The following selected consolidated financial data for each of the five years in the period ended December 31, 2019 have been derived from our consolidated financial statements. Such data should be read in conjunction with our consolidated financial statements and notes thereto in Item 8 of this annual report.
* As of January 1, 2018, we adopted ASC 606, Revenues from Contracts with Customers related to Topic 606 using the full retrospective method to restate 2017 and 2016. The cumulative effect of the adoption was recognized as an increase to retained earnings of $125.3 million on January 1, 2016. As permitted under the guidelines issued by the SEC related to the adoption of Topic 606, we did not restate the 2015 information in the table above.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included in Item 8 of this annual report. In addition, please see “Information Regarding Non-GAAP
In our corporate segment, net after tax earnings from our clean energy investments was $88.5 million and $118.6 million in 2019 and 2018, respectively. Our current estimate of the 2020 annual net after tax earnings, including IRC Section 45 tax credits, which will be produced from all of our clean energy investments in 2020, is $80.0 million to $100.0 million. 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.
Fluctuations in premiums charged by property/casualty underwriting enterprises have a direct and potentially material impact on the insurance brokerage industry. Commission revenues are generally based on a percentage of the premiums paid by insureds and normally follow premium levels. Insurance premiums are cyclical in nature and may vary widely based on market conditions. Various factors, including competition for market share among underwriting enterprises, increased underwriting capacity and improved economies of scale following consolidations, can result in flat or reduced property/casualty premium rates (a “soft” market). A soft market tends to put downward pressure on commission revenues. Various countervailing factors, such as greater than anticipated loss experience, unexpected loss exposure and capital shortages, can result in increasing property/casualty premium rates (a “hard” market). A hard market tends to favorably impact commission revenues. Hard and soft markets may be broad-based or more narrowly focused across individual product lines or geographic areas. As markets
risk retention groups and capital market solutions to transfer risk. According to industry estimates, these alternative markets now account for 50% of the total U.S. commercial property/casualty market. Our brokerage units are very active in these markets as well. While increased use by insureds of these alternative markets historically has reduced commission revenue to us, such trends generally have been accompanied by new sales and renewal increases in the areas of risk management, claims management, captive insurance and self-insurance services and related growth in fee revenue. Inflation tends to increase the levels of insured values and risk exposures, resulting in higher overall premiums and higher commissions. However, the impact of hard and soft market fluctuations has historically had a greater impact on changes in premium rates, and therefore on our revenues, than inflationary pressures.
We typically cite the Council of Insurance Agents & Brokers (which we refer to as the CIAB) insurance pricing quarterly survey at this time as an indicator of the current insurance rate environment. The fourth quarter 2019 survey had not been published as of the filing date of this report. The first three 2019 quarterly surveys indicated that U.S. commercial property/casualty rates increased by 3.5%, 5.2%, and 6.2% on average, for the first, second and third quarters of 2019, respectively. We expect a similar trend to be noted when the CIAB fourth quarter 2019 survey report is issued, which would signal continued price firming. The CIAB represents the leading domestic and international insurance brokers, who write approximately 85% of the commercial property/casualty premiums in the U.S.
In 2020, we expect increases in property/casualty rates and exposures greater than the modest increases observed during 2019. Within our employee benefits and consulting brokerage operations, we believe that employment growth, a tightening labor market and the complexity surrounding the healthcare regulatory environment bode well for the continued demand of our solutions. In addition, 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. Internationally, pricing is increasing the most in our London Specialty and Canadian retail property/casualty markets, and is positive in our Australian, New Zealand and UK retail property/casualty markets. 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. Based on our experience, insurance carriers appear to be making rational pricing decisions. In lines and accounts where rate increases or decreases are warranted, the underwriters are pricing accordingly. In summary, there is adequate capacity in the insurance market and most businesses continue to stay in standard-line markets. Clients can broadly still obtain coverage, but at reduced levels in some lines of business.
- We have investments in limited liability companies that own 29 clean coal production plants developed by us and five clean coal production plants we purchased from a third party on September 1, 2013. All 34 plants produce refined coal using propriety technologies owned by Chem-Mod.
Uncertain tax positions are measured based upon the facts and circumstances that exist at each reporting period and involve significant management judgment. Subsequent changes in judgment based upon new information may lead to changes in recognition, derecognition and measurement. Adjustments may result, for example, upon resolution of an issue with the taxing authorities, or expiration of a statute of limitations barring an assessment for an issue. We recognize interest and penalties, if any, related to unrecognized tax benefits in our provision for income taxes. See Note 19 to our 2019 consolidated financial statements for a discussion regarding the possibility that our gross unrecognized tax benefits balance may change within the next twelve months.
We establish or adjust valuation allowances for deferred tax assets when we estimate that it is more likely than not that future taxable income will be insufficient to fully use a deduction or credit in a specific jurisdiction. In assessing the need for the recognition of a valuation allowance for deferred tax assets, we consider whether it is more likely than not that some portion, or all, of the deferred tax assets will not be realized and adjust the valuation allowance accordingly. We evaluate all significant available positive and negative evidence as part of our analysis. Negative evidence includes the existence of losses in recent years. Positive evidence includes the forecast of future taxable income by jurisdiction, tax-planning
strategies that would result in the realization of deferred tax assets and the presence of taxable income in prior carryback years. The underlying assumptions we use in forecasting future taxable income require significant judgment and take into account our recent performance. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which temporary differences are deductible or creditable. See Note 19 to our 2019 consolidated financial statements related to changes in our valuation allowances.
- See Intangible Assets in Note 1 to our 2019 consolidated financial statements.
to three-year period subsequent to the acquisition date, are measured at fair value as of the acquisition date and are included on that basis in the recorded purchase price consideration. We will record subsequent changes in these estimated earnout obligations, including the accretion of discount, in our consolidated statement of earnings when incurred.
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, adjusted EBITDAC margin (before acquisitions), 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 report. 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
presentation of our 2019, 2018 and 2017 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
- 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:
• Costs related to divestitures, which include legal and other costs related to certain operations that are being exited by us.
• 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.
- Adjusted compensation expense and adjusted operating expense, respectively, each divided by adjusted revenues.
- 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 net earnings have been adjusted to exclude the after-tax
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 2020 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 non-GAAP
(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.
Financial information relating to our brokerage segment results for 2019, 2018 and 2017 (in millions, except per share, percentages and workforce data):
The following provides information that management believes is helpful when comparing EBITDAC and adjusted EBITDAC for 2019, 2018 and 2017 (in millions):
Items excluded from organic revenue computations yet impacting revenue comparisons for 2019 and 2018 include the following (in millions):
For 2019, 2018 and 2017, we issued 1,908,000, 881,000, and 1,041,000 shares, respectively, in connection with tax-free
information that management believes is helpful when comparing 2019 and 2018 compensation expense and 2018 and 2017 compensation expense (in millions):
The increase in compensation expense in 2019 compared to 2018 was primarily due to an increase in the average number of employees, salary increases, one-time
information that management believes is helpful when comparing 2019 and 2018 operating expense and 2018 and 2017 operating expense (in millions):
The increase in operating expense in 2019 compared to 2018 was due primarily to unfavorable foreign currency translation - $1.5 million and increases in meeting and client entertainment expenses - $22.9 million, technology expenses - $17.1 million, business insurance - $13.8 million, costs related to divestitures - $13.0 million, outside consulting fees - $11.8 million, real estate expenses - $10.8 million, marketing expense - $8.2 million, acquisition integration - $7.1 million, professional and banking fees - $5.6 million, lease termination charges - $3.2 million, employee related expense - $2.7 million, office supplies - $2.6 million, outside services expense - $2.0 million, other expense - $0.9 million, change in deferred operating expense - $2.0 million and bad debt expense - $0.3 million, partially offset by a decrease in licenses and fees - $1.7 million. Also contributing to the increase in operating expense in 2019 were increased expenses associated with the acquisitions completed in 2019.
The increase in operating expense in 2018 compared to 2017 was due primarily to increases in technology expenses - $30.5 million, marketing expense - $9.4 million, meeting and client entertainment expenses - $8.9 million, real estate expenses - $4.3 million, office supplies - $3.4 million, employee related expense - $3.2 million, outside services expense - $3.2 million, licenses and fees - $2.6 million, professional and banking fees - $2.2 million, other expense - $1.9 million, business insurance - $1.8 million and premium financing interest expense - $0.5 million, partially offset by favorable foreign currency translation - $2.0 million and decreases in bad debt expense - $3.5 million, outside consulting fees - $3.4 million, lease termination charges - $2.3 million and change in deferred operating expense - $2.2 million. Also contributing to the increase in operating expense in 2018 were increased expenses associated with the acquisitions completed in 2018.
- The change in the expense from the change in estimated acquisition earnout payables in 2019 compared to 2018 and 2018 compared to 2017 was due primarily to adjustments made to the estimated fair value of earnout obligations related to revised projections of future performance. During 2019, 2018 and 2017, we recognized $26.2 million, $17.5 million and $19.7 million, respectively, of expense related to the accretion of the discount recorded for earnout obligations in connection with our 2019, 2018 and 2017 acquisitions. During 2019, 2018 and 2017, we recognized $9.3 million of income, $3.2 million of income and $9.6 million of expense, respectively, related to net adjustments in the estimated fair market values of earnout obligations in connection with revised projections of future performance for 112, 109 and 106 acquisitions, respectively.
