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 nine-month periods endedSeptember 30, 2022 . Readers should review this information in conjunction with theSeptember 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 third 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 nine-month periods endedSeptember 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 (losses) 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 (including Willis Re), 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
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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 primarily 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 our merger and acquisition strategy, the
impact to amortization expense of acquisition valuation adjustments to these
assets as well as non-cash impairment charges.
•
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 in second quarter 2022 and a net favorableU.K. tax impact related to earnout liability adjustments in second and third quarters of 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 a 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. It also includes the impact of additionalU.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, 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.
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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 (losses) 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 (losses) on divestitures,
acquisition integration costs, the impact of foreign currency translation,
workforce
- 40 - -------------------------------------------------------------------------------- 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 third 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 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 48 and 55), for adjusted revenues, adjusted EBITDAC and adjusted diluted net earnings per share (on pages 42 and 43), for organic revenue measures (on pages 49 and 55), respectively, for the brokerage and risk management segments, for adjusted compensation and operating expenses and adjusted EBITDAC margin, (on pages 50 and 51), respectively, for the brokerage segment and on page 56 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 for 2021 and prior periods 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 expired 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 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 ofDecember 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 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 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 nine-month period endedSeptember 30, 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 86%, 14% and 0% for brokerage, risk management and corporate, respectively, to revenues during the nine-month period endedSeptember 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. - 41 - --------------------------------------------------------------------------------
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 third quarter 2022 survey had not been published as of the filing date of this report. The second quarter 2022 survey indicated that commercial property/casualty rates increased by 7.1% on average. We expect a similar trend to be noted when the CIAB third 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 for the remainder of 2022 and in 2023. If loss trends deteriorate over the coming quarters, including the impact of natural catastrophes, it could lead to a more difficult rate and conditions environment in certain lines. The combination of increasing insurable values (due in large part to 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 increasing 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, most insurance carriers appear to be making rational pricing decisions and there is adequate capacity in the insurance and reinsurance market for most lines of coverage; however, theU.S. property catastrophe market could face significant price increases, tightening terms and conditions and a supply/demand imbalance during the 2023 renewal season.
Summary of Financial Results - Three-Month Periods Ended
2021
See the reconciliations of non-GAAP measures on page 43.
(Dollars in millions, except
per share data) 3rd Quarter 2022 3rd Quarter 2021 Change
Reported Adjusted Reported Adjusted Reported Adjusted
GAAP Non-GAAP GAAP Non-GAAP GAAP Non-GAAP
Brokerage Segment
Revenues $ 1,736.2 $ 1,737.5 $ 1,499.7 $ 1,446.6 16 % 20 %
Organic revenues $ 1,537.9 $ 1,427.3 7.8 %
Net earnings $ 282.5 $ 253.6 11 %
Net earnings margin 16.3 % 16.9 % - 64 bpts
Adjusted EBITDAC $ 560.3 $ 484.3 16 %
Adjusted EBITDAC margin 32.2 % 33.5 % - 123 bpts
Diluted net earnings per
share $ 1.31 $ 1.83 $ 1.20 $ 1.64 9 % 12 %
Risk Management Segment
Revenues before
reimbursements $ 275.5 $ 275.5 $ 248.0 $ 244.4 11 % 13 %
Organic revenues $ 274.0 $ 244.3 12.2 %
Net earnings $ 26.9 $ 22.0 22 %
Net earnings margin (before
reimbursements) 9.8 % 8.9 % + 89 bpts
Adjusted EBITDAC $ 50.2 $ 47.6 5 %
Adjusted EBITDAC margin
(before reimbursements) 18.2 % 19.5 % - 126 bpts
Diluted net earnings per
share $ 0.13 $ 0.14 $ 0.10 $ 0.13 30 % 8 %
Corporate Segment
Diluted net loss per share $ (0.25 ) $ (0.25 ) $ (0.24 ) $ (0.11 )
Total Company
Diluted net earnings per
share $ 1.19 $ 1.72 $ 1.06 $ 1.66 12 % 4 %
Total Brokerage and Risk
Management Segment
Diluted net earnings per
share $ 1.44 $ 1.97 $ 1.30 $ 1.77 10 % 11 %
Summary of Financial Results - Nine-Month Periods Ended
2021
See the reconciliation of non-GAAP measures on page 44.
