BROWN & BROWN, INC. - Quarter Report: 2016 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-13619

BROWN & BROWN, INC.

(Exact name of Registrant as specified in its charter)



Florida				59-0864469
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification Number)
220 South Ridgewood Avenue, Daytona Beach, FL				32114
(Address of principal executive offices)				(Zip Code)

Registrant’s telephone number, including area code: (386) 252-9601

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of shares of the Registrant’s common stock, $0.10 par value, outstanding as of November 4, 2016 was 140,209,157.

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BROWN & BROWN, INC.

INDEX




		PAGE NO.
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015	4
	Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015	6
	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 6.	Exhibits	37

SIGNATURE		38

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Disclosure Regarding Forward-Looking Statements

Brown & Brown, Inc., together with its subsidiaries (collectively, “we,” “Brown & Brown” or the “Company”), makes “forward-looking statements” within the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995, as amended, throughout this report and in the documents we incorporate by reference into this report. You can identify these statements by forward-looking words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “estimate,” “plan” and “continue” or similar words. We have based these statements on our current expectations about potential future events. Although we believe the expectations expressed in the forward-looking statements included in this Quarterly Report on Form 10-Q and the reports, statements, information and announcements incorporated by reference into this report are based on reasonable assumptions within the bounds of our knowledge of our business, a number of factors could cause actual results to differ materially from those expressed in any forward-looking statements, whether oral or written, made by us or on our behalf. Many of these factors have previously been identified in filings or statements made by us or on our behalf. Important factors which could cause our actual results to differ materially from the forward-looking statements in this report include but are not limited to the following items, in addition to those matters described in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:


•	Future prospects;


•	Material adverse changes in economic conditions in the markets we serve and in the general economy;


•	Downward pressure on commercial property and casualty premiums or employee benefits premiums;


•	Future regulatory actions and conditions in the states in which we conduct our business;


•	The occurrence of adverse economic conditions, an adverse regulatory climate, or a disaster in California, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Massachusetts, Michigan, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Texas, Virginia and Washington, because a significant portion of business written by us is for customers located in these states;


•	Our ability to attract, retain and enhance qualified personnel;


•	Competition from others in or entering into the insurance agency, wholesale brokerage, insurance programs and service business;


•	The integration of our operations with those of businesses or assets we have acquired or may acquire in the future and the failure to realize the expected benefits of such integration;


•	Risks that could negatively affect our acquisition strategy, including continuing consolidation among insurance intermediaries and the increasing presence of private equity investors driving up valuations;


•	Exposure units, and premium rates set by insurance companies which have traditionally varied and are difficult to predict;


•	Our ability to forecast liquidity needs through at least the end of 2017;


•	Our ability to renew or replace expiring leases;


•	Outcomes of existing or future legal proceedings and governmental investigations;


•	Policy cancellations and renewal terms, which can be unpredictable;


•	Potential changes to the tax rate that would affect the value of deferred tax assets and liabilities and the impact on income available for investment or distributable to shareholders;


•	The inherent uncertainty in making estimates, judgments, and assumptions in the preparation of financial statements in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”);


•	Our ability to effectively utilize technology in providing improved value for our customers or carrier partners as well as applying effective internal controls and efficiencies in operations; and


•	Other risks and uncertainties as may be detailed from time to time in our public announcements and Securities and Exchange Commission filings.

Assumptions as to any of the foregoing and all statements are not based on historical fact, but rather reflect our current expectations concerning future results and events. Forward-looking statements that we make or that are made by others on our behalf are based on a knowledge of our business and the environment in which we operate, but because of the factors listed above, among others, actual results may differ from those in the forward-looking statements. Consequently, these cautionary statements qualify all of the forward-looking statements we make herein. We cannot assure you that the results or developments anticipated by us will be realized or, even if substantially realized, that those results or developments will result in the expected consequences for us or affect us, our business or our operations in the way we expect. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of their dates. We assume no obligation to update any of the forward-looking statements.

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PART I — FINANCIAL INFORMATION

ITEM 1 — Financial Statements (Unaudited)

BROWN & BROWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)



(in thousands, except per share data)	For the three months ended September 30,						For the nine months ended September 30,
	2016			2015			2016			2015
REVENUES
Commissions and fees	$	461,652		$	431,863		$	1,329,649		$	1,252,888
Investment income	230			228			1,150			708
Other income, net	392			76			2,166			2,316
Total revenues	462,274			432,167			1,332,965			1,255,912
EXPENSES
Employee compensation and benefits	237,653			216,156			692,814			645,419
Other operating expenses	67,433			66,121			197,329			191,591
Gain on disposal	(277		)	(654		)	(3,131		)	(1,259		)
Amortization	21,805			22,158			65,025			65,406
Depreciation	5,195			5,215			15,867			15,635
Interest	9,883			9,882			29,617			29,404
Change in estimated acquisition earn-out payables	3,610			459			6,846			2,194
Total expenses	345,302			319,337			1,004,367			948,390
Income before income taxes	116,972			112,830			328,598			307,522
Income taxes	45,427			45,403			128,733			122,139
Net income	$	71,545		$	67,427		$	199,865		$	185,383
Net income per share:
Basic	$	0.51		$	0.48		$	1.43		$	1.31
Diluted	$	0.50		$	0.47		$	1.41		$	1.29
Dividends declared per share	$	0.12		$	0.11		$	0.37		$	0.33

See accompanying Notes to Condensed Consolidated Financial Statements.

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BROWN & BROWN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



(in thousands, except per share data)	September 30, 2016			December 31, 2015
ASSETS
Current Assets:
Cash and cash equivalents	$	488,683		$	443,420
Restricted cash and investments	278,279			229,753
Short-term investments	13,287			13,734
Premiums, commissions and fees receivable	469,452			433,885
Reinsurance recoverable	332,004			31,968
Prepaid reinsurance premiums	333,967			309,643
Deferred income taxes	16,961			24,635
Other current assets	42,041			50,351
Total current assets	1,974,674			1,537,389
Fixed assets, net	77,771			81,753
Goodwill	2,672,365			2,586,683
Amortizable intangible assets, net	726,140			744,680
Investments	26,307			18,092
Other assets	44,770			35,882
Total assets	$	5,522,027		$	5,004,479
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Premiums payable to insurance companies	$	619,149		$	574,736
Losses and loss adjustment reserve	332,004			31,968
Unearned premiums	333,967			309,643
Premium deposits and credits due customers	111,012			83,098
Accounts payable	53,911			63,910
Accrued expenses and other liabilities	171,200			192,067
Current portion of long-term debt	80,492			73,125
Total current liabilities	1,701,735			1,328,547
Long-term debt less unamortized discount and debt issuance costs	1,031,693			1,071,618
Deferred income taxes, net	376,658			360,949
Other liabilities	87,169			93,589
Shareholders’ Equity:
Common stock, par value $0.10 per share; authorized 280,000 shares; issued 148,110 shares and outstanding 140,317 shares at 2016, issued 146,415 shares and outstanding 138,985 shares at 2015	14,811			14,642
Additional paid-in capital	464,028			426,498
Treasury stock, at cost 7,794 and 7,430 shares at 2016 and 2015, respectively	(250,025		)	(238,775		)
Retained earnings	2,095,958			1,947,411
Total shareholders’ equity	2,324,772			2,149,776
Total liabilities and shareholders’ equity	$	5,522,027		$	5,004,479

See accompanying Notes to Condensed Consolidated Financial Statements.

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BROWN & BROWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)



	For the nine months ended September 30,
(in thousands)	2016			2015
Cash flows from operating activities:
Net income	$	199,865		$	185,383
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization	65,025			65,406
Depreciation	15,867			15,635
Non-cash stock-based compensation	11,593			17,348
Change in estimated acquisition earn-out payables	6,846			2,194
Deferred income taxes	20,081			16,974
Amortization of debt discount	118			118
Amortization and disposal of deferred financing costs	1,207			—
Accretion of discounts and premiums, investment	36			—
Income tax benefit from exercise of shares from the stock benefit plans	(7,213		)	(2,502		)
Net gain on sales of investments, fixed assets and customer accounts	(2,860		)	(830		)
Payments on acquisition earn-outs in excess of original estimated payables	(3,683		)	(4,917		)
Changes in operating assets and liabilities, net of effect from acquisitions and divestitures:
Restricted cash and investments (increase) decrease	(48,526		)	42,123
Premiums, commissions and fees receivable (increase) decrease	(31,324		)	2,277
Reinsurance recoverables (increase)	(300,036		)	(24,177		)
Prepaid reinsurance premiums (increase)	(24,324		)	(9,191		)
Other assets decrease (increase)	1,231			(13,076		)
Premiums payable to insurance companies decrease (increase)	39,787			(37,845		)
Premium deposits and credits due customers increase	27,914			12,717
Losses and loss adjustment reserve increase	300,036			24,177
Unearned premiums increase	24,324			9,191
Accounts payable increase	13,858			27,793
Accrued expenses and other liabilities (decrease)	(22,119		)	(11,547		)
Other liabilities (decrease)	(17,094		)	(26,610		)
Net cash provided by operating activities	270,609			290,641
Cash flows from investing activities:
Additions to fixed assets	(13,135		)	(12,773		)
Payments for businesses acquired, net of cash acquired	(113,219		)	(109,926		)
Proceeds from sales of fixed assets and customer accounts	3,411			4,794
Purchases of investments	(24,332		)	(16,875		)
Proceeds from sales of investments	16,716			14,460
Net cash used in investing activities	(130,559		)	(120,320		)
Cash flows from financing activities:
Payments of long-term debt	(34,375		)	(38,750		)
Payments on acquisition earn-outs	(23,872		)	(22,020		)
Income tax benefit from exercise of shares from the stock benefit plans	7,213			2,502
Issuances of common stock for employee stock benefit plans	15,959			15,854
Repurchase stock benefit plan shares for employees to fund tax withholdings	(8,395		)	(2,297		)
Purchase of treasury stock	(11,250		)	(100,000		)
Settlement of accelerated share repurchase program	11,250			—
Cash dividends paid	(51,317		)	(46,840		)
Net cash used in financing activities	(94,787		)	(191,551		)
Net increase (decrease) in cash and cash equivalents	45,263			(21,230		)
Cash and cash equivalents at beginning of period	443,420			470,048
Cash and cash equivalents at end of period	$	488,683		$	448,818

See accompanying Notes to Condensed Consolidated Financial Statements.

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BROWN & BROWN, INC.

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 and casualty area. 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 entity, 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, and Brown & Brown retail agents; the Wholesale Brokerage Segment markets and sells excess and surplus commercial insurance, primarily through independent agents and brokers, as well as 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. Since May 2014, we have owned a flood insurance carrier, Wright National Flood Insurance Company (“Wright Flood”). Wright Flood’s business consists of policies written pursuant to the National Flood Insurance Program of the Federal Emergency Management Agency (“FEMA”), and several excess flood insurance policies, all of which are fully reinsured.

NOTE 2· Basis of Financial Reporting

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with 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 normal recurring accruals) considered 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, 2015.

