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

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

General

The following discussion should be read in conjunction with our Consolidated Financial Statements and the related Notes to those Financial Statements included elsewhere in this Annual Report on Form 10-K. In addition, please see “Information Regarding Non-GAAP Measures” below, regarding important information on non-GAAP financial measures contained in our discussion and analysis.

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

We have increased revenues every year from 1993 to 2018, with the exception of 2009, when our revenues dropped 1.0%. Our revenues grew from $95.6 million in 1993 to $2.0 billion in 2018, reflecting a compound annual growth rate of 13.0%. In the same 25-year period, we increased net income from $8.1 million to $344.3 million in 2018, a compound annual growth rate of 16.2%.

The volume of business from new and existing customers, fluctuations in insurable exposure units, changes in premium rate levels, changes in general economic and competitive conditions, and the occurrence of catastrophic weather events all affect our revenues. For example, level rates of inflation or a general decline in economic activity could limit increases in the values of insurable exposure units. Conversely, increasing costs of litigation settlements and awards could cause some customers to seek higher levels of insurance coverage. Historically, our revenues have typically grown as a result of our focus on net new business growth and acquisitions. We foster a strong, decentralized sales and service culture with the goal of consistent, sustained growth over the long-term.

The term “Organic Revenue,” a non-GAAP measure, is our core commissions and fees less (i) the core commissions and fees earned for the first twelve months by newly-acquired operations, (ii) divested business (core commissions and fees generated from offices, books of business or niches sold or terminated during the comparable period), and (iii) the impact of the adoption of Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” and Accounting Standards Codification Topic 340 – Other Assets and Deferred Cost (the “New Revenue Standard”) effective January 1, 2018. The term “core commissions and fees” excludes profit-sharing contingent commissions and guaranteed supplemental commissions, and therefore represents the revenues earned directly from specific insurance policies sold, and specific fee-based services rendered. “Organic Revenue” is reported in this manner in order to express the current year’s core commissions and fees on a comparable basis with the prior year’s core commissions and fees. The resulting net change reflects the aggregate changes attributable to (i) net new and lost accounts, (ii) net changes in our customers’ exposure units, (iii) net changes in insurance premium rates or the commission rate paid to us by our carrier partners, (iv) the net change in fees paid to us by our customers and (v) fees earned based upon claim processing volumes within our Services Segment. Organic Revenue is reported in “Results of Operations” and in “Results of Operations - Segment Information” of this Form 10-K.

We also earn “profit-sharing contingent commissions,” which are commissions based primarily on underwriting results, but which may also reflect considerations for volume, growth and/or retention. These commissions which are included in our commissions and fees in the Consolidated Statement of Income, are accrued throughout the year based on actual premiums written and are primarily received in the first and second quarters of each year, based upon the aforementioned considerations for the prior year(s). Prior to the adoption of the New Revenue Standard, these commissions were recorded to income when received. Over the last three years, profit-sharing contingent commissions have averaged approximately 3.1% of the previous year’s commissions and fees revenue.

Certain insurance companies offer guaranteed fixed-base agreements, referred to as “Guaranteed Supplemental Commissions” (“GSCs”) in lieu of profit-sharing contingent commissions. GSCs are accrued throughout the year based upon actual premiums written. For the year ended December 31, 2018, we had earned $10.0 million of GSCs, of which $8.9 million remained accrued at December 31, 2018 as most of this will be collected over the first and second quarters of 2019. For the years ended December 31, 2018, 2017, and 2016, we earned $10.0 million, $10.4 million and $11.5 million, respectively, from GSCs.

Combined, our profit-sharing contingent commissions and GSCs for the year ended December 31, 2018 increased by $3.3 million over 2017 primarily as a result of an increase in profit-sharing contingent commissions and GSCs in the National Programs Segments. Other income decreased by $20.8 million primarily as a result of a legal settlement recognized in the first quarter of 2017.

Fee revenues primarily relate to services other than securing coverage for our customers, as well as fees negotiated in lieu of commissions, and are recognized as performance obligations are satisfied. Fee revenues have historically been generated primarily by: (1) our Services Segment, which provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare benefits advocacy services, and claims adjusting services; (2) our National Programs and Wholesale Brokerage Segments, which earn fees primarily for the issuance of insurance policies on behalf of insurance companies; and to a lesser extent

(3) our Retail Segment in our large-account customer base. Fee revenues as a percentage of our total commissions and fees, represented 19.8% in 2018, 31.5% in 2017 and 31.3% in 2016.

For the years ended December 31, 2018 and 2017, our commissions and fees growth rate was 8.2% and 5.4%, respectively, and our consolidated Organic Revenue growth rate was 2.4% and 4.4%, respectively. In the event that the gradual increases in insurable exposure units that occurred in the past few years continues through 2019 and premium rate changes are similar with 2018, we believe we will continue to see positive quarterly Organic Revenue growth rates in 2019.

Historically, investment income has consisted primarily of interest earnings on operating cash and where permitted, on premiums and advance premiums collected and held in a fiduciary capacity before being remitted to insurance companies. Our policy is to invest available funds in high-quality, short-term fixed income investment securities. Investment income also includes gains and losses realized from the sale of investments. Other income primarily reflects legal settlements and other miscellaneous income.

Income before income taxes for the year ended December 31, 2018 increased over 2017 by $12.7 million, primarily as a result of net new business and acquisitions completed in the past twelve months offset by lower weather related claims processing revenues in 2018 and a legal settlement recorded in the first quarter of 2017.

Information Regarding Non-GAAP Measures

In the discussion and analysis of our results of operations, in addition to reporting financial results in accordance with generally accepted accounting principles (“GAAP”), we provide references to the following non-GAAP financial measures as defined in Regulation G of SEC rules: Organic Revenue, Organic Revenue growth, EBITDAC and EBITDAC Margin. We view these non-GAAP financial measures as important indicators when assessing and evaluating our performance on a consolidated basis and for each of our segments because they allow us to determine a more comparable, but non-GAAP, measurement of revenue growth and operating performance that is associated with the revenue sources that were a part of our business in both the current and prior year. We believe that Organic Revenue provides a meaningful representation of our operating performance and view Organic Revenue growth as an important indicator when assessing and evaluating the performance of our four segments. Organic Revenue can be expressed as a dollar amount or a percentage rate when describing Organic Revenue growth. We also use Organic Revenue growth and EBITDAC Margin for incentive compensation determinations for executive officers and other key employees. We view EBITDAC and EBITDAC Margin as important indicators of operating performance, because they allow us to determine more comparable, but non-GAAP, measurements of our operating margins in a meaningful and consistent manner by removing the significant non-cash items of depreciation, amortization and the change in estimated acquisition earn-out payables, and also interest expense and taxes, which are reflective of investment and financing activities, not operating performance.

These measures are not in accordance with, or an alternative to the GAAP information provided in this Annual Report on Form 10-K. We present such non-GAAP supplemental financial information because we believe such information is of interest to the investment community and because we believe they provide additional meaningful methods of evaluating certain aspects of our operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis. We believe these non-GAAP financial measures improve the comparability of results between periods by eliminating the impact of certain items that have a high degree of variability. Our industry peers may provide similar supplemental non-GAAP information with respect to one or more of these measures, although they may not use the same or comparable terminology and may not make identical adjustments. This supplemental financial information should be considered in addition to, not in lieu of, our Consolidated Financial Statements.

Tabular reconciliations of this supplemental non-GAAP financial information to our most comparable GAAP information are contained in this Annual Report on Form 10-K under “Results of Operation - Segment Information.”

Acquisitions

Part of our business strategy is to attract high-quality insurance intermediaries to join our operations. From 1993 through the fourth quarter of 2018, we acquired 513 insurance intermediary operations, excluding acquired books of business (customer accounts). During the year ended December 31, 2018, the Company acquired the assets and assumed certain liabilities of twenty insurance intermediaries, all of the stock of three insurance intermediaries and one book of business (customer accounts). Collectively, these acquired businesses had annualized revenues of approximately $323.2 million.