- The amounts reported in this line for 2019, 2018 and 2017 include noncontrolling interest earnings of $17.2 million, $10.7 million and $7.6 million, respectively, primarily related to our investment in Capsicum Reinsurance Brokers LLP (which we refer to as Capsicum Re). We were partners in this venture with Grahame Chilton, the former CEO of our International Brokerage Division (he stepped down from that role effective July 1, 2018). Prior to December 31, 2019, we were the controlling partner, participating in 33% of Capsicum Re’s net operating results and Mr. Chilton owned approximately 50% of Capsicum Re. In January 2020, we increased our ownership interest in Capsicum Re from 33% to 100%. Founded in December 2013 through a strategic partnership with Gallagher, Capsicum Re has since grown to become the world’s fifth largest reinsurance broker with offices in the U.K., U.S., Bermuda and South America.
basis, (ii) on a cost-plus basis, or (iii) as performance-based fees. We also provide risk management consulting services that are recognized as the services are delivered.
Financial information relating to our risk management segment results for 2019, 2018 and 2017 (in millions, except per share, percentages and workforce data):
information that management believes is helpful when comparing 2019 and 2018 EBITDAC and adjusted EBITDAC and 2018 and 2017 EBITDAC and adjusted EBITAC (in millions):
- The increase in fees for 2019 compared to 2018 was primarily due to new business of $44.0 million, which was partially offset by lost business of $18.5 million and lower international performance bonus fees. The increase in fees for 2018 compared to 2017 was primarily due to new business of $78.8 million and higher international performance bonus fees, which were partially offset by lost business of $29.3 million. Organic change in fee revenues was 4% in 2019 and 7% in 2018.
Items excluded from organic fee computations yet impacting revenue comparisons in 2019 and 2018 include the following (in millions):
- Reimbursements represent amounts received from clients reimbursing us for certain third-party costs associated with providing our claims management services. In certain service partner relationships, we are considered a principal because we direct the third party, control the specified service and combine the services provided into an integrated solution. Given this principal relationship, we are required to recognize revenue on a gross basis and service partner vendor fees in the operating expense line in our consolidated statement of earnings. The decrease in reimbursements in 2019 compared to 2018 was primarily due to a change in business mix that is processed internally versus using outside service partners. The increase in reimbursements in 2018 compared to 2017 was primarily due to the net increase in new business discussed above.
The increase in operating expense in 2018 compared to 2017 was primarily due to an adverse make-whole settlement - $1.5 million and increases in technology expenses - $5.6 million, outside consulting fees - $3.0 million, business insurance - $1.4 million, meeting and client entertainment expense - $1.0 million, employee expense - $0.9 million, bad debt expense - $0.6 million, lease termination related charges - $0.4 million and outside services - $0.2 million, partially offset by decreases in other expense - $2.8 million, professional and banking fees - $1.7 million and licenses and fees - $0.4 million and office supplies - $0.1 million.
Depreciation expense increased in 2019 compared to 2018 and 2018 compared to 2017, which reflects the impact of purchases of furniture, equipment and leasehold improvements related to office expansions and moves and expenditures related to upgrading computer systems.
- Amortization expense increased in 2019 compared to 2018 and increased in 2018 compared to 2017. In 2019, we made three acquisitions with annualized revenues of approximately $15.9 million. In 2018, we made four acquisitions with annualized revenues of approximately $21.9 million. In 2017, we made three acquisitions with annualized revenues of approximately $13.3 million. No indicators of impairment were noted in 2019, 2018 or 2017.
The decrease in 2019 is due to decreased production of clean coal. The increases in 2018 and 2017 are due to increased production of clean coal.
The increase in royalty income in 2019 compared to 2018 was due to increased production of refined coal by Chem-Mod
The losses in 2019, 2018 and 2017 were low because the vast majority of our operations are consolidated.
In 2019, we recorded a write down related to moving certain IRC Section 45 facilities and gains from legacy investments, which netted to a loss of $2.9 million.
Cost of revenues from consolidated clean coal production plants in 2019, 2018 and 2017 consists of the cost of coal, labor, equipment maintenance, chemicals, supplies, management fees and depreciation incurred by the clean coal production plants to generate the consolidated revenues discussed above. The decreases in cost of revenues in 2019 compared to 2018, were primarily due to decreased production. The increases in cost of revenues in 2018 compared to 2017, were primarily due to increased production of refined coal.
Compensation expense for 2019, 2018 and 2017, respectively, was $77.9 million, $89.5 million and $88.2 million.
The $11.6 million decrease in 2019 compensation expense compared to 2018 was primarily due to lower clean energy results in 2019 and due to a reallocation of some additional costs to the brokerage and risk management segments. In June 2019, we reviewed our allocation of corporate costs to our business segments. In conjunction with that review, we made changes to how we allocate certain costs to our business segments reflecting management’s updated view of the costs necessary to support these segments.
The $1.3 million increase in 2018 compensation expense compared to 2017 was primarily due to increased staffing and salary increases, clean-energy performance and efforts related to implementation of the new ASC 606 accounting standard, partially offset by a decrease in the net pension cost related to our legacy U.S. defined pension plan and a decrease in incentive compensation in 2018 compared to 2017 due to efforts on the new headquarters in 2017.
Operating expense for 2018 includes banking and related fees of $3.8 million, external professional fees and other due diligence costs related to 2018 acquisitions of $13.2 million, other corporate and clean energy related expenses of $22.4 million, corporate related marketing costs of $15.6 million, expenses of $2.8 million for systems and consulting related to implementation of the new revenue recognition accounting standard rules, and a net unrealized foreign exchange remeasurement gain of $2.2 million.
Operating expense for 2017 includes banking and related fees of $3.5 million, external professional fees and other due diligence costs related to 2017 acquisitions of $10.6 million, other corporate and clean energy related expenses of $10.0 million, $2.2 million for a biennial corporate-wide meeting, corporate related marketing costs of $4.0 million, one-time
costs of $12.2 million related to the new headquarters, $5.3 million of consulting expenses related to the new revenue recognition accounting standard and tax reform and a $2.5 million net unrealized foreign exchange remeasurement loss.
LLC. Also, included in net earnings attributable to noncontrolling interests are offsetting amounts related to non-Gallagher
- 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 credits generated, because that is the segment which produced the credits. The law that provides for IRC Section 45 tax credits substantially expires in December 2019 for our fourteen 2009 Era Plants and in December 2021 for our twenty 2011 Era Plants. Our consolidated effective tax rate was (14.3)%, (41.0)% and (43.7)% for 2019, 2018 and 2017, respectively. The tax rates for 2019, 2018 and 2017 were lower than the statutory rate primarily due to the amount of IRC Section 45 tax credits recognized during the year. There were $196.0 million, $252.9 million and $229.7 million of Section 45 tax credits generated and recognized in 2019, 2018 and 2017, respectively. Also impacting the benefit for the income taxes line is the adoption of a new accounting pronouncement in 2017, whereby it requires that the income tax effects of awards be recognized in the income statement when the awards vest or are settled, rather than recognizing the tax benefits in excess of compensation costs through stockholders’ equity. The income tax benefit of stock based awards that vested or were settled in the years ended December 31, 2019, 2018 and 2017 was $17.4 million, $15.0 million and $15.1 million, respectively.
The Tax Act requires U.S. shareholders to include in income certain “global intangible low-taxed
income” (which we refer to as GILTI) beginning in 2018. We have adopted a policy to include the GILTI income in the future period when the tax arises and we recorded income tax expense on such income for the years ended December 31, 2019 and 2018.
- The Tax Act contains provisions that may limit deductions for executive compensation. We determined that our ability to deduct executive compensation will be limited as a result of the Tax Act.
information that we believe is helpful when comparing 2019, 2018 and 2017 operating results for the corporate segment (in millions):
(2) Corporate includes the impact of tax reform and corporate legal entity restructuring.
LLC, incurred costs related to (a) settling certain patent infringement litigation, (b) prevailing in a tax court matter, (c) defending a new patent matter, and (d) moving three 2011 Era plants into different locations that could generate more after-tax
Includes the operating results related to our investments in clean coal production plants and Chem-Mod
Consists of professional fees, due diligence and other costs incurred related to our acquisitions.
Consists of overhead allocations mostly related to corporate staff compensation and other corporate level activities, costs related to biennial company-wide award event, cross-selling and motivational meetings for our production staff and field management, expenses related to our new corporate headquarters, corporate related data and branding initiatives, expenses for systems and consulting related to the implementation of the new revenue recognition accounting and tax reform rules and the impact of foreign currency translation.
During the years ended December 31, 2018 and 2017, we incurred $5.9 million and $8.9 million, respectively, of pre-tax
Improvements to Employee Share-Based Payment Accounting, was effective January 1, 2017. It requires that the income tax effects of awards be recognized in the income statement (in the Income Tax Benefit column above) when the awards vest or are settled, rather than recognizing the tax benefits in excess of compensation costs through stockholders’ equity. The income tax benefit of stock based awards that vested or were settled in the years ended December 31, 2019, 2018 and 2017 was $17.4 million, $15.0 million and $15.1 million, respectively, and is included in the table above in the Corporate line.