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 Consolidated Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2015-03, "Simplifying the Presentation of Debt Issuance Costs". The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts, and not recorded as a separate asset. The reason for the change is to align the treatment of debt issuance costs and debt discounts so that both reduce the carrying value of the liability. In August 2015, the FASB clarified that its guidance does not apply to line-of credit arrangements. This guidance requires retrospective application and is effective for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on January 1, 2016, as required. As a result, the Company retrospectively applied the guidance to the 2015 Consolidated Balance Sheet by reclassifying $8.3 million from other assets to long-term debt.

The Company has condensed the presentation of non-cash stock based compensation into the employee compensation and benefits line. The non-cash stock based compensation shown in the 2015 Consolidated Statement of Income was $15.5 million for the full year.

Recently Issued Accounting Pronouncements

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, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230. ASU 2016-15 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements.

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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. ASU 2016-08 is effective for the Company beginning January 1, 2018. The impact of ASU 2016-08 is currently being evaluated along with ASU 2014-09.

In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share Based Payment Accounting" ("ASU 2016-09"), which amends guidance issued in Accounting Standards Codification ("ASC") Topic 718, Compensation – Stock Compensation. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of the ASU on its Consolidated Financial Statements.

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 is currently evaluating its leases against the requirements of this pronouncement, with the primary effect of adopting the new standard being the requirement to record assets and obligations for operating leases with original terms greater than twelve months.

In November 2015, FASB issued ASU No. 2015-17, “Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”), which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as a single non-current item on the balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016 with early adoption permitted as of the beginning of any interim or annual reporting period. The Company plans to adopt ASU 2015-17 in the first quarter of 2017. This is not expected to have a material impact on our Consolidated Financial Statements other than reclassifying current deferred tax assets and liabilities to non-current on the balance sheet.

In August 2014, FASB issued ASU No. 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which addresses management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted. The Company does not expect to early adopt this guidance, and it believes the adoption of this guidance will not have an impact on our Consolidated Financial Statements.

In May 2014, FASB issued ASU 2014-09, which provides guidance for revenue recognition. ASU 2014-09 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, and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. The standard’s core principle is that a company will 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. In doing so, companies will need to use more judgment and make more estimates than under the current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the Company beginning January 1, 2018. At that time, the Company may adopt the new standard under the full retrospective approach or the modified retrospective approach. The Company is currently evaluating its revenue streams against the requirements of this pronouncement.

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NOTE 3· Net Income Per Share

Basic EPS is computed based on the weighted average number of common shares (including participating securities) issued and outstanding during the period. Diluted EPS 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 three months ended September 30,						For the nine months ended September 30,
(in thousands, except per share data)	2016			2015			2016			2015
Net income	$	71,545		$	67,427		$	199,865		$	185,383
Net income attributable to unvested awarded performance stock	(1,873		)	(1,565		)	(5,210		)	(4,370		)
Net income attributable to common shares	$	69,672		$	65,862		$	194,655		$	181,013
Weighted average number of common shares outstanding – basic	140,129			140,955			139,642			141,517
Less unvested awarded performance stock included in weighted average number of common shares outstanding – basic	(3,668		)	(3,271		)	(3,640		)	(3,336		)
Weighted average number of common shares outstanding for basic earnings per common share	136,461			137,684			136,002			138,181
Dilutive effect of stock options	1,721			2,357			1,582			2,265
Weighted average number of shares outstanding – diluted	138,182			140,041			137,584			140,446
Net income per share:
Basic	$	0.51		$	0.48		$	1.43		$	1.31
Diluted	$	0.50		$	0.47		$	1.41		$	1.29

NOTE 4· Business Combinations

During the nine months ended September 30, 2016, Brown & Brown acquired the assets and assumed certain liabilities of five insurance intermediaries and all of the stock of one 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. All of these businesses were acquired primarily to expand Brown & Brown’s core business and to attract and hire high-quality individuals. The recorded purchase price for all acquisitions consummated after January 1, 2009 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 nine months ended September 30, 2016, several adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $917,497 relating to the assumption of certain liabilities. These measurement period adjustments have been reflected as current period adjustments in the nine months ended September 30, 2016 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 $115.3 million and $109.9 million in the nine-month periods ended September 30, 2016 and 2015, respectively. We completed six acquisitions (excluding book of business purchases) in the nine-month period ended September 30, 2016. We completed nine acquisitions (excluding book of business purchases) in the nine-month period ended September 30, 2015.

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The following table summarizes the purchase price allocation made as of the date of each acquisition for current year acquisitions and adjustments made during the measurement period for prior year acquisitions. The purchase price allocation for Social Security Advocates for the Disabled ("SSAD") and Morstan General Agency, Inc. ("Morstan") are provisional as they are based on initial valuations. The primary areas of the preliminary purchase price allocations for SSAD and Morstan that are not yet finalized relate to the fair value of certain tangible and intangible assets acquired and liabilities assumed, assets and liabilities related to income taxes and residual goodwill. 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. With the Company's adoption of ASU No. 2015-16 in the first fiscal quarter of 2016, these adjustments will be 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		Note Payable		Other Payable		Recorded Earn-Out Payable			Net Assets Acquired		Maximum Potential Earn- Out Payable
Social Security Advocates for the Disabled (SSAD)	Services	February 1, 2016	$	32,526	$	492	$	—	$	971		$	33,989	$	3,000
Morstan General Agency, Inc. (Morstan)	Wholesale	June 1, 2016	66,050		—		10,200		3,091			79,341		5,000
Other	Various	Various	16,737		—		305		(234		)	16,808		5,722
Total			$	115,313	$	492	$	10,505	$	3,828		$	130,138	$	13,722

The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition.



(in thousands)	SSAD			Morstan			Other			Total
Cash	$	2,094		$	—		$	—		$	2,094
Other current assets	1,042			2,482			753			4,277
Fixed assets	307			300			47			654
Goodwill	22,352			51,454			11,876			85,682
Purchased customer accounts	13,069			26,481			7,201			46,751
Non-compete agreements	72			39			84			195
Total assets acquired	38,936			80,756			19,961			139,653
Other current liabilities	(1,717		)	(1,415		)	(3,153		)	(6,285		)
Deferred income tax, net	(3,230		)	—			—			(3,230		)
Total liabilities assumed	(4,947		)	(1,415		)	(3,153		)	(9,515		)
Net assets acquired	$	33,989		$	79,341		$	16,808		$	130,138

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 $85.7 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 Service Segments in the amounts of $11.9 million, $(1.0) thousand, $51.5 million and $22.4 million, respectively. Of the total goodwill of $85.7 million, $60.5 million is currently deductible for income tax purposes and $21.4 million is non-deductible. The remaining $3.8 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

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For the acquisitions completed during 2016, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues from the acquisitions completed through September 30, 2016, included in the Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2016, were $12.6 million and $21.5 million, respectively. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through September 30, 2016, included in the Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2016, were $1.0 million and $2.4 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)	For the three months ended September 30,				For the nine months ended September 30,
(in thousands, except per share data)	2016		2015		2016		2015
Total revenues	$	462,684	$	445,672	$	1,350,014	$	1,295,027
Income before income taxes	$	117,144	$	115,749	$	332,101	$	315,824
Net income	$	71,650	$	69,171	$	201,996	$	190,387
Net income per share:
Basic	$	0.51	$	0.49	$	1.45	$	1.35
Diluted	$	0.51	$	0.48	$	1.43	$	1.32
Weighted average number of shares outstanding:
Basic	136,461		137,684		136,002		138,181
Diluted	138,182		140,041		137,584		140,446

As of September 30, 2016 and 2015, 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 and nine months ended September 30, 2016 and 2015, were as follows:



	For the three months ended September 30,						For the nine months ended September 30,
(in thousands)	2016			2015			2016			2015
Balance as of the beginning of the period	$	73,447		$	90,113		$	78,387		$	75,283
Additions to estimated acquisition earn-out payables	1,437			2,363			3,828			29,496
Payments for estimated acquisition earn-out payables	(16,988		)	(12,899		)	(27,555		)	(26,937		)
Subtotal	57,896			79,577			54,660			77,842
Net change in earnings from estimated acquisition earn-out payables:
Change in fair value on estimated acquisition earn-out payables	2,883			(365		)	4,704			(30		)
Interest expense accretion	727			824			2,142			2,224
Net change in earnings from estimated acquisition earn-out payables	3,610			459			6,846			2,194
Balance as of September 30,	$	61,506		$	80,036		$	61,506		$	80,036

Of the $61.5 million estimated acquisition earn-out payables as of September 30, 2016, $23.0 million was recorded as accounts payable and $38.5 million was recorded as other non-current liabilities. 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.

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NOTE 5· 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, 2015, and identified no impairment as a result of the evaluation.

The changes in the carrying value of goodwill by reportable segment for the nine months ended September 30, 2016 are as follows:



(in thousands)	Retail		National Programs			Wholesale Brokerage		Services		Total
Balance as of January 1, 2016	$	1,345,636	$	901,866		$	226,961	$	112,220	$	2,586,683
Goodwill of acquired businesses	11,854		(1		)	51,477		22,352		85,682
Goodwill of transferred businesses	571		(571		)	—		—		—
Balance as of September 30, 2016	$	1,358,061	$	901,294		$	278,438	$	134,572	$	2,672,365

NOTE 6· Amortizable Intangible Assets

Amortizable intangible assets at September 30, 2016 and December 31, 2015 consisted of the following:



	September 30, 2016								December 31, 2015
(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	$	1,445,052	$	(720,728	)	$	724,324	15.0	$	1,398,986	$	(656,799	)	$	742,187	15.0
Non-compete agreements	29,635		(27,819		)	1,816		6.8	29,440		(26,947		)	2,493		6.8
Total	$	1,474,687	$	(748,547	)	$	726,140		$	1,428,426	$	(683,746	)	$	744,680


(1)	Weighted average life calculated as of the date of acquisition.

Amortization expense for amortizable intangible assets for the years ending December 31, 2016, 2017, 2018, 2019 and 2020 is estimated to be $86.6 million, $84.7 million, $79.5 million, $75.0 million, and $67.6 million, respectively.

NOTE 7· Long-Term Debt

Long-term debt at September 30, 2016 and December 31, 2015 consisted of the following:



(in thousands)	September 30, 2016			December 31, 2015
Current portion of long-term debt:
Current portion of 5-year term loan facility expires 2019	$	55,000		$	48,125
5.660% senior notes, Series C, semi-annual interest payments, balloon due 2016	25,000			25,000
Short-term promissory note	492			—
Total current portion of long-term debt	80,492			73,125
Long-term debt:
Note agreements:
4.500% senior notes, Series E, quarterly interest payments, balloon due 2018	100,000			100,000
4.200% senior notes, semi-annual interest payments, balloon due 2024	498,746			498,628
Total notes	598,746			598,628
Credit agreements:
5-year term-loan facility, periodic interest and principal payments, LIBOR plus up to 1.750%, expires May 20, 2019	440,000			481,250
5-year revolving-loan facility, periodic interest payments, currently LIBOR plus up to 1.500% and commitment fees up to 0.250%, expires May 20, 2019	—			—
Total credit agreements	440,000			481,250
Debt issuance costs (contra)	(7,053		)	(8,260		)
Total long-term debt less unamortized discount and debt issuance costs	1,031,693			1,071,618
Current portion of long-term debt	80,492			73,125
Total debt	$	1,112,185		$	1,144,743

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On December 22, 2006, the Company entered into a Master Shelf and Note Purchase Agreement (the “Master Agreement”) with a national insurance company (the “Purchaser”). 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 (the “Confirmation”), 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 Notes were redeemed at maturity using cash proceeds to pay off the principal of $25.0 million plus any remaining accrued interest. As of September 30, 2016, there was an outstanding debt balance issued under the provisions of the Master Agreement of $125.0 million.

