ARTHUR J. GALLAGHER & CO. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
The discussion and analysis that follows relates to our financial condition and results of operations for the three and nine-month periods endedSeptember 30, 2021 . Readers should review this information in conjunction with theSeptember 30, 2021 unaudited consolidated financial statements and notes included in Item 1 of Part I of this quarterly report on Form 10Q and the audited consolidated financial statements and notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in our annual report on Form 10-K for the year endingDecember 31, 2020 .
Prior Year Discussion of Results and Comparisons
For Information on fiscal third quarter 2020 results and similar comparisons, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-Q for the fiscal three and nine-month periods endedSeptember 30, 2020 .
Information Regarding Non-GAAP Measures and Other
In the discussion and analysis of our results of operations that follows, in addition to reporting financial results in accordance with GAAP, we provide information regarding EBITDAC, EBITDAC margin, adjusted EBITDAC, adjusted EBITDAC margin, diluted net earnings per share, as adjusted (adjusted EPS), adjusted revenues, adjusted compensation and operating expenses, adjusted compensation expense ratio, adjusted operating expense ratio and organic revenue. These measures are not in accordance with, or an alternative to, the GAAP information provided in this quarterly report on Form 10Q. We believe that these presentations provide useful information to management, analysts and investors regarding financial and business trends relating to our results of operations and financial condition because they provide investors with measures that our chief operating decision maker uses when reviewing the company's performance, and for the other reasons described below. Our industry peers may provide similar supplemental non-GAAP information with respect to one or more of these measures, although they may not use the same or comparable terminology and may not make identical adjustments. The non-GAAP information we provide should be used in addition to, but not as a substitute for, the GAAP information provided. We make determinations regarding certain elements of executive officer incentive compensation, performance share awards and annual cash incentive awards, partly on the basis of measures related to adjusted EBITDAC. Adjusted Non-GAAP presentation - We believe that the adjusted non-GAAP presentation of the current and prior period information presented on the following pages provides stockholders and other interested persons with useful information regarding certain financial metrics that may assist such persons in analyzing our operating results as they develop a future earnings outlook for us. The after-tax amounts related to the adjustments were computed using the normalized effective tax rate for each respective period.
• Adjusted measures - We define these measures as revenues (for the
brokerage segment), revenues before reimbursements (for the risk
management segment), net earnings, compensation expense and operating
expense, respectively, each adjusted to exclude the following, as
applicable:
• Net gains on divestitures, which are primarily net proceeds received
related to sales of books of business and other divestiture
transactions, such as the disposal of a business through sale or
closure.
• Acquisition integration costs, which include costs related to certain
of our large acquisitions, outside the scope of our usual
tuck-in
strategy, not expected to occur on an ongoing basis in the
future once
we fully assimilate the applicable acquisition. These costs are
typically associated with redundant workforce, extra lease space,
duplicate services and external costs incurred to assimilate the
acquisition with our IT related systems.
• Transaction-related costs associated with the due diligence and
pre-closing integration preparation for its pending agreement to
acquire Willis Towers Watson plc treaty reinsurance brokerage
operations and the previous terminated agreement to acquire certain
Willis Towers Watson plc reinsurance and other brokerage operations.
• Workforce related charges, which primarily include severance costs
(either accrued or paid) related to employee terminations and other
costs associated with redundant workforce.
• Lease termination related charges, which primarily include costs
related to terminations of real estate leases and abandonment of
leased space.
• Acquisition related adjustments, which include change in estimated
acquisition earnout payables adjustments, impairment charges and
acquisition related compensation charges. For third quarter 2021, this
adjustment also includes the impact of an acquisition valuation
analysis and corresponding adjustments.
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• The impact of foreign currency translation, as applicable. The amounts
excluded with respect to foreign currency translation are
calculated
by applying current year foreign exchange rates to the same
period in
the prior year.
• Income tax related changes, which represents the impact in second
quarter 2021 of one-time income tax expense associated with the change
in the U.K. effective income tax rate from 19% to 25% that is
effective in 2023. It also includes the impact of additional U.K.
income tax expense related to the non-deductibility of some
acquisition related adjustments made in third quarter 2021.
• Loss on extinguishment of debt represents costs incurred on the early
redemption of the $650 million of 2031 Senior Notes, which included
the redemption price premium, the unamortized discount amount on the
debt issuance and the write-off of all the debt acquisition costs.
• Adjusted ratios - Adjusted compensation expense and adjusted operating
expense, respectively, each divided by adjusted revenues.
Non-GAAP Earnings Measures
We believe that the presentation of EBITDAC, EBITDAC margin, adjusted EBITDAC, adjusted EBITDAC margin and adjusted EPS for the brokerage and risk management segment, each as defined below, provides a meaningful representation of our operating performance. Adjusted EPS is a performance measure and should not be used as a measure of our liquidity. We also consider EBITDAC and EBITDAC margin as ways to measure financial performance on an ongoing basis. In addition, adjusted EBITDAC, adjusted EBITDAC margin and adjusted EPS for the brokerage and risk management segments are presented to improve the comparability of our results between periods by eliminating the impact of the items that have a high degree of variability.
