2013 AnnuAl RepoRt
“We push for professional excellence.”
TENET 3 – THE GALLAGHER WAY
Cautionary Language regarding Forward-Looking StatementSThis Annual Report to Stockholders contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of these forward-looking statements include statements regarding future sources of growth for our company or any part of our company, future rates of organic growth, the status of our Risk Management segment as the preferred administrator for any insurance company going forward, the number and value of acquisitions we will complete in the future, the future revenue impact of recently completed acquisitions, expense control and productivity initiatives, and our commitment to maintaining our culture. See “Information Concerning Forward-Looking Statements” beginning on page 2, and “Risk Factors” beginning on page 8, of our Annual Report on Form 10-K for the year ended December 31, 2013, for other examples of these forward-looking statements and a description of risks and uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements.NON-GAAP FiNANciAl MeAsuresFor the purpose of each non-GAAP measure used and a reconciliation of non-GAAP information to the most directly comparable GAAP measures, please see “Information Regarding Non-GAAP Measures and Other” (See pages 26 to 27) in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and “4th Qtr. 2013 Reconciliation of Non-GAAP Measures and Supplemental Quarterly Financial Data” on our website at www.ajg.com under “Investor Relations.” DRIVEN TO SUCCEED
“We demonstrate the strength of
our company daily—through our
responsiveness to clients, through the
collaboration of our highly specialized
teams, and through our creativity and
expertise in managing risk.”
J. patrick Gallagher, Jr.
Chairman, President and CEO
Selected Financial Data as Reported
(in millions, except per share, percentage, workforce and number of acquisitions data)
REVENUES
Brokerage
Risk Management
BROKERAGE & RISK MANAGEMENT COMBINED
Corporate
TOTAL COMPANY
Percent revenue growth
EBITDAC (1)
Brokerage
Risk Management
BROKERAGE & RISK MANAGEMENT COMBINED
Corporate
TOTAL COMPANY
Percent EBITDAC growth(1)
NET EARNINGS FROM CONTINUING OPERATIONS
Brokerage
Risk Management
BROKERAGE & RISK MANAGEMENT COMBINED
Corporate
TOTAL COMPANY
Percent net earnings growth
2013
2012
2011
$ 2,144.3
611.0
2,755.3
424.3
$ 3,179.6
$ 1,827.6
571.7
2,399.3
121.0
$ 2,520.3
26%
18%
$ 1,556.5
548.8
2,105.3
29.4
$ 2,134.7
$
$
$
$
484.0
94.5
578.5
(73.6)
504.9
17%
204.8
46.2
251.0
17.6
268.6
38%
$
$
$
$
383.3
87.0
470.3
(38.2)
432.1
21%
155.8
42.5
198.3
(3.3)
195.0
35%
$
$
$
$
320.8
68.9
389.7
(32.1)
357.6
140.2
33.3
173.5
(29.4)
144.1
TOTAL COMPANY DILUTED NET EARNINGS PER SHARE
$
2.06
$
1.59
$
1.28
Percent diluted net earnings per share growth
30%
24%
OTHER INFORMATION
Dividends declared per share
Total assets at end of year
Total stockholders equity at end of year
Workforce at end of year
ACQUISITION ACTIVITY
Number of acquisitions closed
Annualized revenue acquired
Domestic
International
TOTAL
(1) See “non-GAAp Financial Measures” on the inside front cover.
$
1.40
$ 6,860.5
$ 2,085.5
16,336
$
1.36
$ 5,352.3
$ 1,658.6
13,707
$
1.32
$ 4,483.5
$ 1,243.6
12,383
31
193.3
190.6
383.9
$
$
60
169.5
62.2
231.7
$
$
32
102.2
174.8
277.0
$
$
BROKERAGE SEGMENT
totAl ReVenueS – $2.1 BILLION
56% Retail p/C
77% Domestic
26% Retail Benefits
18% Wholesale
23% International
RISK MANAGEMENT SEGMENT
totAl ReVenueS – $611.0 MILLION
68% Workers Compensation
77% Domestic
28% liability
4% property
23% International
NICHE/PRACTICE GROUPS
Our sales culture includes specialized teams that target areas of business and/or industries in which we have developed a depth of
expertise and a large client base. Our specialized focus on these niche/practice groups allows for highly focused marketing efforts
and facilitates the development of value-added products and services. Significant niche/practice groups we serve are as follows:
• Global Risks
• life Science
• Religious/nonprofit
• Health and Welfare
• Marine
• Aviation & Aerospace
• Healthcare
• Manufacturing
• Healthcare Analytics
• personal
• Restaurant
• Retirement
• Scholastic
• Higher education
• private equity
• technology/telecom
• Hospitality
• professional Groups
• transportation
• Human Resources
• public entity
• Voluntary Benefits
• Agribusiness
• Automotive
• Construction
• energy
• entertainment
• environmental
• executive Benefits
• International Benefits
• Real estate
2013 ANNuAl REPORT 3
Our people drive
our success.
To Our Stockholders
I am truly proud of our team’s outstanding performance in 2013.
Arthur J. Gallagher & Co. continues to get stronger, quarter after
quarter, year after year, and every division around the globe contributed
to the company’s record results and strong shareholder returns.
Total shareholder returns were 40% in 2013, including dividends.
The Board of Directors increased our quarterly cash dividend to
$0.35 per share in January 2013 and to $0.36 in January 2014,
which reflects their continued confidence in our financial strength.