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(Dollars in millions, except
per share data) Nine-Months 2022 Nine-Months 2021 Change
Reported Adjusted Reported Adjusted Reported Adjusted
GAAP Non-GAAP GAAP Non-GAAP GAAP Non-GAAP
Brokerage Segment
Revenues $ 5,599.5 $ 5,596.6 $ 4,500.1 $ 4,385.8 24 % 28 %
Organic revenues $ 4,736.2 $ 4,331.5 9.3 %
Net earnings $ 1,058.5 $ 845.6 25 %
Net earnings margin 18.9 % 18.8 % + 11 bpts
Adjusted EBITDAC $ 1,959.8 $ 1,553.6 26 %
Adjusted EBITDAC margin 35.0 % 35.4 % - 40 bpts
Diluted net earnings per
share $ 4.92 $ 6.52 $ 4.09 $ 5.41 21 % 21 %
Risk Management Segment
Revenues before
reimbursements $ 802.0 $ 802.0 $ 713.3 $ 703.5 12 % 14 %
Organic revenues $ 791.0 $ 703.3 12.5 %
Net earnings $ 79.4 $ 64.9 22 %
Net earnings margin (before
reimbursements) 9.9 % 9.1 % + 80 bpts
Adjusted EBITDAC $ 145.7 $ 135.1 8 %
Adjusted EBITDAC margin
(before reimbursements) 18.2 % 19.2 % - 103 bpts
Diluted net earnings per
share $ 0.37 $ 0.40 $ 0.31 $ 0.36 18 % 11 %
Corporate Segment
Diluted net loss per share $ (0.72 ) $ (0.70 ) $ (0.52 ) $ (0.27 )
Total Company
Diluted net earnings per
share $ 4.57 $ 6.22 $ 3.88 $ 5.50 18 % 13 %
Total Brokerage and Risk
Management Segment
Diluted net earnings per
share $ 5.29 $ 6.92 $ 4.40 $ 5.77 20 % 20 %
Within our corporate segment, net after-tax (loss) earnings related to our clean
energy investments were $(2.2) million and $30.8 million , as reported, in the
three-month periods ended September 30, 2022 and 2021, respectively. Within our
corporate segment, net after-tax (loss) earnings related to our clean energy
investments were $(6.5) million and $85.0 million , as reported, in the
nine-month periods ended September 30, 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 and nine-month periods ended September 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 48 and 55,
respectively, of this filing.
For the Three-Month Periods Ended
Non-GAAP Reconciliation:
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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
9 % Net losses (gains) on divestitures 1.3 (4.3 ) 1.0
(3.4 ) 1.3 (4.3 ) - (0.02 )
Acquisition integration
- - 30.3 4.6 39.5 5.8 0.14 0.02 Workforce and lease termination - - 4.5 3.3 6.8 3.9 0.02 0.01 Acquisition related adjustments - - (8.8 ) 24.6 24.2 5.8 (0.04 ) 0.12 Amortization of intangible assets - - 85.3 70.1 - - 0.40 0.33 Levelized foreign currency translation - (48.8 ) - (5.2 ) - (8.1 ) - (0.02 ) Brokerage, as adjusted * 1,737.5 1,446.6 394.8 347.6 560.3 484.3 1.83 1.64 12 % Risk Management, as reported 275.5 248.0 26.9 22.0 47.3 43.7 0.13 0.10 30 % Workforce and lease termination - - 1.7 4.0 2.2 4.5 0.01 0.02 Acquisition related adjustments - - 0.1 (0.1 ) 0.1 0.1 - - Acquisition integration - - 0.5 - 0.6 - - - Amortization of intangible assets - - 1.0 1.6 - - - 0.01 Levelized foreign currency translation - (3.6 ) - (0.4 ) - (0.7 ) - - Risk Management, as adjusted * 275.5 244.4 30.2 27.1 50.2 47.6 0.14 0.13 8 % Corporate, as reported 0.3 357.9 (53.1 ) (37.0 ) (27.1 ) (51.5 ) (0.25 ) (0.24 ) Loss on extinguishment of debt - - - 12.2 - - - 0.06 Transaction-related costs - - 5.9 8.2 6.3 11.0 0.03 0.04 Income tax related - - (7.0 ) 4.9 - - (0.03 ) 0.03 Corporate, as adjusted* 0.3 357.9 (54.2 ) (11.7 ) (20.8 ) (40.5 ) (0.25 ) (0.11 )Total Company , as reported$ 2,012.0 $ 2,105.6 $ 256.3 $ 238.6 $ 508.7 $ 473.4 $ 1.19 $ 1.06 12 %Total Company , as adjusted *$ 2,013.3 $ 2,048.9 $ 370.8 $ 363.0 $ 589.7 $ 491.4 $ 1.72 $ 1.66 4 %
