Newswires
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 six-month periods endedJune 30, 2022 . Readers should review this information in conjunction with theJune 30, 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 second 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 and six-month periods endedJune 30, 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 revenue, 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, compensation expense related to amortization of certain retention bonus arrangements, extra lease space, duplicate services and external costs incurred to assimilate the acquisition into 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 and acquisition related compensation charges.
•
Amortization of intangible assets reflects the amortization of
customer/expiration lists, non-compete agreements, trade names and other
intangible assets acquired through the company's merger and acquisition
strategy, the impact to amortization expense of acquisition valuation
adjustments to these assets as well as non-cash impairment charges.
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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 of a one-timeU.S. state tax benefit that resulted from legal entity restructuring and a favorableU.K. tax impact related to earnout liability adjustments in second quarter 2022. This 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. The 2021 values represent the impact in second quarter 2021 of one-time income tax expense associated with the change in theU.K. effective income tax rate from 19% to 25% that is effective in 2023.
•
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, adjusted EPS and adjusted net earnings for the brokerage and risk management segments, 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 second quarter we have
excluded amortization of intangible assets from adjusted EPS, and as such, 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
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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 46 and 52), for
adjusted revenues, adjusted EBITDAC and adjusted diluted net earnings per share
(on pages 40 and 41), for organic revenue measures (on pages 47 and 52),
respectively, for the brokerage and risk management segments, for adjusted
compensation and operating expenses and adjusted EBITDAC margin, (on pages 48
and 49), respectively, for the brokerage segment and on page 53 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 Second 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 six-month period endedJune 30, 2022 , we generated approximately 64% of our revenues for the combined brokerage and risk management segments domestically and 36% internationally, primarily inAustralia ,Bermuda ,Canada , theCaribbean ,New Zealand and theU.K. We have three reportable segments: brokerage, risk management and corporate, which contributed approximately 86%, 13% and 1%, respectively, to revenues during the six-month period endedJune 30, 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 second quarter 2022 survey had not been published as of the filing date of this report. The first quarter 2022 survey indicated that commercial property/casualty rates increased by 6.6% on average. We expect a similar trend to be noted when the CIAB second 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. Despite the ongoing military conflict betweenRussia andUkraine , first half 2022 economic activity has improved from 2020 COVID-19 impacted levels and the combination of inflation, a tight labor market and lower unemployment is likely contributing to increases in client insured exposures. 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 exposures, 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. - 39 - --------------------------------------------------------------------------------
Summary of Financial Results - Three-Month Periods Ended
See the reconciliations of non-GAAP measures on page 42.
(Dollars in millions, except
per share data) 2nd Quarter 2022 2nd Quarter 2021 Change
Reported Adjusted Reported Adjusted Reported Adjusted
GAAP Non-GAAP GAAP Non-GAAP GAAP Non-GAAP
Brokerage Segment
Revenues $ 1,740.7 $ 1,737.9 $ 1,390.2 $ 1,347.9 25 % 29 %
Organic revenues $ 1,474.2 $ 1,330.9 10.8 %
Net earnings $ 311.7 $ 227.6 37 %
Net earnings margin 17.9 % 16.4 % + 154 bpts
Adjusted EBITDAC $ 555.5 $ 443.9 25 %
Adjusted EBITDAC margin 32.0 % 32.9 % - 97 bpts
Diluted net earnings per
share $ 1.45 $ 1.82 $ 1.09 $ 1.52 33 % 20 %
Risk Management Segment
Revenues before
reimbursements $ 267.4 $ 267.4 $ 245.0 $ 241.1 9 % 11 %
Organic revenues $ 265.9 $ 241.1 10.3 %
Net earnings $ 28.6 $ 24.9 15 %
Net earnings margin (before
reimbursements) 10.7 % 10.2 % + 54 bpts
Adjusted EBITDAC $ 50.6 $ 47.3 7 %
Adjusted EBITDAC margin
(before reimbursements) 18.9 % 19.6 % - 70 bpts
Diluted net earnings per
share $ 0.13 $ 0.14 $ 0.12 $ 0.13 8 % 8 %
Corporate Segment
Diluted net loss per share $ (0.25 ) $ (0.26 ) $ (0.29 ) $ (0.16 )
Total Company
Diluted net earnings per
share $ 1.33 $ 1.70 $ 0.92 $ 1.49 45 % 14 %
Total Brokerage and Risk
Management Segment
Diluted net earnings per
share $ 1.58 $ 1.96 $ 1.21 $ 1.65 31 % 19 %
Summary of Financial Results - Six-Month Periods Ended
See the reconciliation of non-GAAP measures on page 43.
