Item 8. Financial Statements and Supplementary Data.

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Item 8. Financial Statements and Supplementary Data.

Index to Consolidated Financial Statements




	Page No.
Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014	42
Consolidated Balance Sheets as of December 31, 2016 and 2015	43
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2016, 2015 and 2014	44
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014	45
Notes to Consolidated Financial Statements for the years ended December 31, 2016, 2015 and 2014	46
Note 1: Summary of Significant Accounting Policies	46
Note 2: Business Combinations	50
Note 3: Goodwill	56
Note 4: Amortizable Intangible Assets	57
Note 5: Investments	57
Note 6: Fixed Assets	59
Note 7: Accrued Expenses and Other Liabilities	59
Note 8: Long-Term Debt	60
Note 9: Income Taxes	61
Note 10: Employee Savings Plan	63
Note 11: Stock-Based Compensation	63
Note 12: Supplemental Disclosures of Cash Flow Information	68
Note 13: Commitments and Contingencies	69
Note 14: Quarterly Operating Results (Unaudited)	70
Note 15: Segment Information	70
Note 16: Reinsurance	72
Note 17: Statutory Financial Information	72
Note 18: Subsidiary Dividend Restrictions	72
Note 19: Shareholders’ Equity	72

Report of Independent Registered Public Accounting Firm	74

BROWN & BROWN, INC.

CONSOLIDATED STATEMENTS OF INCOME



(in thousands, except per share data)	For the Year Ended December 31,
	2016			2015			2014
REVENUES
Commissions and fees	$	1,762,787		$	1,656,951		$	1,567,460
Investment income	1,456			1,004			747
Other income, net	2,386			2,554			7,589
Total revenues	1,766,629			1,660,509			1,575,796
EXPENSES
Employee compensation and benefits	925,217			856,952			811,112
Other operating expenses	262,872			251,055			235,328
(Gain)/loss on disposal	(1,291		)	(619		)	47,425
Amortization	86,663			87,421			82,941
Depreciation	21,003			20,890			20,895
Interest	39,481			39,248			28,408
Change in estimated acquisition earn-out payables	9,185			3,003			9,938
Total expenses	1,343,130			1,257,950			1,236,047
Income before income taxes	423,499			402,559			339,749
Income taxes	166,008			159,241			132,853
Net income	$	257,491		$	243,318		$	206,896
Net income per share:
Basic	$	1.84		$	1.72		$	1.43
Diluted	$	1.82		$	1.70		$	1.41
Dividends declared per share	$	0.50		$	0.45		$	0.41

See accompanying notes to Consolidated Financial Statements.

BROWN & BROWN, INC.

CONSOLIDATED BALANCE SHEETS



(in thousands, except per share data)	December 31, 2016			December 31, 2015
ASSETS
Current Assets:
Cash and cash equivalents	$	515,646		$	443,420
Restricted cash and investments	265,637			229,753
Short-term investments	15,048			13,734
Premiums, commissions and fees receivable	502,482			433,885
Reinsurance recoverable	78,083			31,968
Prepaid reinsurance premiums	308,661			309,643
Deferred income taxes	24,609			24,635
Other current assets	50,571			50,351
Total current assets	1,760,737			1,537,389
Fixed assets, net	75,807			81,753
Goodwill	2,675,402			2,586,683
Amortizable intangible assets, net	707,454			744,680
Investments	23,048			18,092
Other assets	44,895			35,882
Total assets	$	5,287,343		$	5,004,479
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Premiums payable to insurance companies	$	647,564		$	574,736
Losses and loss adjustment reserve	78,083			31,968
Unearned premiums	308,661			309,643
Premium deposits and credits due customers	83,765			83,098
Accounts payable	69,595			63,910
Accrued expenses and other liabilities	201,989			192,067
Current portion of long-term debt	55,500			73,125
Total current liabilities	1,445,157			1,328,547
Long-term debt less unamortized discount and debt issuance costs	1,018,372			1,071,618
Deferred income taxes, net	382,295			360,949
Other liabilities	81,308			93,589
Commitments and contingencies (Note 13)
Shareholders’ Equity:
Common stock, par value $0.10 per share; authorized 280,000 shares; issued 148,107 shares and outstanding 140,104 shares at 2016, issued 146,415 shares and outstanding 138,985 shares at 2015	14,811			14,642
Additional paid-in capital	468,443			426,498
Treasury stock, at cost 8,003 and 7,430 shares at 2016 and 2015, respectively	(257,683		)	(238,775		)
Retained earnings	2,134,640			1,947,411
Total shareholders’ equity	2,360,211			2,149,776
Total liabilities and shareholders’ equity	$	5,287,343		$	5,004,479

See accompanying notes to Consolidated Financial Statements.

BROWN & BROWN, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY



	Common Stock
(in thousands, except per share data)	Shares	Par Value		Additional Paid-In Capital			Treasury Stock			Retained Earnings			Total
Balance at January 1, 2014	145,419	$	14,542	$	371,960		$	—		$	1,620,639		$	2,007,141
Net income										206,896			206,896
Common stock issued for employee stock benefit plans	442	44		30,405									30,449
Purchase of treasury stock							(75,025		)				(75,025		)
Income tax benefit from exercise of stock benefit plans				3,298									3,298
Common stock issued to directors	10	1		319									320
Cash dividends paid ($0.37 per share)										(59,334		)	(59,334		)
Balance at December 31, 2014	145,871	14,587		405,982			(75,025		)	1,768,201			2,113,745
Net income										243,318			243,318
Common stock issued for employee stock benefit plans	528	53		27,992									28,045
Purchase of treasury stock				(11,250		)	(163,750		)				(175,000		)
Income tax benefit from exercise of stock benefit plans				3,276									3,276
Common stock issued to directors	16	2		498									500
Cash dividends paid ($0.41 per share)										(64,108		)	(64,108		)
Balance at December 31, 2015	146,415	14,642		426,498			(238,775		)	1,947,411			2,149,776
Net income										257,491			257,491
Common stock issued for employee stock benefit plans	1,675	167		22,851									23,018
Purchase of treasury stock				11,250			(18,908		)				(7,658		)
Income tax benefit from exercise of stock benefit plans				7,346									7,346
Common stock issued to directors	17	2		498									500
Cash dividends paid ($0.50 per share)										(70,262		)	(70,262		)
Balance at December 31, 2016	148,107	$	14,811	$	468,443		$	(257,683	)	$	2,134,640		$	2,360,211

See accompanying notes to Consolidated Financial Statements.

BROWN & BROWN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Year Ended December 31,
(in thousands)	2016			2015			2014
Cash flows from operating activities:
Net income	$	257,491		$	243,318		$	206,896
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization	86,663			87,421			82,941
Depreciation	21,003			20,890			20,895
Non-cash stock-based compensation	16,052			15,513			19,363
Change in estimated acquisition earn-out payables	9,185			3,003			9,938
Deferred income taxes	18,163			22,696			7,369
Amortization of debt discount	165			157			46
Amortization and disposal of deferred financing costs	1,597			—			—
Accretion of discounts and premiums, investments	39			—			—
Income tax benefit from exercise of shares from the stock benefit plans	(7,346		)	(3,276		)	(3,298		)
Loss/(gain) on sales of investments, fixed assets and customer accounts	596			(107		)	42,465
Payments on acquisition earn-outs in excess of original estimated payables	(3,904		)	(11,383		)	(2,539		)
Changes in operating assets and liabilities, net of effect from acquisitions and divestitures:
Restricted cash and investments (increase) decrease	(35,884		)	30,016			(9,760		)
Premiums, commissions and fees receivable (increase)	(63,550		)	(7,163		)	(11,160		)
Reinsurance recoverables (increase) decrease	(46,115		)	(18,940		)	12,210
Prepaid reinsurance premiums decrease (increase)	982			10,943			(31,573		)
Other assets (increase)	(4,718		)	(5,318		)	(12,564		)
Premiums payable to insurance companies decrease	66,084			542			8,164
Premium deposits and credits due customers increase (decrease)	527			(2,973		)	2,323
Losses and loss adjustment reserve increase (decrease)	46,115			18,940			(12,210		)
Unearned premiums (decrease) increase	(982		)	(10,943		)	31,573
Accounts payable increase	30,174			34,206			36,949
Accrued expenses and other liabilities increase	8,670			8,204			11,718
Other liabilities (decrease)	(25,849		)	(23,898		)	(24,727		)
Net cash provided by operating activities	375,158			411,848			385,019
Cash flows from investing activities:
Additions to fixed assets	(17,765		)	(18,375		)	(24,923		)
Payments for businesses acquired, net of cash acquired	(122,622		)	(136,000		)	(696,486		)
Proceeds from sales of fixed assets and customer accounts	4,957			10,576			13,631
Purchases of investments	(25,872		)	(22,766		)	(17,813		)
Proceeds from sales of investments	18,890			21,928			18,278
Net cash used in investing activities	(142,412		)	(144,637		)	(707,313		)
Cash flows from financing activities:
Payments on acquisition earn-outs	(24,309		)	(25,415		)	(9,530		)
Proceeds from long-term debt	—			—			1,048,425
Payments on long-term debt	(73,125		)	(45,625		)	(330,000		)
Borrowings on revolving credit facilities	—			—			475,000
Payments on revolving credit facilities	—			—			(475,000		)
Income tax benefit from exercise of shares from the stock benefit plans	7,346			3,276			3,298
Issuances of common stock for employee stock benefit plans	15,983			15,890			14,808
Repurchase of stock benefit plan shares for employees to fund tax withholdings	(8,495		)	(2,857		)	(3,252		)
Purchase of treasury stock	(18,908		)	(163,750		)	(75,025		)
Settlement (prepayment) of accelerated share repurchase program	11,250			(11,250		)	—
Cash dividends paid	(70,262		)	(64,108		)	(59,334		)
Net cash (used in) provided by financing activities	(160,520		)	(293,839		)	589,390
Net increase (decrease) in cash and cash equivalents	72,226			(26,628		)	267,096
Cash and cash equivalents at beginning of period	443,420			470,048			202,952
Cash and cash equivalents at end of period	$	515,646		$	443,420		$	470,048

See accompanying notes to Consolidated Financial Statements.

BROWN & BROWN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1· Summary of Significant Accounting Policies

Nature of Operations

Brown & Brown, Inc., a Florida corporation, and its subsidiaries (collectively, “Brown & Brown” or the “Company”) is a diversified insurance agency, wholesale brokerage, insurance programs and services organization that markets and sells to its customers, insurance products and services, primarily in the property and casualty area. Brown & Brown’s business is divided into four reportable segments: the Retail Segment provides a broad range of insurance products and services to commercial, public entity, professional and individual customers; the National Programs Segment, acting as a managing general agent (“MGA”), provides professional liability and related package products for certain professionals, a range of insurance products for individuals, flood coverage, and targeted products and services designated for specific industries, trade groups, governmental entities and market niches, all of which are delivered through nationwide networks of independent agents, and Brown & Brown retail agents; the Wholesale Brokerage Segment markets and sells excess and surplus commercial insurance, primarily through independent agents and brokers, as well as Brown & Brown Retail offices; and the Services Segment provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare benefits advocacy services, and claims adjusting services.

Recently Issued Accounting Pronouncements

In November 2016, the Financial Accountings Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18, “Statement of Cash Flows (Topic 230)”: Restricted Cash (“ASU 2016-18”), which requires that the Statement of Cash Flows explain the changes during the period of cash and cash equivalents inclusive of amounts categorized as Restricted Cash. As such, upon adoption, the Company’s Statement of Cash Flows will show the sources and uses of cash that explain the movement in the balance of cash and cash equivalents, inclusive of restricted cash, over the period presented. ASU 2016-18 is effective for periods beginning after December 15, 2017.

