ARTHUR J. GALLAGHER & CO. The discussion and analysis that follows relates to our financial condition and results of operations for the three and six-month periods endedJune 30, 2021 . Readers should review this information in conjunction with theJune 30, 2021 unaudited consolidated financial statements and notes included in Item 1 of Part I of this quarterly report on Form 10Q and the audited consolidated financial statements and notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in our annual report on Form 10-K for the year endingDecember 31, 2020 .
Prior Year Discussion of Results and Comparisons
For Information on fiscal second quarter 2020 results and similar comparisons, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-Q for the fiscal three and six-month periods endedJune 30, 2020 .
Information Regarding Non-GAAP Measures and Other
In the discussion and analysis of our results of operations that follows, in addition to reporting financial results in accordance with GAAP, we provide information regarding EBITDAC, EBITDAC margin, adjusted EBITDAC, adjusted EBITDAC margin, diluted net earnings per share, as adjusted (adjusted EPS), adjusted revenues, adjusted compensation and operating expenses, adjusted compensation expense ratio, adjusted operating expense ratio and organic revenue. These measures are not in accordance with, or an alternative to, the GAAP information provided in this quarterly report on Form 10Q. We believe that these presentations provide useful information to management, analysts and investors regarding financial and business trends relating to our results of operations and financial condition because they provide investors with measures that our chief operating decision maker uses when reviewing the company's performance, and for the other reasons described below. Our industry peers may provide similar supplemental non-GAAP information with respect to one or more of these measures, although they may not use the same or comparable terminology and may not make identical adjustments. The non-GAAP information we provide should be used in addition to, but not as a substitute for, the GAAP information provided. We make determinations regarding certain elements of executive officer incentive compensation, performance share awards and annual cash incentive awards, partly on the basis of measures related to adjusted EBITDAC. Adjusted Non-GAAP presentation - We believe that the adjusted non-GAAP presentation of the current and prior period information presented on the following pages provides stockholders and other interested persons with useful information regarding certain financial metrics that may assist such persons in analyzing our operating results as they develop a future earnings outlook for us. The after-tax amounts related to the adjustments were computed using the normalized effective tax rate for each respective period.
• Adjusted measures - We define these measures as revenues (for the
brokerage segment), revenues before reimbursements (for the risk
management segment), net earnings, compensation expense and operating
expense, respectively, each adjusted to exclude the following, as
applicable:
• Net gains on divestitures, which are primarily net proceeds received
related to sales of books of business and other divestiture
transactions, such as the disposal of a business through sale or
closure.
• Acquisition integration costs, which include costs related to certain
of our large acquisitions, outside the scope of our usualtuck-in
strategy, not expected to occur on an ongoing basis in the future once
we fully assimilate the applicable acquisition. These costs are
typically associated with redundant workforce, extra lease space,
duplicate services and external costs incurred to assimilate the
acquisition with our IT related systems.
• Transaction-related costs associated with the due diligence related to
the now terminated agreement to acquire certain assets of Willis
Towers Watson plc.
• 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.
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• The impact of foreign currency translation, as applicable. The amounts
excluded with respect to foreign currency translation arecalculated
by applying current year foreign exchange rates to the same period in
the prior year.
• U.K. -related tax-rate change, which represents the impact in second
quarter 2021 of one-time income tax expense associated with the change
in the U.K. effective income tax rate from 19% to 25% that is
effective in 2023.
• Adjusted ratios - Adjusted compensation expense and adjusted operating
expense, respectively, each divided by adjusted revenues.
Non-GAAP Earnings Measures
We believe that the presentation of EBITDAC, EBITDAC margin, adjusted EBITDAC, adjusted EBITDAC margin and adjusted EPS for the brokerage and risk management segment, each as defined below, provides a meaningful representation of our operating performance. Adjusted EPS is a performance measure and should not be used as a measure of our liquidity. We also consider EBITDAC and EBITDAC margin as ways to measure financial performance on an ongoing basis. In addition, adjusted EBITDAC, adjusted EBITDAC margin and adjusted EPS for the brokerage and risk management segments are presented to improve the comparability of our results between periods by eliminating the impact of the items that have a high degree of variability.
