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, 2017, 2016 and 2015	44
Consolidated Balance Sheets as of December 31, 2017 and 2016	45
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017, 2016 and 2015	46
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015	47
Notes to Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015	48
Note 1: Summary of Significant Accounting Policies	48
Note 2: Business Combinations	53
Note 3: Goodwill	59
Note 4: Amortizable Intangible Assets	59
Note 5: Investments	59
Note 6: Fixed Assets	61
Note 7: Accrued Expenses and Other Liabilities	62
Note 8: Long-Term Debt	62
Note 9: Income Taxes	63
Note 10: Employee Savings Plan	66
Note 11: Stock-Based Compensation	66
Note 12: Supplemental Disclosures of Cash Flow Information	71
Note 13: Commitments and Contingencies	71
Note 14: Quarterly Operating Results (Unaudited)	72
Note 15: Segment Information	72
Note 16: Reinsurance	74
Note 17: Statutory Financial Information	74
Note 18: Subsidiary Dividend Restrictions	75
Note 19: Shareholders’ Equity	75
Note 20: Subsequent Event	75

Report of Independent Registered Public Accounting Firm	76

BROWN & BROWN, INC.

CONSOLIDATED STATEMENTS OF INCOME



(in thousands, except per share data)	For the Year Ended December 31,
	2017			2016			2015
REVENUES
Commissions and fees	$	1,857,270		$	1,762,787		$	1,656,951
Investment income	1,626			1,456			1,004
Other income, net	22,451			2,386			2,554
Total revenues	1,881,347			1,766,629			1,660,509
EXPENSES
Employee compensation and benefits	994,652			925,217			856,952
Other operating expenses	283,470			262,872			251,055
(Gain)/loss on disposal	(2,157		)	(1,291		)	(619		)
Amortization	85,446			86,663			87,421
Depreciation	22,698			21,003			20,890
Interest	38,316			39,481			39,248
Change in estimated acquisition earn-out payables	9,200			9,185			3,003
Total expenses	1,431,625			1,343,130			1,257,950
Income before income taxes	449,722			423,499			402,559
Income taxes	50,092			166,008			159,241
Net income	$	399,630		$	257,491		$	243,318
Net income per share:
Basic	$	2.86		$	1.84		$	1.72
Diluted	$	2.81		$	1.82		$	1.70
Dividends declared per share	$	0.56		$	0.50		$	0.45

See accompanying notes to Consolidated Financial Statements.

BROWN & BROWN, INC.

CONSOLIDATED BALANCE SHEETS



(in thousands, except per share data)	December 31, 2017			December 31, 2016
ASSETS
Current Assets:
Cash and cash equivalents	$	573,383		$	515,646
Restricted cash and investments	250,705			265,637
Short-term investments	24,965			15,048
Premiums, commissions and fees receivable	546,402			502,482
Reinsurance recoverable	477,820			78,083
Prepaid reinsurance premiums	321,017			308,661
Other current assets	47,864			50,571
Total current assets	2,242,156			1,736,128
Fixed assets, net	77,086			75,807
Goodwill	2,716,079			2,675,402
Amortizable intangible assets, net	641,005			707,454
Investments	13,949			23,048
Other assets	57,275			44,895
Total assets	$	5,747,550		$	5,262,734
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Premiums payable to insurance companies	$	685,163		$	647,564
Losses and loss adjustment reserve	476,721			78,083
Unearned premiums	321,017			308,661
Premium deposits and credits due customers	91,648			83,765
Accounts payable	64,177			69,595
Accrued expenses and other liabilities	228,748			201,989
Current portion of long-term debt	120,000			55,500
Total current liabilities	1,987,474			1,445,157
Long-term debt less unamortized discount and debt issuance costs	856,141			1,018,372
Deferred income taxes, net	256,185			357,686
Other liabilities	65,051			81,308
Shareholders’ Equity:
Common stock, par value $0.10 per share; authorized 280,000 shares; issued 148,824 shares and outstanding 138,105 shares at 2017, issued 148,107 shares and outstanding 140,104 shares at 2016	14,882			14,811
Additional paid-in capital	497,540			468,443
Treasury stock, at cost 10,719 and 8,003 shares at 2017 and 2016, respectively	(386,322		)	(257,683		)
Retained earnings	2,456,599			2,134,640
Total shareholders’ equity	2,582,699			2,360,211
Total liabilities and shareholders’ equity	$	5,747,550		$	5,262,734

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, 2015	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
Net income										399,630			399,630
Net unrealized holding (loss) gain on available-for-sale securities				(47		)				41			(6		)
Common stock issued for employee stock benefit plans	706	70		39,895									39,965
Purchase of treasury stock				(11,250		)	(128,639		)				(139,889		)
Common stock issued to directors	11	1		499									500
Cash dividends paid ($0.56 per share)										(77,712		)	(77,712		)
Balance at December 31, 2017	148,824	$	14,882	$	497,540		$	(386,322	)	$	2,456,599		$	2,582,699

See accompanying notes to Consolidated Financial Statements.

