filings.toolsItem 8. Financial Statements and Supplementary Data.
182K characters. Original on sec.gov · Markdown
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
BROWN & BROWN, INC.
CONSOLIDATED STATEMENTS OF INCOME
| For the Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share data) | 2020 | 2019 | 2018 | |||||||||
| REVENUES | ||||||||||||
| Commissions and fees | $ | 2,606,108 | $ | 2,384,737 | $ | 2,009,857 | ||||||
| Investment income | 2,811 | 5,780 | 2,746 | |||||||||
| Other income, net | 4,456 | 1,654 | 1,643 | |||||||||
| Total revenues | 2,613,375 | 2,392,171 | 2,014,246 | |||||||||
| EXPENSES | ||||||||||||
| Employee compensation and benefits | 1,436,377 | 1,308,165 | 1,068,914 | |||||||||
| Other operating expenses | 365,973 | 377,089 | 332,118 | |||||||||
| (Gain)/loss on disposal | (2,388 | ) | (10,021 | ) | (2,175 | ) | ||||||
| Amortization | 108,523 | 105,298 | 86,544 | |||||||||
| Depreciation | 26,276 | 23,417 | 22,834 | |||||||||
| Interest | 58,973 | 63,660 | 40,580 | |||||||||
| Change in estimated acquisition earn-out payables | (4,458 | ) | (1,366 | ) | 2,969 | |||||||
| Total expenses | 1,989,276 | 1,866,242 | 1,551,784 | |||||||||
| Income before income taxes | 624,099 | 525,929 | 462,462 | |||||||||
| Income taxes | 143,616 | 127,415 | 118,207 | |||||||||
| Net income | $ | 480,483 | $ | 398,514 | $ | 344,255 | ||||||
| Net income per share: | ||||||||||||
| Basic | $ | 1.70 | $ | 1.42 | $ | 1.24 | ||||||
| Diluted | $ | 1.69 | $ | 1.40 | $ | 1.22 | ||||||
| Dividends declared per share | $ | 0.35 | $ | 0.33 | $ | 0.31 |
See accompanying notes to Consolidated Financial Statements.
BROWN & BROWN, INC.
CONSOLIDATED BALANCE SHEETS
| (in thousands, except per share data) | December 31, 2020 | December 31, 2019 | ||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 817,398 | $ | 542,174 | ||||
| Restricted cash and investments | 454,517 | 420,801 | ||||||
| Short-term investments | 18,332 | 12,325 | ||||||
| Premiums, commissions and fees receivable | 1,099,248 | 942,834 | ||||||
| Reinsurance recoverable | 43,469 | 58,505 | ||||||
| Prepaid reinsurance premiums | 377,615 | 366,021 | ||||||
| Other current assets | 147,670 | 152,142 | ||||||
| Total current assets | 2,958,249 | 2,494,802 | ||||||
| Fixed assets, net | 201,115 | 148,627 | ||||||
| Operating lease assets | 186,998 | 184,288 | ||||||
| Goodwill | 4,395,918 | 3,746,094 | ||||||
| Amortizable intangible assets, net | 1,049,660 | 916,768 | ||||||
| Investments | 24,971 | 27,378 | ||||||
| Other assets | 149,581 | 104,864 | ||||||
| Total assets | $ | 8,966,492 | $ | 7,622,821 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Premiums payable to insurance companies | $ | 1,198,529 | $ | 1,014,317 | ||||
| Losses and loss adjustment reserve | 43,469 | 58,505 | ||||||
| Unearned premiums | 377,615 | 366,021 | ||||||
| Premium deposits and credits due customers | 102,505 | 113,841 | ||||||
| Accounts payable | 190,497 | 99,960 | ||||||
| Accrued expenses and other liabilities | 371,737 | 337,717 | ||||||
| Current portion of long-term debt | 70,000 | 55,000 | ||||||
| Total current liabilities | 2,354,352 | 2,045,361 | ||||||
| Long-term debt less unamortized discount and debt issuance costs | 2,025,906 | 1,500,343 | ||||||
| Operating lease liabilities | 172,935 | 167,855 | ||||||
| Deferred income taxes, net | 344,222 | 328,277 | ||||||
| Other liabilities | 314,854 | 230,706 | ||||||
| Shareholders’ Equity: | ||||||||
| Common stock, par value $0.10 per share; authorized 560,000 shares; issued 299,689 shares and outstanding 283,004 at 2020, issued 297,106 shares and outstanding 281,655 shares at 2019 - in thousands. | 29,969 | 29,711 | ||||||
| Additional paid-in capital | 794,909 | 716,049 | ||||||
| Treasury stock, at cost at 16,685 at 2020 and 15,451 shares at 2019, respectively - in thousands | (591,338 | ) | (536,243 | ) | ||||
| Retained earnings | 3,520,683 | 3,140,762 | ||||||
| Total shareholders’ equity | 3,754,223 | 3,350,279 | ||||||
| Total liabilities and shareholders’ equity | $ | 8,966,492 | $ | 7,622,821 |
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, 2018 | 286,895 | $ | 28,689 | $ | 483,733 | $ | (386,322 | ) | $ | 2,456,599 | $ | 2,582,699 | ||||||||||||
| Adoption of Topic 606 at January 1, 2018 | 117,515 | 117,515 | ||||||||||||||||||||||
| Beginning balance after adoption of Topic 606 | 286,895 | 28,689 | 483,733 | (386,322 | ) | 2,574,114 | 2,700,214 | |||||||||||||||||
| Net income | 344,255 | 344,255 | ||||||||||||||||||||||
| Net unrealized holding (loss) gain on available-for-sale securities | (21 | ) | (57 | ) | (78 | ) | ||||||||||||||||||
| Common stock issued for employee stock benefit plans | 3,096 | 310 | 39,857 | 40,167 | ||||||||||||||||||||
| Common stock issued for agency acquisitions | 3,376 | 338 | 99,662 | 100,000 | ||||||||||||||||||||
| Purchase of treasury stock | (8,750 | ) | (91,250 | ) | (100,000 | ) | ||||||||||||||||||
| Common stock issued to directors | 13 | 1 | 699 | 700 | ||||||||||||||||||||
| Cash dividends paid ($0.31 per share) | (84,690 | ) | (84,690 | ) | ||||||||||||||||||||
| Balance at December 31, 2018 | 293,380 | 29,338 | 615,180 | (477,572 | ) | 2,833,622 | 3,000,568 | |||||||||||||||||
| Net Income | 398,514 | 398,514 | ||||||||||||||||||||||
| Net unrealized holding (loss) gain on available-for-sale securities | 182 | (30 | ) | 152 | ||||||||||||||||||||
| Common stock issued for employee stock benefit plans | 3,129 | 313 | 59,867 | 60,180 | ||||||||||||||||||||
| Common stock issued for agency acquisitions | 569 | 57 | 19,943 | 20,000 | ||||||||||||||||||||
| Purchase of treasury stock | 20,000 | (58,671 | ) | (38,671 | ) | |||||||||||||||||||
| Common stock issued to directors | 28 | 3 | 877 | 880 | ||||||||||||||||||||
| Cash dividends paid ($0.33 per share) | (91,344 | ) | (91,344 | ) | ||||||||||||||||||||
| Balance at December 31, 2019 | 297,106 | 29,711 | 716,049 | (536,243 | ) | 3,140,762 | 3,350,279 | |||||||||||||||||
| Net Income | 480,483 | 480,483 | ||||||||||||||||||||||
| Net unrealized holding (loss) gain on available-for-sale securities | 466 | 30 | 496 | |||||||||||||||||||||
| Common stock issued for employee stock benefit plans | 1,844 | 184 | 47,761 | 47,945 | ||||||||||||||||||||
| Common stock issued for agency acquisitions | 723 | 72 | 30,048 | 30,120 | ||||||||||||||||||||
| Purchase of treasury stock | (55,095 | ) | (55,095 | ) | ||||||||||||||||||||
| Common stock issued to directors | 16 | 2 | 585 | 587 | ||||||||||||||||||||
| Cash dividends paid ($0.35 per share) | (100,592 | ) | (100,592 | ) | ||||||||||||||||||||
| Balance at December 31, 2020 | 299,689 | $ | 29,969 | $ | 794,909 | $ | (591,338 | ) | $ | 3,520,683 | $ | 3,754,223 |
See accompanying notes to Consolidated Financial Statements.
BROWN & BROWN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2020 | 2019 | 2018 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 480,483 | $ | 398,514 | $ | 344,255 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Amortization | 108,523 | 105,298 | 86,544 | |||||||||
| Depreciation | 26,276 | 23,417 | 22,834 | |||||||||
| Non-cash stock-based compensation | 59,749 | 46,994 | 33,519 | |||||||||
| Change in estimated acquisition earn-out payables | (4,458 | ) | (1,366 | ) | 2,969 | |||||||
| Deferred income taxes | 15,943 | 12,383 | 15,008 | |||||||||
| Amortization of debt discount and disposal of deferred financing costs | 2,319 | 2,054 | 1,627 | |||||||||
| Accretion of discounts and premiums, investments | 48 | (5 | ) | (10 | ) | |||||||
| (Gain)/loss on sales of investments, fixed assets and customer accounts | (831 | ) | (9,550 | ) | (1,934 | ) | ||||||
| Payments on acquisition earn-outs in excess of original estimated payables | (4,532 | ) | (351 | ) | (12,538 | ) | ||||||
| Changes in operating assets and liabilities, net of effect from acquisitions and divestitures: | ||||||||||||
| Premiums, commissions and fees receivable (increase) decrease | (135,367 | ) | (86,778 | ) | (93,630 | ) | ||||||
| Reinsurance recoverables (increase) decrease | 15,036 | 6,891 | 412,424 | |||||||||
| Prepaid reinsurance premiums (increase) decrease | (11,594 | ) | (28,101 | ) | (16,903 | ) | ||||||
| Other assets (increase) decrease | (42,731 | ) | (46,520 | ) | (22,440 | ) | ||||||
| Premiums payable to insurance companies (increase) decrease | 158,775 | 148,658 | 141,169 | |||||||||
| Premium deposits and credits due customers increase (decrease) | (12,886 | ) | 7,820 | 13,792 | ||||||||
| Losses and loss adjustment reserve increase (decrease) | (15,036 | ) | (6,707 | ) | (411,509 | ) | ||||||
| Unearned premiums increase (decrease) | 11,594 | 28,101 | 16,903 | |||||||||
| Accounts payable increase (decrease) | 107,754 | 17,800 | 21,880 | |||||||||
| Accrued expenses and other liabilities increase (decrease) | 34,716 | 43,330 | 22,801 | |||||||||
| Other liabilities increase (decrease) | (72,134 | ) | 16,298 | (9,232 | ) | |||||||
| Net cash provided by operating activities | 721,647 | 678,180 | 567,529 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Additions to fixed assets | (70,700 | ) | (73,108 | ) | (41,520 | ) | ||||||
| Payments for businesses acquired, net of cash acquired | (694,842 | ) | (353,043 | ) | (923,874 | ) | ||||||
| Proceeds from sales of fixed assets and customer accounts | 9,615 | 21,592 | 4,984 | |||||||||
| Purchases of investments | (14,168 | ) | (17,520 | ) | (9,284 | ) | ||||||
| Proceeds from sales of investments | 11,025 | 8,494 | 17,923 | |||||||||
| Net cash used in investing activities | (759,070 | ) | (413,585 | ) | (951,771 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Payments on acquisition earn-outs | (24,977 | ) | (9,566 | ) | (14,059 | ) | ||||||
| Proceeds from long-term debt | 700,000 | 350,000 | 300,000 | |||||||||
| Payments on long-term debt | (55,000 | ) | (50,000 | ) | (120,000 | ) | ||||||
| Deferred debt issuance costs | (6,756 | ) | (3,701 | ) | (778 | ) | ||||||
| Borrowings on revolving credit facilities | 250,000 | 100,000 | 600,000 | |||||||||
| Payments on revolving credit facilities | (350,000 | ) | (350,000 | ) | (250,000 | ) | ||||||
| Issuances of common stock for employee stock benefit plans | 30,104 | 24,999 | 19,432 | |||||||||
| Repurchase of stock benefit plan shares for employees to fund tax withholdings | (41,321 | ) | (10,933 | ) | (12,155 | ) | ||||||
| Purchase of treasury stock | (55,095 | ) | (58,671 | ) | (91,250 | ) | ||||||
| Settlement (prepayment) of accelerated share repurchase program | — | 20,000 | (8,750 | ) | ||||||||
| Cash dividends paid | (100,592 | ) | (91,344 | ) | (84,690 | ) | ||||||
| Net cash provided by (used in) financing activities | 346,363 | (79,216 | ) | 337,750 | ||||||||
| Net increase (decrease) in cash and cash equivalents inclusive of restricted cash | 308,940 | 185,379 | (46,492 | ) | ||||||||
| Cash and cash equivalents inclusive of restricted cash at beginning of period | 962,975 | 777,596 | 824,088 | |||||||||
| Cash and cash equivalents inclusive of restricted cash at end of period | $ | 1,271,915 | $ | 962,975 | $ | 777,596 |
See accompanying notes to Consolidated Financial Statements. Refer to Note 13 for reconciliation of cash and cash equivalents inclusive of restricted cash.