• EBITDAC and EBITDAC Margin - EBITDAC is net earnings before interest,
income taxes, depreciation, amortization and the change in estimated
acquisition earnout payables and EBITDAC margin is EBITDAC divided by
total revenues (for the brokerage segment) and revenues before
reimbursements (for the risk management segment). These measures for the
brokerage and risk management segments provide a meaningful representation
of our operating performance for the overall business and provide a
meaningful way to measure its financial performance on an ongoing basis.
• Adjusted EBITDAC and Adjusted EBITDAC Margin - Adjusted EBITDAC is EBITDAC
adjusted to exclude net gains on divestitures, acquisition integration
costs, workforce related charges, lease termination related charges,
acquisition related adjustments, and the period-over-period impact of
foreign currency translation, as applicable, and Adjusted EBITDAC margin
is Adjusted EBITDAC divided by total adjusted revenues (defined above).
These measures for the brokerage and risk management segments provide a
meaningful representation of our operating performance and, are also
presented to improve the comparability of our results between periods by
eliminating the impact of the items that have a high degree of
variability.
• Adjusted EPS and Adjusted Net Earnings - Adjusted net earnings have been
adjusted to exclude the after-tax impact of net gains on divestitures,
acquisition integration costs, the impact of foreign currency translation,
workforce related charges, lease termination related charges, acquisition
related adjustments and effective income tax rate impact, as applicable.
Adjusted EPS is Adjusted Net Earnings divided by diluted weighted average
shares outstanding. This measure provides a meaningful representation of
our operating performance (and as such should not be used as a measure of
our liquidity), and for the overall business is also presented to improve
the comparability of our results between periods by eliminating the impact
of the items that have a high degree of variability.
Organic Revenues (a non-GAAP measure) - For the brokerage segment, organic change in base commission and fee revenues, supplemental revenues and contingent revenues exclude the first twelve months of such revenues generated from acquisitions and such revenues related to divested operations in each year presented. These revenues are excluded from organic revenues in order to help interested persons analyze the revenue growth associated with the operations that were a part of our business in both the current and prior period. In addition, organic change in base commission and fee revenues, supplemental revenues and contingent revenues exclude the periodoverperiod impact of foreign currency translation to improve the comparability of our results between periods by eliminating the impact of the items that have a high degree of variability. For the risk management segment, organic change in fee revenues excludes the first twelve months of fee revenues generated from acquisitions in each year presented. In addition, change in organic growth excludes the period-over-period impact of foreign currency translation to improve the comparability of our results between periods by eliminating the impact of the items that have a high degree of variability. These revenue items are excluded from organic revenues in order to determine a comparable, but non-GAAP, measurement of revenue growth that is associated with the revenue sources that are expected to continue in the current year and beyond. We have historically viewed organic revenue growth as an important indicator when assessing and evaluating the performance of our brokerage and risk 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 50 and 55), respectively, for the brokerage and risk management segments), for adjusted EBITDAC margin, adjusted compensation expense
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--------------------------------------------------------------------------------and operating expenses, (on pages 49, 51 and 52, respectively, for the brokerage segment and on pages 55, 56 and 57, respectively, for the risk management segment).
Other Information - Allocations of investment income and certain expenses are based on reasonable assumptions and estimates primarily using revenue, headcount and other information. We allocate the provision for income taxes to the brokerage and risk management segments using local statutory rates. As a result, the provision for income taxes for the corporate segment reflects the entire benefit to us of the IRC Section 45 tax credits produced, because that is the segment which generated the credits. The law that provides for IRC Section 45 tax credits expired inDecember 2019 for our fourteen plants placed in service prior toDecember 31, 2009 (which we refer to as the 2009 Era Plants) and will expire inDecember 2021 for our twenty-one plants placed in service prior toDecember 31, 2011 (which we refer to as the 2011 Era Plants). We anticipate reporting an effective tax rate of approximately 23.0% to 25.0% in the brokerage segment and 24.0% to 26.0% in the risk management segment for the foreseeable future. Reported operating results by segment would change if different allocation methods were applied. When the law governing IRC Section 45 tax credits expires, reported GAAP revenues and net earnings will decrease, yet our net cash flow will increase as a result of not having to pay expenses to operate the clean coal facilities and also from an increase in the use of credits against ourU.S. federal income tax obligations.