BROWN & BROWN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Year Ended December 31,
(in thousands)	2017			2016			2015
Cash flows from operating activities:
Net income	$	399,630		$	257,491		$	243,318
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization	85,446			86,663			87,421
Depreciation	22,698			21,003			20,890
Non-cash stock-based compensation	30,631			16,052			15,513
Change in estimated acquisition earn-out payables	9,200			9,185			3,003
Deferred income taxes	(102,183		)	18,163			22,696
Amortization of debt discount	158			165			157
Amortization and disposal of deferred financing costs	1,682			1,597			—
Accretion of discounts and premiums, investments	22			39			—
Income tax benefit from exercise of shares from the stock benefit plans	—			(7,346		)	(3,276		)
Loss/(gain) on sales of investments, fixed assets and customer accounts	(1,841		)	596			(107		)
Payments on acquisition earn-outs in excess of original estimated payables	(14,501		)	(3,904		)	(11,383		)
Changes in operating assets and liabilities, net of effect from acquisitions and divestitures:
Premiums, commissions and fees receivable (increase)	(43,306		)	(63,550		)	(7,163		)
Reinsurance recoverables (increase)	(399,737		)	(46,115		)	(18,940		)
Prepaid reinsurance premiums (increase) decrease	(12,356		)	982			10,943
Other assets (increase)	(9,747		)	(4,718		)	(5,318		)
Premiums payable to insurance companies decrease	37,380			66,084			542
Premium deposits and credits due customers increase (decrease)	7,750			527			(2,973		)
Losses and loss adjustment reserve increase	398,638			46,115			18,940
Unearned premiums increase (decrease)	12,356			(982		)	(10,943		)
Accounts payable increase	26,798			30,174			34,206
Accrued expenses and other liabilities increase	25,509			8,670			8,204
Other liabilities (decrease)	(32,252		)	(25,849		)	(23,898		)
Net cash provided by operating activities	441,975			411,042			381,832
Cash flows from investing activities:
Additions to fixed assets	(24,192		)	(17,765		)	(18,375		)
Payments for businesses acquired, net of cash acquired	(41,471		)	(122,622		)	(136,000		)
Proceeds from sales of fixed assets and customer accounts	4,094			4,957			10,576
Purchases of investments	(10,665		)	(25,872		)	(22,766		)
Proceeds from sales of investments	9,644			18,890			21,928
Net cash used in investing activities	(62,590		)	(142,412		)	(144,637		)
Cash flows from financing activities:
Payments on acquisition earn-outs	(29,265		)	(24,309		)	(25,415		)
Payments on long-term debt	(96,750		)	(73,125		)	(45,625		)
Deferred debt issuance costs	(2,821		)	—			—
Income tax benefit from exercise of shares from the stock benefit plans	—			7,346			3,276
Issuances of common stock for employee stock benefit plans	17,422			15,983			15,890
Repurchase of stock benefit plan shares for employees to fund tax withholdings	(7,565		)	(8,495		)	(2,857		)
Purchase of treasury stock	(128,639		)	(18,908		)	(163,750		)
Settlement (prepayment) of accelerated share repurchase program	(11,250		)	11,250			(11,250		)
Cash dividends paid	(77,712		)	(70,262		)	(64,108		)
Net cash used in by financing activities	(336,580		)	(160,520		)	(293,839		)
Net increase (decrease) in cash and cash equivalents inclusive of restricted cash	42,805			108,110			(56,644		)
Cash and cash equivalents inclusive of restricted cash at beginning of period	781,283			673,173			729,817
Cash and cash equivalents inclusive of restricted cash at end of period	$	824,088		$	781,283		$	673,173

See accompanying notes to Consolidated Financial Statements. Refer to Note 12 for reconciliation of cash and cash equivalents inclusive of restricted cash.

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, casualty and employee benefits areas. Brown & Brown’s business is divided into four reportable segments: the Retail Segment provides a broad range of insurance products and services to commercial, public and quasi-public entities, 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, including 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. ASU 2016-18 is effective for periods beginning after December 15, 2017. However, the Company elected to early adopt for the reporting period beginning January 1, 2017 under the full retrospective approach for all periods presented. With the adoption of ASU 2016-18, the change in restricted cash is no longer reflected as a change in operating assets and liabilities, and the Statement of Cash Flows details the changes in the balance of cash and cash equivalents inclusive of restricted cash. Net cash provided by operating activities for the years ended December 31, 2015 and 2016 were previously reported as $411.8 million and $375.2 million, respectively. With the retrospective adoption, the net cash provided by operating activities for the years ended December 31, 2015 and 2016 is now reported as $381.8 million and $411.0 million, respectively. The Company reflects cash collected from customers that is payable to insurance companies as restricted cash if segregation of this cash is required by the state of domicile for the office conducting this transaction or if required by contract with the relevant insurance company providing coverage. Cash collected from customers that is payable to insurance companies is reported in cash and cash equivalents if no such restriction is required.

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 is adopting this change effective January 1, 2018 and has evaluated the impact of ASU 2016-15 determining that there is no impact on the Company’s Statement of Cash Flows. 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 adopted the guidance on January 1, 2017, as required. Prior periods have not been adjusted, as the guidance was adopted prospectively. The principal impact is that the tax benefit or expense from stock compensation is now presented in the income tax line of the Statement of Income, whereas the prior treatment was to present this amount as a component of equity on the Balance Sheet. In addition, the tax benefit or expense is now presented as activity in Cash Flow from Operating Activity, rather than the prior presentation as Cash Flow from Financing Activity in the Statement of Cash Flows. The Company also continues 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 adopting ASU 2016-08 is 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 of the 2016 10-K, the undiscounted contractual cash payments remaining on leased properties was $213.2 million as of December 31, 2016 and is $210.4 million as of December 31, 2017 as detailed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and Note 13 “Commitments and Contingencies.”

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 adopted the guidance on January 1, 2017, as required. As a result, the Company retrospectively applied the guidance to the 2016 balance sheet by reclassifying $24.6 million from deferred income taxes (asset) to deferred income taxes, net (liability) on the Condensed Consolidated Balance Sheet. This reclassification occurred prior to the passage of the Tax Cuts and Jobs Act of 2017, which had a material impact on the value of deferred tax items. See Note 9 “Income Taxes” for more information.

In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“Topic 606”), which provides guidance for revenue recognition. Topic 606 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. It supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. The standard’s core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. 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 a contract, the use of estimates is required to allocate the transaction price to each separate performance obligation.

Historically, approximately 70% of the Company’s commissions and fees are in the form of commissions paid by insurance carriers. These commissions are earned upon the effective date of bound coverage, as no significant performance obligation remains after coverage is bound. The following areas are impacted by the adoption of Topic 606:

Installment billing - Prior to the adoption of Topic 606, commission revenues related to installment billings were recognized on the latter of the policy effective date (as indicated in the policy) or the date that the premium was billed to the client (as indicated on the premium invoice), with the exception of our Arrowhead businesses, which follow a policy of recognizing these revenues on the latter of the policy effective date or processed date into our systems, regardless of the billing arrangement. As a result of the adoption of Topic 606, revenue associated with the issuance of policies will be recognized upon the effective date of the associated policy, which means that commission revenues billed on an installment basis will be now recognized earlier than they had been previously resulting in revenue will accrued based upon the completion of the performance obligation and thus creating a current asset for the unbilled revenue until such time as an invoice is generated, typically not to exceed twelve months. The Company does not expect the overall impact of these changes to be significant on a full-year basis, but the timing of recognizing revenue will be impacted among quarters when compared to prior years.