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230)": Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) ("ASU 2016-15"), which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified and applies to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230. ASU 2016-15 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and early adoption is permitted. The Company has evaluated the impact of ASU 2016-15 and has determined the impact to be immaterial. The Company already presents cash paid on contingent consideration in business combination as prescribed by ASU 2016-15 and does not, at this time, engage in the other activities being addressed.

In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share Based Payment Accounting" ("ASU 2016-09"), which amends guidance issued in Accounting Standards Codification ("ASC") Topic 718, Compensation - Stock Compensation. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The Company has evaluated the impact of adoption of the ASU on its Consolidated Financial Statements. The principal impact will be that the tax benefit or expense from stock compensation will be presented in the income tax line of the Statement of Income rather than the current presentation as a component of equity on the Balance Sheet. Also the tax benefit or expense will be presented as activity in Cash Flow from Operating Activity rather than the current presentation as Cash Flow from Financing Activity in the Statement of Cash Flows. The Company will also continue to estimate forfeitures of stock grants as allowed by ASU 2016-09.

In March 2016, the FASB issued ASU 2016-08, "Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)" ("ASU 2016-08") to clarify certain aspects of the principal-versus-agent guidance included in the new revenue standard ASU 2014-09 "Revenue from Contracts with Customers" ("ASU 2014-09"). The FASB issued the ASU in response to concerns identified by stakeholders, including those related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. ASU 2016-08 is effective contemporaneous with ASU 2014-09 beginning January 1, 2018. The impact of ASU 2016-08 is currently being evaluated along with ASU 2014-09. At this point in our evaluation the potential impact would be limited to the claims administering activities within our Services Segment and therefore not material to the Company.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which provides guidance for accounting for leases. Under ASU 2016-02, the Company will be required to recognize the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company continues to evaluate the impact of this pronouncement with the principal impact being that the present

value of the remaining lease payments be presented as a liability on the Balance Sheet as well as an asset of similar value representing the “Right of Use” for those leased properties. As detailed in Note 13, the undiscounted contractual cash payments remaining on leased properties is $213 million as of December 31, 2016.

In November 2015, FASB issued ASU No. 2015-17, “Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”), which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as a single non-current item on the balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016 with early adoption permitted as of the beginning of any interim or annual reporting period. The Company plans to adopt ASU 2015-17 in the first quarter of 2017. This is not expected to have a material impact on our Consolidated Financial Statements other than reclassifying current deferred tax assets and liabilities to non-current in the balance sheet.

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 non-financial 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 the current guidance. Specifically in situations where multiple performance obligations exist within the contract, the use of estimates is required to allocate the transaction price to each separate performance obligation. Historically 70% or more of the Company’s revenue is in the form of commissions paid by insurance carriers. Commission are earned upon the effective date of bound coverage and no significant performance obligation remains in those arrangements after coverage is bound. The Company is currently evaluating the approximately 30% of revenue earned in the form of fees against the requirements of this pronouncement. Fees are predominantly in our National Programs and Services Segments, and to a lesser extent in the large accounts business within our Retail Segment. At the conclusion of this evaluation it may be determined that fee revenue from certain agreements will be recognized in earlier periods under the new guidance in comparison to our current accounting policies and others will be recognized in later periods. Based upon the work completed to date, management does not expect the overall impact to be significant.

ASU 2014-09 is effective for the Company beginning January 1, 2018, after FASB voted to delay the effective date by one year. At that time, the Company may adopt the new standard under the full retrospective approach or the modified retrospective approach.

We do not anticipate a material change in our internal control framework necessitated by the adoption of ASU 2014-09.

Principles of Consolidation

The accompanying Consolidated Financial Statements include the accounts of Brown & Brown, Inc. and its subsidiaries. All significant intercompany account balances and transactions have been eliminated in the Consolidated Financial Statements.

Segment results for prior periods have been recast to reflect the current year segmental structure. Certain reclassifications have been made to the prior year amounts reported in this Annual Report on Form 10-K in order to conform to the current year presentation.

Revenue Recognition

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 and invoiced to the customer, whichever is later. Commission revenues related to installment billings are recognized on the latter of effective or invoiced date, with the exception of our Arrowhead business which follows a policy of recognizing on the latter of effective or processed date into our systems, regardless of the billing arrangement. Management determines the policy cancellation reserve based upon historical cancellation experience adjusted for any 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 generally 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.

Use of Estimates

The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosures of contingent assets and liabilities, at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents principally consist of demand deposits with financial institutions and highly liquid investments with quoted market prices having maturities of three months or less when purchased.

Restricted Cash and Investments, and Premiums, Commissions and Fees Receivable

In our capacity as an insurance agent or broker, the Company typically collects premiums from insureds and, after deducting its authorized commissions, remits the net premiums to the appropriate insurance company or companies. Accordingly, as reported in the Consolidated Balance Sheets, “premiums” are receivable from insureds. Unremitted net insurance premiums are held in a fiduciary capacity until Brown & Brown disburses them. Where allowed by law, Brown & Brown invests these unremitted funds only in cash, money market accounts, tax-free variable-rate demand bonds and commercial paper held for a short term. In certain states in which Brown & Brown operates, the use and investment alternatives for these funds are regulated and restricted by various state laws and agencies. These restricted funds are reported as restricted cash and investments on the Consolidated Balance Sheets. The interest income earned on these unremitted funds, where allowed by state law, is reported as investment income in the Consolidated Statement of Income.

In other circumstances, the insurance companies collect the premiums directly from the insureds and remit the applicable commissions to Brown & Brown. Accordingly, as reported in the Consolidated Balance Sheets, “commissions” are receivables from insurance companies. “Fees” are primarily receivables due from customers.

Investments

Certificates of deposit, and other securities, having maturities of more than three months when purchased are reported at cost and are adjusted for other-than-temporary market value declines. The Company’s investment holdings include U.S. Government securities, municipal bonds, domestic corporate and foreign corporate bonds as well as short-duration fixed income funds. Investments within the portfolio or funds are held as available for sale and are carried at their fair value. Any gain/loss applicable from the fair value change is recorded, net of tax, as other comprehensive income within the equity section of the Consolidated Balance Sheet. Realized gains and losses are reported on the Consolidated Statement of Income, with the cost of securities sold determined on a specific identification basis.

Fixed Assets

Fixed assets, including leasehold improvements, are carried at cost, less accumulated depreciation and amortization. Expenditures for improvements are capitalized, and expenditures for maintenance and repairs are expensed to operations as incurred. Upon sale or retirement, the cost and related accumulated depreciation and amortization are removed from the accounts and the resulting gain or loss, if any, is reflected in other income. Depreciation has been determined using the straight-line method over the estimated useful lives of the related assets, which range from three to 15 years. Leasehold improvements are amortized on the straight-line method over the shorter of the useful life of the improvement or the term of the related lease.

Goodwill and Amortizable Intangible Assets

All of our business combinations initiated after June 30, 2001 are accounted for using the aquisition method. Acquisition purchase prices are typically based upon a multiple of average annual operating profit earned over a 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 upon the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions contained in the respective purchase agreements. In determining fair value, the acquired business’ future performance is estimated using financial projections developed by management for the acquired business and this estimate reflects market participant assumptions regarding revenue growth and/or profitability. The expected future payments are estimated on the basis of the earn-out formula and performance targets specified in each purchase agreement compared to the associated financial projections. These estimates are then discounted to present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out payments will be made.

Amortizable intangible assets are stated at cost, less accumulated amortization, and consist of purchased customer accounts and non-compete agreements. Purchased customer accounts and non-compete agreements are amortized on a straight-line basis over the related estimated lives and contract periods, which range from 3 to 15 years. Purchased customer accounts primarily consist of records and files that contain information about insurance policies and the related insured parties that are essential to policy renewals.

The excess of the purchase price of an acquisition over the fair value of the identifiable tangible and amortizable intangible assets is assigned to goodwill. While goodwill is not amortizable, it is subject to assessment at least annually, and more frequently in the presence of certain circumstances, for impairment by application of a fair value-based test. The Company compares the fair value of each reporting unit with its carrying amount to determine if there is potential impairment of goodwill. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value.

Fair value is estimated based upon multiples of earnings before interest, income taxes, depreciation, amortization and change in estimated acquisition earn-out payables (“EBITDAC”), or on a discounted cash flow basis. Brown & Brown completed its most recent annual assessment as of November 30, 2016 and determined that the fair value of goodwill exceeded the carrying value of such assets. In addition, as of December 31, 2016, there are no accumulated impairment losses.

The carrying value of amortizable intangible assets attributable to each business or asset group comprising Brown & Brown is periodically reviewed by management to determine if there are events or changes in circumstances that would indicate that its carrying amount may not be recoverable. Accordingly, if there are any such changes in circumstances during the year, Brown & Brown assesses the carrying value of its amortizable intangible assets by considering the estimated future undiscounted cash flows generated by the corresponding business or asset group. Any impairment identified through this assessment may require that the carrying value of related amortizable intangible assets be adjusted. There were no impairments recorded for the years ended December 31, 2016, 2015 and 2014.

Income Taxes

Brown & Brown records income tax expense using the asset-and-liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and the income tax bases of Brown & Brown’s assets and liabilities.

Brown & Brown files a consolidated federal income tax return and has elected to file consolidated returns in certain states. Deferred income taxes are provided for in the Consolidated Financial Statements and relate principally to expenses charged to income for financial reporting purposes in one period and deducted for income tax purposes in other periods.

Net Income Per Share

Basic EPS is computed based upon the weighted-average number of common shares (including participating securities) issued and outstanding during the period. Diluted EPS is computed based upon the weighted-average number of common shares issued and outstanding plus equivalent shares, assuming the exercise of stock options. The dilutive effect of stock options is computed by application of the treasury-stock method. The following is a reconciliation between basic and diluted weighted-average shares outstanding for the years ended December 31:



(in thousands, except per share data)	2016			2015			2014
Net income	$	257,491		$	243,318		$	206,896
Net income attributable to unvested awarded performance stock	(6,705		)	(5,695		)	(5,186		)
Net income attributable to common shares	$	250,786		$	237,623		$	201,710
Weighted-average number of common shares outstanding – basic	139,779			141,113			144,568
Less unvested awarded performance stock included in weighted-average number of common shares outstanding – basic	(3,640		)	(3,303		)	(3,624		)
Weighted-average number of common shares outstanding for basic earnings per common share	136,139			137,810			140,944
Dilutive effect of stock options	1,665			2,302			1,947
Weighted-average number of shares outstanding – diluted	137,804			140,112			142,891
Net income per share:
Basic	$	1.84		$	1.72		$	1.43
Diluted	$	1.82		$	1.70		$	1.41

Fair Value of Financial Instruments

The carrying amounts of Brown & Brown’s financial assets and liabilities, including cash and cash equivalents; restricted cash and short-term investments; investments; premiums, commissions and fees receivable; reinsurance recoverable; prepaid reinsurance premiums; premiums payable to insurance companies; losses and loss adjustment reserve; unearned premium; premium deposits and credits due customers and accounts payable, at December 31, 2016 and 2015, approximate fair value because of the short-term maturity of these instruments. The carrying amount of Brown & Brown’s long-term debt approximates fair value at December 31, 2016 and 2015 as our fixed-rate borrowings of $598.8 million approximate their values using market quotes of notes with the similar terms as ours, which we deem a close approximation of current market rates. The estimated fair value of the $481.3 million remaining on the term loan under our Credit Facility (as defined below) approximates the carrying value due to the variable interest rate based upon adjusted LIBOR. See Note 2 to our Consolidated Financial Statements for the fair values related to the establishment of intangible assets and the establishment and adjustment of earn-out payables. See Note 5 for information on the fair value of investments and Note 8 for information on the fair value of long-term debt.