In the discussion that follows regarding our results of operations, we also provide the following ratios with respect to our operating results: pretax profit margin, compensation expense ratio and operating expense ratio. Pretax profit margin represents pretax earnings divided by total revenues. The compensation expense ratio is compensation expense divided by total revenues. The operating expense ratio is operating expense divided by total revenues.
Overview and Second Quarter 2021 Highlights
We are engaged in providing insurance brokerage and consulting services, and third-party property/casualty claims settlement and administration services to entities in theU.S. and abroad. In the six-month period endedJune 30, 2021 , we generated approximately 67% of our revenues for the combined brokerage and risk management segments domestically and 33% internationally, primarily inAustralia ,Bermuda ,Canada , theCaribbean ,New Zealand and theU.K. We have three reportable segments: brokerage, risk management and corporate, which contributed approximately 73%, 13% and 14%, respectively, to revenues during the six-month period endedJune 30, 2021 . Our major sources of operating revenues are commissions, fees and supplemental and contingent revenues from brokerage operations and fees from risk management operations. Investment income is generated from invested cash and fiduciary funds, clean energy and other investments, and interest income from premium financing. We typically cite theCouncil of Insurance Agents and Brokers (which we refer to as CIAB) insurance pricing quarterly survey at this time as an indicator of the current insurance rate environment. The second quarter 2021 survey had not been published as of the filing date of this report. The first quarter 2021 survey indicated that commercial property/casualty rates increased by 10.0% on average. We expect a similar trend to be noted when the CIAB second quarter 2021 survey report is issued, which would indicate overall continued price firming and hardening in some lines. The CIAB represents the leading domestic and international insurance brokers, who write approximately 85% of the commercial property/casualty premiums in theU.S. We believe increases in property/casualty rates will continue for the remainder of 2021; and 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, and while second quarter 2021 economic activity improved relative to the last three quarters of 2020 and first quarter 2021, activity has yet to rebound to pre-pandemic levels. The improving level of economic activity is leading to, and is likely to continue to lead to, higher exposure units and lower unemployment. Additionally, we expect that our history of strong new business generation, solid retentions and enhanced value-added services for our carrier partners should all result in further organic growth opportunities around the world. Overall, we believe that in a positive rate environment with growing exposure units, our professionals can demonstrate their expertise and high-quality, value-added capabilities by strengthening our clients' insurance portfolios and delivering insurance and risk management solutions within our clients' budget. Based on our experience, there is adequate capacity in the insurance market for most lines of coverage, terms and conditions are tightening, most insurance carriers appear to be making rational pricing decisions and clients can broadly still obtain coverage. Please also refer to the section entitled "Impact of COVID-19 Pandemic Recovery" below on page 46. - 39 -
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Summary of Financial Results - Three-Month Periods Ended
See the reconciliations of non-GAAP measures on page 44.