(Dollars in millions, except
per share data) Six-Months 2022 Six-Months 2021 Change
Reported Adjusted Reported Adjusted Reported Adjusted
GAAP Non-GAAP GAAP Non-GAAP GAAP Non-GAAP
Brokerage Segment
Revenues $ 3,863.3 $ 3,859.1 $ 3,000.4 $ 2,939.2 29 % 31 %
Organic revenues $ 3,198.3 $ 2,904.2 10.1 %
Net earnings $ 776.0 $ 592.0 31 %
Net earnings margin 20.1 % 19.7 % + 36 bpts
Adjusted EBITDAC $ 1,399.5 $ 1,069.3 31 %
Adjusted EBITDAC margin 36.3 % 36.4 % - 12 bpts
Diluted net earnings per
share $ 3.62 $ 4.69 $ 2.90 $ 3.78 25 % 24 %
Risk Management Segment
Revenues before
reimbursements $ 526.5 $ 526.5 $ 465.3 $ 459.1 13 % 15 %
Organic revenues $ 517.0 $ 459.0 12.6 %
Net earnings $ 52.5 $ 42.9 22 %
Net earnings margin (before
reimbursements) 10.0 % 9.2 % + 75 bpts
Adjusted EBITDAC $ 95.5 $ 87.5 9 %
Adjusted EBITDAC margin
(before reimbursements) 18.1 % 19.1 % - 92 bpts
Diluted net earnings per
share $ 0.24 $ 0.26 $ 0.21 $ 0.24 14 % 8 %
Corporate Segment
Diluted net loss per share $ (0.48 ) $ (0.45 ) $ (0.28 ) $ (0.15 )
Total Company
Diluted net earnings per
share $ 3.38 $ 4.50 $ 2.83 $ 3.87 19 % 16 %
Total Brokerage and Risk
Management Segment
Diluted net earnings per
share $ 3.86 $ 4.95 $ 3.11 $ 4.02 24 % 23 %
In our corporate segment, net after-tax (loss) earnings from our clean energy
investments were $(2.3) million and $20.8 million , as reported, in the
three-month periods ended June 30, 2022 and 2021, respectively. In our corporate
segment, net after-tax (loss) earnings from our clean energy investments were
$(4.3) million and $54.2 million , as reported, in the six-month periods ended
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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 and six-month periods endedJune 30, 2022 with the same periods 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 46 and 52, respectively, of this filing. For the Three-Month Periods EndedJune 30 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 $ 1,740.7 $ 1,390.2 $ 311.7 $ 227.6 $ 506.7 $ 440.0 $ 1.45 $ 1.09 33 %
Net gains on
divestitures (2.8 ) (0.5 ) (2.3 ) (0.4 ) (2.8 ) (0.5 ) (0.01 ) -
Acquisition
integration - - 32.6 4.7 39.0 6.2 0.15 0.02
Workforce and lease
termination - - 9.6 3.1 8.1 4.1 0.04 0.02
Acquisition related
adjustments - - (34.8 ) 9.2 4.5 7.7 (0.16 ) 0.05
Amortization of
intangible assets - - 75.1 80.8 - - 0.35 0.39
Levelized foreign
currency
translation - (41.8 ) - (9.4 ) - (13.6 ) - (0.05 )
Brokerage, as adjusted
* 1,737.9 1,347.9 391.9 315.6 555.5 443.9 1.82 1.52 20 %
Risk Management, as
reported 267.4 245.0 28.6 24.9 48.6 47.6 0.13 0.12 8 %
Net gains on
divestitures - (0.1 ) - (0.1 ) - (0.1 ) - -
Workforce and lease
termination - - 0.6 0.5 0.7 0.6 - -
Acquisition related
adjustments - - (1.2 ) 0.3 0.1 0.2 - -
Acquisition
integration - - 0.9 - 1.2 - - -
Amortization of
intangible assets - - 1.2 1.6 - - 0.01 0.01
Levelized foreign
currency
translation - (3.8 ) - (0.6 ) - (1.0 ) - -
Risk Management, as