On November 15, 2018, we completed the acquisition of certain assets and assumption of certain liabilities of The Hays Group, Inc. and certain of its affiliates (collectively, “Hays”). At closing, we delivered a payment of $705 million, consisting of $605 million in cash and the issuance to certain key owners of Hays of 3,376,103 shares of our common stock for a total value of $100.0 million. In addition, the Company may pay additional consideration to Hays in the form of earn-out payments in the aggregate amount of up to $25.0 million in cash over three years, which is subject to certain conditions and the successful achievement of average annual EBITDA compound annual growth rate targets for the acquired business during 2019, 2020 and 2021. Hays was founded in 1994 providing employee benefits, property & casualty, and personal lines insurance and has grown to be the 22nd largest U.S. broker as measured by Business Insurance magazine. With headquarters in Minneapolis, Hays operates across twenty-one states, increasing our presence in the mid-west. This transaction was initially funded through utilization of the Company’s revolving line of credit within our credit facility, details of which can be found in “Management’s Discussion and Analysis of Financial Condition”,“Results of Operations” and Note 9 “Long-Term Debt” in the “Notes to Consolidated Financial Statements”.

Critical Accounting Policies

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

We believe that of our significant accounting and reporting policies, the more critical policies include our accounting for revenue recognition, business combinations and purchase price allocations, intangible asset impairments, non-cash stock-based compensation and reserves for litigation. In particular, the accounting for these areas requires significant use of judgment to be made by management. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or consolidated results of operations. Refer to Note 1 “Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” for a discussion of the impacts for adopting Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606).

Revenue Recognition

The majority of our revenue is commissions derived from our performance as agents and brokers, acting on behalf of insurance carriers to sell products to customers that are seeking to transfer risk, and conversely, acting on behalf of those customers in negotiating with insurance carriers seeking to acquire risk in exchange for premiums. In these arrangements our performance obligation is complete upon the effective date of the bound policy, as such that is when the associated revenue is recognized. Where the Company’s performance obligations have been completed, but the final amount of compensation is unknown due to variable factors, we estimate the amount of such compensation. We recognize subsequent commission adjustments upon our receipt of additional information or final settlement, whichever occurs first.

To a lesser extent, the Company earns revenues in the form of fees. Like commissions, fees paid to us in lieu of commission, are recognized upon the effective date of the bound policy. When we are paid a fee for service, however, the associated revenue is recognized over a period of time that coincides with when the customer simultaneously receives and consumes the benefit of our work, which characterizes most of our claims processing arrangements and various services performed in our employee benefits practices. Other fees are typically recognized upon the completion of the delivery of the agreed-upon services to the customer.

Management determines a policy cancellation reserve based upon historical cancellation experience adjusted in accordance with known circumstances.

Please see Note 2 “Revenues” in the “Notes to Consolidated Financial Statements” for additional information regarding the nature and timing of our revenues.

Business Combinations and Purchase Price Allocations

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

All of our business combinations initiated after June 30, 2001 have been accounted for using the acquisition method. In connection with these acquisitions, we record the estimated value of the net tangible assets purchased and the value of the identifiable intangible assets purchased, which typically consist of purchased customer accounts and non-compete agreements. Purchased customer accounts include the physical records and files obtained from acquired businesses that contain information about insurance policies, customers and other matters essential to policy renewals. However, they primarily represent the present value of the underlying cash flows expected to be received over the estimated future renewal periods of the insurance policies comprising those purchased customer accounts. The valuation of purchased customer accounts involves significant estimates and assumptions concerning matters such as cancellation frequency, expenses and discount rates. Any change in these assumptions could affect the carrying value of purchased customer accounts. Non-compete agreements are valued based upon their duration and any unique features of the particular agreements. Purchased customer accounts and non-compete agreements are amortized on a straight-line basis over the related estimated lives and contract periods, which range from 3 to 15 years. The excess of the purchase price of an acquisition over the fair value of the identifiable tangible and intangible assets is assigned to goodwill and is not amortized.

Acquisition purchase prices are typically based upon a multiple of average annual operating profit and/or core revenue earned over a one to three-year period within a minimum and maximum price range. The recorded purchase prices for all acquisitions include an estimation of the fair value of liabilities associated with any potential earn-out provisions, where an earn-out is part of the negotiated transaction. Subsequent changes in the fair value of earn-out obligations are recorded in the Consolidated Statement of Income when changes to the expected performance of the associated business are realized.

The fair value of earn-out obligations is based upon the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions contained in the respective purchase agreements. In determining fair value, the acquired business’s future performance is estimated using financial projections developed by management for the acquired business, and this estimate

reflects market participant assumptions regarding revenue growth and/or profitability. The expected future payments are estimated on the basis of the earn-out formula and performance targets specified in each purchase agreement compared to the associated financial projections. These estimates are then discounted to a present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out payments will be made.

Intangible Assets Impairment

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

Management assesses the recoverability of our goodwill and our amortizable intangibles and other long-lived assets annually and whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Any of the following factors, if present, may trigger an impairment review: (i) a significant underperformance relative to historical or projected future operating results, (ii) a significant negative industry or economic trend, and (iii) a significant decline in our market capitalization. If the recoverability of these assets is unlikely because of the existence of one or more of the above-referenced factors, an impairment analysis is performed. Management must make assumptions regarding estimated future cash flows and other factors to determine the fair value of these assets. If these estimates or related assumptions change in the future, we may be required to revise the assessment and, if appropriate, record an impairment charge. We completed our most recent evaluation of impairment for goodwill as of November 30, 2018 and determined that the fair value of goodwill exceeded the carrying value of such assets. Additionally, there have been no impairments recorded for amortizable intangible assets for the years ended December 31, 2018, 2017 and 2016.

Non-Cash Stock-Based Compensation

We grant non-vested stock awards to our employees, with the related compensation expense recognized in the financial statements over the associated service period based upon the grant-date fair value of those awards.

During the first quarter of 2017, the performance conditions for 326,808 shares of the Company’s common stock granted under the Company’s Stock Incentive Plan were determined by the Compensation Committee to have been satisfied relative to performance-based grants issued in 2012. These grants had a performance measurement period that concluded on December 31, 2016. The vesting condition for these grants requires continuous employment for a period of up to ten years from the January 2012 grant date in order for the awarded shares to become fully vested and nonforfeitable. As a result of the awarding of these shares, the grantees will be eligible to receive payments of dividends and exercise voting privileges after the awarding date, and the awarded shares will be included as issued and outstanding common stock shares and included in the calculation of basic and diluted net income per share where the net income attributable to unvested awarded stock plans is excluded from the total net income attributable to common shares.

During the first quarter of 2018, the performance conditions for 260,344 shares of the Company’s common stock granted under the Company’s Stock Incentive Plan were determined by the Compensation Committee to have been satisfied relative to performance-based grants issued in 2013. These grants had a performance measurement period that concluded on December 31, 2017. The vesting condition for these grants requires continuous employment for a period of up to ten years from the January 2013 grant date in order for the awarded shares to become fully vested and nonforfeitable. During the third quarter of 2018, the performance conditions for 2,229,561 shares of the Company’s common stock granted under the Company’s Stock Incentive Plan were determined by the Compensation Committee to have been satisfied relative to performance-based grants issued in July 2013. These grants had a performance measurement period that concluded on June 30, 2018. The vesting condition for these grants requires continuous employment for a period of up to seven years from the July 2013 grant date in order for the awarded shares to become fully vested and nonforfeitable. As a result of the awarding of these shares, the grantees will be eligible to receive payments of dividends and exercise voting privileges after the awarding date, and the awarded shares will be included as issued and outstanding common stock shares and included in the calculation of basic and in diluted net income per share where the net income attributable to unvested awarded stock plans is excluded from the total net income attributable to common shares.

During the first quarter of 2019, the performance conditions for approximately 2.0 million shares of the Company’s common stock granted under the Company’s Stock Incentive Plan were determined by the Compensation Committee to have been satisfied relative to performance-based grants issued in 2014 and 2016. These grants had a performance measurement period that concluded on December 31, 2018. The vesting condition for these grants requires continuous employment for a period of up to seven years from the 2014 grant date and five years from the 2016 grant date in order for the awarded shares to become fully vested and nonforfeitable. As a result of the awarding of these shares, the grantees will be eligible to receive payments of dividends and exercise voting privileges after the awarding date, and the awarded shares will be included as issued and outstanding common stock shares and included in the calculation of basic and diluted net income per share.