Total Brokerage & Risk
Management, as reported
10 % Total Brokerage & Risk Management, as adjusted *$ 2,013.0 $ 1,691.0 $ 425.0 $ 374.7 $ 610.5 $ 531.9 $ 1.97 $ 1.77 11 % *For the three-month period endedSeptember 30, 2022 , the pretax impact of the brokerage segment adjustments totals$146.3 million , with a corresponding adjustment to the provision for income taxes of$34.0 million relating to these items. For the three-month period endedSeptember 30, 2022 , the pretax of the risk management segment adjustments totals$4.4 million , with a corresponding adjustment to the provision for income taxes of$1.1 million relating to these items. For the three-month period endedSeptember 30, 2022 , the pretax impact of the corporate segment adjustments totals$6.3 million , with a corresponding adjustment to the benefit for income taxes of$7.4 million relating to this item and the other tax items noted on page 62 in note (3). A detailed reconciliation of the 2022 provision (benefit) for income taxes is shown on page 44. *For the three-month period endedSeptember 30, 2021 , the pretax impact of the brokerage segment adjustments totals$121.8 million , with a corresponding adjustment to the provision for income taxes of$27.8 million relating to these items. For the three-month period endedSeptember 30, 2021 , the pretax 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 three-month period endedSeptember 30, 2021 , the pretax impact of the corporate segment adjustments totals$27.2 million , with a corresponding adjustment to the benefit for income taxes of$1.9 million relating to this item and the other tax items noted on page 62 in note (3). A detailed reconciliation of the 2021 provision (benefit) for income taxes is shown on page 44. - 44 - -------------------------------------------------------------------------------- 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 2022 2021 2022 2021 2022 2021 2022 2021 Chg (in millions) (in millions) (in millions)
Brokerage, as reported
21 %
Net gains on divestitures (2.9 ) (8.9 ) (2.4 ) (7.0 ) (2.9 ) (8.9 ) (0.01 ) (0.03 )
Acquisition integration
- - 97.9 12.5 122.3 16.1 0.46 0.06 Workforce and lease termination - - 19.1 11.9 21.1 13.2 0.09 0.06 Acquisition related adjustments - - (27.2 ) 41.5 37.7 19.6 (0.13 ) 0.20 Amortization of intangible assets - - 254.1 230.1 - - 1.19 1.12 Levelized foreign currency translation - (105.4 ) - (17.6 ) - (26.0 ) - (0.09 )
Brokerage, as adjusted * 5,596.6 4,385.8 1,400.0 1,117.0 1,959.8 1,553.6 6.52 5.41
21 % Risk Management, as reported 802.0 713.3 79.4 64.9 140.0 131.1 0.37 0.31 18 % Net gains on divestitures - (0.1 ) - (0.1 ) - (0.1 ) - - Workforce and lease termination - - 2.8 5.0 3.6 5.8 0.01 0.03 Acquisition related adjustments - - (1.1 ) 2.0 0.3 0.3 (0.01 ) 0.01 Acquisition integration - - 1.4 - 1.8 - 0.01 - Amortization of intangible assets - - 3.4 4.4 - - 0.02 0.02 Levelized foreign currency translation - (9.7 ) - (1.1 ) - (2.0 ) - (0.01 ) Risk Management, as adjusted * 802.0 703.5 85.9 75.1 145.7 135.1 0.40 0.36 11 % Corporate, as reported 23.4 921.6 (157.4 )
(76.4 ) (107.2 ) (145.0 ) (0.72 ) (0.52 )
Loss on extinguishment of
debt
- - - 12.2 - - - 0.06 Transaction-related costs - - 25.6
16.9 27.7 21.2 0.11 0.08
Income tax related
- - (19.0 ) 24.2 - - (0.09 ) 0.11
Corporate, as adjusted* 23.4 921.6 (150.8 ) (23.1 ) (79.5 ) (123.8 ) (0.70 ) (0.27 )
reported