Contingent commissions - Prior to the adoption of Topic 606, revenue that was not fixed and determinable because a contingency exists was not recognized until the contingency was resolved. Under Topic 606, the Company must use its judgment to estimate the amount of consideration that will be received such that a significant reversal of revenue is not probable. Contingent commissions represent a form of variable consideration associated with the same performance obligation, which is the placement of coverage, for which we earn core commissions. In connection with the new standard, contingent commissions will be estimated with an appropriate constraint applied and accrued relative to the recognition of the corresponding core commissions. The resulting effect on the timing of recognition of contingent commissions will more closely follow a similar pattern as our core commissions with true-ups recognized when payments are received or as additional information that affects the estimate becomes available. Contingent commissions have averaged approximately 3.6% of the previous year’s total commissions and fees over the last three years and have primarily been received in the first and second quarters of the year.

Approximately 30% of the Company’s commissions and fees is in the form of fees, which are predominantly in our National Programs and Services Segments, and to a lesser extent in the large accounts business within our Retail Segment, where we receive fees in lieu of a commission. In accordance with Topic 606, fee revenue from certain agreements will be recognized in earlier periods and others in later periods

as compared to our current accounting treatment. The Company does not expect the overall impact of these changes to be significant on a full-year basis, but the timing of recognizing revenue will be impacted among quarters when compared to prior years.

Additionally, the Company has evaluated ASC Topic 340 - Other Assets and Deferred Cost (“ASC 340”) which requires companies to defer certain incremental costs to obtain customer contracts, and certain costs to fulfill customer contracts.

Incremental cost to obtain - the adoption of ASC 340 will result in the Company deferring certain cost to obtain customer contracts primarily as they relate to commission based compensation plans in the Retail Segment, in which the Company pays an incremental amount of compensation on new business in the first year of the contract. These incremental costs will be deferred and amortized over a 15-year period, which is consistent with the analysis performed on acquired customer accounts and referenced in Note 4 to the Company’s financial statements.

Cost to fulfill - the adoption of ASC 340 will result in the Company deferring certain costs to fulfill a contract and recognize these costs as the associated performance obligations are fulfilled. In order for contract fulfillment costs to be deferred under ASC 340, the costs must (1) relate directly to a specific contract or anticipated contract, (2) generate or enhance resources that the Company will use in satisfying its obligations under the contract, and (3) be expected to be recovered through sufficient net cash flows from the contract. The Company does not expect the overall impact of these changes to be significant on a full-year basis, but the timing of recognizing these expenses will be impacted among quarters to better align with the associated revenue.

Topic 606 is effective for the Company beginning January 1, 2018. Entities are permitted to adopt the guidance under one of the following methods: the “full retrospective” method, which applies the guidance to each period presented (prior years restated), or the “modified retrospective” method, in which the guidance is only applied to the year of adoption, with the cumulative effect of initially applying the guidance recognized as an adjustment to retained earnings. The Company has elected to follow the modified retrospective method applied to contracts that are not completed as of the date of adoption. The estimated cumulative impact of adopting the standard on January 1, 2018 is an increase in stockholders’ equity of between $70.0 million and $110.0 million.

In connection with the implementation of this standard, we expect to modify, and in some instances institute additional accounting procedures, processes and internal controls. Given the relative expected impacts of this standard to our revenue streams, we do not expect that these modifications and additions will materially change our internal controls over financial reporting.

Principles of Consolidation

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

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

Revenue Recognition

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 were 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 the authorized commissions, remits the net premiums to the appropriate insurance company or companies. Accordingly, as reported in the Consolidated Balance Sheets, “premiums” are receivable from insureds. Unremitted net insurance premiums are held in a fiduciary capacity until 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 3 to 15 years. Leasehold improvements are amortized on the straight-line method over the shorter of the useful life of the improvement or the term of the related lease.

Goodwill and Amortizable Intangible Assets

All of our business combinations initiated after June 30, 2001 are accounted for using the acquisition method. Acquisition purchase prices are typically based upon a multiple of average annual operating profit earned over a period of 3 years within a minimum and maximum price range. The recorded purchase prices for all acquisitions consummated after January 1, 2009 include an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations are recorded in the Consolidated Statement of Income when incurred.

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

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

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, 2017 and determined that the fair value of goodwill significantly exceeded the carrying value of such assets. In addition, as of December 31, 2017, 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, 2017, 2016 and 2015.

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)	2017			2016			2015
Net income	$	399,630		$	257,491		$	243,318
Net income attributable to unvested awarded performance stock	(9,746		)	(6,705		)	(5,695		)
Net income attributable to common shares	$	389,884		$	250,786		$	237,623
Weighted-average number of common shares outstanding – basic	139,697			139,779			141,113
Less unvested awarded performance stock included in weighted-average number of common shares outstanding – basic	(3,407		)	(3,640		)	(3,303		)
Weighted-average number of common shares outstanding for basic earnings per common share	136,290			136,139			137,810
Dilutive effect of stock options	2,503			1,665			2,302
Weighted-average number of shares outstanding – diluted	138,793			137,804			140,112
Net income per share:
Basic	$	2.86		$	1.84		$	1.72
Diluted	$	2.81		$	1.82		$	1.70

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, 2017 and 2016, 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, 2017 and 2016 as our fixed-rate borrowings of $598.9 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. Of the $598.9 million, $100.0 million is related to short-term notes which approximates the carrying value due to the proximity to maturity. The estimated fair value of the $385.0 million remaining on the term loan under our Amended and Restated 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 has granted stock options and grants non-vested stock awards to its employees and officers and fully vested stock awards to directors. The Company uses the modified-prospective method to account for share-based payments. Under the modified-prospective method, compensation cost is recognized for all share-based payments granted on or after January 1, 2006 and for all awards granted to

employees prior to January 1, 2006 that remained unvested on that date. The Company uses the alternative-transition method to account for the income tax effects of payments made related to stock-based compensation.

