenditures	$	6,844					$	6,847					$	5,732
Total assets at December 31	$	3,190,737					$	2,992,087					$	2,420,759

(1)	NMF = Not a meaningful figure

The Retail Segment’s total revenues in 2014 increased 11.2%, or $81.4 million, over the same period in 2013, to $809.8 million. Profit-sharing contingent commissions and GSCs in 2014 increased $5.0 million, or 20.3%, over 2013, to $29.3 million, primarily due to improved loss ratios resulting in increased profitability for insurance companies in 2013. The $79.8 million net increase in core commissions and fees revenue resulted from the following factors: (i) an increase of approximately $73.4 million related to core commissions and fees revenue from acquisitions that had no comparable revenues in 2013; (ii) a decrease of $7.5 million related to commissions and fees revenue from business divested during 2013 and 2014; and (iii) the remaining net increase of $13.9 million primarily related to net new business. The Retail Segment’s internal growth rate for core organic commissions and fees revenue was 2.0% for 2014, and was driven by net new customers, increasing insurable exposure units in certain areas of the United States, and was partially offset by continued pressure on property and casualty rates, especially in coastal areas.

Income before income taxes for 2014 decreased 3.5%, or $5.8 million, over the same period in 2013, to $160.5 million. This decrease was primarily due to a higher interest charge of $8.5 million corresponding to capital utilized for acquisitions in 2014 and $9.0 million related to the year-on-year changes in the estimated earn-out payable. The underlying increase was driven by net new business, acquired business and increased profit-sharing contingent commissions and GSCs. Non-cash stock-based compensation increased $2.7 million, or 29.6%, for 2014 over the same period in 2013, as the cost of grants to employees for the purpose of driving performance were realized.

The Retail Segment’s total revenues in 2013 increased 13.0%, or $83.9 million, over the same period in 2012, to $728.3 million. Profit-sharing contingent commissions and GSCs in 2013 increased $4.7 million, or 23.6%, over 2012, to $24.4 million, primarily due to improved loss ratios resulting in increased profitability for insurance companies in 2012. The $80.8 million net increase in core commissions and fees revenue resulted from the following factors: (i) an increase of approximately $79.5 million related to core commissions and fees revenue from acquisitions that had no comparable revenues in 2012; (ii) a decrease of $7.5 million related to commissions and fees revenue recorded in 2012 from business divested during 2013; and (iii) the remaining net increase of $9.0 million primarily related to net new business. The Retail Segment’s internal growth rate for core organic commissions and fees revenue was 1.5% for 2013, and was driven by slightly increasing insurable exposure units in most areas of the United States, and slight increases in general insurance premium rates.

Income before income taxes for 2013 increased 14.5%, or $21.1 million, over the same period in 2012, to $166.3 million. This increase was primarily due to net new business, the increase in profit-sharing contingent commissions, and continued improved efficiencies relating to compensation and employee benefits and certain other operating expenses, but which was partially off-set by a $1.5 million reduction in other income primarily due to gains on the sale of books of businesses in 2012. These increases were also enhanced by changes in estimated acquisition earn-out payables of $3.8 million, but partially offset by a net increase in the inter-company interest expense allocation of $7.8 million. The continued improved efficiencies relating to compensation and employee benefits, and certain other operating expenses resulted mainly from such costs increasing at a lower rate than our growth in net new business. However, a portion of the improved ratio of employee compensation and benefits to total revenues was the result of the $6.8 million of bonus compensation related to a special one-time bonus in 2012 which was not repeated in 2013.

National Programs Segment

The Wright Insurance Group acquisition was completed effective May 1, 2014. With the Wright acquisition completed, the National Programs Segment manages over 50 programs with 40 well-capitalized carrier partners. In most cases, the insurance carriers that support the programs have delegated underwriting and, in many instances, claims-handling authority to our programs operations. These programs are generally distributed through nationwide networks of independent agents and Brown & Brown retail agents, and offer targeted products and services designed for specific industries, trade groups, professions, public entities and market niches. The National Programs Segment operations can be grouped into five broad categories: Commercial Programs, Professional Programs, Arrowhead Insurance Group Programs, Public Entity-Related Programs, and the National Flood Program. Like the Retail and Wholesale Brokerage Segments, the National Programs Segment’s revenue is primarily commission-based.

