NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1· Nature of Operations
Brown & Brown, Inc., a Florida corporation, and its subsidiaries (collectively, “Brown & Brown” or the “Company”) is a diversified insurance agency, wholesale brokerage, insurance programs and services organization that markets and sells to its customers, insurance products and services, primarily in the property, casualty and employee benefits areas. Brown & Brown’s business is divided into
four
reportable segments: the Retail Segment provides a broad range of insurance products and services to commercial, public and quasi-public entities, professional and individual customers; the National Programs Segment, acting as a managing general agent (“MGA”), provides professional liability and related package products for certain professionals, a range of insurance products for individuals, flood coverage, and targeted products and services designated for specific industries, trade groups, governmental entities and market niches, all of which are delivered through nationwide networks of independent agents, including Brown & Brown retail agents; the Wholesale Brokerage Segment markets and sells excess and surplus commercial insurance, primarily through independent agents and brokers, including Brown & Brown Retail offices; and the Services Segment provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare benefits advocacy services, and claims adjusting services.
NOTE 2· Basis of Financial Reporting
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of recurring accruals) necessary for a fair presentation have been included. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the Notes thereto set forth in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
.
The preparation of these financial statements in conformity with 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 Condensed Consolidated Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which provides guidance for accounting for leases. Under ASU 2016-02, the Company will be required to recognize the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company continues to evaluate the impact of this pronouncement with the principal impact being that the present value of the remaining lease payments be presented as a liability on the balance sheet as well as an asset of similar value representing the “Right of Use” for those leased properties. The undiscounted contractual cash payments remaining on leased properties were
$210.4 million
as of December 31, 2017 as indicated in Note 13 of the Company's Form 10-K and
$199.6 million
as of March 31, 2018 as detailed in the Liquidity and Capital Resources section of this Quarterly Report on Form 10-Q.
Recently Adopted Accounting Standards
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230)”: Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (“ASU 2016-15”), which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified and applies to all entities, required to present a statement of cash flows under Topic 230. ASU 2016-15 became effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 with early adoption permitted. The Company adopted ASU 2016-15 effective January 1, 2018 and has determined there is no impact on the Company’s Statement of Cash Flows. The Company already presented cash paid on contingent consideration in business combination as prescribed by ASU 2016-15 and does not, at this time, engage in the other activities being addressed in this ASU.
In March 2016, the FASB issued ASU 2016-08, “Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)” (“ASU 2016-08”) to clarify certain aspects of the principal-versus-agent guidance included in the new revenue standard ASU 2014-09 “Revenue from Contracts with Customers” (“ASU 2014-09”). The FASB issued the ASU in response to concerns identified by stakeholders, including those related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. The Company adopted ASU 2016-08 effective contemporaneously with ASU 2014-09 beginning January 1, 2018. The impact of ASU 2016-08 was limited to the claims administering activities of one of our businesses within our Services Segment and therefore was not material to the net income of the Company.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“Topic 606”), which provides guidance for revenue recognition. Topic 606 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. It supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. The standard’s core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. Effective as of January 1, 2018, the Company adopted ASU 2014–09, and all related amendments, which established Accounting Standards Codification ("ASC") Topic 606. The Company adopted these standards by recognizing the cumulative effect as an adjustment to opening retained earnings at January 1, 2018, under the modified retrospective method for contracts not completed as of the day of adoption. The cumulative impact of adopting Topic 606 on January 1, 2018 was an increase in retained earnings within stockholders’ equity of
$117.5 million
. Under the modified retrospective method, the Company is not required to restate comparative financial information prior to the adoption of these standards and, therefore, such information presented for the three months ended March 31, 2017 continues to be reported under the Company's previous accounting policies.
The following areas are impacted by the adoption of Topic 606:
Historically, approximately 70% of the Company’s commissions and fees are in the form of commissions paid by insurance carriers. These commissions are earned at a point in time upon the effective date of bound insurance coverage, as no significant performance obligation remains 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. In situations where multiple performance obligations exist within a 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.
Commission revenues - Prior to the adoption of Topic 606, commission revenues, including those billed on an installment basis, were recognized on the latter of the policy effective date or the date that the premium was billed to the client, with the exception of the Company's Arrowhead businesses, which followed a policy of recognizing these revenues on the latter of the policy effective date or processed date in our systems. As a result of the adoption of Topic 606, certain revenues associated with the issuance of policies are now recognized upon the effective date of the associated policy. These commission revenues, including those billed on an installment basis, are now recognized earlier than they had been previously. Revenue is now accrued based upon the completion of the performance obligation, thereby creating a current asset for the unbilled revenue, until such time as an invoice is generated, which typically does not exceed twelve months. The Company does not expect the overall impact of these changes to be significant on a full-year basis, but the timing of recognizing revenue will impact our fiscal quarters when compared to prior years. For the three months ended March 31, 2018, the adoption of Topic 606 increased base and incentive commissions revenue, as defined in Note 3, by
$46.0 million
compared to what would have been recognized under the Company's previous accounting policies. Incentive commissions include additional commissions over base commissions received from insurance carriers based on predetermined production levels mutually agreed upon by both parties.
Profit-sharing contingent commissions - Prior to the adoption of Topic 606, revenue that was not fixed and determinable because a contingency existed was not recognized until the contingency was resolved. Under Topic 606, the Company must estimate the amount of consideration that will be received in the coming year such that a significant reversal of revenue is not probable. Profit-sharing contingent commissions represent a form of variable consideration associated with the placement of coverage, for which we earn commissions and fees. In connection with Topic 606, profit-sharing contingent commissions are estimated with a constraint applied and accrued relative to the recognition of the corresponding core commissions. The resulting effect on the timing of recognizing profit-sharing contingent commissions will now more closely follow a similar pattern as our commissions and fees with any true-ups recognized when payments are received or as additional information that affects the estimate becomes available. For the three months ended March 31, 2018, the adoption of Topic 606 reduced profit-sharing contingent commissions revenue by
$18.2 million
compared to what would have been recognized under our previous accounting policies.