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

Reinsurance

The Company protects itself from claims-related losses by reinsuring all claims risk exposure. The only line of insurance 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 are 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, 2017, the Company acquired the assets and assumed certain liabilities of eleven insurance intermediaries and one book of business (customer accounts). Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last 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, 2017, several adjustments were made within the permitted measurement period that resulted in an increase in the aggregate purchase price of the affected acquisitions of $1.5 million relating to the assumption of certain liabilities. These measurement period adjustments have been reflected as current period adjustments for the year ended December 31, 2017 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 $41.5 million and $124.7 million in the years ended December 31, 2017 and 2016, respectively. We completed eleven acquisitions (excluding book of business purchases) during the year ended December 31, 2017. We completed eight acquisitions (excluding book of business purchases) during the year ended December 31, 2016.

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. During the measurement periods, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. These adjustments are made in the period in which the amounts are determined and the current period income effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date.



(in thousands)
Name	Business Segment	Effective Date of Acquisition	Cash Paid		Other Payable		Recorded Earn-Out Payable		Net Assets Acquired		Maximum Potential Earn- Out Payable
Other	Various	Various	$	41,471	$	11,708	$	6,921	$	60,100	$	27,451
Total			$	41,471	$	11,708	$	6,921	$	60,100	$	27,451

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



(in thousands)	Total
Other current assets	$	601
Fixed assets	69
Goodwill	42,172
Purchased customer accounts	18,738
Non-compete agreements	721
Total assets acquired	62,301
Other current liabilities	(1,512		)
Deferred income tax, net	(689		)
Total liabilities assumed	(2,201		)
Net assets acquired	$	60,100

The weighted-average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15.0 years; and non-compete agreements, 5.0 years.

Goodwill of $42.2 million was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $33.1 million, $7.2 million, $1.2 million and $0.7 million, respectively. Of the total goodwill of $42.2 million, $35.3 million is currently deductible for income tax purposes. The remaining $6.9 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

For the acquisitions completed during 2017, 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, 2017 included in the Consolidated Statement of Income for the year ended December 31, 2017 were $7.8 million. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through December 31, 2017 included in the Consolidated Statement of Income for the year ended December 31, 2017 was $2.4 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)	2017		2016
Total revenues	$	1,891,701	$	1,784,776
Income before income taxes	$	453,397	$	429,490
Net income	$	401,908	$	261,133
Net income per share:
Basic	$	2.88	$	1.87
Diluted	$	2.83	$	1.85
Weighted-average number of shares outstanding:
Basic	136,290		136,139
Diluted	138,793		137,804

Acquisitions in 2016

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 ASC 805. Such adjustments are presented in the “Other” category within the following two tables.

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.



(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 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
Total revenues	$	1,688,297
Income before income taxes	$	411,497
Net income	$	248,720
Net income per share:
Basic	$	1.76
Diluted	$	1.73
Weighted-average number of shares outstanding:
Basic	137,810
Diluted	140,112

As of December 31, 2017, the maximum future contingency payments related to all acquisitions totaled $88.4 million, all of which relates to acquisitions consummated subsequent to January 1, 2009.

ASC 805 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, 2017, 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, 2017, 2016 and 2015 were as follows:



	For the Year Ended December 31,
(in thousands)	2017			2016			2015
Balance as of the beginning of the period	$	63,821		$	78,387		$	75,283
Additions to estimated acquisition earn-out payables	6,920			4,462			36,899
Payments for estimated acquisition earn-out payables	(43,766		)	(28,213		)	(36,798		)
Subtotal	26,975			54,636			75,384
Net change in earnings from estimated acquisition earn-out payables:
Change in fair value on estimated acquisition earn-out payables	6,874			6,338			13
Interest expense accretion	2,326			2,847			2,990
Net change in earnings from estimated acquisition earn-out payables	9,200			9,185			3,003
Balance as of December 31,	$	36,175		$	63,821		$	78,387

Of the $36.2 million of estimated acquisition earn-out payables as of December 31, 2017, $25.1 million was recorded as accounts payable, and $11.1 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 of the acquisition and may therefore differ from previously reported amounts. Of the $63.8 million of 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. Of the $78.4 million of 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 another 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, 2016	$	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
Goodwill of acquired businesses	33,076			7,178			1,229		689		42,172
Goodwill disposed of relating to sales of businesses	(1,495		)	—			—		—		(1,495		)
Balance as of December 31, 2017	$	1,386,248		$	908,472		$	286,098	$	135,261	$	2,716,079

NOTE 4· Amortizable Intangible Assets

Amortizable intangible assets at December 31, 2017 and 2016 consisted of the following:



	December 31, 2017								December 31, 2016
(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	$	1,464,274	$	(824,584	)	$	639,690	15.0	$	1,447,680	$	(741,770	)	$	705,910	15.0
Non-compete agreements	30,287		(28,972		)	1,315		6.8	29,668		(28,124		)	1,544		6.8
Total	$	1,494,561	$	(853,556	)	$	641,005		$	1,477,348	$	(769,894	)	$	707,454


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

Amortization expense for amortizable intangible assets for the years ending December 31, 2018, 2019, 2020, 2021 and 2022 is estimated to be $81.0 million, $76.5 million, $69.1 million, $65.9 million and $61.4 million, respectively.

NOTE 5· Investments

At December 31, 2017, 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 Municipalities	$	29,970	$	—	$	(206	)	$	29,764
Corporate debt	1,072		12		—			1,084
Total	$	31,042	$	12	$	(206	)	$	30,848

At December 31, 2017, the Company held $30.0 million in fixed income securities composed of U.S Treasury securities, securities issued by U.S. Government agencies and Municipalities, and $1.1 million issued by corporations with investment-grade ratings. Of the total, $16.9 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 $8.1 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, 2017:



(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 Municipalities	$	17,919	$	(157	)	$	11,845	$	(49	)	$	29,764	$	(206	)
Corporate debt	400		—			—		—			400		—
Total	$	18,319	$	(157	)	$	11,845	$	(49	)	$	30,164	$	(206	)

The unrealized losses from corporate issuers were caused by interest rate increases. At December 31, 2017, the Company had 27 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, 2017.