Financial information relating to our National Programs Segment is as follows (in thousands, except percentages):


	2014			Percent Change			2013			Percent Change			2012
REVENUES
Core commissions and fees	$	367,214			35.1	%	$	271,772			16.5	%	$	233,261
Profit-sharing contingent commissions		20,623			7.0	%		19,265			4.7	%		18,392
Guaranteed supplemental commissions		21			NMF	(1)		(23	)		NMF	(1)		276
Investment income		164			NMF	(1)		19			(5.0	)%		20
Other income, net		6,767			NMF	(1)		1,097			10.4	%		994

Total revenues		394,789			35.1	%		292,130			15.5	%		252,943
EXPENSES
Employee compensation and benefits		163,522			23.0	%		132,948			20.5	%		110,362
Non-cash stock-based compensation		754			(83.6	)%		4,604			24.2	%		3,707
Other operating expenses		76,833			45.0	%		53,001			19.8	%		44,248
Loss on disposal		—			—	%		—			—	%		—
Amortization		24,769			69.7	%		14,593			4.7	%		13,936
Depreciation		7,699			42.6	%		5,399			17.4	%		4,600
Interest		49,663			NMF	(1)		24,014			(6.5	)%		25,674
Change in estimated acquisition earn-out payables		314			NMF	(1)		(808	)		(24.8	)%		(1,075	)

Total expenses		323,554			38.4	%		233,751			16.0	%		201,452

Income before income taxes	$	71,235			22.0	%	$	58,379			13.4	%	$	51,491

Net internal growth rate — core organic commissions and fees		2.0	%					13.5	%					0.8	%
Employee compensation and benefits ratio		41.4	%					45.5	%					43.6	%
Other operating expenses ratio		19.5	%					18.1	%					17.5	%
Capital expenditures	$	13,739					$	4,473					$	9,633
Total assets at December 31	$	2,411,839					$	1,335,911					$	1,183,191

(1)	NMF = Not a meaningful figure

The National Programs Segment’s total revenues in 2014 increased $102.7 million to $394.8 million, a 35.1% increase over 2013. Core commission and fees increased by $95.4 million due to the following factors: (i) an increase of approximately $93.8 million related to core commissions and fees revenue from the Wright and Beecher Carlson acquisitions that had no comparable revenues in 2013; (ii) a decrease of approximately $3.6 million in books of business that were disposed or transferred to other segments; and (iii) the remaining increase of $5.2 million is primarily related to net new business. Profit-sharing contingent commissions and GSCs in 2014 increased $1.4 million over 2013, due primarily to a $0.5 million increase in profit-sharing contingent commissions received by Florida Intracoastal Underwriters, Limited Company (“FIU”), and a $0.8 million increase in profit-sharing contingent commissions received by Proctor Financial, Inc. (“Proctor”). Other income increased by approximately $5.7 million primarily due to the gain recognized on the sale of Industry Consulting Group, Inc. (“ICG”) of $6.0 million.

Income before income taxes for 2014 increased 22.0% or $12.9 million over the same period in 2013, to $71.2 million. The increase in income before taxes was due to net new business growth noted above, revenues and operating profits derived from Wright, the gain on the sale of ICG, and a non-cash stock-based compensation decrease of $3.8 million primarily related to partial SIP grant forfeitures associated to Arrowhead. The $71.2 million increase was partially offset by an increase in the intercompany interest expense charge related to Wright.