Our core Brokerage and Risk Management segments ended 2013
with $579 million of EBITDAC(1) (up 23% from 2012) on nearly $2.8
billion in total revenues (up 15% from 2012). And, net earnings for
our clean-energy investments nearly doubled to more than $63 million
in 2013. We intend to reinvest these earnings into growing our core
Brokerage and Risk Management businesses.
We also continued to expand our international capabilities. In 2013,
23% of our Brokerage and Risk Management revenues were
generated outside of the united States, up from 11% in 2009. By
the end of 2013, Gallagher had operations in 24 countries and, in
combination with our international network of independent broker
partners, we now offer client-service capabilities in more than 140
countries around the world.
Our success in 2013 comes directly from our continued focus on
four key areas:
• organic revenue growth,
• Mergers and acquisitions,
• productivity and quality enhancements, and
• Maintaining our unique, team-oriented sales culture.
ORGANIC GROwTH
Organic base commission and fee revenues(1) grew 5.6% within our
Brokerage segment in 2013. Both our retail and wholesale property/
casualty operations brought in significant new business and achieved
solid account retention. The greatest growth within the Brokerage
segment came from our international operations, where we have
substantially expanded both our physical presence and client-service
capabilities over the last several years. Our employee benefits
consulting and brokerage business has also grown significantly,
particularly as it works to address a growing customer need for help
with a variety of regulatory and compliance issues, both domestically
and internationally. We deliver a full range of capabilities, solutions
and analytics tools to support our customers, and demand for these
services should remain strong going forward.
BROKERAGE & RISK MANAGEMENT
REVENUES
(in millions)
$2,755
$2,399
$2,105
2011
2012
2013
BROKERAGE & RISK MANAGEMENT
EBITDAC(1)
(in millions)
$579
$470
$390
2011
2012
2013
(1) See “non-GAAp Financial Measures” on the
inside front cover.
2013 ANNuAl REPORT 5
2013 AwARDS & RECOGNITIONS
Ethisphere Institute named Arthur J. Gallagher & Co.
one of the World’s Most Ethical Companies.
AJG International/OIM received the E-Business Award
at the British Insurance Awards.
Chief Executive magazine named Gallagher one of the
Best Companies for Leaders.
Gallagher Bassett Services, Inc. received the Buyers
Choice Award for Best Commercial TPA-Overall from
Business Insurance magazine.
Arthur J. Gallagher Risk Management Services, Inc.
was named Risk Management Provider of the Year by
the Midcontinent Oil & Gas Awards judging panel.
Gallagher was named Best Latin America/Caribbean
Insurance Broker by Global Finance magazine.
Reactions magazine named Gallagher Best Mid-sized
Insurance Broking Company for U.S. Business.
Reactions magazine recognized Gallagher for Best
Broker M&A Deal – Arthur J. Gallagher buys Barbon’s
commercial and property interests.
Pat Gallagher was named Insurance Broking CEO of the
Year by Reactions magazine.
Gallagher’s UK retail operation was named Commercial
Lines Broker of the Year by Insurance Times.
Our Risk Management segment posted 9.3% growth in
organic base fee revenue(1) in 2013 through strong new
business production and high account retention. In June,
we introduced a new reporting tool that offers clients
advanced analytics and benchmarking capabilities to
improve their program performance and drive down their risk
costs. The increase we are seeing in claims management
outsourcing opportunities with insurance companies and
a solid new business pipeline also bode well for continued
organic growth from this segment throughout 2014.
We focus on delivering responsive and effective products and
services to clients of all sizes, whether their exposures are
local, regional, national or global. Our objective is to help
our clients overcome barriers that could hinder their success.
Our sales and service professionals are aligned within highly
specialized niche and industry practice groups to deliver the
most effective client solutions within their respective areas of
expertise. This enables us to assemble a team with the best
combination of skills for any given client. Opportunities for
cross-selling across and between divisions further strengthen
client relationships and enable us to deliver added value.
MERGERS AND ACQUISITIONS
2013 was a great year for mergers and acquisitions. We
acquired a record $384 million in annualized revenues across
all of our operations. Our Brokerage segment completed 30
acquisitions with annualized revenues of nearly $370 million.
Our Risk Management segment closed a claim portfolio
transfer from a major insurance company in the fourth quarter
and we will act as that company’s preferred administrator for
certain claims going forward.
Two of our acquisitions in 2013 were our largest ever. In
August, we acquired Bollinger, Inc., with a team of more
than 500 people operating out of eight offices, mostly in
New Jersey and New York. In November, we acquired the
Giles Group of Companies, which brought us more than
1,100 employees operating out of 43 offices in England,
Scotland, Wales, Northern Ireland, Isle of Man and the
Channel Islands. We are now well positioned among the
five largest retail insurance brokers in the united Kingdom.
Together we anticipate that these two organizations could
generate more than $240 million in annual revenues. We
have also seen significant M&A activity in the benefits area,
in part due to the Affordable Care Act, as smaller brokers seek
access to the greater array of capabilities and service options
we can offer their clients.
During 2013 our workforce expanded by approximately
2,600 people, the vast majority of whom joined us through
the merger and acquisition process. These new colleagues
should contribute greatly to our continued growth and have
further bolstered our capabilities across a broad range
of disciplines, including real estate, nonprofits, affinity
business, voluntary benefits, banking, public entities, sports
organizations, country clubs, retirement and estate planning,
transportation, renewable energy, fine arts, professional
indemnity, marine, construction and personal lines.
We offer a welcoming culture and a team-oriented
environment. As we enter 2014, our momentum is good
and our acquisition pipeline remains full. We anticipate
that 2014 will be another strong year for acquisitions.