On July 1, 2013, in conjunction with the acquisition of Beecher Carlson Holdings, Inc., the Company entered into a revolving loan agreement (the “Wells Fargo Agreement”) with Wells Fargo Bank, N.A. that provided for a $50.0 million revolving line of credit (the “Wells Fargo Revolver”). The maturity date for the Wells Fargo Revolver is December 31, 2016, at which time all outstanding principal and unpaid interest will be due. On April 16, 2014, in connection with the signing of the Credit Facility (as defined below) an amendment to the agreement was established to reduce the total revolving loan commitment from $50.0 million to $25.0 million. The Wells Fargo Revolver may be increased by up to $50.0 million (bringing the total amount available to $75.0 million). The calculation of interest and fees for the Wells Fargo Agreement is generally based on the Company’s funded debt-to-EBITDA ratio. Interest is charged at a rate equal to 1.000% to 1.400% above LIBOR or 1.000% below the Base Rate, each as more fully described in the Wells Fargo Agreement. Fees include an up-front fee, an availability fee of 0.175% to 0.250%, and a letter of credit margin fee of 1.000% to 1.400%. The obligations under the Wells Fargo Revolver are unsecured and the Wells Fargo Agreement includes various covenants, limitations and events of default that are customary for similar facilities for similar borrowers. On March 14, 2016, the Wells Fargo Revolver was terminated before its maturity date as mentioned above with no fees incurred. There were no borrowings against the Wells Fargo Revolver as of September 30, 2016 and December 31, 2015.

On April 17, 2014, the Company entered into a credit agreement with JPMorgan Chase Bank, N.A. as administrative agent and certain other banks as co-syndication agents and co-documentation agents (the “Credit Agreement”). The Credit Agreement in the amount of $1,350.0 million provides for an unsecured revolving credit facility (the “Credit Facility”) in the initial amount of $800.0 million and unsecured term loans in the initial amount of $550.0 million, either or both of which may, subject to lenders’ discretion, potentially be increased by up to $500.0 million. The Credit Facility was funded on May 20, 2014 in conjunction with the closing of the Wright acquisition, with the $550.0 million term loan being funded as well as a drawdown of $375.0 million on the revolving loan facility. Use of these proceeds was to retire existing term loan debt and to facilitate the closing of the Wright acquisition as well as other acquisitions. The Credit Facility terminates on May 20, 2019, but 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 on the better of the Company’s net debt leverage ratio or a non-credit enhanced senior unsecured long-term debt rating. Based on 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 on 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 on the amounts of outstanding secured or unsecured letters of credit. The Credit Facility includes various covenants, limitations and events of default customary for similar facilities for similarly rated borrowers. As of September 30, 2016 and December 31, 2015, there was an outstanding debt balance issued under the provisions of the Credit Facility in total of $495.0 million and $529.4 million respectively, with no borrowings outstanding relative to the revolving loan. Per the terms of the agreement, a scheduled principal payment of $13.8 million is due on December 31, 2016.

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 September 30, 2016 and December 31, 2015, there was an outstanding debt balance of $500.0 million exclusive of the associated discount balance.

The Master Agreement and the Credit Agreement all 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 September 30, 2016 and December 31, 2015.

The 30-day Adjusted LIBOR Rate as of September 30, 2016 was 0.563%.

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NOTE 8· 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, pursuant to agreements with our carrier partners. In the second quarter of 2015, certain balances that had previously been reported as held in restricted premium trust accounts were reclassified as non-restricted as they were not restricted by state law or by contractual agreement with a carrier. The resulting impact of this change is a reduction during the second quarter of 2015 of approximately $41.0 million in the balance reported on our Condensed Consolidated Balance Sheet as Restricted Cash and Investments and a corresponding increase in the balance reported as Cash and Cash Equivalents. While these balances are not restricted, they do represent premium payments from customers to be paid to insurance carriers and this change should not be viewed as a source of operating cash.



	For the nine months ended September 30,
(in thousands)	2016		2015
Cash paid during the period for:
Interest	$	33,122	$	33,091
Income taxes	$	104,739	$	96,579

Brown & Brown’s significant non-cash investing and financing activities are summarized as follows:



	For the nine months ended September 30,
(in thousands)	2016		2015
Other payable issued for purchased customer accounts	$	10,505	$	995
Estimated acquisition earn-out payables and related charges	$	3,828	$	29,497
Notes payable issued or assumed for purchased customer accounts	$	492	$	—
Notes received on the sale of fixed assets and customer accounts	$	—	$	544

NOTE 9· 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.

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 on 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 10· 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’

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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 $3.8 million and $3.2 million of total revenues for the three months ended September 30, 2016 and 2015, respectively. These operations earned $10.3 million and $9.3 million of total revenues for the nine months ended September 30, 2016 and 2015, respectively. Long-lived assets held outside of the United States as of September 30, 2016 and 2015 were not material.

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, 2015. 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, corporate-related items, including the inter-company interest expense charge to the reporting segment, and the elimination of inter-segment activities.



	For the three months ended September 30, 2016
(in thousands)	Retail		National Programs		Wholesale Brokerage		Services		Other			Total
Total revenues	$	228,645	$	123,632	$	70,192	$	39,586	$	219		$	462,274
Investment income	$	5	$	96	$	—	$	57	$	72		$	230
Amortization	$	10,861	$	6,921	$	2,882	$	1,140	$	1		$	21,805
Depreciation	$	1,508	$	1,945	$	503	$	473	$	766		$	5,195
Interest expense	$	9,026	$	10,844	$	1,540	$	1,257	$	(12,784	)	$	9,883
Income before income taxes	$	44,894	$	32,319	$	20,862	$	5,971	$	12,926		$	116,972
Total assets	$	3,652,977	$	2,933,568	$	1,053,516	$	342,360	$	(2,460,394	)	$	5,522,027
Capital expenditures	$	1,443	$	2,153	$	11	$	80	$	504		$	4,191



	For the three months ended September 30, 2015
(in thousands)	Retail		National Programs		Wholesale Brokerage		Services		Other			Total
Total revenues	$	216,249	$	116,966	$	61,374	$	37,980	$	(402	)	$	432,167
Investment income	$	19	$	49	$	3	$	—	$	157		$	228
Amortization	$	11,552	$	7,133	$	2,441	$	1,022	$	10		$	22,158
Depreciation	$	1,632	$	1,850	$	506	$	474	$	753		$	5,215
Interest expense	$	10,121	$	13,398	$	200	$	1,527	$	(15,364	)	$	9,882
Income before income taxes	$	41,785	$	25,281	$	22,276	$	6,022	$	17,466		$	112,830
Total assets	$	3,400,407	$	2,542,619	$	880,454	$	296,659	$	(2,117,947	)	$	5,002,192
Capital expenditures	$	1,637	$	1,754	$	425	$	233	$	127		$	4,176



	For the nine months ended September 30, 2016
(in thousands)	Retail		National Programs		Wholesale Brokerage		Services		Other			Total
Total revenues	$	695,393	$	333,522	$	184,893	$	117,906	$	1,251		$	1,332,965
Investment income	$	33	$	583	$	4	$	204	$	326		$	1,150
Amortization	$	32,743	$	21,011	$	7,915	$	3,345	$	11		$	65,025
Depreciation	$	4,761	$	5,881	$	1,487	$	1,432	$	2,306		$	15,867
Interest expense	$	29,415	$	34,895	$	2,472	$	3,820	$	(40,985	)	$	29,617
Income before income taxes	$	144,496	$	68,367	$	51,711	$	17,929	$	46,095		$	328,598
Total assets	$	3,652,977	$	2,933,568	$	1,053,516	$	342,360	$	(2,460,394	)	$	5,522,027
Capital expenditures	$	4,664	$	5,399	$	925	$	561	$	1,586		$	13,135

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	For the nine months ended September 30, 2015
(in thousands)	Retail		National Programs		Wholesale Brokerage		Services		Other			Total
Total revenues	$	657,314	$	319,577	$	168,619	$	111,128	$	(726	)	$	1,255,912
Investment income	$	62	$	150	$	148	$	1	$	347		$	708
Amortization	$	33,671	$	21,343	$	7,296	$	3,067	$	29		$	65,406
Depreciation	$	4,908	$	5,372	$	1,630	$	1,533	$	2,192		$	15,635
Interest expense	$	30,841	$	42,306	$	645	$	4,722	$	(49,110	)	$	29,404
Income before income taxes	$	137,249	$	48,567	$	53,150	$	16,062	$	52,494		$	307,522
Total assets	$	3,400,407	$	2,542,619	$	880,454	$	296,659	$	(2,117,947	)	$	5,002,192
Capital expenditures	$	4,410	$	5,004	$	2,087	$	774	$	498		$	12,773

NOTE 11· Investments

At September 30, 2016, 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 Municipals	$	26,787	$	118	$	(5	)	$	26,900
Corporate debt	3,129		38		—			3,167
Total	$	29,916	$	156	$	(5	)	$	30,067

At September 30, 2016, the Company held $26.9 million in fixed income securities composed of U.S. Treasury securities, securities issued by U.S. Government agencies and Municipalities, and $3.2 million issued by corporations with investment grade ratings. Of that total, $3.8 million is classified as short-term investments on the Consolidated Balance Sheet as maturities are less than one-year. Additionally, the Company holds $9.5 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 September 30, 2016:



	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 Municipals	$	5,102	$	(5	)	$	—	$	—	$	5,102	$	(5	)
Corporate debt	701		—			160		—		861		—
Total	$	5,803	$	(5	)	$	160	$	—	$	5,963	$	(5	)

The unrealized losses were caused by interest rate increases. At September 30, 2016, the Company had 10 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 September 30, 2016.

At December 31, 2015, 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 Municipals	$	11,876	$	6	$	(26	)	$	11,856
Foreign government	50		—		—			50
Corporate debt	4,505		7		(16		)	4,496
Short-duration fixed income fund	1,663		27		—			1,690
Total	$	18,094	$	40	$	(42	)	$	18,092

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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, 2015:



	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 Municipals	$	8,998	$	(26	)	$	—	$	—		$	8,998	$	(26	)
Foreign Government	50		—			—		—			50		—
Corporate debt	2,731		(14		)	284		(2		)	3,015		(16		)
Total	$	11,779	$	(40	)	$	284	$	(2	)	$	12,063	$	(42	)

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, 2015, the Company had 35 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 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, 2015.