Fee revenues - Approximately 30% of the Company’s commissions and fees is in the form of fees, which are predominantly in the Company's National Programs and Services Segments, and to a lesser extent in the large accounts business within the Company's Retail Segment, where the Company receives fees in lieu of a commission. In accordance with Topic 606, fees revenue from certain agreements are recognized in earlier periods and others in later periods as compared to our previous accounting treatment depending on when the services within the contract are satisfied and we have transferred control of the related services to the customer. The Company does not expect the overall impact of these changes to be significant on a full-year basis, but the timing of recognizing fees revenue will impact our fiscal quarters when compared to prior years. For the three months ended March 31, 2018, the adoption of Topic 606 reduced fees revenue by
$0.4 million
compared to what would have been recognized under our previous accounting policies.
Additionally, the Company has evaluated ASC Topic 340 - Other Assets and Deferred Cost (“ASC 340”) which requires companies to defer certain incremental cost to obtain customer contracts, and certain costs to fulfill customer contracts.
Incremental cost to obtain - The adoption of ASC 340 resulted in the Company deferring certain cost to obtain customer contracts primarily as they relate to commission-based compensation plans in the Retail Segment, in which the Company pays an incremental amount of compensation on new business. These incremental cost is deferred and amortized over a 15-year period, which is consistent with the analysis performed on acquired customer accounts and referenced in Note 7 to the Company’s condensed consolidated financial statements. For the three months ended March 31, 2018, the Company deferred
$2.8 million
of incremental cost to obtain customer contracts. The Company expensed
$31.7 thousand
of these incremental cost to obtain customer contracts for the three months ended March 31, 2018.
Cost to fulfill - The adoption of ASC 340 resulted in the Company deferring certain cost to fulfill a contract and to recognize these costs as the associated performance obligations are fulfilled. In order for contract fulfillment costs to be deferred under ASC 340, the costs must (1) relate directly to a specific contract or anticipated contract, (2) generate or enhance resources that the Company will use in satisfying its obligations under the contract, and (3) be expected to be recovered through sufficient net cash flows from the contract. The Company does not expect the overall impact of these changes to be significant on a full-year basis, but the timing of recognizing these expenses will impact quarterly results compared to prior years as such recognition better aligns with the associated revenue. With the modified retrospective adoption of Topic 606, the Company deferred
$52.7 million
in contract fulfillment costs on its opening balance sheet on January 1, 2018 based upon the estimated average time spent on policy renewals. For the three months ended March 31, 2018, the Company expensed a net of
$10.1 million
of these deferred cost as the associated performance obligations were fulfilled.
In connection with the implementation of this standard, we modified, and in some instances instituted, additional accounting procedures, processes and internal controls. Given the relative impacts of this standard to our revenue streams, we do not expect that these modifications and additions will materially change our internal controls over financial reporting.
The cumulative effect of the changes made to our unaudited condensed consolidated balance sheet as of January 1, 2018 for the adoption of Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” and Accounting Standards Codification Topic 340 – Other Assets and Deferred Cost (the “New Revenue Standard”):
|
|
|
|
|
|
|
(in thousands)
|
Balance at December 31, 2017
|
|
Adjustments due to the New Revenue Standard
|
|
Balance at January 1, 2018
|
Balance Sheet
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Premiums, commissions and fees receivable
|
546,402
|
|
153,058
|
|
699,460
|
Other current assets
|
47,864
|
|
52,680
|
|
100,544
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Premiums payable to insurance companies
|
685,163
|
|
12,107
|
|
697,270
|
Accounts payable
|
64,177
|
|
8,747
|
|
72,924
|
Accrued expenses and other liabilities
|
228,748
|
|
22,794
|
|
251,542
|
Deferred income taxes, net
|
256,185
|
|
44,575
|
|
300,760
|
|
|
|
|
|
|
Shareholders' Equity:
|
|
|
|
|
|
Retained earnings
|
2,456,599
|
|
117,515
|
|
2,574,114
|
The $52.7 million adjustment to other current assets reflects the deferral of certain cost to fulfill contracts. The
$12.1 million
adjustment to premiums payable to insurance companies reflects the estimated amount payable to outside brokers on unbilled premiums, commissions and fees receivable.
The following table illustrates the impact of adopting the New Revenue Standard has had on our reported results in the unaudited condensed consolidated statement of income.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
(in thousands)
|
As reported
|
|
Impact of adopting the New Revenue Standard
|
|
Balances without the New Revenue Standard
|
Statement of Income
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
Commissions and fees
|
500,338
|
|
|
27,410
|
|
|
472,928
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
Employee compensation and benefits
|
270,899
|
|
|
10,121
|
|
|
260,778
|
|
Other operating expenses
|
76,313
|
|
|
2,761
|
|
|
73,552
|
|
Income taxes
|
27,613
|
|
|
3,387
|
|
|
24,226
|
|
|
|
|
|
|
|
Net income
|
90,828
|
|
|
11,141
|
|
|
79,687
|
|
NOTE 3· Revenues
The following tables present the revenues disaggregated by revenue source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
(in thousands)
|
Retail
|
|
National Programs
|
|
Wholesale
|
|
Services
|
|
Other
|
|
Total
|
Base commissions
(1)
|
$
|
222,329
|
|
|
$
|
74,610
|
|
|
$
|
52,425
|
|
|
$
|
—
|
|
|
$
|
126
|
|
|
$
|
349,490
|
|
Fees
(2)
|
23,655
|
|
|
33,685
|
|
|
11,271
|
|
|
43,993
|
|
|
(236
|
)
|
|
112,368
|
|
Incentive commissions
(3)
|
23,560
|
|
|
40
|
|
|
207
|
|
|
—
|
|
|
9
|
|
|
23,816
|
|
Profit-sharing contingent commissions
(4)
|
6,130
|
|
|
3,982
|
|
|
1,572
|
|
|
—
|
|
|
—
|
|
|
11,684
|
|
Guaranteed supplemental commissions
(5)
|
2,522
|
|
|
15
|
|
|
443
|
|
|
—
|
|
|
—
|
|
|
2,980
|
|
Investment income
(6)
|
1
|
|
|
114
|
|
|
—
|
|
|
73
|
|
|
413
|
|
|
601
|
|
Other income, net
(7)
|
205
|
|
|
29
|
|
|
230
|
|
|
—
|
|
|
58
|
|
|
522
|
|
Total Revenues
|
$
|
278,402
|
|
|
$
|
112,475
|
|
|
$
|
66,148
|
|
|
$
|
44,066
|
|
|
$
|
370
|
|
|
$
|
501,461
|
|
|
|
(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 and fees negotiated in lieu of commissions.
|
|
|
(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 which may also reflect considerations for volume, growth and/or retention.
|
|
|
(5)
|
Guaranteed supplemental commissions represents 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.
|
Contract Assets and Liabilities
The balances of contract assets and contract liabilities arising from contracts with customers for the period ended March 31, 2018 and December 31, 2017 were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2018
|
|
December 31, 2017
(1)
|
Contract assets
|
$
|
222,544
|
|
|
$
|
210,323
|
|
Contract liabilities
|
$
|
54,881
|
|
|
$
|
51,236
|
|
|
|
(1)
|
The balances as of December 31, 2017 have been revised to reflect the impact of adopting the New Revenue Standard.
|
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.