PRODUCTIVITY AND QUALITY
We maintain an unwavering focus on improving productivity
and enhancing quality. We are leveraging our sales,
marketing and customer relationship management platform
across our global organization. We have centralized client
billing and consolidated regional accounting centers within
our u.S. brokerage operations to shorten processing
time and reduce costs. Through our service “centers
of excellence,” we have expedited client service while
improving quality and enabling our branch offices around
the world to concentrate on core activities. We continue to
optimize our real estate footprint and find ways to offset
normal inflation in our consumable expenses.
CULTURE
Arthur J. Gallagher & Co.’s strong and supportive culture was
instilled in all of us by our namesake founder and has been
nurtured from generation to generation. We are committed
to retaining that culture, which we view as a strategic
advantage, as we continue to grow our global enterprise.
Our team is client-focused, aggressive and competitive.
Creativity is our hallmark. We look for the best solutions
for each client’s unique needs, even when it means doing
something that has never been done before. We maintain
a relentless focus on quality and on adhering to the highest
levels of moral and ethical behavior. We support and
promote the health and wellness of our employees and their
families. And we strive to be good corporate citizens by
supporting the communities in which we live and work, and
preserving and protecting our environment.
(1) See “non-GAAp Financial Measures” on the inside front cover.
2013 ANNuAl REPORT 7
MERGERS & ACQUISITIONS
ANNOUNCED IN 2013
Advanced Benefit Advisors, Inc.
Barmore Insurance Agency, Inc.
Belmont International
Bergvall Marine A.S.
Bollinger, Inc.
Cleaveland Insurance Group, Inc.
Dickinson & Associates, Inc.
Employee Benefits Analysis Corporation
Haber & Fischman
G.S. Levine Insurance Services, Inc.
Garza Long Group, LLC
Giles Group of Companies
Longfellow Financial, LLC
McIntyre Risk Management, LLC
Metzler Bros. Insurance
Property & Commercial Limited
R.w. Scobie, Inc.
RJ Dutton Incorporated
The Jenkins Group, Inc.
The Parks Johnson Agency, LLC
MoRe tHAn
500
SAleS AnD
SeRVICe oFFICeS
A ReCoRD
$384m
In ACquIReD
ReVenueS In 2013
oVeR
16,300
eMployeeS
Finally, we were pleased to receive a number of awards in
2013 that recognize Gallagher’s focused expertise, client
responsiveness and ethical culture. Those awards include:
• For the second year in a row, Arthur J. Gallagher & Co. was
the only insurance brokerage and claim-paying enterprise
to be recognized by the ethisphere Institute as one of the
World’s Most ethical Companies.
• We were also recognized as one of the Best Companies for
leaders by Chief Executive magazine.
• our risk management operation received the Buyers
Choice Award for Best Commercial tpA–overall by Business
Insurance magazine.
• We were named Best Insurance Broker in latin America by
Global Finance magazine.
• our domestic retail brokerage operation was recognized
as the Best Mid-sized Insurance Broking Company for u.S.
Business by Reactions magazine.
• our uK retail brokerage operation was named Commercial
lines Broker of the year by Insurance Times magazine.
• our london-based international brokerage operations
were awarded Insurance Broking Company of the year and
recognized for the Best Broker M&A Deal of the year by
Reactions magazine.
These awards and the many other group and individual
recognitions received in 2013 serve as a tremendous source
of pride for our team and speak to our rich culture and the
exceptional strengths of our employees.
OTHER NEwS
In July 2013, we elected a new director, Sherry S. Barrat,
who retired as Northern Trust Corporation’s Vice Chairman in
2012. We welcome Sherry’s extensive business, finance and
leadership experience to your Board and we expect to benefit
from her deep understanding of the financial services industry.
LOOKING AHEAD
We are very excited about our future. The moves that we made
in 2013—including our acquisitions, organic hires, productivity
and quality enhancements, and investments in technology—
should position us well for continued growth. As we enter
2014, our culture is thriving, our people are energized and I
truly believe that we are just getting started.
Sincerely,
J. PATRICK GALLAGHER, JR.
Chairman, president and Ceo
DIVIDENDS DECLARED PER SHARE
$1.40
$1.36
$1.32
2011
2012
2013
TOTAL STOCKHOLDERS’ EQUITY
(in millions)
$2,086
$1,659
$1,244
2011
2012
2013
2013 ANNuAl REPORT 9
ETHICS, ENVIRONMENT &
OUR COMMUNITY
At Gallagher, we understand the
importance of giving back to our
communities. We are committed to
promoting environmental, social and
economic benefits in the communities
in which we live and work.
We believe in running our business with integrity
and strong values, and take pride in a culture
that embodies both. That is why we recognize
the thousands of hours of community service our
employees undertake around the world every year.
These charitable activities give testament to the
compassion and generosity of our workforce, and
the strength of our company culture.
The Gallagher culture empowers our employees
to serve their communities by supporting their
favorite charities and organizations. And, to assist
in those efforts, The Gallagher Foundation, which
we support, matches qualified employee donations
of up to $1,000 per employee per year.
In 2013, The Gallagher Foundation also authorized
a special match to aid victims of Typhoon Haiyan
in the Philippines. The Foundation matched more
than $25,000 of employee donations, with a total
of nearly $55,000 going to various organizations
supporting the recovery efforts.
neARly
In addition to monetary donations, our employees around the
world volunteer their time and efforts in support of a wide range of
charitable activities, including:
• Schools, day care and after-school programs, ranging from
teaching classes to tutoring to coaching to donating supplies
and recreational equipment
• Habitat for Humanity and a broad range of other building and
rebuilding projects to benefit individuals, families and entire
communities
• environmental cleanup, protection and preservation projects
• Food, clothing and gift drives to assist the disadvantaged
• programs and activities to assist youth, the elderly, the sick and
the physically or mentally impaired
• Servicemen and servicewomen
• Animal shelters and animal rescue programs.