adjusted * 267.4 241.1 30.1 26.6 50.6 47.3 0.14 0.13 8 %
Corporate, as reported 0.3 261.6 (55.2 ) (50.7 ) (31.9 ) (50.1 ) (0.25 ) (0.29 )
Transaction-related
costs - - 5.1 8.7 5.6 10.2 0.02 0.04
Income tax related - - (7.0 ) 19.3 - - (0.03 ) 0.09
Corporate, as
adjusted* 0.3 261.6 (57.1 ) (22.7 ) (26.3 ) (39.9 ) (0.26 ) (0.16 )
Total Company , as
reported $ 2,008.4 $ 1,896.8 $ 285.1 $ 201.8 $ 523.4 $ 437.5 $ 1.33 $ 0.92 45 %
Total Company , as
adjusted * $ 2,005.6 $ 1,850.6 $ 364.9 $ 319.5 $ 579.8 $ 451.3 $ 1.70 $ 1.49 14 %
Total Brokerage & Risk
Management, as
reported $ 2,008.1 $ 1,635.2 $ 340.3 $ 252.5 $ 555.3 $ 487.6 $ 1.58 $ 1.21 31 %
Total Brokerage & Risk
Management, as
adjusted * $ 2,005.3 $ 1,589.0 $ 422.0 $ 342.2 $ 606.1 $ 491.2 $ 1.96 $ 1.65 19 %
*For the three-month period ended
brokerage segment adjustments totals
$104.8 million , with a corresponding adjustment to the provision for income taxes of$24.6 million relating to these items. For the three-month period endedJune 30, 2022 , the pretax of the risk management segment adjustments totals$1.9 million , with a corresponding adjustment to the provision for income taxes of$0.4 million relating to these items. For the three-month period endedJune 30, 2022 , the pretax impact of the corporate segment adjustments totals$5.6 million , with a corresponding adjustment to the benefit for income taxes of$7.5 million relating to this item and the other tax items noted on page 58 in note (3). A detailed reconciliation of the 2022 provision for income taxes is shown on page 42. *For the three-month period endedJune 30, 2021 , the pretax impact of the brokerage segment adjustments totals$115.4 million , with a corresponding adjustment to the provision for income taxes of$27.4 million relating to these items. For the three-month period endedJune 30, 2021 , the pretax of the risk management segment adjustments totals$2.3 million , with a corresponding adjustment to the provision for income taxes of$0.6 million relating to these items. For the three-month period endedJune 30, 2021 , the pretax impact of the corporate segment adjustments totals$10.2 million , with a corresponding adjustment to the benefit for income taxes of$(17.8) million relating to this item and the other tax items noted on page 58 in note (3). A detailed reconciliation of the 2021 provision for income taxes is shown on page 42. - 41 - -------------------------------------------------------------------------------- For the Six-Month Periods EndedJune 30 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
25 % Net gains on divestitures (4.2 ) (4.6 ) (3.4 )
(3.6 ) (4.2 ) (4.6 ) (0.02 ) (0.02 )
Acquisition integration