Approximately
87%
of the contract liability balance at the beginning of the period is expected to be recognized as revenue during 2018. The remaining
13%
of the contract liability balance at the beginning of the period is included within other liabilities (long term) and expected to be recognized as revenue during 2019 or thereafter.
During the period ended March 31, 2018, the amount of revenue recognized during the period related to performance obligations satisfied in a previous period, inclusive of changes due to estimates, was insignificant.
NOTE 4· 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:
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
(in thousands, except per share data)
|
2018
|
|
2017
|
Net income
|
$
|
90,828
|
|
|
$
|
70,110
|
|
Net income attributable to unvested awarded performance stock
|
(1,902
|
)
|
|
(1,686
|
)
|
Net income attributable to common shares
|
$
|
88,926
|
|
|
$
|
68,424
|
|
Weighted average number of common shares outstanding – basic
|
275,952
|
|
|
280,224
|
|
Less unvested awarded performance stock included in weighted average number of common shares outstanding – basic
|
(5,780
|
)
|
|
(6,737
|
)
|
Weighted average number of common shares outstanding for basic net income per common share
|
270,172
|
|
|
273,487
|
|
Dilutive effect of stock options
|
5,542
|
|
|
4,565
|
|
Weighted average number of shares outstanding – diluted
|
275,714
|
|
|
278,052
|
|
Net income per share:
|
|
|
|
Basic
|
$
|
0.33
|
|
|
$
|
0.25
|
|
Diluted
|
$
|
0.32
|
|
|
$
|
0.25
|
|
NOTE 5· Business Combinations
During the
three months ended March 31, 2018
, Brown & Brown acquired the assets and assumed certain liabilities of
two
insurance intermediaries. Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last twelve months as permitted by Accounting Standards Codification Topic 805 —
Business Combinations
(“ASC 805”). Such adjustments are presented in the “Other” category within the following two tables. The recorded purchase price for all acquisitions included an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations will be recorded in the Condensed Consolidated Statement of Income when incurred.
The fair value of earn-out obligations is based on 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 on the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company’s Condensed Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period, as defined in ASC 805. For the
three months ended March 31, 2018
, several adjustments were made within the permitted measurement period that resulted in an increase in the aggregate purchase price of the affected acquisitions of
$21.4 thousand
relating to the assumption of certain liabilities. These measurement period adjustments have been reflected as current period adjustments in the
three months ended March 31, 2018
in accordance with the guidance in ASU 2015-16 “Business Combinations.” The measurement period adjustments primarily impacted goodwill, with no effect on earnings or cash in the current period.
Cash paid for acquisitions was $
33.6 million
in the
three
-month period ended
March 31, 2018
. We completed
two
acquisitions (excluding book of business purchases) in the
three
-month period ended
March 31, 2018
. We completed
zero
acquisitions (excluding book of business purchases) in the
three
-month period ended
March 31, 2017
.
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
|
|
Other
Payable
|
|
Recorded
Earn-Out
Payable
|
|
Net Assets
Acquired
|
|
Maximum
Potential Earn-
Out Payable
|
Other
|
Various
|
|
Various
|
|
$
|
33,576
|
|
|
$
|
1,690
|
|
|
$
|
4,524
|
|
|
$
|
39,790
|
|
|
$
|
6,520
|
|
Total
|
|
|
|
|
$
|
33,576
|
|
|
$
|
1,690
|
|
|
$
|
4,524
|
|
|
$
|
39,790
|
|
|
$
|
6,520
|
|
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)
|
|
Other
|
|
Total
|
Fixed assets
|
|
$
|
21
|
|
|
$
|
21
|
|
Goodwill
|
|
31,367
|
|
|
31,367
|
|
Purchased customer accounts
|
|
9,774
|
|
|
9,774
|
|
Non-compete agreements
|
|
42
|
|
|
42
|
|
Total assets acquired
|
|
41,204
|
|
|
41,204
|
|
Other current liabilities
|
|
(1,414
|
)
|
|
(1,414
|
)
|
Total liabilities assumed
|
|
(1,414
|
)
|
|
(1,414
|
)
|
Net assets acquired
|
|
$
|
39,790
|
|
|
$
|
39,790
|
|
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
$31.4 million
, which is net of any opening balance sheet adjustments within the allowable measurement period, was allocated to the Retail Segment. Of the total goodwill of
$31.4 million
, the amount currently deductible for income tax purposes is
$26.9 million
and the remaining
$4.5 million
relates to the recorded earn-out payables and will not be deductible until it is earned and paid.