(Dollars in millions, except
per share data) 2nd Quarter 2021 2nd Quarter 2020 Change
Reported Adjusted Reported Adjusted Reported Adjusted
GAAP Non-GAAP GAAP Non-GAAP GAAP Non-GAAP
Brokerage Segment
Revenues $ 1,390.2 $ 1,389.7 $ 1,201.1 $ 1,250.6 16 % 11 %
Organic revenues $ 1,312.1 $ 1,228.2 6.8 %
Net earnings $ 227.6 $ 190.2 20 %
Net earnings margin 16.4 % 15.8 % + 54 bpts
Adjusted EBITDAC $ 457.5 $ 408.8 12 %
Adjusted EBITDAC margin 32.9 % 32.7 % + 23 bpts
Diluted net earnings per
share $ 1.09 $ 1.21 $ 0.97 $ 1.14 12 % 7 %
Risk Management Segment
Revenues before
reimbursements $ 245.0 $ 244.9 $ 190.8 $ 195.2 28 % 25 %
Organic revenues $ 233.3 $ 195.0 19.6 %
Net earnings $ 24.9 $ 9.9 152 %
Net earnings margin (before
reimbursements) 10.2 % 5.2 % + 510 bpts
Adjusted EBITDAC $ 48.3 $ 34.2 41 %
Adjusted EBITDAC margin
(before reimbursements) 19.7 % 17.5 % + 220 bpts
Diluted net earnings per
share $ 0.12 $ 0.12 $ 0.05 $ 0.08 140 % 59 %
Corporate Segment
Diluted net loss per share $ (0.29 ) $ (0.16 ) $ (0.23 ) $ (0.23 )
Total Company
Diluted net earnings per
share $ 0.92 $ 1.17 $ 0.79 $ 0.99 16 % 18 %
Total Brokerage and Risk
Management Segment
Diluted net earnings per
share $ 1.21 $ 1.33 $ 1.02 $ 1.22 19 % 9 %
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Summary of Financial Results - Six-Month Periods Ended
See the reconciliations of non-GAAP measures on page 45.
(Dollars in millions, except
per share data) Six-Months 2021 Six-Months 2020 Change
Reported Adjusted Reported Adjusted Reported Adjusted
GAAP Non-GAAP GAAP Non-GAAP GAAP Non-GAAP
Brokerage Segment
Revenues $ 3,000.4 $ 2,995.8 $ 2,636.7 $ 2,725.1 14 % 10 %
Organic revenues $ 2,849.0 $ 2,678.5 6.4 %
Net earnings $ 592.0 $ 501.6 18 %
Net earnings margin 19.7 % 19.0 % + 71 bpts
Adjusted EBITDAC $ 1,087.2 $ 916.1 19 %
Adjusted EBITDAC margin 36.3 % 33.6 % + 267 bpts
Diluted net earnings per
share $ 2.90 $ 3.10 $ 2.58 $ 2.82 13 % 11 %
Risk Management Segment
Revenues before
reimbursements $ 465.3 $ 465.2 $ 402.6 $ 413.3 16 % 13 %
Organic revenues $ 452.4 $ 412.8 9.6 %
Net earnings $ 42.9 $ 29.0 48 %
Net earnings margin (before
reimbursements) 9.2 % 7.2 % + 221 bpts
Adjusted EBITDAC $ 88.8 $ 70.4 26 %
Adjusted EBITDAC margin
(before reimbursements) 19.1 % 17.0 % + 205 bpts
Diluted net earnings per
share $ 0.21 $ 0.23 $ 0.15 $ 0.17 41 % 33 %
Corporate Segment
Diluted net loss per share $ (0.28 ) $ (0.15 ) $ (0.15 ) $ (0.15 )
Total Company
Diluted net earnings per
share $ 2.83 $ 3.18 $ 2.58 $ 2.84 10 % 12 %
Total Brokerage and Risk
Management Segment
Diluted net earnings per
share $ 3.11 $ 3.33 $ 2.73 $ 2.99 14 % 11 %
In our corporate segment, net after-tax earnings from our clean energy
investments were $20.8 million and $5.0 million , as reported, in the three-month
periods ended June 30, 2021 and 2020, respectively. In our corporate segment,
net after-tax earnings from our clean energy investments were $54.2 million and
$57.5 million , as reported, in the six-month periods ended June 30, 2021 and
2020, respectively. We anticipate our clean energy investments to generate
between $75.0 million and $85.0 million in adjusted net earnings in 2021. See
"Impact of COVID-19 Pandemic Recovery" on page 46. We expect to use the
additional cash flow generated by these earnings to continue our mergers and
acquisition strategy in our core brokerage and risk management operations.