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 service organization that markets and sells 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, professional and individual insured customers, and non-insurance risk-mitigating products through our automobile dealer services (“F&I”) businesses. The National Programs Segment, which acts 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 a nationwide network of independent agents, including Brown & Brown retail agents. The Wholesale Brokerage Segment markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers, as well as Brown & Brown retail agents. 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 March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We are currently evaluating our contracts and the available expedients provided by the new standard; however, the Company can assert there is no impact to any carrying value of assets or liabilities aside from our floating-rate debt instruments that are indexed to LIBOR and are carried at amortized cost. Any further impact of adoption will be in determining the new periodic floating interest rate indexed to our floating-rate debt instruments with no impact on the balance sheet upon adoption.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The standard removes specific exceptions in the current rules and eliminates the need for an organization to analyze whether the following apply in a given period: (a) exception to the incremental approach for intra-period tax allocation; (b) exceptions to accounting for basis differences when there are ownership changes in foreign investments and (c) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The standard also is designed to improve financial statement preparers’ application of income tax-related guidance and simplify GAAP for (a) franchise taxes that are partially based on income; (b) transactions with a government that result in a step-up in the tax basis of goodwill; (c) separate financial statements of legal entities that are not subject to tax and (d) enacted changes in tax laws in interim periods. The standard takes effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company does not expect that adopting this standard will have a material impact on the Company’s financial position.
Recently Adopted Accounting Standards
In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which provides guidance for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 became effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted ASU 2018-15 effective January 1, 2020. The impact of adoption of this standard on our consolidated financial statements, including accounting policies, processes, and systems, was not material.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The new guidance eliminates Step 2 of the goodwill impairment test. The updated guidance requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit to its carrying value, and recognizing a non-cash impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. ASU 2017-04 became effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and will be applied prospectively. The Company adopted ASU 2017-04 effective January 1, 2020, with interim or annual goodwill impairment tests now comparing the fair value of a reporting unit with its carrying value and no longer performing Step 2 of the goodwill impairment test. There was no impact from adopting ASU 2017-04 as there were no impairments recorded.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The new guidance adds an impairment model, known as the current expected credit loss (CECL) model that is based on expected losses rather than incurred losses. These amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable forward-looking information, which is intended to result in more timely recognition of such losses. All related guidance has been codified into, and is now known as, ASC 326 – Financial Instruments—Credit Losses. The new standard is effective for public companies for annual reporting periods beginning after December 15, 2019, and interim periods therein. The Company adopted ASU 2016-13 effective January 1, 2020 and has determined there is not a material impact on the Company’s Financial Statements given that historical trend analysis and assessments for forward-looking qualitative analysis are already integrated into financial assessments for the Company.
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
The Company earns commissions paid by insurance carriers for the binding of insurance coverage. Commissions are earned at a point in time upon the effective date of bound insurance coverage, as no performance obligation exists after coverage is bound. If there are other services within the contract, the Company estimates the stand-alone selling price for each separate performance obligation, and the corresponding apportioned revenue is recognized over a period of time as the performance obligations are fulfilled. The Company earns fee revenue by receiving negotiated fees in lieu of a commission and from services other than securing insurance coverage. Fee revenues from certain agreements are recognized depending on when the services within the contract are satisfied and when we have transferred control of the related services to the customer. In situations where multiple performance obligations exist within a fee contract, the use of estimates is required to allocate the transaction price on a relative stand-alone selling price basis to each separate performance obligation. Incentive commissions represent a form of variable consideration which includes additional commissions over base commissions received from insurance carriers based on predetermined production levels mutually agreed upon by both parties. Profit-sharing contingent commissions represent a form of variable consideration associated with the placement of coverage, for which we earn commissions. Profit-sharing contingent commissions and incentive commissions are estimated with a constraint applied and accrued relative to the recognition of the corresponding core commissions based on the amount of consideration that will be received in the coming year such that a significant reversal of revenue is not probable. Guaranteed supplemental commissions, a form of variable consideration, represent guaranteed fixed-base agreements in lieu of profit-sharing contingent commissions.
Management determines the policy cancellation reserve based upon historical cancellation experience adjusted for any known circumstances.
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. Included in cash and cash equivalents are unrestricted premium from insureds before it is remitted to the appropriate insurance company or companies, net of any commissions we are due.
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, premiums that are receivable from insureds are reported within Premiums, commissions, and fee receivable in the Consolidated Balance Sheets. Unremitted net insurance premiums are held in a fiduciary capacity until the Company disburses them, and the use of such funds is restricted by laws in certain states in which our subsidiaries operate, or restricted due to our contracts with a certain insurance company or companies in which we hold premiums in a fiduciary capacity. Where allowed by law, the Company 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 the Company 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 the Company. 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 Sheets. 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 39 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 are accounted for using the acquisition method. Acquisition purchase prices are typically based upon a multiple of average annual EBITDA, operating profit and/or core revenue earned over a period of 3 years within a minimum and maximum price range. The recorded purchase prices for acquisitions 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. The Company completed its most recent annual assessment as of November 30, 2020 and determined that the fair value of goodwill significantly exceeded the carrying value of such assets. In addition, as of December 31, 2020, there are no accumulated impairment losses.
The carrying value of amortizable intangible assets attributable to each business or asset group comprising the Company 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, the Company 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, 2020, 2019 and 2018.
Income Taxes
The Company 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 the Company’s assets and liabilities.
The Company 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 net income per share is computed based on the weighted average number of common shares (including participating securities) issued and outstanding during the period. Diluted net income per share is computed based on 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) | 2020 | 2019 | 2018 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net income | $ | 480,483 | $ | 398,514 | $ | 344,255 | ||||||
| Net income attributable to unvested awarded performance stock | (15,197 | ) | (12,873 | ) | (8,297 | ) | ||||||
| Net income attributable to common shares | $ | 465,286 | $ | 385,641 | $ | 335,958 | ||||||
| Weighted average number of common shares outstanding – basic | 283,294 | 281,566 | 277,663 | |||||||||
| Less unvested awarded performance stock included in weighted average number of common shares outstanding – basic | (8,960 | ) | (9,095 | ) | (6,692 | ) | ||||||
| Weighted average number of common shares outstanding for basic earnings per common share | 274,334 | 272,471 | 270,971 | |||||||||
| Dilutive effect of stock options | 1,533 | 2,145 | 4,550 | |||||||||
| Weighted average number of shares outstanding – diluted | 275,867 | 274,616 | 275,521 | |||||||||
| Net income per share: | ||||||||||||
| Basic | $ | 1.70 | $ | 1.42 | $ | 1.24 | ||||||
| Diluted | $ | 1.69 | $ | 1.40 | $ | 1.22 |
Fair Value of Financial Instruments
The carrying amounts of the Company’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, 2020 and 2019, approximate fair value because of the short-term maturity of these instruments. The carrying amount of the Company’s long-term debt approximates fair value at December 31, 2020 and 2019 as our fixed-rate borrowings of $1,548.2 million approximate their values using market quotes of notes with the similar terms as ours, which we deem a close approximation of current market rates. The estimated fair value of our variable floating rate debt agreements is $560.0 million currently outstanding approximates the carrying value due to the variable interest rate based upon adjusted LIBOR. See Note 3 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 6 for information on the fair value of investments and Note 9 for information on the fair value of long-term debt.
Non-Cash Stock-Based Compensation
The Company 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 only line of insurance in which the Company acts in a risk-bearing capacity is flood insurance associated with the Wright National Flood Insurance Company (“WNFIC”), which is part of our National Programs Segment. The Company protects itself from claims-related losses by reinsuring all claims risk exposure. However, for basic admitted policies conforming to the National Flood Insurance Program all exposure is reinsured with the Federal Emergency Management Agency (“FEMA”). 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 national reinsurance carriers for private 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 from WNFIC 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 Revenues
The following tables present the revenues disaggregated by revenue source:
| Twelve months ended December 31, 2020 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | Retail | National Programs | Wholesale Brokerage | Services | Other(8) | Total | ||||||||||||||||||
| Base commissions(1) | $ | 1,054,619 | $ | 422,916 | $ | 273,878 | $ | — | $ | 1 | $ | 1,751,414 | ||||||||||||
| Fees(2) | 275,900 | 159,337 | 66,051 | 174,012 | (1,291 | ) | 674,009 | |||||||||||||||||
| Incentive commissions(3) | 89,920 | 549 | 3,057 | — | 31 | 93,557 | ||||||||||||||||||
| Profit-sharing contingent commissions(4) | 35,785 | 27,278 | 7,871 | — | — | 70,934 | ||||||||||||||||||
| Guaranteed supplemental commissions(5) | 15,128 | (238 | ) | 1,304 | — | — | 16,194 | |||||||||||||||||
| Investment income(6) | 163 | 756 | 184 | — | 1,708 | 2,811 | ||||||||||||||||||
| Other income, net(7) | 1,251 | 42 | 452 | — | 2,711 | 4,456 | ||||||||||||||||||
| Total Revenues | $ | 1,472,766 | $ | 610,640 | $ | 352,797 | $ | 174,012 | $ | 3,160 | $ | 2,613,375 |
| Twelve months ended December 31, 2019 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | Retail | National Programs | Wholesale Brokerage | Services | Other(8) | Total | ||||||||||||||||||
| Base commissions(1) | $ | 994,170 | $ | 338,058 | $ | 242,380 | $ | — | $ | (128 | ) | $ | 1,574,480 | |||||||||||
| Fees(2) | 246,135 | 151,298 | 56,852 | 193,641 | (1,160 | ) | 646,766 | |||||||||||||||||
| Incentive commissions(3) | 80,505 | (524 | ) | 1,252 | — | 27 | 81,260 | |||||||||||||||||
| Profit-sharing contingent commissions(4) | 34,150 | 17,517 | 7,499 | — | — | 59,166 | ||||||||||||||||||
| Guaranteed supplemental commissions(5) | 11,056 | 10,566 | 1,443 | — | — | 23,065 | ||||||||||||||||||
| Investment income(6) | 149 | 1,397 | 178 | 139 | 3,917 | 5,780 | ||||||||||||||||||
| Other income, net(7) | 1,096 | 72 | 483 | 1 | 2 | 1,654 | ||||||||||||||||||
| Total Revenues | $ | 1,367,261 | $ | 518,384 | $ | 310,087 | $ | 193,781 | $ | 2,658 | $ | 2,392,171 |
| (1) | Base commissions 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. |
|---|
| (2) | Fee revenues relate to fees for services other than securing coverage for our customers, fees negotiated in lieu of commissions, and F&I products and services. |
|---|
| (3) | Incentive commissions include additional commissions over base commissions received from insurance carriers based on predetermined production levels mutually agreed upon by both parties. |
|---|
| (4) | Profit-sharing contingent commissions are based primarily on underwriting results, but may also reflect considerations for volume, growth and/or retention. |
|---|
| (5) | Guaranteed supplemental commissions represent guaranteed fixed-base agreements in lieu of profit-sharing contingent commissions. |
|---|
| (6) | Investment income consists primarily of interest on cash and investments. |
|---|
| (7) | Other income consists primarily of legal settlements and other miscellaneous income. |
|---|
| (8) | Fees within other reflects the elimination of intercompany revenues. |
|---|
Contract Assets and Liabilities
The balances of contract assets and contract liabilities arising from contracts with customers as of December 31, 2020 and 2019 were as follows:
| (in thousands) | December 31, 2020 | December 31, 2019 | ||||||
|---|---|---|---|---|---|---|---|---|
| Contract assets | $ | 308,755 | $ | 289,609 | ||||
| Contract liabilities | $ | 80,997 | $ | 58,126 |
Unbilled receivables (contract assets) arise when the Company recognizes revenue for amounts which have not yet been billed in our systems. Deferred revenue (contract liabilities) relates to payments received in advance of performance under the contract before the transfer of a good or service to the customer.
As of December 31, 2020, deferred revenue consisted of $54.0 million as current portion to be recognized within one year and $27.0 million in long-term to be recognized beyond one year. As of December 31, 2019, deferred revenue consisted of $41.2 million as current portion to be recognized within one year and $16.9 million in long-term deferred revenue to be recognized beyond one year.
Contract assets and contract liabilities arising from acquisitions in 2020 were approximately $11.5 million and $20.0 million, respectively. Contract assets and contract liabilities arising from acquisitions in 2019 were approximately $6.5 million and $9.3 million, respectively.
During the twelve months ended December 31, 2020 and 2019, the amount of revenue recognized related to performance obligations satisfied in a previous period, inclusive of changes due to estimates, was approximately $8.9 million and $17.2 million, respectively. The $8.9 million for 2020 consists of $18.1 million of additional variable consideration received on our supplemental commissions, offset by $7.1 million of revised estimates related to variable consideration on policies where the exposure units are expected to be impacted by the COVID-19 pandemic (“COVID-19”) and $2.1 million of other adjustments.
Other Assets and Deferred Cost
Incremental cost to obtain – The Company defers certain costs 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. These incremental costs are deferred and amortized over a 15-year period. The cost to obtain balance within the Other assets caption in the Company’s Condensed Consolidated Balance Sheets was $42.2 million and $26.9 million as of December 31, 2020 and December 31, 2019, respectively. For the 12 months ended December 31, 2020 and December 31, 2019, the Company deferred $17.8 million and $15.1 million of incremental cost to obtain customer contracts, respectively. The Company expensed $2.5 million and $1.4 million of the incremental cost to obtain customer contracts for the 12 months ended December 31, 2020 and December 31, 2019, respectively.