Stock-Based Compensation

The Company granted stock options and grants non-vested stock awards to its employees, officers and directors. The Company uses the modified-prospective method to account for share-based payments. Under the modified-prospective method, compensation cost is recognized for all share-based payments granted on or after January 1, 2006 and for all awards granted to employees prior to January 1, 2006 that remained unvested on that date. The Company uses the alternative-transition method to account for the income tax effects of payments made related to stock-based compensation.

The Company uses the Black-Scholes valuation model for valuing all stock options and shares purchased under the Employee Stock Purchase Plan (the “ESPP”). Compensation for non-vested stock awards is measured at fair value on the grant date based upon the number of shares expected to vest. Compensation cost for all awards is recognized in earnings, net of estimated forfeitures, on a straight-line basis over the requisite service period.

Reinsurance

The Company protects itself from claims-related losses by reinsuring all claims risk exposure. The only line of insurance the Company underwrites is flood insurance associated with the Wright National Flood Insurance Company (“WNFIC”), which is part of our National Programs Segment. However, all exposure is reinsured with the Federal Emergency Management Agency (“FEMA”) for basic admitted policies conforming to the National Flood Insurance Program. For excess flood insurance policies, all exposure is reinsured with a reinsurance carrier with an AM Best Company rating of “A” or better. Reinsurance does not legally discharge the ceding insurer from the primary liability for the full amount due under the reinsured policies. Reinsurance premiums, commissions, expense reimbursement and reserves related to ceded business are accounted for on a basis consistent with the accounting for the original policies issued and the terms of reinsurance contracts. Premiums earned and losses and loss adjustment expenses incurred are reported net of reinsurance amounts. Other underwriting expenses are shown net of earned ceding commission income. The liabilities for unpaid losses and loss adjustment expenses and unearned premiums are reported gross of ceded reinsurance recoverable.

Balances due from reinsurers on unpaid losses and loss adjustment expenses, including an estimate of such recoverables related to reserves for incurred but not reported (“IBNR”) losses, are reported as assets and are included in reinsurance recoverable even though amounts due on unpaid loss and loss adjustment expense are not recoverable from the reinsurer until such losses are paid. The Company does not believe it is exposed to any material credit risk through its reinsurance as the reinsurer is FEMA for basic admitted flood policies and a national reinsurance carrier for excess flood policies, which has an AM Best Company rating of “A” or better. Historically, no amounts due from reinsurance carriers have been written off as uncollectible.

Unpaid Losses and Loss Adjustment Reserve

Unpaid losses and loss adjustment reserve include amounts determined on individual claims and other estimates based upon the past experience of WNFIC and the policyholders for IBNR claims, less anticipated salvage and subrogation recoverable. The methods of making such estimates and for establishing the resulting reserves are continually reviewed and updated, and any adjustments resulting therefrom are reflected in operations currently.

WNFIC engages the services of outside actuarial consulting firms (the “Actuaries”) to assist on an annual basis to render an opinion on the sufficiency of the Company’s estimates for unpaid losses and related loss adjustment reserve. The Actuaries utilize both industry experience and the Company’s own experience to develop estimates of those amounts as of year-end. These estimated liabilities are subject to the impact of future changes in claim severity, frequency and other factors. In spite of the variability inherent in such estimates, management believes that the liabilities for unpaid losses and related loss adjustment reserve is adequate.

Premiums

Premiums are recognized as income over the coverage period of the related policies. Unearned premiums represent the portion of premiums written that relate to the unexpired terms of the policies in force and are determined on a daily pro rata basis. The income is recorded to the commissions and fees line of the income statement.

NOTE 2· Business Combinations

During the year ended December 31, 2016, the Company acquired the assets and assumed certain liabilities of seven insurance intermediaries, all of the stock of one insurance intermediary and three books of business (customer accounts). Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last twelve months as permitted by Accounting Standards Codification Topic 805 — Business Combinations (“ASC 805”). Such adjustments are presented in the “Other” category within the following two tables. All of these businesses were acquired primarily to expand Brown & Brown’s core business and to attract and hire high-quality individuals. The recorded purchase price for all acquisitions consummated after January 1, 2009 included an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations will be recorded in the Consolidated Statement of Income when incurred.

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

Based upon the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company’s Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period, as defined in ASC 805. For the year ended December 31, 2016, several adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $917,497 relating to the assumption of certain liabilities. These measurement period adjustments have been reflected as current period adjustments for the year ended December 31, 2016 in accordance with the guidance in ASU 2015-16 “Business Combinations.” The measurement period adjustments impacted goodwill, with no effect on earnings or cash in the current period.

Cash paid for acquisitions was $124.7 million and $136.0 million in the years ended December 31, 2016 and 2015, respectively. We completed eight acquisitions (excluding book of business purchases) during the year ended December 31, 2016. We completed thirteen acquisitions (excluding book of business purchases) in the twelve-month period ended December 31, 2015.

The following table summarizes the purchase price allocation made as of the date of each acquisition for current year acquisitions and significant adjustments made during the measurement period for prior year acquisitions:



(in thousands)
Name	Business Segment	Effective Date of Acquisition	Cash Paid		Note Payable		Other Payable		Recorded Earn-Out Payable		Net Assets Acquired		Maximum Potential Earn- Out Payable
Social Security Advocates for the Disabled LLC (SSAD)	Services	February 1, 2016	$	32,526	$	492	$	—	$	971	$	33,989	$	3,500
Morstan General Agency, Inc. (Morstan)	Wholesale Brokerage	June 1, 2016	66,050		—		10,200		3,091		79,341		5,000
Other	Various	Various	26,140		—		464		400		27,004		7,785
Total			$	124,716	$	492	$	10,664	$	4,462	$	140,334	$	16,285

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



(in thousands)	SSAD			Morstan			Other			Total
Cash	$	2,094		$	—		$	—		$	2,094
Other current assets	1,042			2,482			1,555			5,079
Fixed assets	307			300			77			684
Goodwill	22,352			51,454			19,570			93,376
Purchased customer accounts	13,069			26,481			11,075			50,625
Non-compete agreements	72			39			117			228
Other assets	—			—			20			20
Total assets acquired	38,936			80,756			32,414			152,106
Other current liabilities	(1,717		)	(1,415		)	(5,410		)	(8,542		)
Deferred income tax, net	(3,230		)	—			—			(3,230		)
Total liabilities assumed	(4,947		)	(1,415		)	(5,410		)	(11,772		)
Net assets acquired	$	33,989		$	79,341		$	27,004		$	140,334

The weighted-average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15 years; and non-compete agreements, 5 years.

Goodwill of $93.4 million was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $13.1 million, $(1.2) thousand, $57.9 million and $22.4 million, respectively. Of the total goodwill of $93.4 million, $88.9 million is currently deductible for income tax purposes. The remaining $4.5 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

For the acquisitions completed during 2016, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues from the acquisitions completed through December 31, 2016, included in the Consolidated Statement of Income for the year ended December 31, 2016, were $34.2 million. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through December 31, 2016, included in the Consolidated Statement of Income for the year ended December 31, 2016, was $4.3 million. If the acquisitions had occurred as of the beginning of the respective periods, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.



(UNAUDITED)	For the Year Ended December 31,
(in thousands, except per share data)	2016		2015
Total revenues	$	1,789,790	$	1,716,592
Income before income taxes	$	428,194	$	414,911
Net income	$	260,346	$	250,783
Net income per share:
Basic	$	1.86	$	1.78
Diluted	$	1.84	$	1.75
weighted-average number of shares outstanding:
Basic	136,139		137,810
Diluted	137,804		140,112

Acquisitions in 2015

During the year ended December 31, 2015, Brown & Brown acquired the assets and assumed certain liabilities of thirteen insurance intermediaries and four books of business (customer accounts). The cash paid for these acquisitions was $136.0 million. Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last twelve months as permitted by Accounting Standards Codification Topic 805 — Business Combinations (“ASC 805”). Such adjustments are presented in ‘Other’ within the following two tables. All of these businesses were acquired primarily to expand Brown & Brown’s core business and to attract and hire high-quality individuals.

For the year ended December 31, 2015, several adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $503,442 relating to the assumption of certain liabilities.



(in thousands)
Name	Business Segment	Effective Date of Acquisition	Cash Paid		Other Payable		Recorded Earn-Out Payable		Net Assets Acquired		Maximum Potential Earn- Out Payable
Liberty Insurance Brokers, Inc. and Affiliates (Liberty)	Retail	February 1, 2015	$	12,000	$	—	$	2,981	$	14,981	$	3,750
Spain Agency, Inc. (Spain)	Retail	March 1, 2015	20,706		—		2,617		23,323		9,162
Bellingham Underwriters, Inc. (Bellingham)	National Programs	May 1, 2015	9,007		500		3,322		12,829		4,400
Fitness Insurance, LLC (Fitness)	Retail	June 1, 2015	9,455		—		2,379		11,834		3,500
Strategic Benefit Advisors, Inc. (SBA)	Retail	June 1, 2015	49,600		400		13,587		63,587		26,000
Bentrust Financial, Inc. (Bentrust)	Retail	December 1, 2015	10,142		391		319		10,852		2,200
MBA Insurance Agency of Arizona, Inc. (MBA)	Retail	December 1, 2015	68		8,442		6,063		14,573		9,500
Smith Insurance, Inc. (Smith)	Retail	December 1, 2015	12,096		200		1,047		13,343		6,350
Other	Various	Various	12,926		95		4,584		17,605		8,212
Total			$	136,000	$	10,028	$	36,899	$	182,927	$	73,074

The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition. The data included in the ‘Other’ column shows a negative adjustment for purchased customer accounts. This is driven mainly by the final valuation adjustment for the acquisition of Wright.



(in thousands)	Liberty			Spain			Bellingham			Fitness			SBA		Bentrust			MBA			Smith			Other			Total
Other current assets	$	2,486		$	324		$	—		$	9		$	652	$	—		$	—		$	—		$	169		$	3,640
Fixed assets	40			50			25			17			41		36			33			73			59			374
Goodwill	10,010			15,748			9,608			8,105			39,859		8,166			13,471			10,374			21,040			136,381
Purchased customer accounts	4,506			7,430			3,223			3,715			23,000		2,789			7,338			3,526			(2,135		)	53,392
Non-compete agreements	24			21			21			—			21		43			11			31			156			328
Other assets	—			—			—			—			14		—			—			—			—			14
Total assets acquired	17,066			23,573			12,877			11,846			63,587		11,034			20,853			14,004			19,289			194,129
Other current liabilities	(42		)	(250		)	(48		)	(12		)	—		(182		)	(6,280		)	(504		)	(4,895		)	(12,213		)
Deferred income tax, net	—			—			—			—			—		—			—			—			2,576			2,576
Other liabilities	(2,043		)	—			—			—			—		—			—			(157		)	635			(1,565		)
Total liabilities assumed	(2,085		)	(250		)	(48		)	(12		)	—		(182		)	(6,280		)	(661		)	(1,684		)	(11,202		)
Net assets acquired	$	14,981		$	23,323		$	12,829		$	11,834		$	63,587	$	10,852		$	14,573		$	13,343		$	17,605		$	182,927

The weighted-average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15 years; and non-compete agreements, 5 years.