The National Programs Segment’s total revenues in 2013 increased $39.2 million to $292.1 million, a 15.5% increase over 2012. Profit-sharing contingent commissions and GSCs in 2013 increased $0.6 million over 2012, due primarily to a $3.7 million increase in profit-sharing contingent commissions received by FIU, which was partially offset by a decrease of $3.5 million at Proctor. The $38.5 million net increase in core commissions and fees resulted from the following factors: (i) an increase of approximately $7.1 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in 2012; and (ii) the remaining net increase of $31.4 million primarily related to net new business. Therefore, the National Programs Segment’s internal growth rate for core organic commissions and fees revenue was 13.5% for 2013. Of the $31.4 million of net new business, $27.7 million related to a net increase in commissions and fees revenue from our Arrowhead operations.

Income before income taxes for 2013 increased 13.4% or $6.9 million, over the same period in 2012, to $58.4 million. This net increase was primarily due to the new automobile aftermarket and the non-standard auto programs at our Arrowhead subsidiary. Even though these programs increased the total operating profit dollars for the Segment, the increase in the ratios of employee compensation and benefits, and other operating expenses as a percentage of total revenues over the prior year. This was due to the fact that these programs operated at a higher cost factor than the average program operated in 2012.

Wholesale Brokerage Segment

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

Financial information relating to our Wholesale Brokerage Segment is as follows (in thousands, except percentages):


	2014			Percent Change			2013			Percent Change			2012
REVENUES
Core commissions and fees	$	216,727			11.9	%	$	193,601			15.1	%	$	168,182
Profit-sharing contingent commissions		15,467			7.1	%		14,443			16.0	%		12,448
Guaranteed supplemental commissions		2,100			44.9	%		1,449			(33.9	)%		2,192
Investment income		26			18.2	%		22			—	%		22
Other income, net		353			(9.9	)%		392			(45.6	)%		721

Total revenues		234,673			11.8	%		209,907			14.4	%		183,565
EXPENSES
Employee compensation and benefits		109,951			12.0	%		98,144			12.4	%		87,293
Non-cash stock-based compensation		2,775			36.1	%		2,039			53.5	%		1,328
Other operating expenses		38,813			6.1	%		36,589			9.3	%		33,486
Loss on disposal		47,425			—	%		—			—	%		—
Amortization		11,729			1.5	%		11,550			2.4	%		11,280
Depreciation		2,616			(6.4	)%		2,794			2.8	%		2,718
Interest		1,878			(26.8	)%		2,565			(35.5	)%		3,974
Change in estimated acquisition earn-out payables		2,862			19.1	%		2,404			NMF	(1)		131

Total expenses		218,049			39.7	%		156,085			11.3	%		140,210

Income before income taxes	$	16,624			(69.1	)%	$	53,822			24.1	%	$	43,355

Net internal growth rate — core organic commissions and fees		8.7	%					12.6	%					6.1	%
Employee compensation and benefits ratio		46.9	%					46.8	%					47.6	%
Other operating expenses ratio		16.5	%					17.4	%					18.2	%
Capital expenditures	$	1,949					$	1,931					$	3,383
Total assets at December 31	$	940,461					$	927,825					$	837,364

(1)	NMF = Not a meaningful figure

The Wholesale Brokerage Segment’s total revenues for 2014 increased 11.8%, or $24.8 million, over the same period in 2013, to $234.7 million. Profit-sharing contingent commissions and GSCs for 2014 increased $1.7 million over the same period of 2013. The $23.1 million net increase in core commissions and fees revenue resulted from the following factors: (i) an increase of approximately $4.0 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2013; (ii) an increase of $2.0 million related to net sold and transferred books of business; and (iii) the remaining net increase of $17.1 million primarily related to net new business. As such, the Wholesale Brokerage Segment’s internal growth rate for core organic commissions and fees revenue was 8.7% for 2014.

Income before income taxes for 2014 decreased 69.1%, or $37.2 million over the same period in 2013. This decrease includes a $47.4 million net loss on the disposal of the Axiom Re business. Effective December 31, 2014, the Company sold certain assets of the Axiom Re business as part of the strategic plan to exit the reinsurance brokerage market. Axiom Re had annual revenues of approximately $6.9 million in 2014. The underlying performance of this segment was driven by new business growth and to a lesser extent an increase in profit sharing contingent commissions.