Cost to fulfill - The Company defers certain costs to fulfill contracts and recognizes these costs as the associated performance obligations are fulfilled. The cost to fulfill balance within the Other current assets caption in the Company's Condensed Consolidated Balance Sheets was $77.8 million, which is inclusive of deferrals from businesses acquired in the current year of $1.2 million. The cost to fulfill balance as of December 31, 2019 was $73.3 million. For the 12 months ended December 31, 2019, the Company had a net deferral of $3.3 million related to current year deferrals for costs incurred that relate to performance obligations yet to be fulfilled, net of the expense of previously deferred contract fulfillment costs associated with performance obligations that were satisfied in the period.
NOTE 3 Business Combinations
During the year ended December 31, 2020, the Company acquired the assets and assumed certain liabilities of 20 insurance intermediaries, all the stock of one F&I administrative services company and 4 books of businesses (customer accounts). Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last 12 months as permitted by ASC Topic 805 - Business Combinations (“ASC 805”). Such adjustments are presented in the “Other” category within the following two tables. The recorded purchase price for all acquisitions includes 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, 2020, adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $3.5 million relating to the assumption of certain liabilities on acquisitions completed in 2019. These measurement period adjustments have been reflected as current period adjustments for the year ended December 31, 2020 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 $722.5 million and $356.3 million in the years ended December 31, 2020 and 2019, respectively. We completed 25 acquisitions (including book of business purchases) during the year ended December 31, 2020. We completed 27 acquisitions (including book of business purchases) during the year ended December 31, 2019.
The following table summarizes the purchase price allocations made as of the date of each acquisition for current year acquisitions and 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 | Common Stock Issued | Other payable | Recorded earn-out payable | Net assets acquired | Maximum potential earn- out payable | ||||||||||||||||||||
| Special Risk Insurance Managers Ltd. (Special Risk) | National Programs | January 1, 2020 | $ | 70,156 | $ | — | $ | — | $ | 9,859 | $ | 80,015 | $ | 14,650 | ||||||||||||||
| Texas All Risk General Agency, Inc. et al (Texas Risk) | Wholesale Brokerage | January 1, 2020 | 10,511 | — | 159 | 310 | 10,980 | 1,150 | ||||||||||||||||||||
| The Colonial Group, Inc. et al (Colonial) | Wholesale Brokerage | March 1, 2020 | 29,037 | — | 527 | 7,577 | 37,141 | 10,150 | ||||||||||||||||||||
| RLA Insurance Intermediaries, LLC (RLA) | Wholesale Brokerage | March 1, 2020 | 42,496 | — | 786 | 11,687 | 54,969 | 22,500 | ||||||||||||||||||||
| Dealer Financial Services of N.C., LLC d/b/a The Sterling Group (Sterling) | Retail | April 1, 2020 | 19,341 | — | 300 | 4,129 | 23,770 | 5,400 | ||||||||||||||||||||
| LP Insurance Services, LLC (LP) | National Programs | May 1, 2020 | 115,948 | 10,000 | 318 | 23,394 | 149,660 | 75,850 | ||||||||||||||||||||
| First Resource, Inc. (First) | Retail | July 1, 2020 | 10,700 | — | 450 | 3,776 | 14,926 | 5,800 | ||||||||||||||||||||
| Buiten & Associates, LLC (Buiten) | Retail | August 1, 2020 | 38,225 | — | 1,175 | 7,448 | 46,848 | 14,175 | ||||||||||||||||||||
| Amity Insurance, Inc. (Amity) | Retail | August 1, 2020 | 14,820 | 2,000 | 200 | 1,860 | 18,880 | 4,060 | ||||||||||||||||||||
| Frank E. Neal & Co., Inc. (Neal) | Retail | September 1, 2020 | 32,589 | 3,120 | 345 | 5,732 | 41,786 | 10,325 | ||||||||||||||||||||
| BrookStone Insurance Group, LLC (BrookStone) | Retail | September 1, 2020 | 12,030 | — | — | 1,058 | 13,088 | 1,878 | ||||||||||||||||||||
| VAS GenPar, LLC (VAS) | Retail | October 1, 2020 | 114,249 | 15,000 | — | 23,274 | 152,523 | 48,000 | ||||||||||||||||||||
| Bright & Associates, Inc. (Bright) | Retail | October 1, 2020 | 12,528 | — | 1,257 | 3,854 | 17,639 | 5,775 | ||||||||||||||||||||
| J.E. Brown & Associates Insurance Services, Inc. (J.E. Brown) | Wholesale Brokerage | October 1, 2020 | 33,331 | — | 1,030 | 5,947 | 40,308 | 10,425 | ||||||||||||||||||||
| CoverHound, Inc. and CyberPolicy, Inc. (CoverHound) | Retail | November 1, 2020 | 27,595 | — | 600 | — | 28,195 | — | ||||||||||||||||||||
| MAJ Companies, Ltd. (MAJ) | Retail | December 1, 2020 | 19,072 | — | 300 | 2,006 | 21,378 | 6,475 | ||||||||||||||||||||
| South & Western General Agency, Inc. (South & Western) | Wholesale Brokerage | December 1, 2020 | 69,673 | — | 1,193 | 7,294 | 78,160 | 18,000 | ||||||||||||||||||||
| Berry Insurance Group, Inc. (Berry) | Retail | December 31, 2020 | 35,326 | — | — | 3,694 | 39,020 | 6,500 | ||||||||||||||||||||
| Other | Various | Various | 14,888 | — | 490 | 8,498 | 23,876 | 12,337 | ||||||||||||||||||||
| Total | $ | 722,515 | $ | 30,120 | $ | 9,130 | $ | 131,397 | $ | 893,162 | $ | 273,450 |
The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition and adjustments made during the measurement period of the prior year acquisitions.
| (in thousands) | Special Risk | Texas Risk | Colonial | RLA | Sterling | LP | First | Buiten | Amity | Neal | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||
| Other current assets | 2,477 | 446 | 1,344 | — | 612 | 3,162 | 302 | 2,595 | 653 | 2,337 | ||||||||||||||||||||||||||||||
| Fixed assets | 345 | 27 | 59 | 55 | 16 | 1,877 | 1 | 43 | 58 | 46 | ||||||||||||||||||||||||||||||
| Goodwill | 63,087 | 8,940 | 27,845 | 53,567 | 17,339 | 99,983 | 9,523 | 33,641 | 15,454 | 28,929 | ||||||||||||||||||||||||||||||
| Purchased customer accounts | 14,286 | 3,222 | 9,205 | 12,309 | 5,962 | 44,801 | 5,095 | 11,323 | 5,614 | 13,225 | ||||||||||||||||||||||||||||||
| Non-compete agreements | 136 | 25 | 43 | 481 | 21 | 31 | 21 | 91 | 21 | 31 | ||||||||||||||||||||||||||||||
| Other assets | — | — | — | — | — | — | — | — | — | 274 | ||||||||||||||||||||||||||||||
| Total assets acquired | 80,331 | 12,660 | 38,496 | 66,412 | 23,950 | 149,854 | 14,942 | 47,693 | 21,800 | 44,842 | ||||||||||||||||||||||||||||||
| Other current liabilities | (316 | ) | (1,680 | ) | (1,355 | ) | (11,443 | ) | (180 | ) | (10 | ) | (16 | ) | (845 | ) | (2,920 | ) | (3,056 | ) | ||||||||||||||||||||
| Other liabilities | — | — | — | — | — | (184 | ) | — | — | — | — | |||||||||||||||||||||||||||||
| Total liabilities assumed | (316 | ) | (1,680 | ) | (1,355 | ) | (11,443 | ) | (180 | ) | (194 | ) | (16 | ) | (845 | ) | (2,920 | ) | (3,056 | ) | ||||||||||||||||||||
| Net assets acquired | $ | 80,015 | $ | 10,980 | $ | 37,141 | $ | 54,969 | $ | 23,770 | $ | 149,660 | $ | 14,926 | $ | 46,848 | $ | 18,880 | $ | 41,786 |
| (in thousands) | Brook Stone | VAS | Bright | J.E. Brown | Cover Hound | MAJ | South & Western | Berry | Other | Total | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash | $ | — | $ | 27,673 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 27,673 | ||||||||||||||||||||
| Other current assets | 527 | 5,486 | 402 | — | 375 | 413 | — | — | 912 | 22,043 | ||||||||||||||||||||||||||||||
| Fixed assets | 22 | 138 | 23 | 32 | 6,441 | — | 149 | 30 | 25 | 9,387 | ||||||||||||||||||||||||||||||
| Goodwill | 8,585 | 100,826 | 12,218 | 31,476 | 19,524 | 13,003 | 63,128 | 29,702 | 11,325 | 648,095 | ||||||||||||||||||||||||||||||
| Purchased customer accounts | 3,689 | 48,188 | 5,055 | 9,479 | 3,678 | 8,034 | 18,513 | 9,701 | 8,582 | 239,961 | ||||||||||||||||||||||||||||||
| Non-compete agreements | 21 | 101 | 42 | 41 | — | 11 | 21 | 11 | 64 | 1,213 | ||||||||||||||||||||||||||||||
| Other assets | 290 | — | — | — | — | — | — | — | 3,088 | 3,652 | ||||||||||||||||||||||||||||||
| Total assets acquired | 13,134 | 182,412 | 17,740 | 41,028 | 30,018 | 21,461 | 81,811 | 39,444 | 23,996 | 952,024 | ||||||||||||||||||||||||||||||
| Other current liabilities | (46 | ) | (3,760 | ) | (101 | ) | (720 | ) | (1,823 | ) | (83 | ) | (3,651 | ) | (424 | ) | (120 | ) | (32,549 | ) | ||||||||||||||||||||
| Other liabilities | — | (26,129 | ) | — | — | — | — | — | — | — | (26,313 | ) | ||||||||||||||||||||||||||||
| Total liabilities assumed | (46 | ) | (29,889 | ) | (101 | ) | (720 | ) | (1,823 | ) | (83 | ) | (3,651 | ) | (424 | ) | (120 | ) | (58,862 | ) | ||||||||||||||||||||
| Net assets acquired | $ | 13,088 | $ | 152,523 | $ | 17,639 | $ | 40,308 | $ | 28,195 | $ | 21,378 | $ | 78,160 | $ | 39,020 | $ | 23,876 | $ | 893,162 |
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 $648.1 million, which is net of any opening balance sheet adjustments within the allowable measurement period, was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $300.0 million, $163.1 million, $185.0 million and $0.1 million, respectively. Of the total goodwill of $648.1 million, the amount currently deductible for income tax purposes is $516.7 million and the remaining $131.4 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.
For the acquisitions completed during 2020, 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, 2020 included in the Consolidated Statement of Income for the year ended December 31, 2020 were $93.9 million. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through December 31, 2020 included in the Consolidated Statement of Income for the year ended December 31, 2020 was $7.5 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) | Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share data) | 2020 | 2019 | ||||||
| Total revenues | $ | 2,714,314 | $ | 2,579,075 | ||||
| Income before income taxes | $ | 650,618 | $ | 576,355 | ||||
| Net income | $ | 500,900 | $ | 436,722 | ||||
| Net income per share: | ||||||||
| Basic | $ | 1.77 | $ | 1.55 | ||||
| Diluted | $ | 1.76 | $ | 1.54 | ||||
| Weighted average number of shares outstanding: | ||||||||
| Basic | 274,334 | 272,471 | ||||||
| Diluted | 275,867 | 274,616 |
Acquisitions in 2019
During the year ended December 31, 2019, the Company acquired the assets and assumed certain liabilities of 22 insurance intermediaries, all the stock of one insurance intermediaries and 4 book of business (customer accounts). Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last 12 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, 2019, several adjustments were made within the permitted measurement period that resulted in an increase in the aggregate purchase price of the affected acquisitions of $4.1 million, relating to the assumption of certain liabilities.