Litigation and Claims

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

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2018**,** 2017 AND 2016

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

Financial information relating to our Consolidated Financial Results is as follows:

(in thousands, except percentages)2018% Change2017% Change2016
REVENUES
Core commissions and fees$1,944,0218.3%$1,794,7145.7%$1,697,308
Profit-sharing contingent commissions55,8757.1%52,186(3.4)%54,000
Guaranteed supplemental commissions9,961(3.9)%10,370(9.7)%11,479
Commissions and fees2,009,8578.2%1,857,2705.4%1,762,787
Investment income2,74668.9%1,62611.7%1,456
Other income, net1,643(92.7)%22,451NMF2,386
Total revenues2,014,2467.1%1,881,3476.5%1,766,629
EXPENSES
Employee compensation and benefits1,068,9147.5%994,6527.5%925,217
Other operating expenses332,11817.2%283,4707.8%262,872
(Gain)/loss on disposal(2,175)0.8%(2,157)67.1%(1,291)
Amortization86,5441.3%85,446(1.4)%86,663
Depreciation22,8340.6%22,6988.1%21,003
Interest40,5805.9%38,316(3.0)%39,481
Change in estimated acquisition earn-out payables2,969(67.7)%9,2000.2%9,185
Total expenses1,551,7848.4%1,431,6256.6%1,343,130
Income before income taxes462,4622.8%449,7226.2%423,499
Income taxes118,207136.0%50,092(69.8)%166,008
NET INCOME$344,255(13.8)%$399,63055.2%$257,491
Income Before Income Taxes Margin23.0%23.9%24.0%
EBITDAC (1)615,3891.7%605,3824.4%579,831
EBITDAC Margin (1)30.6%32.2%32.8%
Organic Revenue growth rate (1)2.4%4.4%3.0%
Employee compensation and benefits relative to total revenues53.1%52.9%52.4%
Other operating expenses relative to total revenues16.5%15.1%14.9%
Capital expenditures$41,52071.6%$24,19236.2%$17,765
Total assets at December 31$6,688,66816.4%$5,747,5509.2%$5,262,734

(1) A non-GAAP measure

NMF = Not a meaningful figure

Commissions and Fees

Commissions and fees, including profit-sharing contingent commissions and GSCs for 2018, increased $152.6 million to $2,009.9 million, or 8.2% over 2017. Core commissions and fees in 2018 increased $149.3 million, of which $91.2 million represented core commissions and fees from acquisitions that had no comparable revenues in 2017; approximately $43.5 million represented net new and renewal business; approximately $16.1 million related to the impact of the adoption of the New Revenue Standard; which was offset by $1.5 million related to commissions and fees revenue from businesses divested in 2017 and 2018, which reflected an Organic Revenue growth rate of 2.4%. Profit-sharing contingent commissions and GSCs for 2018 increased by $3.3 million, or 5.2%, compared to the same period in 2017. The net increase of $3.3 million was mainly driven by an increase in profit-sharing contingent commissions and GSCs in the National Programs Segment.

Commissions and fees, including profit-sharing contingent commissions and GSCs for 2017, increased $94.5 million to $1,857.3 million, or 5.4% over 2016. Core commissions and fees in 2017 increased $97.4 million, of which approximately $27.7 million represented core commissions and fees from agencies acquired since 2016 that had no comparable revenues. After accounting for divested business of $4.9 million, the remaining net increase of $74.6 million represented net new business, which reflected an Organic Revenue growth rate of 4.4% for core commissions and fees. Profit-sharing contingent commissions and GSCs for 2017 decreased by $2.9 million, or 4.5%, compared to the same period in 2016. The net decrease of $2.9 million was mainly driven by a decrease in profit-sharing contingent commissions and GSCs in the Retail and Wholesale Brokerage Segments, as a result of increased loss ratios and lower premium rates, which was partially offset by an increase in profit-sharing contingent commissions and GSCs in the National Programs Segment.

Investment Income

Investment income increased to $2.7 million in 2018, compared with $1.6 million in 2017 and increased to $1.6 million in 2017, compared with $1.5 million in 2016. The increases in both years were due to additional interest income driven by higher interest rates and cash management activities to earn a higher yield on excess cash balances.

Other Income, Net

Other income for 2018 was $1.6 million, compared with $22.4 million in 2017 and $2.4 million in 2016. Other income consists primarily of legal settlements and other miscellaneous income. In 2017, $20.0 million of other income was recognized as a result of a legal settlement with AssuredPartners.

Employee Compensation and Benefits

Employee compensation and benefits expense increased 7.5%, or $74.3 million, in 2018 over 2017. This increase included $34.8 million of compensation costs related to stand-alone acquisitions that had no comparable costs in the same period of 2017. Therefore, employee compensation and benefits expense attributable to those offices that existed in the same time periods of 2018 and 2017 increased by $39.5 million or 3.9%. This underlying employee compensation and benefits expense increase was primarily related to (i) an increase in staff salaries attributable to salary inflation, higher volumes in portions of our business and the mix of business across the company; (ii) increased producer commissions due to higher revenue; partially offset by (iii) a decrease of approximately $8.8 million in commission expense as a result of the adoption of the New Revenue Standard which requires the deferral of incremental costs to obtain a customer contract, and (iv) the increase in the value of corporate-owned life insurance policies associated with our deferred compensation plan which is substantially offset in other operating expenses. Employee compensation and benefits expense as a percentage of total revenues was 53.1% for 2018 as compared to 52.9% for the year ended December 31, 2017.

Employee compensation and benefits expense increased 7.5%, or $69.4 million, in 2017 over 2016. This increase included $11.1 million of compensation costs related to stand-alone acquisitions that had no comparable costs in the same period of 2016. Therefore, employee compensation and benefits expense attributable to those offices that existed in the same time periods of 2017 and 2016 increased by $58.3 million or 6.4%. This underlying employee compensation and benefits expense increase was primarily related to (i) higher bonuses due to increased revenue and operating profit as well as the additional cost associated with the Retail Segment’s performance incentive plan introduced in 2017, (ii) an increase in producer commissions driven by new and renewed business, (iii) an increase in non-cash stock-based compensation expense due to forfeiture credits recognized in 2016, and (iv) increased staff salaries attributable to salary inflation and higher volumes in portions of our business. Employee compensation and benefits expense as a percentage of total revenues was 52.9% for 2017 as compared to 52.4% for the year ended December 31, 2016.

Other Operating Expenses

Other operating expenses in 2018 increased 17.2%, or $48.6 million, over 2017, of which $14.0 million was related to acquisitions that had no comparable costs in the same period of 2017. The other operating expenses for those offices that existed in the same periods in both 2018 and 2017 increased by $34.7 million or 6.6%, which was primarily attributable to (i) additional expenses associated with our investment in information technology and higher value-added consulting services; (ii) an increase of approximately $10.5 million for costs that had previously been reported on a net basis as contra-revenue prior to the adoption of the New Revenue Standard ; (iii) the increase in the value of corporate-owned life insurance policies associated with our deferred compensation plan which was substantially offset by employee compensation and benefits and partially offset by (iv) the benefits from our strategic purchasing program. Other operating expenses as a percentage of total revenues was 16.5% in 2018 as compared to 15.1% for the year ended December 31, 2017.

Other operating expenses in 2017 increased 7.8%, or $20.6 million, over 2016, of which $3.3 million was related to acquisitions that had no comparable costs in the same period of 2016. The other operating expenses for those offices that existed in the same periods in both 2017 and 2016, increased by $17.3 million or 6.6%, which was primarily attributable to (i) higher data processing costs related to our multi-year technology investment program, (ii) the receipt of certain premium tax refunds by our National Flood Program business in 2016, and (iii) professional fees at our National Programs Division. Other operating expenses as a percentage of total revenues was 15.1% in 2017 and 14.9% in 2016.

Gain or Loss on Disposal

The Company recognized gains on disposal of $2.2 million in 2018 and 2017 and $1.3 million in 2016. The change in the gain on disposal was due to activity associated with book of business sales. Although we are not in the business of selling customer accounts, we periodically sell an office or a book of business (one or more customer accounts) that we believe does not produce reasonable margins or demonstrate a potential for growth, or because doing so is in the Company’s best interest.

Amortization

Amortization expense increased $1.1 million, or 1.3%, in 2018, and decreased $1.2 million, or 1.4%, in 2017. The increase in 2018 is a result of the addition of intangibles associated with newly acquired businesses and the decrease in 2017 is a result of certain intangibles becoming fully amortized or otherwise written off as part of disposed businesses, which was partially offset by the amortization of new intangibles from recently acquired businesses.

