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-month period endedMarch 31, 2022 . Readers should review this information in conjunction with theMarch 31, 2022 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, 2021 .
Prior Year Discussion of Results and Comparisons
For Information on fiscal first quarter 2021 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-month period endedMarch 31, 2021 .
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 or because they provide investors with measures that our chief operating decision makers use when reviewing the company's performance. See further below for definitions and additional reasons each of these measures is useful to investors. 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
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 acquisition of the
Willis Towers Watson plc treaty reinsurance brokerage
operations. These include costs related to regulatory filings, legal,
accounting services, insurance and incentive compensation.
• 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 first quarter 2022, this
adjustment also includes the impact of an acquisition valuation
analysis and corresponding adjustments.
• Amortization of intangible assets reflects the amortization of
customer/expiration lists, non-compete agreements, trade names and
other intangible assets have been acquired through the company's
merger and acquisition strategy.
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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, which represents the impact in first quarter 2022
of a one-time income tax benefit related to the revaluation of certain
deferred income tax assets as a result of a change in our state
effective income tax rate.
• 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, transaction related costs, legal and
income tax related costs 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, transaction related costs, amortization of intangible
assets, legal and income tax related costs 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. This is the first quarter we have excluded amortization of
intangible assets from adjusted EPS, and we have provided the same
adjustment for the prior period for comparability.
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 excludes 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 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.
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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 42 and 48), for
adjusted revenues, adjusted EBITDAC and adjusted diluted net earnings per share
(on page 38), for organic revenue measures (on pages 43 and 48, respectively,
for the brokerage and risk management segments), for adjusted compensation
expense and operating expenses and adjusted EBITDAC margin, (on pages 44 and 45,
respectively, for the brokerage segment and on pages 49 and 50, 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 in December 2019 for our fourteen plants placed in service
prior to December 31, 2009 (which we refer to as the 2009 Era Plants) and
expired in December 2021 for our twenty-one plants placed in service prior to
December 31, 2011 (which we refer to as the 2011 Era Plants). We anticipate
reporting an effective tax rate of approximately 24.0% to 25.5% in the brokerage
segment and 25.0% to 27.0% in the risk management segment for the foreseeable
future. Reported operating results by segment would change if different
allocation methods were applied. Because the law governing IRC Section 45 tax
credits expired as of December 31, 2021 , 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 our U.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 First Quarter 2022 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 three-month period endedMarch 31, 2022 , we generated approximately 65% of our revenues for the combined brokerage and risk management segments domestically and 35% internationally, primarily inAustralia ,Bermuda ,Canada , theCaribbean ,New Zealand and theU.K. We have three reportable segments: brokerage, risk management and corporate, which contributed approximately 87%, 12% and 1%, respectively, to revenues during the three-month period endedMarch 31, 2022 . 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, 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 first quarter 2022 survey had not been published as of the filing date of this report. The fourth quarter 2021 survey indicated that commercial property/casualty rates increased by 8.7% on average. We expect a similar trend to be noted when the CIAB first quarter 2022 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 during 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 improved during 2021 and first quarter 2022, however, worldwide economic activity has yet to rebound to pre-pandemic levels. The improving level of economic activity has lead to and is likely to continue to lead to, higher exposure units, inflation, a tight labor market and lower unemployment, despite the ongoing military conflict betweenRussia andUkraine . 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. - 36 - --------------------------------------------------------------------------------
Summary of Financial Results - Three-Month Periods Ended
See the reconciliations of non-GAAP measures on page 39.
(Dollars in millions, except
per share data) 1st Quarter 2022 1st Quarter 2021 Change
Reported Adjusted Reported Adjusted Reported Adjusted
GAAP Non-GAAP GAAP Non-GAAP GAAP Non-GAAP
Brokerage Segment
Revenues $ 2,122.6 $ 2,121.2 $ 1,610.2 $ 1,591.3 32 % 33 %
Organic revenues $ 1,724.1 $ 1,573.3 9.6 %
Net earnings $ 464.3 $ 364.4 27 %
Net earnings margin 21.9 % 22.6 % - 76 bpts
Adjusted EBITDAC $ 844.0 $ 625.4 35 %
Adjusted EBITDAC margin 39.8 % 39.3 % + 49 bpts
Diluted net earnings per
share $ 2.17 $ 2.87 $ 1.82 $ 2.27 19 % 26 %
Risk Management Segment
Revenues before
reimbursements $ 259.1 $ 259.1 $ 220.3 $ 218.0 18 % 19 %
Organic revenues $ 251.1 $ 217.9 15.2 %
Net earnings $ 23.9 $ 18.0 33 %
Net earnings margin (before
reimbursements) 9.2 % 8.2 % + 105 bpts
Adjusted EBITDAC $ 44.9 $ 40.2 12 %
Adjusted EBITDAC margin
(before reimbursements) 17.3 % 18.4 % - 111 bpts
Diluted net earnings per
share $ 0.11 $ 0.12 $ 0.09 $ 0.11 22 % 9 %
Corporate Segment
Diluted net loss per share $ (0.23 ) $ (0.18 ) $ 0.01 $ 0.01
Total Company
Diluted net earnings per
share $ 2.05 $ 2.81 $ 1.92 $ 2.39 7 % 18 %
Total Brokerage and Risk
Management Segment
Diluted net earnings per
share $ 2.28 $ 2.99 $ 1.91 $ 2.38 19 % 26 %
In our corporate segment, net after-tax (loss) earnings from our clean energy
investments were $(2.0) million and $33.4 million , as reported, in the
three-month periods ended March 31, 2022 and 2021, respectively. At this time,
we do not anticipate our clean energy investments will produce after-tax
earnings in 2022.