During 2017, we relocated our corporate office headquarters to a nearby suburb of Chicago. Move related after-tax
LLC. We believe that the production and sale of refined coal at these plants are qualified to receive refined coal tax credits under IRC Section 45. The 14 2009 Era Plants received tax credits through 2019 and the 20 2011 Era Plants can receive tax credits through 2021.
The estimated earnings information in the table reflects management’s current best estimate of the 2020 low and high ranges of after-tax
earnings based on early production estimates from the host utilities, other operating assumptions, including current U.S. federal income tax laws. However, coal-fired power plants may not ultimately produce refined fuel at estimated levels due to seasonal electricity demand, production costs, natural gas prices, weather conditions, as well as many other operational, regulatory and environmental compliance reasons. Future changes in EPA regulations or U.S. federal income tax laws might materially impact these estimates.
LLC generates royalty income from refined coal production plants owned by those limited liability companies in which we invest as well as refined coal production plants owned by other unrelated parties. Future changes in EPA regulations or U.S. federal income tax laws might materially impact these estimates.
We may sell ownership interests in some or all of the plants to co-investors
expenses, which include depreciation, amortization, change in estimated acquisition earnout payables, deferred compensation, restricted stock, and stock-based and other non-cash
compensation expenses. Cash provided by operating activities can be unfavorably impacted if the amount of IRC Section 45 tax credits generated (which is the amount we recognize for financial reporting purposes) is greater than the amount of tax credits actually used to reduce our tax cash obligations. Excess tax credits produced during the period result in an increase to our deferred tax assets, which is a net use of cash related to operating activities. Please see “Clean energy investments” below for more information on their potential future impact on cash provided by operating activities.
When assessing our overall liquidity, we believe that the focus should be on net earnings as reported in our consolidated statement of earnings, adjusted for non-cash
items (i.e., EBITDAC), and cash provided by operating activities in our consolidated statement of cash flows. Consolidated EBITDAC was $1,295.6 million, $1,046.4 million and $900.6 million for 2019, 2018 and 2017, respectively. Net earnings attributable to controlling interests were $668.8 million, $633.5 million and $481.3 million for 2019, 2018 and 2017, respectively. We believe that EBITDAC items are indicators of trends in liquidity. From a balance sheet perspective, we believe the focus should not be on premium and fees receivable, premiums payable or restricted cash for trends in liquidity. Net cash flows provided by operations will vary substantially from quarter to quarter and year to year because of the variability in the timing of premiums and fees receivable and premiums payable. We believe that in order to consider these items in assessing our trends in liquidity, they should be looked at in a combined manner, because changes in these balances are
interrelated and are based on the timing of premium payments, both to and from us. In addition, funds legally restricted as to our use relating to premiums and clients’ claim funds held by us in a fiduciary capacity are presented in our consolidated balance sheet as “Restricted cash” and have not been included in determining our overall liquidity.
In 2019, the funded status of the Plans was unfavorably impacted by a decrease in the discount rates used in the measurement of the pension liabilities at December 31, 2019, the impact of which was approximately $21.3 million. However, the funded status was favorably impacted by returns on the plan’s assets being higher in 2019 than anticipated by approximately $23.8 million. The net change in the funded status of the Plan in 2019 resulted in a decrease in noncurrent liabilities in 2019 of $2.5 million. In 2018, the funded status of the Plans was favorably impacted by the $30.0 million contribution discussed above and an increase in the discount rate used in the measurement of the pension liabilities at December 31, 2018, which resulted in a decrease of approximately $20.2 million. However, the funded status was unfavorably impacted by returns on the plan’s assets being lower in 2018 than anticipated by approximately $31.4 million. The net change in the funded status of the Plan in 2018 resulted in a decrease in noncurrent liabilities in 2018 of $18.8 million. While the change in funded status of the Plans had no direct impact on our cash flows from operations in 2019, 2018 and 2017, potential changes in the pension regulatory environment and investment losses in our pension plan have an effect on our capital position and could require us to make significant contributions to our defined benefit pension plan and increase our pension expense in future periods.
- Capital expenditures were $138.8 million, $124.4 million and $129.2 million for 2019, 2018 and 2017, respectively, of which $11.8 million in 2017 related to expenditures on our new corporate headquarters building. In addition, 2019 and 2018 capital expenditures include amounts incurred related to investments made in information technology and software development projects. Relating to the development of our new corporate headquarters, we received property tax related credits under a tax-increment
- During 2019, 2018 and 2017, we sold several books of business and recognized one-time
net gain of $0.17 of diluted net earnings per share as a result of the sale.
earnings, including IRC Section 45 tax credits, which will be produced from all of our clean energy investments in 2020, is $80.0 million to $100.0 million. The IRC Section 45 tax credits generate positive cash flow by reducing the amount of federal income taxes we pay, which is offset by the operating expenses of the plants, by any capital expenditures related to the redeployment, and in some cases the relocation of refined coal plants. We anticipate positive net cash flow related to IRC Section 45 activity in 2020. However, there are several variables that can impact net cash flow from clean energy investments in any given year. Therefore, accurately predicting positive or negative cash flow in particular future periods is not possible at this time. Nonetheless, if current ownership interests remain the same, if capital expenditures related to redeployment and relocation of refined coal plants remain as currently anticipated, and if we continue to generate sufficient taxable income to use the tax credits produced by our IRC Section 45 investments, we anticipate that these investments will continue to generate positive net cash flows for the period 2020 through at least 2025. While we cannot precisely forecast the cash flow impact in any particular period, we anticipate that the net cash flow impact of these investments will be positive overall. Please see “Clean energy investments” on pages 48 to 50 for a more detailed description of these investments and their risks and uncertainties.
We use the Credit Agreement to post letters of credit and to borrow funds to supplement our operating cash flows from time to time. During 2019, we borrowed an aggregate of $4,315.0 million and repaid $4,060.0 million under our Credit Agreement. During 2018, we borrowed an aggregate of $3,075.0 million and repaid $3,000.0 million under our Credit Agreement. During 2017, we borrowed an aggregate of $3,643.0 million and repaid $3,731.0 million under our Credit Agreement. Principal uses of the 2019, 2018 and 2017 borrowings under the Credit Agreement were to fund acquisitions, earnout payments related to acquisitions and general corporate purposes.
On August 15, 2019, we entered into an amendment to our revolving loan facility (which we refer to as the Premium Financing Debt Facility), that provides funding for the three Australian (AU) and New Zealand (NZ) premium finance subsidiaries. The amendment, among other things, extended the expiration date of the Premium Financing Debt Facility from May 18, 2020 to July 18, 2021, increased the Interbank fee rates (see Note 8) and increased the total commitment for the AU$ denominated tranche from AU$185.0 million to AU$245.0 million. The Premium Financing Debt Facility is comprised of: (i) Facility B, which is separated into AU$205.0 million and NZ$25.0 million tranches, (ii) Facility C, an AU$40.0 million equivalent multi-currency overdraft tranche and (iii) Facility D, a NZ$15.0 million equivalent multi-currency overdraft tranche. There was a three month increase in the AU$160.0 million tranche to AU$190.0 million, which expired on January 31, 2019. At December 31, 2019, $170.6 million of borrowings were outstanding under the Premium Financing Debt Facility.
At December 31, 2019, we had $3,923.0 million of corporate-related borrowings outstanding under separate note purchase agreements entered into in the period 2009 to 2019, $520.0 million outstanding under our credit facility, $170.6 million outstanding under our Premium Financing Debt Facility and a cash and cash equivalent balance of $604.8 million. See Note 8 to our 2019 consolidated financial statements for a discussion of the terms of the note purchase agreements, the Credit Agreement and the Premium Financing Debt Facility.
interest rate hedging transactions related to this private placement. We realized a net cash loss of approximately $5.2 million on the hedging transactions that will be recognized on a pro rata basis as an increase in our reported interest expense over ten years of the total 15-year
Consistent with past practice, as of December 31, 2019 we had pre-issuance
hedges open for $350.0 million for 2020, $350.0 million for 2021 and $100.0 million for 2022.
As previously disclosed, on January 30, 2020, we closed and funded an offering of $575.0 million aggregate principal amount of fixed rate private placement unsecured senior notes. The weighted average maturity of these notes is 11.7 years and the weighted average interest rate is 4.23% per annum after giving effect to underwriting costs and the net hedge loss. In 2017 and 2018, we entered into pre-issuance
• $79.0 million of 4.24% senior notes due in 2035; and
interest rate hedging transactions related to the $300.0 million August 3, 2017 notes maturity. We realized a cash gain of approximately $8.3 million on the hedging transaction that will be recognized on a pro rata basis as a reduction in our reported interest expense over the life of the debt.
- Our board of directors determines our dividend policy. Our board of directors determines dividends on our common stock on a quarterly basis after considering our available cash from earnings, our anticipated cash needs and current conditions in the economy and financial markets.
with the SEC, registering 10.0 million shares of our common stock that we may offer and issue from time to time in connection with future acquisitions of other businesses, assets or securities. At December 31, 2019, 7.3 million shares remained available for issuance under this registration statement.