Depreciation

Depreciation expense increased $0.1 million, or 0.6%, in 2018, and increased $1.7 million, or 8.1% in 2017 as compared to 2016. These increases are due primarily to the addition of fixed assets resulting from capital projects related to our multi-year technology investment program and other business initiatives.

Interest Expense

Interest expense increased $2.3 million, or 5.9%, in 2018 from 2017, and decreased $1.2 million, or 3.0% in 2017 from 2016. The increase in 2018 was due primarily to the additional debt added in the fourth quarter with increased payments for newly acquired businesses, as well as increased interest rate exposure on the Company’s floating rate notes. The decrease in 2017 was due primarily to having less total debt outstanding.

Change in Estimated Acquisition Earn-Out Payables

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

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

As of December 31, 2018, the fair values of the estimated acquisition earn-out payables were re-evaluated and measured at fair value on a recurring basis using unobservable inputs (Level 3) as defined in ASC 820-Fair Value Measurement. The resulting net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the years ended December 31, 2018, 2017 and 2016 were as follows:

(in thousands)201820172016
Change in fair value of estimated acquisition earn-out payables$603$6,874$6,338
Interest expense accretion2,3662,3262,847
Net change in earnings from estimated acquisition earn-out payables$2,969$9,200$9,185

For the years ended December 31, 2018, 2017 and 2016, the fair value of estimated earn-out payables was re-evaluated and increased by $0.6 million, $6.9 million and $6.3 million, respectively, which resulted in charges to the Consolidated Statement of Income.

As of December 31, 2018, the estimated acquisition earn-out payables equaled $89.9 million, of which $21.1 million was recorded as accounts payable and $68.8 million was recorded as other non-current liability. As of December 31, 2017, the estimated acquisition earn-out payables equaled $36.2 million, of which $25.1 million was recorded as accounts payable and $11.1 million was recorded as other non-current liability.

Income Taxes

The effective tax rate on income from operations was 25.6% in 2018, 11.1% in 2017, and 39.2% in 2016. The Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”) makes changes to the U.S. tax code that affected our income tax rate in 2017 and 2018. 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. The 2018 effective tax rate reflects the reduction in the federal corporate income tax rate. The 2017 effective tax rate reflects the revaluation of deferred tax liabilities as described in Part II, Note 10 “Income Taxes,” in addition to adoption of FASB Accounting Standards Update 2016-09, “Improvements to Employee Share Based Payment Accounting” (“ASU 2016-09”) in the first quarter of 2017. ASU 2016-09, which requires upon vesting of stock-based compensation, any tax implications be treated as a discrete credit to the income tax expense in the quarter of vesting, amends guidance issued in ASC Topic 718, Compensation - Stock Compensation.

RESULTS OF OPERATIONS — SEGMENT INFORMATION

As discussed in Note 16 “Segment Information” of the Notes to Consolidated Financial Statements, we operate four reportable segments: Retail, National Programs, Wholesale Brokerage and Services. On a segmented basis, changes in amortization, depreciation and interest expenses generally result from activity associated with acquisitions. Likewise, other income in each segment reflects net gains primarily from legal settlements and miscellaneous income. As such, in evaluating the operational efficiency of a segment, management focuses on the Organic Revenue growth rate of core commissions and fees, the ratio of total employee compensation and benefits to total revenues, and the ratio of other operating expenses to total revenues.

The reconciliation of total commissions and fees, included in the Consolidated Statement of Income, to Organic Revenue for the years ended December 31, 2018 and 2017 is as follows:

Year Ended December 31,
(in thousands)20182017
Commissions and fees$2,009,857$1,857,270
Profit-sharing contingent commissions(55,875)(52,186)
Guaranteed supplemental commissions(9,961)(10,370)
Core commissions and fees1,944,0211,794,714
New Revenue Standard impact on core commissions and fees(16,091)—
Acquisition revenues(91,177)—
Divested businesses—(1,490)
Organic Revenue$1,836,753$1,793,224

The reconciliation of total commissions and fees to Organic Revenue for the year ended December 31, 2018, by Segment, are as follows:

2018Retail**(1)**National ProgramsWholesale BrokerageServicesTotal
(in thousands, except percentages)2018201720182017201820172018201720182017
Commissions and fees$1,040,574$942,039$493,878$479,017$286,364$271,141$189,041$165,073$2,009,857$1,857,270
Total change$98,535$14,861$15,223$23,968$152,587
Total growth %10.5%3.1%5.6%14.5%8.2%
Profit-sharing contingent commissions(24,517)(23,377)(23,896)(20,123)(7,462)(8,686)——(55,875)(52,186)
GSCs(8,535)(9,108)(76)(31)(1,350)(1,231)——(9,961)(10,370)
Core commissions and fees$1,007,522$909,554$469,906$458,863$277,552$261,224$189,041$165,073$1,944,021$1,794,714
New Revenue Standard1,254—(7,973)—935—(10,307)—(16,091)—
Acquisition revenues(73,405)—(7,289)—(2,514)—(7,969)—(91,177)—
Divested business—(1,270)—(114)—(106)———(1,490)
Organic Revenue(2)$935,371$908,284$454,644$458,749$275,973$261,118$170,765$165,073$1,836,753$1,793,224
Organic Revenue growth(2)$27,087$(4,105)$14,855$5,692$43,529
Organic Revenue growth %(2)3.0%(0.9)%5.7%3.4%2.4%
(1)The Retail Segment includes commissions and fees reported in the “Other” column of the Segment Information in Note 16 of the Notes to the Consolidated Financial Statements, which includes corporate and consolidation items.
(2)A non-GAAP financial measure.

The reconciliation of total commissions and fees, included in the Consolidated Statement of Income, to Organic Revenue for the years ended December 31, 2017 and 2016, is as follows:

Year Ended December 31,
(in thousands)20172016
Commissions and fees$1,857,270$1,762,787
Profit-sharing contingent commissions(52,186)(54,000)
Guaranteed supplemental commissions(10,370)(11,479)
Core commissions and fees1,794,7141,697,308
Acquisition revenues(27,739)—
Divested businesses—(4,912)
Organic Revenue$1,766,975$1,692,396

The reconciliation of total commissions and fees to Organic Revenue for the year ended December 31, 2017, by Segment, are as follows:

2017Retail**(1)**National ProgramsWholesale BrokerageServicesTotal
(in thousands, except percentages)2017201620172016201720162017201620172016
Commissions and fees$942,039$916,084$479,017$447,808$271,141$242,813$165,073$156,082$1,857,270$1,762,787
Total change$25,955$31,209$28,328$8,991$94,483
Total growth %2.8%7.0%11.7%5.8%5.4%
Profit-sharing contingent commissions(23,377)(25,207)(20,123)(17,306)(8,686)(11,487)——(52,186)(54,000)
GSCs(9,108)(9,787)(31)(23)(1,231)(1,669)——(10,370)(11,479)
Core commissions and fees$909,554$881,090$458,863$430,479$261,224$229,657$165,073$156,082$1,794,714$1,697,308
Acquisition revenues(8,151)—(2,296)—(16,442)—(850)—(27,739)—
Divested business—(4,838)—(277)———203—(4,912)
Organic Revenue(2)$901,403$876,252$456,567$430,202$244,782$229,657$164,223$156,285$1,766,975$1,692,396
Organic Revenue growth(2)$25,151$26,365$15,125$7,938$74,579
Organic Revenue growth %(2)2.9%6.1%6.6%5.1%4.4%
(1)The Retail Segment includes commissions and fees reported in the “Other” column of the Segment Information in Note 16 of the Notes to the Consolidated Financial Statements, which includes corporate and consolidation items.
(2)A non-GAAP financial measure.