Goodwill of $136.4 million was allocated to the Retail, National Programs and Wholesale Brokerage Segments in the amounts of $113.8 million, $18.0 million and $4.6 million, respectively. Of the total goodwill of $136.4 million, $91.1 million is currently deductible for income tax purposes and $8.4 million is non-deductible. The remaining $36.9 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

For the acquisitions completed during 2015, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues from the acquisitions completed through December 31, 2015, included in the Consolidated Statement of Income for the year ended December 31, 2015, were $28.2 million. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through December 31, 2015, included in the Consolidated Statement of Income for the year ended December 31, 2015, was $1.5 million. If the acquisitions had occurred as of the beginning of the respective periods, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.



(UNAUDITED)	For the Year Ended December 31,
(in thousands, except per share data)	2015		2014
Total revenues	$	1,688,297	$	1,630,992
Income before income taxes	$	411,497	$	356,426
Net income	$	248,720	$	217,053
Net income per share:
Basic	$	1.76	$	1.50
Diluted	$	1.73	$	1.48
weighted-average number of shares outstanding:
Basic	137,810		140,944
Diluted	140,112		142,891

Acquisitions in 2014

During the year ended December 31, 2014, Brown & Brown acquired the assets and assumed certain liabilities of nine insurance intermediaries, all of the stock of one insurance intermediary that owns an insurance carrier and five books of business (customer accounts). The cash paid for these acquisitions was $721.9 million. Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last twelve months as permitted by Accounting Standards Codification Topic 805 — Business Combinations (“ASC 805”). Such adjustments are presented in the “Other” category within the following two tables. All of these acquisitions were acquired primarily to expand Brown & Brown’s core business and to attract and hire high-quality individuals.

For the year ended December 31, 2014, several adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $25,941 relating to the assumption of certain liabilities.

The following table summarizes the purchase price allocation made as of the date of each acquisition for current year acquisitions and significant adjustment made during the measurement period for prior year acquisitions:



(in thousands)
Name	Business Segment	Effective Date of Acquisition	Cash Paid		Other Payable		Recorded Earn-Out Payable		Net Assets Acquired		Maximum Potential Earn- Out Payable
The Wright Insurance Group, LLC (Wright)	National Programs	May 1, 2014	$	609,183	$	1,471	$	—	$	610,654	$	—
Pacific Resources Benefits Advisors, LLC (PacRes)	Retail	May 1, 2014	90,000		—		27,452		117,452		35,000
Axia Strategies, Inc (Axia)	Wholesale Brokerage	May 1, 2014	9,870		—		1,824		11,694		5,200
Other	Various	Various	12,798		433		3,953		17,184		9,262
Total			$	721,851	$	1,904	$	33,229	$	756,984	$	49,462

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



(in thousands)	Wright			PacRes			Axia		Other			Total
Cash	$	25,365		$	—		$	—	$	—		$	25,365
Other current assets	16,474			3,647			101		742			20,964
Fixed assets	7,172			53			24		1,724			8,973
Reinsurance recoverable	25,238			—			—		—			25,238
Prepaid reinsurance premiums	289,013			—			—		—			289,013
Goodwill	420,209			76,023			7,276		10,417			513,925
Purchased customer accounts	213,677			38,111			4,252		4,384			260,424
Non-compete agreements	966			21			41		166			1,194
Other assets	20,045			—			—		—			20,045
Total assets acquired	1,018,159			117,855			11,694		17,433			1,165,141
Other current liabilities	(14,322		)	(403		)	—		(249		)	(14,974		)
Losses and loss adjustment reserve	(25,238		)	—			—		—			(25,238		)
Unearned premiums	(289,013		)	—			—		—			(289,013		)
Deferred income tax, net	(46,566		)	—			—		—			(46,566		)
Other liabilities	(32,366		)	—			—		—			(32,366		)
Total liabilities assumed	(407,505		)	(403		)	—		(249		)	(408,157		)
Net assets acquired	$	610,654		$	117,452		$	11,694	$	17,184		$	756,984

The weighted-average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15 years; and non-compete agreements, 3.4 years.

Goodwill of $513.9 million was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $86.4 million, $420.0 million, $7.7 million and $(0.2) million, respectively. Of the total goodwill of $513.9 million, $141.9 million is currently deductible for income tax purposes and $338.8 million is non-deductible. The remaining $33.2 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

For the acquisitions completed during 2014, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues and income before income taxes, including the intercompany cost of capital, from the acquisitions completed through December 31, 2014, included in the Consolidated Statement of Income for the year ended December 31, 2014, were $112.2 million and $(1.3) million, respectively. If the acquisitions had occurred as of the beginning of the respective periods, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.



(UNAUDITED)	For the Year Ended December 31,
(in thousands, except per share data)	2014		2013
Total revenues	$	1,630,162	$	1,520,858
Income before income taxes	$	358,229	$	409,522
Net income	$	218,150	$	248,628
Net income per share:
Basic	$	1.51	$	1.72
Diluted	$	1.49	$	1.70
Weighted-average number of shares outstanding:
Basic	140,944		141,033
Diluted	142,891		142,624

As of December 31, 2016, the maximum future contingency payments related to all acquisitions totaled $117.2 million, all of which relates to acquisitions consummated subsequent to January 1, 2009.

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 will be recorded in the Consolidated Statement of Income when incurred. Potential earn-out obligations are typically based upon future earnings of the acquired entities, usually between one and three years.

As of December 31, 2016, the fair values of the estimated acquisition earn-out payables were re-evaluated and measured at fair value on a recurring basis using unobservable inputs (Level 3) as defined in ASC 820-Fair Value Measurement. The resulting additions, payments, and net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the years ended December 31, 2016, 2015 and 2014 were as follows:



	For the Year Ended December 31,
(in thousands)	2016			2015			2014
Balance as of the beginning of the period	$	78,387		$	75,283		$	43,058
Additions to estimated acquisition earn-out payables	4,462			36,899			34,356
Payments for estimated acquisition earn-out payables	(28,213		)	(36,798		)	(12,069		)
Subtotal	54,636			75,384			65,345
Net change in earnings from estimated acquisition earn-out payables:
Change in fair value on estimated acquisition earn-out payables	6,338			13			7,375
Interest expense accretion	2,847			2,990			2,563
Net change in earnings from estimated acquisition earn-out payables	9,185			3,003			9,938
Balance as of December 31,	$	63,821		$	78,387		$	75,283

Of the $63.8 million estimated acquisition earn-out payables as of December 31, 2016, $31.8 million was recorded as accounts payable and $32.0 million was recorded as other non-current liabilities. Included within additions to estimated acquisition earn-out payables are any adjustments to opening balance sheet items prior to the one-year anniversary date and may therefore differ from previously reported amounts. Of the $78.4 million estimated acquisition earn-out payables as of December 31, 2015, $25.3 million was recorded as accounts payable and $53.1 million was recorded as other non-current liabilities. Of the $75.3 million estimated acquisition earn-out payables as of December 31, 2014, $26.0 million was recorded as accounts payable and $49.3 million was recorded as an other non-current liability.

NOTE 3· Goodwill

The changes in the carrying value of goodwill by reportable segment for the years ended December 31, are as follows:



(in thousands)	Retail			National Programs			Wholesale Brokerage		Services			Total
Balance as of January 1, 2015	$	1,231,869		$	886,095		$	222,356	$	120,291		$	2,460,611
Goodwill of acquired businesses	113,767			18,009			4,605		—			136,381
Goodwill disposed of relating to sales of businesses	—			(2,238		)	—		(8,071		)	(10,309		)
Balance as of December 31, 2015	$	1,345,636		$	901,866		$	226,961	$	112,220		$	2,586,683
Goodwill of acquired businesses	13,117			(1		)	57,908		22,352			93,376
Goodwill of transferred businesses	571			(571		)	—		—			—
Goodwill disposed of relating to sales of businesses	(4,657		)	—			—		—			(4,657		)
Balance as of December 31, 2016	$	1,354,667		$	901,294		$	284,869	$	134,572		$	2,675,402

NOTE 4· Amortizable Intangible Assets

Amortizable intangible assets at December 31, 2016 and 2015 consisted of the following:



	December 31, 2016								December 31, 2015
(in thousands)	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Weighted Average Life in Years(1)	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Weighted Average Life in Years(1)
Purchased customer accounts	$	1,447,680	$	(741,770	)	$	705,910	15.0	$	1,398,986	$	(656,799	)	$	742,187	15.0
Non-compete agreements	29,668		(28,124		)	1,544		6.8	29,440		(26,947		)	2,493		6.8
Total	$	1,477,348	$	(769,894	)	$	707,454		$	1,428,426	$	(683,746	)	$	744,680


(1)	Weighted-average life calculated as of the date of acquisition.

Amortization expense for amortizable intangible assets for the years ending December 31, 2017, 2018, 2019, 2020 and 2021 is estimated to be $84.9 million, $79.6 million, $75.1 million, $67.8 million, and $64.5 million, respectively.

NOTE 5· Investments

At December 31, 2016, the Company’s amortized cost and fair values of fixed maturity securities are summarized as follows:



(in thousands)	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury securities, obligations of U.S. Government agencies and Municipals	$	26,280	$	11	$	(59	)	$	26,232
Corporate debt	2,358		13		(1		)	2,370
Total	$	28,638	$	24	$	(60	)	$	28,602

At December 31, 2016, the Company held $26.28 million in fixed income securities composed of U.S Treasury securities, securities issued by U.S. Government agencies and Municipalities, and $2.4 million issued by corporations with investment grade ratings. Of the total, $5.6 million is classified as short-term investments on the Consolidated Balance Sheet as maturities are less than one year in duration. Additionally, the Company holds $9.5 million in short-term investments which are related to time deposits held with various financial institutions.

For securities in a loss position, the following table shows the investments’ gross unrealized loss and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2016:



(in thousands)	Less than 12 Months					12 Months or More				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities, obligations of U.S. Government agencies and Municipals	$	14,663	$	(59	)	$	—	$	—	$	14,663	$	(59	)
Foreign Government	—		—			—		—		—		—
Corporate debt	1,001		(1		)	—		—		1,001		(1		)
Total	$	15,664	$	(60	)	$	—	$	—	$	15,664	$	(60	)

The unrealized losses from corporate issuers were caused by interest rate increases. At December 31, 2016, the Company had 20 securities in an unrealized loss position. The corporate securities are highly rated securities with no indicators of potential impairment. Based upon the ability and intent of the Company to hold these investments until recovery of fair value, which may be maturity, the bonds were not considered to be other-than-temporarily impaired at December 31, 2016.

At December 31, 2015, the Company’s amortized cost and fair values of fixed maturity securities are summarized as follows:



(in thousands)	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury securities, obligations of U.S. Government agencies and Municipals	$	11,876	$	6	$	(26	)	$	11,856
Foreign government	50		—		—			50
Corporate debt	4,505		7		(16		)	4,496
Short duration fixed income fund	1,663		27		—			1,690
Total	$	18,094	$	40	$	(42	)	$	18,092

The following table shows the investments’ gross unrealized loss and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2015:



(in thousands)	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury securities, obligations of U.S. Government agencies and Municipals	$	8,998	$	(26	)	$	—	$	—		$	8,998	$	(26	)
Foreign Government	50		—			—		—			50		—
Corporate debt	2,731		(14		)	284		(2		)	3,015		(16		)
Total	$	11,779	$	(40	)	$	284	$	(2	)	$	12,063	$	(42	)

The unrealized losses in the Company’s investments in U.S. Treasury Securities and obligations of U.S. Government Agencies and bonds from corporate issuers were caused by interest rate increases. At December 31, 2015, the Company had 35 securities in an unrealized loss position. The contractual cash flows of the U.S. Treasury Securities and obligations of the U.S. Government agencies investments are either guaranteed by the U.S. Government or an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. The corporate securities are highly rated securities with no indicators of potential impairment. Based upon the ability and intent of the Company to hold these investments until recovery of fair value, which may be maturity, the bonds were not considered to be other-than-temporarily impaired at December 31, 2015.