- Another source of liquidity to us is the issuance of our common stock pursuant to our stock option and employee stock purchase plans. Proceeds from the issuance of common stock under these plans were $101.2 million in 2019, $81.9 million in 2018 and $60.4 million in 2017. On May 16, 2017, our stockholders approved the 2017 Long-Term Incentive Plan (which we refer to as the LTIP), which replaced our previous stockholder-approved 2014 Long-Term Incentive Plan. All of our officers, employees and non-employee
and incentive stock options, stock appreciation rights, restricted stock units and performance units, any or all of which may be made contingent upon the achievement of performance criteria. Stock options with respect to 13.2 million shares (less any shares of restricted stock issued under the LTIP - 2.8 million shares of our common stock were available for this purpose as of December 31, 2019) were available for grant under the LTIP at December 31, 2019. Our employee stock purchase plan allows our employees to purchase our common stock at 95% of its fair market value. Proceeds from the issuance of our common stock related to these plans have contributed favorably to net cash provided by financing activities in the years ended December 31, 2019, 2018 and 2017, and we believe this favorable trend will continue in the foreseeable future.
- We believe that we have sufficient capital and access to additional capital to meet our short- and long-term cash flow needs.
Since commitments may expire unused, the amounts presented in the table above do not necessarily reflect our actual future cash funding requirements. See Note 17 to our 2019 consolidated financial statements for a discussion of our funding commitments related to our corporate segment and the Off-Balance
At December 31, 2019, we had posted two letters of credit totaling $9.4 million, in the aggregate, related to our self-insurance deductibles, for which we have recorded a liability of $16.5 million. We have an equity investment in a rent-a-captive
facility, which we use as a placement facility for certain of our insurance brokerage operations. At December 31, 2019, we had posted seven letters of credit totaling $6.3 million to allow certain of our captive operations to meet minimum statutory surplus requirements plus additional collateral related to premium and claim funds held in a fiduciary capacity, one letter of credit totaling $0.9 million for collateral related to claim funds held in a fiduciary capacity by a recent acquisition and one letter of credit totaling $0.5 million as a security deposit for a 2015 acquisition’s lease. These letters of credit have never been drawn upon.
- Insurance companies, reinsurance companies and various other forms of risk-taking entities, including intermediaries of underwriting enterprises.
Our brokerage segment operations provide brokerage and consulting services to companies and entities of all types, including commercial, not-for-profit,
In the preparation of our consolidated financial statements as of December 31, 2019, management evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date on which the financial statements were issued for potential recognition in our consolidated financial statements and/or disclosure in the notes therein.
Certain underwriting enterprises may pay us additional revenues for our sales capabilities, our risk selection knowledge, or our administrative efficiencies. These amounts are in excess of the commission or fee revenues discussed above, and not all business we place with participating underwriting enterprises is eligible for contingent revenues. Unlike supplemental revenues, also discussed above, these revenues are variable, generally based on growth, the loss experience of the underlying insurance contracts, and/or our efficiency in processing the business. We generally operate under calendar year contracts, but we do not receive these revenues from the underwriting enterprises until the following calendar year, generally in the first and second quarters, after verification of the performance indicators outlined in the contracts. Accordingly, during each reporting period, we must make our best estimate of amounts we have earned using historical averages and other factors to project such revenues. We base our estimates each period on a contract-by-contract
basis, or (iii) as performance-based fees. We also provide risk management consulting services that are recognized as the services are delivered.
basis, our obligation is to process claims for a term specified within the contract. Because it is impractical to recognize our revenues on an individual claim-by-claim
basis, we recognize revenue plus an appropriate estimate of our profit margin on a portfolio basis by grouping claims with similar characteristics (a practical expedient as defined in Topic 606). We apply actuarially-determined, historical-based patterns to determine our future service obligations, without applying a present value discount.
Basic net earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the reporting period. Diluted net earnings per share is computed by dividing net earnings by the weighted average number of common and common equivalent shares outstanding during the reporting period. Common equivalent shares include incremental shares from dilutive stock options, which are calculated from the date of grant under the treasury stock method using the average market price for the period.
Premiums and fees receivable in the accompanying consolidated balance sheet are net of allowances for estimated policy cancellations and doubtful accounts. The allowance for estimated policy cancellations was $8.3 million and $7.8 million at December 31, 2019 and 2018, respectively, which represents a reserve for future reversals in commission and fee revenues related to the potential cancellation of client insurance policies that were in force as of each year end. The allowance for doubtful accounts was $8.7 million and $10.0 million at December 31, 2019 and 2018, respectively. We establish the allowance for estimated policy cancellations through a charge to revenues and the allowance for doubtful accounts through a charge to operating expenses. Both of these allowances are based on estimates and assumptions using historical data to project future experience. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein. We periodically review the adequacy of these allowances and make adjustments as necessary.
Seven subsidiaries of the brokerage segment make short-term loans (generally with terms of twelve months or less) to our clients to finance premiums. These premium financing contracts are structured to minimize potential bad debt expense to us. Such receivables are generally considered delinquent after seven days of the payment due date. In normal course, insurance policies are cancelled within one month of the contractual payment due date if the payment remains delinquent. We recognize interest income as it is earned over the life of the contract using the “level-yield” method. Unearned interest related to contracts receivable is included in the receivable balance in the accompanying consolidated balance sheet. The outstanding loan receivable balance was $388.1 million and $316.2 million at December 31, 2019 and 2018, respectively.
Intangible assets represent the excess of cost over the estimated fair value of net tangible assets of acquired businesses. Our primary intangible assets are classified as either goodwill, expiration lists, non-compete
agreements and trade names are amortized using the straight-line method over their estimated useful lives (one to fifteen years
strategies that would result in the realization of deferred tax assets and the presence of taxable income in prior carryback years. The underlying assumptions we use in forecasting future taxable income require significant judgment and take into account our recent performance. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which temporary differences are deductible or creditable.
Fair value accounting establishes a framework for measuring fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). This framework includes a fair value hierarchy that prioritizes the inputs to the valuation technique used to measure fair value.
The carrying amounts of financial assets and liabilities reported in the accompanying consolidated balance sheet for cash and cash equivalents, restricted cash, premiums and fees receivable, other current assets, premiums payable to underwriting enterprises, accrued compensation and other accrued liabilities and deferred revenue - current, at December 31, 2019 and 2018, approximate fair value because of the short-term duration of these instruments. See Note 3
We have several employee equity-settled and cash-settled share-based compensation plans. Equity-settled share-based payments to employees include grants of stock options, performance stock units and restricted stock units and are measured based on estimated grant date fair value. We have elected to use the Black-Scholes option pricing model to determine the fair value of stock options on the dates of grant. Performance stock units are measured on the probable outcome of the performance conditions applicable to each grant. Restricted stock units are measured based on the fair market values of the underlying stock on the dates of grant. Shares are issued on the vesting dates net of the minimum statutory tax withholding requirements, as applicable, to be paid by us on behalf of our employees. As a result, the actual number of shares issued will be fewer than the actual number of performance stock units and restricted stock units outstanding. Furthermore, we record the liability for withholding amounts to be paid by us as a reduction to additional paid-in
Cash-settled share-based payments to employees include awards under our Performance Unit Program and stock appreciation rights. The fair value of the amount payable to employees in respect of cash-settled share-based payments is recognized as compensation expense, with a corresponding increase in liabilities, over the vesting period. The liability is remeasured at each reporting date and at settlement date. Any changes in fair value of the liability are recognized as compensation expense.
We have an employee stock purchase plan (which we refer to as the ESPP), under which the sale of 8.0 million shares of our common stock has been authorized. Eligible employees may contribute up to 15% of their compensation towards the quarterly purchase of our common stock at a purchase price equal to 95% of the lesser of the fair market value of our common stock on the first business day or the last business day of the quarterly offering period. Eligible employees may annually purchase shares of our common stock with an aggregate fair market value of up to $25,000 (measured as of the first day of each quarterly offering period of each calendar year), provided that no employee may purchase more than 2,000 shares of our common stock under the ESPP during any calendar year. At December 31, 2019, 6.4 million shares of our common stock was reserved for future issuance under the ESPP.