For the acquisitions completed during 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
March 31, 2018
, included in the Condensed Consolidated Statement of Income for the
three months ended March 31, 2018
, was
$0.9 million
. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through
March 31, 2018
, included in the Condensed Consolidated Statement of Income for the
three months ended March 31, 2018
, was
$0.1 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)
|
Three months ended
March 31,
|
(in thousands, except per share data)
|
2018
|
|
2017
|
Total revenues
|
$
|
502,679
|
|
|
$
|
467,198
|
|
Income before income taxes
|
$
|
118,807
|
|
|
$
|
111,618
|
|
Net income
|
$
|
91,109
|
|
|
$
|
70,522
|
|
Net income per share:
|
|
|
|
Basic
|
$
|
0.33
|
|
|
$
|
0.25
|
|
Diluted
|
$
|
0.32
|
|
|
$
|
0.25
|
|
Weighted average number of shares outstanding:
|
|
|
|
Basic
|
270,172
|
|
|
273,487
|
|
Diluted
|
275,714
|
|
|
278,052
|
|
As of
March 31, 2018
and
2017
, the fair values of the estimated acquisition earn-out payables were re-evaluated and measured at fair value on a recurring basis using unobservable inputs (Level 3) as defined in ASC 820-
Fair Value Measurement
. The resulting additions, payments, and net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the
three
months ended
March 31, 2018
and
2017
, were as follows:
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
(in thousands)
|
2018
|
|
2017
|
Balance as of the beginning of the period
|
$
|
36,175
|
|
|
$
|
63,821
|
|
Additions to estimated acquisition earn-out payables
|
4,524
|
|
|
(211
|
)
|
Payments for estimated acquisition earn-out payables
|
(2,565
|
)
|
|
(10,230
|
)
|
Subtotal
|
38,134
|
|
|
53,380
|
|
Net change in earnings from estimated acquisition earn-out payables:
|
|
|
|
Change in fair value on estimated acquisition earn-out payables
|
2,062
|
|
|
3,335
|
|
Interest expense accretion
|
404
|
|
|
693
|
|
Net change in earnings from estimated acquisition earn-out payables
|
2,466
|
|
|
4,028
|
|
Balance as of March 31,
|
$
|
40,600
|
|
|
$
|
57,408
|
|
Of the
$40.6
million estimated acquisition earn-out payables as of
March 31, 2018
,
$29.1
million was recorded as accounts payable and
$11.5
million was recorded as other non-current liabilities. As of
March 31, 2018
, the maximum future acquisition contingency payments related to all acquisitions was
$84.2 million
, inclusive of the
$40.6 million
estimated acquisition earn-out payables as of
March 31, 2018
. Included within the additions to estimated acquisition earn-out payables are any adjustments to opening balance sheet items within the allowable measurement period, which may therefore differ from previously reported amounts.
NOTE 6· Goodwill
Goodwill is subject to at least an annual assessment for impairment by applying a fair value-based test. The Company completed its most recent annual assessment as of November 30, 2017, and identified no impairment as a result of the evaluation.
The changes in the carrying value of goodwill by reportable segment for the
three months ended March 31, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Retail
|
|
National
Programs
|
|
Wholesale
Brokerage
|
|
Services
|
|
Total
|
Balance as of January 1, 2018
|
$
|
1,386,248
|
|
|
$
|
908,472
|
|
|
$
|
286,098
|
|
|
$
|
135,261
|
|
|
$
|
2,716,079
|
|
Goodwill of acquired businesses
|
31,356
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
31,367
|
|
Balance as of March 31, 2018
|
$
|
1,417,604
|
|
|
$
|
908,472
|
|
|
$
|
286,109
|
|
|
$
|
135,261
|
|
|
$
|
2,747,446
|
|
NOTE 7· Amortizable Intangible Assets
Amortizable intangible assets at
March 31, 2018
and
December 31, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
(in thousands)
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Weighted
Average
Life
(Years)
(1)
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Weighted
Average
Life
(Years)
(1)
|
Purchased customer accounts
|
$
|
1,474,048
|
|
|
$
|
(844,901
|
)
|
|
$
|
629,147
|
|
|
15.0
|
|
$
|
1,464,274
|
|
|
$
|
(824,584
|
)
|
|
$
|
639,690
|
|
|
15.0
|
Non-compete agreements
|
30,330
|
|
|
(29,194
|
)
|
|
1,136
|
|
|
6.8
|
|
30,287
|
|
|
(28,972
|
)
|
|
1,315
|
|
|
6.8
|
Total
|
$
|
1,504,378
|
|
|
$
|
(874,095
|
)
|
|
$
|
630,283
|
|
|
|
|
$
|
1,494,561
|
|
|
$
|
(853,556
|
)
|
|
$
|
641,005
|
|
|
|
|
|
(1)
|
Weighted average life calculated as of the date of acquisition.
|
Amortization expense for amortizable intangible assets for the years ending
December 31, 2018
,
2019
,
2020
,
2021
and
2022
is estimated to be
$81.6 million
,
$77.1 million
,
$69.8 million
,
$66.5 million
, and
$62.1 million
, respectively.
NOTE 8· Long-Term Debt
Long-term debt at
March 31, 2018
and
December 31, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2018
|
|
December 31, 2017
|
Current portion of long-term debt:
|
|
|
|
Current portion of 5-year term loan facility expires June 28, 2022
|
$
|
20,000
|
|
|
$
|
20,000
|
|
4.500% senior notes, Series E, quarterly interest payments, balloon due September 2018
|
100,000
|
|
|
100,000
|
|
Total current portion of long-term debt
|
120,000
|
|
|
120,000
|
|
Long-term debt:
|
|
|
|
Note agreements:
|
|
|
|
4.200% senior notes, semi-annual interest payments, net of the unamortized discount, balloon due 2024
|
498,983
|
|
|
498,943
|
|
Total notes
|
498,983
|
|
|
498,943
|
|
Credit agreements:
|
|
|
|
5-year term-loan facility, periodic interest and principal payments, LIBOR plus up to 1.750%, expires June 28, 2022
|
360,000
|
|
|
365,000
|
|
5-year revolving-loan facility, periodic interest payments, LIBOR plus up to 1.500%, plus commitment fees up to 0.250%, expires June 28, 2022
|
—
|
|
|
—
|
|
Total credit agreements
|
360,000
|
|
|
365,000
|
|
Debt issuance costs (contra)
|
(7,435
|
)
|
|
(7,802
|
)
|
Total long-term debt less unamortized discount and debt issuance costs
|
851,548
|
|
|
856,141
|
|
Current portion of long-term debt
|
120,000
|
|
|
120,000
|
|
Total debt
|
$
|
971,548
|
|
|
$
|
976,141
|
|
On December 22, 2006, the Company entered into a Master Shelf and Note Purchase Agreement (the “Master Agreement”) with a national insurance company. The initial issuance of notes under the Master Agreement occurred on December 22, 2006, through the issuance of
$25.0 million
in Series C Senior Notes due December 22, 2016, with a fixed interest rate of
5.660%
per year. On February 1, 2008,
$25.0 million
in Series D Senior Notes due January 15, 2015, with a fixed interest rate of
5.370%
per year, were issued. On September 15, 2011, and pursuant to a Confirmation of Acceptance, dated January 21, 2011, in connection with the Master Agreement,
$100.0 million
in Series E Senior Notes were issued and are due September 15, 2018, with a fixed interest rate of
4.500%
per year. The Series E Senior Notes were issued for the sole purpose of retiring existing Senior Notes. On January 15, 2015 the Series D Senior Notes were redeemed at maturity using cash proceeds to pay off the principal of
$25.0 million
plus any remaining accrued interest. On December 22, 2016, the Series C Senior Notes were redeemed at maturity using cash proceeds to pay off the principal of
$25.0 million
plus any remaining accrued interest. As of
March 31, 2018
, there was an outstanding debt balance issued under the provisions of the Master Agreement of
$100.0 million
.