The amortized cost and estimated fair value of the fixed maturity securities at December 31, 2016 by contractual maturity are set forth below:



(in thousands)	Amortized Cost		Fair Value
Years to maturity:
Due in one year or less	$	5,551	$	5,554
Due after one year through five years	22,757		22,708
Due after five years through ten years	330		340
Total	$	28,638	$	28,602

The amortized cost and estimated fair value of the fixed maturity securities at December 31, 2015 by contractual maturity are set forth below:



(in thousands)	Amortized Cost		Fair Value
Years to maturity:
Due in one year or less	$	5,726	$	5,722
Due after one year through five years	12,038		12,041
Due after five years through ten years	330		329
Total	$	18,094	$	18,092

The expected maturities in the foregoing table may differ from the contractual maturities because certain borrowers have the right to call or prepay obligations with or without penalty.

Proceeds from the sales and maturity of the Company’s investment in fixed maturity securities were $6.0 million. This along with maturing time deposits and the utilization of funds from a money market account of $9.1 million yielded total cash proceeds from the sale of investments of $18.9 million in the period of January 1, 2016 to December 31, 2016. These proceeds were used to purchase additional fixed maturity securities. The gains and losses realized on those sales for the period from January 1, 2016 to December 31, 2016 were insignificant. Additionally, there was a sale of the short-duration fixed income fund which resulted in cash proceeds of $1.7 million, as the fund was liquidated in the third quarter of 2016. Gains on this sale were also insignificant.

Proceeds from sales of the Company’s investment in fixed maturity securities were $5.6 million including maturities for the year ended December 31, 2015. The gains and losses realized on those sales for the year ended December 31, 2015 were insignificant.

Realized gains and losses are reported on the Consolidated Statement of Income, with the cost of securities sold determined on a specific identification basis.

At December 31, 2016, investments with a fair value of approximately $4.0 million were on deposit with state insurance departments to satisfy regulatory requirements.

NOTE 6· Fixed Assets

Fixed assets at December 31 consisted of the following:



(in thousands)	2016			2015
Furniture, fixtures and equipment	$	177,823		$	169,682
Leasehold improvements	33,137			32,132
Land, buildings and improvements	3,375			3,370
Total cost	214,335			205,184
Less accumulated depreciation and amortization	(138,528		)	(123,431		)
Total	$	75,807		$	81,753

Depreciation and amortization expense for fixed assets amounted to $21.0 million in 2016, $20.9 million in 2015, and $20.9 million in 2014.

NOTE 7· Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities at December 31 consisted of the following:



(in thousands)	2016		2015
Accrued bonuses	$	82,438	$	76,210
Accrued compensation and benefits	45,771		39,366
Accrued rent and vendor expenses	28,669		29,225
Reserve for policy cancellations	9,567		9,617
Accrued interest	6,441		6,375
Other	29,103		31,274
Total	$	201,989	$	192,067

NOTE 8· Long-Term Debt

Long-term debt at December 31, 2016 and 2015 consisted of the following:



(in thousands)	December 31, 2016			December 31, 2015
Current portion of long-term debt:
Current portion of 5-year term loan facility expires 2019	$	55,000		$	48,125
5.660% senior notes, Series C, semi-annual interest payments, balloon due 2016	—			25,000
Short-term promissory note	500			—
Total current portion of long-term debt	55,500			73,125
Long-term debt:
Note agreements:
4.500% senior notes, Series E, quarterly interest payments, balloon due 2018	100,000			100,000
4.200% senior notes, semi-annual interest payments, balloon due 2024	498,785			498,628
Total notes	598,785			598,628
Credit agreements:
5-year term loan facility, periodic interest and principal payments, LIBOR plus up to 1.750%, expires May 20, 2019	426,250			481,250
5-year revolving loan facility, periodic interest payments, currently LIBOR plus up to 1.500%, plus commitment fees up to 0.250%, expires May 20, 2019	—			—
Revolving credit loan, quarterly interest payments, LIBOR plus up to 1.400% and availability fee up to 0.250%, expires December 31, 2016	—			—
Total credit agreements	426,250			481,250
Debt issuance costs (contra)	(6,663		)	(8,260		)
Total long-term debt less unamortized discount and debt issuance costs	1,018,372			1,071,618
Current portion of long-term debt	55,500			73,125
Total debt	$	1,073,872		$	1,144,743

On December 22, 2006, the Company entered into a Master Shelf and Note Purchase Agreement (the “Master Agreement”) with a national insurance company (the “Purchaser”). The initial issuance of notes under the Master Agreement occurred on December 22, 2006, through the issuance of $25.0 million in Series C Senior Notes due December 22, 2016, with a fixed interest rate of 5.660% per year. On February 1, 2008, $25.0 million in Series D Senior Notes due January 15, 2015, with a fixed interest rate of 5.370% per year, were issued. On September 15, 2011, and pursuant to a Confirmation of Acceptance (the “Confirmation”), dated January 21, 2011, in connection with the Master Agreement, $100.0 million in Series E Senior Notes were issued and are due September 15, 2018, with a fixed interest rate of 4.500% per year. The Series E Senior Notes were issued for the sole purpose of retiring existing senior notes. On January 15, 2015, the Series D Notes were redeemed at maturity using cash proceeds to pay off the principal of $25.0 million plus any remaining accrued interest. On December 22, 2016, the Series C Notes were redeemed at maturity using cash proceeds to pay off the principal of $25.0 million plus any remaining accrued interest. As of December 31, 2016, there was an outstanding debt balance issued under the provisions of the Master Agreement of $100.0 million.

On July 1, 2013, in conjunction with the acquisition of Beecher Carlson Holdings, Inc., the Company entered into a revolving loan agreement (the “Wells Fargo Agreement”) with Wells Fargo Bank, N.A. that provided for a $50.0 million revolving line of credit (the “Wells Fargo Revolver”). On April 16, 2014, in connection with the signing of the Credit Facility (as defined below) an amendment to the agreement was established to reduce the total revolving loan commitment from $50.0 million to $25.0 million. The Wells Fargo Revolver may be increased by up to $50.0 million (bringing the total amount available to $75.0 million). The calculation of interest and fees for the Wells Fargo Agreement is generally based upon the Company’s funded debt-to-EBITDA ratio. Interest is charged at a rate equal to 1.000% to 1.400% above LIBOR or 1.000% below the Base Rate, each as more fully described in the Wells Fargo Agreement. Fees include an up-front fee, an availability fee of 0.175% to 0.250%, and a letter of credit margin fee of 1.000% to 1.400%. The obligations under the Wells Fargo Revolver are unsecured and the Wells Fargo Agreement includes various covenants, limitations and events of default that are customary for similar facilities for similar borrowers. The maturity date for the Wells Fargo Revolver was December 31, 2016. However, on March 14, 2016, the Wells Fargo Revolver was terminated before its maturity date with no fees incurred. There were no borrowings against the Wells Fargo Revolver as of December 31, 2016 or as of December 31, 2015.

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 was to retire existing term loan debt 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 upon the better of the Company’s net debt leverage ratio or a non-credit enhanced senior unsecured long-term debt rating. Based upon the Company’s net debt leverage ratio, the rates of interest charged on the term loan are 1.000% to 1.750%, and the revolving loan is 0.850% to 1.500% above the adjusted LIBOR rate for outstanding amounts drawn. There are fees included in the facility which include a facility fee based upon the revolving credit commitments of the lenders (whether used or unused) at a rate of 0.150% to 0.250% and letter of credit fees based upon 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, 2016 and 2015, there was an outstanding debt balance issued under the provisions of the Credit Facility in total of $481.3 million and $529.4 million respectively, with no borrowings outstanding relative to the revolving loan. Per the terms of the agreement, scheduled principal payments of $55.0 million are due in 2017.

On September 18, 2014, the Company issued $500.0 million of 4.200% unsecured senior notes due in 2024. The senior notes were given 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 for other general corporate purposes. As of December 31, 2016 and 2015, there was an outstanding debt balance of $500.0 million exclusive of the associated discount balance.

The Master Agreement, Wells Fargo Agreement and the Credit Agreement all require the Company to maintain certain financial ratios and comply with certain other covenants. The Company was in compliance with all such covenants as of December 31, 2016 and 2015.

The 30-day Adjusted LIBOR Rate as of December 31, 2016 was 0.813%.

Interest paid in 2016, 2015 and 2014 was $37.7 million, $37.5 million, and $25.1 million, respectively.

At December 31, 2016, maturities of long-term debt were $55.5 million in 2017, $155.0 million in 2018, $371.3 million in 2019, and $500.0 million in 2024.

NOTE 9· Income Taxes

Significant components of the provision for income taxes for the years ended December 31 are as follows:



(in thousands)	2016		2015		2014
Current:
Federal	$	126,145	$	118,490	$	109,893
State	21,110		17,625		15,482
Foreign	590		430		109
Total current provision	147,845		136,545		125,484
Deferred:
Federal	15,551		18,416		5,987
State	2,612		4,280		1,440
Foreign	—		—		(58		)
Total deferred provision	18,163		22,696		7,369
Total tax provision	$	166,008	$	159,241	$	132,853

A reconciliation of the differences between the effective tax rate and the federal statutory tax rate for the years ended December 31 is as follows:



	2016	2015	2014
Federal statutory tax rate	35.0%	35.0%	35.0%
State income taxes, net of federal income tax benefit	3.9	3.9	3.3
Non-deductible employee stock purchase plan expense	0.3	0.3	0.3
Non-deductible meals and entertainment	0.3	0.3	0.4
Other, net	(0.3)	0.1	0.1
Effective tax rate	39.2%	39.6%	39.1%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the corresponding amounts used for income tax reporting purposes.

Significant components of Brown & Brown’s current deferred tax assets as of December 31 are as follows:



(in thousands)	2016		2015
Current deferred tax assets:
Deferred profit-sharing contingent commissions	$	10,567	$	9,767
Net operating loss carryforwards	10		10
Accruals and reserves	14,032		14,858
Total current deferred tax assets	$	24,609	$	24,635

Significant components of Brown & Brown’s non-current deferred tax liabilities and assets as of December 31 are as follows:



(in thousands)	2016			2015
Non-current deferred tax liabilities:
Fixed assets	$	6,425		$	8,585
Net unrealized holding (loss)/gain on available-for-sale securities	(12		)	(9		)
Intangible assets	422,478			393,251
Total non-current deferred tax liabilities	428,891			401,827
Non-current deferred tax assets:
Deferred compensation	44,912			38,966
Net operating loss carryforwards	2,384			2,518
Valuation allowance for deferred tax assets	(700		)	(606		)
Total non-current deferred tax assets	46,596			40,878
Net non-current deferred tax liability	$	382,295		$	360,949

Income taxes paid in 2016, 2015 and 2014 were $143.1 million, $132.9 million, and $118.3 million respectively.