Revenue from Contracts with Customers, (Topic 606), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principal of the new accounting guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. We adopted Topic 606 as of January 1, 2018, using the full retrospective method to restate each prior reporting period presented. The cumulative effect of the adoption was recognized as an increase to retained earnings of $125.3
Leases (Topic 842). Under this new accounting guidance, an entity is required to recognize right-of-use
We adopted ASC Topic 842 for all leases effective January 1, 2019, using the modified retrospective approach allowing us to initially apply the new lease standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the first quarter of 2019. Consequently, the reporting for the comparative prior year periods presented in 2019 will continue to be in accordance with the previous lease guidance under ASC Topic 840, including comparative disclosure requirements. We elected the package of practical expedients to carry forward historical identification and classification of leases that commenced before January 1, 2019 and to not re-assess
initial direct costs for leases commencing before January 1, 2019. We also elected the lessee practical expedient, by class of underlying asset (e.g., office space), to not separate non-lease
components such as lessor-provided maintenance and property management services from the associated lease component. The new lease accounting standard requires us to recognize lease right-of-use
assets and lease liabilities on our balance sheet, which are established at the inception of a lease by computing a net present value of the future lease payments. Right-of-use
asset is calculated as the difference between the straight-line lease expense and the interest calculated on the lease liability. Rent payments are applied against the lease liabilities. Adoption of the new standard resulted in
assets and lease liabilities of approximately $379.6 million and $420.3 million, respectively, and the reclassification of net rent related assets and liabilities of $38.3 million as of January 1, 2019. The difference between the additional lease assets and lease liabilities, net of the deferred tax impact, was recorded as a decrease to beginning retained earnings of $2.4 million. The adoption of the new standard had a de minimis impact on our consolidated statement of earnings and had no impact on our consolidated statement of cash flows. See Note 15 and 17 to these 2019 consolidated financial statements for details on our current lease arrangements, the amounts of which represent the future undiscounted commitments.
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This new accounting guidance allows entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Current guidance does not allow recognition until the asset has been sold to an outside party. This new guidance was effective beginning January 1, 2018 and was to be applied on a modified retrospective basis. We adopted this new guidance effective January 1, 2018 and it did not have a material impact on our consolidated financial statements.
Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of tax effects stranded in Accumulated Other Comprehensive Income (AOCI). This new guidance gives entities the option to reclassify to retained earnings stranded tax effects related to the change in federal tax rate for all items accounted for in other comprehensive earnings (OCI). These entities can also elect to reclassify other stranded tax effects that relate to the Tax Cuts and Jobs Act (which we refer to as the Tax Act) but do not directly relate to the change in the federal rate (e.g., state taxes or changing from a worldwide tax system to a territorial system). Tax effects that are stranded in OCI for other reasons (e.g., prior changes in tax law or a change in valuation allowance) cannot be reclassified. All entities are required to make new disclosures, regardless of whether they elect to reclassify stranded amounts. Entities are required to disclose whether or not they elected to reclassify the tax effects related to the Tax Act as well as their policy for releasing income tax effects from accumulated OCI. Under Topic 740-10-45-15,
the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of tax expense related to continuing operations for the period in which the law was enacted, even if the assets and liabilities related to items of accumulated OCI. The enactment of the Tax Act on December 22, 2017 resulted in stakeholder concerns about this accounting treatment. The new guidance is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted for reporting periods, including interim periods, for which financial statements have not yet been issued or made available for issuance. An entity will be able to choose whether to apply the guidance retrospectively to each period in which the effect of the Tax Act is recognized or to apply the guidance in the period of adoption. We adopted this new guidance effective January 1, 2018, which resulted in a $6.6 million increase in retained earnings and a corresponding decrease in accumulated other comprehensive earnings (loss). This reclassification relates to the income tax effects of lowering the corporate income tax rate from 35.0% to 21.0% on deferred income taxes established on pension plan liabilities and the fair value of derivative instruments.
Income Taxes (Topic 740): Amendment to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This new accounting guidance codifies guidance pursuant to SEC Staff Accounting Bulletin No. 118 (which we refer to as SAB 118), which was issued in connection with the Tax Act. The guidance allows companies to use provisional estimates to record the effects of the Tax Act and also provides a measurement period (not to exceed one year from the date of enactment) to complete the accounting for the impacts of the Tax Act. We adopted this guidance when it was initially issued as SAB 118. During 2018, we recognized approximately $5.8 million in net benefit to our provisional estimate under SAB 118. We recorded these amounts as discrete items. We have completed and finalized our analysis of the income tax implication of the Tax Act and recorded additional adjustments to provisional amounts as discrete items. Additionally, we reevaluated our indefinite reinvestment assertion during 2018 for certain foreign jurisdictions and determined that our intention to repatriate undistributed earnings from certain jurisdictions has changed. The impact of this change is not material to our consolidated financial statements.
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The new guidance amends the hedge accounting model in the current guidance to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. The new guidance requires revised tabular disclosures that focus on the effect of hedge accounting by income statement line and the disclosure of the cumulative basis adjustments to the hedged assets and liabilities in fair value hedges. Certain additional disclosures are also required for hedge relationships designated under the last-of-layer
method. The current guidance that requires entities to disclose hedge ineffectiveness has been eliminated because this amount will no longer be separately measured. Under the new guidance, entities will apply the amendments to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach (i.e., with a cumulative effect adjustment recorded to the opening balance of retained earnings as of the initial application date). The new guidance also provides transition relief to make it easier for entities to apply certain amendments to existing hedges (including fair value hedges) where the hedge documentation needs to be modified. The presentation and disclosure requirements will be applied prospectively.
we modified the recognition model for the excluded component from a mark-to-market
approach to an amortization approach for our cash flow hedges with forward points existing as of the adoption date. The cumulative-effect related to this change resulted in an adjustment of $
impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. The new guidance is effective beginning January 1, 2020, with early adoption permitted, and will be applied on a prospective basis. The new guidance currently has no impact on our consolidated financial statements and we do not expect a significant impact on the future annual or interim goodwill impairment tests performed as we adopt the new guidance in first quarter 2020.
software. Accounting for the service component of a hosting arrangement remains unchanged. An entity will defer these implementation costs over the term of the hosting arrangement, including optional renewal periods that are reasonably certain of exercise. Amounts expensed would be presented through operating expense, rather than depreciation or amortization. The new guidance is effective January 1, 2020, with early adoption permitted. An entity may adopt the guidance either prospectively for all cloud computing arrangement implementation costs incurred on or after the effective date or retrospectively, including comparative periods. We are currently assessing the impact that adopting this guidance will have on our consolidated financial statements.
Common shares issued in connection with acquisitions are valued at closing market prices as of the effective date of the applicable acquisition or on the days when the shares are issued, if purchase consideration is deferred. We record escrow deposits that are returned to us as a result of adjustments to net assets acquired as reductions of goodwill when the escrows are settled. The maximum potential earnout payables disclosed in the foregoing table represent the maximum amount of additional consideration that could be paid pursuant to the terms of the purchase agreement for the applicable acquisition. The amounts recorded as earnout payables, which are primarily based upon the estimated future operating results of the acquired entities over a two-
to three-year period subsequent to the acquisition date, are measured at fair value as of the acquisition date and are included on that basis in the recorded purchase price consideration in the foregoing table. We will record subsequent changes in these estimated earnout obligations, including the accretion of discount, in our consolidated statement of earnings when incurred.
rates of return that reflect the ability of the acquired entity to achieve the targets. These discount rates generally ranged from 7.5% to 9.0% for our 2019 acquisitions. Changes in financial projections, market participant assumptions for revenue growth and/or profitability, or the risk-adjusted discount rate, would result in a change in the fair value of recorded earnout obligations.
During 2019, 2018 and 2017, we recognized $27.0 million, $18.8 million and $20.2 million, respectively, of expense in our consolidated statement of earnings related to the accretion of the discount recorded for earnout obligations in connection with our acquisitions. In addition, during 2019, 2018 and 2017, we recognized $11.7 million of income, $9.2 million of income and $10.7 million of expense, respectively, related to net adjustments in the estimated fair value of the liability for earnout obligations in connection with revised projections of future performance for 116, 112 and 108 acquisitions, respectively. The aggregate amount of maximum earnout obligations related to acquisitions made in 2016 and subsequent years was $982.9 million as of December 31, 2019, of which $565.0 million was recorded in the consolidated balance sheet as of that date based on the estimated fair value of the expected future payments to be made. The aggregate amount of maximum earnout obligations related to acquisitions made in 2015 and subsequent years was $558.1 million as of December 31, 2018, of which $258.8 million was recorded in the consolidated balance sheet as of that date based on the estimated fair value of the expected future payments to be made.
The rate used to discount the net benefits was based on a risk-adjusted rate that takes into consideration market-based rates of return and reflects the risk of the asset relative to the acquired business. These discount rates generally ranged from 10.0% to 12.5% for our 2019 and 2018
agreements was established using the profit differential method, which is an income approach based on estimated financial projections developed by management for the acquired company using market participant assumptions and various non-compete
for trade names), while goodwill is not subject to amortization. We use the straight-line method to amortize these intangible assets because the pattern of their economic benefits cannot be reasonably determined with any certainty. We review all of our intangible assets for impairment periodically (at least annually) and whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. In reviewing intangible assets, if the fair value were less than the carrying amount of the respective (or underlying) asset, an indicator of impairment would exist and further analysis would be required to determine whether or not a loss would need to be charged against current period earnings as a component of amortization expense. Based on the results of impairment reviews in 2019,
Of the $841.3 million of expiration lists, $11.7 million of non-compete
agreements and $4.0 million of trade names related to the 2019 acquisitions, $215.4 million, $4.7 million and $0.4 million, respectively, is not expected to be deductible for income tax purposes. Accordingly, we recorded a deferred tax liability of $43.3 million, and a corresponding amount of goodwill, in 2019 related to the nondeductible amortizable intangible assets.