Whether we are working to help our communities and the
environment, or striving to always be an ethical company,
Gallagher’s employees are making a difference around the world.
And those efforts are being recognized. We are very proud that, for
the second year in a row, Gallagher was named one of the World’s
Most Ethical Companies in 2013 by the Ethisphere Institute.
$6 mILLIONContributions MatChed 2009–2013 neARly
MAKING STRIDES
Each year, Nikki Woodard, Assistant
Account Manager of our P/C Brokerage
in las Vegas, participates in a Making
Strides Against Breast Cancer walk. For this
year’s walk, Nikki’s children decorated her
“Gallagher Gives” t-shirt with the names of
loved ones that some of her coworkers had
lost to breast cancer.
BEACH CLEANUP
In September, the team at CGM Gallagher Insurance Brokers Jamaica
limited took part in the Jamaica Environment Trust’s (JET) awareness,
education and advocacy activities, as part of the 20th annual
International Coastal Cleanup Day. The team participates annually in
this worldwide event committed to the preservation of the environment.
THE STROKE
ASSOCIATION
In April, Compliance
Assistant Jessica Belfield-
Waters of our london
brokerage operations
skydived to raise money
for The Stroke Association.
On a fortunately bright and
sunny day, with the help of
her coworkers, she raised
nearly £960 to donate to
this charity.
SECOND HARVEST
In June, members of our employee benefits
team in Nashville volunteered at Second
Harvest Food Bank of Middle Tennessee.
The team stayed “cool” while they
packaged nearly 20,000 pounds of frozen
food to be sent out to those in need.
SPINAL CURE
In October, employees from our Sydney, Australia
brokerage office held their first-ever charity golf day at the
Killara Golf Club. The event raised $24,000 (AuD) for
Spinal Cure Australia, the team’s charity of choice for this
year’s tournament.
2013 ANNuAl REPORT 11
$12 mILLION2009–2013 ToTal ImpacT The
Gallagher Way
As a global corporation, we pride ourselves
on being a socially responsible company.
We strive to make a positive impact in our
communities and to society as a whole.
We also believe that Gallagher offers a
supportive and team-oriented culture in
which employees can thrive. The key tenets
of this culture were captured in a one-page
document, The Gallagher Way, penned in
1984 by our former Chairman and CEO,
Robert E. Gallagher.
Shared values at Arthur J. Gallagher & Co. are the rock foundation of the Company and our Culture. What is a Shared Value? These are concepts that the vast majority of the movers and shakers in the Company passionately adhere to. What are some of Arthur J. Gallagher & Co.’s Shared Values?1. We are a Sales and Marketing Company dedicated to providing excellence in Risk Management Services to our clients. 2. We support one another. We believe in one another. We acknowledge and respect the ability of one another. 3. We push for professional excellence. 4. We can all improve and learn from one another. 5. There are no second-class citizens—everyone is important and everyone’s job is important. 6. We’re an open society. 7. Empathy for the other person is not a weakness. 8. Suspicion breeds more suspicion. To trust and be trusted is vital. 9. Leaders need followers. How leaders treat followers has a direct impact on the effectiveness of the leader. 10. Interpersonal business relationships should be built. 11. We all need one another. We are all cogs in a wheel. 12. No department or person is an island. 13. Professional courtesy is expected. 14. Never ask someone to do something you wouldn’t do yourself. 15. I consider myself support for our Sales and Marketing. We can’t make things happen without each other. We are a team.16. Loyalty and respect are earned—not dictated. 17. Fear is a turnoff. 18. People skills are very important at Arthur J. Gallagher & Co. 19. We’re a very competitive and aggressive Company. 20. We run to problems—not away from them. 21. We adhere to the highest standards of moral and ethical behavior. 22. People work harder and are more effective when they’re turned on—not turned off. 23. We are a warm, close Company. This is a strength—not a weakness. 24. We must continue building a professional Company—together—as a team. 25. Shared values can be altered with circumstances—but carefully and with tact and consideration for one another’s needs. When accepted Shared Values are changed or challenged, the emotional impact and negative feelings can damage the Company.– Robert E. Gallagher May 1984 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2013
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 1-09761
ARTHUR J. GALLAGHER & CO.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
36-2151613
(I.R.S. Employer Identification Number)
Two Pierce Place
Itasca, Illinois
(Address of principal executive offices)
60143-3141
(Zip Code)
Registrant’s telephone number, including area code (630) 773-3800
--------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $1.00 per share
Name of each exchange
on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X No .
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No X .
Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from
their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No .
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X .
The aggregate market value of the voting common equity held by non-affiliates of the registrant, computed by reference to the last reported
price at which the registrant’s common equity was sold on June 30, 2013 (the last day of the registrant’s most recently completed second
quarter) was $5,276,300,000.
The number of outstanding shares of the registrant’s Common Stock, $1.00 par value, as of January 31, 2014 was 133,841,000.
Documents incorporated by reference:
Portions of Arthur J. Gallagher & Co.’s definitive 2014 Proxy Statement are incorporated by reference into this Form 10-K in response to Part
III to the extent described herein.
Arthur J. Gallagher & Co.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2013
Index
Page No.
Part I.