• EBITDAC and EBITDAC Margin - EBITDAC is net earnings before interest,
income taxes, depreciation, amortization and the change in estimated
acquisition earnout payables and EBITDAC margin is EBITDAC divided by
total revenues (for the brokerage segment) and revenues before
reimbursements (for the risk management segment). These measures for the
brokerage and risk management segments provide a meaningful representation
of our operating performance for the overall business and provide a
meaningful way to measure its financial performance on an ongoing basis.
• Adjusted EBITDAC and Adjusted EBITDAC Margin - Adjusted EBITDAC is EBITDAC
adjusted to exclude net gains on divestitures, acquisition integration
costs, workforce related charges, lease termination related charges,
acquisition related adjustments, and the period-over-period impact of
foreign currency translation, as applicable, and Adjusted EBITDAC margin
is Adjusted EBITDAC divided by total adjusted revenues (defined above).
These measures for the brokerage and risk management segments provide a
meaningful representation of our operating performance and, are also
presented to improve the comparability of our results between periods by
eliminating the impact of the items that have a high degree of
variability.
• Adjusted EPS and Adjusted Net Earnings - Adjusted net earnings have been
adjusted to exclude the after-tax impact of net gains on divestitures,
acquisition integration costs, the impact of foreign currency translation,
workforce related charges, lease termination related charges, acquisition
related adjustments and effective income tax rate impact, as applicable.
Adjusted EPS is Adjusted Net Earnings divided by diluted weighted average
shares outstanding. This measure provides a meaningful representation of
our operating performance (and as such should not be used as a measure of
our liquidity), and for the overall business is also presented to improve
the comparability of our results between periods by eliminating the impact
of the items that have a high degree of variability.
Organic Revenues (a non-GAAP measure) - For the brokerage segment, organic
change in base commission and fee revenues, supplemental revenues and contingent
revenues exclude the first twelve months of such revenues generated from
acquisitions and such revenues related to divested operations in each year
presented. These revenues are excluded from organic revenues in order to help
interested persons analyze the revenue growth associated with the operations
that were a part of our business in both the current and prior period. In
addition, organic change in base commission and fee revenues, supplemental
revenues and contingent revenues exclude the periodoverperiod impact of
foreign currency translation to improve the comparability of our results between
periods by eliminating the impact of the items that have a high degree of
variability. For the risk management segment, organic change in fee revenues
excludes the first twelve months of fee revenues generated from acquisitions in
each year presented. In addition, change in organic growth excludes the
period-over-period impact of foreign currency translation to improve the
comparability of our results between periods by eliminating the impact of the
items that have a high degree of variability.
These revenue items are excluded from organic revenues in order to determine a
comparable, but non-GAAP, measurement of revenue growth that is associated with
the revenue sources that are expected to continue in the current year and
beyond. We have historically viewed organic revenue growth as an important
indicator when assessing and evaluating the performance of our brokerage and
risk
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-------------------------------------------------------------------------------- management segments. We also believe that using this nonGAAP measure allows readers of our financial statements to measure, analyze and compare the growth from our brokerage and risk management segments in a meaningful and consistent manner. Reconciliation of Non-GAAP Information Presented to GAAP Measures - This quarterly report on Form 10Q includes tabular reconciliations to the most comparable GAAP measures, as follows: for EBITDAC (on pages 51 and 57), for adjusted revenues, adjusted EBITDAC and adjusted diluted net earnings per share (on pages 44 and 45), for organic revenue measures (on pages 52 and 57), respectively, for the brokerage and risk management segments), for adjusted EBITDAC margin, adjusted compensation expense and operating expenses, (on pages 53 and 54, respectively, for the brokerage segment and on pages 58 and 59, respectively, for the risk management segment). Other Information - Allocations of investment income and certain expenses are based on reasonable assumptions and estimates primarily using revenue, headcount and other information. We allocate the provision for income taxes to the brokerage and risk management segments using local statutory rates. As a result, the provision for income taxes for the corporate segment reflects the entire benefit to us of the IRC Section 45 tax credits produced, because that is the segment which generated the credits. The law that provides for IRC Section 45 tax credits expired inDecember 2019 for our fourteen plants placed in service prior toDecember 31, 2009 (which we refer to as the 2009 Era Plants) and will expire inDecember 2021 for our twenty-one plants placed in service prior toDecember 31, 2011 (which we refer to as the 2011 Era Plants). We anticipate reporting an effective tax rate of approximately 23.0% to 25.0% in the brokerage segment and 24.0% to 26.0% in the risk management segment for the foreseeable future. Reported operating results by segment would change if different allocation methods were applied. When the law governing IRC Section 45 tax credits expires, reported GAAP revenues and net earnings will decrease, yet our net cash flow will increase as a result of not having to pay expenses to operate the clean coal facilities and also from an increase in the use of credits against ourU.S. federal income tax obligations.