The amortized cost and estimated fair value of the fixed maturity securities at September 30, 2016 by contractual maturity are set forth below:



(in thousands)	Amortized Cost		Fair Value
Years to maturity:
Due in one year or less	$	3,753	$	3,760
Due after one year through five years	25,833		25,951
Due after five years	330		356
Total	$	29,916	$	30,067

The amortized cost and estimated fair value of the fixed maturity securities at December 31, 2015 by contractual maturity are set forth below:



(in thousands)	Amortized Cost		Fair Value
Years to maturity:
Due in one year or less	$	5,726	$	5,722
Due after one year through five years	12,038		12,041
Due after five years	330		329
Total	$	18,094	$	18,092

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 $4.7 million. This along with maturing time deposits and the utilization of funds from a money-market investment account of $8.2 million yielded total cash proceeds from the sale of investments of $16.7 million in the period of January 1, 2016 to September 30, 2016. These proceeds were used to purchase additional fixed maturity securities. The gains and losses realized on those sales for the period from January 1, 2016 to September 30, 2016 were insignificant. Additionally, there was a sale of the short-duration fixed income fund which resulted in cash proceeds of $1.7 million, as the fund was liquidated in the third quarter of 2016. Gains on this sale were also 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 September 30, 2016, investments with a fair value of approximately $4.0 million were on deposit with state insurance departments to satisfy regulatory requirements.

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NOTE 12· Reinsurance

Although the reinsurers are liable to the Company for amounts reinsured, our subsidiary, 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, 2016 to September 30, 2016
(in thousands)	Written			Earned
Direct premiums	$	472,138		$	447,813
Ceded premiums	(472,124		)	(447,799		)
Net premiums	$	14		$	14

All premiums written by Wright Flood under the National Flood Insurance Program are 100% ceded to FEMA, for which Wright Flood received a 30.9% expense allowance from January 1, 2016 through September 30, 2016. For the period from January 1, 2016 through September 30, 2016, the Company ceded $470.9 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 $1.2 million for the period from January 1, 2016 through September 30, 2016. No loss data exists on this agreement.

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 still exists on this business. As of September 30, 2016, 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 September 30, 2016 the Condensed Consolidated Balance Sheet contained reinsurance recoverable of $332.0 million and prepaid reinsurance premiums of $334.0 million. There was no net activity in the reserve for losses and loss adjustment expense during the period January 1, 2016 through September 30, 2016, 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 September 30, 2016 was $332.0 million.

NOTE 13· 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 $22.0 million at September 30, 2016. For the period from January 1, 2016 through September 30, 2016, Wright Flood generated statutory net income of $6.7 million.

NOTE 14· 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 2015 and the maximum dividend payout that may be made in 2016 without prior approval is $4.1 million.

NOTE 15· Shareholders’ Equity

On March 5, 2015, the Company entered into an accelerated share repurchase program ("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 delivery of 2,667,992 shares of the Company’s common stock with a fair market value of approximately $85.0 million. On August 6, 2015, the Company was notified by its investment bank that the March 5, 2015 ASR agreement between the Company and the investment bank had been completed in accordance with the terms of the agreement. The investment bank delivered to the Company an additional 391,637 shares of the Company’s common stock for a total of 3,059,629 shares repurchased under the agreement. The delivery of the remaining 391,637 shares occurred on August 11, 2015. At the conclusion of this contract the Company had authorization for $50.0 million of share repurchases under the original Board authorization.

On July 20, 2015, the Company’s Board of Directors authorized the repurchase of up to an additional $400.0 million of the Company’s outstanding common stock.

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On November 11, 2015, the Company entered into an ASR with an investment bank to purchase an aggregate $75.0 million of the Company’s common stock. The Company received an initial delivery of 1,985,981shares of the Company’s common stock with a fair market value of approximately $63.8 million. On January 6, 2016 this agreement was completed by the investment bank with the delivery of 363,209 shares of the Company’s common stock. After completion of the ASR on January 6, 2016, the Company has approval to repurchase up to $375.0 million, in the aggregate, of the Company’s outstanding 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.

ITEM 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion updates the MD&A contained in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2015, and the two discussions should be read together.

GENERAL

Company Overview — Third Quarter of 2016

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

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

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

The term “core commissions and fees” excludes profit-sharing contingent commissions and guaranteed supplemental commissions, and therefore represents the revenues earned directly from specific insurance policies sold, and specific fee-based services rendered. The term “core organic commissions and fees” is our core commissions and fees less (i) the core commissions and fees earned for the first twelve months by newly-acquired operations and (ii) divested business (core commissions and fees generated from offices, books of business or niches sold or terminated during the comparable period). “Core organic commissions and fees”, a non-GAAP measure, are reported in this manner in order to express the current year’s core commissions and fees on a comparable basis with the prior year’s core commissions and fees. The resulting net change reflects the aggregate changes attributable to (i) net new and lost accounts, (ii) net changes in our clients’ exposure units, and (iii) net changes in insurance premium rates or the commission rate paid to us by our carrier partners.

We also earn “profit-sharing contingent commissions,” which are profit-sharing commissions based primarily on underwriting results, but which may also reflect considerations for volume, growth and/or retention. These commissions are primarily received in the first and second quarters of each year, based on the aforementioned considerations for the prior year(s). Over the last three years, profit-sharing contingent commissions have averaged approximately 4.0% of the previous year’s total commissions and fees revenue. Profit-sharing contingent commissions are included in our total commissions and fees in the Consolidated Statement of Income in the year received. For the three-month period ended September 30, 2016, profit-sharing contingent commissions were down $3.8 million as compared to the same period of the prior year.

Certain insurance companies offer guaranteed fixed-base agreements, referred to as “Guaranteed Supplemental Commissions” (“GSCs”) in lieu of profit-sharing contingent commissions. Since GSCs are not subject to the uncertainty of loss ratios, they are accrued throughout the year based on actual premiums written. For the twelve-month period ending December 31, 2015, we had earned $10.0 million of GSCs, of which $7.6 million remained accrued at December 31, 2015, the balance of which is typically collected over the first and second quarter. For the three-month periods ended September 30, 2016 and 2015, we earned and accrued $2.9 million and $2.5 million, respectively, and for the nine-month periods ended September 30, 2016 and 2015, we earned and accrued $8.9 million and $8.1 million, respectively, from GSCs.

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Combined, our profit-sharing contingent commissions and GSCs for the three months ended September 30, 2016 decreased by $3.4 million compared to the third quarter of 2015, primarily in our Wholesale Brokerage Segment.

Fee revenues relate to fees negotiated in lieu of commissions, which are recognized as services are rendered. Fee revenues have historically been generated primarily by: (1) our Services Segment, which provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare benefits advocacy services, and claims adjusting services, and (2) our National Programs and Wholesale Brokerage Segments, which earn fees primarily for the issuance of insurance policies on behalf of insurance companies, and to a lesser extent (3) our Retail Segment in our large-account customer base. These services are provided over a period of time, typically one year. Fee revenues, on a consolidated basis, as a percentage of our total commissions and fees, represented 30.6% in 2015, 30.6% in 2014 and 26.6% in 2013.

For the three and nine-month periods ended September 30, 2016, our consolidated internal revenue growth rate was 4.3% and 2.8%, respectively. Additionally, each of our four segments recorded positive internal revenue growth for the three and nine months ended September 30, 2016. In the event that the gradual increases in insurable exposure units that occurred in the past few years continues through 2016 and premium rate changes are similar with 2015, we believe we will continue to see positive quarterly internal revenue growth rates in 2016.

Historically, investment income has consisted primarily of interest earnings on operating cash as well as on premiums and advance premiums collected and held in a fiduciary capacity before being remitted to insurance companies. Our policy is to invest available funds in high-quality, short-term fixed income investment securities. Investment income also includes gains and losses realized from the sale of investments. Other income primarily reflects legal settlements and other miscellaneous income and for the three months ended September 30, 2016 increased by $0.3 million as compared to the same period of the prior year, primarily reflecting that prior to 2016 we reported gains and losses on the sale of fixed assets as Other income.

Income before income taxes for the three-month period ended September 30, 2016 increased from the third quarter of 2015 by $4.1 million, primarily as a result of acquisitions completed in the past twelve months and profits from net new business partially offset by the change in estimated acquisition earn-out payables.

Information Regarding Non-GAAP Measures

In the discussion and analysis of our results of operations, in addition to reporting financial results in accordance with GAAP, we provide information regarding core commissions and fees, core organic commissions and fees, and our internal growth rate, which is the growth rate of our core organic commissions and fees. These measures are not in accordance with, or an alternative to the GAAP information provided in this Quarterly Report on Form 10-Q. Tabular reconciliations of this supplemental non-GAAP financial information to our most comparable GAAP information are contained in this Quarterly Report on Form 10-Q. We present such non-GAAP supplemental financial information, as we believe such information provides additional meaningful methods of evaluating certain aspects of our operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis. This supplemental financial information should be considered in addition to, not in lieu of, our Condensed Consolidated Financial Statements.

Acquisitions

Part of our continuing business strategy is to attract high-quality insurance intermediaries to join our operations. From 1993 through the third quarter of 2016, we acquired 478 insurance intermediary operations, excluding acquired books of business (customer accounts).

Critical Accounting Policies

We have had no changes to our Critical Accounting Policies. 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 and reserves for litigation. In particular, the accounting for these areas requires significant use of judgment 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” in our Annual Report on Form 10-K for the year ended December 31, 2015 on file with the Securities and Exchange Commission for details regarding our critical and significant accounting policies.

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RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

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

Financial information relating to our Condensed Consolidated Financial results for the three and nine months ended September 30, 2016 and 2015 is as follows:



	For the three months ended September 30,								For the nine months ended September 30,
(in thousands, except percentages)	2016			2015			% Change		2016			2015			% Change
REVENUES
Core commissions and fees	$	450,464		$	417,275		8.0	%	$	1,274,170		$	1,199,180		6.3	%
Profit-sharing contingent commissions	8,247			12,068			(31.7	)%	46,586			45,596			2.2	%
Guaranteed supplemental commissions	2,941			2,520			16.7	%	8,893			8,112			9.6	%
Investment income	230			228			0.9	%	1,150			708			62.4	%
Other income, net	392			76			NMF		2,166			2,316			(6.5	)%
Total revenues	462,274			432,167			7.0	%	1,332,965			1,255,912			6.1	%
EXPENSES
Employee compensation and benefits	237,653			216,156			9.9	%	692,814			645,419			7.3	%
Other operating expenses	67,433			66,121			2.0	%	197,329			191,591			3.0	%
(Gain) loss on disposal	(277		)	(654		)	(57.6	)%	(3,131		)	(1,259		)	148.7	%
Amortization	21,805			22,158			(1.6	)%	65,025			65,406			(0.6	)%
Depreciation	5,195			5,215			(0.4	)%	15,867			15,635			1.5	%
Interest	9,883			9,882			—	%	29,617			29,404			0.7	%
Change in estimated acquisition earn-out payables	3,610			459			NMF		6,846			2,194			NMF
Total expenses	345,302			319,337			8.1	%	1,004,367			948,390			5.9	%
Income before income taxes	116,972			112,830			3.7	%	328,598			307,522			6.9	%
Income taxes	45,427			45,403			0.1	%	128,733			122,139			5.4	%
NET INCOME	$	71,545		$	67,427		6.1	%	$	199,865		$	185,383		7.7	%
Net internal growth rate – core organic commissions and fees	4.3		%	2.4		%			2.8		%	2.6		%
Employee compensation and benefits ratio	51.4		%	50.0		%			52.0		%	51.4		%
Other operating expenses ratio	14.6		%	15.3		%			14.8		%	15.3		%
Capital expenditures	$	4,191		$	4,176				$	13,135		$	12,773
Total assets at September 30									$	5,522,027		$	5,002,192

NMF = Not a meaningful figure

Commissions and Fees

Commissions and fees, including profit-sharing contingent commissions and GSCs, for the three months ended September 30, 2016 increased $29.8 million to $461.7 million, or 6.9% over the same period in 2015. Core commissions and fees revenue for the third quarter of 2016 increased $33.2 million, of which approximately $17.3 million represented core commissions and fees from agencies acquired since 2015 that had no comparable revenues in the same period of 2015. After accounting for divested business of $2.0 million, the remaining net increase of $17.9 million represented net new business, which reflects a growth rate of 4.3% for core organic commissions and fees. Profit-sharing contingent commissions and GSCs for the third quarter of 2016 decreased by $3.4 million, or 23.3%, compared to the same period in 2015. The net decrease of $3.4 million in the third quarter was mainly driven by a decrease in profit-sharing contingent commissions in the Wholesale Brokerage Segment as a result of carrier experience.