The following table summarizes the purchase price allocation made as of the date of each acquisition for current year acquisitions and significant adjustments made during the measurement period for prior year acquisitions:
| (in thousands) | ||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Name | Business segment | Effective date of acquisition | Cash paid | Common Stock Issued | Other payable | Recorded earn-out payable | Net assets acquired | Maximum potential earn- out payable | ||||||||||||||||||||
| Smith Insurance Associates, Inc. (Smith) | Retail | February 1, 2019 | $ | 20,129 | $ | — | $ | — | $ | 2,704 | $ | 22,833 | $ | 4,550 | ||||||||||||||
| Donald P. Pipino Company, LTD (Pipino) | Retail | February 1, 2019 | 16,420 | — | 135 | 9,821 | 26,376 | 12,996 | ||||||||||||||||||||
| AGA Enterprises, LLC d/b/a Cossio Insurance Agency (Cossio) | Retail | March 1, 2019 | 13,990 | — | 10 | 696 | 14,696 | 2,000 | ||||||||||||||||||||
| Medval, LLC (Medval) | Services | March 1, 2019 | 29,106 | — | 100 | 1,684 | 30,890 | 2,500 | ||||||||||||||||||||
| United Development Systems, Inc. (United) | Retail | May 1, 2019 | 18,987 | — | 388 | 3,268 | 22,643 | 8,625 | ||||||||||||||||||||
| Twinbrook Insurance Brokerage, Inc. (Twinbrook) | Retail | June 1, 2019 | 26,251 | — | 400 | 1,565 | 28,216 | 5,073 | ||||||||||||||||||||
| Innovative Risk Solutions, Inc. (IRS) | Retail | July 1, 2019 | 26,435 | — | 2,465 | 6,109 | 35,009 | 9,000 | ||||||||||||||||||||
| WBR Insurance Agency, LLC et al (WBR) | Retail | August 1, 2019 | 10,667 | — | 203 | 2,197 | 13,067 | 4,575 | ||||||||||||||||||||
| West Ridge Insurance Agency, Inc. d/b/a Yozell Associates (Yozell) | Retail | August 1, 2019 | 13,030 | — | 470 | 768 | 14,268 | 6,730 | ||||||||||||||||||||
| CKP Insurance, LLC (CKP) | Retail | August 1, 2019 | 89,190 | 20,000 | 4,000 | 38,093 | 151,283 | 76,500 | ||||||||||||||||||||
| Poole Professional Ltd. Insurance Agents and Brokers et al (Poole) | Retail | October 1, 2019 | 32,358 | — | 75 | 4,556 | 36,989 | 6,850 | ||||||||||||||||||||
| VerHagen Glendenning & Walker LLP (VGW) | Retail | October 1, 2019 | 23,032 | — | 1,498 | 2,385 | 26,915 | 8,170 | ||||||||||||||||||||
| Other | Various | Various | 36,665 | — | 2,391 | 9,026 | 48,082 | 14,454 | ||||||||||||||||||||
| Total | $ | 356,260 | $ | 20,000 | $ | 12,135 | $ | 82,872 | $ | 471,267 | $ | 162,023 |
The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition and adjustments made during the measurement period of the prior year acquisitions.
| (in thousands) | Smith | Pipino | Cossio | Medval | United | Twinbrook | IRS | WBR | Yozell | CKP | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash | $ | — | $ | — | $ | — | $ | 3,217 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||
| Other current assets | 680 | 819 | 236 | 1,708 | 477 | 919 | 1,375 | 449 | 1,781 | 9,170 | ||||||||||||||||||||||||||||||
| Fixed assets | 39 | 112 | 29 | 50 | 20 | 85 | 11 | 10 | 12 | 193 | ||||||||||||||||||||||||||||||
| Goodwill | 16,042 | 16,765 | 10,010 | 19,108 | 15,111 | 18,935 | 24,938 | 9,096 | 8,904 | 110,495 | ||||||||||||||||||||||||||||||
| Purchased customer accounts | 6,500 | 11,360 | 4,403 | 7,300 | 7,065 | 8,557 | 8,800 | 4,022 | 3,550 | 32,274 | ||||||||||||||||||||||||||||||
| Non-compete agreements | 41 | 11 | 21 | 1 | 11 | 12 | 11 | 34 | 21 | 21 | ||||||||||||||||||||||||||||||
| Other assets | — | 772 | — | 15 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Total assets acquired | 23,302 | 29,839 | 14,699 | 31,399 | 22,684 | 28,508 | 35,135 | 13,611 | 14,268 | 152,153 | ||||||||||||||||||||||||||||||
| Other current liabilities | (469 | ) | (3,463 | ) | (3 | ) | (480 | ) | (41 | ) | (292 | ) | (126 | ) | (166 | ) | — | (870 | ) | |||||||||||||||||||||
| Other liabilities | — | — | — | (29 | ) | — | — | — | (378 | ) | — | — | ||||||||||||||||||||||||||||
| Total liabilities assumed | (469 | ) | (3,463 | ) | (3 | ) | (509 | ) | (41 | ) | (292 | ) | (126 | ) | (544 | ) | — | (870 | ) | |||||||||||||||||||||
| Net assets acquired | $ | 22,833 | $ | 26,376 | $ | 14,696 | $ | 30,890 | $ | 22,643 | $ | 28,216 | $ | 35,009 | $ | 13,067 | $ | 14,268 | $ | 151,283 |
| (in thousands) | Poole | VGW | Other | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash | $ | — | $ | — | $ | — | $ | 3,217 | ||||||||
| Other current assets | 938 | 1,190 | (6,786 | ) | 12,956 | |||||||||||
| Fixed assets | 4 | 20 | (130 | ) | 455 | |||||||||||
| Goodwill | 28,233 | 16,595 | 34,314 | 328,546 | ||||||||||||
| Purchased customer accounts | 10,359 | 9,092 | 15,020 | 128,302 | ||||||||||||
| Non-compete agreements | 33 | 34 | 161 | 412 | ||||||||||||
| Other assets | — | — | (732 | ) | 55 | |||||||||||
| Total assets acquired | 39,567 | 26,931 | 41,847 | 473,943 | ||||||||||||
| Other current liabilities | (2,578 | ) | (16 | ) | 6,235 | (2,269 | ) | |||||||||
| Other liabilities | — | — | — | (407 | ) | |||||||||||
| Total liabilities assumed | (2,578 | ) | (16 | ) | 6,235 | (2,676 | ) | |||||||||
| Net assets acquired | $ | 36,989 | $ | 26,915 | $ | 48,082 | $ | 471,267 |
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 $328.5 million, which is net of any opening balance sheet adjustments within the allowable measurement period, was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $302.6 million, $0.1 million, $6.5 million and $19.3 million, respectively. Of the total goodwill of $328.5 million, the amount currently deductible for income tax purposes is $245.6 million and the remaining $82.9 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.
For the acquisitions completed during 2019, 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, 2019 included in the Consolidated Statement of Income for the year ended December 31, 2019 were $49.1 million. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through December 31, 2019 included in the Consolidated Statement of Income for the year ended December 31, 2019 was $3.4 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) | Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share data) | 2019 | 2018 | ||||||
| Total revenues | $ | 2,447,401 | $ | 2,120,867 | ||||
| Income before income taxes | $ | 545,182 | $ | 496,076 | ||||
| Net income | $ | 412,974 | $ | 369,277 | ||||
| Net income per share: | ||||||||
| Basic | $ | 1.47 | $ | 1.33 | ||||
| Diluted | $ | 1.46 | $ | 1.31 | ||||
| Weighted average number of shares outstanding: | ||||||||
| Basic | 272,471 | 270,971 | ||||||
| Diluted | 274,616 | 275,521 |
Acquisitions in 2018
During the year ended December 31, 2018, the Company acquired the assets and assumed certain liabilities of 20 insurance intermediaries, all the stock of three 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 12 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, 2018, several adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $21.4 thousand, relating to the assumption of certain liabilities.
The following table summarizes the purchase price allocation made as of the date of each acquisition for current year acquisitions and significant adjustments made during the measurement period for prior year acquisitions:
| (in thousands) | ||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Name | Business segment | Effective date of acquisition | Cash paid | Common Stock Issued | Other payable | Recorded earn-out payable | Net assets acquired | Maximum potential earn- out payable | ||||||||||||||||||||
| Opus Advisory Group, LLC (Opus) | Retail | February 1, 2018 | $ | 20,400 | $ | — | $ | 200 | $ | 2,384 | $ | 22,984 | $ | 3,600 | ||||||||||||||
| Kerxton Insurance Agency, Inc. (Kerxton) | Retail | March 1, 2018 | 13,176 | — | 1,490 | 2,080 | 16,746 | 2,920 | ||||||||||||||||||||
| Automotive Development Group, LLC (ADG) | Retail | May 1, 2018 | 29,471 | — | 559 | 17,545 | 47,575 | 20,000 | ||||||||||||||||||||
| Servco Pacific, Inc. (Servco) | Retail | June 1, 2018 | 76,245 | — | — | 934 | 77,179 | 7,000 | ||||||||||||||||||||
| Tower Hill Prime Insurance Company (Tower Hill) | National Programs | July 1, 2018 | 20,300 | — | — | 1,188 | 21,488 | 7,700 | ||||||||||||||||||||
| Health Special Risk, Inc. (HSR) | National Programs | July 1, 2018 | 20,132 | — | — | 1,991 | 22,123 | 9,000 | ||||||||||||||||||||
| Professional Disability Associates, LLC (PDA) | Services | July 1, 2018 | 15,025 | — | — | 9,818 | 24,843 | 17,975 | ||||||||||||||||||||
| Finance & Insurance Resources, Inc. (F&I) | Retail | September 1, 2018 | 44,940 | — | 410 | 9,121 | 54,471 | 19,500 | ||||||||||||||||||||
| Rodman Insurance Agency, Inc. (Rodman) | Retail | November 1, 2018 | 31,121 | — | 261 | 3,720 | 35,102 | 9,850 | ||||||||||||||||||||
| The Hays Group, Inc. et al (Hays) | Retail | November 16, 2018 | 605,000 | 100,000 | — | 19,600 | 724,600 | 25,000 | ||||||||||||||||||||
| Dealer Associates, Inc. (Dealer) | Retail | December 1, 2018 | 28,825 | — | 1,175 | 3,100 | 33,100 | 12,125 | ||||||||||||||||||||
| Other | Various | Various | 30,293 | — | 1,367 | 5,896 | 37,556 | 12,998 | ||||||||||||||||||||
| Total | $ | 934,928 | $ | 100,000 | $ | 5,462 | $ | 77,377 | $ | 1,117,767 | $ | 147,668 |
The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition.
| (in thousands) | Opus | Kerxton | ADG | Servco | Tower Hill | HSR | PDA | F&I | Rodman | Hays | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash | $ | — | $ | — | $ | — | $ | 8,188 | $ | — | $ | 3,114 | $ | (248 | ) | $ | — | $ | — | $ | — | |||||||||||||||||||
| Other current assets | 1,215 | 663 | 1,500 | 7,769 | — | 818 | 1,762 | 999 | 1,062 | 36,254 | ||||||||||||||||||||||||||||||
| Fixed assets | 11 | 10 | 67 | 179 | $ | — | $ | 124 | $ | 310 | $ | 34 | $ | 45 | $ | 4,936 | ||||||||||||||||||||||||
| Goodwill | 16,414 | 12,423 | 35,769 | 54,429 | — | 18,737 | 16,547 | 36,423 | 26,572 | 456,217 | ||||||||||||||||||||||||||||||
| Purchased customer accounts | 5,008 | 4,712 | 9,751 | 16,442 | 21,468 | 5,516 | 7,700 | 16,611 | 10,129 | 218,600 | ||||||||||||||||||||||||||||||
| Non-compete agreements | 21 | 22 | 21 | 1 | 20 | 65 | 82 | 21 | 51 | 2,600 | ||||||||||||||||||||||||||||||
| Other assets | 315 | 419 | 467 | 1,478 | — | 21 | 6 | 383 | 542 | 13,977 | ||||||||||||||||||||||||||||||
| Total assets acquired | 22,984 | 18,249 | 47,575 | 88,486 | 21,488 | 28,395 | 26,159 | 54,471 | 38,401 | 732,584 | ||||||||||||||||||||||||||||||
| Other current liabilities | — | (1,503 | ) | — | (11,307 | ) | — | (5,930 | ) | (1,093 | ) | — | (3,299 | ) | (7,984 | ) | ||||||||||||||||||||||||
| Deferred income tax, net | — | — | — | — | — | (342 | ) | (223 | ) | — | — | — | ||||||||||||||||||||||||||||
| Total liabilities assumed | — | (1,503 | ) | — | (11,307 | ) | — | (6,272 | ) | (1,316 | ) | — | (3,299 | ) | (7,984 | ) | ||||||||||||||||||||||||
| Net assets acquired | $ | 22,984 | $ | 16,746 | $ | 47,575 | $ | 77,179 | $ | 21,488 | $ | 22,123 | $ | 24,843 | $ | 54,471 | $ | 35,102 | $ | 724,600 |
| (in thousands) | Dealer | Other | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash | $ | — | $ | — | $ | 11,054 | ||||||
| Other current assets | 552 | 323 | 52,917 | |||||||||
| Fixed assets | 13 | 100 | 5,829 | |||||||||
| Goodwill | 21,467 | 22,712 | 717,710 | |||||||||
| Purchased customer accounts | 10,986 | 15,085 | 342,008 | |||||||||
| Non-compete agreements | 21 | 297 | 3,222 | |||||||||
| Other assets | 226 | 754 | 18,588 | |||||||||
| Total assets acquired | 33,265 | 39,271 | 1,151,328 | |||||||||
| Other current liabilities | (165 | ) | (1,715 | ) | (32,996 | ) | ||||||
| Other liabilities | — | — | (565 | ) | ||||||||
| Total liabilities assumed | (165 | ) | (1,715 | ) | (33,561 | ) | ||||||
| Net assets acquired | $ | 33,100 | $ | 37,556 | $ | 1,117,767 |
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 $717.7 million was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $676.9 million, $18.7 million, $5.5 million and $16.5 million, respectively. Of the total goodwill of $717.7 million, $640.3 million is currently deductible for income tax purposes. The remaining $77.4 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.
For the acquisitions completed during 2018, 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, 2018 included in the Consolidated Statement of Income for the year ended December 31, 2018 were $82.4 million. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through December 31, 2018 included in the Consolidated Statement of Income for the year ended December 31, 2018 was $6.3 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) | Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share data) | 2018 | 2017 | ||||||
| Total revenues | $ | 2,259,812 | $ | 2,193,169 | ||||
| Income before income taxes | $ | 504,664 | $ | 503,927 | ||||
| Net income | $ | 375,670 | $ | 447,796 | ||||
| Net income per share: | ||||||||
| Basic | $ | 1.35 | $ | 1.60 | ||||
| Diluted | $ | 1.33 | $ | 1.57 | ||||
| Weighted average number of shares outstanding: | ||||||||
| Basic | 270,971 | 272,580 | ||||||
| Diluted | 275,521 | 277,586 |
As of December 31, 2020, the maximum future contingency payments related to all acquisitions totaled $544.7 million.