- - 67.6 7.9 82.8 10.3 0.32 0.04 Workforce and lease termination - - 14.6 8.7 14.3 9.3 0.07 0.04 Acquisition related adjustments - - (18.4 ) 16.9 13.5 13.8 (0.09 ) 0.08 Amortization of intangible assets - - 168.8 159.9 - - 0.79 0.79 Levelized foreign currency translation - (56.6 ) - (12.4 ) - (17.9 ) - (0.05 ) Brokerage, as adjusted * 3,859.1 2,939.2 1,005.2 769.4 1,399.5 1,069.3 4.69 3.78 24 % Risk Management, as reported 526.5 465.3 52.5 42.9 92.7 87.4 0.24 0.21 14 % Net gains on divestitures - (0.1 ) - (0.1 ) - (0.1 ) - - Workforce and lease termination - - 1.1 1.0 1.4 1.3 - 0.01 Acquisition related adjustments - - (1.2 ) 2.1 0.2 0.2 - 0.01 Acquisition integration - - 0.9 - 1.2 - - - Amortization of intangible assets - - 2.4 2.8 - - 0.02 0.01 Levelized foreign currency translation - (6.1 ) - (0.7 ) - (1.3 ) - - Risk Management, as adjusted * 526.5 459.1 55.7 48.0 95.5 87.5 0.26 0.24 8 % Corporate, as reported 23.1 563.7 (104.3 )
(39.4 ) (80.1 ) (93.5 ) (0.48 ) (0.28 )
Transaction-related
costs
- - 19.7
8.7 21.4 10.2 0.09 0.04
Income tax related
- - (12.0 ) 19.3 - - (0.06 ) 0.09 Corporate, as adjusted* 23.1 563.7 (96.6 )
(11.4 ) (58.7 ) (83.3 ) (0.45 ) (0.15 )
reported
$ 4,412.9 $ 4,029.4 $ 724.2 $ 595.5 $ 1,305.7 $ 1,052.3 $ 3.38 $ 2.83 19 %Total Company , as adjusted *$ 4,408.7 $ 3,962.0 $ 964.3 $ 806.0 $ 1,436.3 $ 1,073.5 $ 4.50 $ 3.87 16 %
Total Brokerage & Risk
Management, as reported
24 % Total Brokerage & Risk Management, as adjusted *$ 4,385.6 $ 3,398.3 $ 1,060.9 $ 817.4 $ 1,495.0 $ 1,156.8 $ 4.95 $ 4.02 23 % *For six-month period endedJune 30, 2022 , the pretax impact of the brokerage segment adjustments totals$297.1 million , with a corresponding adjustment to the provision for income taxes of$67.9 million relating to these items. For the six-month period endedJune 30, 2022 , the pretax impact of the risk management segment adjustments totals$4.3 million , with a corresponding adjustment to the provision for income taxes of$1.1 million relating to these items. For the six-month period endedJune 30, 2022 , the pretax impact of the corporate segment adjustments totals$21.4 million , with a corresponding adjustment to the benefit for income taxes of$13.7 million relating to these items and the other tax items noted on page 58 in note (3). A detailed reconciliation of the 2022 provision for income taxes is shown on page 43. *For the six-month period endedJune 30, 2021 , the pretax impact of the brokerage segment adjustments totals$231.9 million , with a corresponding adjustment to the provision for income taxes of$54.5 million relating to these items. For the six-month period endedJune 30, 2021 , the pretax impact of the risk management segment adjustments totals$6.8 million , with a corresponding adjustment to the provision for income taxes of$1.7 million relating to these items. For the six-month period endedJune 30, 2021 , the pretax impact of the corporate segment adjustments totals$10.2 million , with a corresponding adjustment to the benefit for income taxes of$(17.8) million relating to these items and other tax items noted on page 58 in note (3). A detailed reconciliation of the 2021 provision for income taxes is shown on page 43. - 42 - --------------------------------------------------------------------------------