For the nine months ended September 30, 2016 commissions and fees, including profit-sharing contingent commissions and GSCs, increased $76.8 million to $1,329.6 million, or 6.1% over the same period in 2015. Core commissions and fees revenue for the nine months ended September 30, 2016 increased $75.0 million, of which approximately $47.5 million represented core commissions and fees from acquisitions that had no comparable revenues in the same period of 2015. After accounting for divested business of $5.9 million, the remaining

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net increase of $33.4 million represented net new business, which reflects an internal growth rate of 2.8% for core organic commissions and fees. Profit-sharing contingent commissions and GSCs for the nine months ended September 30, 2016 increased by $1.8 million, or 3.3%, compared to the same period in 2015. The net increase of $1.8 million in the first nine months of 2016 was mainly driven by an increase in profit-sharing contingent commissions in the National Programs and Retail Segments, which was partially offset by a decrease in the Wholesale Brokerage Segment.

Investment Income

Investment income for the three months ended September 30, 2016 remained flat over the same period in 2015. Investment income for the nine months ended September 30, 2016 increased $0.4 million, or 62.4%, over the same period in 2015. This increase was related to higher average invested cash balances and additional interest income driven by cash management activities to earn a higher yield.

Other Income, net

Other income for the three months ended September 30, 2016 was $0.4 million, compared with $0.1 million in the same period in 2015. Other income consists primarily of legal settlements and other miscellaneous income. The $0.3 million increase for the three months ended September 30, 2016 from the comparable period in 2015 was primarily a result of a change in accounting treatment for the loss on fixed asset sales.

Other income for the nine months ended September 30, 2016 was $2.2 million, compared with $2.3 million in the same period in 2015. The $0.1 million decrease for the nine months ended September 30, 2016 from the comparable period in 2015 was primarily due to a $1.0 million benefit received from Company-owned life insurance, offset by a legal settlement realized in the prior year.

Employee Compensation and Benefits

Employee compensation and benefits expense as a percentage of total revenues increased to 51.4% for the three months ended September 30, 2016, from 50.0% for the three months ended September 30, 2015. Employee compensation and benefits for the third quarter of 2016 increased, approximately 9.9%, or $21.5 million, over the same period in 2015. This net increase included $2.7 million of compensation costs related to stand-alone acquisitions that had no comparable costs in the same period of 2015. Therefore, employee compensation and benefits expense attributable to those offices that existed in the same three-month period ended September 30, 2016 and 2015 increased by $18.8 million or 8.7%. The employee compensation and benefits expense net increases for these offices were primarily related to (i) an increase in staff salaries attributable to salary inflation and higher volumes in portions of our business; (ii) increased producer commissions due to increased revenue; and (iii) cost associated with our deferred compensation plan which are largely offset by unrealized gains reported in other operating expenses.

Employee compensation and benefits expense as a percentage of total revenues increased to 52.0% for the nine months ended September 30, 2016, from 51.4% for the nine months ended September 30, 2015. Employee compensation and benefits for the first nine months of 2016 increased, by approximately 7.3%, or $47.4 million, over the same period in 2015. This increase included $17.3 million of compensation costs related to acquisitions that had no comparable costs in the same period of 2015. Therefore, employee compensation and benefits expense attributable to those offices that existed in the same nine-month period ended September 30, 2016 and 2015 increased by $30.1 million or 4.7%. The employee compensation and benefits expense increases for these offices were primarily related to (i) an increase in staff salaries attributable to salary inflation and higher volumes in portions of our business; (ii) increased producer commissions due to increased revenue; and (iii) a decrease in non-cash stock-based compensation which partially offset the overall increase.

Other Operating Expenses

As a percentage of total revenues, other operating expenses represented 14.6% in the third quarter of 2016, versus 15.3% reported in the third quarter of 2015. Other operating expenses for the third quarter of 2016 increased $1.3 million, or 2.0%, over the same period of 2015, of which $0.6 million was related to acquisitions that had no comparable costs in the same period of 2015. The other operating expenses for those offices that existed in both three-month periods ended September 30, 2016 and 2015, respectively, increased by $0.7 million, which was primarily attributable to (i) increased expenses associated with information technology services and consulting; (ii) a decrease in life insurance expense related to the deferred compensation plan; and (iii) partially offset by the benefits from our strategic purchasing program.

Other operating expenses represented 14.8% of total revenues for the nine months ended September 30, 2016, versus 15.3% for the nine months ended September 30, 2015. Other operating expenses for the first nine months of 2016 increased $5.7 million, or 3.0%, over the same period of 2015, of which $6.1 million was related to acquisitions that had no comparable costs in the same period of 2015. The other operating expenses for those offices that existed in both of the nine months ended September 30, 2016 and 2015, respectively, decreased by $0.4 million, which was primarily attributable to information technology services, consulting expenses and office rent offset by a decrease in life insurance expense related to the deferred compensation plan and benefits from our strategic purchasing program and premium tax refunds received in National Programs.

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Gain on Disposal

Gain on disposal for the third quarter of 2016 decreased $0.4 million from the third quarter of 2015. Gain on disposal for the nine months ended September 30, 2016 increased $1.9 million over the nine months ended September 30, 2015. The change in the gain on disposal for the three and nine months ended September 30, 2016 was due to activity associated with book of business sales. Although we are not in the business of selling customer accounts, we periodically sell an office or a book of business (one or more customer accounts) because we believe doing so is in the Company’s best interest.

Amortization

Amortization expense for the third quarter of 2016 decreased $0.4 million, or 1.6%, over the third quarter of 2015. Amortization expense for the nine months ended September 30, 2016 decreased $0.4 million, or 0.6%, over the nine months ended September 30, 2015. These decreases reflect certain intangibles becoming fully amortized, partially offset with amortization of new intangibles from recently acquired businesses.

Depreciation

Depreciation expense for the third quarter of 2016 remained flat compared to the third quarter of 2015. Depreciation expense for the nine months ended September 30, 2016 increased $0.2 million, or 1.5%, over the nine months ended September 30, 2015. These changes were due primarily to the addition of fixed assets resulting from acquisitions completed since the first three quarters of 2015, net of assets which became fully depreciated.

Interest Expense

Interest expense for the third quarter of 2016 remained flat compared to the third quarter of 2015. Interest expense for the nine months ended September 30, 2016 increased $0.2 million, or 0.7%, over the nine months ended September 30, 2015. This increase was due to a rise in the floating interest rate of our Credit Facility term loan, partially offset by the scheduled amortized principal payments on the Credit Facility term loan which has reduced the Company's average debt balance.

Change in Estimated Acquisition Earn-Out Payables

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

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

As of September 30, 2016 and 2015, the fair values of the estimated acquisition earn-out payables were re-evaluated and measured at fair value on a recurring basis using unobservable inputs (Level 3) as defined in ASC 820-Fair Value Measurement. The resulting net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the three and nine month periods ended September 30, 2016 and 2015 were as follows:



	For the three months ended September 30,					For the nine months ended September 30,
(in thousands)	2016		2015			2016		2015
Change in fair value of estimated acquisition earn-out payables	$	2,883	$	(365	)	$	4,704	$	(30	)
Interest expense accretion	727		824			2,142		2,224
Net change in earnings from estimated acquisition earn-out payables	$	3,610	$	459		$	6,846	$	2,194

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For the three months ended September 30, 2016 and 2015, the fair value of estimated earn-out payables was re-evaluated and increased by $2.9 million and decreased by $0.4 million, respectively, which resulted in charges and credits to the Condensed Consolidated Statement of Income. For the nine months ended September 30, 2016 and 2015, the fair value of estimated earn-out payables was re-evaluated and increased by $4.7 million and decreased by $0.03 million, respectively, which resulted in charges and credits to the Condensed Consolidated Statement of Income.

As of September 30, 2016, the estimated acquisition earn-out payables equaled $61.5 million, of which $23.0 million was recorded as accounts payable and $38.5 million was recorded as other non-current liability.

Income Taxes

The effective tax rate on income from operations for the three months ended September 30, 2016 and 2015 was 38.8% and 40.2%, respectively. The effective tax rate on income from operations for the nine months ended September 30, 2016 and 2015 was 39.2% and 39.7% respectively. The decrease in the effective tax rate is driven by several permanent tax differences along with the apportionment of taxable income in the states where we operate.

RESULTS OF OPERATIONS — SEGMENT INFORMATION

As discussed in Note 10 to the Condensed Consolidated Financial Statements, we operate four reportable segments: Retail, National Programs, Wholesale Brokerage, and Services. On a segmented basis, increases in amortization, depreciation and interest expenses generally result from completed acquisitions within a given segment in a particular year. Likewise, other income in each segment reflects net gains primarily from legal settlements and miscellaneous income. As such, in evaluating the operational efficiency of a segment, management emphasizes the net internal growth rate of core commissions and fees revenue, the ratio of total employee compensation and benefits to total revenues, and the ratio of other operating expenses to total revenues.