In the discussion that follows regarding our results of operations, we also
provide the following ratios with respect to our operating results: pretax
profit margin, compensation expense ratio and operating expense ratio. Pretax
profit margin represents pretax earnings divided by total revenues. The
compensation expense ratio is compensation expense divided by total
revenues. The operating expense ratio is operating expense divided by total
revenues.
Overview and Third Quarter 2021 Highlights
We are engaged in providing insurance brokerage and consulting services, and third-party property/casualty claims settlement and administration services to entities in theU.S. and abroad. In the nine-month period endedSeptember 30, 2021 , we generated approximately 68% of our revenues for the combined brokerage and risk management segments domestically and 32% internationally, primarily inAustralia ,Bermuda ,Canada , theCaribbean ,New Zealand and theU.K. We have three reportable segments: brokerage, risk management and corporate, which contributed approximately 72%, 13% and 15%, respectively, to revenues during the nine-month period endedSeptember 30, 2021 . Our major sources of operating revenues are commissions, fees and supplemental and contingent revenues from brokerage operations and fees from risk management operations. Investment income is generated from invested cash and fiduciary funds, clean energy and other investments, and interest income from premium financing. We typically cite theCouncil of Insurance Agents and Brokers (which we refer to as CIAB) insurance pricing quarterly survey at this time as an indicator of the current insurance rate environment. The third quarter 2021 survey had not been published as of the filing date of this report. The second quarter 2021 survey indicated that commercial property/casualty rates increased by 8.3% on average. We expect a similar trend to be noted when the CIAB third quarter 2021 survey report is issued, which would indicate overall continued price firming and hardening in some lines. The CIAB represents the leading domestic and international insurance brokers, who write approximately 85% of the commercial property/casualty premiums in theU.S. We believe increases in property/casualty rates will continue for the remainder of 2021 and into 2022, and if loss trends deteriorate over the coming quarters, it could lead to a more difficult rate and conditions environment in certain lines. The economies of theU.S. and other countries around the world contracted during 2020 as a result of COVID-19. Global economic conditions in many geographies have improved thus far in 2021, however, worldwide economic activity has yet to rebound to pre-pandemic levels as a result of new COVID-19 variants and supply chain disruptions. The improving level of economic activity is leading to and is likely to continue to lead to, higher exposure units, inflation, a tight labor market and lower unemployment. Additionally, we expect that our history of strong new business generation, solid retentions and enhanced value-added services for our carrier partners should all result in further organic growth opportunities around the world. Overall, we believe that in a positive rate environment with growing exposure units, our professionals can demonstrate their expertise and high-quality, value-added capabilities by strengthening our clients' insurance portfolios and delivering insurance and risk management solutions within our clients' budget. Based on our experience, there is adequate capacity in the insurance market for most lines of coverage, terms and conditions are tightening, most insurance carriers appear to be making rational pricing decisions and clients can broadly still obtain coverage. Please also refer to the section entitled "Impact of COVID-19 Pandemic Recovery" below on page 48. - 41 -
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Summary of Financial Results - Three-Month Periods Ended
2020
See the reconciliations of non-GAAP measures on page 46.
(Dollars in millions, except
per share data) 3rd Quarter 2021 3rd Quarter 2020 Change
Reported Adjusted Reported Adjusted Reported Adjusted
GAAP Non-GAAP GAAP Non-GAAP GAAP Non-GAAP
Brokerage Segment
Revenues $ 1,499.7 $ 1,495.4 $ 1,294.6 $ 1,309.0 16 % 14 %
Organic revenues $ 1,401.9 $ 1,286.3 9.0 %
Net earnings $ 253.6 $ 206.7 23 %
Net earnings margin 16.9 % 16.0 % + 94 bpts
Adjusted EBITDAC $ 492.4 $ 437.3 13 %
Adjusted EBITDAC margin 32.9 % 33.4 % - 48 bpts
Diluted net earnings per
share $ 1.20 $ 1.32 $ 1.05 $ 1.21 14 % 9 %
Risk Management Segment
Revenues before
reimbursements $ 248.0 $ 248.0 $ 202.7 $ 203.6 22 % 22 %
Organic revenues $ 237.2 $ 203.5 16.6 %
Net earnings $ 22.0 $ 18.8 17 %
Net earnings margin (before
reimbursements) 8.9 % 9.3 % - 40 bpts
Adjusted EBITDAC $ 48.3 $ 39.4 23 %
Adjusted EBITDAC margin
(before reimbursements) 19.5 % 19.4 % + 13 bpts
Diluted net earnings per
share $ 0.10 $ 0.12 $ 0.09 $ 0.10 11 % 20 %
Corporate Segment
Diluted net loss per share $ (0.24 ) $ (0.11 ) $ (0.24 ) $ (0.22 )
Total Company
Diluted net earnings per
share $ 1.06 $ 1.33 $ 0.90 $ 1.09 18 % 22 %
Total Brokerage and Risk
Management Segment
Diluted net earnings per
share $ 1.30 $ 1.44 $ 1.14 $ 1.31 14 % 10 %
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Summary of Financial Results - Nine-Month Periods Ended
2020
See the reconciliations of non-GAAP measures on page 47.