The Wholesale Brokerage Segment’s total revenues for 2013 increased 14.4%, or $26.3 million, over the same period in 2012, to $209.9 million. Profit-sharing contingent commissions and GSCs for 2013 increased $1.3 million over the same period of 2012. The $25.4 million net increase in core commissions and fees revenue resulted from the following factors: (i) an increase of approximately $4.3 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2012; and (ii) the remaining net increase of $21.1 million primarily related to net new business and continued increases in premium rates on many lines of insurance, but primarily on coastal property. As such, the Wholesale Brokerage Segment’s internal growth rate for core organic commissions and fees revenue was 12.6% for 2013.

Income before income taxes for 2013 increased 24.1%, or $10.5 million over the same period in 2012 to $53.8 million, primarily due to net new business, an increase in profit-sharing contingent commissions, and a net reduction in the inter-company interest expense allocation of $1.4 million, but then partially offset by a $2.3 million expense in the form of a change in estimated acquisition earn-out payables.

Services Segment

The Services Segment provides insurance-related services, including third-party claims administration (“TPA”) 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.

Unlike our other segments, nearly all of the Services Segment’s 2014 commissions and fees revenue was generated from fees, which are not significantly affected by fluctuations in general insurance premiums.

Financial information relating to our Services Segment is as follows (in thousands, except percentages):


	2014			Percent Change			2013			Percent Change			2012
REVENUES
Core commissions and fees	$	136,482			4.2	%	$	131,033			12.7	%	$	116,247
Profit-sharing contingent commissions		—			—	%		—			—	%		—
Guaranteed supplemental commissions		—			—	%		—			—	%		—
Investment income		3			NMF	(1)		1			—	%		1
Other income, net		74			(83.7	)%		455			(6.8	)%		488

Total revenues		136,559			3.9	%		131,489			12.6	%		116,736
EXPENSES
Employee compensation and benefits		73,590			17.0	%		62,908			6.2	%		59,235
Non-cash stock-based compensation		(72	)		NMF	(1)		755			26.5	%		597
Other operating expenses		31,877			14.3	%		27,885			6.5	%		26,180
Loss on disposal		—			—	%		—			—	%		—
Amortization		4,134			11.8	%		3,698			0.5	%		3,680
Depreciation		2,213			36.4	%		1,623			27.0	%		1,278
Interest		7,678			4.9	%		7,321			(14.9	)%		8,602
Change in estimated acquisition earn-out payables		(385	)		NMF	(1)		2,781			NMF	(1)		394

Total expenses		119,035			11.3	%		106,971			7.0	%		99,966

Income before income taxes	$	17,524			(28.5	)%	$	24,518			46.2	%	$	16,770

Net internal growth rate — core organic commissions and fees		(8.1	)%					12.2	%					8.6	%
Employee compensation and benefits ratio		53.9	%					47.8	%					50.7	%
Other operating expenses ratio		23.3	%					21.2	%					22.4	%
Capital expenditures	$	1,210					$	1,811					$	2,519
Total assets at December 31	$	296,034					$	277,652					$	238,430

(1)	NMF = Not a meaningful figure

The Services Segment’s total revenues for 2014 increased 3.9%, or $5.1 million, over 2013, to $136.6 million. The $5.4 million net increase in core commissions and fees revenue consisted of the following: (i) an increase of approximately $15.6 million related to the core commissions and fees revenue from the acquisition of ICA, Inc. business, that had no comparable revenues in the same period of 2013; (ii) net new business of $7.7, (iii) offset by a reduction of $18.3 million due to the significant flood claims processed in 2013 resulting from Superstorm Sandy in 2012 with no comparable storm in 2013 and (iv) $0.4 million of net sold books of business. As such, the Services Segment’s internal growth rate for core organic commissions and fees revenue was (8.1)% for 2014 and excluding the impact of Superstorm Sandy internal growth would be 6.8% in 2014.