The following provides information that management believes is helpful when
comparing revenues before reimbursements, net earnings, EBITDAC and diluted net
earnings per share for the three and six-month periods ended June 30, 2021 with
the same periods in 2020. In addition, these tables provide reconciliations to
the most comparable GAAP measures for adjusted revenues, adjusted EBITDAC and
adjusted diluted net earnings per share. Reconciliations of EBITDAC for the
brokerage and risk management segments are provided on pages 49 and 55,
respectively, of this filing.
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For the Three-Month Periods Ended June 30 Reported GAAP to Adjusted Non-GAAP
Reconciliation:
Revenues Before Diluted Net Earnings
Reimbursements Net Earnings (Loss) EBITDAC (Loss) Per Share
Segment 2021 2020 2021 2020 2021 2020 2021 2020 Chg
(in millions) (in millions) (in millions)
Brokerage, as reported $ 1,390.2 $ 1,201.1 $ 227.6 $ 190.2 $ 440.0 $ 366.5 $ 1.09 $ 0.97 12 %
Net gains on
divestitures (0.5 ) (1.0 ) (0.4 ) (0.8 ) (0.5 ) (1.0 ) - -
Acquisition integration - 4.7 5.1 6.2 6.7 0.02 0.02
Workforce and lease
termination - - 3.1 11.5 4.1 15.0 0.02 0.06
Acquisition related
adjustments - - 15.3 8.3 7.7 4.1 0.08 0.04
Levelized foreign
currency
translation - 50.5 - 8.9 - 17.5 - 0.05
Brokerage, as adjusted
* 1,389.7 1,250.6 250.3 223.2 457.5 408.8 1.21 1.14 7 %
Risk Management, as
reported 245.0 190.8 24.9 9.9 47.6 28.5 0.12 0.05 140 %
Net gains on
divestitures (0.1 ) - (0.1 ) - (0.1 ) - - -
Workforce and lease
termination - - 0.5 3.7 0.6 5.0 - 0.02
Acquisition related
adjustments - - 0.3 1.1 0.2 - - 0.01
Levelized foreign
currency
translation - 4.4 - 0.1 - 0.7 - -
Risk Management, as
adjusted * 244.9 195.2 25.6 14.8 48.3 34.2 0.12 0.08 59 %
Corporate, as reported 261.6 159.7 (50.7 ) (38.3 ) (50.1 ) (35.0 ) (0.29 ) (0.23 )
Transaction-related
costs - - 8.7 - 10.2 - 0.04 -
U.K.-related rate
change - - 19.3 - - - 0.09 -
Corporate, as adjusted* 261.6 159.7 (22.7 ) (38.3 ) (39.9 ) (35.0 ) (0.16 ) (0.23 )
Total Company , as
reported $ 1,896.8 $ 1,551.6 $ 201.8 $ 161.8 $ 437.5 $ 360.0 $ 0.92 $ 0.79 16 %
Total Company , as
adjusted * $ 1,896.2 $ 1,605.5 $ 253.2 $ 199.7 $ 465.9 $ 408.0 $ 1.17 $ 0.99 18 %
Total Brokerage & Risk
Management, as reported $ 1,635.2 $ 1,391.9 $ 252.5 $ 200.1 $ 487.6 $ 395.0 $ 1.21 $ 1.02 19 %
Total Brokerage & Risk
Management, as adjusted
* $ 1,634.6 $ 1,445.8 $ 275.8 $ 238.0 $ 505.8 $ 443.0 $ 1.33 $ 1.22 9 %
* For three-month period ended June 30, 2021 , the pretax impact of the
brokerage segment adjustments totals
adjustment to the provision for income taxes of
these items. For the three-month period ended
impact of the risk management segment adjustments totals
corresponding adjustment to the provision for income taxes of
relating to these items. For the three-month period ended
pretax impact of the corporate segment adjustments totals
a corresponding adjustment to the benefit for income taxes of
relating to this item and the
detailed reconciliation of the 2021 provision for income taxes is shown on
page 44.
* 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 2020 provision for
income taxes is shown on page 44.