Item 1. Business ................................................................................................................................................................ 2-8
Item 1A. Risk Factors ........................................................................................................................................................ 8-17
Item 1B. Unresolved Staff Comments ................................................................................................................................... 17
Item 2. Properties ................................................................................................................................................................. 17
Item 3. Legal Proceedings ................................................................................................................................................... 17
Item 4. Mine Safety Disclosures . ........................................................................................................................................ 18
Executive Officers................................................................................................................................................................... 18
Part II.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities .......................................................................................................................... 18-19
Item 6. Selected Financial Data ........................................................................................................................................... 20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ............................ 21-44
Item 7A. Quantitative and Qualitative Disclosure about Market Risk ............................................................................. 44-45
Item 8. Financial Statements and Supplementary Data ................................................................................................. 46-85
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................................. 86
Item 9A. Controls and Procedures ......................................................................................................................................... 86
Item 9B. Other Information ................................................................................................................................................... 86
Part III.
Item 10. Directors, Executive Officers and Corporate Governance ...................................................................................... 86
Item 11. Executive Compensation ......................................................................................................................................... 86
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ............... 86
Item 13. Certain Relationships and Related Transactions, and Director Independence ........................................................ 87
Item 14. Principal Accountant Fees and Services ................................................................................................................. 87
Part IV.
Item 15. Exhibits and Financial Statement Schedules ..................................................................................................... 87-90
Signatures ....................................................................................................................................................................... 91
Schedule II - Valuation and Qualifying Accounts ......................................................................................................................... 92
Exhibit Index .................................................................................................................................................................................. 93
1
Item 1. Business.
Overview
Part I
Arthur J. Gallagher & Co. and its subsidiaries, collectively referred to herein as we, our, us or Gallagher, are engaged in providing
insurance brokerage and third-party claims settlement and administration services to entities in the United States (U.S.) and
abroad. We believe that our major strength is our ability to deliver comprehensively structured insurance and risk management
services to our clients. Our brokers, agents and administrators act as intermediaries between insurers and their customers and we
do not assume underwriting risks.
Since our founding in 1927, we have grown from a one-person agency to the world’s fourth largest insurance broker based on
revenues, according to Business Insurance magazine’s July 15, 2013 edition, and the world’s largest property/casualty third-party
claims administrator, according to Business Insurance magazine’s April 22, 2013 edition. We have three reportable segments:
brokerage, risk management and corporate, which contributed approximately 68%, 19% and 13%, respectively, to 2013 revenues
We generate approximately 77% of our revenues from the combined brokerage and risk management segments domestically, with
the remaining 23% derived primarily from operations in Australia, Bermuda, Canada, the Caribbean, Singapore, New Zealand
and the U.K. Substantially all of the revenues of the corporate segment are generated in the United States.
Shares of our common stock are traded on the New York Stock Exchange under the symbol AJG, and we had a market
capitalization at December 31, 2013 of approximately $6.3 billion. Information in this report is as of December 31, 2013 unless
otherwise noted. We were reincorporated as a Delaware corporation in 1972. Our executive offices are located at Two Pierce
Place, Itasca, Illinois 60143-3141, and our telephone number is (630) 773-3800.
Information Concerning Forward-Looking Statements
This report contains certain statements related to future results, or states our intentions, beliefs and expectations or predictions for
the future, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements relate to expectations or forecasts of future events. Such statements use words such as “anticipate,”
“believe,” “estimate,” “expect,” “contemplate,” “forecast,” “project,” “intend,” “plan,” “potential,” and other similar terms, and
future or conditional tense verbs like “could,” “may,” “might,” “see,” “should,” “will” and “would.” You can also identify
forward-looking statements by the fact that they do not relate strictly to historical or current facts. For example, we may use
forward-looking statements when addressing topics such as: market and industry conditions, including competitive and pricing
trends; acquisition strategy; the expected impact of acquisitions and dispositions; the development and performance of our
services and products; changes in the composition or level of our revenues or earnings; our cost structure and the outcome of cost-
saving or restructuring initiatives; the outcome of contingencies; dividend policy; pension obligations; cash flow and liquidity;
capital structure and financial losses; future actions by regulators; the impact of changes in accounting rules; financial markets;
interest rates; foreign exchange rates; matters relating to our operations; income taxes; and expectations regarding our
investments, including our clean energy investments. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from either historical or anticipated results depending on a variety
of factors. Potential factors that could impact results include:
Volatility or declines in premiums or other adverse trends in the insurance industry;
An economic downturn, including one caused by a U.S. government shutdown and potential default, as well as uncertainty
regarding the European debt situation and market perceptions concerning the instability of the Euro;
Competitive pressures in each of our businesses;
Risks that could negatively affect the success of our acquisition strategy, including continuing consolidation in our industry
and growing interest in acquiring insurance brokers on the part of private equity firms, which could make it more difficult
to identify targets and could make them more expensive, execution risks, integration risks, the risk of post-acquisition
deterioration leading to intangible asset impairment charges, and the risk we could incur or assume unanticipated regulatory
liabilities such as those relating to violations of anti-corruption and sanctions laws;
Our failure to attract and retain experienced and qualified personnel;
Risks arising from our growing international operations, including the risks posed by political and economic uncertainty in
certain countries, risks related to maintaining regulatory and legal compliance across multiple jurisdictions (such as those
relating to violations of anti-corruption, sanctions and privacy laws), and risks arising from the complexity of managing
businesses across different time zones, geographies, cultures and legal regimes;
Risks particular to our risk management segment;
The lower level of predictability inherent in contingent and supplemental commissions versus standard commissions;
Sustained increases in the cost of employee benefits;
Our failure to apply technology effectively in driving value for our clients through technology-based solutions, or our
failure to gain internal efficiencies and effective internal controls through the application of technology and related tools;
2
Our inability to recover successfully should we experience a disaster, material cybersecurity attack or other significant
disruption to business continuity;
Our failure to comply with regulatory requirements, including those related to international sanctions, or a change in
regulations or enforcement policies that adversely affects our operations;
Violations or alleged violations of the U.S. Foreign Corrupt Practices Act (FCPA), the U.K. Bribery Act 2010 (U.K.