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 acquisitions 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, 2020, 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, 2020, 2019 and 2018 were as follows:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2020 | 2019 | 2018 | |||||||||
| Balance as of the beginning of the period | $ | 161,513 | $ | 89,924 | $ | 36,175 | ||||||
| Additions to estimated acquisition earn-out payables from new acquisitions | 131,397 | 82,872 | 77,377 | |||||||||
| Payments for estimated acquisition earn-out payables | (29,509 | ) | (9,917 | ) | (26,597 | ) | ||||||
| Subtotal | 263,401 | 162,879 | 86,955 | |||||||||
| Net change in earnings from estimated acquisition earn-out payables: | ||||||||||||
| Change in fair value on estimated acquisition earn-out payables | (11,814 | ) | (7,298 | ) | 603 | |||||||
| Interest expense accretion | 7,356 | 5,932 | 2,366 | |||||||||
| Net change in earnings from estimated acquisition earn- out payables | (4,458 | ) | (1,366 | ) | 2,969 | |||||||
| Balance as of December 31, | $ | 258,943 | $ | 161,513 | $ | 89,924 |
Of the $258.9 million of estimated acquisition earn-out payables as of December 31, 2020, $79.2 million was recorded as accounts payable, and $179.7 million was recorded as another non-current liability. 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 $161.5 million of estimated acquisition earn-out payables as of December 31, 2019, $17.9 million was recorded as accounts payable, and $143.6 million was recorded as other non-current liabilities. Of the $89.9 million of estimated acquisition earn-out payables as of December 31, 2018, $21.1 million was recorded as accounts payable, and $68.8 million was recorded as other non-current liabilities.
NOTE 4 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, 2019 | $ | 2,063,150 | $ | 926,206 | $ | 291,622 | $ | 151,808 | $ | 3,432,786 | ||||||||||
| Goodwill of acquired businesses | 302,640 | 74 | 6,479 | 19,353 | 328,546 | |||||||||||||||
| Goodwill disposed of relating to sales of businesses | (14,499 | ) | (739 | ) | — | — | (15,238 | ) | ||||||||||||
| Balance as of December 31, 2019 | $ | 2,351,291 | $ | 925,541 | $ | 298,101 | $ | 171,161 | $ | 3,746,094 | ||||||||||
| Goodwill of acquired businesses | 299,961 | 163,070 | 184,956 | 108 | 648,095 | |||||||||||||||
| Goodwill disposed of relating to sales of businesses | (782 | ) | — | — | — | (782 | ) | |||||||||||||
| Foreign currency translation adjustments during the year | — | 2,511 | — | — | 2,511 | |||||||||||||||
| Balance as of December 31, 2020 | $ | 2,650,470 | $ | 1,091,122 | $ | 483,057 | $ | 171,269 | $ | 4,395,918 |
NOTE 5 Amortizable Intangible Assets
Amortizable intangible assets at December 31, 2020 and 2019 consisted of the following:
| December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (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 | $ | 2,164,968 | $ | (1,118,316 | ) | $ | 1,046,652 | 15.0 | $ | 1,925,326 | $ | (1,011,574 | ) | $ | 913,752 | 15.0 | ||||||||||||||||
| Non-compete agreements | 35,093 | (32,085 | ) | 3,008 | 4.6 | 33,881 | (30,865 | ) | 3,016 | 4.6 | ||||||||||||||||||||||
| Total | $ | 2,200,061 | $ | (1,150,401 | ) | $ | 1,049,660 | $ | 1,959,207 | $ | (1,042,439 | ) | $ | 916,768 |
| (1) | Weighted average life calculated as of the date of acquisition. |
|---|
Amortization expense for amortizable intangible assets for the years ending December 31, 2021, 2022, 2023, 2024 and 2025 is estimated to be $113.8 million, $109.4 million, $102.4 million, $98.5 million and $96.1 million, respectively.
NOTE 6 Investments
At December 31, 2020, 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 | $ | 28,372 | $ | 464 | $ | (5 | ) | $ | 28,831 | |||||||
| Corporate debt | 7,190 | 239 | (6 | ) | 7,423 | |||||||||||
| Total | $ | 35,562 | $ | 703 | $ | (11 | ) | $ | 36,254 |
At December 31, 2020, the Company held $28.8 million in fixed income securities composed of U.S Treasury securities, securities issued by U.S. Government agencies and municipalities, and $7.4 million issued by corporations with investment-grade ratings. Of the total, $11.3 million is classified as short-term investments on the Consolidated Balance Sheets as maturities are less than one year in duration. Additionally, the Company holds $7.0 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, 2020:
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
| U.S. Treasury securities, obligations of U.S. Government agencies and Municipalities | $ | 1,995 | $ | (5 | ) | $ | — | $ | — | $ | 1,995 | $ | (5 | ) | ||||||||||
| Corporate debt | 808 | (6 | ) | — | — | 808 | (6 | ) | ||||||||||||||||
| Total | $ | 2,803 | $ | (11 | ) | $ | — | $ | — | $ | 2,803 | $ | (11 | ) |
The unrealized losses from corporate issuers were caused by interest rate increases. At December 31, 2020, the Company had 3 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, 2020.
At December 31, 2019, 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 | $ | 26,487 | $ | 174 | $ | (39 | ) | $ | 26,622 | |||||||
| Corporate debt | 5,324 | 68 | (8 | ) | 5,384 | |||||||||||
| Total | $ | 31,811 | $ | 242 | $ | (47 | ) | $ | 32,006 |
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, 2019:
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
| U.S. Treasury securities, obligations of U.S. Government agencies and Municipalities | $ | — | $ | — | $ | 7,053 | $ | (39 | ) | $ | 7,053 | $ | (39 | ) | ||||||||||
| Corporate debt | — | — | 998 | (8 | ) | 998 | (8 | ) | ||||||||||||||||
| Total | $ | — | $ | — | $ | 8,051 | $ | (47 | ) | $ | 8,051 | $ | (47 | ) |
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, 2019, the Company had 10 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, 2019.
The amortized cost and estimated fair value of the fixed maturity securities at December 31, 2020 by contractual maturity are set forth below:
| (in thousands) | Amortized cost | Fair value | ||||||
|---|---|---|---|---|---|---|---|---|
| Years to maturity: | ||||||||
| Due in one year or less | $ | 11,214 | $ | 11,283 | ||||
| Due after one year through five years | 23,348 | 23,976 | ||||||
| Due after five years through ten years | 1,000 | 995 | ||||||
| Total | $ | 35,562 | $ | 36,254 |
The amortized cost and estimated fair value of the fixed maturity securities at December 31, 2019 by contractual maturity are set forth below:
| (in thousands) | Amortized cost | Fair value | ||||||
|---|---|---|---|---|---|---|---|---|
| Years to maturity: | ||||||||
| Due in one year or less | $ | 4,616 | $ | 4,628 | ||||
| Due after one year through five years | 27,195 | 27,378 | ||||||
| Due after five years through ten years | — | — | ||||||
| Total | $ | 31,811 | $ | 32,006 |
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 $8.6 million. This along with maturing time deposits yielded total cash proceeds from the sale of investments of $11.0 million in the period of January 1, 2020 to December 31, 2020. These proceeds, along with other sources of cash were used to purchase an additional $14.2 million of fixed maturity securities and to fund certain general corporate purposes. The gains and losses realized on those sales for the period from January 1, 2020 to December 31, 2020 were insignificant.
Proceeds from the sales and maturity of the Company’s investment in fixed maturity securities were $5.8 million for the year ended December 31, 2019. This along with maturing time deposits yielded total cash proceeds from the sale of investments of $8.5 million in the period of January 1, 2019 to December 31, 2019. These proceeds were used to purchase an additional $17.5 million of fixed maturity securities and to fund certain general corporate purposes. The gains and losses realized on those sales for the period from January 1, 2019 to December 31, 2019 were insignificant.
Realized gains and losses are reported on the Consolidated Statement of Income, with the cost of securities sold determined on a specific identification basis.
At December 31, 2020, investments with a fair value of approximately $4.2 million were on deposit with state insurance departments to satisfy regulatory requirements.
NOTE 7 Fixed Assets
Fixed assets at December 31 consisted of the following:
| (in thousands) | 2020 | 2019 | ||||||
|---|---|---|---|---|---|---|---|---|
| Furniture, fixtures and equipment | $ | 259,524 | $ | 231,005 | ||||
| Leasehold improvements | 42,261 | 42,485 | ||||||
| Construction in progress | 81,736 | 38,035 | ||||||
| Land, buildings and improvements | 8,428 | 8,400 | ||||||
| Total cost | 391,949 | 319,925 | ||||||
| Less accumulated depreciation and amortization | (190,834 | ) | (171,298 | ) | ||||
| Total | $ | 201,115 | $ | 148,627 |
Depreciation expense for fixed assets amounted to $26.3 million in 2020, $23.4 million in 2019 and $22.8 million in 2018.
Construction in progress primarily reflects expenditures related to the construction of the new headquarters in Daytona Beach, Florida which was subsequently placed into service in January of 2021.
NOTE 8 Accrued Expenses and Other Liabilities
Accrued expenses and other current liabilities at December 31 consisted of the following:
| (in thousands) | 2020 | 2019 | ||||||
|---|---|---|---|---|---|---|---|---|
| Accrued incentive compensation | $ | 159,356 | $ | 144,475 | ||||
| Accrued compensation and benefits | 41,550 | 60,260 | ||||||
| Lease liability(1) | 43,542 | 43,415 | ||||||
| Deferred revenue | 53,956 | 41,180 | ||||||
| Reserve for policy cancellations | 31,081 | 18,353 | ||||||
| Accrued interest | 15,260 | 10,984 | ||||||
| Accrued rent and vendor expenses | 6,682 | 7,422 | ||||||
| Other | 20,310 | 11,628 | ||||||
| Total | $ | 371,737 | $ | 337,717 |
| (1) | The Lease liability is the current portion of the Operating lease liabilities as reflected in the Consolidated Balance Sheets as of December 31, 2020 and 2019. |
|---|
NOTE 9 Long-Term Debt
Long-term debt at December 31, 2020 and 2019 consisted of the following:
| (in thousands) | December 31, 2020 | December 31, 2019 | ||||||
|---|---|---|---|---|---|---|---|---|
| Current portion of long-term debt: | ||||||||
| Current portion of 5-year term loan facility expires 2022 | $ | 40,000 | $ | 40,000 | ||||
| Current portion of 5-year term loan credit agreement expires 2023 | 30,000 | 15,000 | ||||||
| Total current portion of long-term debt | 70,000 | 55,000 | ||||||
| Long-term debt: | ||||||||
| Note agreements: | ||||||||
| 4.200% Senior Notes, semi-annual interest payments, balloon due 2024 | 499,416 | 499,259 | ||||||
| 4.500% Senior Notes, semi-annual interest payments, balloon due 2029 | 349,540 | 349,484 | ||||||
| 2.375% Senior Note due 2031, semi-annual interest payments, balloon due 2031 | 699,252 | — | ||||||
| Total notes | 1,548,208 | 848,743 | ||||||
| Credit agreements: | ||||||||
| 5-year term loan facility, periodic interest and principal payments, LIBOR plus up to 1.750%, expires June 28, 2022 | 250,000 | 290,000 | ||||||
| 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 | — | 100,000 | ||||||
| 5-year term loan facility, periodic interest and principal payments, LIBOR plus up to 1.750%, expires December 21, 2023 | 240,000 | 270,000 | ||||||
| Total credit agreements | 490,000 | 660,000 | ||||||
| Debt issuance costs (contra) | (12,302 | ) | (8,400 | ) | ||||
| Total long-term debt less unamortized discount and debt issuance costs | 2,025,906 | 1,500,343 | ||||||
| Current portion of long-term debt | 70,000 | 55,000 | ||||||
| Total debt | $ | 2,095,906 | $ | 1,555,343 |
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 “Revolving Credit 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 Revolving Credit Facility to the Condensed Consolidated Balance Sheets. The Company also expensed to the Condensed 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 Condensed Consolidated Balance Sheets 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. As of December 31, 2020, there was an outstanding debt balance issued under the term loan of the Amended and Restated Credit Agreement of $290.0 million and no borrowings outstanding against the Revolving Credit Facility. As of December 31, 2019, there was an outstanding debt balance issued under the term loan of the Amended and Restated Credit Agreement of $330.0 million with $100.0 million in borrowings outstanding against the Revolving Credit Facility.
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, 2020 and December 31, 2019, there was an outstanding debt balance of $500.0 million exclusive of the associated discount balance.
On December 21, 2018, the Company entered into a term loan credit agreement (the “Term Loan Credit Agreement”) with the lenders named therein, Wells Fargo Bank, National Association, as administrative agent, and certain other banks as co-syndication agents and as joint lead arrangers and joint bookrunners. 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 rates of interest charged on the term loan are 1.000% to 1.750%, above the adjusted 1-Month LIBOR rate. On December 21, 2018, the Company borrowed $300.0 million under the Term Loan Credit Agreement and used $250.0 million of the proceeds to reduce indebtedness under the Revolving Credit Facility. As of December 31, 2020, there was an outstanding debt balance issued under the Term Loan of $270.0 million. As of December 31, 2019, there was an outstanding debt balance issued under the Term Loan of $285.0 million.
On March 11, 2019, the Company completed the issuance of $350.0 million aggregate principal amount of the Company's 4.500% Senior Notes due 2029. The Senior Notes were given investment grade ratings of BBB-/Baa3 with a stable outlook. The notes are subject to certain covenant restrictions, 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 a portion of the outstanding balance of $350.0 million on the Revolving Credit Facility, utilized in connection with the financing related to our acquisition of Hays and for other general corporate purposes. As of December 31, 2020, and December 31, 2019 there was an outstanding debt balance of $350.0 million exclusive of the associated discount balance.