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-month period ended March 31, 2022 with the same
period in 2021. 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 42 and 48, respectively, of this
filing.
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For the Three-Month Periods Ended March 31 Reported GAAP to Adjusted Non-GAAP
Reconciliation:
Revenues Before Diluted Net Earnings
Reimbursements Net Earnings (Loss) EBITDAC (Loss) Per Share
Segment 2022 2021 2022 2021 2022 2021 2022 2021 Chg
(in millions) (in millions) (in millions)
Brokerage, as reported $ 2,122.6 $ 1,610.2 $ 464.3 $ 364.4 $ 786.4 $ 618.4 $ 2.17 $ 1.82 19 %
Net gains on
divestitures (1.4 ) (4.1 ) (1.1 )
(3.2 ) (1.4 ) (4.1 ) (0.01 ) (0.02 )
Acquisition integration
- - 35.0 3.2 43.8 4.1 0.17 0.02 Workforce and lease termination - - 5.0 5.5 6.2 5.2 0.02 0.03 Acquisition related adjustments - - 16.4 12.7 9.0 6.1 0.08 0.06 Amortization of intangible assets - - 93.7 74.2 - - 0.44 0.37 Levelized foreign currency translation - (14.8 ) - (3.0 ) - (4.3 ) - (0.01 ) Brokerage, as adjusted * 2,121.2 1,591.3 613.3 453.8 844.0 625.4 2.87 2.27 26 % Risk Management, as reported 259.1 220.3 23.9 18.0 44.1 39.8 0.11 0.09 22 % Workforce and lease termination - - 0.5 0.5 0.7 0.7 - - Acquisition related adjustments - - - 1.8 0.1 - - 0.01 Amortization of intangible assets - - 1.2 1.2 - - 0.01 0.01 Levelized foreign currency translation - (2.3 ) - (0.1 ) - (0.3 ) - - Risk Management, as adjusted * 259.1 218.0 25.6 21.4 44.9 40.2 0.12 0.11 9 % Corporate, as reported 22.8 302.1 (49.1 ) 11.3 (48.2 ) (43.4 ) (0.23 ) 0.01 Transaction-related costs - - 14.6 - 15.8 - 0.07 - Income tax related - - (5.0 ) - - - (0.02 ) - Corporate, as adjusted* 22.8 302.1 (39.5 ) 11.3 (32.4 ) (43.4 ) (0.18 ) 0.01Total Company , as reported$ 2,404.5 $ 2,132.6 $ 439.1 $ 393.7 $ 782.3 $ 614.8 $ 2.05 $ 1.92 7 %Total Company , as adjusted *$ 2,403.1 $ 2,111.4 $ 599.4 $ 486.5 $ 856.5 $ 622.2 $ 2.81 $ 2.39 18 % Total Brokerage & Risk Management, as reported$ 2,381.7 $ 1,830.5 $ 488.2 $ 382.4 $ 830.5 $ 658.2 $ 2.28 $ 1.91 19 % Total Brokerage & Risk Management, as adjusted *$ 2,380.3 $ 1,809.3 $ 638.9 $ 475.2 $ 888.9 $ 665.6 $ 2.99 $ 2.38 26 %
* For three-month period ended
brokerage segment adjustments totals
adjustment to the provision for income taxes of
these items. For the threemonth 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
pretax impact of the corporate segment adjustments totals
a corresponding adjustment to the benefit for income taxes of
relating to these items and the other tax items noted on page 53 in note
(3). A detailed reconciliation of the 2022 provision for income taxes is
shown on page 39.
* 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. A detailed reconciliation of the 2021 provision for
income taxes is shown on page 39.