(Dollars in millions, except
per share data) Nine-Months 2021 Nine-Months 2020 Change
Reported Adjusted Reported Adjusted Reported Adjusted
GAAP Non-GAAP GAAP Non-GAAP GAAP Non-GAAP
Brokerage Segment
Revenues $ 4,500.1 $ 4,491.2 $ 3,931.3 $ 4,034.1 14 % 11 %
Organic revenues $ 4,250.9 $ 3,964.8 7.2 %
Net earnings $ 845.6 $ 708.3 19 %
Net earnings margin 18.8 % 18.0 % + 77 bpts
Adjusted EBITDAC $ 1,579.6 $ 1,353.4 17 %
Adjusted EBITDAC margin 35.2 % 33.6 % + 162 bpts
Diluted net earnings per
share $ 4.09 $ 4.43 $ 3.62 $ 4.03 13 % 10 %
Risk Management Segment
Revenues before
reimbursements $ 713.3 $ 713.2 $ 605.3 $ 616.9 18 % 16 %
Organic revenues $ 689.6 $ 616.3 11.9 %
Net earnings $ 64.9 $ 47.8 36 %
Net earnings margin (before
reimbursements) 9.1 % 7.9 % + 120 bpts
Adjusted EBITDAC $ 137.1 $ 109.8 25 %
Adjusted EBITDAC margin
(before reimbursements) 19.2 % 17.8 % + 142 bpts
Diluted net earnings per
share $ 0.31 $ 0.35 $ 0.25 $ 0.27 24 % 30 %
Corporate Segment
Diluted net loss per share $ (0.52 ) $ (0.27 ) $ (0.39 ) $ (0.36 )
Total Company
Diluted net earnings per
share $ 3.88 $ 4.51 $ 3.48 $ 3.94 11 % 14 %
Total Brokerage and Risk
Management Segment
Diluted net earnings per
share $ 4.40 $ 4.78 $ 3.87 $ 4.30 14 % 11 %
In our corporate segment, net after-tax earnings from our clean energy
investments were $30.8 million and $4.4 million , as reported, in the three-month
periods ended September 30, 2021 and 2020, respectively. In our corporate
segment, net after-tax earnings from our clean energy investments were $85.0
million and $61.9 million , as reported, in the nine-month periods ended
September 30, 2021 and 2020, respectively. We anticipate our clean energy
investments to generate between $87.0 million and $95.0 million in adjusted net
earnings in 2021. See "Impact of COVID-19 Pandemic Recovery" on page 48. We
expect to use the additional cash flow generated by these earnings to continue
our mergers and acquisition strategy in our core brokerage and risk management
operations.
The following provides information that management believes is helpful when
comparing revenues before reimbursements, net earnings, EBITDAC and diluted net
earnings per share for the three and nine-month periods ended September 30, 2021
with the same periods in 2020. In addition, these tables provide reconciliations
to the most comparable GAAP measures for adjusted revenues, adjusted EBITDAC and
adjusted diluted net earnings per share. Reconciliations of EBITDAC for the
brokerage and risk management segments are provided on pages 51 and 57,
respectively, of this filing.
