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Business Combinations | 12 Months Ended
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Dec. 31, 2020
Business Combinations [Abstract] |
Business Combinations | 3. Business Combinations During 2020, 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) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Capsicum Reinsurance Brokers LLP (CRB) January 1, 2020 |  |  | 584 |  |  | $ | 62.9 |  |  | $ | 64.5 |  |  | $ | - |  |  | $ | - |  |  | $ | 129.9 |  |  | $ | 257.3 |  |  | $ | 209.1 |
Hanover Excess & Surplus, Inc. and Hanover Premium Finance, Inc. (HES) January 1, 2020 |  |  | - |  |  |  | - |  |  |  | 30.1 |  |  |  | - |  |  |  | 3.0 |  |  |  | - |  |  |  | 33.1 |  |  |  | 9.3 |
CRES Insurance Services, LLC (CRES) June 1, 2020 |  |  | 288 |  |  |  | 28.5 |  |  |  | 1.5 |  |  |  | - |  |  |  | 1.0 |  |  |  | 5.5 |  |  |  | 36.5 |  |  |  | 7.3 |
Optimum Talent Inc. (OTI) November 1, 2020 |  |  | 102 |  |  |  | 11.1 |  |  |  | 14.1 |  |  |  | - |  |  |  | 3.4 |  |  |  | 14.0 |  |  |  | 42.6 |  |  |  | 21.1 |
Cool Insuring Agency, Inc. (CIA) December 1, 2020 |  |  | 406 |  |  |  | 48.4 |  |  |  | 65.0 |  |  |  | - |  |  |  | 7.2 |  |  |  | 8.5 |  |  |  | 129.1 |  |  |  | 30.0 |
Harden & Associates, Inc. (HAI) December 1, 2020 |  |  | 49 |  |  |  | - |  |  |  | 95.6 |  |  |  | - |  |  |  | 6.2 |  |  |  | 10.0 |  |  |  | 111.8 |  |  |  | 22.5 |
Ashton Tiffany, LLC (AT) December 31, 2020 |  |  | - |  |  |  | - |  |  |  | 48.3 |  |  |  | 48.2 |  |  |  | - |  |  |  | 9.0 |  |  |  | 105.5 |  |  |  | 20.0 |
Twenty other acquisitions completed in 2020 |  |  | 414 |  |  |  | 38.8 |  |  |  | 79.2 |  |  |  | 1.8 |  |  |  | 9.9 |  |  |  | 30.5 |  |  |  | 160.2 |  |  |  | 68.6 |
|  |  | 1,843 |  |  | $ | 189.7 |  |  | $ | 398.3 |  |  | $ | 50.0 |  |  | $ | 30.7 |  |  | $ | 207.4 |  |  | $ | 876.1 |  |  | $ | 387.9 |
On December 23, 2020, we signed a definitive agreement to acquire 100% of the equity of The Bollington Wilson Group (which we refer to as Bollington) headquartered in Sale, Greater Manchester, U.K., for approximately $330.0 million of cash consideration. Bollington is a specialist U.K. insurance broker that has more than 400 employees and operates from a network of seven offices in the U.K. The transaction is subject to regulatory approval, which was received on January 26, 2021, and is expected to close in February 2021. 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. The $48.2 million accrued liability related to Ashton Tiffany in the foregoing table may be settled using shares of our common stock in early February 2021. 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 2.5% to 15.0% for our 2020 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 6.0% to 9.0% for our 2020 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 2020, 2019 and 2018, we recognized $32.5 million, $27.0 million and $18.8 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 2020, 2019 and 2018, we recognized $65.4 million, $11.7 million and $9.2 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 135, 116 and 112 acquisitions, respectively. The aggregate amount of maximum earnout obligations related to acquisitions made in 2017 and subsequent years was $1,128.1 million as of December 31, 2020, of which $592.2 million was recorded in the consolidated balance sheet as of that date based on the estimated fair value of the expected future payments to be made, of which approximately $493.7 million can be settled in cash or stock at our option and $98.5 million must be settled in cash. The aggregate amount of maximum earnout obligations related to acquisitions made in 2016 and subsequent years was $982.9 million as of December 31, 2019, of which $565.0 million was recorded in the consolidated balance sheet as of that date 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 2020 (in millions):
|  | CRB |  |  | HES |  |  | CRES |  |  | OTI |  |  | CIA |  |  | HAI |  |  | AT |  |  | Twenty Other Acquisitions |  |  | Total |
Cash and restricted cash |  | $ | - |  |  | $ | 3.3 |  |  | $ | 4.3 |  |  | $ | 0.6 |  |  | $ | 4.2 |  |  | $ | 2.3 |  |  | $ | 6.0 |  |  | $ | 13.3 |  |  | $ | 34.0 |
Other current assets |  |  | - |  |  |  | 1.0 |  |  |  | 12.4 |  |  |  | 3.0 |  |  |  | 28.8 |  |  |  | 9.0 |  |  |  | 8.6 |  |  |  | 25.2 |  |  |  | 88.0 |
Fixed assets |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 0.9 |  |  |  | 0.1 |  |  |  | 1.1 |  |  |  | 0.5 |  |  |  | 0.6 |  |  |  | 3.2 |
Noncurrent assets |  |  | 7.6 |  |  |  | 0.8 |  |  |  | - |  |  |  | 6.7 |  |  |  | 0.9 |  |  |  | 6.4 |  |  |  | 2.1 |  |  |  | 3.1 |  |  |  | 27.6 |