The internal growth rates for our core organic commissions and fees for the three months ended September 30, 2016, by segment, are as follows:



2016	For the three months ended September 30,				Total Net Change		Total Net Growth %		Less Acquisition Revenues		Internal Net Growth $		Internal Net Growth %
(in thousands, except percentages)	2016		2015		Total Net Change		Total Net Growth %		Less Acquisition Revenues		Internal Net Growth $		Internal Net Growth %
Retail(1)	$	223,723	$	211,601	$	12,122	5.7	%	$	6,248	$	5,874	2.8	%
National Programs	121,011		113,136		7,875		7.0	%	—		7,875		7.0	%
Wholesale Brokerage	66,201		53,813		12,388		23.0	%	8,764		3,624		6.7	%
Services	39,529		36,665		2,864		7.8	%	2,295		569		1.6	%
Total core commissions and fees	$	450,464	$	415,215	$	35,249	8.5	%	$	17,307	$	17,942	4.3	%

The reconciliation of the above internal growth schedule to the total commissions and fees included in the Condensed Consolidated Statements of Income for the three months ended September 30, 2016, and 2015, is as follows:



	For the three months ended September 30,
(in thousands)	2016		2015
Total core commissions and fees	$	450,464	$	415,215
Profit-sharing contingent commissions	8,247		12,068
Guaranteed supplemental commissions	2,941		2,520
Divested business	—		2,060
Total commissions and fees	$	461,652	$	431,863

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The internal growth rates for our core organic commissions and fees for the three months ended September 30, 2015, by segment, are as follows:



2015	For the three months ended September 30,				Total Net Change		Total Net Growth %		Less Acquisition Revenues		Internal Net Growth $		Internal Net Growth %
(in thousands, except percentages)	2015		2014		Total Net Change		Total Net Growth %		Less Acquisition Revenues		Internal Net Growth $		Internal Net Growth %
Retail(1)	$	211,759	$	201,072	$	10,687	5.3	%	$	7,756	$	2,931	1.5	%
National Programs	113,721		111,597		2,124		1.9	%	1,195		929		0.8	%
Wholesale Brokerage	53,813		50,334		3,479		6.9	%	728		2,751		5.5	%
Services	37,982		35,228		2,754		7.8	%	—		2,754		7.8	%
Total core commissions and fees	$	417,275	$	398,231	$	19,044	4.8	%	$	9,679	$	9,365	2.4	%



	For the three months ended September 30,
(in thousands)	2015		2014
Total core commissions and fees	$	417,275	$	398,231
Profit-sharing contingent commissions	12,068		15,011
Guaranteed supplemental commissions	2,520		2,571
Divested business	—		4,802
Total commissions and fees	$	431,863	$	420,615

The internal growth rates for our core organic commissions and fees for the nine months ended September 30, 2016, by segment, are as follows:



2016	For the nine months ended September 30,				Total Net Change		Total Net Growth %		Less Acquisition Revenues		Internal Net Growth $		Internal Net Growth %
(in thousands, except percentages)	2016		2015		Total Net Change		Total Net Growth %		Less Acquisition Revenues		Internal Net Growth $		Internal Net Growth %
Retail(1)	$	662,549	$	624,357	$	38,192	6.1	%	$	27,080	$	11,112	1.8	%
National Programs	320,696		307,373		13,323		4.3	%	1,680		11,643		3.8	%
Wholesale Brokerage	173,223		153,767		19,456		12.7	%	12,147		7,309		4.8	%
Services	117,702		107,829		9,873		9.2	%	6,568		3,305		3.1	%
Total core commissions and fees	$	1,274,170	$	1,193,326	$	80,844	6.8	%	$	47,475	$	33,369	2.8	%

The reconciliation of the above internal growth schedule to the total commissions and fees included in the Condensed Consolidated Statements of Income for the nine months ended September 30, 2016, and 2015, is as follows:



	For the nine months ended September 30,
(in thousands)	2016		2015
Total core commissions and fees	$	1,274,170	$	1,193,326
Profit-sharing contingent commissions	46,586		45,596
Guaranteed supplemental commissions	8,893		8,112
Divested business	—		5,854
Total commissions and fees	$	1,329,649	$	1,252,888

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The internal growth rates for our core organic commissions and fees for the nine months ended September 30, 2015, by segment, are as follows:



2015	For the nine months ended September 30,				Total Net Change		Total Net Growth %		Less Acquisition Revenues		Internal Net Growth $		Internal Net Growth %
(in thousands, except percentages)	2015		2014		Total Net Change		Total Net Growth %		Less Acquisition Revenues		Internal Net Growth $		Internal Net Growth %
Retail(1)	$	625,640	$	592,428	$	33,212	5.6	%	$	25,896	$	7,316	1.2	%
National Programs	308,628		267,052		41,576		15.6	%	37,301		4,275		1.6	%
Wholesale Brokerage	153,767		143,636		10,131		7.1	%	1,719		8,412		5.9	%
Services	111,145		102,324		8,821		8.6	%	—		8,821		8.6	%
Total core commissions and fees	$	1,199,180	$	1,105,440	$	93,740	8.5	%	$	64,916	$	28,824	2.6	%



	For the nine months ended September 30,
(in thousands)	2015		2014
Total core commissions and fees	$	1,199,180	$	1,105,440
Profit-sharing contingent commissions	45,596		49,515
Guaranteed supplemental commissions	8,112		7,587
Divested business	—		14,770
Total commissions and fees	$	1,252,888	$	1,177,312


(1)	The Retail Segment includes commissions and fees reported in the “Other” column of the Segment Information in Note 10 of the Notes to the Condensed Consolidated Financial Statements, which includes corporate and consolidation items.

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Retail Segment

The Retail Segment provides a broad range of insurance products and services to commercial, public and quasi-public, professional and individual insured customers. Approximately 88% of the Retail Segment’s commissions and fees revenue is commission-based. Because most of our other operating expenses are not correlated to changes in commissions on insurance premiums, a significant portion of any fluctuation in the commissions we receive, net of related producer compensation, will result in a similar fluctuation in our income before income taxes, unless we make incremental investments or modifications to the costs in the organization.

Financial information relating to our Retail Segment for the three and nine months ended September 30, 2016 and 2015 is as follows:



	For the three months ended September 30,								For the nine months ended September 30,
(in thousands, except percentages)	2016			2015			% Change		2016			2015			% Change
REVENUES
Core commissions and fees	$	223,641		$	212,176		5.4	%	$	662,963		$	626,563		5.8	%
Profit-sharing contingent commissions	2,229			1,810			23.1	%	24,365			21,653			12.5	%
Guaranteed supplemental commissions	2,516			2,061			22.1	%	7,488			6,699			11.8	%
Investment income	5			19			(73.7	)%	33			62			(46.8	)%
Other income, net	254			183			38.8	%	544			2,337			(76.7	)%
Total revenues	228,645			216,249			5.7	%	695,393			657,314			5.8	%
EXPENSES
Employee compensation and benefits	123,175			116,906			5.4	%	369,109			345,432			6.9	%
Other operating expenses	35,953			34,571			4.0	%	111,377			105,266			5.8	%
(Gain) loss on disposal	(277		)	(655		)	(57.7	)%	(3,131		)	(1,333		)	134.9	%
Amortization	10,861			11,552			(6.0	)%	32,743			33,671			(2.8	)%
Depreciation	1,508			1,632			(7.6	)%	4,761			4,908			(3.0	)%
Interest	9,026			10,121			(10.8	)%	29,415			30,841			(4.6	)%
Change in estimated acquisition earn-out payables	3,505			337			NMF		6,623			1,280			NMF
Total expenses	183,751			174,464			5.3	%	550,897			520,065			5.9	%
Income before income taxes	$	44,894		$	41,785		7.4	%	$	144,496		$	137,249		5.3	%
Net internal growth rate – core organic commissions and fees	2.8		%	1.5		%			1.8		%	1.2		%
Employee compensation and benefits ratio	53.9		%	54.1		%			53.1		%	52.6		%
Other operating expenses ratio	15.7		%	16.0		%			16.0		%	16.0		%
Capital expenditures	$	1,443		$	1,637				$	4,664		$	4,410
Total assets at September 30									$	3,652,977		$	3,400,407

NMF = Not a meaningful figure

The Retail Segment’s total revenue during the three months ended September 30, 2016 increased 5.7%, or $12.4 million, over the same period in 2015, to $228.6 million. The $11.5 million increase in core commissions and fees revenue was driven by the following: (i) approximately $6.2 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2015; (ii) $5.9 million related to net new business; and (iii) an offsetting decrease of $0.6 million related to commissions and fees revenue from business divested in 2015 and 2016. Profit-sharing contingent commissions and GSCs for the third quarter of 2016 increased 22.6%, or $0.9 million, from the same period in 2015, to $4.7 million due to better performance realized by our insurance carrier partners. The Retail Segment’s internal growth rate for core organic commissions and fees revenue was 2.8% for the third quarter of 2016 and was driven by revenue from net new business written during the preceding twelve months, which was impacted by some exposure unit growth and modest increases in commercial auto rates, and was partially offset by continued reductions in property insurance premium rates, particularly in catastrophe prone areas. The internal growth rate was also partially driven by timing items related to revenue that was not recognized in previous quarters.

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Income before income taxes for the three months ended September 30, 2016 increased 7.4%, or $3.1 million, over the same period in 2015, to $44.9 million. The primary factors affecting this increase were: (i) the net increase in revenue as described above, in addition to increased retail margins in contingents and GSCs, offset by, (ii) total compensation which increased by $6.3 million or 5.4%, due primarily to new teammates related to acquisitions completed over the past twelve months, salary inflation, and additional teammates to support revenue growth; (iii) operating expenses which increased by $1.4 million or 4.0%, due primarily to information technology services fees, professional fees relating to value added services in support of revenue generation, and rent expense partially offset by the benefits of our strategic purchasing program; (iv) a change in estimated acquisition earn-out payables that increased by $3.2 million to $3.5 million; and (v) a $0.4 million change in the benefit of gains on disposals to $0.3 million associated with book sales within certain profit centers.

The Retail Segment’s total revenue during the nine months ended September 30, 2016 increased 5.8%, or $38.1 million, over the same period in 2015, to $695.4 million. The $36.4 million increase in core commissions and fees revenue was driven by the following: (i) approximately $27.1 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2015; (ii) $11.1 million related to net new business; and (iii) an offsetting decrease of $1.8 million related to commissions and fees revenue from business divested in 2015 and 2016. Profit-sharing contingent commissions and GSCs for the first nine months of 2016 increased 12.3%, or $3.5 million, from the same period in 2015, to $31.9 million. The Retail Segment’s internal growth rate for core organic commissions and fees revenue was 1.8% for the first nine months of 2016 and was driven by revenue from net new business written during the preceding twelve months, some exposure unit growth, and modest increases in commercial auto rates, which was partially offset by continued reductions in property insurance premium rates, particularly in catastrophe prone areas.

Income before income taxes for the nine months ended September 30, 2016 increased 5.3%, or $7.2 million, over the same period in 2015, to $144.5 million. The primary factors affecting this increase were: (i) the net increase in revenue as described above; (ii) total compensation increased by $23.7 million or 6.9%, due primarily to new teammates related to acquisitions completed over the past twelve months, salary inflation, and additional teammates to support revenue growth; (iii) operating expenses which increased by $6.1 million or 5.8%, due primarily to information technology services fees, professional fees relating to value added services in support of revenue generation, and rent expense partially offset by the benefits or our strategic purchasing program; (iv) a change in estimated acquisition earn-out payables that increased $5.3 million to $6.6 million; partially offset by (v) a $1.8 million change in the benefit of gains on disposals to $3.1 million associated with book sales within certain profit centers.