On September 24, 2020, the Company completed the issuance of $700.0 million aggregate principal amount of the Company's 2.375% Senior Notes due 2031. The Senior Notes were given investment grade ratings of BBB- stable outlook and Baa3 positive outlook. The notes are subject to certain covenant restrictions, 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 a portion of the outstanding balance of $200.0 million on the Revolving Credit Facility, utilized in connection with the financing related to the acquisitions of LP Insurance Services, LLP and CKP Insurance, LLC and for other general corporate purposes. As of December 31, 2020, there was an outstanding debt balance of $700.0 million exclusive of the associated discount balance.
The Amended and Restated Credit Agreement and Term Loan 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, 2020 and December 31, 2019.
The 30-day Adjusted LIBOR Rate for the term loan of the Amended and Restated Credit Agreement and Term Loan Credit Agreement as of December 31, 2020 was 0.188%.
Interest paid in 2020, 2019 and 2018 was $52.4 million, $58.3 million, and $38.0 million, respectively.
At December 31, 2020, maturities of long-term debt were $70.0 million in 2021, $280.0 million in 2022, $210.0 million in 2023, $500.0 million in 2024, $350.0 million in 2029 and $700.0 million in 2031.
NOTE 10 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 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. 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.
For 2017, we 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. During 2018, we made a credit adjustment to the transition tax on untaxed international operations in the amount of $1.6 million. This adjustment was a reduction of income tax expense for 2018 as a result of updated calculations based on the Company’s tax filings for the 2017 year end. As of December 31, 2020, management does not expect any further changes to the amounts previously recorded and adjusted under SAB 118.
Significant components of the provision for income taxes for the years ended December 31 are as follows:
| (in thousands) | 2020 | 2019 | 2018 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Current: | ||||||||||||
| Federal | $ | 93,620 | $ | 85,507 | $ | 77,694 | ||||||
| State | 34,123 | 28,905 | 25,096 | |||||||||
| Foreign | 325 | 620 | 409 | |||||||||
| Total current provision | 128,068 | 115,032 | 103,199 | |||||||||
| Deferred: | ||||||||||||
| Federal | 11,655 | 14,994 | 8,483 | |||||||||
| State | 4,119 | (2,587 | ) | 6,519 | ||||||||
| Foreign | (226 | ) | (24 | ) | 6 | |||||||
| Total deferred provision | 15,548 | 12,383 | 15,008 | |||||||||
| Total tax provision | $ | 143,616 | $ | 127,415 | $ | 118,207 |
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:
| 2020 | 2019 | 2018 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Federal statutory tax rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||
| State income taxes, net of federal income tax benefit | 5.3 | 3.8 | 5.7 | |||||||||
| Non-deductible employee stock purchase plan expense | 0.3 | 0.3 | 0.2 | |||||||||
| Non-deductible meals and entertainment | 0.1 | 0.3 | 0.3 | |||||||||
| Non-deductible officers’ compensation | 0.3 | 0.2 | 0.3 | |||||||||
| Tax Reform Act deferred tax revaluation and transition tax impact | 0.0 | 0.0 | (0.3 | ) | ||||||||
| Stock Vesting under ASU 2016-19 | (3.5 | ) | (1.1 | ) | (1.4 | ) | ||||||
| Other, net | (0.5 | ) | (0.3 | ) | (0.2 | ) | ||||||
| Effective tax rate | 23.0 | % | 24.2 | % | 25.6 | % |
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 the Company’s net deferred tax liabilities as of December 31 are as follows:
| (in thousands) | 2020 | 2019 | ||||||
|---|---|---|---|---|---|---|---|---|
| Non-current deferred tax liabilities: | ||||||||
| Intangible assets | $ | 400,335 | $ | 360,660 | ||||
| Fixed assets | 11,740 | 10,325 | ||||||
| ASC 842 ROU Asset | 46,730 | 46,188 | ||||||
| Impact of adoption of ASC 606 revenue recognition | 19,928 | 24,687 | ||||||
| Net unrealized holding (loss)/gain on available-for-sale securities | 176 | 36 | ||||||
| Total non-current deferred tax liabilities | 478,909 | 441,896 | ||||||
| Non-current deferred tax assets: | ||||||||
| Deferred compensation | 59,897 | 52,566 | ||||||
| Accruals and reserves | 19,497 | 7,743 | ||||||
| ASC 842 lease liabilities | 53,150 | 52,185 | ||||||
| Net operating loss carryforwards and 163(j) disallowed carryforwards | 3,168 | 2,377 | ||||||
| Valuation allowance for deferred tax assets | (1,025 | ) | (1,252 | ) | ||||
| Total non-current deferred tax assets | 134,687 | 113,619 | ||||||
| Net non-current deferred tax liability | $ | 344,222 | $ | 328,277 |
Income taxes paid in 2020, 2019 and 2018 were $132.9 million, $110.0 million and $110.6 million, respectively.
At December 31, 2020, the Company had no net operating loss carryforwards for federal purposes and $36.0 million net operating loss carryforwards for state income tax reporting purposes, portions of which expire in the years 2021 through indefinite. The state carryforward amount is derived from the operating results of certain subsidiaries. As of December 31, 2020, the Company had a net operating loss carryforward in Canada of $6.4 million.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| (in thousands) | 2020 | 2019 | 2018 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Unrecognized tax benefits balance at January 1 | $ | 1,127 | $ | 1,639 | $ | 1,694 | ||||||
| Gross increases for tax positions of prior years | 848 | 778 | 594 | |||||||||
| Gross decreases for tax positions of prior years | (708 | ) | (791 | ) | (5 | ) | ||||||
| Settlements | — | (499 | ) | (644 | ) | |||||||
| Unrecognized tax benefits balance at December 31 | $ | 1,267 | $ | 1,127 | $ | 1,639 |
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2020, 2019 and 2018 the Company had $0.3 million, $0.2 million and $0.2 million 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 $1.3 million as of December 31, 2020, $1.1 million as of December 31, 2019 and $1.6 million as of December 31, 2018. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.
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 and Canada. In the United States, federal returns for fiscal years 2016 through 2020 remain open and subject to examination by the Internal Revenue Service. 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 2016 through 2020. In the United Kingdom, the Company’s filings remain open for audit for the fiscal years 2019 and 2020. In Canada, the Company’s filings remain open for audit for the fiscal years 2016 through 2020. The Company also operates in Bermuda and the Cayman Islands. The Company is not subject to any income taxes in these countries.
During 2018, the Company settled the previously disclosed State of Massachusetts income tax audit for the fiscal year 2013 through 2014.
During 2019, the Company settled the previously disclosed State of Colorado income tax audit for the fiscal years 2013-2016, the State of Kansas income tax audit for the fiscal years 2014-2016, and the State of New York income tax audit for the fiscal years 2015-2017. The Company is currently under audit in the states of California, Illinois, Massachusetts and Wisconsin for the fiscal years 2015 through 2017. In addition, the Company is under audit in the state of Wisconsin for the fiscal year 2018.
In general, it is our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations. The Company has determined it is not practical to determine the unrecognized deferred tax liabilities on the undistributed earnings from the Company’s international subsidiaries as such earnings are considered to be indefinitely reinvested.
NOTE 11 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, the Company makes matching contributions of up to 4.0% of each participant’s annual compensation. The Company’s contribution expense to the plan totaled $31.2 million in 2020, $22.8 million in 2019 and $22.8 million in 2018.
NOTE 12 Stock-Based Compensation
Performance Stock Plan
In 1996, the Company adopted and the shareholders approved a performance stock plan, under which until the suspension of the plan in 2010, up to 28,800,000 Performance Stock Plan (“PSP”) shares could be granted to key employees contingent on the employees’ future years of service with the Company 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 net income per share. 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, were reserved for issuance under the 2010 Stock Incentive Plan (the “2010 SIP”).
At December 31, 2020, 10,217,232 shares had been granted, net of forfeitures, under the PSP. As of December 31, 2020, 909,828 shares had met the first condition of vesting and had been awarded, and 9,307,404 shares had satisfied both conditions of vesting and had been distributed to participants. Of the shares that have not vested as of December 31, 2020, the initial stock prices ranged from $8.30 to $10.31.
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, 2020, 2019 and 2018 is as follows:
| Weighted- average grant date fair value | Granted shares | Awarded shares | Shares not yet awarded | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding at January 1, 2018 | $ | 5.16 | 1,694,476 | 1,694,476 | — | |||||||||||
| Granted | $ | — | — | — | — | |||||||||||
| Awarded | $ | — | — | — | — | |||||||||||
| Vested | $ | 5.53 | (453,860 | ) | (453,860 | ) | — | |||||||||
| Forfeited | $ | 4.92 | (44,524 | ) | (44,524 | ) | — | |||||||||
| Outstanding at December 31, 2018 | $ | 5.03 | 1,196,092 | 1,196,092 | — | |||||||||||
| Granted | $ | — | — | — | — | |||||||||||
| Awarded | $ | — | — | — | — | |||||||||||
| Vested | $ | 5.29 | (115,040 | ) | (115,040 | ) | — | |||||||||
| Forfeited | $ | 4.74 | (29,760 | ) | (29,760 | ) | — | |||||||||
| Outstanding at December 31, 2019 | $ | 5.00 | 1,051,292 | 1,051,292 | — | |||||||||||
| Granted | $ | — | — | — | — | |||||||||||
| Awarded | $ | — | — | — | — | |||||||||||
| Vested | $ | 6.06 | (119,072 | ) | (119,072 | ) | — | |||||||||
| Forfeited | $ | 5.03 | (22,392 | ) | (22,392 | ) | — | |||||||||
| Outstanding at December 31, 2020 | $ | 4.86 | 909,828 | 909,828 | — |
The total fair value of PSP grants that vested during each of the years ended December 31, 2020, 2019 and 2018 was $5.0 million, $3.5 million and $11.9 million, respectively.
Stock Incentive Plan****s
On April 28, 2010, the shareholders of the Company, Inc. approved the 2010 Stock Incentive Plan (“2010 SIP”), which was suspended on May 1, 2019. On May 1, 2019, the shareholders of the Company, Inc. approved the 2019 Stock Incentive Plan (“2019 SIP”) that provides for the granting of restricted stock, restricted stock units, stock options, stock appreciation rights, and other stock-based awards to employees and directors contingent on performance-based and/or time-based criteria established by the Compensation Committee of the Company’s Board of Directors. In addition, the 2019 SIP provides for a limited delegation of authority of the Company’s Chief Executive Officer to grant awards to individuals who are not subject to Section 16 of the Securities Exchange Act of 1934. The principal purpose of the 2019 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 number of shares of stock reserved for issuance under the 2019 SIP is 2,283,475 shares, plus any shares that are authorized for issuance under the 2010 SIP (described below), and not already subject to grants under the 2010 SIP, and that were outstanding as of May 1, 2019, the date of suspension of the 2010 SIP, together with PSP shares, 2010 SIP shares and 2019 SIP shares forfeited after that date. As of May 1, 2019, 6,957,897 shares were available for issuance under the 2010 SIP, which were then transferred to the 2019 SIP.
The Company has granted stock to our employees in the form of Restricted Stock Awards and Performance Stock Awards under the 2010 SIP and 2019 SIP. To date, a substantial majority of stock grants to employees under these plans vest in five 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 Revenue growth and operating profit growth of a profit center, Organic Revenue growth of the Company and consolidated diluted net income per share 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 2010 SIP and 2019 SIP as part of their annual compensation. A total of 26,620 shares were issued in January 2018, 27,885 shares were issued in April 2019 and 16,490 shares were issued in May 2020.
The Company uses the closing stock price on the day prior to the grant date to determine the fair value of grants under the 2010 SIP and 2019 SIP 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 net income per share.