At December 31, 2016, Brown & Brown had net operating loss carryforwards of $156,435 and $60.2 million for federal and state income tax reporting purposes, respectively, portions of which expire in the years 2017 through 2036. The federal carryforward is derived from insurance operations acquired by Brown & Brown in 2001. The state carryforward amount is derived from the operating results of certain subsidiaries and from the 2013 stock acquisition of Beecher Carlson Holdings, Inc.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



(in thousands)	2016			2015			2014
Unrecognized tax benefits balance at January 1	$	584		$	113		$	391
Gross increases for tax positions of prior years	412			773			—
Gross decreases for tax positions of prior years	(41		)	—			(21		)
Settlements	(205		)	(302		)	(257		)
Unrecognized tax benefits balance at December 31	$	750		$	584		$	113

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2016 and 2015, the Company had $86,191 and $102,171 of accrued interest and penalties related to uncertain tax positions, respectively.

The total amount of unrecognized tax benefits that would affect the Company’s effective tax rate if recognized was $750,258 as of December 31, 2016 and $583,977 as of December 31, 2015. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.

As a result of a 2006 Internal Revenue Service (“IRS”) audit, the Company agreed to accrue at each December 31, for tax purposes only, a known amount of profit-sharing contingent commissions represented by the actual amount of profit-sharing contingent commissions received in the first quarter of the related year, with a true-up adjustment to the actual amount received by the end of the following March. Since this method for tax purposes differs from the method used for book purposes, it will result in a current deferred tax asset as of December 31 each year which will reverse by the following March 31 when the related profit-sharing contingent commissions are recognized for financial accounting purposes.

The Company is subject to taxation in the United States and various state jurisdictions. The Company is also subject to taxation in the United Kingdom. In the United States, federal returns for fiscal years 2013 through 2016 remain open and subject to examination by the IRS. The Company files and remits state income taxes in various states where the Company has determined it is required to file state income taxes. The Company’s filings with those states remain open for audit for the fiscal years 2011 through 2016. In the United Kingdom, the Company’s filings remain open for audit for the fiscal years 2015 and 2016.

The federal income tax returns of The Wright Insurance Group are currently under IRS audit for the short period ended May 1, 2014. Also during 2016, the Company settled the previously disclosed State of Kansas audit for fiscal years 2012 through 2014 in the amount of $204,695. The Company and one of its subsidiaries, The Advocator Group, LLC, is currently under examination by the State of Massachusetts for the fiscal year 2013 through 2014. There are no other federal or state income tax audits as of December 31, 2016.

In general, it is our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations. As of December 31, 2016, we have not made a provision for U.S. or additional foreign withholding taxes on approximately $2.6 million of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.

NOTE 10· Employee Savings Plan

The Company has an Employee Savings Plan (401(k)) in which substantially all employees with more than 30 days of service are eligible to participate. Under this plan, Brown & Brown makes matching contributions of up to 4.0% of each participant’s annual compensation. Prior to 2014, the Company’s matching contribution was up to 2.5% of each participant’s annual compensation with a discretionary profit-sharing contribution each year, which equaled 1.5% of each eligible employee’s compensation. The Company’s contributions to the plan totaled $19.3 million in 2016, $17.8 million in 2015, and $15.8 million in 2014.

NOTE 11· Stock-Based Compensation

Performance Stock Plan

In 1996, Brown & Brown adopted and the shareholders approved a performance stock plan, under which until the suspension of the plan in 2010, up to 14,400,000 Performance Stock Plan (“PSP”) shares could be granted to key employees contingent on the employees’ future years of service with Brown & Brown and other performance-based criteria established by the Compensation Committee of the Company’s Board of Directors. Before participants may take full title to Performance Stock, two vesting conditions must be met. Of the grants currently outstanding, specified portions satisfied the first condition for vesting based upon 20% incremental increases in the 20-trading-day average stock price of Brown & Brown’s common stock from the price on the business day prior to date of grant. Performance Stock that has satisfied the first vesting condition is considered “awarded shares.” Awarded shares are included as issued and outstanding common stock shares and are included in the calculation of basic and diluted EPS. Dividends are paid on awarded shares and participants may exercise voting privileges on such shares. Awarded shares satisfy the second condition for vesting on the earlier of a participant’s: (i) 15 years of continuous employment with Brown & Brown from the date shares are granted to the participants (or, in the case of the July 2009 grant to Powell Brown, 20 years); (ii) attainment of age 64 (on a prorated basis corresponding to the number of years since the date of grant); or (iii) death or disability. On April 28, 2010, the PSP was suspended and any remaining authorized, but unissued shares, as well as any shares forfeited in the future, will be reserved for issuance under the 2010 Stock Incentive Plan (the “SIP”).

At December 31, 2016, 5,174,190 shares had been granted under the PSP. As of December 31, 2016, 1,003,275 shares had met the first condition of vesting and had been awarded, and 4,170,915 shares had satisfied both conditions of vesting and had been distributed to participants. Of the shares that have not vested as of December 31, 2016, the initial stock prices ranged from $13.65 to $25.68.

The Company uses a path-dependent lattice model to estimate the fair value of PSP grants on the grant date.

A summary of PSP activity for the years ended December 31, 2016, 2015 and 2014 is as follows:



	Weighted- Average Grant Date Fair Value		Granted Shares		Awarded Shares		Shares Not Yet Awarded
Outstanding at January 1, 2014	$	8.62	2,371,287		2,295,852		75,435
Granted	$	—	—		—		—
Awarded	$	—	—		—		—
Vested	$	16.76	(277,009	)	(277,009	)	—
Forfeited	$	9.75	(165,647	)	(115,630	)	(50,017	)
Outstanding at December 31, 2014	$	8.71	1,928,631		1,903,213		25,418
Granted	$	—	—		—		—
Awarded	$	—	—		—		—
Vested	$	5.55	(208,889	)	(208,889	)	—
Forfeited	$	9.78	(117,528	)	(100,110	)	(17,418	)
Outstanding at December 31, 2015	$	9.03	1,602,214		1,594,214		8,000
Granted	$	—	—		—		—
Awarded	$	—	—		4,000		(4,000	)
Vested	$	6.39	(506,422	)	(506,422	)	—
Forfeited	$	10.52	(92,517	)	(88,517	)	(4,000	)
Outstanding at December 31, 2016	$	10.23	1,003,275		1,003,275		—

The total fair value of PSP grants that vested during each of the years ended December 31, 2016, 2015 and 2014 was $18.1 million, $6.8 million and $8.4 million, respectively.

Stock Incentive Plan

On April 28, 2010, the shareholders of Brown & Brown, Inc. approved the Stock Incentive Plan (“SIP”) that provides for the granting of stock options, stock, restricted stock units, and/or stock appreciation rights to employees and directors contingent on criteria established by the Compensation Committee of the Company’s Board of Directors. The principal purpose of the SIP is to attract, incentivize and retain key employees by offering those persons an opportunity to acquire or increase a direct proprietary interest in the Company’s operations and future success. The SIP includes a sub-plan applicable to Decus Insurance Brokers Limited (“Decus”) which, is a subsidiary of Decus Holdings (U.K.) Limited. The shares of stock reserved for issuance under the SIP are any shares that are authorized for issuance under the PSP and not already subject to grants under the PSP, and that were outstanding as of April 28, 2010, the date of suspension of the PSP, together with PSP shares and SIP shares forfeited after that date. As of April 28, 2010, 6,046,768 shares were available for issuance under the PSP, which were then transferred to the SIP. In addition, in May 2016 our shareholders approved an amendment to the SIP to increase the shares available for issuance by an additional 1,200,000.

The Company has granted stock grants to our employees in the form of Restricted Stock Awards and Peformance Stock Awards under the SIP. To date, a substantial majority of stock grants to employees under the SIP vest in four to ten years The Performance Stock Awards are subject to the achievement of certain performance criteria by grantees, which may include growth in a defined book of business, organic growth and operating profit growth of a profit center, EBITDA growth, organic growth of the Company and consolidated EPS growth at certain levels of the Company. The performance measurement period ranges from three to five years. Beginning in 2016, certain Performance Stock Awards have a payout range between 0% to 200% depending on the achievement against the stated performance target. Prior to 2016, the majority of the grants had a binary performance measurement criteria that only allowed for 0% or 100% payout.

In 2010, 187,040 shares were granted under the SIP. This grant was conditioned upon the surrender of 187,040 shares previously granted under the PSP in 2009, which were accordingly treated as forfeited PSP shares. The vesting conditions of this grant were identical to those provided for in connection with the 2009 PSP grant; thus the target stock prices and the periods associated with satisfaction of the first and second conditions of vesting were unchanged. Additionally, grants totaling 5,205 shares were made in 2010 to Decus employees under the SIP sub-plan applicable to Decus.

In 2011, 2,375,892 shares were granted under the SIP. Of this total, 24,670 shares were granted to Decus employees under the SIP sub-plan applicable to Decus.

In 2012, 814,545 shares were granted under the SIP, primarily related to the Arrowhead acquisition.

In 2013, 3,719,974 shares were granted under the SIP. Of the shares granted in 2013, 891,399 shares will vest upon the grantees’ completion of between three and seven years of service with the Company, and because grantees have the right to vote the shares and receive dividends immediately after the date of grant these shares are considered awarded and outstanding under the two-class method.

In 2014, 422,572 shares were granted under the SIP. Of the shares granted in 2014, 113,088 shares will vest upon the grantees’ completion of between three and six years of service with the Company, and because grantees have the right to vote the shares and receive dividends immediately after the date of grant these shares are considered awarded and outstanding under the two-class method.

In 2015, 481,166 shares were granted under the SIP. Of the shares granted in 2015, 164,646 shares will vest upon the grantees’ completion of between five and seven years of service with the Company, and because grantees have the right to vote the shares and receive dividends immediately after the date of grant these shares are considered awarded and outstanding under the two-class method.

In 2016, 972,099 shares were granted under the SIP. Of the shares granted in 2016, 182,653 shares will vest upon the grantees’ completion of five years of service with the Company, and because grantees have the right to vote the shares and receive dividends immediately after the date of grant these shares are considered awarded and outstanding under the two-class method.

Additionally, non-employee members of the Board of Directors received shares annually issued pursuant to the SIP as part of their annual compensation. A total of 36,919 SIP shares were issued to these directors in 2011 and 2012, of which 11,682 were issued in January 2011, 12,627 in January 2012, and 12,610 in December 2012. The shares issued in December 2012 were issued at that earlier time rather than in January 2013 pursuant to action of the Board of Directors. No additional shares were granted or issued to the non-employee members of the Board of Directors in 2013. A total of 9,870 shares were issued to these directors in January 2014, 15,700 shares were issued in January 2015 and 16,860 shares were issued in January 2016.

The following table sets forth information as of December 31, 2016, 2015, and 2014, with respect to the number of time-based restricted shares granted and awarded, the number of performance-based restricted shares granted, and the number of performance-based restricted shares awarded under our Performance Stock Plan and 2010 Stock Incentive Plan:



Year	Time-Based Restricted Stock Granted and Awarded	Performance-Based Restricted Stock Granted		Performance-Based Restricted Stock Awarded
2016	182,653	789,446	(1)	1,435,319
2015	164,646	316,520		—
2014	113,088	309,484		—


(1)	Of the 789,446 shares of performance-based restricted stock granted in 2016, the payout for 353,132 shares may be increased up to 200% of the target or decreased to zero, subject to the level of performance attained. The amount reflected in the table includes all restricted stock grants at a target payout of 100%.

At December 31, 2016, 3,729,566 shares were available for future grants. This amount is calculated assuming the maximum payout for all restricted stock grants. The payout for 321,955 shares of our outstanding performance-based restricted stock grants may be increased up to 200% of the target or decreased to zero, subject to the level of performance attained.

The Company uses the closing stock price on the day prior to the grant date to determine the fair value of SIP grants and then applies an estimated forfeiture factor to estimate the annual expense. Additionally, the Company uses the path-dependent lattice model to estimate the fair value of grants with PSP-type vesting conditions as of the grant date. SIP shares that satisfied the first vesting condition for PSP-type grants or the established performance criteria are considered awarded shares. Awarded shares are included as issued and outstanding common stock shares and are included in the calculation of basic and diluted EPS.