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 Municipalities	$	26,280	$	11	$	(59	)	$	26,232
Corporate debt	2,358		13		(1		)	2,370
Total	$	28,638	$	24	$	(60	)	$	28,602

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 Municipalities	$	14,663	$	(59	)	$	—	$	—	$	14,663	$	(59	)
Corporate debt	1,001		(1		)	—		—		1,001		(1		)
Total	$	15,664	$	(60	)	$	—	$	—	$	15,664	$	(60	)

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, 2016, the Company had 20 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, 2016.

The amortized cost and estimated fair value of the fixed maturity securities at December 31, 2017 by contractual maturity are set forth below:



(in thousands)	Amortized Cost		Fair Value
Years to maturity:
Due in one year or less	$	16,934	$	16,899
Due after one year through five years	13,876		13,708
Due after five years through ten years	232		241
Total	$	31,042	$	30,848

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 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 $5.8 million. This along with maturing time deposits yielded total cash proceeds from the sale of investments of $9.6 million in the period of January 1, 2017 to December 31, 2017. These proceeds were used to purchase additional fixed maturity securities. The gains and losses realized on those sales for the period from January 1, 2017 to December 31, 2017 were insignificant.

Proceeds from the sales and maturity of the Company’s investment in fixed maturity securities were $6.0 million for the year ended December 31, 2016. 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.

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, 2017, investments with a fair value of approximately $4.1 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)	2017			2016
Furniture, fixtures and equipment	$	190,784		$	177,823
Leasehold improvements	35,481			33,137
Land, buildings and improvements	7,643			3,375
Total cost	233,908			214,335
Less accumulated depreciation and amortization	(156,822		)	(138,528		)
Total	$	77,086		$	75,807

Depreciation and amortization expense for fixed assets amounted to $22.7 million in 2017, $21.0 million in 2016 and $20.9 million in 2015.

NOTE 7· Accrued Expenses and Other Liabilities

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



(in thousands)	2017		2016
Accrued incentive compensation	$	106,923	$	82,438
Accrued compensation and benefits	40,540		45,771
Accrued rent and vendor expenses	30,616		28,669
Deferred revenue	21,921		17,377
Reserve for policy cancellations	11,048		9,567
Accrued interest	6,749		6,441
Other	10,951		11,726
Total	$	228,748	$	201,989

NOTE 8· Long-Term Debt

Long-term debt at December 31, 2017 and 2016 consisted of the following:



(in thousands)	December 31, 2017			December 31, 2016
Current portion of long-term debt:
Current portion of 5-year term loan facility expires 2019	$	20,000		$	55,000
4.500% senior notes, Series E, quarterly interest payments, balloon due 2018	100,000			—
Short-term promissory note	—			500
Total current portion of long-term debt	120,000			55,500
Long-term debt:
Note agreements:
4.500% senior notes, Series E, quarterly interest payments, balloon due 2018	—			100,000
4.200% senior notes, semi-annual interest payments, balloon due 2024	498,943			498,785
Total notes	498,943			598,785
Credit agreements:
5-year term loan facility, periodic interest and principal payments, LIBOR plus up to 1.750%, expires June 28, 2022	365,000			426,250
5-year revolving loan facility, periodic interest payments, currently LIBOR plus up to 1.500%, plus commitment fees up to 0.250%, expires June 28, 2022	—			—
Total credit agreements	365,000			426,250
Debt issuance costs (contra)	(7,802		)	(6,663		)
Total long-term debt less unamortized discount and debt issuance costs	856,141			1,018,372
Current portion of long-term debt	120,000			55,500
Total debt	$	976,141		$	1,073,872

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, 2017, there was an outstanding debt balance issued under the provisions of the Master Agreement of $100.0 million.

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.

On June 28, 2017, the Company entered into an amended and restated credit agreement (the “Amended and Restated Credit Agreement”) with the lenders named therein, JPMorgan Chase Bank, N.A. as administrative agent and certain other banks as co-syndication agents and co-documentation agents. The Amended and Restated Credit Agreement amended and restated the credit agreement dated April 17, 2014, among such parties (the “Original Credit Agreement”). The Amended and Restated Credit Agreement extends the applicable maturity date of the existing revolving credit facility (the “Facility”) of $800.0 million to June 28, 2022 and re-evidences unsecured term loans at $400.0 million, while also extending the applicable maturity date to June 28, 2022. The quarterly term loan principal amortization schedule was reset. At the time of the execution of the Amended and Restated Credit Agreement, $67.5 million of principal from the original unsecured term loans was repaid using operating cash balances, and the Company added an additional $2.8 million in debt issuance costs related to the Facility to the Consolidated Balance Sheet. The Company also expensed to the Consolidated Statements of Income $0.2 million of debt issuance costs related to the Original Credit Agreement due to certain lenders exiting prior to execution of the Amended and Restated Credit Agreement. The Company also carried forward $1.6 million on the Consolidated Balance Sheet the remaining unamortized portion of the Original Credit Agreement debt issuance costs, which will be amortized over the term of the Amended and Restated Credit Agreement. On December 31, 2017, the Company made a scheduled principal payment of $5.0 million per the terms of the Amended and Restated Credit Agreement. As of December 31, 2017, there was an outstanding debt balance issued under the term loan of the Amended and Restated Credit Agreement of $385.0 million with no borrowings outstanding against the Facility. Per the terms of the Amended and Restated Credit Agreement, a scheduled principal payment of $5.0 million is due March 31, 2018.

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, 2017 and 2016, there was an outstanding debt balance of $500.0 million exclusive of the associated discount balance.

In conjunction with the acquisition of Social Security Advocates for the Disabled LLC (“SSAD”) effective February 1, 2016, the company agreed to a $0.5 million promissory note incurred as a payment to the sellers and payable after the one-year anniversary of the acquisition. The note had a nominal rate of interest 0.81%. On March 10, 2017, the promissory note was settled, plus any outstanding accrued interest, using cash.