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-------------------------------------------------------------------------------- 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 2021 2020 2021 2020 2021 2020 2021 2020 Chg (in millions) (in millions) (in millions)
Brokerage, as reported
(4.6 ) (1.2 ) (3.6 ) (1.0 ) (4.6 ) (1.2 ) (0.02 ) - Acquisition integration
- - 7.9 10.2 10.3 13.4 0.04 0.05
Workforce and lease
termination - - 8.6 16.5 9.3 21.5 0.04 0.09
Acquisition related
adjustments - - 27.0 6.2 13.8 8.7 0.14 0.03
Levelized foreign
currency
translation - 89.6 - 14.3 - 29.3 - 0.07
Brokerage, as adjusted
* 2,995.8 2,725.1 631.9 547.8 1,087.2 916.1 3.10 2.82 11 %
Risk Management, as
reported 465.3 402.6 42.9 29.0 87.4 63.5 0.21 0.15 41 %
Net gains on
divestitures (0.1 ) - (0.1 ) - (0.1 ) - - -
Workforce and lease
termination - - 1.0 3.9 1.3 5.3 0.01 0.02
Acquisition related
adjustments - - 2.1 0.9 0.2 - 0.01 -
Levelized foreign
currency
translation - 10.7 - 0.3 - 1.6 - -
Risk Management, as
adjusted * 465.2 413.3 45.9 34.1 88.8 70.4 0.23 0.17 33 %
Corporate, as reported 563.7 341.5 (39.4 ) (13.4 ) (93.5 ) (58.0 ) (0.28 ) (0.15 )
Transaction-related
costs - - 8.7 - 10.2 - 0.04 -
U.K. -related tax rate
change - - 19.3 - - - 0.09 -
Corporate, as adjusted* 563.7 341.5 (11.4 ) (13.4 ) (83.3 ) (58.0 ) (0.15 ) (0.15 )
$ 4,029.4 $ 3,380.8 $ 595.5 $
517.2
$ 4,024.7 $ 3,479.9 $ 666.4 $ 568.5 $ 1,092.7 $ 928.5 $ 3.18 $ 2.84 12 % Total Brokerage & Risk Management, as reported$ 3,465.7 $ 3,039.3 $ 634.9 $ 530.6 $ 1,145.8 $ 907.9 $ 3.11 $ 2.73 14 % Total Brokerage & Risk Management, as adjusted *$ 3,461.0 $ 3,138.4 $ 677.8 $ 581.9 $ 1,176.0 $ 986.5 $ 3.33 $ 2.99 11 % * For, the six-month period endedJune 30, 2021 , the pretax impact of the
brokerage segment adjustments totals
adjustment to the provision for income taxes of
these items. For the six-month period ended
of the risk management segment adjustments totals
corresponding adjustment to the provision for income taxes of
relating to these items. For the six-month period ended
pretax impact of the corporate segment adjustments totals
a corresponding adjustment to the benefit for income taxes of
relating to this item and the
detailed reconciliation of the 2021 provision for income taxes is shown on
page 45.
* For the six-month period ended June 30, 2020 , the pretax impact of the
brokerage segment adjustments totals
adjustment to the provision for income taxes of
these items. For the six-month period ended
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 2020 provision for
income taxes is shown on page 45.