A summary of 2010 SIP and 2019 SIP activity for the years ended December 31, 2020, 2019 and 2018 is as follows:
| Weighted- average grant date fair value | Granted shares | Awarded shares | Shares not yet awarded | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding at January 1, 2018 | $ | 15.58 | 12,821,990 | 4,809,604 | 8,012,386 | ||||||||||||
| Granted | $ | 22.87 | 1,577,721 | 454,313 | 1,123,408 | (1) | |||||||||||
| Awarded | $ | 15.89 | — | 2,489,905 | (2,489,905 | ) | |||||||||||
| Vested | $ | 14.09 | (933,916 | ) | (933,916 | ) | — | ||||||||||
| Forfeited | $ | 16.37 | (2,363,420 | ) | (224,587 | ) | (2,138,833 | ) | |||||||||
| Outstanding at December 31, 2018 | $ | 16.69 | 11,102,375 | 6,595,319 | 4,507,056 | ||||||||||||
| Granted | $ | 28.53 | 1,812,047 | 797,778 | 1,014,269 | (2) | |||||||||||
| Awarded | $ | 17.26 | 299,339 | 1,954,983 | (1,655,644 | ) | |||||||||||
| Vested | $ | 14.29 | (1,068,211 | ) | (1,068,211 | ) | — | ||||||||||
| Forfeited | $ | 19.09 | (503,632 | ) | (209,293 | ) | (294,339 | ) | |||||||||
| Outstanding at December 31, 2019 | $ | 18.10 | 11,641,918 | 8,070,576 | 3,571,342 | ||||||||||||
| Granted | $ | 46.58 | 970,997 | 148,015 | 822,982 | (3) | |||||||||||
| Awarded | $ | 19.71 | 497,082 | 1,880,512 | (1,383,430 | ) | |||||||||||
| Vested | $ | 15.97 | (3,059,619 | ) | (3,059,619 | ) | — | ||||||||||
| Forfeited | $ | 20.75 | (356,041 | ) | (119,637 | ) | (236,404 | ) | |||||||||
| Outstanding at December 31, 2020 | $ | 19.89 | 9,694,337 | 6,919,847 | 2,774,490 |
| (1) | Of the 1,123,408 shares of performance-based restricted stock granted in 2018, the payout for 576,886 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 1,014,269 shares of performance-based restricted stock granted in 2019, the payout for 501,384 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%. |
|---|
| (3) | Of the 822,982 shares of performance-based restricted stock granted in 2020, the payout for 365,606 shares may be increased up to 200% of the target or decreased to zero, 20,611 shares may be increased up to 120% of the target or decreased to zero, 15,850 shares may be increased up to 150% of the target or decreased to zero, and 56,226 shares may be increased up to 150% or decreased to 50% of target subject to the level of performance attained. The amount reflected in the table includes all restricted stock grants at a target payout of 100%. |
|---|
The following table sets forth information as of December 31, 2020, 2019 and 2018, 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 and 2019 Stock Incentive Plans:
| Year | Time-based restricted stock granted and awarded | Performance-based restricted stock granted | Performance-based restricted stock awarded | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 148,015 | 822,982 | (1) | 1,880,512 | ||||||||
| 2019 | 797,778 | 1,014,269 | (2) | 1,954,983 | ||||||||
| 2018 | 454,313 | 1,123,408 | (3) | 2,489,905 |
| (1) | Of the 822,982 shares of performance-based restricted stock granted in 2020, the payout for 365,606 shares may be increased up to 200% of the target or decreased to zero, 20,611 shares may be increased up to 120% of the target or decreased to zero, 15,850 shares may be increased up to 150% of the target or decreased to zero, and 56,226 shares may be increased up to 150% or decreased to 50% of target 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 1,014,269 shares of performance-based restricted stock granted in 2019, the payout for 501,384 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%. |
|---|
| (3) | Of the 1,123,408 shares of performance-based restricted stock granted in 2018, the payout for 576,886 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, 2020, 8,624,668 shares were available for future grants under the 2019 SIP. This amount is calculated assuming the maximum payout for all restricted stock grants.
Employee Stock Purchase Plan
The Company has a shareholder-approved Employee Stock Purchase Plan (“ESPP”) with a total of 34,000,000 authorized shares of which 5,378,467 were available for future subscriptions as of December 31, 2020. 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 2020 was $12.43. The fair values of an ESPP share option as of the Subscription Periods beginning in August 2019 and 2018, were $7.46 and $5.88, respectively.
For the ESPP plan years ended July 31, 2020, 2019 and 2018, the Company issued 962,131, 976,303 and 985,601 shares of common stock, respectively. These shares were issued at an aggregate purchase price of $29.3 million, or $30.51 per share, in 2020, $24.0 million, or $24.63 per share, in 2019, and $18.7 million, or $18.96 per share, in 2018.
For the five months ended December 31, 2020, 2019 and 2018 (portions of the 2020-2021, 2019-2020, and 2018-2019 plan years), 381,371, 419,446 and 402,349 shares of common stock (from authorized but unissued shares), respectively, were subscribed to by ESPP participants for proceeds of approximately $14.8 million, $12.8 million and $9.9 million, respectively.
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) | 2020 | 2019 | 2018 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Stock incentive plan | $ | 50,198 | $ | 39,626 | $ | 28,027 | ||||||
| Employee stock purchase plan | 8,789 | 6,504 | 4,744 | |||||||||
| Performance stock plan | 762 | 864 | 748 | |||||||||
| Total | $ | 59,749 | $ | 46,994 | $ | 33,519 |
Summary of Unamortized Compensation Expense
As of December 31, 2020, the Company estimates there to be $112.6 million of unamortized compensation expense related to all non-vested stock-based compensation arrangements granted under the Company’s stock-based compensation plans, based upon current projections of grant measurement against performance criteria. That expense is expected to be recognized over a weighted average period of 3.29 years.
NOTE 13 Supplemental Disclosures of Cash Flow Information and Non-Cash Financing and Investing Activities
The Company’s cash paid during the period for interest and income taxes are summarized as follows:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2020 | 2019 | 2018 | |||||||||
| Cash paid during the period for: | ||||||||||||
| Interest | $ | 52,378 | $ | 58,290 | $ | 38,032 | ||||||
| Income taxes, net of refunds | $ | 131,596 | $ | 109,766 | $ | 110,350 |
The Company’s significant non-cash investing and financing activities are summarized as follows:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2020 | 2019 | 2018 | |||||||||
| Other payables issued for purchased customer accounts | $ | 9,130 | $ | 12,135 | $ | 5,462 | ||||||
| Estimated acquisition earn-out payables and related charges | $ | 131,397 | $ | 82,872 | $ | 77,378 | ||||||
| Notes received on the sale of fixed assets and customer accounts | $ | — | $ | 9,903 | $ | 52 |
Our Restricted Cash balance is composed of funds held in separate premium trust accounts as required by state law or, in some cases, per agreement with our carrier partners. The following is a reconciliation of cash and cash equivalents inclusive of restricted cash as of December 31, 2020, 2019 and 2018.
| Balance as of December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2020 | 2019 | 2018 | |||||||||
| Table to reconcile cash and cash equivalents inclusive of restricted cash | ||||||||||||
| Cash and cash equivalents | $ | 817,398 | $ | 542,174 | $ | 438,961 | ||||||
| Restricted cash | 454,517 | 420,801 | 338,635 | |||||||||
| Total cash and cash equivalents inclusive of restricted cash at the end of the period | $ | 1,271,915 | $ | 962,975 | $ | 777,596 |
NOTE 14 Commitments and Contingencies
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, 2020 and 2019. 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 15 Leases
Substantially all of the Company's leases are classified as operating leases and primarily represent real estate leases for office space used to conduct the Company's business that expire on various dates through 2041. Leases generally contain renewal options and escalation clauses based upon increases in the lessors’ operating expenses and other charges. The Company anticipates that most of these leases will be renewed or replaced upon expiration.
The Company assesses at inception of a contract if it contains a lease. This assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether the Company has the right to direct the use of the asset.
The right-of-use asset is initially measured at cost, which is primarily composed of the initial lease liability, plus any initial direct costs incurred, less any lease incentives received. The lease liability is initially measured at the present value of the minimum lease payments through the term of the lease. Minimum lease payments are discounted to present value using the incremental borrowing rate at the lease commencement date, which approximates the rate of interest the Company expects to be paid on a secured borrowing in an amount equal to the lease payments for the underlying asset under similar terms and economic conditions. The Company elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a total term of 12 months or less. The effect of short-term leases on the Company’s right-of-use asset and lease liability would not be significant. The balances and classification of operating lease right-of-use assets and operating lease liabilities within the Condensed Consolidated Balance Sheets as of December 31, 2020 and 2019 is as follows:
| (in thousands) | December 31, 2020 | December 31, 2019 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Balance Sheet | ||||||||||
| Assets: | ||||||||||
| Operating lease right-of-use assets | 186,998 | 184,288 | ||||||||
| Total assets | Operating lease assets | $ | 186,998 | $ | 184,288 | |||||
| Liabilities: | ||||||||||
| Current operating lease liabilities | Accrued expenses and other liabilities | 43,542 | 43,415 | |||||||
| Non-current operating lease liabilities | Operating lease liabilities | 172,935 | 167,855 | |||||||
| Total liabilities | $ | 216,477 | $ | 211,270 |
As of December 31, 2020, the Company has entered into future lease agreements expected to commence in 2021 consisting of undiscounted lease liabilities of $5.0 million.
The expense recognition for operating leases under Topic 842 is substantially consistent with Topic 840. Therefore, there was no significant impact to Company’s results of operations presented in the Company’s Condensed Consolidated Statements of Income as a result of adopting ASU 2016-02 in the first quarter of 2019.
Variable lease cost is lease payments that are based on an index or similar rate. They are initially measured using the index or rate in effect at lease commencement and are based on the minimum payments stated in the lease. Additional payments based on the change in an index or rate, or payments based on a change in the Company's portion of the operating expenses, including real estate taxes and insurance, are recorded as a period expense when incurred.
Lease expense for operating leases consists of the lease payments, inclusive of lease incentives, plus any initial direct costs, and is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Variable lease cost is lease payments that are based on an index or similar rate. They are initially measured using the index or rate in effect at lease commencement and are based on the minimum payments stated in the lease. Additional payments based on the change in an index or rate, or payments based on a change in the Company's portion of the operating expenses, including real estate taxes and insurance, are recorded as a period expense when incurred.
The components of lease cost for operating leases for the 12 months ended December 31, 2020 and 2019 were:
| (in thousands) | Twelve Months Ended December 31, 2020 | Twelve Months Ended December 31, 2019 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Operating leases: | ||||||||||
| Lease cost | $ | 53,821 | $ | 49,872 | ||||||
| Variable lease cost | 3,739 | 3,819 | ||||||||
| Short term lease cost | 468 | 267 | ||||||||
| Operating lease cost | $ | 58,028 | $ | 53,958 | ||||||
| Sublease income | (1,798 | ) | (1,386 | ) | ||||||
| Total lease cost net | $ | 56,230 | $ | 52,572 |
The weighted average remaining lease term and the weighted average discount rate for operating leases as of December 31, 2020 were:
| Weighted-average remaining lease term | 5.94 | |||
|---|---|---|---|---|
| Weighted-average discount rate | 3.32 |
Maturities of the operating lease liabilities by fiscal year at December 31, 2020 for the Company's operating leases are as follows:
| (in thousands) | Operating Leases | |||
|---|---|---|---|---|
| 2021 | $ | 49,923 | ||
| 2022 | 46,447 | |||
| 2023 | 39,251 | |||
| 2024 | 31,033 | |||
| 2025 | 22,921 | |||
| Thereafter | 49,687 | |||
| Total undiscounted lease payments | 239,262 | |||
| Less: Imputed interest | 22,785 | |||
| Present value of future lease payments | $ | 216,477 |
Supplemental cash flow information for operating leases:
| (in thousands) | Twelve months ended December 31, 2020 | Twelve months ended December 31, 2019 | |||||
|---|---|---|---|---|---|---|---|
| Cash paid for amounts included in measurement of liabilities | |||||||
| Operating cash flows from operating leases | $ | 54,946 | $ | 51,894 | |||
| Right-of-use assets obtained in exchange for new operating liabilities | $ | 45,750 | $ | 46,730 |
NOTE 16 Quarterly Operating Results (Unaudited)
Quarterly operating results for 2020 and 2019 were as follows:
| (in thousands, except per share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | ||||||||||||||||
| Total revenues | $ | 698,495 | $ | 598,806 | $ | 673,962 | $ | 642,111 | ||||||||
| Total expenses | $ | 493,242 | $ | 469,405 | $ | 515,434 | $ | 511,195 | ||||||||
| Income before income taxes | $ | 205,253 | $ | 129,401 | $ | 158,528 | $ | 130,916 | ||||||||
| Net income | $ | 152,400 | $ | 96,784 | $ | 133,979 | $ | 97,320 | ||||||||
| Net income per share: | ||||||||||||||||
| Basic | $ | 0.54 | $ | 0.34 | $ | 0.47 | $ | 0.34 | ||||||||
| Diluted | $ | 0.54 | $ | 0.34 | $ | 0.47 | $ | 0.34 | ||||||||
| 2019 | ||||||||||||||||
| Total revenues | $ | 619,280 | $ | 575,219 | $ | 618,683 | $ | 578,989 | ||||||||
| Total expenses | $ | 470,760 | $ | 451,697 | $ | 466,845 | $ | 476,940 | ||||||||
| Income before income taxes | $ | 148,520 | $ | 123,522 | $ | 151,838 | $ | 102,049 | ||||||||
| Net income | $ | 113,896 | $ | 92,593 | $ | 115,506 | $ | 76,519 | ||||||||
| Net income per share: | ||||||||||||||||
| Basic | $ | 0.41 | $ | 0.33 | $ | 0.41 | $ | 0.27 | ||||||||
| Diluted | $ | 0.40 | $ | 0.33 | $ | 0.41 | $ | 0.27 |
Quarterly financial results are affected by seasonal variations. The timing of insurance policy renewals sold by the Company and acquisitions may cause revenues, expenses, and net income to vary significantly between quarters.
The sum of the quarterly results may not equal year to date or year ended results due to rounding.
NOTE 17 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, and non-insurance risk-mitigating products through our automobile dealer services (“F&I”) businesses, (2) the National Programs Segment, which acts as an 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, retail operations in Bermuda and the Cayman Islands, and a national programs operation in Canada. These operations earned $35.1 million, $17.7 million and $15.2 million of total revenues for the years ended December 31, 2020, 2019 and 2018, respectively. Long-lived assets held outside of the United States during each of these three years were not material.
The accounting policies of the reportable segments are the same as those described in Note 1. The Company evaluates the performance of its segments based upon revenues and income before income taxes. Inter-segment revenues are eliminated.