$ 6,424.9 $ 6,135.0 $ 980.5 $ 834.1 $ 1,814.4 $ 1,525.7 $ 4.57 $ 3.88 18 %Total Company , as adjusted *$ 6,422.0 $ 6,010.9 $ 1,335.1 $ 1,169.0 $ 2,026.0 $ 1,564.9 $ 6.22 $ 5.50 13 %
Total Brokerage & Risk
Management, as reported
20 %
Total Brokerage & Risk
Management, as adjusted *
20 % *For nine-month period endedSeptember 30, 2022 , the pretax impact of the brokerage segment adjustments totals$443.4 million , with a corresponding adjustment to the provision for income taxes of$101.9 million relating to these items. For the nine-month period endedSeptember 30, 2022 , the pretax impact of the risk management segment adjustments totals$8.7 million , with a corresponding adjustment to the provision for income taxes of$2.2 million relating to these items. For the nine-month period endedSeptember 30, 2022 , the pretax impact of the corporate segment adjustments totals$27.7 million , with a corresponding adjustment to the benefit for income taxes of$21.1 million relating to these items and the other tax items noted on page 62 in note (3). A detailed reconciliation of the 2022 provision (benefit) for income taxes is shown on page 45. *For the nine-month period endedSeptember 30, 2021 , the pretax impact of the brokerage segment adjustments totals$353.7 million , with a corresponding adjustment to the provision for income taxes of$82.3 million relating to these items. For the nine-month period endedSeptember 30, 2021 , the pretax impact of the risk management segment adjustments totals$13.6 million , with a corresponding adjustment to the provision for income taxes of$3.4 million relating to these items. For the nine-month period endedSeptember 30, 2021 , the pretax impact of the corporate segment adjustments totals$37.4 million , with a corresponding adjustment to the benefit for income taxes of$(15.9) million relating to these items and other tax items noted on page 62 in note (3). A detailed reconciliation of the 2021 provision (benefit) for income taxes is shown on page 45. - 45 - --------------------------------------------------------------------------------
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 September 30,
2022
Brokerage, as reported $ 370.7 $ 88.2 $ 282.5 $ 1.2 $ 281.3 $ 1.31
Net losses on divestitures 1.3 0.3 1.0 - 1.0 -
Acquisition integration 39.5 9.2 30.3 - 30.3 0.14
Workforce and lease
termination 5.8 1.3 4.5 - 4.5 0.02
Acquisition related
adjustments (11.4 ) (2.6 ) (8.8 ) - (8.8 ) (0.04 )
Amortization of intangible
assets 111.1 25.8 85.3 - 85.3 0.40
Brokerage, as adjusted $ 517.0
1.2 $ 393.6$ 1.83
Risk Management, as reported $ 36.6
26.9 $ - $ 26.9$ 0.13 Workforce and lease termination 2.2 0.5 1.7 - 1.7 0.01 Acquisition related adjustments 0.1 - 0.1 - 0.1 - Acquisition integration 0.6 0.1 0.5 - 0.5 - Amortization of intangible assets 1.5 0.5 1.0 - 1.0 -
Risk Management, as adjusted $ 41.0
30.2 $ - $ 30.2$ 0.14
Corporate, as reported $ (92.3 )
Transaction-related costs
6.3 0.4 5.9 - 5.9 0.03 Income tax related - 7.0 (7.0 ) - (7.0 ) (0.03 ) Corporate, as adjusted $ (86.0 )$ (31.8 ) $ (54.2 ) $ (0.7 ) $ (53.5 )$ (0.25 ) 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 32.0 7.4 24.6 - 24.6 0.12 Amortization of intangible assets 90.8 20.7 70.1 - 70.1 0.33 Levelized foreign currency translation (6.7 ) (1.5 ) (5.2 ) - (5.2 ) (0.02 )
Brokerage, as adjusted $ 456.3
1.2 $ 346.4$ 1.64
Risk Management, as reported $ 29.5
22.0 $ - $ 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 ) - Amortization of intangible assets 2.1 0.5 1.6 - 1.6 0.01 Levelized foreign currency translation (0.6 ) (0.2 ) (0.4 ) - (0.4 ) -