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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 EndedMarch 31, 2022 Brokerage, as reported$ 618.4 $ 154.1 $ 464.3 $ 0.7 $ 463.6$ 2.17 Net gains on divestitures (1.4 ) (0.3 ) (1.1 ) - (1.1 ) (0.01 ) Acquisition integration 43.8 8.8 35.0 - 35.0 0.17 Workforce and lease termination 6.3 1.3 5.0 - 5.0 0.02 Acquisition related adjustments 20.6 4.2 16.4 - 16.4 0.08 Amortization of intangible assets 123.0 29.3 93.7 - 93.7 0.44 Brokerage, as adjusted$ 810.7 $ 197.4 $ 613.3 $ 0.7 $ 612.6$ 2.87 Risk Management, as reported$ 32.3 $ 8.4 $ 23.9 $ - $ 23.9$ 0.11 Workforce and lease termination 0.8 0.3 0.5 - 0.5 - Amortization of intangible assets 1.6 0.4 1.2 - 1.2 0.01 Risk Management, as adjusted$ 34.7 $ 9.1 $ 25.6 $ - $ 25.6$ 0.12 Corporate, as reported$ (113.0 ) $ (63.9 ) $ (49.1 ) $ (0.3 ) $ (48.8 )$ (0.23 ) Transaction-related costs 15.8 1.2 14.6 - 14.6 0.07 Income tax related - 5.0 (5.0 ) - (5.0 ) (0.02 ) Corporate, as adjusted$ (97.2 ) $ (57.7 ) $ (39.5 ) $ (0.3 ) $ (39.2 )$ (0.18 ) Quarter EndedMarch 31, 2021 Brokerage, as reported$ 480.3 $ 115.9 $ 364.4 $ 1.8 $ 362.6$ 1.82 Net gains on divestitures (4.1 ) (0.9 ) (3.2 ) - (3.2 ) (0.02 ) Acquisition integration 4.1 0.9 3.2 - 3.2 0.02 Workforce and lease termination 7.0 1.5 5.5 - 5.5 0.03 Acquisition related adjustments 16.1 3.4 12.7 - 12.7 0.06 Amortization of intangible assets 97.2 23.0 74.2 - 74.2 0.37 Levelized foreign currency translation (3.8 ) (0.8 ) (3.0 ) - (3.0 ) (0.01 ) Brokerage, as adjusted$ 596.8 $ 143.0 $ 453.8 $ 1.8 $ 452.0$ 2.27 Risk Management, as reported$ 24.1 $ 6.1 $ 18.0 $ - $ 18.0$ 0.09 Workforce and lease termination 0.7 0.2 0.5 - 0.5 - Acquisition related adjustments 2.4 0.6 1.8 - 1.8 0.01 Amortization of intangible assets 1.6 0.4 1.2 - 1.2 0.01 Levelized foreign currency translation (0.2 ) (0.1 ) (0.1 ) - (0.1 ) - Risk Management, as adjusted$ 28.6 $ 7.2 $ 21.4 $ - $ 21.4$ 0.11
Acquisition of the Willis Towers Watson plc Treaty Reinsurance Brokerage
Operations
OnDecember 1, 2021 , we acquired substantially all of 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. As of the date of this filing, there is one remaining of the initial twelve international operations with deferred closings that is subject to local regulatory approval and is expected to close in the second quarter of 2022. We funded the transaction using cash on hand, including the$1.4 billion of net cash raised via theMay 17, 2021 follow-on common stock offering,$850 million of net cash borrowed in ourMay 20, 2021 30-year senior note issuance,$750 million of net cash borrowed in ourNovember 9, 2021 10-year ($400 million ) and 30-year ($350 million ) senior note issuances and short-term borrowings. - 39 -
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Impact Related to
We do not have any offices or direct operations withinUkraine orRussia . While we had a small number of clients that were based in or had operations withinRussia , we have suspended those relationships and are no longer providing services to these clients. We have also implemented robust procedures designed to ensure that we are in compliance with all applicable sanctions laws. We currently estimate these actions will adversely impact full year 2022 brokerage segment annual revenues by up to$10 million and full year 2022 net after tax earnings by up to$0.03 per share, with a$0.01 adverse impact in first quarter of 2022. The indirect impact of the ongoing conflict is difficult to estimate, but we currently believe it will not be significant to our full year 2022 financial results. Results of Operations Brokerage The brokerage segment accounted for 87% of our revenues during the three-month period endedMarch 31, 2022 . Our brokerage segment is primarily comprised of retail, wholesale and reinsurance 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;
(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; and
(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.
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. We are not able to reasonably estimate the ultimate amount of any potential loss in connection with these matters, we do not expect any such loss to be material to our consolidated financial statements. - 40 - --------------------------------------------------------------------------------
Financial information relating to our brokerage segment results for the
three-month period ended
is as follows (in millions, except per share, percentages and workforce data):
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