Bribery Act) or other anti-corruption laws;
Our failure to adapt our services to changes resulting from the Patient Protection and Affordable Care Act and the Health
Care and Education Affordability Reconciliation Act (2010 Health Care Reform Legislation);
Unfavorable determinations related to contingencies and legal proceedings;
Damage to our reputation if clients are not satisfied with our services;
Improper disclosure of personal data;
Significant changes in foreign exchange rates;
Changes in our accounting estimates and assumptions;
Risks related to our clean energy investments, including the risk of environmental and product liability claims and
environmental compliance costs;
Disallowance of Internal Revenue Code of 1986, as amended (which we refer to as IRC) Section 29 or IRC Section 45 tax
credits;
Risks related to losses on other investments held by our corporate segment;
Restrictions and limitations in the agreements and instruments governing our debt;
The risk of share ownership dilution when we issue common stock as consideration for acquisitions; and
Volatility of the price of our common stock.
Any or all of our forward-looking statements may turn out to be inaccurate, and there are no guarantees about our performance. The
factors identified above are not exhaustive. Gallagher and its subsidiaries operate in a dynamic business environment in which new
risks may emerge frequently. Accordingly, readers should not place undue reliance on forward-looking statements, which speak only
as of the dates on which they are made. Except as required by law, we expressly disclaim any obligation to update or alter any
forward-looking statement that we may make from time to time, whether as a result of new information, future events or otherwise.
Further information about factors that could materially affect Gallagher, including our results of operations and financial condition, is
contained in the “Risk Factors” section in Part I, Item 1A of this report.
Operating Segments
We report our results in three segments: brokerage, risk management and corporate. The major sources of our operating revenues
are commissions, fees and supplemental and contingent commissions from brokerage operations and fees from risk management
operations. Information with respect to all sources of revenue, by segment, for each of the three years in the period ended
December 31, 2013, is as follows (in millions):
Brokerage
Commissions
Fees
Supplemental commissions
Contingent commissions
Investment income and other
Risk Management
Fees
Investment income
Corporate
2013
2012
2011
Amount
$
1,553.1
450.5
77.3
52.1
11.3
2,144.3
609.0
2.0
611.0
% of
Total
49%
15%
2%
2%
-%
68%
19%
-%
19%
Amount
$
1,302.5
403.2
67.9
42.9
11.1
1,827.6
568.5
3.2
571.7
% of
Total
52%
16%
3%
2%
-%
73%
22%
-%
22%
Amount
$
1,127.4
324.1
56.0
38.1
10.9
1,556.5
546.1
2.7
548.8
% of
Total
53%
15%
3%
2%
-%
73%
26%
-%
26%
Clean energy and other investment income
424.3
13%
121.0
5%
29.4
1%
Total revenues
$
3,179.6
100%
$
2,520.3
100%
$
2,134.7
100%
3
See Note 17 to our 2013 consolidated financial statements for additional financial information, including earnings before income
taxes and identifiable assets by segment for 2013, 2012 and 2011.
Our business, particularly our brokerage business, is subject to seasonal fluctuations. Commission and fee revenues, and the
related brokerage and marketing expenses, can vary from quarter to quarter as a result of the timing of policy inception dates and
the timing of receipt of information from insurance carriers. On the other the hand, salaries and employee benefits, rent,
depreciation and amortization expenses generally tend to be more uniform throughout the year. The timing of acquisitions,
recognition of books of business gains and losses and the variability in the recognition of IRC Section 45 tax credits also impact
the trends in our quarterly operating results. See Note 16 to our 2013 consolidated financial statements for unaudited quarterly
operating results for 2013 and 2012.
Brokerage Segment
The brokerage segment accounted for 68% of our revenues in 2013. Our brokerage segment is primarily comprised of retail and
wholesale insurance brokerage operations. Our retail brokerage operations negotiate and place property/casualty, employer-
provided health and welfare insurance, and healthcare exchange and retirement solutions principally for middle-market
commercial, industrial, public entity, religious and not-for-profit entities. Many of our retail brokerage customers choose to place
their insurance with insurance underwriters, while others choose to use alternative vehicles such as self-insurance pools, risk
retention groups or captive insurance companies. Our wholesale brokerage operations assist our brokers and other unaffiliated
brokers and agents in the placement of specialized, unique and hard-to-place insurance programs.
Our primary sources of compensation for our retail brokerage services are commissions paid by insurance carriers, which are
usually based upon either a percentage of the premium paid by insureds or brokerage and advisory fees paid directly by our
clients. For wholesale brokerage services, we generally receive a share of the commission paid to the retail broker by the insurer.
Commission rates depend on a number of factors, including the type of insurance, the particular insurance company underwriting
the policy and whether we act as a retail or wholesale broker. Advisory fees paid to us by our clients depend on the extent and
value of the services we provide. In addition, under certain circumstances, we receive supplemental and contingent commissions
for both retail and wholesale brokerage services. A supplemental commission is a commission paid by an insurance carrier that is
above the base commission paid. The insurance carrier determines the supplemental commission that is eligible to be paid
annually based on historical performance criteria in advance of the contractual period. A contingent commission is a commission
paid by an insurance carrier based on the overall profit and/or the overall volume of business placed with that insurance carrier
during a particular calendar year and is determined after the contractual period.