The reconciliation of total commissions and fees, included in the Consolidated Statement of Income, to Organic Revenue for the years ended December 31, 2016 and 2015, is as follows:

Year Ended December 31,
(in thousands)20162015
Commissions and fees$1,762,787$1,656,951
Profit-sharing contingent commissions(54,000)(51,707)
Guaranteed supplemental commissions(11,479)(10,026)
Core commissions and fees1,697,3081,595,218
Acquisition revenues(61,713)—
Divested businesses—(6,669)
Organic Revenue$1,635,595$1,588,549

The reconciliation of total commissions and fees to Organic Revenue for the year ended December 31, 2016, by Segment, are as follows:

2016Retail**(1)**National ProgramsWholesale BrokerageServicesTotal
(in thousands, except percentages)2016201520162015201620152016201520162015
Commissions and fees$916,084$866,465$447,808$428,473$242,813$216,638$156,082$145,375$1,762,787$1,656,951
Total change$49,619$19,335$26,175$10,707$105,836
Total growth %5.7%4.5%12.1%7.4%6.4%
Profit-sharing contingent commissions(25,207)(22,051)(17,306)(15,558)(11,487)(14,098)——(54,000)(51,707)
GSCs(9,787)(8,291)(23)(30)(1,669)(1,705)——(11,479)(10,026)
Core commissions and fees$881,090$836,123$430,479$412,885$229,657$200,835$156,082$145,375$1,697,308$1,595,218
Acquisition revenues(31,151)—(1,680)—(20,164)—(8,718)—(61,713)—
Divested business—(1,926)—(1,296)———(3,447)—(6,669)
Organic Revenue(2)$849,939$834,197$428,799$411,589$209,493$200,835$147,364$141,928$1,635,595$1,588,549
Organic Revenue growth(2)$15,742$17,210$8,658$5,436$47,046
Organic Revenue growth %(2)1.9%4.2%4.3%3.8%3.0%
(1)The Retail Segment includes commissions and fees reported in the “Other” column of the Segment Information in Note 16 of the Notes to the Consolidated Financial Statements, which includes corporate and consolidation items.
(2)A non-GAAP financial measure.

The reconciliation of income before incomes taxes, included in the Consolidated Statement of Income, to EBITDAC, a non-GAAP measure, and Income Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, for the year ended December 31, 2018, is as follows:

(in thousands)RetailNational ProgramsWholesale BrokerageServicesOtherTotal
Income before income taxes$217,845$117,375$70,171$34,508$22,563$462,462
Income Before Income Taxes Margin20.9%23.7%24.4%18.2%NMF23.0%
Amortization44,38625,95411,3914,813—86,544
Depreciation5,2895,4861,6281,5588,87322,834
Interest35,96926,1815,2542,869(29,693)40,580
Change in estimated acquisition earn-out payables1,081875815198—2,969
EBITDAC$304,570$175,871$89,259$43,946$1,743$615,389
EBITDAC Margin29.2%35.6%31.1%23.2%NMF30.6%

NMF = Not a meaningful figure

The reconciliation of income before incomes taxes, included in the Consolidated Statement of Income, to EBITDAC, a non-GAAP measure, and Income Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, for the year ended December 31, 2017, is as follows:

(in thousands)RetailNational ProgramsWholesale BrokerageServicesOtherTotal
Income before income taxes$196,616$109,961$68,844$30,498$43,803$449,722
Income Before Income Taxes Margin20.8%22.9%25.3%18.4%NMF23.9%
Amortization42,16427,27711,4564,548185,446
Depreciation5,2106,3251,8851,6007,67822,698
Interest31,13335,5616,2633,522(38,163)38,316
Change in estimated acquisition earn-out payables8,087786327——9,200
EBITDAC$283,210$179,910$88,775$40,168$13,319$605,382
EBITDAC Margin30.0%37.5%32.7%24.3%NMF32.2%

NMF = Not a meaningful figure

The reconciliation of income before incomes taxes, included in the Consolidated Statement of Income, to EBITDAC, a non-GAAP measure, and Income Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, for the year ended December 31, 2016, is as follows:

(in thousands)RetailNational ProgramsWholesale BrokerageServicesOtherTotal
Income before income taxes$188,001$91,762$62,623$24,338$56,775$423,499
Income Before Income Taxes Margin20.5%20.5%25.8%15.6%NMF24.0%
Amortization43,44727,92010,8014,4851086,663
Depreciation6,1917,8681,9751,8813,08821,003
Interest38,21645,7383,9764,950(53,399)39,481
Change in estimated acquisition earn-out payables10,253207(274)(1,001)—9,185
EBITDAC$286,108$173,495$79,101$34,653$6,474$579,831
EBITDAC Margin31.2%38.7%32.5%22.2%NMF32.8%

NMF = Not a meaningful figure

Retail Segment

The Retail Segment provides a broad range of insurance products and services to commercial, public and quasi-public, professional and individual insured customers. Approximately 85.9% of the Retail Segment’s commissions and fees revenue is commission based. Because most of our other operating expenses are not correlated to changes in commissions on insurance premiums, a significant portion of any fluctuation in the commissions we receive, net of related producer compensation and cost to fulfill expense deferrals and releases as required by the New Revenue Standard, will result in a similar fluctuation in our income before income taxes, unless we make incremental investments or modifications to the costs in the organization.

Financial information relating to our Retail Segment is as follows:

(in thousands, except percentages)2018% Change2017% Change2016
REVENUES
Core commissions and fees$1,008,63910.9%$909,7623.2%$881,729
Profit-sharing contingent commissions24,5174.9%23,377(7.3)%25,207
Guaranteed supplemental commissions8,535(6.3)%9,108(6.9)%9,787
Commissions and fees1,041,69110.6%942,2472.8%916,723
Investment income2(75.0)%8(78.4)%37
Other income, net1,070(11.2)%1,20586.5%646
Total revenues1,042,76310.5%943,4602.8%917,406
EXPENSES
Employee compensation and benefits570,22210.6%515,4776.0%486,303
Other operating expenses169,10415.0%147,0840.5%146,286
(Gain)/loss on disposal(1,133)(51.0)%(2,311)79.0%(1,291)
Amortization44,3865.3%42,164(3.0)%43,447
Depreciation5,2891.5%5,210(15.8)%6,191
Interest35,96915.5%31,133(18.5)%38,216
Change in estimated acquisition earn-out payables1,081(86.6)%8,087(21.1)%10,253
Total expenses824,91810.5%746,8442.4%729,405
Income before income taxes$217,84510.8%$196,6164.6%$188,001
Income Before Income Taxes Margin (1)20.9%20.8%20.5%
EBITDAC (1)304,5707.5%283,210(1.0)%286,108
EBITDAC Margin (1)29.2%30.0%31.2%
Organic Revenue growth rate (1)3.0%2.9%1.9%
Employee compensation and benefits relative to total revenues54.7%54.6%53.0%
Other operating expenses relative to total revenues16.2%15.6%15.9%
Capital expenditures$6,85852.6%$4,494(24.5)%$5,951
Total assets at December 31$5,850,04537.5%$4,255,51510.4%$3,854,393

(1) A non-GAAP measure

NMF = Not a meaningful figure

The Retail Segment’s total revenues in 2018 increased 10.5%, or $99.3 million, over the same period in 2017, to $1,042.8 million. The $98.9 million increase in core commissions and fees was driven by the following: (i) approximately $73.4 million related to the core commissions and fees from acquisitions that had no comparable revenues in the same period of 2017; (ii) $28.1 million related to net new and renewal business; offset by (iii) $1.3 million related to the impact of adopting the New Revenue Standard; and (iv) a decrease of $1.3 million related to commissions and fees from businesses divested in 2017 and 2018. Profit-sharing contingent commissions and GSCs in 2018 increased 1.7%, or $0.6 million, over 2017, to $33.1 million. The Retail Segment’s growth rate for total commissions and fees was 10.6% and the Organic Revenue growth rate was 3.0% for 2018. The Organic Revenue growth rate was driven by increased new business and higher retention across most lines of business the preceding twelve months.

Income before income taxes for 2018 increased 10.8%, or $21.2 million, over the same period in 2017, to $217.8 million. The primary factors affecting this increase were: (i) the net increase in revenue as described above, (ii) offset by a 10.6%, or $54.7 million, increase in

employee compensation and benefits, due primarily to the year-on-year impact of salary inflation and additional teammates to support revenue growth, (iii) operating expenses which increased by increased by $22.0 million, or 15.0%, primarily due to our multi-year technology investment program and increased professional services to support our customers; (iv) a combined increase in amortization, depreciation and intercompany interest expense of $7.2 million resulting from our acquisition activity over the past twelve months; offset by (v) a reduction in the change in estimated acquisition earn-out payables of $7.0 million, or 86.6%, to $1.1 million.

EBITDAC for 2018 increased 7.5%, or $21.4 million, from the same period in 2017, to $304.6 million. EBITDAC Margin for 2018 decreased to 29.2% from 30.0% in the same period in 2017. EBITDAC Margin was impacted by the net increase in revenue as described above, including the New Revenue Standard, which impacted the EBITDAC Margin by approximately 90 basis points.