Our consolidated financial statements for the year ended December 31, 2019 include the operations of the acquired entities from their respective acquisition dates. The following is a summary of the unaudited pro forma historical results, as if these entities had been acquired at January 1, 2018 (in millions, except per share data):
The premium finance advances and loans represent short-term loans which we make to many of our brokerage related clients and other non-brokerage
clients to finance their premiums paid to underwriting enterprises. These premium finance advances and loans are primarily generated by three Australian and New Zealand premium finance subsidiaries. Financing receivables are carried at amortized cost. Given that these receivables carry a fairly rapid delinquency period of only seven days post payment date, and that contractually the majority of the underlying insurance policies will be cancelled within one month of the payment due date in normal course, there historically has been a minimal risk of not receiving payment, and therefore we do not maintain any significant allowance for losses against this balance.
The changes in the carrying amount of goodwill for 2019 and 2018 are as follows (in millions):
2018 Series K notes maturity. The weighted average maturity of the $450.0 million of senior fixed rate notes is 13.6 years and their weighted average interest rate is 4.42% after giving effect to net hedging gains. The interest rate on the $50.0 million of floating rate notes would be 3.14% using three-month LIBOR on February 3, 2020.
interest rate hedging transactions related to the $500.0 million private placement funded on June 13, 2018. We realized a net cash gain of approximately $2.9 million on the hedging transaction that will be recognized on a pro rata basis as a reduction in our reported interest expense over the life of the debt. We used the proceeds of these offerings to repay certain existing indebtedness and fund acquisitions.
On February 13, 2019, we closed an offering of $600.0 million aggregate principal amount of fixed rate private placement senior unsecured notes. This offering was funded on February 13, 2019 ($340.0 million) and March 13, 2019 ($260.0 million). The weighted average maturity of these notes is 10.1 years and the weighted average interest rate is 5.04% after giving effect to a net hedging loss. In 2017 and 2018, we entered into pre-issuance
On June 12, 2019, we closed a private placement of $175.0 million aggregate principal amount of unsecured senior notes. The unsecured senior notes were issued with an interest rate of 4.48% and are due in 2034. We used the proceeds of these offerings in part to fund the $50.0 million June 24, 2019 Series L note maturity, and for acquisitions and general corporate purposes. The weighted average interest rate is 4.68% after giving effect to a net hedging loss. In 2017 and 2018, we entered into pre-issuance
We plan to use these offerings to repay certain existing indebtedness and for general corporate purposes, including to fund acquisitions.
- On June 7, 2019, we entered into an amendment and restatement to our multicurrency credit agreement dated April 8, 2016, (which we refer to as the Credit Agreement) with a group of fifteen financial institutions. The amendment and restatement, among other things, extended the expiration date of the Credit Agreement from April 8, 2021 to June 7, 2024 and increased the revolving credit commitment from $800.0 million to $1,200.0 million, of which up to $75.0 million may be used for issuances of standby or commercial letters of credit and up to $75.0 million may be used for the making of swing loans (as defined in the Credit Agreement). We may from time to time request, subject to certain conditions, an increase in the revolving credit commitment under the Credit Agreement up to a maximum aggregate revolving credit commitment of $1,700.0 million.
The terms of the Credit Agreement include various financial covenants, including covenants that require us to maintain specified financial ratios. We were in compliance with these covenants as of December 31, 2019. The Credit Agreement also includes customary provisions for transactions of this type, including events of default, with corresponding grace periods and cross-defaults
that provides funding for the three acquired Australian (AU) and New Zealand (NZ) premium finance subsidiaries. The amendment, among other things, extended the expiration date of the Premium Financing Debt Facility from May 18, 2020 to July 18, 2021, increased the Interbank fee rates and increased the total commitment for the AU$ denominated tranche from AU$185.0 million to AU$245.0 million. The Premium Financing Debt Facility is comprised of: (i) Facility B is separate AU$205.0 million and NZ$25.0 million tranches, (ii) Facility C is an AU$40.0 million equivalent multi-currency overdraft tranche and (iii) Facility D is a NZ$15.0 million equivalent multi-currency overdraft tranche. There was a three month increase in the AU$160.0 million tranche to AU$190.0 million, which expired January 31, 2019.
The interest rates on Facility B are Interbank rates, which vary by tranche, duration and currency, plus a margin of 1.10% and 1.15% for the AU$ and NZ$ tranches, respectively. The interest rates on Facilities C and D are 30 day Interbank rates, plus a margin of 0.575% and 0.600% for the AU$ and NZ$ tranches, respectively. The annual fee for Facility B is 0.495% and 0.5175% for the undrawn commitments for the AU$ and NZ$ tranches, respectively. The annual fee for Facility C is 0.525% and for Facility D is 0.55% of the total commitments of the facilities.
On March 14, 2019, the compensation committee granted 1,283,300 options under the 2017 LTIP to our officers and key employees that become exercisable at the rate of 34%, 33% and 33% on the anniversary date of the grant in 2022, 2023 and 2024, respectively. On March 15, 2018, the compensation committee granted 1,261,000 options under the 2017 LTIP to our officers and key employees that become exercisable at the rate of 34%, 33% and 33% on the anniversary date of the grant in 2021, 2022 and 2023, respectively. On March 16, 2017, the compensation committee granted 1,650,400 options under the 2014 LTIP to our
officers and key employees that become exercisable at the rate of 34%, 33% and 33% on the anniversary date of the grant in 2020, 2021 and 2022, respectively. The 2019, 2018 and 2017 options expire seven years from the date of grant, or earlier in the event of certain terminations of employment. For our executive officers age 55
or older, stock options awarded in 2019, 2018 and 2017 are no longer subject to forfeiture upon such officers’ departure from the company after two years from the date of grant.
For purposes of expense recognition in 2019, 2018 and 2017, the estimated fair values of the stock option grants are amortized to expense over the options’ vesting period. We estimated the fair value of stock options at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. The weighted average fair value per option for all options granted during 2019, 2018 and 2017, as determined on the grant date using the Black-Scholes option pricing model, was $10.71, $9.27 and $11.42, respectively.
The following is a summary of our stock option activity and related information for 2019 and 2018 (in millions, except exercise price and year data):
We have a Deferred Equity Participation Plan, (which we refer to as the DEPP), which is a non-qualified
In the first quarter of each of 2019, 2018 and 2017, the compensation committee approved $10.1 million, $11.5 million and $14.0 million, respectively, of awards in the aggregate to certain key executives under the DEPP that were contributed to the rabbi trust in the first quarters of 2019, 2018 and 2017. We contributed cash to the rabbi trust and instructed the trustee to acquire a specified number of shares of our common stock on the open market to fund these 2019, 2018 and 2017 awards. During 2019, 2018 and 2017, we charged $9.8 million, $9.1 million and $9.6 million, respectively, to compensation expense related to these awards.
At December 31, 2019 and 2018, we recorded $64.5 million (related to 2.9 million shares) and $57.6 million (related to 2.7 million shares), respectively, of unearned deferred compensation as a reduction of capital in excess of par value in the accompanying consolidated balance sheet. The total intrinsic value of our unvested equity based awards under the plan at December 31, 2019 and 2018 was $276.3 million and $199.8 million, respectively. During 2019, 2018 and 2017, cash and equity awards with an aggregate fair value of $3.1 million, $6.4 million and $8.4 million, respectively, were vested and distributed to executives under the DEPP.
deferred compensation plan for certain key employees, other than executive officers, that generally provides for vesting and/or distributions no sooner than five years from the date of awards. Under the provisions of the DCPP, we typically contribute cash in an amount approved by the compensation committee to the rabbi trust on behalf of the executives participating in the DCPP, and instruct the trustee to acquire a specified number of shares of our common stock on the open market or in privately negotiated transactions based on participant elections. In the first quarter of each of 2019, 2018 and 2017, the compensation committee approved $2.4 million, $5.6 million and $5.1 million, respectively, of awards in the aggregate to certain key executives under the DCPP that were contributed to the rabbi trust in second quarter 2019, 2018 and 2017, respectively. In addition
directors. In either case, the compensation committee may determine that the award will be subject to the attainment of performance measures over an established performance period. Stock awards and the related dividend equivalents are non-transferable
and subject to forfeiture if the holder does not remain continuously employed with us during the applicable restriction period or, in the case of a performance-based award, if applicable performance measures are not attained. The compensation committee will determine all of the terms relating to the satisfaction of performance measures and the termination of a restriction period, or the forfeiture and cancellation of a restricted stock award upon a termination of employment, whether by reason of disability, retirement, death or any other reason.
The agreements awarding restricted stock units under the LTIP will specify whether such awards may be settled in shares of our common stock, cash or a combination of shares and cash and whether the holder will be entitled to receive dividend equivalents, on a current or deferred basis, with respect to such award. Prior to the settlement of a restricted stock unit, the holder of a restricted stock unit will have no rights as a stockholder of the company. The maximum number of shares available under the LTIP for restricted stock, restricted stock units and performance unit awards settled with stock (i.e., all awards other than stock options and stock appreciation rights) is 4.0 million. At December 31, 2019, 2.8 million shares were available for grant under the LTIP for such awards.