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National Programs Segment

The National Programs Segment manages over 50 programs supported by approximately 40 well-capitalized carrier partners. In most cases, the insurance carriers that support the programs have delegated underwriting and, in many instances, claims-handling authority to our programs operations. These programs are generally distributed through a nationwide network of independent agents and Brown & Brown retail agents, and offer targeted products and services designed for specific industries, trade groups, professions, public entities and market niches. The National Programs Segment operations can be grouped into five broad categories: Professional Programs, Arrowhead Insurance Programs, Commercial Programs, Public Entity-Related Programs and the National Flood Program. The National Programs Segment’s revenue is primarily commission-based.

Financial information relating to our National Programs Segment for the three and nine months ended September 30, 2016 and 2015 is as follows:



	For the three months ended September 30,								For the nine months ended September 30,
(in thousands, except percentages)	2016			2015			% Change		2016			2015			% Change
REVENUES
Core commissions and fees	$	121,011		$	113,721		6.4	%	$	320,696		$	308,628		3.9	%
Profit-sharing contingent commissions	2,498			3,188			(21.6	)%	12,152			10,734			13.2	%
Guaranteed supplemental commissions	14			10			40.0	%	24			15			60.0	%
Investment income	96			49			95.9	%	583			150			NMF
Other income, net	13			(2		)	NMF		67			50			34.0	%
Total revenues	123,632			116,966			5.7	%	333,522			319,577			4.4	%
EXPENSES
Employee compensation and benefits	47,796			46,412			3.0	%	141,204			135,743			4.0	%
Other operating expenses	23,756			22,836			4.0	%	62,009			65,681			(5.6	)%
(Gain) loss on disposal	—			1			(100.0	)%	—			459			(100.0	)%
Amortization	6,921			7,133			(3.0	)%	21,011			21,343			(1.6	)%
Depreciation	1,945			1,850			5.1	%	5,881			5,372			9.5	%
Interest	10,844			13,398			(19.1	)%	34,895			42,306			(17.5	)%
Change in estimated acquisition earn-out payables	51			55			(7.3	)%	155			106			46.2	%
Total expenses	91,313			91,685			(0.4	)%	265,155			271,010			(2.2	)%
Income before income taxes	$	32,319		$	25,281		27.8	%	$	68,367		$	48,567		40.8	%
Net internal growth rate – core organic commissions and fees	7.0		%	0.8		%			3.8		%	1.6		%
Employee compensation and benefits ratio	38.7		%	39.7		%			42.3		%	42.5		%
Other operating expenses ratio	19.2		%	19.5		%			18.6		%	20.6		%
Capital expenditures	$	2,153		$	1,754				$	5,399		$	5,004
Total assets at September 30									$	2,933,568		$	2,542,619

NMF = Not a meaningful figure

The National Program Segment's revenue for the three months ended September 30, 2016 increased 5.7%, or $6.7 million, from the same period in 2015, to $123.6 million. The $7.3 million net increase in core commissions and fees revenue was driven by: (i) $7.9 million related to net new business and (ii) a decrease of $0.6 million related to commissions and fees revenue recorded in the third quarter of 2015 from businesses since divested. Profit-sharing contingent commissions and GSCs were $2.5 million for the third quarter of 2016, which was a decrease of $0.7 million from the third quarter of 2015, primarily related to one of our coastal property programs shifting premium to other carriers within the program to better manage market conditions.

The National Programs Segment’s internal growth rate for core commissions and fees revenue was 7.0% for the three months ended September 30, 2016. This internal growth rate was mainly due to increased flood claims revenues and revenues from our lender placed coverage program. Growth in this segment was partially offset by certain programs that have been affected by lower premium rates, primarily in our coastal property programs.

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Income before income taxes for the three months ended September 30, 2016 increased 27.8%, or $7.0 million, from the same period in 2015, to $32.3 million. The increase was driven by the net revenue growth noted above, and continued expense management initiatives as we grow and scale our programs along with a $2.6 million decrease in the intercompany interest expense charge for acquisitions. We charge our segments an intercompany interest charge associated with the cost of capital for each business they acquire. This intercompany interest charge is reduced each year according to a fixed amortization schedule.

National Programs revenue for the nine months ended September 30, 2016 increased 4.4%, or $13.9 million, from the same period in 2015, to $333.5 million. The $12.1 million increase in core commissions and fees revenue was driven by: (i) $11.6 million related to net new business, (ii) approximately $1.7 million related to core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2015, and (iii) a decrease of $1.2 million related to commissions and fees revenue from business divested in 2015 and 2016. Profit-sharing contingent commissions and GSCs were $12.2 million for the first nine months of 2016, which was an increase of $1.4 million from the same period in 2015.

The National Programs Segment’s internal growth rate for core commissions and fees revenue was 3.8% for the nine months ended September 30, 2016. This internal growth rate was mainly due to increased flood claims revenues and revenues from our lender placed coverage program. Growth in this segment was partially offset by certain programs that have been affected by lower premium rates, primarily in our costal property programs.

Income before income taxes for the nine months ended September 30, 2016 increased 40.8%, or $19.8 million, from the same period in 2015, to 68.4 million. The increase was driven by the net revenue growth noted above, expense management initiatives as we grow and scale our programs, $5.8 million in credits related to premium taxes along with a $7.4 million decrease in the intercompany interest expense charge for acquisitions. We charge our segments an intercompany interest charge associated with the cost of capital for each business they acquire. This intercompany interest charge is reduced each year according to a fixed amortization schedule.

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Wholesale Brokerage Segment

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

Financial information relating to our Wholesale Brokerage Segment for the three and nine months ended September 30, 2016 and 2015 is as follows:



	For the three months ended September 30,								For the nine months ended September 30,
(in thousands, except percentages)	2016			2015			% Change		2016			2015			% Change
REVENUES
Core commissions and fees	$	66,201		$	53,813		23.0	%	$	173,223		$	153,767		12.7	%
Profit-sharing contingent commissions	3,520			7,070			(50.2	)%	10,069			13,209			(23.8	)%
Guaranteed supplemental commissions	411			449			(8.5	)%	1,381			1,398			(1.2	)%
Investment income	—			3			(100.0	)%	4			148			(97.3	)%
Other income, net	60			39			53.8	%	216			97			122.7	%
Total revenues	70,192			61,374			14.4	%	184,893			168,619			9.7	%
EXPENSES
Employee compensation and benefits	33,187			26,373			25.8	%	90,099			79,111			13.9	%
Other operating expenses	11,175			9,503			17.6	%	31,141			26,373			18.1	%
(Gain) loss on disposal	—			—			—	%	—			(385		)	(100.0	)%
Amortization	2,882			2,441			18.1	%	7,915			7,296			8.5	%
Depreciation	503			506			(0.6	)%	1,487			1,630			(8.8	)%
Interest	1,540			200			NMF		2,472			645			NMF
Change in estimated acquisition earn-out payables	43			75			(42.7	)%	68			799			(91.5	)%
Total expenses	49,330			39,098			26.2	%	133,182			115,469			15.3	%
Income before income taxes	$	20,862		$	22,276		(6.3	)%	$	51,711		$	53,150		(2.7	)%
Net internal growth rate – core organic commissions and fees	6.7		%	5.5		%			4.8		%	5.9		%
Employee compensation and benefits ratio	47.3		%	43.0		%			48.7		%	46.9		%
Other operating expenses ratio	15.9		%	15.5		%			16.8		%	15.6		%
Capital expenditures	$	11		$	425				$	925		$	2,087
Total assets at September 30									$	1,053,516		$	880,454

NMF = Not a meaningful figure

The Wholesale Brokerage Segment’s total revenues for the three months ended September 30, 2016 increased 14.4%, or $8.8 million, from the same period in 2015, to $70.2 million. The $12.4 million net increase in core commissions and fees revenue was driven primarily by the following: (i) $8.8 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2015; and (ii) $3.6 million related to net new business. Contingent commissions and GSCs for the third quarter of 2016 decreased $3.6 million compared to the third quarter of 2015, to $3.9 million. This decrease in contingents was driven by an increase in loss ratios with certain carriers. The Wholesale Brokerage Segment’s internal growth rate for core organic commissions and fees revenue was 6.7% for the third quarter of 2016, and was driven by net new business and modest increases in exposure units, partially offset by contraction in insurance premium rates for catastrophe prone properties.

Income before income taxes for the three months ended September 30, 2016 decreased 6.3%, or $1.4 million, over the same period in 2015, to $20.9 million, primarily due to the following: (i) the net increase in revenue as described above, offset by; (ii) an increase in employee compensation and benefits of $6.8 million, of which $4.7 million was related to acquisitions that had no comparable compensation and benefits in the same period of 2015, with the remainder related to additional teammates to support increased transaction volumes; (iii) a decrease in profit from lower contingent commissions and GSCs; (iv) a $1.7 million increase in operating expenses, of which $1.5 million was related to acquisitions that had no comparable expenses in the same period of 2015 and (v) higher intercompany interest charge related to acquisitions completed in the previous year.

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The Wholesale Brokerage Segment’s total revenues for the nine months ended September 30, 2016 increased 9.7%, or $16.3 million, from the same period in 2015, to $184.9 million. The $19.5 million net increase in core commissions and fees revenue was driven primarily by the following: (i) $7.4 million related to net new business; and (ii) $12.1 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2015. Contingent commissions and GSCs for the first nine months of 2016 decreased $3.2 million compared to the same period of 2015, to $11.5 million. This decrease in contingents was driven by an increase in loss ratios with certain carriers. The Wholesale Brokerage Segment’s internal growth rate for core organic commissions and fees revenue was 4.8% for the first nine months of 2016, and was driven by net new business and modest increases in exposure units, partially offset by significant contraction in insurance premium rates for catastrophe prone properties.

Income before income taxes for the nine months ended September 30, 2016 decreased 2.7%, or $1.4 million, over the same period in 2015, to $51.7 million, primarily due to the following: (i) the net increase in revenue as described above, offset by; (ii) a gain on a business divested in the first nine months of 2015 that has no equivalent gain in the first nine months of 2016; (iii) a $3.0 million decrease in profit from lower contingent commissions and GSCs; (iv) an increase in employee compensation and benefits of $11.0 million, of which $6.2 million was related to acquisitions that had no comparable compensation and benefits in the same period of 2015 with the remainder related to additional teammates to support increased transaction volumes; (v) a $4.8 million increase is operating expenses, of which $1.9 million was related to acquisitions that had no comparable expenses in the same period of 2015; a (vi) a decrease of $0.7 million in estimated acquisition earn-out expenses; and (vii) an increase of $1.8 million in intercompany interest expense related to acquisitions completed in the previous twelve months.