On June 28, 2017, the Company entered into an amended and restated credit agreement (the “Amended and Restated Credit Agreement”) with the lenders named therein, JPMorgan Chase Bank, N.A. as administrative agent and certain other banks as co-syndication agents and co-documentation agents. The Amended and Restated Credit Agreement amended and restated the credit agreement dated April 17, 2014, among such parties (the “Original Credit Agreement”). The Amended and Restated Credit Agreement extends the applicable maturity date of the existing revolving credit facility (the “Facility”) of
$800.0 million
to June 28, 2022 and re-evidences unsecured term loans at
$400.0 million
while also extending the applicable maturity date to June 28, 2022. The term loan principal amortization schedule was reset with payments due quarterly. At the time of the execution of the Amended and Restated Credit Agreement,
$67.5 million
of principal from the original unsecured term loans was repaid using operating cash balances, and the Company added an additional
$2.8 million
in debt issuance costs related to the Facility to the Consolidated Balance Sheet. The Company also expensed to the Consolidated Statements of Income
$0.2 million
of debt issuance costs related to the Original Credit Agreement due to certain lenders exiting prior to the modified agreement, while also carrying forward
$1.6 million
on the Consolidated Balance Sheet the unamortized portion of the Original Credit Agreement debt issuance costs which will amortize over the term of the Amended and Restated Credit Agreement. Either or both of the revolving credit facility and the term loans may be extended for
two
additional
one
year periods at the Company’s request and at the discretion of the respective lenders. Interest and facility fees in respect to the Credit Facility are based upon the better of the Company’s net debt leverage ratio or a non-credit enhanced senior unsecured long-term debt rating. Based upon the Company’s net debt leverage ratio, the rates of interest charged on the term loan are
1.000%
to
1.750%
, and the revolving loan is
0.850%
to
1.500%
above the adjusted LIBOR rate for outstanding amounts drawn. There are fees included in the facility which include a facility fee based upon the revolving credit commitments of the lenders (whether used or unused) at a rate of
0.150%
to
0.250%
and letter of credit fees based upon the amounts of outstanding secured or unsecured letters of credit. The Amended and Restated Credit Agreement includes various covenants, limitations and events of default customary for similar facilities for similarly rated borrowers. On March 31, 2018, a scheduled principal payment of
$5.0 million
was satisfied per the terms of the Amended and Restated Credit Agreement. As of March 31, 2018, there was an outstanding debt balance issued under the terms of the Amended and Restated Credit Agreement of
$380.0 million
with
no
borrowings outstanding against the revolving loan. Per the terms of the Amended and Restated Credit Agreement, a scheduled principal payment of
$5.0 million
is due June 30, 2018.
On September 18, 2014, the Company issued
$500.0 million
of
4.200%
unsecured Senior Notes due in
2024
. The Senior Notes were given investment grade ratings of BBB-/Baa3 with a stable outlook. The notes are subject to certain covenant restrictions and regulations which are customary for credit rated obligations. At the time of funding, the proceeds were offered at a discount of the original note amount which also excluded an underwriting fee discount. The net proceeds received from the issuance were used to repay the outstanding balance of
$475.0 million
on the revolving Credit Facility and for other general corporate purposes. As of
March 31, 2018
and December 31, 2017, there was an outstanding debt balance of
$500.0 million
exclusive of the associated discount balance.
The Master Agreement and the Amended and Restated Credit Agreement require the Company to maintain certain financial ratios and comply with certain other covenants. The Company was in compliance with all such covenants as of
March 31, 2018
and December 31, 2017.
The 30-day Adjusted LIBOR Rate as of
March 31, 2018
was
1.938%
.
NOTE 9· Supplemental Disclosures of Cash Flow Information and Non-Cash Financing and Investing Activities
Our restricted cash balance is composed of funds held in separate premium trust accounts as required by state law or, in some cases, by agreement with our carrier partners.
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
(in thousands)
|
2018
|
|
2017
|
Cash paid during the period for:
|
|
|
|
Interest
|
$
|
14,472
|
|
|
$
|
14,531
|
|
Income taxes
|
$
|
3,179
|
|
|
$
|
2,704
|
|
Brown & Brown’s significant non-cash investing and financing activities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
(in thousands)
|
2018
|
|
2017
|
Other payable issued for purchased customer accounts
|
$
|
1,690
|
|
|
$
|
—
|
|
Estimated acquisition earn-out payables and related charges
|
$
|
4,524
|
|
|
$
|
(211
|
)
|
The following is a reconciliation of cash and cash equivalents inclusive of restricted cash as of
March 31, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
Balance as of March 31,
|
(in thousands)
|
2018
|
|
2017
|
Table to reconcile cash and cash equivalents inclusive of restricted cash
|
|
|
|
Cash and cash equivalents
|
$
|
558,248
|
|
|
$
|
546,721
|
|
Restricted cash
|
268,129
|
|
|
279,368
|
|
Total cash and cash equivalents inclusive of restricted cash at the end of the period
|
$
|
826,377
|
|
|
$
|
826,089
|
|
The following is a reconciliation of cash and cash equivalents inclusive of restricted cash as of
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
|
(in thousands)
|
2017
|
|
2016
|
Table to reconcile cash and cash equivalents inclusive of restricted cash
|
|
|
|
Cash and cash equivalents
|
$
|
573,383
|
|
|
$
|
515,646
|
|
Restricted cash
|
250,705
|
|
|
265,637
|
|
Total cash and cash equivalents inclusive of restricted cash at the end of the period
|
$
|
824,088
|
|
|
$
|
781,283
|
|
In the preparation of the Statement of Cash Flows in this Quarterly Report on Form 10-Q, beginning balance sheet balances for 2018 were adjusted to reflect the modified retrospective adoption of Accounting Standards Update No.2014-09, “Revenue from Contracts with Customers” and Accounting Standards Codification Topic 340 - Other Assets and Deferred Cost, thereby reflecting in the Statement of Cash Flows the change in operating assets and liabilities for the period, excluding the initial impact of adoption of these new accounting standards. Refer to Note 2 in the "Recently Adopted Accounting Standards" for the initial impact of adoption of these new accounting standards.
