Business Combinations

9 Months Ended

Sep. 30, 2019

3.	Business Combinations

During the nine-month period ended September 30, 2019, we acquired substantially all of the net assets of the following firms in exchange for our common stock and/or cash. These acquisitions have been accounted for using the acquisition method for recording business combinations (in millions, except share data):


Name and Effective Date of Acquisition	Common Shares Issued		Common Share Value		Cash Paid		Accrued Liability		Escrow Deposited		Recorded Earnout Payable		Total Recorded Purchase Price		Maximum Potential Earnout Payable
	(000s)
Inversion Holding Company, LLC (IHC) January 1, 2019		452	$	35.9	$	31.2	$	—	$	4.5	$	20.9	$	92.5	$	35.0
Jones Brown Inc. (JBI) January 1, 2019		—		—		65.9		—		8.7		—		74.6		—
Stackhouse Poland Group Limited (SPG) April 5, 2019		—		—		326.8		—		4.8		—		331.6		—
RPA Insurance Services LLC (RPA) May 1, 2019		—		—		44.0		—		3.9		16.9		64.8		22.0
JLT Aerospace (JLT) June 1, 2019		—		—		162.8		—		—		63.6		226.4		75.1
RGA Group (RGA) September 4, 2019		—		—		42.8		6.0		4.7		8.0		61.5		9.3
32 other acquisitions completed in 2019		156		12.1		290.9		32.3		26.0		59.9		421.2		147.3

		608	$	48.0	$	964.4	$	38.3	$	52.6	$	169.3	$	1,272.6	$	288.7

On September 27, 2019, we signed a definitive agreement to acquire substantially all of the net assets of LSG Insurance Partners (which we refer to as LSG) headquartered in Bloomfield Hills, Michigan for approximately $174.0 million of cash consideration, plus a potential earnout obligation of approximately $72.0 million. The transaction was subject to regulatory approval and customary closing conditions and it closed on October 15, 2019.

Common shares issued in connection with acquisitions are valued at closing market prices as of the effective date of the applicable acquisition or on the days when the shares are issued, if purchase consideration is deferred. We record escrow deposits that are returned to us as a result of adjustments to net assets acquired as reductions of goodwill when the escrows are settled. The maximum potential earnout payables disclosed in the foregoing table represent the maximum amount of additional consideration that could be paid pursuant to the terms of the purchase agreement for the applicable acquisition. The amounts recorded as earnout payables, which are primarily based upon the estimated

future operating results of the acquired entities over a

two-

to three-year period subsequent to the acquisition date, are measured at fair value as of the acquisition date and are included on that basis in the recorded purchase price consideration in the foregoing table. We will record subsequent changes in these estimated earnout obligations, including the accretion of discount, in our consolidated statement of earnings when incurred.

The fair value of these earnout obligations is based on the present value of the expected future payments to be made to the sellers of the acquired entities in accordance with the provisions outlined in the respective purchase agreements, which is a Level 3 fair value measurement. In determining fair value, we estimated the acquired entity’s future performance using financial projections developed by management for the acquired entity and market participant assumptions that were derived for revenue growth and/or profitability. Revenue growth rates generally ranged from 3.0% to 20.0% for our 2019 acquisitions. We estimated future payments using the earnout formula and performance targets specified in each purchase agreement and the financial projections just described. We then discounted these payments to present value using a risk-adjusted rate that takes into consideration market-based rates of return that reflect the ability of the acquired entity to achieve the targets. The discount rates generally ranged from 7.5% to 8.2% for all of our 2019 acquisitions. Changes in financial projections, market participant assumptions for revenue growth and/or profitability, or the risk-adjusted discount rate, would result in a change in the fair value of recorded earnout obligations.

During the three-month periods ended September 30, 2019 and 2018, we recognized $7.1 million and $4.5 million, respectively, of expense in our consolidated statement of earnings related to the accretion of the discount recorded for earnout obligations in connection with our acquisitions. During the nine-month periods ended September 30, 2019 and 2018, we recognized $18.5 million and $14.5 million, respectively, of expense in our consolidated statement of earnings related to the accretion of the discount recorded for earnout obligations in connection with our acquisitions. In addition, during the three-month periods ended September 30, 2019 and 2018, we recognized $1.4 million of income and $1.3 million of expense, respectively, related to net adjustments in the estimated fair value of the liability for earnout obligations in connection with revised projections of future performance for 29 and 38 acquisitions, respectively. In addition, during the nine-month periods ended September 30, 2019 and 2018, we recognized $6.5 million and $7.3 million of income, respectively, related to net adjustments in the estimated fair value of the liability for earnout obligations in connection with revised projections of future performance for 86 and 95 acquisitions, respectively. The aggregate amount of maximum earnout obligations related to acquisitions was $764.7 million as of September 30, 2019, of which $419.4 million was recorded in the consolidated balance sheet as of September 30, 2019, based on the estimated fair value of the expected future payments to be made.