In 2019, 2018 and 2017, we granted 414,700, 439,100 and 476,350 restricted stock units, respectively, to employees under the LTIP and 2014 LTIP, with an aggregate fair value of $31.8 million, $28.7 million and $26.8 million, respectively, at the date of grant.
The vesting periods of the 2019, 2018 and 2017 restricted stock unit awards are as follows (in actual shares):
We account for restricted stock awards at historical cost, which equals its fair market value at the date of grant, which is amortized to compensation expense ratably over the vesting period of the participants. Future changes in the fair value of our common stock that is owed to the participants do not have any impact on the amounts recorded in our consolidated financial statements. During 2019, 2018 and 2017, we charged $29.8 million, $27.2 million and $19.6 million, respectively, to compensation expense related to restricted stock awards granted in 2008 through 2019. The total intrinsic value of unvested restricted stock at December 31, 2019 and 2018 was $215.1 million and $140.8 million, respectively. During 2019 and 2018, equity awards (including accrued dividends) with an aggregate fair value of $2.1 million and $23.6 million were vested and distributed to employees under this plan.
share of our common stock on the date such provisional award was approved. At the end of the performance period, eligible participants will receive
units for the 2019, 2018 and 2017 provisional awards will fully vest based on continuous employment through March 14, 2022, March 15, 2021 and March 16, 2020, respectively, and will be settled in shares of our common stock on a one-for-one
or older, awards granted in 2019, 2018 and 2017 are no longer subject to forfeiture upon such officers’ departure from the company after two years from the date of grant. During 2019, 2018 and 2017, equity awards (including accrued dividends) with an aggregate fair value of $5.7
times the original value of the units determined as of the grant date. The fair value of the awarded units will be paid out in cash as soon as practicable in 2022. If an eligible employee leaves us prior to the vesting date, the entire award will be forfeited. We did not recognize any compensation expense during the year ended December 31, 2019 related to the 2019 provisional award under the Program. Based on company performance for 2019, we expect to grant 201,000 units under the Program in first quarter 2020 that will fully vest on January 1, 2022.
units in the aggregate), each of which was equivalent to the value of one share of our common stock on the date the provisional awards were approved. Terms of the 2015 provisional award were similar to the terms of the 2016 provisional awards. Based on our performance for 2015, we granted 294,000 units under the Program in first quarter 2016 that fully vested on January 1, 2018. During 2017, we charged $9.3 million to compensation expense related to these awards.
During 2019, cash awards related to the 2016 provisional awards with an aggregate fair value of $22.4 million (341,000 units in the aggregate) were vested and distributed to employees under the Program. During 2018, cash awards related to the 2015 provisional awards with an aggregate fair value of $15.8 million (269,000 units in the aggregate) were vested and distributed to employees under the Program. During 2017, cash awards related to the 2014 provisional awards with an aggregate fair value of $9.3 million (199,000 units in the aggregate) were vested and distributed to employees under the Program.
We have a noncontributory defined benefit pension plan that, prior to July 1, 2005, covered substantially all of our domestic employees who had attained a specified age and one year of employment. Benefits under the plan were based on years of service and salary history. In 2005, we amended our defined benefit pension plan to freeze the accrual of future benefits for all U.S. employees, effective on July 1, 2005. Since the plan is frozen, there is no difference between the projected benefit obligation and accumulated benefit obligation at December 31, 2019 and 2018. In the table below, the service cost component represents plan administration costs that are incurred directly by the plan. A reconciliation of the beginning and ending balances of the pension benefit obligation and fair value of plan assets and the funded status of the plan is as follows (in millions):
Plan assets are invested in various pooled separate accounts under annuity contracts managed by two life underwriting enterprises. The plan’s investment policy provides that investments will be allocated in a manner designed to provide a long-term investment return greater than the actuarial assumptions, maximize investment return commensurate with risk and to comply with the Employee Income Retirement Security Act of 1974, as amended (which we refer to as ERISA), by investing the funds in a manner consistent with ERISA’s fiduciary standards. The weighted average expected long-term rate of return on plan assets assumption was determined based on a review of the asset allocation strategy of the plan using expected ten-year
The plan’s Level 2 assets consist of ownership interests in various pooled separate accounts within a life insurance carrier’s group annuity contract. The fair value of the pooled separate accounts is determined based on the net asset value of the respective funds, which is obtained from the underwriting enterprise and determined each business day with issuances and redemptions of units of the funds made based on the net asset value per unit as determined on the valuation date. We have not adjusted the net asset values provided by the underwriting enterprise. There are no restrictions as to the plan’s ability to redeem its investment at the net asset value of the respective funds as of the reporting date. The plan’s Level 3 assets consist of pooled separate accounts within another life insurance carrier’s annuity contracts for which fair value has been determined by an independent valuation. Due to the nature of these annuity contracts, our management makes assumptions to determine how a market participant would price these Level 3 assets. In determining fair value, the future cash flows to be generated by the annuity contracts were estimated using the underlying benefit provisions specified in each contract, market participant assumptions and various actuarial and financial models. These cash flows were then discounted to present value using a risk-adjusted rate that takes into consideration market based rates of return and probability-weighted present values.
We also have a qualified contributory savings and thrift (401(k)) plan covering the majority of our domestic employees. For eligible employees who have met the plan’s age and service requirements to receive matching contributions, we match 100% of pre-tax
and Roth elective deferrals up to a maximum of 5.0% of eligible compensation, subject to federal limits on plan contributions and not in excess of the maximum amount deductible for federal income tax purposes. Effective January 1, 2014, employees must be employed and eligible for the plan on the last day of the plan year to receive a matching contribution, subject to certain exceptions enumerated in the plan document. Matching contributions are subject to a five-year graduated vesting schedule. We expensed (net of plan forfeitures) $59.4 million, $53.9 million and $51.6 million related to the plan in 2019, 2018 and 2017, respectively.
We also have a nonqualified deferred compensation plan, the Supplemental Savings and Thrift Plan, for certain employees who, due to IRS rules, cannot take full advantage of our matching contributions under the 401(k) plan. The plan permits these employees to annually elect to defer a portion of their compensation until their retirement or a future date. Our matching contributions to this plan (up to a maximum of the lesser of a participant’s elective deferral of base salary, annual bonus and commissions or 5.0% of eligible compensation, less matching amounts contributed under the 401(k) plan) are also at the discretion of our board of directors. We expensed $7.1 million, $6.5 million and $6.4 million related to contributions made to a rabbi trust maintained under the plan in 2019, 2018 and 2017, respectively. The fair value of the assets in the plan’s rabbi trust at December 31, 2019 and 2018, including employee contributions and investment earnings, was $452.9 million and $355.0 million, respectively, and has been included in other noncurrent assets and the corresponding liability has been included in other noncurrent liabilities in the accompanying consolidated balance sheet.
At December 31, 2019, we held a 46.5% controlling interest in Chem-Mod
Solution uses a dual injection sorbent system to reduce mercury, sulfur dioxide and other emissions at coal-fired power plants.
LLC has been marketing its technologies principally to coal-fired power plants owned by utility companies, including those utilities that are operating with the IRC Section 45 refined coal production plants in which we hold an investment.
Chem-Mod LLC is determined to be a variable interest entity (which we refer to as a VIE). We are the manager (decision maker) of Chem-Mod
At December 31, 2019, we held a 31.5% noncontrolling ownership interest in Chem-Mod
• We have investments in limited liability companies that own 34 refined coal production plants which produce refined coal using proprietary technologies owned by Chem-Mod LLC. We believe the production and sale of refined coal at these plants is qualified to receive refined coal tax credits under IRC Section 45. The 14 plants placed in service prior to December 31, 2009 (which we refer to as the 2009 Era Plants) were eligible to receive tax credits through 2019 and the 20 plants placed in service prior to December 31, 2011 (which we refer to as the 2011 Era Plants) are eligible to receive tax credits through 2021.
At December 31, 2019, total assets and total liabilities of this VIE were $31.1 million and $30.0 million, respectively. For 2019, total revenues and expenses of this VIE were $64.9 million and $79.8 million, respectively.
operations of the limited liability companies in proportion to our investment ownership percentages. Other than our portion of the on-going
operational funding, there are no additional amounts that we are committed to related to funding these investments.
minority interest in four venture capital funds totaling $4.5 million and eight certified low-income
components (common-area or other maintenance costs) which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease
We exclude options to extend or terminate a lease from our recognition as part of our right-of-use
assets and lease liabilities until those options are reasonably certain and/or executed. We do not have any material guarantees, options to purchase, or restrictive covenants related to our leases.
Variable lease cost consist primarily of common area and other maintenance costs for our lease facilities, as well as variable lease payments related to indexed and/or market adjustments. Our sublease income derives primarily from a few office lease arrangements and we have no significant sublease losses.
use asset as noncash transactions. This includes all noncash charges related to any modification or reassessment events triggering remeasurement.
Maturities of operating lease liabilities for each of the next five years and thereafter are as follows:
Our leases have remaining lease terms of 0.1 years to 12.7 years, some of which may include options to extend the leases for up to 5.0 years and some of which may include options to terminate the leases.