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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 ShareQuarter EndedJune 30, 2021 Brokerage, as reported$ 299.7 $ 72.1 $ 227.6 $ 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 20.2 4.9 15.3 - 15.3 0.08 Brokerage, as adjusted$ 329.7 $ 79.4 $ 250.3 $ 2.6 $ 247.7$ 1.21 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 - Risk Management, as adjusted$ 34.2 $ 8.6 $ 25.6 $ - $ 25.6$ 0.12 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 U.K.-related tax rate change - (19.3 ) 19.3 - 19.3 0.09 Corporate, as adjusted$ (100.6 ) $ (77.9 ) $ (22.7 ) $ 9.0 $ (31.7 )$ (0.16 ) Quarter EndedJune 30, 2020 Brokerage, as reported$ 247.8 $ 57.6 $ 190.2 $ 1.5 $ 188.7$ 0.97 Net gains on divestitures (1.0 ) (0.2 ) (0.8 ) - (0.8 ) - Acquisition integration 6.7 1.6 5.1 - 5.1 0.02 Workforce and lease termination 15.0 3.5 11.5 - 11.5 0.06 Acquisition related adjustments 10.8 2.5 8.3 - 8.3 0.04 Levelized foreign currency translation 11.6 2.7 8.9 - 8.9 0.05 Brokerage, as adjusted$ 290.9 $ 67.7 $ 223.2 $ 1.5 $ 221.7$ 1.14 Risk Management, as reported$ 13.2 $ 3.3 $ 9.9 $ - $ 9.9$ 0.05 Workforce and lease termination 5.0 1.3 3.7 - 3.7 0.02 Acquisition related adjustments 1.5 0.4 1.1 - 1.1 0.01 Levelized foreign currency translation 0.2 0.1 0.1 - 0.1 - Risk Management, as adjusted$ 19.9 $ 5.1 $ 14.8 $ - $ 14.8$ 0.08 - 44 -
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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)
Taxes Taxes Earnings Interests Interests per Share
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 9.3 0.7 8.6 - 8.6 0.04
Acquisition related
adjustments 36.8 9.8 27.0 - 27.0 0.14
Brokerage, as adjusted $ 831.8 $ 199.9 $ 631.9 $ 4.4 $ 627.5 $ 3.10
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
Risk Management, as adjusted $ 61.4 $ 15.5 $ 45.9 $ - $ 45.9 $ 0.23
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
U.K.-related tax rate change - (19.3 ) 19.3 - 19.3 0.09
Corporate, as adjusted $ (196.6 ) $ (185.2 ) $ (11.4 ) $ 18.8 $ (30.2 ) $ (0.15 )
Six-Months Ended June 30, 2020
Brokerage, as reported $ 658.6 $ 157.0 $ 501.6 $ 2.2 $ 499.4 $ 2.58
Net gains on divestitures (1.2 ) (0.2 ) (1.0 ) - (1.0 ) -
Acquisition integration 13.4 3.2 10.2 - 10.2 0.05
Workforce and lease
termination 21.5 5.0 16.5 - 16.5 0.09
Acquisition related
adjustments 8.0 1.8 6.2 - 6.2 0.03
Levelized foreign currency
translation 18.7 4.4 14.3 - 14.3 0.07
Brokerage, as adjusted $ 719.0 $ 171.2 $ 547.8 $ 2.2 $ 545.6 $ 2.82
Risk Management, as reported $ 38.8 $ 9.8 $ 29.0 $ - $ 29.0 $ 0.15
Workforce and lease
termination 5.3 1.4 3.9 - 3.9 0.02
Acquisition related
adjustments 1.2 0.3 0.9 - 0.9 -
Levelized foreign currency
translation 0.5 0.2 0.3 - 0.3 -
Risk Management, as adjusted $ 45.8 $ 11.7 $ 34.1 $ - $ 34.1 $ 0.17
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Termination of Agreement to Acquire Certain Willis Towers Watson plc Brokerage Operations
As we previously disclosed onJuly 26, 2021 , ourMay 12, 2021 agreement to acquire certain Willis Towers Watson plc brokerage operations was terminated as a result of Aon plc and Willis Towers Watson plc terminating their combination. In conjunction with the termination of this agreement, we exercised the special optional redemption feature of our$650 million tranche of 10-year senior notes issued onMay 20, 2021 . These notes will be redeemed onAugust 13, 2021 . We continue to evaluate opportunities to deploy our excess cash position through our merger program as well as possible share repurchases, including the new repurchase program discussed below.
EffectiveJuly 29, 2021 , our Board of Directors authorized the repurchase of up to$1.5 billion of common stock under a new share repurchase plan. This repurchase plan replaces our prior repurchase program, of which approximately$1.0 billion remained.