NOTE 10· Legal and Regulatory Proceedings
The Company is involved in numerous pending or threatened proceedings by or against Brown & Brown, Inc. or one or more of its subsidiaries that arise in the ordinary course of business. The damages that may be claimed against the Company in these various proceedings are in some cases substantial, including in certain instances claims for punitive or extraordinary damages. Some of these claims and lawsuits have been resolved, others are in the process of being resolved and others are still in the investigation or discovery phase. The Company will continue to respond appropriately to these claims and lawsuits and to vigorously protect its interests.
During the first quarter of 2017, the Company was successful in settling a lawsuit it had brought against certain former employees of Brown & Brown, their employer, AssuredPartners, Inc. and certain key executives of AssuredPartners. The settlement included a payment of
$20.0 million
by AssuredPartners to Brown & Brown in exchange for releasing certain individuals from restrictive covenants in the employment contracts they had signed with the Company and provides protection for current Brown & Brown teammates from continued solicitation for employment by AssuredPartners.
The proceeds of the settlement were received in March 2017 and were recorded in the other income line in the Condensed Consolidated Statement of Income.
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 11· Segment Information
Brown & Brown’s business is divided into
four
reportable segments: (1) the Retail Segment, which provides a broad range of insurance products and services to commercial, public and quasi-public entities, and to professional and individual customers, (2) the National Programs Segment, which acts as a MGA, provides professional liability and related package products for certain professionals, a range of insurance products for individuals, flood coverage, and targeted products and services designated for specific industries, trade groups, governmental entities and market niches, all of which are delivered through nationwide networks of independent agents, and Brown & Brown retail agents, (3) the Wholesale Brokerage Segment, which markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers, as well as Brown & Brown retail agents, and (4) the Services Segment, which provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare benefits advocacy services and claims adjusting services.
Brown & Brown conducts all of its operations within the United States of America, except for a wholesale brokerage operation based in London, England, and retail operations in Bermuda and the Cayman Islands. These operations earned
$3.3 million
and
$3.0 million
of total revenues for the
three months ended March 31, 2018
and
2017
, respectively. Long-lived assets held outside of the United States as of
March 31, 2018
and
2017
were not material. Additionally, we have a licenses to operate as a broker in various Canadian provinces.
The accounting policies of the reportable segments are the same as those described in Note 1 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
. 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 tables. The “Other” column includes any income and expenses not allocated to reportable segments, corporate-related items, including the intercompany interest expense charge to the reporting segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
(in thousands)
|
Retail
|
|
National
Programs
|
|
Wholesale
Brokerage
|
|
Services
|
|
Other
|
|
Total
|
Total revenues
|
$
|
278,402
|
|
|
$
|
112,475
|
|
|
$
|
66,148
|
|
|
$
|
44,066
|
|
|
$
|
370
|
|
|
$
|
501,461
|
|
Investment income
|
$
|
1
|
|
|
$
|
114
|
|
|
$
|
—
|
|
|
$
|
73
|
|
|
$
|
413
|
|
|
$
|
601
|
|
Amortization
|
$
|
10,242
|
|
|
$
|
6,323
|
|
|
$
|
2,837
|
|
|
$
|
1,137
|
|
|
$
|
—
|
|
|
$
|
20,539
|
|
Depreciation
|
$
|
1,237
|
|
|
$
|
1,387
|
|
|
$
|
427
|
|
|
$
|
411
|
|
|
$
|
2,090
|
|
|
$
|
5,552
|
|
Interest expense
|
$
|
6,797
|
|
|
$
|
7,496
|
|
|
$
|
1,435
|
|
|
$
|
594
|
|
|
$
|
(6,651
|
)
|
|
$
|
9,671
|
|
Income before income taxes
|
$
|
70,399
|
|
|
$
|
20,778
|
|
|
$
|
11,383
|
|
|
$
|
8,816
|
|
|
$
|
7,065
|
|
|
$
|
118,441
|
|
Total assets
|
$
|
4,687,456
|
|
|
$
|
3,009,147
|
|
|
$
|
1,323,046
|
|
|
$
|
432,920
|
|
|
$
|
(3,837,486
|
)
|
|
$
|
5,615,083
|
|
Capital expenditures
|
$
|
2,407
|
|
|
$
|
2,678
|
|
|
$
|
420
|
|
|
$
|
285
|
|
|
$
|
3,961
|
|
|
$
|
9,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2017
|
(in thousands)
|
Retail
|
|
National
Programs
|
|
Wholesale
Brokerage
|
|
Services
|
|
Other
|
|
Total
|
Total revenues
|
$
|
239,287
|
|
|
$
|
101,183
|
|
|
$
|
65,247
|
|
|
$
|
39,326
|
|
|
$
|
20,037
|
|
|
$
|
465,080
|
|
Investment income
|
$
|
2
|
|
|
$
|
74
|
|
|
$
|
—
|
|
|
$
|
80
|
|
|
$
|
87
|
|
|
$
|
243
|
|
Amortization
|
$
|
10,647
|
|
|
$
|
6,904
|
|
|
$
|
2,931
|
|
|
$
|
1,138
|
|
|
$
|
—
|
|
|
$
|
21,620
|
|
Depreciation
|
$
|
1,389
|
|
|
$
|
1,959
|
|
|
$
|
490
|
|
|
$
|
399
|
|
|
$
|
1,861
|
|
|
$
|
6,098
|
|
Interest expense
|
$
|
8,576
|
|
|
$
|
10,035
|
|
|
$
|
1,675
|
|
|
$
|
961
|
|
|
$
|
(11,565
|
)
|
|
$
|
9,682
|
|
Income before income taxes
|
$
|
48,855
|
|
|
$
|
12,527
|
|
|
$
|
15,265
|
|
|
$
|
6,121
|
|
|
$
|
28,199
|
|
|
$
|
110,967
|
|
Total assets
|
$
|
3,861,118
|
|
|
$
|
2,634,008
|
|
|
$
|
1,121,109
|
|
|
$
|
363,173
|
|
|
$
|
(2,781,964
|
)
|
|
$
|
5,197,444
|
|
Capital expenditures
|
$
|
1,136
|
|
|
$
|
1,080
|
|
|
$
|
378
|
|
|
$
|
150
|
|
|
$
|
288
|
|
|
$
|
3,032
|
|
NOTE 12· Investments
At
March 31, 2018
, the Company’s amortized cost and fair values of fixed maturity securities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized
Losses
|
|
Fair Value
|
U.S. Treasury securities, obligations of U.S. Government agencies and Municipalities
|
$
|
29,560
|
|
|
$
|
—
|
|
|
$
|
(318
|
)
|
|
$
|
29,242
|
|
Corporate debt
|
1,072
|
|
|
4
|
|
|
(3
|
)
|
|
1,073
|
|
Total
|
$
|
30,632
|
|
|
$
|
4
|
|
|
$
|
(321
|
)
|
|
$
|
30,315
|
|
At
March 31, 2018
, the Company held
$29.2 million
in fixed income securities composed of U.S. Treasury securities, securities issued by U.S. Government agencies and municipalities, and
$1.1 million
issued by corporations with investment grade ratings. Of that total,
$12.8 million
is classified as short-term investments on the Condensed Consolidated Balance Sheet as maturities are less than one-year, which also includes
$8.0 million
that is 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
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
16,235
|
|
|
$
|
(261
|
)
|
|
$
|
12,802
|
|
|
$
|
(57
|
)
|
|
$
|
29,037
|
|
|
$
|
(318
|
)
|
Corporate debt
|
803
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
803
|
|
|
(3
|
)
|
Total
|
$
|
17,038
|
|
|
$
|
(264
|
)
|
|
$
|
12,802
|
|
|
$
|
(57
|
)
|
|
$
|
29,840
|
|
|
$
|
(321
|
)
|
The unrealized losses were caused by interest rate increases. At
March 31, 2018
, the Company had
31
securities in an unrealized loss position. The corporate securities are highly rated securities with no indicators of potential impairment. Based on 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
March 31, 2018
.