A summary of SIP activity for the years ended December 31, 2016, 2015 and 2014 is as follows:



	Weighted- Average Grant Date Fair Value		Granted Shares		Awarded Shares		Shares Not Yet Awarded
Outstanding at January 1, 2014	$	27.96	6,606,101		995,717		5,610,384
Granted	$	31.02	422,572		113,088		309,484
Awarded	$	—	—		—		—
Vested	$	—	—		—		—
Forfeited	$	27.41	(369,626	)	(47,915	)	(321,711	)
Outstanding at December 31, 2014	$	28.19	6,659,047		1,060,890		5,598,157
Granted	$	31.74	481,166		164,646		316,520
Awarded	$	—	—		—		—
Vested	$	—	—		—		—
Forfeited	$	26.32	(863,241	)	(95,542	)	(767,699	)
Outstanding at December 31, 2015	$	28.74	6,276,972		1,129,994		5,146,978
Granted	$	35.52	972,099		182,653		789,446		(1)
Awarded	$	24.93	—		1,431,319		(1,431,319	)
Vested	$	27.31	(166,884	)	(166,884	)	—
Forfeited	$	25.34	(954,131	)	(175,788	)	(778,343	)
Outstanding at December 31, 2016	$	29.96	6,128,056		2,401,294		3,726,762


(1)	Of the 789,446 shares of performance-based restricted stock granted in 2016, the payout for 353,132 shares may be increased up to 200% of the target or decreased to zero, subject to the level of performance attained. The amount reflected in the table includes all restricted stock grants at a target payout of 100%.

Employee Stock Purchase Plan

The Company has a shareholder-approved Employee Stock Purchase Plan (“ESPP”) with a total of 17,000,000 authorized shares of which 4,680,263 were available for future subscriptions as of December 31, 2016. Employees of the Company who regularly work more than 20 hours per week are eligible to participate in the ESPP. Participants, through payroll deductions, may allot up to 10% of their compensation, up to a maximum of $25,000, to purchase Company stock between August 1st of each year and the following July 31st (the “Subscription Period”) at a cost of 85% of the lower of the stock price as of the beginning or end of the Subscription Period.

The Company estimates the fair value of an ESPP share option as of the beginning of the Subscription Period as the sum of: (1) 15% of the quoted market price of the Company’s stock on the day prior to the beginning of the Subscription Period, and (2) 85% of the value of a one-year stock option on the Company stock using the Black-Scholes option-pricing model. The estimated fair value of an ESPP share option as of the Subscription Period beginning in August 2016 was $7.61. The fair values of an ESPP share option as of the Subscription Periods beginning in August 2015 and 2014, were $6.43 and $6.39, respectively.

For the ESPP plan years ended July 31, 2016, 2015 and 2014, the Company issued 514,665, 539,389, and 512,521 shares of common stock, respectively. These shares were issued at an aggregate purchase price of $15.0 million, or $29.23 per share, in 2016, $14.4 million, or $26.62 per share, in 2015, and $13.4 million, or $26.16 per share, in 2014.

For the five months ended December 31, 2016, 2015 and 2014 (portions of the 2016-2017, 2015-2016 and 2014-2015 plan years), 247,023; 231,803; and 235,794 shares of common stock (from authorized but unissued shares), respectively, were subscribed to by ESPP participants for proceeds of approximately $7.7 million, $6.8 million and $6.3 million, respectively.

Incentive Stock Option Plan

On April 21, 2000, Brown & Brown adopted, and the shareholders approved, a qualified incentive stock option plan (the “ISOP”) that provides for the granting of stock options to certain key employees for up to 4,800,000 shares of common stock. On December 31, 2008, the ISOP expired. The objective of the ISOP was to provide additional performance incentives to grow Brown & Brown’s pre-tax income in excess of 15% annually. The options were granted at the most recent trading day’s closing market price and vest over a one-to-ten-year period, with a potential acceleration of the vesting period to three-to-six years based upon achievement of certain performance goals. All of the options expire 10 years after the grant date.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options on the grant date. The risk-free interest rate is based upon the U.S. Treasury yield curve on the date of grant with a remaining term approximating the expected term of the option granted. The expected term of the options granted is derived from historical data; grantees are divided into two groups based upon expected exercise behavior and are considered separately for valuation purposes. The expected volatility is based upon the historical volatility of the Company’s common stock over the period of time equivalent to the expected term of the options granted. The dividend yield is based upon the Company’s best estimate of future dividend yield.

A summary of stock option activity for the years ended December 31, 2016, 2015 and 2014 is as follows:



Stock Options	Shares Under Option		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2014	622,945		$	18.39	4.1	$	7,289
Granted	—		$	—
Exercised	(106,589	)	$	18.48
Forfeited	(46,000	)	$	18.48
Expired	—		$	—
Outstanding at December 31, 2014	470,356		$	18.57	3.1	$	5,087
Granted	—		$	—
Exercised	(151,767	)	$	18.48
Forfeited	(49,000	)	$	19.36
Expired	—		$	—
Outstanding at December 31, 2015	269,589		$	18.48	2.2	$	2,395
Granted	—		$	—
Exercised	(64,589	)	$	18.48
Forfeited	(30,000	)	$	18.48
Expired	—		$	—
Outstanding at December 31, 2016	175,000		$	18.48	1.2	$	4,616
Ending vested and expected to vest at December 31, 2016	175,000		$	18.48	1.2	$	4,616
Exercisable at December 31, 2016	175,000		$	18.48	1.2	$	4,616
Exercisable at December 31, 2015	164,589		$	18.48	2.2	$	2,241
Exercisable at December 31, 2014	316,356		$	18.48	3.2	$	4,565

The following table summarizes information about stock options outstanding at December 31, 2016:



Options Outstanding					Options Exercisable
Exercise Price	Number Outstanding	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$18.48	175,000	1.2	$	18.48	175,000	$	18.48
Totals	175,000	1.2	$	18.48	175,000	$	18.48

The total intrinsic value of options exercised, determined as of the date of exercise, during the years ended December 31, 2016, 2015 and 2014 was $1.0 million, $2.2 million and $1.3 million, respectively. The total intrinsic value is calculated as the difference between the exercise price of all underlying awards and the quoted market price of the Company’s stock for all in-the-money stock options at December 31, 2016, 2015 and 2014, respectively.

There are no option shares available for future grant under the ISOP since this plan expired as of December 31, 2008.

Summary of Non-Cash Stock-Based Compensation Expense

The non-cash stock-based compensation expense for the years ended December 31 is as follows:



(in thousands)	2016		2015		2014
Stock Incentive Plan	$	11,049	$	11,111	$	14,447
Employee Stock Purchase Plan	3,698		3,430		2,425
Performance Stock Plan	1,305		972		2,354
Incentive Stock Option Plan	—		—		137
Total	$	16,052	$	15,513	$	19,363

Summary of Unrecognized Compensation Expense

As of December 31, 2016, there was approximately $92.1 million of unrecognized compensation expense related to all non-vested stock-based compensation arrangements granted under the Company’s stock-based compensation plans. That expense is expected to be recognized over a weighted-average period of 4.3 years.

NOTE 12· Supplemental Disclosures of Cash Flow Information and Non-Cash Financing and Investing Activities

Our Restricted Cash balance is comprised of funds held in separate premium trust accounts as required by state law or, in some cases, per agreement with our carrier partners. In the second quarter of 2015, certain balances that had previously been reported as held in restricted premium trust accounts were reclassified as non-restricted as they were not restricted by state law or by contractual agreement with a carrier. The resulting impact of this change was a reduction in the balance reported on our Consolidated Balance Sheet as Restricted Cash and Investments and a corresponding increase in the balance reported as Cash and Cash Equivalents of approximately $33.0 million as of December 31, 2015 as compared to the corresponding account balances as of December 31, 2014 of $32.2 million which was reflected as Restricted Cash. While these referenced funds are not restricted, they do represent premium payments from customers to be paid to insurance carriers and this change in classification should not be viewed as a source of operating cash.



	For the Year Ended December 31,
(in thousands)	2016		2015		2014
Cash paid during the period for:
Interest	$	37,652	$	37,542	$	25,115
Income taxes	$	143,111	$	132,874	$	118,290

Brown & Brown’s significant non-cash investing and financing activities are summarized as follows:



	For the Year Ended December 31,
(in thousands)	2016		2015		2014
Other payables issued for purchased customer accounts	$	10,664	$	10,029	$	1,930
Estimated acquisition earn-out payables and related charges	$	4,463	$	36,899	$	33,229
Notes payable issued or assumed for purchased customer accounts	$	492	$	—	$	—
Notes received on the sale of fixed assets and customer accounts	$	22	$	7,755	$	6,340

NOTE 13· Commitments and Contingencies

Operating Leases

Brown & Brown leases facilities and certain items of office equipment under non-cancelable operating lease arrangements expiring on various dates through 2042. The facility leases generally contain renewal options and escalation clauses based upon increases in the lessors’ operating expenses and other charges. Brown & Brown anticipates that most of these leases will be renewed or replaced upon expiration. At December 31, 2016, the aggregate future minimum lease payments under all non-cancelable lease agreements were as follows:



(in thousands)
2017	$	42,727
2018	39,505
2019	34,277
2020	29,393
2021	22,222
Thereafter	45,036
Total minimum future lease payments	$	213,160

Rental expense in 2016, 2015 and 2014 for operating leases totaled $49.3 million, $46.0 million, and $49.0 million, respectively.

Legal Proceedings

The Company records losses for claims in excess of the limits of, or outside the coverage of, applicable insurance at the time and to the extent they are probable and estimable. In accordance with ASC Topic 450-Contingencies, the Company accrues anticipated costs of settlement, damages, losses for liability claims and, under certain conditions, costs of defense, based upon historical experience or to the extent specific losses are probable and estimable. Otherwise, the Company expenses these costs as incurred. If the best estimate of a probable loss is a range rather than a specific amount, the Company accrues the amount at the lower end of the range.

The Company’s accruals for legal matters that were probable and estimable were not material at December 31, 2016 and 2015. We continue to assess certain litigation and claims to determine the amounts, if any, that management believes will be paid as a result of such claims and litigation and, therefore, additional losses may be accrued and paid in the future, which could adversely impact the Company’s operating results, cash flows and overall liquidity. The Company maintains third-party insurance policies to provide coverage for certain legal claims, in an effort to mitigate its overall exposure to unanticipated claims or adverse decisions. However, as (i) one or more of the Company’s insurance carriers could take the position that portions of these claims are not covered by the Company’s insurance, (ii) to the extent that payments are made to resolve claims and lawsuits, applicable insurance policy limits are eroded and (iii) the claims and lawsuits relating to these matters are continuing to develop, it is possible that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by unfavorable resolutions of these matters. Based upon the AM Best Company ratings of these third-party insurers, management does not believe there is a substantial risk of an insurer’s material non-performance related to any current insured claims.

On the basis of current information, the availability of insurance and legal advice, in management’s opinion, the Company is not currently involved in any legal proceedings which, individually or in the aggregate, would have a material adverse effect on its financial condition, operations and/or cash flows.