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Services Segment

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

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

Financial information relating to our Services Segment for the three and nine months ended September 30, 2016 and 2015 is as follows:



	For the three months ended September 30,								For the nine months ended September 30,
(in thousands, except percentages)	2016			2015			% Change		2016			2015			% Change
REVENUES
Core commissions and fees	$	39,529		$	37,982		4.1	%	$	117,702		$	111,145		5.9	%
Profit-sharing contingent commissions	—			—			—	%	—			—			—	%
Guaranteed supplemental commissions	—			—			—	%	—			—			—	%
Investment income	57			—			—	%	204			1			NMF
Other income, net	—			(2		)	(100.0	)%	—			(18		)	(100.0	)%
Total revenues	39,586			37,980			4.2	%	117,906			111,128			6.1	%
EXPENSES
Employee compensation and benefits	20,151			19,302			4.4	%	58,658			58,340			0.5	%
Other operating expenses	10,583			9,641			9.8	%	32,722			27,395			19.4	%
(Gain) loss on disposal	—			—			—	%	—			—			—	%
Amortization	1,140			1,022			11.5	%	3,345			3,067			9.1	%
Depreciation	473			474			(0.2	)%	1,432			1,533			(6.6	)%
Interest	1,257			1,527			(17.7	)%	3,820			4,722			(19.1	)%
Change in estimated acquisition earn-out payables	11			(8		)	NMF		—			9			(100.0	)%
Total expenses	33,615			31,958			5.2	%	99,977			95,066			5.2	%
Income before income taxes	$	5,971		$	6,022		(0.8	)%	$	17,929		$	16,062		11.6	%
Net internal growth rate – core organic commissions and fees	1.6		%	7.8		%			3.1		%	8.6		%
Employee compensation and benefits ratio	50.9		%	50.8		%			49.7		%	52.5		%
Other operating expenses ratio	26.7		%	25.4		%			27.8		%	24.7		%
Capital expenditures	$	80		$	233				$	561		$	774
Total assets at September 30									$	342,360		$	296,659

NMF = Not a meaningful figure

The Services Segment’s total revenues for the three months ended September 30, 2016 increased 4.2%, or $1.6 million, over the same period in 2015, to $39.6 million. The $1.5 million increase in core commissions and fees revenue was driven primarily by the following: (i) $2.3 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2015; and (ii) $0.6 million related to net new business; (iii) partially offset by a decrease of $1.4 million related to commissions and fees revenue recorded in the third quarter of 2015 from businesses since divested. The Services Segment’s internal growth rate for core commissions and fees revenue was 1.6% for the third quarter of 2016. This growth was driven primarily by an increase in weather-related claims.

Income before income taxes for the three months ended September 30, 2016 decreased 0.8%, or $0.1 million, over the same period in 2015, to $6.0 million due to a combination of internal revenue growth as noted above offset by higher variable costs for certain of our businesses.

The Services Segment’s total revenues for the nine months ended September 30, 2016 increased 6.1%, or $6.8 million, over the same period in 2015, to $117.9 million. The $6.6 million increase in core commissions and fees revenue was driven by the following: (i) approximately $6.6 million related to core commissions and fees revenue from acquisitions that had no comparable revenues in the same period of 2015; (ii) $3.3 million related to net new business; and (iii) that was partially offset by a decrease of $3.3 million related to commissions and

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fees revenue from business divested in 2015 and 2016. The Services Segment’s internal growth rate for core commissions and fees revenue was 3.1% for the first nine months of 2016. This growth was driven primarily by an increase in weather related claims, our Social Security Advocacy businesses and partially offset by some decline in our Medicare Set-aside businesses as there were lower referrals.

Income before income taxes for the nine months ended September 30, 2016 increased 11.6%, or $1.9 million, over the same period in 2015, to $17.9 million due to a combination of internal revenue growth noted above and the continued efficient operating of our businesses.

Other

As discussed in Note 10 of the Notes to Condensed Consolidated Financial Statements, the “Other” column in the Segment Information table includes any income and expenses not allocated to reportable segments, and corporate-related items, including the inter-company interest expense charges to reporting segments.

LIQUIDITY AND CAPITAL RESOURCES

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

Contractual Cash Obligations

As of September 30, 2016, our contractual cash obligations were as follows:



	Payments Due by Period
(in thousands)	Total		Less Than 1 Year		1-3 Years		4-5 Years		After 5 Years
Long-term debt	$	1,120,500	$	80,500	$	540,000	$	—	$	500,000
Other liabilities⁽¹⁾	70,541		21,899		14,492		1,562		32,588
Operating leases	216,944		42,405		74,466		52,505		47,568
Interest obligations	200,771		35,958		60,688		42,000		62,125
Unrecognized tax benefits	433		—		433		—		—
Maximum future acquisition contingency payments⁽²⁾	116,406		34,156		81,595		655		—
Total contractual cash obligations	$	1,725,595	$	214,918	$	771,674	$	96,722	$	642,281


(1)	Includes the current portion of other long-term liabilities.


(2)	Includes $61.5 million of current and non-current estimated earn-out payables.

Debt

Total debt at September 30, 2016 was $1,112.2 million, which was a decrease of $32.5 million compared to December 31, 2015. The decrease includes the repayment of $34.3 million in principal, net of the amortization of discounted debt related to our 4.200% Notes due 2024 and debt issuance cost amortization of $1.2 million plus the addition of $0.5 million in a short-term note payable related to the recent acquisition of Social Security Advocates for the Disabled, LLC.

As of September 30, 2016, the Company satisfied the fifth installment of scheduled quarterly principal payments on the Credit Facility term loan. The Company has satisfied $55.0 million in total principal payments through September 30, 2016 since the inception of the note. Scheduled quarterly principal payments are expected to be made until maturity. The balance of the Credit Facility term loan is $495.0 million as of September 30, 2016. Of the total amount, $55.0 million is classified as current portion of long-term debt in the Condensed Consolidated Balance Sheet as the date of maturity is less than one year.

During 2015, the $25.0 million of 5.660% notes due December 2016 were classified as current portion of long-term debt in the Condensed Consolidated Balance Sheet as the date of maturity is less than one year. It is management's intention to repay this debt from operating cash.

On March 14, 2016, the Company terminated the Wells Fargo Revolver $25.0 million facility without incurring any fees. The facility was to mature on December 31, 2016. The Company terminated the Wells Fargo Revolver as it maintains flexibility with the Credit Facility revolver capacity and current capital and credit resources available.

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Off-Balance Sheet Arrangements

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

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

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign exchange rates and equity prices. We are exposed to market risk through our investments, revolving credit line, term loan agreements and international operations.

Our invested assets are held primarily as cash and cash equivalents, restricted cash, available-for-sale marketable debt securities, non-marketable debt securities, certificates of deposit, U.S. treasury securities, and professionally managed short-duration fixed income funds. Some of these investments are subject to interest rate risk. The fair values of our invested assets at September 30, 2016 and December 31, 2015, approximated their respective carrying values due to their short-term duration and therefore, such market risk is not considered to be material.

We do not actively invest or trade in equity securities. In addition, we generally dispose of any significant equity securities received in conjunction with an acquisition shortly after the acquisition date.

As of September 30, 2016, we had $495.0 million of borrowings outstanding under our term loan, which bears interest on a floating basis tied to the London Interbank Offered Rate (LIBOR) and is therefore subject to changes in the associated interest expense. The effect of an immediate hypothetical 10% change in interest rates would not have a material effect on our Consolidated Financial Statements.

We are subject to exchange rate risk primarily in our U.K. based wholesale brokerage business that has a cost base principally denominated in British pounds and a revenue base in several other currencies, but principally in U.S. dollars. Based on our foreign currency rate exposure as of September 30, 2016, an immediate 10% hypothetical change of foreign currency exchange rates would not have a material effect on our Consolidated Financial Statements.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation (the “Evaluation”) required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15 and 15d-15 under the Exchange Act (“Disclosure Controls”) as of September 30, 2016. Based on the Evaluation, our CEO and CFO concluded that the design and operation of our Disclosure Controls were effective.

Changes in Internal Controls

There has not been any change in our internal control over financial reporting identified in connection with the Evaluation that occurred during the quarter ended September 30, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of Internal Control Over Financial Reporting

Our management, including our CEO and CFO, does not expect that our Disclosure Controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

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The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

CEO and CFO Certifications

Exhibits 31.1 and 31.2 are the Certifications of the CEO and the CFO, respectively. The Certifications are supplied in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This Item 4 of Part I of this Quarterly Report on Form 10-Q contains the information concerning the evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

PART II

ITEM 1. Legal Proceedings

In Item 3 of Part I of the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2015, certain information concerning litigation claims arising in the ordinary course of business was disclosed. Such information was current as of the date of filing. During the Company’s fiscal quarter ended September 30, 2016, no new legal proceedings, or material developments with respect to existing legal proceedings, occurred which require disclosure in this Quarterly Report on Form 10-Q.

ITEM 1A. Risk Factors

There were no material changes in the risk factors previously disclosed in Item 1A, “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about our repurchase of shares of our common stock during the three months ended September 30, 2016:



	Total Number of Shares Purchased(1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Value that May Yet be Purchased Under the Plans or Programs(2)
July 1, 2016 to July 31, 2016	54,669	$	37.45	—	$ 375.0 million
August 1, 2016 to August 31, 2016	308	$ 36.69		—	375.0 million
September 1, 2016 to September 30, 2016	2,021	36.99		—	375.0 million
Total	56,998	$	37.43	—	$ 375.0 million


(1)	We purchased 56,998 shares during the quarter ended September 30, 2016 outside of our publicly announced share repurchase program, all of which represent shares surrendered by our teammates in the exercise of stock options under our equity compensation plans or to cover required tax withholdings on the vesting of shares in our equity compensation plans.

(2)

As announced on July 21, 2014, our Board of Directors approved the purchase of up to $200.0 million of the Company’s outstanding common stock of which $150.0 million have been purchased with the last settlement on August 11, 2015. On July 20, 2015, the Company’s Board of Directors authorized the purchasing of up to an additional $400.0 million of the Company's outstanding common stock. On November 11, 2015, the Company entered into an accelerated share repurchase program with an investment bank to purchase an aggregate $75.0 million of the Company’s common stock, all of which has been settled with this latest settlement on January 6, 2016 in which the Company received 363,209 shares. After this completion, the Company has outstanding approval to purchase up to $375.0 million, in the aggregate, of the Company's outstanding common stock. As of September 30, 2016, a total of 7,793,579 shares have been repurchased since the first quarter of 2015.

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ITEM 6. Exhibits

The following exhibits are filed as a part of this Report:




3.1		Articles of Amendment to Articles of Incorporation (adopted April 24, 2003) (incorporated by reference to Exhibit 3a to Form 10-Q for the quarter ended March 31, 2003), and Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3a to Form 10-Q for the quarter ended March 31, 1999).

3.2		Bylaws (incorporated by reference to Exhibit 3.2 to Form 8-K filed on October 12, 2016).

10.3		Transition Agreement dated and effective as of July 1, 2016 between the Registrant and Charles H. Lydecker.

10.3		Consulting Agreement dated and effective as of July 1, 2016 between the Registrant and Charles H. Lydecker.

31.1		Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer of the Registrant.

31.2		Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer of the Registrant.

32.1		Section 1350 Certification by the Chief Executive Officer of the Registrant.

32.2		Section 1350 Certification by the Chief Financial Officer of the Registrant.

101.INS		XBRL Instance Document.

101.SCH		XBRL Taxonomy Extension Schema Document.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF		XBRL Taxonomy Definition Linkbase Document.

101.LAB		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




				BROWN & BROWN, INC.


				/s/ R. Andrew Watts
Date: November 9, 2016				R. Andrew Watts
				Executive Vice President, Chief Financial Officer and Treasurer
				(duly authorized officer, principal financial officer and principal accounting officer)