At
December 31, 2017
, the Company’s amortized cost and fair values of fixed maturity securities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized
Losses
|
|
Fair Value
|
U.S. Treasury securities, obligations of U.S. Government agencies and Municipalities
|
$
|
29,970
|
|
|
$
|
—
|
|
|
$
|
(206
|
)
|
|
$
|
29,764
|
|
Corporate debt
|
1,072
|
|
|
12
|
|
|
—
|
|
|
1,084
|
|
Total
|
$
|
31,042
|
|
|
$
|
12
|
|
|
$
|
(206
|
)
|
|
$
|
30,848
|
|
At
December 31, 2017
, the Company held
$29.8 million
in fixed income securities composed of U.S. Treasury securities, securities issued by U.S. Government agencies and municipalities, and
$1.1 million
issued by corporations with investment grade ratings. Of that total,
$16.9 million
is classified as short-term investments on the Condensed Consolidated Balance Sheet as maturities are less than one-year, which also includes
$8.1 million
that is related to time deposits held with various financial institutions.
For securities in a loss position, the following table shows the investments’ gross unrealized loss and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
17,919
|
|
|
$
|
(157
|
)
|
|
$
|
11,845
|
|
|
$
|
(49
|
)
|
|
$
|
29,764
|
|
|
$
|
(206
|
)
|
Corporate debt
|
400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
400
|
|
|
—
|
|
Total
|
$
|
18,319
|
|
|
$
|
(157
|
)
|
|
$
|
11,845
|
|
|
$
|
(49
|
)
|
|
$
|
30,164
|
|
|
$
|
(206
|
)
|
The unrealized losses from corporate issuers were caused by interest rate increases. At
December 31, 2017
, the Company had
27
securities in an unrealized loss position. The corporate securities are highly rated securities with no indicators of potential impairment. Based on the ability and intent of the Company to hold these investments until recovery of fair value, which may be maturity, the bonds were not considered to be other-than-temporarily impaired at
December 31, 2017
.
The amortized cost and estimated fair value of the fixed maturity securities at
March 31, 2018
by contractual maturity are set forth below:
|
|
|
|
|
|
|
|
|
(in thousands)
|
Amortized Cost
|
|
Fair Value
|
Years to maturity:
|
|
|
|
Due in one year or less
|
$
|
12,791
|
|
|
$
|
12,756
|
|
Due after one year through five years
|
17,609
|
|
|
17,325
|
|
Due after five years
|
232
|
|
|
234
|
|
Total
|
$
|
30,632
|
|
|
$
|
30,315
|
|
The amortized cost and estimated fair value of the fixed maturity securities at
December 31, 2017
by contractual maturity are set forth below:
|
|
|
|
|
|
|
|
|
(in thousands)
|
Amortized Cost
|
|
Fair Value
|
Years to maturity:
|
|
|
|
Due in one year or less
|
$
|
16,934
|
|
|
$
|
16,899
|
|
Due after one year through five years
|
13,876
|
|
|
13,708
|
|
Due after five years
|
232
|
|
|
241
|
|
Total
|
$
|
31,042
|
|
|
$
|
30,848
|
|
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
$6.0 million
. This along with maturing time deposits yielded total cash proceeds from the sale of investments of
$6.5 million
in the period of
January 1, 2018
to
March 31, 2018
. These proceeds were used to purchase additional fixed maturity securities and time deposits. The gains and losses realized on those sales for the period from January 1, 2018 to
March 31, 2018
were
insignificant
.
Realized gains and losses are reported on the Condensed Consolidated Statements of Income, with the cost of securities sold determined on a specific identification basis.
At
March 31, 2018
, investments with a fair value of approximately
$4.0 million
were on deposit with state insurance departments to satisfy regulatory requirements.
NOTE 13· Reinsurance
Although the reinsurers are liable to the Company for amounts reinsured, our subsidiary, Wright National Flood Insurance Company (“Wright Flood”) 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 are as follows:
|
|
|
|
|
|
|
|
|
|
Period from January 1, 2018 to
March 31, 2018
|
(in thousands)
|
Written
|
|
Earned
|
Direct premiums
|
$
|
116,490
|
|
|
$
|
145,336
|
|
Ceded premiums
|
(116,487
|
)
|
|
(145,333
|
)
|
Net premiums
|
$
|
3
|
|
|
$
|
3
|
|
All premiums written by Wright Flood under the National Flood Insurance Program are
100%
ceded to the Federal Emergency Management Agency, or FEMA, for which Wright Flood received a
30.9%
expense allowance from January 1,
2018
through
March 31, 2018
. For the period from January 1,
2018
through
March 31, 2018
, the Company ceded
$116.1 million
of written premiums.