Income before income taxes in 2014 decreased 28.5%, or $7.0 million, over 2013, to $17.5 million, primarily due to the reduction in Superstorm Sandy related revenues and corresponding operating profit partially offset by the increase associated with net new and acquired business.

The Services Segment’s total revenues for 2013 increased 12.6%, or $14.8 million, over 2012, to $131.5 million. Of the $14.8 million net increase in core commissions and fees revenue: (i) an increase of approximately $0.7 million related to the core commissions and fees revenue from the TPA business acquired as part of the Arrowhead acquisition, that had no comparable revenues in the same period of 2012; and (ii) net new business of $14.1 million, of which $13.0 million was due to our Colonial Claims operation and the impact of the significant flood claims resulting from the 2012 Superstorm Sandy. As such, the Services Segment’s internal growth rate for core organic commissions and fees revenue was 12.2% for 2013.

Income before income taxes in 2013 increased 46.2%, or $7.7 million, over 2012, to $24.5 million, primarily due to net new business from our Colonial Claims operation. Additionally, this net increase was enhanced by a $1.3 million reduction in inter-company interest expense, but partially offset by a $2.4 million expense from changes in estimated earn-out payables.

Other

As discussed in Note 15 of the Notes to Consolidated Financial Statements, the “Other” column in the Segment Information table includes all income and expenses not allocated to reportable segments, as well as corporate-related items, including the inter-company interest expense charges to reporting segments.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents of $470.0 million at December 31, 2014 reflected an increase of $267.1 million from the $203.0 million balance at December 31, 2013. During 2014, $385.0 million of cash was generated from operating activities. During this period, $696.5 million of cash was used for acquisitions, $9.5 million was used for acquisition earn-out payments, $24.9 million was used for additions to fixed assets, $59.3 million was used for payment of dividends, and $718.0 million was provided from proceeds received on net new long-term debt.

We hold approximately $12.4 million in cash outside of the U.S. for which we have no plans to repatriate in the near future.

On May 1, 2014, we completed the acquisition of Wright for a total cash purchase price of $609.2 million, subject to certain adjustments. We financed the acquisition through various modified and new credit facilities.

Our cash and cash equivalents of $203.0 million at December 31, 2013 reflected a decrease of $16.9 million from the $219.8 million balance at December 31, 2012. During 2013, $389.4 million of cash was generated from operating activities. During this period, $367.7 million of cash was used for acquisitions, $15.5 million was used for acquisition earn-out payments, $16.4 million was used for additions to fixed assets, $53.5 million was used for payment of dividends, and $30.0 million was provided from proceeds received on new long-term debt.

On July 1, 2013, we completed the acquisition of Beecher Carlson for a total cash purchase price of $364.2 million, subject to certain adjustments. We financed the acquisition through various modified and new credit facilities.

Our cash and cash equivalents of $219.8 million at December 31, 2012 reflected a decrease of $66.5 million from the $286.3 million balance at December 31, 2011. During 2012, $220.3 million of cash was generated from operating activities. During this period, $425.1 million of cash was used for acquisitions, $13.5 million was used for acquisition earn-out payments, $24.0 million was used for additions to fixed assets, $49.5 million was used for payment of dividends, and $200.0 million was provided from proceeds received on new long-term debt.

On January 9, 2012, we completed the acquisition of Arrowhead for a total cash purchase price of $397.0 million, subject to certain adjustments and potential earn-out payments of up to $5 million in the aggregate following the third anniversary of the acquisition’s closing date. We financed the acquisition through various modified and new credit facilities.

Our ratio of current assets to current liabilities (the “current ratio”) was 1.24 and 1.02 at December 31, 2014 and 2013, respectively.