The Retail Segment’s total revenues in 2017 increased 2.8%, or $26.1 million, over the same period in 2016, to $943.5 million. The $28.0 million increase in core commissions and fees was driven by the following: (i) $24.6 million related to net new business; (ii) approximately $8.2 million related to the core commissions and fees from acquisitions that had no comparable revenues in the same period of 2016; and (iii) an offsetting decrease of $4.8 million related to commissions and fees from businesses divested in 2016 and 2017. Profit-sharing contingent commissions and GSCs in 2017 decreased 7.2%, or $2.5 million, over 2016, to $32.5 million. The Retail Segment’s growth rate for total commissions and fees was 2.8%, and the Organic Revenue growth rate was 2.9% for 2017. The Organic Revenue growth rate was driven by increased new business and higher retention during the preceding twelve months, along with continued increases in commercial auto and employee benefits rates and underlying exposure unit values that drive insurance premiums.

Income before income taxes for 2017 increased 4.6%, or $8.6 million, over the same period in 2016, to $196.6 million. The primary factors affecting this increase were: (i) the net increase in revenue as described above, which was offset by (ii) a 6.0%, or $29.2 million, increase in employee compensation and benefits, due primarily to the year-on-year impact of salary inflation, additional teammates to support revenue growth and the incremental investment in our performance incentive plan, (iii) an increase in operating expenses by $0.8 million, or 0.5%, primarily due to our multi-year technology investment program and increased value-added consulting services to support our customers; offset by (iv) a reduction in the change in estimated acquisition earn-out payables of $2.2 million, or 21.1%, to $8.1 million, and (v) a combined decrease in amortization, depreciation and intercompany interest expense of $9.3 million.

EBITDAC for 2017 decreased 1.0%, or $2.9 million, from the same period in 2016, to $283.2 million. EBITDAC Margin for 2017 decreased to 30.0% from 31.2% in the same period in 2016. EBITDAC Margin was impacted by the factors impacting employee compensation and benefits as well as other operating expenses described above, partially offset by the net increase in revenue as described above.

National Programs Segment

The National Programs Segment manages over 40 programs supported by approximately one hundred well-capitalized carrier partners. In most cases, the insurance carriers that support the programs have delegated underwriting and, in many instances, claims-handling authority to our programs operations. These programs are generally distributed through a nationwide network of independent agents and Brown & Brown retail agents, and offer targeted products and services designed for specific industries, trade groups, professions, public entities and market niches. The National Programs Segment operations can be grouped into five broad categories: Professional Programs, Personal Lines Programs, Commercial Programs, Public Entity-Related Programs and the National Flood Program. The National Programs Segment’s revenue is primarily commission based.

Financial information relating to our National Programs Segment is as follows:

(in thousands, except percentages)2018% Change2017% Change2016
REVENUES
Core commissions and fees$469,9062.4%$458,8636.6%$430,479
Profit-sharing contingent commissions23,89618.7%20,12316.3%17,306
Guaranteed supplemental commissions76145.2%3134.8%23
Commissions and fees493,8783.1%479,0177.0%447,808
Investment income50631.8%384(38.9)%628
Other income, net79(80.8)%412NMF80
Total revenues494,4633.1%479,8137.0%448,516
EXPENSES
Employee compensation and benefits219,1668.6%201,8165.6%191,199
Other operating expenses98,012—%97,98816.9%83,822
(Gain)/loss on disposal1,414NMF99—%—
Amortization25,954(4.9)%27,277(2.3)%27,920
Depreciation5,486(13.3)%6,325(19.6)%7,868
Interest26,181(26.4)%35,561(22.3)%45,738
Change in estimated acquisition earn-out payables87511.3%786NMF207
Total expenses377,0882.0%369,8523.7%356,754
Income before income taxes$117,3756.7%$109,96119.8%$91,762
Income Before Income Taxes Margin (1)23.7%22.9%20.5%
EBITDAC (1)175,871(2.2)%179,9103.7%173,495
EBITDAC Margin (1)35.6%37.5%38.7%
Organic Revenue growth rate (1)(0.9)%6.1%4.2%
Employee compensation and benefits relative to total revenues44.3%42.1%42.6%
Other operating expenses relative to total revenues19.8%20.4%18.7%
Capital expenditures$12,391108.7%$5,936(14.9)%$6,977
Total assets at December 31$2,940,097(10.0)%$3,267,48620.5%$2,711,378

(1) A non-GAAP measure

NMF = Not a meaningful figure

The National Programs Segment’s total revenues in 2018 increased 3.1%, or $14.7 million, over 2017, to a total $494.5 million. The $11.0 million increase in core commissions and fees was driven by the following: (i) $7.9 million related to the impact of adopting the New Revenue Standard; (ii) an increase of approximately $7.3 million related to core commissions and fees from acquisitions that had no comparable revenues in 2017; which was offset by (iii) $4.1 million related to net new and renewal business, which was impacted by lower weather related claims revenue as compared to the prior year; and (iv) a decrease of $0.1 million related to commissions and fees recorded in 2017 from businesses since divested. Profit-sharing contingent commissions and GSCs were $24.0 million in 2018, which was an increase of $3.8 million over 2017, which was primarily driven by the improved loss experience of our carrier partners.

The National Programs Segment’s growth rate for total commissions and fees was 3.1% and the Organic Revenue growth rate was (0.9)% for 2018. The total commissions and fees growth was mainly due to recognizing a full year of revenues for our core commercial program, new

acquisitions, strong growth in our earthquake programs, increased profit-sharing contingent commissions and a non-recurring adjustment of approximately $8.0 million relating to the New Revenue Standard with an offset for the lower weather-related claims revenue. The Organic Revenue growth rate decline was driven substantially by lower flood claims revenue as compared to the prior year.

Income before income taxes for 2018 increased 6.7%, or $7.4 million, from the same period in 2017, to $117.4 million. The increase was the result of a lower intercompany interest charge of $9.4 million, growth in a number of our programs, and was offset by the investment in our core commercial program, and lower weather-related claims revenue.

EBITDAC for 2018 decreased 2.2%, or $4.0 million, from the same period in 2017, to $175.9 million. EBITDAC Margin for 2018 decreased to 35.6% from 37.5% in the same period in 2017. The decrease in EBITDAC Margin was related to (i) increased employee compensation and benefits primarily driven by the investment in our core commercial program; (ii) a decrease in weather-related claims revenue compared to the prior year which has a margin higher than the average margin of the National Programs Segment; partially offset by (iii) the total revenue growth.

The National Programs Segment’s total revenues in 2017 increased 7.0%, or $31.3 million, over 2016, to a total of $479.8 million. The $28.4 million increase in core commissions and fees was driven by the following: (i) $26.4 million related to net new business; (ii) an increase of approximately $2.3 million related to core commissions and fees from acquisitions that had no comparable revenues in 2016; and which was offset by (iii) a decrease of $0.3 million related to commissions and fees recorded in 2016 from businesses since divested. Profit-sharing contingent commissions and GSCs were $20.2 million in 2017, which was an increase of $2.8 million over 2016, which was primarily driven by the improved loss experience of our carrier partners.

The National Programs Segment’s growth rate for total commissions and fees was 7.0% and the Organic Revenue growth rate was 6.1% for 2017. This Organic Revenue growth rate was mainly due to increased flood claims revenues and our new core commercial program with QBE. Growth in these businesses was partially offset by certain programs that have been affected by certain carriers changing their risk appetite for new or existing programs or lower premium rates for certain lines of business.

Income before income taxes for 2017 increased 19.8%, or $18.2 million, from the same period in 2016, to $110.0 million. The increase was the result of a lower intercompany interest charge of $10.2 million, along with leveraging revenue growth of $31.3 million.

EBITDAC for 2017 increased 3.7%, or $6.4 million, from the same period in 2016, to $179.9 million. EBITDAC Margin for 2017 decreased to 37.5% from 38.7% in the same period in 2016. The decrease in EBITDAC Margin was related to (i) the investment in our new core commercial program; which was partially offset by (ii) increased flood claims processing revenue which has a higher than average margin.