The Master Agreement and the Amended and Restated Credit Agreement 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, 2017 and 2016.

The 30-day Adjusted LIBOR Rate as of December 31, 2017 was 1.625%.

Interest paid in 2017, 2016 and 2015 was $36.2 million, $37.7 million, and $37.5 million, respectively.

At December 31, 2017, maturities of long-term debt were $120.0 million in 2018, $30.0 million in 2019, $40.0 million in 2020, $40.0 million in 2021, $255.0 million in 2022 and $500.0 million in 2024.

NOTE 9· Income Taxes

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”). The Tax Reform Act makes broad and complex changes to the U.S. tax code that affected our income tax rate in 2017. The Tax Reform Act reduces the U.S. federal corporate income tax rate from 35.0% to 21.0% and requires companies to pay a one-time transition tax on certain unrepatriated earnings from foreign subsidiaries that is payable over eight years. The Tax Reform Act also establishes new tax laws that became effective January 1, 2018.

ASC 740 requires a company to record the effects of a tax law change in the period of enactment, however, shortly after the enactment of the Tax Reform Act, the SEC staff issued SAB 118, which allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.

We have made a reasonable estimate of the impact of the Tax Reform Act and recorded a one-time credit in our 2017 income tax expense of $120.9 million, which reflects an estimated reduction in our deferred income tax liabilities of $124.2 million as a result of the maximum federal rate decreasing to 21.0% from 35.0%, which was partially offset by an estimated increase in income tax payable in the amount of $3.3 million as a result of the transition tax on cash and cash equivalent balances related to untaxed accumulated earnings associated with our international operations. We are continuing to gather additional information related to estimates surrounding the re-measurement of our deferred tax liabilities and the transition tax on unrepatriated earnings.

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



(in thousands)	2017			2016		2015
Current:
Federal	$	129,954		$	126,145	$	118,490
State	21,392			21,110		17,625
Foreign	929			590		430
Total current provision	152,275			147,845		136,545
Deferred:
Federal	18,999			15,551		18,416
State	2,984			2,612		4,280
Foreign	—			—		—
Tax Reform Act deferred tax revaluation	(124,166		)	—		—
Total deferred provision	(102,183		)	18,163		22,696
Total tax provision	$	50,092		$	166,008	$	159,241

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:



	2017	2016	2015
Federal statutory tax rate	35.0%	35.0%	35.0%
State income taxes, net of federal income tax benefit	3.8	3.9	3.9
Non-deductible employee stock purchase plan expense	0.3	0.3	0.3
Non-deductible meals and entertainment	0.3	0.3	0.3
Tax Reform Act deferred tax revaluation and transition tax impact	(26.9)	—	—
Other, net	(1.4)	(0.3)	0.1
Effective tax rate	11.1%	39.2%	39.6%

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 net deferred tax liabilities as of December 31 are as follows:



(in thousands)	2017			2016
Non-current deferred tax liabilities:
Intangible assets	$	306,351		$	422,478
Fixed assets	2,723			6,425
Net unrealized holding (loss)/gain on available-for-sale securities	(6		)	(12		)
Total non-current deferred tax liabilities	309,068			428,891
Non-current deferred tax assets:
Deferred compensation	36,701			44,912
Accruals and reserves	7,534			14,032
Deferred profit-sharing contingent commissions	7,107			10,567
Net operating loss carryforwards	2,434			2,394
Valuation allowance for deferred tax assets	(893		)	(700		)
Total non-current deferred tax assets	52,883			71,205
Net non-current deferred tax liability	$	256,185		$	357,686

Income taxes paid in 2017, 2016 and 2015 were $152.0 million, $143.1 million and $132.9 million, respectively.

At December 31, 2017, Brown & Brown had net operating loss carryforwards of $0.1 million and $52.2 million for federal and state income tax reporting purposes, respectively, portions of which expire in the years 2018 through 2037. 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)	2017			2016			2015
Unrecognized tax benefits balance at January 1	$	750		$	584		$	113
Gross increases for tax positions of prior years	1,070			412			773
Gross decreases for tax positions of prior years	—			(41		)	—
Settlements	(126		)	(205		)	(302		)
Unrecognized tax benefits balance at December 31	$	1,694		$	750		$	584

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2017, 2016 and 2015 the Company had $228,608, $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 $1.7 million as of December 31, 2017, $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 2017. In the United Kingdom, the Company’s filings remain open for audit for the fiscal years 2016 and 2017.

During 2017, the Company settled the previously disclosed IRS income tax audit of The Wright Insurance Group for the short period ended May 1, 2014. Pursuant to the agreement in which the Company acquired The Wright Insurance Group, the Company was fully indemnified for all audit-related assessments. 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, 2017.

As a result of the Tax Reform Act, the Company has recorded a transition tax of $3.2 million. As of December 31, 2017, the Company has estimated $20.9 million of cash and cash equivalent balances related to accumulated earnings associated with our international operations. We are continuing to gather additional information related to estimates surrounding the transition tax on unrepatriated earnings. In general, it is our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations.

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 an additional discretionary profit-sharing contribution each year, which equaled 1.5% of each eligible employee’s compensation. The Company’s contributions to the plan totaled $19.6 million in 2017, $19.3 million in 2016 and $17.8 million in 2015.

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, 2017, 5,156,954 shares had been granted under the PSP. As of December 31, 2017, 847,238 shares had met the first condition of vesting and had been awarded, and 4,309,716 shares had satisfied both conditions of vesting and had been distributed to participants. Of the shares that have not vested as of December 31, 2017, the initial stock prices ranged from $15.58 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, 2017, 2016 and 2015 is as follows:



	Weighted- Average Grant Date Fair Value		Granted Shares		Awarded Shares		Shares Not Yet Awarded
Outstanding at January 1, 2015	$	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		—
Granted	$	—	—		—		—
Awarded	$	—	—		—		—
Vested	$	9.61	(138,801	)	(138,801	)	—
Forfeited	$	10.47	(17,236	)	(17,236	)	—
Outstanding at December 31, 2017	$	10.32	847,238		847,238		—

The total fair value of PSP grants that vested during each of the years ended December 31, 2017, 2016 and 2015 was $6.3 million, $18.1 million and $6.8 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 and May 2017 our shareholders approved an amendment to the SIP to increase the shares available for issuance by an additional 1,200,000 and 1,300,000, respectively.

