Brown & Brown Insurance 2016 Annual Report

Management’s Discussion and Analysis
of Financial Condition and Results of Operations
34
Brown & Brown, Inc.
growth rate for core organic commissions and fees revenue was 1.9% for 2016 and was driven by revenue from net new
business written during the preceding twelve months along with modest increases in commercial auto rates and underlying
exposure unit values that drive insurance premiums, and partially offset by rate reductions in most lines of coverage, other
than commercial auto, with the most pronounced declines realized for insurance premium rates for properties in catastrophe-prone
areas.
Income before income taxes for 2016 increased 3.3%, or $6.1 million, over the same period in 2015, to $188.0 million.
This growth in income before income taxes was negatively impacted by $10.3 million in expense associated with the change
in estimated acquisition earn-out payables, an increase of $8.2 million over the same period in 2015. Other factors affecting
this increase were: (i) the net increase in revenue as described above; (ii) a 6.3%, or $29.0 million increase in employee
compensation and benefits due primarily to the year on year impact of new teammates related to acquisitions completed
in the past twelve months and to a lesser extent continued investment in producers and other staff to support current and
future expected organic revenue growth; and (iii) operating expenses which increased by $8.8 million or 6.4%, primarily
due to increased value-added consulting services to support our customers and increases in office rent expense, offset by
a combined decrease in amortization, depreciation and intercompany interest expense of $4.9 million.
The Retail Segment’s total revenues in 2015 increased 5.7%, or $46.7 million, over the same period in 2014, to
$870.3 million. The $43.6 million increase in core commissions and fees revenue was driven by the following: (i) approximately
$35.6 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues
in the same period of 2014; (ii) $11.0 million related to net new business; and (iii) an offsetting decrease of $3.0 million
related to commissions and fees revenue recorded from business divested in 2014 and 2015. Profit-sharing contingent
commissions and GSCs in 2015 increased 3.4%, or $1.0 million, over 2014, to $30.3 million. The Retail Segment’s organic
revenue growth rate for core organic commissions and fees revenue was 1.4% for 2015 and was driven by revenue from
net new business written during the preceding twelve months along with modest increases in commercial auto rates, and
partially offset by: (i) terminated association health plans in the state of Washington; (ii) continued pressure on the small
employee benefits business as some accounts adopt alternative plan designs and move to a per employee/per month
payment model due to the implementation of the Affordable Care Act; and (iii) reductions in property insurance premium
rates specifically in catastrophe-prone areas.
Income before income taxes for 2015 increased 15.5%, or $24.4 million, over the same period in 2014, to $181.9 million.
The primary factors affecting this increase were: (i) the net increase in revenue as described above; (ii) a 7.1%, or $29.4 million
increase in employee compensation and benefits due primarily to the year on year impact of new teammates related to acquisitions
completed in the past twelve months in addition to incremental investments in revenue producing teammates; and (iii)
operating expenses which increased by $3.8 million or 2.9%, due to increased travel and value added consulting services;
offset by (iv) a reduction in the change in estimated acquisition earn-out payables of $5.5 million, or 73.1% to $2.0 million;
and (v) a $4.2 million, or 25.7% reduction in non-cash stock-based compensation to $12.1 million due to the forfeiture of
certain grants where performance conditions were not fully achieved.