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For the Three-Month Periods Ended September 30 Reported GAAP to Adjusted
Non-GAAP Reconciliation:
Revenues Before Diluted Net Earnings
Reimbursements Net Earnings (Loss) EBITDAC (Loss) Per Share
Segment 2021 2020 2021 2020 2021 2020 2021 2020 Chg
(in millions) (in millions) (in millions)
Brokerage, as reported $ 1,499.7 $ 1,294.6 $ 253.6 $ 206.7 $ 481.2 $ 411.2 $ 1.20 $ 1.05 14 %
Net gains on
divestitures (4.3 ) (3.4 ) (3.4 )
(2.6 ) (4.3 ) (3.4 ) (0.02 ) (0.01 )
Acquisition integration
- - 4.6 4.6 5.8 6.1 0.02 0.02 Workforce and lease termination - - 3.3 9.2 3.9 12.0 0.01 0.05 Acquisition related adjustments - - 22.5 18.5 5.8 5.7 0.11 0.09 Levelized foreign currency translation - 17.8 - 2.5 - 5.7 - 0.01 Brokerage, as adjusted * 1,495.4 1,309.0 280.6 238.9 492.4 437.3 1.32 1.21 9 % Risk Management, as reported 248.0 202.7 22.0 18.8 43.7 38.2 0.10 0.09 11 % Workforce and lease termination - - 4.0 0.9 4.5 1.1 0.02 0.01 Acquisition related adjustments - - (0.1 ) (0.5 ) 0.1 - - - Levelized foreign currency translation - 0.9 - 0.1 - 0.1 - - Risk Management, as adjusted * 248.0 203.6 25.9 19.3 48.3 39.4 0.12 0.10 20 % Corporate, as reported 357.9 310.2 (37.0 ) (37.7 ) (51.5 ) (37.8 ) (0.24 ) (0.24 ) Loss on extinguishment of debt - - 12.2 - - - 0.06 - Transaction-related costs - - 8.2 - 11.0 - 0.04 - Income tax related - - 4.9 5.5 - - 0.03 0.02 Corporate, as adjusted* 357.9 310.2 (11.7 ) (32.2 ) (40.5 ) (37.8 ) (0.11 ) (0.22 )Total Company , as reported$ 2,105.6 $ 1,807.5 $ 238.6 $ 187.8 $ 473.4 $ 411.6 $ 1.06 $ 0.90 18 %Total Company , as adjusted *$ 2,101.3 $ 1,822.8 $ 294.8 $ 226.0 $ 500.2 $ 438.9 $ 1.33 $ 1.09 22 % Total Brokerage & Risk Management, as reported$ 1,747.7 $ 1,497.3 $ 275.6 $ 225.5 $ 524.9 $ 449.4 $ 1.30 $ 1.14 14 % Total Brokerage & Risk Management, as adjusted *$ 1,743.4 $ 1,512.6 $ 306.5 $ 258.2 $ 540.7 $ 476.7 $ 1.44 $ 1.31 10 %
* For three-month period ended
brokerage segment adjustments totals
adjustment to the provision for income taxes of
these items. For the three-month period ended
impact of the risk management segment adjustments totals
corresponding adjustment to the provision for income taxes of
relating to these items. For the three-month period ended
the pretax impact of the corporate segment adjustments totals
with a corresponding adjustment to the provision for income taxes of
page 64 in note (3). A detailed reconciliation of the 2021 provision for
income taxes is shown on page 46.
* For the three-month period ended
brokerage segment adjustments totals
adjustment to the provision for income taxes of
these items. For the three-month period ended
impact of the risk management segment adjustments totals
corresponding adjustment to the provision for income taxes of
relating to these items. There is no pretax impact of the corporate segment
adjustments, but there is an adjustment to the benefit for income taxes of
(3). A detailed reconciliation of the 2020 provision for income taxes is
shown on page 46.
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-------------------------------------------------------------------------------- For the Nine-Month Periods EndedSeptember 30 Reported GAAP to Adjusted Non-GAAP Reconciliation: Revenues Before Diluted Net Earnings Reimbursements Net Earnings (Loss) EBITDAC (Loss) Per Share Segment 2021 2020 2021 2020 2021 2020 2021 2020 Chg (in millions) (in millions) (in millions) Brokerage, as reported$ 4,500.1 $ 3,931.3 $ 845.6 $ 708.3 $ 1,539.6 $ 1,255.6 $ 4.09 $ 3.62 13 % Net gains on divestitures (8.9 ) (4.6 ) (7.0 ) (3.6 ) (8.9 ) (4.6 ) (0.03 ) (0.02 ) Acquisition integration - - 12.5 14.8 16.1 19.5 0.06 0.08 Workforce and lease termination - - 11.9 25.7 13.2 33.5 0.06 0.13 Acquisition related adjustments - - 52.3 24.7 19.6 14.4 0.25 0.13 Levelized foreign currency translation - 107.4 - 16.8 - 35.0 - 0.09 Brokerage, as adjusted * 4,491.2 4,034.1 915.3 786.7 1,579.6 1,353.4 4.43 4.03 10 % Risk Management, as reported 713.3 605.3 64.9 47.8 131.1 101.7 0.31 0.25 24 % Net gains on divestitures (0.1 ) - (0.1 ) - (0.1 ) - - - Workforce and lease termination - - 5.0 4.8 5.8 6.4 0.03 0.02 Acquisition related adjustments - - 2.0 0.4 0.3 - 0.01 - Levelized foreign currency translation - 11.6 - 0.4 - 1.7 - - Risk Management, as adjusted * 713.2 616.9 71.8 53.4 137.1 109.8 0.35 0.27 30 % Corporate, as reported 921.6 651.7 (76.4 ) (51.1 ) (145.0 ) (95.8 ) (0.52 ) (0.39 ) Loss on extinguishment of debt - - 12.2 - - - 0.06 - Transaction-related costs - - 16.9 - 21.2 - 0.08 Income tax related - - 24.2 5.5 - - 0.11 0.03
Corporate, as adjusted* 921.6 651.7 (23.1 ) (45.6 ) (123.8 ) (95.8 ) (0.27 ) (0.36 )
reported
$ 6,135.0 $ 5,188.3 $ 834.1 $
705.0
adjusted *
$ 6,126.0 $ 5,302.7 $ 964.0 $ 794.5 $ 1,592.9 $ 1,367.4 $ 4.51 $ 3.94 14 % Total Brokerage & Risk Management, as reported$ 5,213.4 $ 4,536.6 $ 910.5 $ 756.1 $ 1,670.7 $ 1,357.3 $ 4.40 $ 3.87 14 % Total Brokerage & Risk Management, as adjusted *$ 5,204.4 $ 4,651.0 $ 987.1 $ 840.1 $ 1,716.7 $ 1,463.2 $ 4.78 $ 4.30 11 %
* For the nine-month period ended
brokerage segment adjustments totals
adjustment to the provision for income taxes of
these items. For the nine-month period ended
impact of the risk management segment adjustments totals
corresponding adjustment to the provision for income taxes of
relating to these items. For the nine-month period ended
the pretax impact of the corporate segment adjustments totals
with a corresponding adjustment to the benefit for income taxes of
on page 64 in note (3). A detailed reconciliation of the 2021 provision for
income taxes is shown on page 47.