NOTE 14· Quarterly Operating Results (Unaudited)

Quarterly operating results for 2016 and 2015 were as follows:



(in thousands, except per share data)	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
2016
Total revenues	$	424,173	$	446,518	$	462,274	$	433,664
Total expenses	$	321,624	$	337,441	$	345,302	$	338,763
Income before income taxes	$	102,549	$	109,077	$	116,972	$	94,901
Net income	$	62,070	$	66,250	$	71,545	$	57,626
Net income per share:
Basic	$	0.45	$	0.47	$	0.51	$	0.41
Diluted	$	0.44	$	0.47	$	0.50	$	0.41
2015
Total revenues	$	404,298	$	419,447	$	432,167	$	404,597
Total expenses	$	310,520	$	318,533	$	319,337	$	309,560
Income before income taxes	$	93,778	$	100,914	$	112,830	$	95,037
Net income	$	56,951	$	61,005	$	67,427	$	57,935
Net income per share:
Basic	$	0.40	$	0.43	$	0.48	$	0.41
Diluted	$	0.39	$	0.43	$	0.47	$	0.41

Quarterly financial results are affected by seasonal variations. The timing of the Company’s receipt of profit-sharing contingent commissions, policy renewals and acquisitions may cause revenues, expenses and net income to vary significantly between quarters.

NOTE 15· Segment Information

Brown & Brown’s business is divided into four reportable segments: (1) the Retail Segment, which provides a broad range of insurance products and services to commercial, public and quasi-public entities, and to professional and individual customers; (2) the National Programs Segment, which acts as a MGA, provides professional liability and related package products for certain professionals, a range of insurance products for individuals, flood coverage, and targeted products and services designated for specific industries, trade groups, governmental entities and market niches, all of which are delivered through nationwide networks of independent agents, and Brown & Brown retail agents; (3) the Wholesale Brokerage Segment, which markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers, as well as Brown & Brown retail agents; and (4) the Services Segment, which provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare benefits advocacy services and claims adjusting services.

Brown & Brown conducts all of its operations within the United States of America, except for a wholesale brokerage operation based in London, England, and retail operations in Bermuda and the Cayman Islands. These operations earned $14.5 million, $13.4 million and $13.3 million of total revenues for the years ended December 31, 2016, 2015 and 2014, respectively. Long-lived assets held outside of the United States during each of these three years were not material.

The accounting policies of the reportable segments are the same as those described in Note 1. The Company evaluates the performance of its segments based upon revenues and income before income taxes. Inter-segment revenues are eliminated.

Summarized financial information concerning the Company’s reportable segments is shown in the following table. The “Other” column includes any income and expenses not allocated to reportable segments and corporate-related items, including the intercompany interest expense charge to the reporting segment.

Segment results for prior periods have been recast to reflect the current year segmental structure. Certain reclassifications

have been made to the prior year amounts reported in this Annual Report on Form 10-K in order to conform to the current year

presentation.



	For the year ended December 31, 2016
(in thousands)	Retail		National Programs		Wholesale Brokerage		Services		Other			Total
Total revenues	$	917,406	$	448,516	$	243,103	$	156,365	$	1,239		$	1,766,629
Investment income	$	37	$	628	$	4	$	283	$	504		$	1,456
Amortization	$	43,447	$	27,920	$	10,801	$	4,485	$	10		$	86,663
Depreciation	$	6,191	$	7,868	$	1,975	$	1,881	$	3,088		$	21,003
Interest expense	$	38,216	$	45,738	$	3,976	$	4,950	$	(53,399	)	$	39,481
Income before income taxes	$	188,001	$	91,762	$	62,623	$	24,338	$	56,775		$	423,499
Total assets	$	3,854,393	$	2,711,378	$	1,108,829	$	371,645	$	(2,758,902	)	$	5,287,343
Capital expenditures	$	5,951	$	6,977	$	1,301	$	656	$	2,880		$	17,765



	For the year ended December 31, 2015
(in thousands)	Retail		National Programs		Wholesale Brokerage		Services		Other			Total
Total revenues	$	870,346	$	428,734	$	216,996	$	145,365	$	(932	)	$	1,660,509
Investment income	$	87	$	210	$	150	$	42	$	515		$	1,004
Amortization	$	45,145	$	28,479	$	9,739	$	4,019	$	39		$	87,421
Depreciation	$	6,558	$	7,250	$	2,142	$	1,988	$	2,952		$	20,890
Interest expense	$	41,036	$	55,705	$	891	$	5,970	$	(64,354	)	$	39,248
Income before income taxes	$	181,938	$	67,673	$	64,708	$	19,713	$	68,527		$	402,559
Total assets	$	3,507,476	$	2,505,752	$	895,782	$	285,459	$	(2,189,990	)	$	5,004,479
Capital expenditures	$	6,797	$	6,001	$	3,084	$	1,088	$	1,405		$	18,375



	For the year ended December 31, 2014
(in thousands)	Retail		National Programs		Wholesale Brokerage		Services		Other			Total
Total revenues	$	823,686	$	404,239	$	211,911	$	136,558	$	(598	)	$	1,575,796
Investment income	$	67	$	164	$	26	$	3	$	487		$	747
Amortization	$	42,935	$	25,129	$	10,703	$	4,135	$	39		$	82,941
Depreciation	$	6,449	$	7,805	$	2,470	$	2,213	$	1,958		$	20,895
Interest expense	$	43,502	$	49,663	$	1,294	$	7,678	$	(73,729	)	$	28,408
Income before income taxes	$	157,491	$	73,178	$	8,276	$	17,870	$	82,934		$	339,749
Total assets	$	3,229,484	$	2,455,749	$	857,804	$	296,034	$	(1,892,511	)	$	4,946,560
Capital expenditures	$	6,873	$	14,133	$	1,526	$	1,210	$	1,181		$	24,923

NOTE 16· Reinsurance

Although the reinsurers are liable to the Company for amounts reinsured, our subsidiary, WNFIC remains primarily liable to its policyholders for the full amount of the policies written whether or not the reinsurers meet their obligations to the Company when they become due. The effects of reinsurance on premiums written and earned at December 31 are as follows:



	2016				2015
(in thousands)	Written		Earned		Written		Earned
Direct premiums	$	591,142	$	592,123	$	599,828	$	610,753
Assumed premiums	—		—		—		18
Ceded premiums	591,124		592,105		599,807		610,750
Net premiums	$	18	$	18	$	21	$	21

All premiums written by WNFIC under the National Flood Insurance Program are 100% ceded to FEMA, for which WNFIC received a 30.9% expense allowance from January 1, 2016 through December 31, 2016. As of December 31, 2016 and 2015, the Company ceded $589.5 million and $598.4 million of written premiums, respectively.

Effective April 1, 2014, WNFIC is also a party to a quota share agreement whereby it cedes 100% of its gross excess flood premiums, excluding fees, to Arch Reinsurance Company and receives a 30.5% commission. WNFIC ceded $1.6 million and $1.4 million for the years ended December 31, 2016 and 2015. No loss data exists on this agreement.

WNFIC also ceded 100%, of the Homeowners, Private Passenger Auto Liability, and Other Liability Occurrence to Stillwater Insurance Company, formerly known as Fidelity National Insurance Company. This business is in runoff. Therefore, only loss data still exists on this business. As of December 31, 2016, ceded unpaid losses and loss adjustment expenses for Homeowners, Private Passenger Auto Liability and Other Liability Occurrence was $5,262, $0 and $95, respectively. There was no incurred but not reported balance for Homeowners, Private Passenger Auto Liability and Other Liability Occurrence.

As of December 31, 2016 the Consolidated Balance Sheet contained Reinsurance recoverable of $78.1 million and Prepaid reinsurance premiums of $308.7 million. As of December 31, 2015 the Consolidated Balance Sheet contained reinsurance recoverable of $32.0 million and prepaid reinsurance premiums of $309.6 million. There was no net activity in the reserve for losses and loss adjustment expense for the years ended December 31, 2016 and 2015, as WNFIC’s direct premiums written were 100% ceded to two reinsurers. The balance of the reserve for losses and loss adjustment expense, excluding related reinsurance recoverable was $78.1 million as of December 31, 2016 and $32.0 million as of December 31, 2015.

NOTE 17· Statutory Financial Information

WNFIC maintains capital in excess of minimum statutory amount of $7.5 million as required by regulatory authorities. The statutory capital and surplus of WNFIC was $23.5 million as of December 31, 2016 and $15.1 million as of December 31, 2015. As of December 31, 2016 and 2015, WNFIC generated statutory net income of $8.2 million and $4.1 million, respectively.

NOTE 18· Subsidiary Dividend Restrictions

Under the insurance regulations of Texas, where WNFIC in incorporated, the maximum amount of ordinary dividends that WNFIC can pay to shareholders in a rolling twelve month period is limited to the greater of 10% of statutory adjusted capital and surplus as shown on WNFIC’s last annual statement on file with the superintendent of the Texas Department of Insurance or 100% of adjusted net income. There was no dividend payout in 2016 and the maximum dividend payout that may be made in 2017 without prior approval is $8.2 million.

NOTE 19· Shareholders’ Equity

On July 18, 2014, the Company’s Board of Directors authorized the repurchase of up to $200.0 million of its shares of common stock. This was in addition to the $25.0 million that was authorized in the first quarter and executed in the second quarter of 2014. On September 2, 2014, the Company entered into an accelerated share repurchase agreement (“ASR”) with an investment bank to purchase an aggregate $50.0 million of the Company’s common stock. The total number of shares purchased under the ASR of 1,539,760 was determined upon settlement of the final delivery and was based upon the Company’s volume weighted-average price per its common share over the ASR period less a discount.

On March 5, 2015, the Company entered into an ASR with an investment bank to purchase an aggregate $100.0 million of the Company’s common stock. As part of the ASR, the Company received an initial delivery of 2,667,992 shares of the Company’s common stock with a fair market value of approximately $85.0 million. On August 6, 2015, the Company was notified by its investment bank that the March 5, 2015 ASR agreement between the Company and the investment bank had been completed in accordance with the terms of the agreement.

The investment bank delivered to the Company an additional 391,637 shares of the Company’s common stock for a total of 3,059,629 shares repurchased under the agreement. The delivery of the remaining 391,637 shares occurred on August 11, 2015. At the conclusion of this contract the Company had authorization for $50.0 million of share repurchases under the original Board authorization.

On July 20, 2015, the Company’s Board of Directors authorized the repurchase of up to an additional $400.0 million of the Company’s outstanding common stock. With this authorization, the Company had total available approval to repurchase up to $450.0 million, in the aggregate, of the Company’s outstanding common stock.

On November 11, 2015, the Company entered into a third ASR with an investment bank to purchase an aggregate $75.0 million of the Company’s common stock. The Company received an initial delivery of 1,985,981 shares of the Company’s common stock with a fair market value of approximately $63.8 million. On January 6, 2016 this agreement was completed by the investment bank with the delivery of 363,209 shares of the Company’s common stock. After completion of this third ASR, the Company has approval to repurchase up to $375.0 million, in the aggregate, of the Company’s outstanding common stock.

Between October 25, 2016 and November 4, 2016, the Company made share repurchases in the open market in total of 209,618 shares at a total cost of $7.7 million. After completing these open market share repurchases, the Company’s outstanding Board approved share repurchase authorization is $367.3 million.

Under the authorization from the Company’s Board of Directors, shares may be purchased from time to time, at the Company’s discretion and subject to the availability of stock, market conditions, the trading price of the stock, alternative uses for capital, the Company’s financial performance and other potential factors. These purchases may be carried out through open market purchases, block trades, accelerated share repurchase plans of up to $100.0 million each (unless otherwise approved by the Board of Directors), negotiated private transactions or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934.

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 accompanying consolidated balance sheets of Brown & Brown, Inc. and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits 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 the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Brown & Brown, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting.




/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants

Miami, Florida
February 24, 2017

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