The following is a summary of the estimated fair values of the net assets acquired at the date of each acquisition made in the nine-month period ended September 30, 2019 (in millions):


	IHC		JBI		SPG		RPA		JLT		RGA		32 Other Acquisitions		Total
Cash	$	—	$	2.7	$	13.6	$	—	$	—	$	6.0	$	3.6	$	25.9
Other current assets		3.8		22.2		35.9		10.6		6.3		5.1		60.1		144.0
Fixed assets		0.3		1.1		3.1		0.2		—		0.2		2.3		7.2
Noncurrent assets		0.5		2.9		9.9		0.7		2.9		5.7		12.8		35.4
Goodwill		41.8		49.5		302.6		34.5		106.2		36.7		184.8		756.1
Expiration lists		50.6		25.4		56.8		32.6		118.8		19.5		223.8		527.5
Non-compete agreements		1.1		0.1		11.4		0.1		2.4		2.7		3.3		21.1
Trade names		—		0.1		—		—		2.3		—		0.1		2.5

Total assets acquired		98.1		104.0		433.3		78.7		238.9		75.9		490.8		1,519.7


Current liabilities		5.1		20.4		78.5		13.2		12.5		10.6		50.9		191.2

Noncurrent liabilities		0.5		9.0		23.2		0.7		—		3.8		18.7		55.9


Total liabilities assumed		5.6		29.4		101.7		13.9		12.5		14.4		69.6		247.1

Total net assets acquired	$	92.5	$	74.6	$	331.6	$	64.8	$	226.4	$	61.5	$	421.2	$	1,272.6

Among other things, these acquisitions allow us to expand into desirable geographic locations, further extend our presence in the retail and wholesale insurance brokerage services markets and increase the volume of general services currently provided. The excess of the purchase price over the estimated fair value of the tangible net assets acquired at the acquisition date was allocated to goodwill, expiration lists,

non-compete

agreements and trade names in the amounts of $756.1 million, $527.5 million, $21.1 million and $2.5 million, respectively, within the brokerage segment.

Provisional estimates of fair value are established at the time of each acquisition and are subsequently reviewed within the first year of operations subsequent to the acquisition date to determine the necessity for adjustments. The fair value of the tangible assets and liabilities for each applicable acquisition at the acquisition date approximated their carrying values. The fair value of expiration lists was established using the excess earnings method, which is an income approach based on estimated financial projections developed by management for each acquired entity using market participant assumptions. Revenue growth and attrition rates generally ranged from 2.0% to 3.0% and 5.0% to 12.5%, respectively, for our 2018 and 2019 acquisitions for which valuations were performed in 2019. We estimate the fair value as the present value of the benefits anticipated from ownership of the subject customer list in excess of returns required on the investment in contributory assets necessary to realize those benefits. The rate used to discount the net benefits was based on a risk-adjusted rate that takes into consideration market-based rates of return and reflects the risk of the asset relative to the acquired business. These discount rates generally ranged from 10.5% to 12.5% for our 2018 and 2019 acquisitions for which valuations were performed in 2019. The fair value of

non-compete

agreements was established using the profit differential method, which is an income approach based on estimated financial projections developed by management for the acquired company using market participant assumptions and various

non-compete

scenarios.

Expiration lists,

non-compete

agreements and trade names related to our acquisitions are amortized using the straight-line method over their estimated useful lives (two to fifteen years for expiration lists, three to five years for

non-compete

agreements and two to fifteen years for trade names), while goodwill is not subject to amortization. We use the straight-line method to amortize these intangible assets because the pattern of their economic benefits cannot be reasonably determined with any certainty. We review all of our intangible assets for impairment periodically (at least annually) and whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. In reviewing intangible assets, if the fair value were less than the carrying amount of the respective (or underlying) asset, an indicator of impairment would exist and further analysis would be required to determine whether or not a loss would need to be charged against current period earnings as a component of amortization expense.

Of the $527.5 million of expiration lists, $21.1 million of

non-compete

agreements and $2.5 million of trade names related to our acquisitions made during the nine-month period ended September 30, 2019, $124.4 million, $15.1 million and $0.2 million, respectively, is not expected to be deductible for income tax purposes. Accordingly, we recorded a deferred tax liability of $28.3 million, and a corresponding amount of goodwill, in the nine-month period ended September 30, 2019, related to the nondeductible amortizable intangible assets.

Our consolidated financial statements for the nine-month period ended September 30, 2019 include the operations of the entities acquired in the nine-month period ended September 30, 2019 from their respective acquisition dates. The following is a summary of the unaudited pro forma historical results, as if these entities had been acquired at January 1, 2018 (in millions, except per share data):


	Three-month period ended September 30,				Nine-month period ended September 30,
	2019		2018		2019		2018
Total revenues	$	1,835.2	$	1,851.4	$	5,577.2	$	5,497.9
Net earnings attributable to controlling interests		127.2		126.8		566.7		514.5
Basic net earnings per share		0.68		0.69		3.05		2.81
Diluted net earnings per share		0.67		0.68		2.99		2.76

The unaudited pro forma results above have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had these acquisitions occurred at January 1, 2018, nor are they necessarily indicative of future operating results. Annualized revenues of entities acquired during the nine-month period ended September 30, 2019 totaled approximately $350.8 million. For the

nine-month

period ended September 30, 2019, total revenues and net earnings recorded in our unaudited consolidated statement of earnings related to our acquisitions made during the nine-month period ended September 30, 2019 in the aggregate, were $134.2 million and $6.7 million, respectively.