* For the nine-month period ended
brokerage segment adjustments totals
adjustment to the provision for income taxes of
these items. For the nine-month period ended
impact of the risk management segment adjustments totals
corresponding adjustment to the provision for income taxes of
relating to these items. There is no pretax impact of the corporate segment
adjustments, but there is an adjustment to the benefit for income taxes of
(3). A detailed reconciliation of the 2020 provision for income taxes is
shown on page 47.
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Reconciliation of Non-GAAP Measures - Pre-tax Earnings and Diluted Net Earnings
per Share
(In millions except share and
per share data)
Net Earnings
Earnings Provision Net Earnings (Loss)
Before (Benefit) Attributable to Attributable to Diluted Net
Earnings
Income for Income Net Noncontrolling Controlling (Loss)
Earnings
Taxes Taxes (Loss) Interests Interests per Share
Quarter Ended September 30,
2021
Brokerage, as reported $ 334.5 $ 80.9 $ 253.6 $ 1.2 $ 252.4 $ 1.20
Net gains on divestitures (4.3 ) (0.9 ) (3.4 ) - (3.4 ) (0.02 )
Acquisition integration 5.8 1.2 4.6 - 4.6 0.02
Workforce and lease
termination 4.2 0.9 3.3 - 3.3 0.01
Acquisition related
adjustments 28.3 5.8 22.5 - 22.5 0.11
Brokerage, as adjusted $ 368.5 $ 87.9 $ 280.6 $ 1.2 $ 279.4 $ 1.32
Risk Management, as reported
$ - $ 22.0$ 0.10 Workforce and lease termination 5.4 1.4 4.0 - 4.0 0.02 Acquisition related adjustments (0.1 ) - (0.1 ) - (0.1 ) -
Risk Management, as adjusted
$ - $ 25.9$ 0.12 Corporate, as reported$ (132.6 ) $ (95.6 ) $ (37.0 ) $ 12.3 $ (49.3 )$ (0.24 ) Loss on extinguishment of debt 16.2 4.0 12.2 - 12.2 0.06 Transaction-related costs 11.0 2.8 8.2 - 8.2 0.04 Income tax rate related - (4.9 ) 4.9 - 4.9 0.03 Corporate, as adjusted$ (105.4 ) $ (93.7 ) $ (11.7 ) $ 12.3 $ (24.0 )$ (0.11 ) Quarter Ended September 30, 2020 Brokerage, as reported$ 276.4 $ 69.7 $ 206.7 $ 0.9 $ 205.8$ 1.05 Net gains on divestitures (3.4 ) (0.8 ) (2.6 ) - (2.6 ) (0.01 ) Acquisition integration 6.1 1.5 4.6 - 4.6 0.02 Workforce and lease termination 12.0 2.8 9.2 - 9.2 0.05 Acquisition related adjustments 24.2 5.7 18.5 - 18.5 0.09 Levelized foreign currency translation 3.3 0.8 2.5 - 2.5 0.01 Brokerage, as adjusted$ 318.6 $ 79.7 $ 238.9 $ 0.9 $ 238.0$ 1.21 Risk Management, as reported$ 25.3 $ 6.5 $ 18.8 $ - $ 18.8$ 0.09 Workforce and lease termination 1.1 0.2 0.9 - 0.9 0.01 Acquisition related adjustments (0.6 ) (0.1 ) (0.5 ) - (0.5 ) - Levelized foreign currency translation 0.1 - 0.1 - 0.1 - Risk Management, as adjusted$ 25.9 $ 6.6 $ 19.3 $ - $ 19.3$ 0.10 Corporate, as reported$ (92.2 ) $ (54.5 ) $ (37.7 ) $ 10.3 $ (48.0 )$ (0.24 ) Income tax related - (5.5 ) 5.5 - 5.5 0.02 Corporate, as adjusted$ (92.2 ) $ (60.0 ) $ (32.2 ) $ 10.3 $ (42.5 )$ (0.22 ) - 46 -
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Reconciliation of Non-GAAP Measures - Pre-tax Earnings and Diluted Net Earnings
per Share
(In millions except share and
per share data)
Net Earnings
Earnings Provision Net Earnings (Loss)
Attributable
Before (Benefit) Attributable to to Diluted Net
Earnings
Income for Income Net Noncontrolling Controlling (Loss)
Taxes Taxes Earnings Interests Interests per Share