Wholesale Brokerage Segment

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

Financial information relating to our Wholesale Brokerage Segment is as follows:

(in thousands, except percentages)2018% Change2017% Change2016
REVENUES
Core commissions and fees$277,5526.3%$261,22413.7%$229,657
Profit-sharing contingent commissions7,462(14.1)%8,686(24.4)%11,487
Guaranteed supplemental commissions1,3509.7%1,231(26.2)%1,669
Commissions and fees286,3645.6%271,14111.7%242,813
Investment income165—%—(100.0)%4
Other income, net485(18.6)%596108.4%286
Total revenues287,0145.6%271,73711.8%243,103
EXPENSES
Employee compensation and benefits147,5716.7%138,29713.5%121,863
Other operating expenses50,17712.3%44,6656.0%42,139
(Gain)/loss on disposal7—%——%—
Amortization11,391(0.6)%11,4566.1%10,801
Depreciation1,628(13.6)%1,885(4.6)%1,975
Interest5,254(16.1)%6,26357.5%3,976
Change in estimated acquisition earn-out payables815NMF327NMF(274)
Total expenses216,8436.9%202,89312.4%180,480
Income before income taxes$70,1711.9%$68,8449.9%$62,623
Income Before Income Taxes Margin (1)24.4%25.3%25.8%
EBITDAC (1)89,2590.5%88,77512.2%79,101
EBITDAC Margin (1)31.1%32.7%32.5%
Organic Revenue growth rate(1)5.7%6.6%4.3%
Employee compensation and benefits relative to total revenues51.4%50.9%50.1%
Other operating expenses relative to total revenues17.5%16.4%17.3%
Capital expenditures$2,51837.1%$1,83641.1%$1,301
Total assets at December 31$1,283,8771.9%$1,260,23913.7%$1,108,829

(1) A non-GAAP measure

NMF = Not a meaningful figure

The Wholesale Brokerage Segment’s total revenues for 2018 increased 5.6%, or $15.3 million, over 2017, to $287.0 million. The $16.3 million increase in core commissions and fees was driven by the following: (i) $14.9 million related to net new and renewal business; (ii) $2.5 million related to the core commissions and fees from acquisitions that had no comparable revenues in 2017; which was offset by (iii) a decrease of $0.9 million related to the impact of adopting the New Revenue Standard; and (iv) a decrease of $0.1 million related to commissions and fees recorded in 2017 from businesses since divested. Profit-sharing contingent commissions and GSCs for 2018 decreased $1.1 million over 2017, to $8.8 million. This decrease was driven by higher loss ratios experienced for several carriers due to losses associated with 2017 weather-related events. The Wholesale Brokerage Segment’s growth rate for total commissions and fees was 5.6%, and the Organic Revenue growth rate was 5.7% for 2018. The Organic Revenue growth rate was driven by net new business and modest increases in exposure units that were partially offset by slightly decreasing rates.

Income before income taxes for 2018 increased 1.9%, or $1.3 million, over 2017, to $70.2 million, primarily due to the following: (i) the net increase in revenue as described above, which was offset by (ii) an increase in employee compensation and benefits of $9.3 million, related to additional teammates to support increased transaction volumes, compensation increases for existing teammates, and additional non-cash stock-based compensation expense; (iii) a decrease in profit from lower profit-sharing contingent commissions and GSCs; and (iv) a net $5.5

million increase in operating expenses, primarily related to intercompany technology charges that had no comparable expenses in the same period of 2017.

EBITDAC for 2018 increased 0.5%, or $0.5 million, from the same period in 2017, to $89.3 million. EBITDAC Margin for 2018 decreased to 31.1% from 32.7% in the same period in 2017. The decrease in EBITDAC Margin was primarily driven by the net decrease in profit-sharing contingent commissions as described above and to a lesser extent the intercompany technology charges and increased non-cash stock-based compensation costs, which more than offset margin expansion from leveraging of Organic Revenue growth.

The Wholesale Brokerage Segment’s total revenues for 2017 increased 11.8%, or $28.6 million, over 2016, to $271.7 million. The $31.6 million net increase in core commissions and fees was driven by the following: (i) $16.5 million related to the core commissions and fees from acquisitions that had no comparable revenues in 2016; and (ii) $15.1 million related to net new business. Profit-sharing contingent commissions and GSCs for 2017 decreased $3.2 million over 2016, to $9.9 million. This decrease was driven by higher loss ratios experienced for several carriers, and partially offset by profit-sharing contingent commissions received from acquisitions that had no comparable profit-sharing contingent commissions in 2016. The Wholesale Brokerage Segment’s growth rate for total commissions and fees was 11.7%, and the Organic Revenue growth rate was 6.6% for 2017, which were driven by net new business and modest increases in exposure units that were partially offset by significant contraction in insurance premium rates for catastrophe-prone properties during the first half of the year, which moderated in the latter part of the year.

Income before income taxes for 2017, increased 9.9%, or $6.2 million, over 2016, to $68.8 million, primarily due to the following: (i) the net increase in revenue as described above, offset by (ii) an increase in employee compensation and benefits of $16.4 million, of which $10.4 million was related to acquisitions that had no comparable compensation and benefits in the same period of 2016, with the remainder related to additional teammates to support increased transaction volumes and compensation increases for existing teammates, (iii) a decrease in profit from lower profit-sharing contingent commissions and GSCs, (iv) a net $2.5 million increase in operating expenses, of which $3.1 million was related to acquisitions that had no comparable expenses in the same period of 2016 and (v) higher intercompany interest charges related to acquisitions completed in the previous year.

EBITDAC for 2017 increased 12.2%, or $9.7 million, from the same period in 2016, to $88.8 million. EBITDAC Margin for 2017 increased to 32.7% from 32.5% in the same period in 2016. The increase in EBITDAC Margin was primarily driven by: (i) growth of core commissions and fees of 13.7%; and (ii) improving the EBITDAC Margin of a business acquired in 2016, which were partially offset by (iii) the net decrease in profit-sharing contingent commissions as a result of higher loss ratios.

Services Segment

The Services Segment provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas. The Services Segment also provides Medicare Set-aside account services, Social Security disability and Medicare benefits advocacy services, and claims adjusting services.

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

Financial information relating to our Services Segment is as follows:

(in thousands, except percentages)2018% Change2017% Change2016
REVENUES
Core commissions and fees$189,04114.5%$165,0735.8%$156,082
Profit-sharing contingent commissions——%——%—
Guaranteed supplemental commissions——%——%—
Commissions and fees189,04114.5%165,0735.8%156,082
Investment income205(31.4)%2995.7%283
Other income, net——%——%—
Total revenues189,24614.4%165,3725.8%156,365
EXPENSES
Employee compensation and benefits85,9306.2%80,9442.7%78,804
Other operating expenses61,83339.9%44,2053.0%42,908
(Gain)/loss on disposal(2,463)NMF55—%—
Amortization4,8135.8%4,5481.4%4,485
Depreciation1,558(2.6)%1,600(14.9)%1,881
Interest2,869(18.5)%3,522(28.8)%4,950
Change in estimated acquisition earn-out payables198—%—(100.0)%(1,001)
Total expenses154,73814.7%134,8742.2%132,027
Income before income taxes$34,50813.1%$30,49825.3%$24,338
Income Before Income Taxes Margin (1)18.2%18.4%15.6%
EBITDAC (1)43,9469.4%40,16815.9%34,653
EBITDAC Margin (1)23.2%24.3%22.2%
Organic Revenue growth rate(1)3.4%5.1%3.8%
Employee compensation and benefits relative to total revenues45.4%48.9%50.4%
Other operating expenses relative to total revenues32.7%26.7%27.4%
Capital expenditures$1,52547.6%$1,03357.5%$656
Total assets at December 31$471,57218.1%$399,2407.4%$371,645

(1) A non-GAAP measure

NMF = Not a meaningful figure

The Services Segment’s total revenues for 2018 increased 14.4%, or $23.9 million, over 2017, to $189.2 million. The $24.0 million increase in core commissions and fees was driven primarily by the following: (i) $10.3 million related to the impact of adopting the New Revenue Standard; (ii) $8.0 million related to the core commissions and fees from acquisitions that had no comparable revenues in the same period of 2017; and (iii) $5.7 million related to net new and renewal business. The Services Segment’s growth rate for total commissions and fees was 14.5%, and the Organic Revenue growth rate was 3.4% for 2018. The Organic Revenue growth rate was driven by growth across multiple businesses.

Income before income taxes for 2018 increased 13.1%, or $4.0 million, over 2017, to $34.5 million due to a combination of: (i) Organic Revenue growth; and (ii) lower intercompany interest charges, which were partially offset by (iii) the growth in other operating expenses associated with the New Revenue Standard and professional fees to support Organic Revenue growth.