We operate our brokerage operations through a network of more than 400 sales and service offices located throughout the U.S.
and in 22 other countries. Most of these offices are fully staffed with sales and service personnel. In addition, we offer client-
service capabilities in more than 140 countries around the world through a network of correspondent brokers and consultants.
Retail Insurance Brokerage Operations
Our retail insurance brokerage operations accounted for 82% of our brokerage segment revenues in 2013. Our retail brokerage
operations place nearly all lines of commercial property/casualty and health and welfare insurance coverage. Significant lines of
insurance coverage and consultant capabilities are as follows:
401(k) Solutions
403(b) Solutions
Aviation
Casualty
Commercial Auto
Dental
Directors & Officers Liability
Disability
Earthquake
Errors & Omissions
Fire
General Liability
Life
Marine
Medical
Products Liability
Professional Liability
Property
Wind
Workers Compensation
Our retail brokerage operations are organized in more than 440 geographical profit centers primarily located in the U.S.,
Australia, Canada, the Caribbean and the U.K. and operate within certain key niche/practice groups, which account for
approximately 62% of our retail brokerage revenues. These specialized teams target areas of business and/or industries in which
we have developed a depth of expertise and a large client base. Significant niche/practice groups we serve are as follows:
Agribusiness
Automotive
Aviation & Aerospace
Construction
Energy
Entertainment
Environmental
Executive Benefits
Global Risks
Health and Welfare
Healthcare
Healthcare Analytics
Higher Education
Hospitality
Human Resources
International Benefits
Life Science
Marine
Manufacturing
Personal
Private Equity
Professional Groups
Public Entity
Real Estate
4
Religious/Not-for-Profit
Restaurant
Retirement
Scholastic
Technology/Telecom
Transportation
Voluntary Benefits
Our specialized focus on these niche/practice groups allows for highly-focused marketing efforts and facilitates the development
of value-added products and services specific to those industries or business segments. We believe that our detailed
understanding and broad client contacts within these niche/practice groups provide us with a competitive advantage.
We anticipate that our retail brokerage operations’ greatest revenue growth over the next several years will continue to come
from:
Mergers and acquisitions;
Our niche/practice groups and middle-market accounts;
Cross-selling other brokerage products to existing customers; and
Developing and managing alternative market mechanisms such as captives, rent-a-captives and deductible
plans/self-insurance.
Wholesale Insurance Brokerage Operations
Our wholesale insurance brokerage operations accounted for 18% of our brokerage segment revenues in 2013. Our wholesale
brokers assist our retail brokers and other non-affiliated brokers in the placement of specialized and hard-to-place insurance.
These brokers operate through more than 65 geographical profit centers located across the U.S., Bermuda and through our
approved Lloyd’s of London brokerage operation. In certain cases, we act as a brokerage wholesaler and, in other cases, we act
as a managing general agent or managing general underwriter distributing specialized insurance coverages for insurance carriers.
Managing general agents and managing general underwriters are agents authorized by an insurance company to manage all or a
part of the insurer’s business in a specific geographic territory. Activities they perform on behalf of the insurer may include
marketing, underwriting (although we do not assume any underwriting risk), issuing policies, collecting premiums, appointing
and supervising other agents, paying claims and negotiating reinsurance.
More than 75% of our wholesale brokerage revenues come from non-affiliated brokerage customers. Based on revenues, our
domestic wholesale brokerage operation ranked as the largest domestic managing general agent/underwriting manager according
to Business Insurance magazine’s September 23, 2013 edition.
We anticipate growing our wholesale brokerage operations by increasing the number of broker-clients, developing new managing
general agency and underwriter programs, and through mergers and acquisitions.
Risk Management Segment
Our risk management segment accounted for 19% of our revenues in 2013. Our risk management segment provides contract
claim settlement and administration services for enterprises that choose to self-insure some or all of their property/casualty
coverages and for insurance companies that choose to outsource some or all of their property/casualty claims departments.
Approximately 68% of our risk management segment’s revenues are from workers compensation related claims, 28% are from
general and commercial auto liability related claims and 4% are from property related claims. In addition, we generate revenues
from integrated disability management (employee absence management) programs, information services, risk control consulting
(loss control) services and appraisal services, either individually or in combination with arising claims. Revenues for risk
management services are comprised of fees generally negotiated in advance on a per-claim or per-service basis, depending upon
the type and estimated volume of the services to be performed.
Risk management services are primarily marketed directly to Fortune 1000 companies, larger middle-market companies,
not-for-profit organizations and public entities on an independent basis from our brokerage operations. We manage our third-
party claims adjusting operations through a network of more than 100 offices located throughout the U.S., Australia, Canada,
New Zealand and the U.K. Most of these offices are fully staffed with claims adjusters and other service personnel. Our
adjusters and service personnel act solely on behalf and under the instruction of our clients and customers.
While this segment complements our insurance brokerage offerings, more than 90% of our risk management segment’s revenues
come from non-affiliated brokerage customers, such as insurance companies and clients of other insurance brokers. Based on
revenues, our risk management operation ranked as the world’s largest property/casualty third party claims administrator
according to Business Insurance magazine’s April 22, 2013 edition.
We expect that the risk management segment’s most significant growth prospects through the next several years will come from:
Increased levels of business with Fortune 1000 companies;
Larger middle-market companies, captives;
Program business and the outsourcing of insurance company claims departments; and
Mergers and acquisitions.