Nine-Months EndedSeptember 30, 2021 Brokerage, as reported$ 1,114.5 $ 268.9 $ 845.6 $ 5.6$ 840.0 $ 4.09 Net gains on divestitures (8.9 ) (1.9 ) (7.0 ) - (7.0 ) (0.03 ) Acquisition integration 16.1 3.6 12.5 - 12.5 0.06 Workforce and lease termination 15.3 3.4 11.9 - 11.9 0.06 Acquisition related adjustments 67.0 14.7 52.3 - 52.3 0.25 Brokerage, as adjusted$ 1,204.0 $ 288.7 $ 915.3 $ 5.6$ 909.7 $ 4.43 Risk Management, as reported$ 87.0 $ 22.1 $ 64.9 $ -$ 64.9 $ 0.31 Net gains on divestitures (0.1 ) - (0.1 ) - (0.1 ) - Workforce and lease termination 6.7 1.7 5.0 - 5.0 0.03 Acquisition related adjustments 2.6 0.6 2.0 - 2.0 0.01 Risk Management, as adjusted$ 96.2 $ 24.4 $ 71.8 $ -$ 71.8 $ 0.35 Corporate, as reported$ (339.4 ) $ (263.0 ) $ (76.4 ) $ 31.1$ (107.5 ) $ (0.52 ) Loss on extinguishment of debt 16.2 4.0 12.2 - 12.2 0.06 Transaction-related costs 21.2 4.3 16.9 - 16.9 0.08 Income tax rate related - (24.2 ) 24.2 - 24.2 0.11 Corporate, as adjusted$ (302.0 ) $ (278.9 ) $ (23.1 ) $ 31.1$ (54.2 ) $ (0.27 ) Nine-Months Ended September 30, 2020 Brokerage, as reported$ 935.0 $ 226.7 $ 708.3 $ 3.1$ 705.2 $ 3.62 Net gains on divestitures (4.6 ) (1.0 ) (3.6 ) - (3.6 ) (0.02 ) Acquisition integration 19.5 4.7 14.8 - 14.8 0.08 Workforce and lease termination 33.5 7.8 25.7 - 25.7 0.13 Acquisition related adjustments 32.2 7.5 24.7 - 24.7 0.13 Levelized foreign currency translation 22.0 5.2 16.8 - 16.8 0.09 Brokerage, as adjusted$ 1,037.6 $ 250.9 $ 786.7 $ 3.1$ 783.6 $ 4.03 Risk Management, as reported$ 64.1 $ 16.3 $ 47.8 $ -$ 47.8 $ 0.25 Workforce and lease termination 6.4 1.6 4.8 - 4.8 0.02 Acquisition related adjustments 0.6 0.2 0.4 - 0.4 - Levelized foreign currency translation 0.6 0.2 0.4 - 0.4 - Risk Management, as adjusted$ 71.7 $ 18.3 $ 53.4 $ -$ 53.4 $ 0.27 Corporate, as reported$ (261.9 ) $ (210.8 ) $ (51.1 ) $ 25.3$ (76.4 ) $ (0.39 ) Income tax related - (5.5 ) 5.5 - 5.5 0.03 Corporate, as adjusted$ (261.9 ) $ (216.3 ) $ (45.6 ) $ 25.3$ (70.9 ) $ (0.36 )
Agreement to Acquire the Willis Towers Watson plc Treaty Reinsurance Brokerage
Operations
OnAugust 13, 2021 , we announced an agreement to acquire the Willis Towers Watson plc treaty reinsurance brokerage operations for an initial gross consideration of$3.25 billion , and potential additional consideration of$750 million subject to certain third-year revenue targets. We intend to finance the transaction using cash on hand, including the$1.4 billion of net cash raised via theMay 17, 2021 follow-on common stock offering, the$850 million of net cash borrowed via theMay 20, 2021 30-year senior note issuance, short-term borrowings and/or capital market transactions. The transaction is subject to customary regulatory approvals and is expected to close during the fourth quarter of 2021. - 47 -
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Impact of COVID-19 Pandemic Recovery
Relative to third quarter 2020, during the third quarter 2021;
• Nearly all of our brokerage segment operations' revenues benefited from our
clients' improving business conditions which increases insured exposure
units (i.e., insured values, payrolls, employees, miles driven, gross
receipts, etc.) and covered lives,
• Our risk management segment operations' revenue benefited from our clients'
improving business conditions which increases new arising workers
compensation and general liability claims, and
• Our clean energy investments benefited from higher electricity production
due to increased demand for electricity from improving business conditions.