EBITDAC for 2018 increased 9.4%, or $3.8 million, over the same period in 2017, to $43.9 million. EBITDAC Margin for 2018 decreased to 23.2% from 24.3% in the same period in 2017. The decrease in EBITDAC Margin was due to the impact of the New Revenue Standard, which resulting in recording $10.0 million of incremental year on year revenues and expenses which therefore compresses margins, along with higher non-cash stock-based compensation costs, and costs associated with onboarding new customers.

The Services Segment’s total revenues for 2017 increased 5.8%, or $9.0 million, over 2016, to $165.4 million. The $9.0 million increase in core commissions and fees was driven primarily by the following: (i) $7.9 million related to net new business; (ii) $0.9 million related to the core commissions and fees from acquisitions that had no comparable revenues in the same period of 2016; and (iii) an increase of $0.2 million related to commissions and fees recorded in 2016 from business since divested. The Services Segment’s growth rate for total commissions and fees was 5.8% and the Organic Revenue growth rate was 5.1% for 2017, primarily driven by our claims offices that handle catastrophe claims.

Income before income taxes for 2017 increased 25.3%, or $6.2 million, over 2016, to $30.5 million due to a combination of: (i) new business realized across most of our businesses, (ii) our claims offices that handled catastrophe claims, (iii) the continued efficient operation of our businesses, and (iv) lower intercompany interest charges.

EBITDAC for 2017 increased 15.9%, or $5.5 million, over the same period in 2016, to $40.2 million. EBITDAC Margin for 2017 increased to 24.3% from 22.2% in the same period in 2016. The increase in EBITDAC Margin was due to net increase in revenue as described above and effective control of expenses.

Other

As discussed in Note 16 of the Notes to Consolidated Financial Statements, the “Other” column in the Segment Information table includes any income and expenses not allocated to reportable segments, and corporate-related items, including the intercompany interest expense charges to reporting segments.

LIQUIDITY AND CAPITAL RESOURCES

The Company seeks to maintain a conservative balance sheet and liquidity profile. Our capital requirements to operate as an insurance intermediary are low and we have been able to grow and invest in our business principally through cash that has been generated from operations. We have the ability to utilize our revolving credit facility (the “Facility”), which provides up to $800.0 million in available cash, and we believe that we have access to additional funds, if needed, through the capital markets to obtain further debt financing under the current market conditions. The Company believes that its existing cash, cash equivalents, short-term investment portfolio and funds generated from operations, together with the funds available under the Facility, will be sufficient to satisfy our normal liquidity needs, including principal payments on our long-term debt, for at least the next twelve months.

Our cash and cash equivalents of $439.0 million at December 31, 2018 reflected a decrease of $134.4 million from the $573.4 million balance at December 31, 2017. During 2018, $567.5 million of cash was generated from operating activities, representing an increase of 28.4%. During this period, $923.9 million of cash was used for acquisitions, $26.6 million was used for acquisition earn-out payments, $41.5 million was used to purchase additional fixed assets, $84.7 million was used for payment of dividends, $100.0 million was used for share repurchases, and $120.0 million was used to pay outstanding principal balances owed on long-term debt.

We hold approximately $19.8 million in cash outside of the U.S., which we currently have no plans to repatriate in the near future.

Our cash and cash equivalents of $573.4 million at December 31, 2017 reflected an increase of $57.8 million from the $515.6 million balance at December 31, 2016. During 2017, $442.0 million of cash was generated from operating activities, representing an increase of 7.5%. During this period, $41.5 million of cash was used for acquisitions, $43.8 million was used for acquisition earn-out payments, $24.2 million was used to purchase additional fixed assets, $77.7 million was used for payment of dividends, $139.9 million was used for share repurchases, and $96.8 million was used to pay outstanding principal balances owed on long-term debt.

Our cash and cash equivalents of $515.6 million at December 31, 2016 reflected an increase of $72.2 million from the $443.4 million balance at December 31, 2015. During 2016, $411.0 million of cash was generated from operating activities. During this period, $122.6 million of cash was used for acquisitions, $28.2 million was used for acquisition earn-out payments, $17.8 million was used for additions to fixed assets, $70.3 million was used for payment of dividends, $7.7 million was used for share repurchases, and $73.1 million was used to pay outstanding principal balances owed on long-term debt.

Our ratio of current assets to current liabilities (the “current ratio”) was 1.22 and 1.13 at December 31, 2018 and 2017, respectively.

Contractual Cash Obligations

As of December 31, 2018, our contractual cash obligations were as follows:

Payments Due by Period
(in thousands)TotalLess Than 1 Year1-3 Years4-5 YearsAfter 5 Years
Long-term debt$1,515,000$50,000$125,000$840,000$500,000
Other liabilities(1)53,1874,9075,5702,47040,240
Operating leases210,01048,29278,35347,01636,349
Interest obligations251,05357,848109,53268,79814,875
Unrecognized tax benefits1,639—1,639——
Maximum future acquisition contingency payments(2)198,62743,184155,443——
Total contractual cash obligations$2,229,516$204,231$475,537$958,284$591,464
(1)Includes the current portion of other long-term liabilities.
(2)Includes $89.9 million of current and non-current estimated earn-out payables.

Debt

Total debt at December 31, 2018 was $1,507.0 million net of unamortized discount and debt issuance costs, which was an increase of $530.8 million compared to December 31, 2017. The increase reflects the addition of $650.0 million in principal balances, total debt repayments of $120.0 million, net of the amortization of discounted debt related to our Senior Notes due 2024, with a fixed interest rate of 4.200% per year and debt issuance cost amortization of $1.6 million. The Company also added $0.8 million in debt issuance costs related to the Term Loan Credit Agreement (as defined below) that was executed in December 2018.

On May 10, 2018, the Company elected to prepay in full the principal balance of $100.0 million from the Series E Senior Notes, along with accrued interest of $0.7 million and a prepayment premium of $0.7 million as the notes were to mature on September 15, 2018. This resulted in a net interest expense savings of $0.8 million after deducting the pro-rated interest expense and prepayment premiums paid when compared to holding the note to maturity paying the full semi-annual coupon interest expense of $2.3 million.

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 Amended and Restated Credit Agreement extends the applicable maturity date of the Facility of $800.0 million to June 28, 2022 and re-evidences the unsecured term loans in the amount of $400.0 million, while also extending the applicable maturity date to June 28, 2022.

The Company borrowed approximately $600.0 million under its Revolving Credit Facility on November 15, 2018 in connection with the closing of the acquisition of certain assets and assumption of certain liabilities of Hays.

On December 21, 2018, the Company borrowed $300.0 million under a term loan credit agreement with Wells Fargo Bank, National Association, as administrative agent, Bank of America, N.A., BMO Harris Bank N.A. and SunTrust Bank as co-syndication agents, and Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, BMO Capital Markets Corp. and SunTrust Robinson Humphrey, Inc. as joint lead arrangers and joint bookrunners (the “Term Loan Credit Agreement”). The Term Loan Credit Agreement provides for an unsecured term loan in the initial amount of $300.0 million, which may, subject to lenders’ discretion, potentially be increased up to an aggregate amount of $450.0 million (the “Term Loan”). The Term Loan is repayable over the five-year term from the effective date of the Term Loan Credit Agreement, which was December 21, 2018. Based on the Company’s net debt leverage ratio or a non-credit enhanced senior unsecured long-term debt rating as determined by Moody’s Investor Service and Standard & Poor’s Rating Service, the current rate of interest on the Term Loan is 1.25% above the adjusted 1-Month London Interbank Offered Rate (“LIBOR”). The Company used $250.0 million of the borrowings to reduce indebtedness under the Facility.

Total debt at December 31, 2017 was $976.1 million net of unamortized discount and debt issuance costs, which was a decrease of $97.7 million compared to December 31, 2016. The decrease reflects the repayment of $96.8 million in principal, related to our credit agreements, repayment of the $0.5 million in a short-term note payable related to the 2016 acquisition of Social Security Advocates for the Disabled, LLC (“SSAD”), net of the amortization of discounted debt related to our Senior Notes due 2024, with a fixed interest rate of 4.200% per year and debt issuance cost amortization of $1.9 million. The Company also added $2.8 million in debt issuance costs related to the Amended and Restated Credit Agreement (as defined below) that was executed in June 2017.

Off-Balance Sheet Arrangements

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

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

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