Summarized financial information concerning the Company’s reportable segments is shown in the following table. The “Other” column includes any income and expenses not allocated to reportable segments and corporate-related items, including the intercompany interest expense charge to the reporting segment. In addition, the total assets balance in “Other” is negative, reflecting the historical accumulation of the purchase price for acquisitions which are funded at the Corporate level, net of a portion returned to Corporate through intercompany interest charges, as well as the historical accumulation of payments for income taxes, dividends, and share repurchases which are paid by Corporate, but not pushed down to the segments.
| Year Ended December 31, 2020 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | Retail | National Programs | Wholesale Brokerage | Services | Other | Total | ||||||||||||||||||
| Total revenues | $ | 1,472,766 | $ | 610,640 | $ | 352,797 | $ | 174,012 | $ | 3,160 | $ | 2,613,375 | ||||||||||||
| Investment income | $ | 163 | $ | 756 | $ | 184 | $ | — | $ | 1,708 | $ | 2,811 | ||||||||||||
| Amortization | $ | 67,315 | $ | 27,166 | $ | 8,481 | $ | 5,561 | $ | — | $ | 108,523 | ||||||||||||
| Depreciation | $ | 9,071 | $ | 8,658 | $ | 1,948 | $ | 1,424 | $ | 5,175 | $ | 26,276 | ||||||||||||
| Interest expense | $ | 85,968 | $ | 20,597 | $ | 10,281 | $ | 4,142 | $ | (62,015 | ) | $ | 58,973 | |||||||||||
| Income before income taxes | $ | 262,245 | $ | 182,892 | $ | 93,593 | $ | 27,994 | $ | 57,375 | $ | 624,099 | ||||||||||||
| Total assets | $ | 7,093,627 | $ | 3,510,983 | $ | 1,791,717 | $ | 480,440 | $ | (3,910,275 | ) | $ | 8,966,492 | |||||||||||
| Capital expenditures | $ | 13,175 | $ | 7,208 | $ | 3,324 | $ | 1,424 | $ | 45,569 | $ | 70,700 |
| Year Ended December 31, 2019 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | Retail | National Programs | Wholesale Brokerage | Services | Other | Total | ||||||||||||||||||
| Total revenues | $ | 1,367,261 | $ | 518,384 | $ | 310,087 | $ | 193,781 | $ | 2,658 | $ | 2,392,171 | ||||||||||||
| Investment income | $ | 149 | $ | 1,397 | $ | 178 | $ | 139 | $ | 3,917 | $ | 5,780 | ||||||||||||
| Amortization | $ | 63,146 | $ | 25,482 | $ | 11,191 | $ | 5,479 | $ | — | $ | 105,298 | ||||||||||||
| Depreciation | $ | 7,390 | $ | 6,791 | $ | 1,674 | $ | 1,229 | $ | 6,333 | $ | 23,417 | ||||||||||||
| Interest expense | $ | 87,295 | $ | 16,690 | $ | 4,756 | $ | 4,404 | $ | (49,485 | ) | $ | 63,660 | |||||||||||
| Income before income taxes | $ | 222,875 | $ | 143,737 | $ | 82,739 | $ | 40,337 | $ | 36,241 | $ | 525,929 | ||||||||||||
| Total assets | $ | 6,413,459 | $ | 3,110,368 | $ | 1,390,250 | $ | 481,336 | $ | (3,772,592 | ) | $ | 7,622,821 | |||||||||||
| Capital expenditures | $ | 12,497 | $ | 10,365 | $ | 6,171 | $ | 804 | $ | 43,271 | $ | 73,108 |
| Year Ended December 31, 2018 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | Retail | National Programs | Wholesale Brokerage | Services | Other | Total | ||||||||||||||||||
| Total revenues | $ | 1,042,763 | $ | 494,463 | $ | 287,014 | $ | 189,246 | $ | 760 | $ | 2,014,246 | ||||||||||||
| Investment income | $ | 2 | $ | 506 | $ | 165 | $ | 205 | $ | 1,868 | $ | 2,746 | ||||||||||||
| Amortization | $ | 44,386 | $ | 25,954 | $ | 11,391 | $ | 4,813 | $ | — | $ | 86,544 | ||||||||||||
| Depreciation | $ | 5,289 | $ | 5,486 | $ | 1,628 | $ | 1,558 | $ | 8,873 | $ | 22,834 | ||||||||||||
| Interest expense | $ | 35,969 | $ | 26,181 | $ | 5,254 | $ | 2,869 | $ | (29,693 | ) | $ | 40,580 | |||||||||||
| Income before income taxes | $ | 217,845 | $ | 117,375 | $ | 70,171 | $ | 34,508 | $ | 22,563 | $ | 462,462 | ||||||||||||
| Total assets | $ | 5,850,045 | $ | 2,940,097 | $ | 1,283,877 | $ | 471,572 | $ | (3,856,923 | ) | $ | 6,688,668 | |||||||||||
| Capital expenditures | $ | 6,858 | $ | 12,391 | $ | 2,518 | $ | 1,525 | $ | 18,228 | $ | 41,520 |
NOTE 18 Insurance Company WNFIC
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:
| 2020 | 2019 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | Written | Earned | Written | Earned | ||||||||||||
| Direct premiums | $ | 728,109 | $ | 716,515 | $ | 697,072 | $ | 668,971 | ||||||||
| Assumed premiums | — | — | — | — | ||||||||||||
| Ceded premiums | 728,093 | 716,499 | 697,059 | 668,958 | ||||||||||||
| Net premiums | $ | 16 | $ | 16 | $ | 13 | $ | 13 |
All premiums written by WNFIC under the National Flood Insurance Program are 100.0% ceded to FEMA, for which WNFIC received a 30.1% expense allowance from January 1, 2020 through September 30, 2020 and a 30.0% expense allowance from October 1, 2020 through December 31, 2020. As of December 31, 2020 and 2019, the Company ceded $725.8 million and $694.9 million of written premiums for Federal Flood, respectively.
As of December 31, 2020, the Consolidated Balance Sheets contained Reinsurance recoverable of $43.5 million and Prepaid reinsurance premiums of $377.6 million. As of December 31, 2019, the Consolidated Balance Sheets contained reinsurance recoverable of $58.5 million and prepaid reinsurance premiums of $366.0 million. There was no net activity in the reserve for losses and loss adjustment expense for the years ended December 31, 2020 and 2019, as WNFIC’s direct premiums written were 100.0% ceded to two reinsurers. The balance of the reserve for losses and loss adjustment expense, excluding related reinsurance recoverables was $43.5 million as of December 31, 2020 and $58.5 million as of December 31, 2019.
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 $32.6 million as of December 31, 2020 and $29.6 million as of December 31, 2019. As of December 31, 2020 and 2019, WNFIC generated statutory net income of $0.8 million and $8.1 million, respectively. The maximum amount of ordinary dividends that WNFIC can pay to shareholders in a rolling 12 month period is limited to the greater of 10.0% of statutory adjusted capital and surplus of 100.0% of adjusted net income. There was no dividend payout in 2019 and 2020 and the maximum dividend payout that may be made in 2021 without prior approval is $3.3 million.
NOTE 19 Shareholders’ Equity
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. On May 1, 2019, the Company's Board of Directors authorized the purchasing of up to an additional $372.5 million of the Company's outstanding common stock.
During 2018, the Company entered into accelerated share repurchase agreement (“ASR”) with an investment bank to purchase an aggregate $100.0 million of the Company’s common stock. As part of the ASR, the company received an initial share delivery of 2,910,150 shares of the Company’s common stock with a fair market value of approximately $80.0 million in 2018. On May 17, 2019, this agreement was completed with the delivery of 566,599 shares of the Company’s common stock, which in total all shares purchased under this ASR represented an average price of $28.76 per share. In addition to the settlement of the ASR, during 2019, the Company made share repurchases in the open market of 1,087,914 shares at a total cost of $38.7 million, at an average price of $35.55 per share. During 2020, the Company repurchased 1,234,417 shares at an average price of $44.63 for a total cost of $55.1 million under the current share repurchase authorization. At December 31, 2020, the remaining amount authorized by our Board of Directors for share repurchases was approximately $406.2 million. Under the authorized repurchase programs, the Company has repurchased a total of approximately 16.7 million shares for an aggregate cost of approximately $591.3 million between 2014 and 2020.
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, 2020 and 2019, the related consolidated statements of income, shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 23, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Adoption of New Accounting Standards
As discussed in Note 15 to the consolidated financial statements, the Company changed its method of accounting for leases on January 1, 2019, on a modified retrospective basis due to the adoption of Financial Accounting Standards Board Accounting Standards Codification 842, Leases, and related amendments.
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Earn-out obligation — Refer to Notes 1 (Goodwill and Amortizable Intangible Assets) and 3 (Business Combinations) to the financial statements
Critical Audit Matter Description
The Company’s acquisition purchase price for business combinations is typically based upon a multiple of average annual operating profit and/or revenue earned over a one to three-year period within a minimum and maximum price range. The recorded purchase prices for most acquisitions include an estimation of the fair value of liabilities associated with potential earn-out provisions, when an earn-out obligation is part of the negotiated transaction. The fair value of the 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. Subsequent changes in the fair value of the earn-out obligations are recorded in the consolidated statement of income when incurred.
In determining fair value of the earn-out obligation, the acquired business’s future performance is estimated using financial projections of future earnings developed by management that are discounted to a present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out obligation will be paid. The earn-out obligation balance was $258.9 million as of December 31, 2020 and the potential maximum earn-out obligation was $544.7 million. Of the total earn-out obligation balance, $79.2 million is recorded as accounts payable and $179.7 million is recorded as other non-current liability.
We identified the earn-out obligation as a critical audit matter because of the increased auditor judgment and extent of effort required to evaluate whether an adjustment is required for the earn-out obligation in periods after the acquisition. Specifically, there was a high degree of auditor judgment and an increased extent of effort to audit the reasonableness of management’s assumptions related to projections of future earnings of the acquired businesses.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasted future earnings assumptions used in determining the fair value of the earn-out obligation included the following, among others:
| • | We tested the effectiveness of controls over management’s earn-out obligation calculation, including those controls over management’s determination of future earnings. |
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| • | We read the asset/stock purchase agreements and associated addenda and agreed the provisions of the contracts to the earn-out obligation models for our testing selections. |
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| • | We read any post acquisition asset/stock purchase agreements and associated addenda modifications for any additional terms to evaluate the completeness and reasonableness of the models utilized to calculate the earn-out obligation for our testing selections. |
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| • | We evaluated the reasonableness of projections of future earnings for the earn-out obligation models by comparing the projections to historical results and assessing management’s key assumptions for our testing selections. |
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| • | We evaluated management’s ability to accurately forecast future earnings by comparing actual results to management’s historical forecast and forecasted growth rates to that of comparable subsidiaries for our testing selections. |
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| /s/ DELOITTE & TOUCHE LLP |
| Certified Public Accountants |
| Tampa, Florida |
| February 23, 2021 |
| We have served as the Company’s auditor since 2002. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Brown & Brown, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Brown & Brown, Inc. (the “Company”) and subsidiaries as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated February 23, 2021 expressed an unqualified opinion on those financial statements.
As described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Special Risk Insurance Managers Ltd., Texas All Risk General Agency, Inc. et al, The Colonial Group, Inc. et al, RLA Insurance Intermediaries, LLC, Buiten & Associates, LLC, Amity Insurance Agency, Inc., BrookStone Insurance Group, LLC, VAS GenPar, LLC, J.E. Brown & Associates Insurance Services, Inc., CoverHound, Inc. and CyberPolicy, Inc., South & Western General Agency, Inc., and Berry Insurance Group, Inc. which were acquired in 2020 and whose financial statements constitute approximately (0.22) and 8.44 percent of net and total assets, respectively, 2.3 percent of revenues, and (0.75) percent of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2020. Accordingly, our audit did not include the internal control over financial reporting of these acquired entities.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ DELOITTE & TOUCHE LLP |
| Certified Public Accountants |
| Tampa, Florida |
| February 23, 2021 |
Management’s Report on Internal Control o****ver Financial Reporting
The management of Brown & Brown, Inc. and its subsidiaries (“Brown & Brown”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including Brown & Brown’s principal executive officer and principal financial officer, Brown & Brown conducted an evaluation of the effectiveness of internal control over financial reporting based upon the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In conducting Brown & Brown’s evaluation of the effectiveness of its internal control over financial reporting, Brown & Brown has excluded the following acquisitions completed by Brown & Brown during 2020: Special Risk Insurance Managers Ltd., Texas All Risk General Agency, Inc. et al, The Colonial Group, Inc. et al, RLA Insurance Intermediaries, LLC, Buiten & Associates, LLC, Amity Insurance Agency, Inc., BrookStone Insurance Group, LLC, VAS GenPar, LLC, J.E. Brown & Associates Insurance Services, Inc., CoverHound, Inc. and CyberPolicy, Inc., South & Western General Agency, Inc., and Berry Insurance Group, Inc. (collectively the “2020 Excluded Acquisitions”), which were acquired during 2020 and whose financial statements constitute approximately (0.22%) and 8.44% of net and total assets, respectively, 2.3% of revenues, and (0.75%) of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2020. Refer to Note 3 to the Consolidated Financial Statements for further discussion of these acquisitions and their impact on Brown & Brown’s Consolidated Financial Statements.
Based upon Brown & Brown’s evaluation under the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission*,* management concluded that internal control over financial reporting was effective as of December 31, 2020. Management’s internal control over financial reporting as of December 31, 2020 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Brown & Brown, Inc.
Daytona Beach, Florida
February 23, 2021
| /s/ J. Powell Brown | /s/ R. Andrew Watts | |
| J. Powell Brown Chief Executive Officer | R. Andrew Watts Executive Vice President, Chief Financial Officer and Treasurer |
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