Effective April 1, 2014, Wright Flood is also a party to a quota share agreement whereby it cedes
100%
of its gross excess flood premiums, excluding fees, to Arch Reinsurance Company and receives a
30.5%
commission. Wright Flood ceded
$0.4 million
for the period from January 1,
2018
through
March 31, 2018
. As of
March 31, 2018
, Wright Flood had
$1.2 million
in paid excess flood losses,
$46,659
in loss adjustment expenses, case reserves of
$554,475
and incurred but not reported of
$628,314
.
Wright Flood also ceded
100%
of the homeowners, private passenger auto liability, and other liability occurrence to Stillwater Insurance Company, formerly known as Fidelity National Insurance Company. This business is in runoff. Therefore, only loss data exists on this business. As of
March 31, 2018
, no ceded unpaid losses and loss adjustment expenses or incurred but not reported expenses for homeowners, private passenger auto liability and other liability occurrence existed.
As of
March 31, 2018
the Condensed Consolidated Balance Sheet contained reinsurance recoverable of
$146.8 million
and prepaid reinsurance premiums of
$292.2 million
. There was
no
net activity in the reserve for losses and loss adjustment expense during the period January 1,
2018
through
March 31, 2018
, as Wright Flood’s direct premiums written were
100%
ceded to
two
reinsurers. The balance of the reserve for losses and loss adjustment expense, excluding related reinsurance recoverable, as of
March 31, 2018
was
$148.0 million
.
NOTE 14· Statutory Financial Data
Wright Flood maintains capital in excess of the minimum statutory amount of
$7.5 million
as required by regulatory authorities. The unaudited statutory capital and surplus of Wright Flood was
$30.2 million
at
March 31, 2018
and
$28.7 million
as of
December 31, 2017
. For the period from January 1,
2018
through
March 31, 2018
, Wright Flood generated statutory net income of
$1.5 million
. For the period from January 1, 2017 through
December 31, 2017
, Wright Flood generated statutory net income of
$4.8 million
.
NOTE 15· Subsidiary Dividend Restrictions
Under the insurance regulations of Texas, where Wright Flood is incorporated, the maximum amount of ordinary dividends that Wright Flood can pay to shareholders in a rolling twelve-month period is limited to the greater of
10%
of statutory adjusted capital and surplus as shown on Wright Flood’s last annual statement on file with the superintendent of the Texas Department of Insurance or
100%
of adjusted net income. There was no dividend payout in 2017 and the maximum dividend payout that may be made in 2018 without prior approval is
$4.8 million
.
NOTE 16· Shareholders’ Equity
On November 14, 2017, the Company entered into an accelerated share repurchase agreement (“ASR”) with an investment bank to purchase an aggregate
$75.0 million
of the Company’s common stock. As part of the ASR, the Company received an initial delivery of
1,290,486
shares of the Company’s common stock with a fair market value of approximately
$63.8 million
. Upon maturity of the program, the Company received
168,227
shares, receiving the remaining balance of
$11.2 million
at settlement on February 9, 2018 for a total delivery of
1,458,713
shares of Company’s common stock.
Under the authorization from the Company’s Board of Directors, shares may be purchased from time to time, at the Company’s discretion and subject to the availability of stock, market conditions, the trading price of the stock, alternative uses for capital, the Company’s financial performance and other potential factors. These purchases may be carried out through open market purchases, block trades, accelerated share repurchase plans of up to
$100.0 million
each (unless otherwise approved by the Board of Directors), negotiated private transactions or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. After completion of the latest ASR transaction, the Company has approval to repurchase up to
$227.5 million
, in the aggregate, of the Company’s outstanding common stock.
On March 28, 2018, we effected a 2-for-1 stock split (the “Stock Split”). As a result of the Stock Split, every share of common stock outstanding as of close of business on March 14, 2018 received an additional share of common stock, increasing the number of outstanding shares of common stock from approximately
138 million
shares to approximately
276 million
shares. The number of authorized shares of our common stock increased from
280 million
shares to
560 million
shares. No fractional shares were issued in connection with the Stock Split. Par value of the Company’s common stock was unchanged as a result of the Stock Split remaining at
$0.10
per share. The number of shares of common stock reserved or subject to outstanding grants, the exercise or purchase prices applicable to such outstanding grants and subscriptions, and certain grant limitations under our 1990 Employee Stock Purchase Plan, Performance Stock Plan and 2010 Stock Incentive Plan were adjusted as a result of the Stock Split, as required under the terms of those plans. Treasury shares were not adjusted for the Stock Split. All other shares and per share data included within this Quarterly Report on Form 10-Q, including our Condensed Consolidated Financial Statements and related footnotes, have been adjusted to account for the effect of the Stock Split.
NOTE 17· Income Taxes
The Tax Cuts and Jobs Act of 2017 (“2017 Tax Reform Act”) made significant changes to the Internal Revenue Code, including, but not limited to, the reduction in the US federal corporate income tax rate from
35.0%
to
21.0%
for tax years beginning after
December 31, 2017
, the transition of U.S. international taxation from a worldwide tax system to a participation exemption regime, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The Company estimated its provision for income taxes in accordance with the 2017 Tax Reform Act and guidance available upon enactment and as a result recorded
$120.9 million
as a one-time credit in the fourth quarter of
2017
, the period in which the legislation was signed into law. The
2017
estimate includes a provisional benefit of
$124.2 million
related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future which was partially offset by a provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings of
$3.3 million
based on cumulative foreign earnings of
$20.9 million
. The Company has not recorded any adjustments to this provisional amount as of
March 31, 2018
.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Reform Act. In accordance with SAB 118, the Company has determined that the deferred tax benefit recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate at March 31, 2018 and December 31, 2017. Additional work is necessary for a more detailed analysis of the Company’s deferred tax assets and liabilities and its historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of identification, but no later than one year from the enactment date.
The 2017 Tax Reform Act instituted a number of new provisions effective January 1, 2018, including the Global Intangible Low Taxed Income (“GILTI”), Foreign Derived Intangible Income (“FDII”) and Base Erosion and Anti-Abuse Tax (“BEAT”). The Company prepared reasonable estimates of the impact of each of these provisions of the 2017 Tax Reform Act on its effective tax rate for quarter ended March 31, 2018 and determined that the resulting impact was not material. The Company will continue to refine its provisional estimates related to the GILTI, FDII and BEAT rules as additional information is made available.