Risk Management, as adjusted $ 36.3
27.1 $ - $ 27.1$ 0.13 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 related - (4.9 ) 4.9 - 4.9 0.03 Corporate, as adjusted$ (105.4 ) $ (93.7 ) $ (11.7 ) $ 12.3 $ (24.0 )$ (0.11 ) - 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 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
Nine-Months Ended September
30, 2022
Brokerage, as reported $ 1,400.0 $ 341.5 $ 1,058.5 $ 3.3 $ 1,055.2 $ 4.92
Net gains on divestitures (2.9 ) (0.5 ) (2.4 ) - (2.4 ) (0.01 )
Acquisition integration 122.3 24.4 97.9 - 97.9 0.46
Workforce and lease
termination 23.6 4.5 19.1 - 19.1 0.09
Acquisition related
adjustments (32.4 ) (5.2 ) (27.2 ) - (27.2 ) (0.13 )
Amortization of intangible
assets 332.8 78.7 254.1 - 254.1 1.19
Brokerage, as adjusted $ 1,843.4 $ 443.4 $ 1,400.0 $ 3.3 $ 1,396.7 $ 6.52
Risk Management, as reported $ 107.7 $ 28.3 $ 79.4 $ - $ 79.4 $ 0.37
Workforce and lease
termination 3.7 0.9 2.8 - 2.8 0.01
Acquisition related
adjustments (1.5 ) (0.4 ) (1.1 ) - (1.1 ) (0.01 )
Acquisition integration 1.8 0.4 1.4 - 1.4 0.01
Amortization of intangible
assets 4.7 1.3 3.4 - 3.4 0.02
Risk Management, as adjusted $ 116.4 $ 30.5 $ 85.9 $ - $ 85.9 $ 0.40
Corporate, as reported $ (302.7 ) $ (145.3 ) $ (157.4 ) $ (1.5 ) $ (155.9 ) $ (0.72 )
Transaction-related costs 27.7 2.1 25.6 - 25.6 0.11
Income tax rate related - 19.0 (19.0 ) - (19.0 ) (0.09 )
Corporate, as adjusted $ (275.0 ) $ (124.2 ) $ (150.8 ) $ (1.5 ) $ (149.3 ) $ (0.70 )
Nine-Months Ended September
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 53.9 12.4 41.5 - 41.5 0.20
Amortization of intangible
assets 300.2 70.1 230.1 - 230.1 1.12
Levelized foreign currency
translation (22.9 ) (5.3 ) (17.6 ) - (17.6 ) (0.09 )
Brokerage, as adjusted $ 1,468.2 $ 351.2 $ 1,117.0 $ 5.6 $ 1,111.4 $ 5.41
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
Amortization of intangible
assets 5.9 1.5 4.4 - 4.4 0.02
Levelized foreign currency
translation (1.5 ) (0.4 ) (1.1 ) - (1.1 ) (0.01 )
Risk Management, as adjusted $ 100.6 $ 25.5 $ 75.1 $ - $ 75.1 $ 0.36
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 related - (24.2 ) 24.2 - 24.2 0.11
Corporate, as adjusted $ (302.0 ) $ (278.9 ) $ (23.1 ) $ 31.1 $ (54.2 ) $ (0.27 )
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 fourth quarter of 2022. - 47 - --------------------------------------------------------------------------------
Results of Operations Brokerage The brokerage segment accounted for 86% of our revenues during the nine-month period endedSeptember 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
InOctober 2022 , we resolved a series of lawsuits where we were the plaintiffs, which resulted in us receiving$55.0 million in a cash settlement. This settlement gain will be recognized in fourth quarter 2022 (approximately$35.0 million net of litigation costs and taxes). We expect to utilize these cash proceeds over the following five to nine quarters to fund incremental production talent hires and make investments in technology. 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. - 48 -
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Financial information relating to our brokerage segment results for the three and nine-month periods endedSeptember 30, 2022 compared to the same periods in 2021, is as follows (in millions, except per share, percentages and workforce data):
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