Reconciliation of Non-GAAP Measures - Pre-tax Earnings and Diluted Net Earnings
per Share
(In millions except share
and per share data)
Net Earnings Net Earnings
Earnings Provision (Loss) (Loss)
(Loss) (Benefit) Attributable to Attributable to Diluted Net
Earnings
Before Income for Income Net Earnings Noncontrolling Controlling (Loss)
Taxes Taxes (Loss) Interests Interests per Share
Quarter Ended
Brokerage, as reported $ 410.9
1.4 $ 310.3$ 1.45 Net gains on divestitures (2.8 ) (0.5 ) (2.3 ) - (2.3 ) (0.01 ) Acquisition integration 39.0 6.4 32.6 - 32.6 0.15 Workforce and lease termination 11.5 1.9 9.6 - 9.6 0.04 Acquisition related adjustments (41.6 ) (6.8 ) (34.8 ) - (34.8 ) (0.16 ) Amortization of intangible assets 98.7 23.6 75.1 - 75.1 0.35
Brokerage, as adjusted $ 515.7
1.4 $ 390.5$ 1.82 Risk Management, as reported $ 38.8$ 10.2 $ 28.6 $ - $ 28.6$ 0.13 Workforce and lease termination 0.7 0.1 0.6 - 0.6 - Acquisition related adjustments (1.6 ) (0.4 ) (1.2 ) - (1.2 ) - Acquisition integration 1.2 0.3 0.9 - 0.9 - Amortization of intangible assets 1.6 0.4 1.2 - 1.2 0.01
Risk Management, as adjusted $ 40.7
- $ 30.1$ 0.14
Corporate, as reported $ (97.4 )
Transaction-related costs
5.6 0.5 5.1 - 5.1 0.02 Income tax related - 7.0 (7.0 ) - (7.0 ) (0.03 )
Corporate, as adjusted $ (91.8 )
Quarter Ended
Brokerage, as reported $ 299.7
2.6 $ 225.0$ 1.09 Net gains on divestitures (0.5 ) (0.1 ) (0.4 ) - (0.4 ) - Acquisition integration 6.2 1.5 4.7 - 4.7 0.02 Workforce and lease termination 4.1 1.0 3.1 - 3.1 0.02 Acquisition related adjustments 12.2 3.0 9.2 - 9.2 0.05 Amortization of intangible assets 105.8 25.0 80.8 - 80.8 0.39 Levelized foreign currency translation (12.4 ) (3.0 ) (9.4 ) - (9.4 ) (0.05 )
Brokerage, as adjusted $ 415.1
2.6 $ 313.0$ 1.52 Risk Management, as reported $ 33.4$ 8.5 $ 24.9 $ - $ 24.9$ 0.12 Net gains on divestitures (0.1 ) - (0.1 ) - (0.1 ) - Workforce and lease termination 0.6 0.1 0.5 - 0.5 - Acquisition related adjustments 0.3 - 0.3 - 0.3 - Amortization of intangible assets 2.2 0.6 1.6 - 1.6 0.01 Levelized foreign currency translation (0.7 ) (0.1 ) (0.6 ) - (0.6 ) - Risk Management, as adjusted $ 35.7$ 9.1 $ 26.6 $ - $ 26.6$ 0.13 Corporate, as reported$ (110.8 ) $ (60.1 ) $ (50.7 ) $ 9.0 $ (59.7 )$ (0.29 ) Transaction-related costs 10.2 1.5 8.7 - 8.7 0.04 Income tax related - (19.3 ) 19.3 - 19.3 0.09 Corporate, as adjusted$ (100.6 ) $ (77.9 ) $ (22.7 ) $ 9.0 $ (31.7 )$ (0.16 ) - 43 -
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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 Net Earnings
Earnings Provision (Loss) (Loss)
(Loss) (Benefit) Attributable to Attributable to Diluted Net
Earnings
Before Income for Income Net Earnings Noncontrolling Controlling (Loss)
Taxes Taxes (Loss) Interests Interests per Share
Six-Months Ended June 30,
2022
Brokerage, as reported $ 1,029.3 $ 253.3 $ 776.0 $ 2.1 $ 773.9 $ 3.62
Net gains on divestitures (4.2 ) (0.8 ) (3.4 ) - (3.4 ) (0.02 )