If economic conditions continue to improve, we believe we may also see favorable revenue benefits in our brokerage and risk management segments in the fourth quarter of 2021 relative to the same quarter in 2020. However, if the economic recovery slows, we could see less revenue benefits than we experienced in second and third quarter 2021. During the second, third and fourth quarters of 2020 and first quarter of 2021, we realized significant expense savings (totaling approximately$60 million to$75 million per quarter relative to prior year same quarters, adjusted for pro forma full-quarter costs related to acquisitions) as a result of reduced travel, entertainment and advertising expenses, reduced costs from lower employee medical plan utilization, a reduction in workforce, wage controls, and reduced use of external consultants. During the second and third quarters of 2021, as we increased our business activities relative to second and third quarters of 2020, we saw modest increases in travel and entertainment, full restoration of advertising and more normalized usage of our employee medical plan, resumption of annual support-layer wage increases, increased use of external consultants, and an increase in incentive compensation. These incremental costs totaled approximately$15 million and$25 million in our brokerage segment relative to second and third quarters of 2020, respectively. We believe we will see incremental higher brokerage segment costs again in fourth quarter 2021, relative to same quarter in 2020, of approximately$30 million . However, if the pace of economic recovery accelerates, we could see expense increases greater than estimates provided.
For a discussion of risk and uncertainties relating to COVID19 for our
business, results of operations and financial condition, see pages 3 and 4.
Results of Operations Brokerage The brokerage segment accounted for 72% of our revenues during the nine-month period endedSeptember 30, 2021 . Our brokerage segment is primarily comprised of retail and wholesale brokerage operations. Our brokerage segment generates revenues by:
(i) Identifying, negotiating and placing all forms of insurance or reinsurance
coverage, as well as providing risk-shifting, risk-sharing and
risk-mitigation consulting services, principally related to
property/casualty, life, health, welfare and disability insurance. We also
provide these services through, or in conjunction with, other unrelated
agents and brokers, consultants and management advisors,
(ii) Acting as an agent or broker for multiple underwriting enterprises by
providing services such as sales, marketing, selecting, negotiating,
underwriting, servicing and placing insurance coverage on their behalf,
and
(iii) Providing consulting services related to health and welfare benefits,
voluntary benefits, executive benefits, compensation, retirement
planning, institutional investment and fiduciary, actuarial, compliance,
private insurance exchange, human resource technology, communications
and benefits administration.
(iv) Providing management and administrative services to captives, pools,
risk-retention groups, healthcare exchanges, small underwriting
enterprises, such as accounting, claims and loss processing assistance,
feasibility studies, actuarial studies, data analytics and other
administrative services.
- 48 -
-------------------------------------------------------------------------------- The primary source of revenues for our brokerage services is commissions from underwriting enterprises, based on a percentage of premiums paid by our clients, or fees received from clients based on an agreed level of service usually in lieu of commissions. Commissions are fixed at the contract effective date and generally are based on a percentage of premiums for insurance coverage or employee headcount for employer sponsored benefit plans. Commissions depend upon a large number of factors, including the type of risk being placed, the particular underwriting enterprise's demand, the expected loss experience of the particular risk of coverage, and historical benchmarks surrounding the level of effort necessary for us to place and service the insurance contract. Rather than being tied to the amount of premiums, fees are most often based on an expected level of effort to provide our services. In addition, under certain circumstances, both retail brokerage and wholesale brokerage services receive supplemental and contingent revenues. Supplemental revenue is revenue paid by an underwriting enterprise that is above the base commission paid, is determined by the underwriting enterprise and is established annually in advance of the contractual period based on historical performance criteria. Contingent revenue is revenue paid by an underwriting enterprise based on the overall profit and/or volume of the business placed with that underwriting enterprise during a particular calendar year and is determined after the contractual period.
Litigation, Regulatory and Taxation Matters
As previously disclosed, our IRC 831(b) (or "micro-captive") advisory services business has been under audit by theIRS since 2013. Among other matters, theIRS is investigating whether we have been acting as a tax shelter promoter in connection with these operations. Additionally, theIRS is conducting a criminal investigation related to IRC 831(b) micro-captive underwriting enterprises. We have been advised that we are not a target of the criminal investigation. We are fully cooperating with both matters. While we are not able to reasonably estimate the amount of any potential loss in connection with these matters, we do not expect any such loss to be material. - 49 -
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Financial information relating to our brokerage segment results for the three and nine-month periods endedSeptember 30, 2021 as compared to the same periods in 2020, is as follows (in millions, except per share, percentages and workforce data):
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