The Company has granted stock grants to our employees in the form of Restricted Stock Awards and Performance 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.

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 15,700 shares were issued in January 2015, 16,860 shares were issued in January 2016 and 11,350 shares were issued in January 2017.

The following table sets forth information as of December 31, 2017, 2016 and 2015, 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
2017	120,667	575,789	(1)	163,404
2016	182,653	789,446	(2)	1,435,319
2015	164,646	316,520		—


(1)	Of the 575,789 shares of performance-based restricted stock granted in 2017, the payout for 320,826 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%.


(2)	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, 2017, 4,197,920 shares were available for future grants. This amount is calculated assuming the maximum payout for all restricted stock grants.

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, 2017, 2016 and 2015 is as follows:



	Weighted- Average Grant Date Fair Value		Granted Shares		Awarded Shares		Shares Not Yet Awarded
Outstanding at January 1, 2015	$	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
Granted	$	41.65	696,456		120,667		575,789		(2)
Awarded	$	31.44	—		163,404		(163,404	)
Vested	$	25.22	(242,457	)	(242,457	)	—
Forfeited	$	29.77	(171,060	)	(38,106	)	(132,954	)
Outstanding at December 31, 2017	$	31.16	6,410,995		2,404,802		4,006,193


(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%.


(2)	Of the 575,789 shares of performance-based restricted stock granted in 2016, the payout for 320,826 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 4,151,251 were available for future subscriptions as of December 31, 2017. Employees of the Company who regularly work 20 hours or more per week are eligible to participate in the ESPP. Participants, through payroll deductions, may allot up to 10% of their compensation towards the purchase of a maximum of $25,000 worth of 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 2017 was $8.64. The fair values of an ESPP share option as of the Subscription Periods beginning in August 2016 and 2015, were $7.61 and $6.43, respectively.

For the ESPP plan years ended July 31, 2017, 2016 and 2015, the Company issued 529,012, 514,665 and 539,389 shares of common stock, respectively. These shares were issued at an aggregate purchase price of $16.4 million, or $31.03 per share, in 2017, $15.0 million, or $29.23 per share, in 2016, and $14.4 million, or $26.62 per share, in 2015.

For the five months ended December 31, 2017, 2016 and 2015 (portions of the 2017-2018, 2016-2017 and 2015-2016 plan years), 217,514, 247,023 and 231,803 shares of common stock (from authorized but unissued shares), respectively, were subscribed to by ESPP participants for proceeds of approximately $8.2 million, $7.7 million and $6.8 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 period of 1-to-10 years , with a potential acceleration of the vesting period to 3-to-6 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, 2017, 2016 and 2015 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, 2015	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
Granted	—		$	—
Exercised	(175,000	)	$	18.48
Forfeited	—		$	—
Expired	—		$	—
Outstanding at December 31, 2017	—		$	—	N/A	$	—
Ending vested and expected to vest at December 31, 2017	—		$	—	N/A	$	—
Exercisable at December 31, 2017	—		$	—	N/A	$	—
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

The total intrinsic value of options exercised, determined as of the date of exercise, during the years ended December 31, 2017, 2016 and 2015 was $4.7 million, $1.0 million and $2.2 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, 2017, 2016 and 2015, 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)	2017		2016		2015
Stock Incentive Plan	$	24,899	$	11,049	$	11,111
Employee Stock Purchase Plan	4,025		3,698		3,430
Performance Stock Plan	1,707		1,305		972
Incentive Stock Option Plan	—		—		—
Total	$	30,631	$	16,052	$	15,513

Summary of Unamortized Compensation Expense

As of December 31, 2017, there was approximately $87.9 million of unamortized 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 3.62 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. 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)	2017		2016		2015
Cash paid during the period for:
Interest	$	36,172	$	37,652	$	37,542
Income taxes	$	152,024	$	143,111	$	132,874

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



	For the Year Ended December 31,
(in thousands)	2017		2016		2015
Other payables issued for purchased customer accounts	$	11,708	$	10,664	$	10,029
Estimated acquisition earn-out payables and related charges	$	6,921	$	4,463	$	36,899
Notes payable issued or assumed for purchased customer accounts	$	—	$	492	$	—
Notes received on the sale of fixed assets and customer accounts	$	—	$	22	$	7,755

The following is a reconciliation of cash and cash equivalents inclusive of restricted cash as of December 31, 2017, 2016 and 2015.



	Balance as of December 31,
(in thousands)	2017		2016		2015
Table to reconcile cash and cash equivalents inclusive of restricted cash
Cash and cash equivalents	$	573,383	$	515,646	443,420
Restricted cash	250,705		265,637		229,753
Total cash and cash equivalents inclusive of restricted cash at the end of the period	$	824,088	$	781,283	673,173

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, 2017, the aggregate future minimum lease payments under all non-cancelable lease agreements were as follows:



(in thousands)
2018	$	42,970
2019	39,005
2020	34,236
2021	27,715
2022	21,996
Thereafter	44,496
Total minimum future lease payments	$	210,418

Rental expense in 2017, 2016 and 2015 for operating leases totaled $51.0 million, $49.3 million and $46.0 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, 2017 and 2016. 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 2017 and 2016 were as follows:



(in thousands, except per share data)	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
2017
Total revenues	$	465,080	$	466,305	$	475,646	$	474,316
Total expenses	$	354,113	$	358,303	$	351,227	$	367,982
Income before income taxes	$	110,967	$	108,002	$	124,419	$	106,334
Net income	$	70,110	$	66,102	$	75,913	$	187,505
Net income per share:
Basic	$	0.50	$	0.47	$	0.54	$	1.35
Diluted	$	0.49	$	0.46	$	0.53	$	1.32	(1)
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


(1)	Includes $0.85 impact associated with recording impact of Tax Reform Act.