Repurchases of common stock may be effected from time to time through open
market purchases, trading plans established in accordance with the
Impact of COVID-19 Pandemic Recovery
Relative to second quarter 2020, during the second quarter 2021;
• Nearly all of our brokerage segment operations' revenues benefited from our
clients' improving business conditions which increases insured exposure
units (i.e., insured values, payrolls, employees, miles driven, gross
receipts, etc.),
• Our risk management segment operations' revenue benefited from our clients'
improving business conditions which increases new arising workers
compensation claims,
• Our clean energy investments benefited from higher electricity production
due to increased demand for electricity from improving business conditions.
If economic conditions continue to improve, we believe we may also see favorable revenue benefits in our brokerage and risk management segments and clean-energy investments in the third and fourth quarters of 2021 relative to same quarters in 2020. However, if economic recovery slows, we could see the favorable revenue and investment returns soften from second quarter 2021 levels. During the second, third and fourth quarters of 2020 and first quarter of 2021, we realized significant expense savings (totaling approximately$60 million to$75 million per quarter relative to prior year same quarters, adjusted for pro forma full-quarter costs related to acquisitions) as a result of reduced travel, entertainment and advertising expenses, reduced costs from lower employee medical plan utilization, a reduction in workforce, wage controls, and reduced use of external consultants. During second quarter 2021, relative to second quarter 2020, as we increased our business activities, we saw modest increases in travel and entertainment, full restoration of advertising and more normalized usage of our employee medical plan, resumption of annual support-layer wage increases, increased use of external consultants, and a slight increase in incentive compensation. These incremental costs totaled approximately$15 million in our brokerage segment relative to second quarter 2020. We believe we will see incremental brokerage segment costs again in third and fourth quarter 2021, relative to same quarters in 2020, of approximately$20 million and$30 million , respectively. However, if the pace of economic recovery accelerates we could see expense increases greater than estimates provided above.
For a discussion of risk and uncertainties relating to COVID19 for our business, results of operations and financial condition, see pages 2 and 3.
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--------------------------------------------------------------------------------Results of Operations Brokerage
The brokerage segment accounted for 73% of our revenues during the six-month
period ended
(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 byproviding 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.
(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
IRS andDOJ investigations - As previously disclosed, our IRC 831(b) (or "micro-captive") advisory services business has been under investigation 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 has initiated audits for the 2012 tax year, and subsequent tax years, of over 100 of the micro-captive underwriting enterprises organized and/or managed by us. InMay 2020 , we learned that theDOJ began conducting a criminal investigation related to IRC 831(b) micro-captive underwriting enterprises. We have been advised that we are not currently a target of the investigation. InJune 2020 our subsidiaryArtex Risk Solutions, Inc. (which we refer to as Artex) received a grand jury subpoena requesting documents relating to its micro-captive advisory business. We have produced documents in response to the subpoena. We are fully cooperating with both theIRS investigation and theDOJ investigation. We are not able to reasonably estimate the amount of any potential loss in connection with these investigations. Class action lawsuit - OnDecember 7, 2018 , a class action lawsuit was filed against us, Artex and other defendants, in theUnited States District Court for the District of Arizona . The named plaintiffs were micro-captives and their related entities and owners who had IRC Section 831(b) tax benefits disallowed by theIRS . The complaint alleged that the defendants defrauded the plaintiffs by marketing and managing micro-captives with the knowledge that the captives did not constitute bona fide insurance and thus would not qualify for tax benefits. OnAugust 5, 2019 , the trial court granted the defendants' motion to compel arbitration and dismissed the class action lawsuit. Plaintiffs appealed this ruling to theUnited States Court of Appeals for the Ninth Circuit . OnSeptember 9, 2020 , the Ninth Circuit affirmed the ruling of the trial court dismissing the class action lawsuit. OnMarch 17, 2021 , plaintiffs filed a petition for writ of certiorari with theUnited States Supreme Court . OnJune 28, 2021 , theUnited States Supreme Court denied the plaintiff's petition for a writ of certiorari. This ruling concluded the class action lawsuit in our favor. - 47 -
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Financial information relating to our brokerage segment results for the three and six-month periods endedJune 30, 2021 as compared to the same periods in 2020, is as follows (in millions, except per share, percentages and workforce data):
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