Brown & Brown Insurance 2016 Annual Report

Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Acquisitions
Part of our continuing business strategy is to attract high-quality insurance intermediaries to join our operations. From
1993 through the fourth quarter of 2016, we acquired 479 insurance intermediary operations, excluding acquired books
of business (customer accounts). During the year ended December 31, 2016, the Company acquired the assets and assumed
certain liabilities of seven insurance intermediaries, all of the stock of one insurance intermediary and three books of business
(customer accounts). Collectively, these acquired business that had annualized revenues of approximately $56 million.
Critical Accounting Policies
Our Consolidated Financial Statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. We continually evaluate our estimates, which are based upon historical experience and on assumptions that we
believe to be reasonable under the circumstances. These estimates form the basis for our judgments about the carrying
values of our assets and liabilities, of which values are not readily apparent from other sources. Actual results may differ
from these estimates.
We believe that of our significant accounting and reporting policies, the more critical policies include our accounting
for revenue recognition, business combinations and purchase price allocations, intangible asset impairments, non-cash
stock-based compensation and reserves for litigation. In particular, the accounting for these areas requires significant use
of judgment to be made by management. Different assumptions in the application of these policies could result in material
changes in our consolidated financial position or consolidated results of operations. Refer to Note 1 in the “Notes to
Consolidated Financial Statements.”
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Brown & Brown, Inc.
Revenue Recognition
Commission revenues are recognized as of the effective date of the insurance policy or the date on which the policy premium
is processed into our systems and invoiced to the customer, whichever is later. Commission revenues related to installment
billings are recognized on the later of the date effective or invoiced, with the exception of our Arrowhead business which
follows a policy of recognizing on the later of the date effective or processed into our systems regardless of the billing arrangement.
Management determines the policy cancellation reserve based upon historical cancellation experience adjusted in
accordance with known circumstances. Subsequent commission adjustments are recognized upon our receipt of notification
from insurance companies concerning matters necessitating such adjustments. Profit-sharing contingent commissions are
recognized when determinable, which is generally when such commissions are received from insurance companies, or periodically
when we receive formal notification of the amount of such payments. Fee revenues, and commissions for employee
benefits coverages and workers’ compensation programs, are recognized as services are rendered.
Business Combinations and Purchase Price Allocations
We have acquired significant intangible assets through business acquisitions. These assets consist of purchased customer
accounts, non-compete agreements, and the excess of purchase prices over the fair value of identifiable net assets acquired
(goodwill). The determination of estimated useful lives and the allocation of purchase price to intangible assets requires
significant judgment and affects the amount of future amortization and possible impairment charges.
All of our business combinations initiated after June 30, 2001 have been accounted for using the acquisition method. In
connection with these acquisitions, we record the estimated value of the net tangible assets purchased and the value of the
identifiable intangible assets purchased, which typically consist of purchased customer accounts and non-compete agreements.
Purchased customer accounts include the physical records and files obtained from acquired businesses that contain
information about insurance policies, customers and other matters essential to policy renewals. However, they primarily
represent the present value of the underlying cash flows expected to be received over the estimated future renewal periods
of the insurance policies comprising those purchased customer accounts. The valuation of purchased customer accounts
involves significant estimates and assumptions concerning matters such as cancellation frequency, expenses and discount
rates. Any change in these assumptions could affect the carrying value of purchased customer accounts. Non-compete