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 $15.9 million, $14.5 million and $13.4 million of total revenues for the years ended December 31, 2017, 2016 and 2015, respectively. Long-lived assets held outside of the United States during each of these three years were not material. Additionally, we have a licenses to operate as a broker in various Canadian provinces.

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.



	For the year ended December 31, 2017
(in thousands)	Retail		National Programs		Wholesale Brokerage		Services		Other			Total
Total revenues	$	943,460	$	479,813	$	271,737	$	165,372	$	20,965		$	1,881,347
Investment income	$	8	$	384	$	—	$	299	$	935		$	1,626
Amortization	$	42,164	$	27,277	$	11,456	$	4,548	$	1		$	85,446
Depreciation	$	5,210	$	6,325	$	1,885	$	1,600	$	7,678		$	22,698
Interest expense	$	31,133	$	35,561	$	6,263	$	3,522	$	(38,163	)	$	38,316
Income before income taxes	$	196,616	$	109,961	$	68,844	$	30,498	$	43,803		$	449,722
Total assets	$	4,255,515	$	3,267,486	$	1,260,239	$	399,240	$	(3,434,930	)	$	5,747,550
Capital expenditures	$	4,494	$	5,936	$	1,836	$	1,033	$	10,893		$	24,192



	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(1)	$	3,854,393	$	2,711,378	$	1,108,829	$	371,645	$	(2,783,511	)	$	5,262,734
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(1)	$	3,507,476	$	2,503,537	$	895,782	$	285,459	$	(2,212,410	)	$	4,979,844
Capital expenditures	$	6,797	$	6,001	$	3,084	$	1,088	$	1,405		$	18,375


(1)	Total assets have been restated to reflect the adoption of ASU No. 2015-17, “Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”).

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:



	2017				2016
(in thousands)	Written		Earned		Written		Earned
Direct premiums	$	604,623	$	592,267	$	591,142	$	592,123
Assumed premiums	—		—		—		—
Ceded premiums	604,610		592,254		591,124		592,105
Net premiums	$	13	$	13	$	18	$	18

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, 2017 through December 31, 2017. As of December 31, 2017 and 2016, the Company ceded $602.9 million and $589.5 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 $1.7 million and $1.6 million for the years ended December 31, 2017 and 2016. As of December 31, 2017, WNFIC had $1.1 million in paid excess flood losses, $16,606 in loss adjustment expenses, case reserves of $838,307 and incurred but not reported of $1.5 million.

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, 2017, no ceded unpaid losses and loss adjustment expenses or incurred but not reported balance for Homeowners, Private Passenger Auto Liability and Other Liability Occurrence.

As of December 31, 2017, the Consolidated Balance Sheet contained Reinsurance recoverable of $477.8 million and Prepaid reinsurance premiums of $321.0 million. As of December 31, 2016, the Consolidated Balance Sheet contained reinsurance recoverable of $78.1 million and prepaid reinsurance premiums of $308.7 million. There was $1.1 million net activity in the reserve for losses and loss adjustment expense for the year ended December 31, 2017, and no net activity in the reserve for losses and loss adjustment expense for the year ended December 31, 2016, 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 recoverables was $477.8 million as of December 31, 2017 and $78.1 million as of December 31, 2016.

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 $28.7 million as of December 31, 2017 and $23.5 million as of December 31, 2016. As of December 31, 2017 and 2016, WNFIC generated statutory net income of $4.8 million and $8.2 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 2017 and the maximum dividend payout that may be made in 2018 without prior approval is $4.8 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, and 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. 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.

Between May 18, 2017 and July 14, 2017, the Company made share repurchases in the open market in total of 348,460 shares at a total cost of $14.9 million.

On August 14, 2017, the Company entered into accelerated share repurchase agreement ("ASR") with an investment bank to purchase an aggregate $50.0 million of the Company's common stock. As part of the ASR, the company received an initial delivery of 967,888 shares of the Company's common stock with a fair market value of approximately $42.5 million. Upon maturity of the program, the Company received 108,288 shares, relieving the remaining balance of $7.5 million at settlement on October 16, 2017 for a total delivery of 1,076,176 shares of the Company's common stock.

On November 14, 2017, the Company entered into an ASR with an investment bank to purchase an aggregate $75.0 million of the Company's common stock. As part of the ASR, the company received an initial delivery of 1,290,486 shares of the Company's common stock with a fair market value of approximately $63.8 million. Upon maturity of the program, the Company received 168,227 shares, relieving the remaining balance of $11.2 million at settlement on February 9, 2018 for a total delivery of 1,458,713 shares of the Company's common stock.

During 2014, the Company repurchased 2,384,760 shares at an average price per share of $31.46 for a total cost of $75.0 million under the original share repurchase authorization from the Board of Directors on July 18, 2014. During 2015, the Company repurchased 5,408,819 shares at an average price per share of $32.35 for a total cost of $175.0 million under the current share repurchase authorization, while exhausting the previous authorization of $200.0 million from the Board of Directors in 2014. During 2016, the Company repurchased 209,618 shares at an average price per share of $36.53 for a total cost of $7.7 million under the current share repurchase authorization. At December 31, 2017, the remaining amount authorized by our Board of Directors for share repurchases was $238.7 million. Under the authorized repurchase programs, the Company has repurchased a total of approximately 10.7 million shares for an aggregate cost of approximately $386.3 million between 2014 and 2017.

NOTE 20· Subsequent Event

On February 26, 2018, the Company’s Board of Directors authorized a 2-for-1 stock split of the Company’s common stock. The stock split will be effectuated by distributing one additional share to each shareholder of record on March 14, 2018 for every share of common stock then owned.

The Company expects the additional shares issued in connection with the split to be distributed on March 28, 2018. As a result of the stock split, the number of outstanding shares of common stock will increase from approximately 138 million to approximately 276 million.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Brown & Brown, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Brown & Brown, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, shareholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, 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) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2018, expressed an unqualified opinion on the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.




/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants

Tampa, Florida
February 28, 2018

We have served as the Company’s auditor since 2002.

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