Contractual Cash Obligations

As of December 31, 2014, our contractual cash obligations were as follows:


*(in thousands)*	Total		Less Than 1 Year		1-3 Years		4-5 Years		After 5 Years
Long-term debt	$	1,200,000	$	45,625	$	128,125	$	526,250	$	500,000
Other liabilities		50,423		20,471		13,520		2,047		14,385
Operating leases		182,937		38,458		65,949		41,623		36,907
Interest obligations		263,221		37,286		70,994		56,066		98,875
Unrecognized tax benefits		113		—		113		—		—
Maximum future acquisition contingency payments		130,653		57,390		70,801		2,462		—

Total contractual cash obligations	$	1,827,347	$	199,230	$	349,502	$	628,448	$	650,167

Debt

On April 17, 2014, the Company entered into a credit agreement with JPMorgan Chase Bank, N.A. as administrative agent and certain other banks as co-syndication agents and co-documentation agents (the “Credit Agreement”). The Credit Agreement in the amount of $1,350.0 million provides for an unsecured revolving credit facility (the “Credit Facility”) in the initial amount of $800.0 million and unsecured term loans in the initial amount of $550.0 million, either or both of which may, subject to lenders’ discretion, potentially be increased by up to $500.0 million. The Credit Facility was funded on May 20, 2014 in conjunction with the closing of the Wright acquisition, with the $550.0 million term loan being funded as well as a drawdown of $375.0 million on the revolving loan facility. Use of these proceeds were to retire existing term loan debt including the JPM Term Loan Agreement, SunTrust Term Loan Agreement and Bank of America Term Loan Agreement in total of $230.0 million (as described above) and to facilitate the closing of the Wright acquisition as well as other acquisitions. The Credit Facility terminates on May 20, 2019, but either or both of the revolving credit facility and the term loans may be extended for two additional one-year periods at the Company’s request and at the discretion of the respective lenders. Interest and facility fees in respect to the Credit Facility are based on the better of the Company’s net debt leverage ratio or a non-credit enhanced senior unsecured long-term debt rating. Based on the Company’s net debt leverage ratio, the rates of interest charged on the term loan and revolving loan are 1.375% and 1.175% respectively in 2014 and above the adjusted LIBOR rate for outstanding amounts drawn. There are fees included in the facility which include a facility fee based on the revolving credit commitments of the lenders (whether used or unused) at a rate of 0.20% and letter of credit fees based on the amounts of outstanding secured or unsecured letters of credit. The Credit Facility includes various covenants, limitations and events of default customary for similar facilities for similarly rated borrowers. As of December 31, 2014, there was an outstanding debt balance issued under the provisions of the Credit Facility in total of $550.0 million with no proceeds outstanding relative to the revolving loan.

In connection with the funding of the Credit Facility on May 20, 2014, the Company retired the JPM term loan of $100.0 million, the SunTrust term loan of $100.0 million and the Bank of America, N.A., $30.0 million term loan, for a total of $230.0 million. The SunTrust revolver was also terminated.

On July 15, 2014, the Company retired the senior notes Series B of $100.0 million which were assigned under the original private placement note agreement from July 2004. Proceeds were drawn from the revolving loan of the Credit Facility to facilitate the payoff of the notes. The $100.0 million proceeds drawn from the revolving Credit Facility used to retire the Series B notes was paid in full in connection with the issuance of the 4.200% senior notes due 2024 on September 18, 2014.

On September 18, 2014, the Company issued $500.0 million of 4.200% unsecured senior notes due in 2024. The senior notes were assigned investment grade ratings of BBB-/Baa3 with a stable outlook. The notes are subject to certain covenant restrictions and regulations which are customary for credit rated obligations. At the time of funding, the proceeds were offered at a discount of the original note amount which also excluded an underwriting fee discount. The net proceeds received from the issuance were used to repay the outstanding balance of $475.0 million on the revolving Credit Facility and other general corporate purposes.

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

We believe that our existing cash, cash equivalents, short-term investment portfolio and funds generated from operations, together with our available funding under our various debt facilities, will be sufficient to satisfy our liquidity needs through at least the end of 2015 including the required principal payments on our long-term debt.

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

Previous: Item 6. Selected Financial Data. · Next: Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

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

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

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