Acquisition integration 82.8 15.2 67.6 - 67.6 0.32
Workforce and lease
termination 17.8 3.2 14.6 - 14.6 0.07
Acquisition related
adjustments (21.0 ) (2.6 ) (18.4 ) - (18.4 ) (0.09 )
Amortization of intangible
assets 221.7 52.9 168.8 - 168.8 0.79
Brokerage, as adjusted $ 1,326.4 $ 321.2 $ 1,005.2 $ 2.1 $ 1,003.1 $ 4.69
Risk Management, as reported $ 71.1 $ 18.6 $ 52.5 $ - $ 52.5 $ 0.24
Workforce and lease
termination 1.5 0.4 1.1 - 1.1 -
Acquisition related
adjustments (1.6 ) (0.4 ) (1.2 ) - (1.2 ) -
Acquisition integration 1.2 0.3 0.9 - 0.9 -
Amortization of intangible
assets 3.2 0.8 2.4 - 2.4 0.02
Risk Management, as adjusted $ 75.4 $ 19.7 $ 55.7 $ - $ 55.7 $ 0.26
Corporate, as reported $ (210.4 ) $ (106.1 ) $ (104.3 ) $ (0.8 ) $ (103.5 ) $ (0.48 )
Transaction-related costs 21.4 1.7 19.7 - 19.7 0.09
Income tax rate related - 12.0 (12.0 ) - (12.0 ) (0.06 )
Corporate, as adjusted $ (189.0 ) $ (92.4 ) $ (96.6 ) $ (0.8 ) $ (95.8 ) $ (0.45 )
Six-Months Ended June 30,
2021
Brokerage, as reported $ 780.0 $ 188.0 $ 592.0 $ 4.4 $ 587.6 $ 2.90
Net gains on divestitures (4.6 ) (1.0 ) (3.6 ) - (3.6 ) (0.02 )
Acquisition integration 10.3 2.4 7.9 - 7.9 0.04
Workforce and lease
termination 11.1 2.4 8.7 - 8.7 0.04
Acquisition related
adjustments 21.9 5.0 16.9 - 16.9 0.08
Amortization of intangible
assets 209.4 49.5 159.9 - 159.9 0.79
Levelized foreign currency
translation (16.2 ) (3.8 ) (12.4 ) - (12.4 ) (0.05 )
Brokerage, as adjusted $ 1,011.9 $ 242.5 $ 769.4 $ 4.4 $ 765.0 $ 3.78
Risk Management, as reported $ 57.5 $ 14.6 $ 42.9 $ - $ 42.9 $ 0.21
Net gains on divestitures (0.1 ) - (0.1 ) - (0.1 ) -
Workforce and lease
termination 1.3 0.3 1.0 - 1.0 0.01
Acquisition related
adjustments 2.7 0.6 2.1 - 2.1 0.01
Amortization of intangible
assets 3.8 1.0 2.8 - 2.8 0.01
Levelized foreign currency
translation (0.9 ) (0.2 ) (0.7 ) - (0.7 ) -
Risk Management, as adjusted $ 64.3 $ 16.3 $ 48.0 $ - $ 48.0 $ 0.24
Corporate, as reported $ (206.8 ) $ (167.4 ) $ (39.4 ) $ 18.8 $ (58.2 ) $ (0.28 )
Transaction-related costs 10.2 1.5 8.7 - 8.7 0.04
Income tax related - (19.3 ) 19.3 - 19.3 0.09
Corporate, as adjusted $ (196.6 ) $ (185.2 ) $ (11.4 ) $ 18.8 $ (30.2 ) $ (0.15 )
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 third quarter of 2022. - 44 -
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Results of Operations Brokerage The brokerage segment accounted for 86% of our revenues during the six-month period endedJune 30, 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. - 45 -
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Financial information relating to our brokerage segment results for the three and six-month periods endedJune 30, 2022 compared to the same periods in 2021, is as follows (in millions, except per share, percentages and workforce data):
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OAK STREET HEALTH, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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