As of December 31, 2019, we have additional leases that have not yet commenced of $4.2 million. These leases will commence in 2020 with lease terms of 5.4 years to 7.0 years.
on January 1, 2019. Among other provisions, the new standard required modification to existing presentation and disclosure requirements on a prospective basis. As such, certain disclosures below conform to the disclosure requirements prior to the adoption of ASU 2017-12.
We enter into various long-term debt agreements. We use interest rate derivatives, typically swaps, to reduce our exposure to the effects of interest rate fluctuations on the forecasted interest rates for up to three years into the future.
We estimate that approximately $1.8 million of pretax income currently included within accumulated other comprehensive loss will be reclassified into earnings in the next twelve months.
See Note 8 to these consolidated financial statements for a summary the amounts outstanding under the note purchase agreements, the Credit Agreement and Premium Debt Facility.
tenants under operating sublease arrangements. In the normal course of business, we expect that certain of these leases will not be renewed or replaced. We adjust charges for real estate taxes and common area maintenance annually based on actual expenses, and we recognize the related revenues in the year in which the expenses are incurred. These amounts are not included in the minimum future rentals to be received in the contractual obligations table above.
We typically do not have a material amount of outstanding purchase obligations at any point in time. The amount disclosed in the contractual obligations table above represents the aggregate amount of unrecorded purchase obligations that we had outstanding at December 31, 2019. These obligations represent agreements to purchase goods or services that were executed in the normal course of business.
Our total unrecorded commitments associated with outstanding letters of credit, financial guarantees and funding commitments at December 31, 2019 were as follows (in millions):
Since commitments may expire unused, the amounts presented in the table above do not necessarily reflect our actual future cash funding requirements. See Note 14 to these consolidated financial statements for a discussion of our funding commitments related to our corporate segment and the Off-Balance
Our unconsolidated investment portfolio includes investments in enterprises where our ownership interest is between 1% and 50%, in which management has determined that our level of influence and economic interest is not sufficient to require consolidation. As a result, these investments are accounted for under the equity method. None of these unconsolidated investments had any outstanding debt at December 31, 2019 and 2018 that was recourse to us.
LLC and numerous other related and unrelated parties. The complaint alleges that the named defendants infringe two patents held exclusively by Midwest Energy and seeks unspecified damages and injunctive relief. We dispute the allegations contained in the complaint and intend to defend this matter vigorously. Litigation is inherently uncertain and it is not possible for us to predict the ultimate outcome of this matter and the financial impact to us. We believe the probability of a material loss is remote.
of the micro-captive underwriting enterprises organized and/or managed by us. Among other matters, the IRS is investigating whether we have been acting as a tax shelter promoter in connection with these operations. While the IRS has not made specific allegations relating to our operations or the pre-acquisition
activities of Tribeca, an adverse determination could subject us to penalties and negatively affect our defense of the class action lawsuit described below. We may also experience lost earnings due to the negative effect of an extended IRS investigation. In the period from 2017 to 2019, our micro-captive operations contributed less than $2.9
insurance and thus would not qualify for tax benefits. The named plaintiffs are seeking to certify a class of all persons who were assessed back taxes, penalties or interest by the IRS as a result of their ownership of or involvement in an IRS Section 831(b) micro-captive formed or managed by Artex or Tribeca during the time period January 1, 2005 to the present. The complaint does not specify the amount of damages sought by the named plaintiffs or the putative class. On August 5, 2019, the trial court granted the defendants’ motion to compel arbitration and dismissed the class action lawsuit. Plaintiffs are appealing this ruling to the United States Court of Appeals for the Ninth Circuit. We will continue to defend against the lawsuit vigorously. Litigation is inherently uncertain, however, and it is not possible for us to predict the ultimate outcome of this matter and the financial impact to us, nor are we able to reasonably estimate the amount of any potential loss in connection with this lawsuit.
LLC and Nalco Company settled the litigation disclosed in our previous SEC filings. Terms of the settlement are confidential and were not, and are not expected to be, material to our clean energy operations.
Due to the contingent nature of this exposure and our related assessment of its likelihood, no reserve has been recorded in our December 31, 2019 consolidated balance sheet related to this exposure.
facility is recorded in our consolidated financial statements, including cash and stockholder’s equity of the legal entity and any expenses incurred to operate the rent-a-captive
facility. Most Captive Cells reinsure individual lines of insurance coverage from external underwriting enterprises. In addition, some Captive Cells offer individual lines of insurance coverage from one of our underwriting enterprise subsidiaries. The different types of insurance coverage include special property, general liability, products liability, medical professional liability, other liability and medical stop loss. The policies are generally claims-made. Insurance policies are written by an underwriting enterprise and the risk is assumed by each of the Captive Cells. In general, we structure these operations to have no underwriting risk on a net written basis. In situations where we have assumed underwriting risk on a net written basis, we have managed that exposure by obtaining full collateral for the underwriting risk we have assumed from our clients. We typically require pledged assets including cash and/or investment accounts or letters of credit to limit our risk.
Reconciliations of direct to net premiums, on a written and earned basis, for 2019, 2018 and 2017 related to the wholly-owned underwriting enterprise subsidiary discussed above are as follows (in millions):
million at December 31, 2019 and 2018, respectively. We accrue interest and penalties related to unrecognized tax benefits in our provision for income taxes. At December 31, 2019 and 2018, we had accrued interest and penalties related to unrecognized tax benefits of $3.1
We file income tax returns in the U.S. and in various state, local and foreign jurisdictions. We are routinely examined by tax authorities in these jurisdictions. At December 31, 2019, our corporate returns had been examined by the IRS through calendar year 2010. The IRS is currently conducting various examinations of calendar years 2011 and 2012
. In addition, a number of foreign, state, local and partnership examinations are currently ongoing. It is reasonably possible that our gross unrecognized tax benefits may change within the next twelve months. However, we believe any changes in the recorded balance would not have a significant impact on our consolidated financial statements.
We have not provided for state or withholding income taxes on the undistributed earnings of $574.0
SAB 118 describes three scenarios associated with a company’s status of accounting for income tax reform. Under the SAB 118 guidance, we made reasonable estimates for certain effects of tax reform in our 2017 consolidated financial statements. We recognized provisional amounts for our deferred income taxes and repatriation tax based on reasonable estimates. We finalized our estimates under SAB 118 which were recorded as discrete items in 2018. We completed our analysis with respect to the income tax implications of the Tax Act, which was reflected in our 2018 consolidated financial statements.
million net benefit to the provision for income taxes as a result of the restatement of our net deferred tax assets. In the 2018 consolidated financial statements, we finalized the revaluation of our net deferred tax asset by recognizing an additional $2.9
We also completed our analysis of the broader tax effects of the Tax Act which were reflected in our 2018 consolidated financial statements.
amounts related to foreign currency translation were reclassified from accumulated other comprehensive loss to the statement of earnings.
Quarterly operating results for 2019 and 2018 were as follows (in millions, except per share data):
Our risk management segment provides contract claim settlement and administration services for enterprises and public entities that choose to self-insure some or all of their property/casualty coverages and for underwriting enterprises that choose to outsource some or all of their property/casualty claims departments. These operations also provide claims management, loss control consulting and insurance property appraisal services. Revenues are principally generated on a negotiated per-claim
Allocations of investment income and certain expenses are based on reasonable assumptions and estimates primarily using revenue, headcount and other information. During the three-month period ended June 30, 2019, we reviewed our allocation of corporate costs to our business segments. In conjunction with that review, we made changes to how we allocate certain costs to our business segments reflecting management’s updated view of the costs necessary to support these segments. This change resulted in additional costs being allocated to the business segments, the amounts of which were less than 6.0% of the corporate segment’s loss before income taxes for the year ended December 31, 2019 and were not significant to each of the business segments. We allocate the provision for income taxes to the brokerage and risk management segments using the local county statutory rates. Reported operating results by segment would change if different methods were applied.
We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over Gallagher’s accounting for the acquisitions noted above. For example, we tested controls over the recognition and measurement of assets acquired and consideration paid and payable, and management’s review of significant assumptions used in the determination of the fair value of intangible assets and earnout obligations.
Auditing the accounting for revenue recognition involved subjectivity and complexity in evaluating management’s estimates, specifically, the impact of significant assumptions, including revenue deferral rates and patterns, on the timing of revenue recognition for Gallagher’s brokerage and risk management revenue. These revenue deferral rates and patterns are used to estimate future service obligations and contain significant subjectivity and variability.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f)
under the Exchange Act. Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework
Based on our assessment under the framework in Internal Control - Integrated Framework,
management concluded that our internal control over financial reporting was effective as of December 31, 2019. In addition, the effectiveness of our internal control over financial reporting as of December 31, 2019, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their attestation report which is included herein.
As indicated in the accompanying management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of 26 of the 49 entities acquired in 2019, which are included in the 2019 consolidated financial statements of Gallagher and constituted approximately 0.8% of total assets as of December 31, 2019, approximately 1.9% of total revenues, and approximately 3.6% of net earnings for the year then ended. Our audit of internal control over financial reporting of Gallagher also did not include an evaluation of the internal control over financial reporting of these acquired entities.