Goodwill |  |  | 108.4 |  |  |  | 19.1 |  |  |  | 21.3 |  |  |  | 25.4 |  |  |  | 58.9 |  |  |  | 45.7 |  |  |  | 14.8 |  |  |  | 66.0 |  |  |  | 359.6 |
Expiration lists |  |  | 133.7 |  |  |  | 13.7 |  |  |  | 13.9 |  |  |  | 18.3 |  |  |  | 56.2 |  |  |  | 62.5 |  |  |  | 78.2 |  |  |  | 90.7 |  |  |  | 467.2 |
Non-compete agreements |  |  | 2.9 |  |  |  | 0.1 |  |  |  | - |  |  |  | 0.4 |  |  |  | 0.8 |  |  |  | 0.7 |  |  |  | 5.8 |  |  |  | 0.7 |  |  |  | 11.4 |
Trade names |  |  | 4.7 |  |  |  | - |  |  |  | 0.3 |  |  |  | - |  |  |  | 7.5 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 12.5 |
Total assets acquired |  |  | 257.3 |  |  |  | 38.0 |  |  |  | 52.2 |  |  |  | 55.3 |  |  |  | 157.4 |  |  |  | 127.7 |  |  |  | 116.0 |  |  |  | 199.6 |  |  |  | 1,003.5 |
Current liabilities |  |  | - |  |  |  | 4.4 |  |  |  | 15.7 |  |  |  | 5.2 |  |  |  | 28.1 |  |  |  | 9.5 |  |  |  | 8.4 |  |  |  | 32.3 |  |  |  | 103.6 |
Noncurrent liabilities |  |  | - |  |  |  | 0.5 |  |  |  | - |  |  |  | 7.5 |  |  |  | 0.2 |  |  |  | 6.4 |  |  |  | 2.1 |  |  |  | 7.1 |  |  |  | 23.8 |
Total liabilities assumed |  |  | - |  |  |  | 4.9 |  |  |  | 15.7 |  |  |  | 12.7 |  |  |  | 28.3 |  |  |  | 15.9 |  |  |  | 10.5 |  |  |  | 39.4 |  |  |  | 127.4 |
Total net assets acquired |  | $ | 257.3 |  |  | $ | 33.1 |  |  | $ | 36.5 |  |  | $ | 42.6 |  |  | $ | 129.1 |  |  | $ | 111.8 |  |  | $ | 105.5 |  |  | $ | 160.2 |  |  | $ | 876.1 |
Among other things, these acquisitions allow us to expand into desirable geographic locations, further extend our presence in the retail and wholesale insurance and reinsurance 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 $359.6 million, $467.2 million, $11.4 million and $12.5 million, respectively, within the brokerage management 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. Fair value estimates were provisional for some of the 2020 acquisitions as of December 31, 2020. Fair value adjustments, if any, are most common to the values established for amortizable intangible assets and earnout liabilities, with the offset to goodwill. 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 1.5% to 4.1% and 5.0% to 15.7% for our 2020 and 2019 acquisitions, respectively, for which valuations were performed in 2020. We estimate the fair value as the present value of the benefits anticipated from ownership of the subject expiration 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 9.0% to 13.5% for our 2020 and 2019 acquisitions, for which valuations were performed in 2020. 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, two to six 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 identifiable 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 identifiable intangible assets, if the undiscounted future cash flows 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. Based on the results of impairment reviews in 2020, 2019 and 2018, we wrote off $51.7 million, $0.1 million and $10.6 million, respectively, of amortizable intangible assets related to the brokerage and risk management segments. Of the $467.2 million of expiration lists, $11.4 million of non-compete agreements and $12.5 million of trade names related to the 2020 acquisitions, $29.0 million, $0.6 million and zero, respectively, is not expected to be deductible for income tax purposes. Accordingly, we recorded a deferred tax liability of $3.9 million, and a corresponding amount of goodwill, in 2020 related to the nondeductible amortizable intangible assets. Our consolidated financial statements for the year ended December 31, 2020 include the operations of the acquired entities 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, 2019 (in millions, except per share data):
|  | Year Ended December 31, |
|  | 2020 |  |  | 2019 |
Total revenues |  | $ | 7,108.7 |  |  | $ | 7,352.7 |
Net earnings attributable to controlling interests |  |  | 817.6 |  |  |  | 670.5 |
Basic net earnings per share |  |  | 4.26 |  |  |  | 3.57 |
Diluted net earnings per share |  |  | 4.17 |  |  |  | 3.49 |
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, 2019, nor are they necessarily indicative of future operating results. Annualized revenues of entities acquired in 2020 totaled approximately $251.4 million. Total revenues and net earnings recorded in our consolidated statement of earnings for 2020 related to the 2020 acquisitions in the aggregate, were $52.7 million and $5.2 million, respectively.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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