5
Corporate Segment
The corporate segment accounted for 13% of our revenues in 2013. The corporate segment reports the financial information
related to our debt, clean energy investments, external acquisition-related expenses and other corporate costs. The revenues
reported by this segment in 2013 resulted primarily from our consolidation of refined fuel operations that we control and own
more than 50% of and from leased facilities we operate and control. At December 31, 2013, significant investments managed by
this segment include:
Clean Coal Related Ventures
We have a 46.54% interest in Chem-Mod LLC, a privately-held enterprise (Chem-Mod) that has commercialized multi-pollutant
reduction technologies to reduce mercury, sulfur dioxide and other emissions at coal-fired power plants. We also have an 8.0%
interest in a privately-held start-up enterprise (C-Quest Technology LLC), which owns technologies that reduce carbon dioxide
emissions created by burning fossil fuels.
Tax-Advantaged Investments
Prior to January 1, 2008, we owned certain partnerships formed to develop energy that qualified for tax credits under the former
IRC Section 29. These consisted of waste-to-energy and synthetic coal operations. These investments helped to substantially
reduce our effective income tax rate from 2002 through 2007. The law that permitted us to claim IRC Section 29 tax credits
expired on December 31, 2007. In 2009 and 2011, we built a total of 29 commercial clean coal production plants to produce
refined coal using Chem-Mod’s proprietary technologies and in 2013, we purchased 99% interests in five commercial clean coal
production plants. We believe these operations produce refined coal that qualifies for tax credits under IRC Section 45. The law
that provides for IRC Section 45 tax credits substantially expires in December 2019 for the fourteen plants we built and placed in
service in 2009 (2009 Era Plants) and in December 2021 for the fifteen plants we built and placed in service in 2011, plus the five
plants we purchased interests in that were placed in service in 2011 (2011 Era Plants).
International Operations
Our total revenues by geographic area for each of the three years in the period ended December 31, 2013 were as follows
(in millions):
Brokerage and risk management segments
United States
United Kingdom
Other foreign, principally Australia,
Bermuda and Canada
2013
2012
2011
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
$
2,118.3
434.4
77%
16%
$
1,885.1
352.3
79%
14%
$
1,695.7
260.5
81%
12%
202.6
7%
161.9
7%
149.1
7%
Total brokerage and risk management
2,755.3
100%
2,399.3
100%
2,105.3
100%
Corporate segment, substantially all United States
424.3
Total revenues
$
3,179.6
121.0
$
2,520.3
29.4
$
2,134.7
See Notes 5, 14 and 17 to our 2013 consolidated financial statements for additional financial information related to our foreign
operations, including goodwill allocation, earnings before income taxes and identifiable assets, by segment, for 2013, 2012 and
2011.
Brokerage Operations in Australia, Bermuda, Canada, the Caribbean and the U.K.
The majority of our international brokerage operations are in Australia, Bermuda, Canada, the Caribbean and the U.K.
We operate in Australia, the Caribbean and Canada primarily as a retail commercial property and casualty broker. In the U.K.,
we have a retail brokerage presence in more than 60 locations across the U.K. targeting small to medium enterprise risks; an
underwriting operation for clients to access the Lloyd’s of London and other international insurance markets, and a program
operation offering customized risk management products and services to U.K. public entities. In Bermuda, we act principally as a
wholesaler for clients looking to access the Bermuda insurance markets and also provide services relating to the formation and
management of offshore captive insurance companies.
We also have ownership interests in two Bermuda-based insurance companies and a Guernsey-based insurance company that
operate segregated account “rent-a-captive” facilities. These facilities enable clients to receive the benefits of owning a captive
insurance company without incurring certain disadvantages of ownership. Captive insurance companies are created for clients to
insure their risks and capture underwriting profit and investment income, which is then available for use by the insureds generally
for reducing future costs of their insurance programs.
6
We also have strategic brokerage alliances with a variety of international brokers in countries where we do not have a local office
presence. Through a network of correspondent insurance brokers and consultants in more than 140 countries, we are able to fully
serve our clients’ coverage and service needs in virtually any geographic area.
Risk Management Operations in Australia, Canada, New Zealand and the U.K.
Our international risk management operations are principally in Australia, Canada, New Zealand and the U.K. Services are
similar to those provided in the U.S. and are provided primarily on behalf of commercial and public entity clients.
Markets and Marketing
We manage our brokerage operations through a network of more than 400 sales and service offices located throughout the U.S.
and in 22 other countries. We manage our third-party claims adjusting operations through a network of approximately
100 offices located throughout the U.S., Australia, Canada, New Zealand and the U.K. Our customer base is highly diversified
and includes commercial, industrial, public entity, religious and not-for-profit entities. No material part of our business depends
upon a single customer or on a few customers. The loss of any one customer would not have a material adverse effect on our
operations. In 2013, our largest single customer accounted for approximately 1% of our revenues from the combined brokerage
and risk management segments and our ten largest customers represented 6% of our revenues from the combined brokerage and
risk management segments in the aggregate. Our revenues are geographically diversified, with both domestic and international
operations.
Each of our retail and wholesale brokerage operations has a small market-share position and, as a result, we believe has
substantial organic growth potential. In addition, each of our retail and wholesale brokerage operations has the ability to grow
through the acquisition of small- to medium-sized independent brokerages. See “Business Combinations” below.
While historically we have generally grown our risk management segment organically, and we expect to continue to do so, from
time to time we consider acquisitions for this segment.
We require our employees serving in sales or marketing capacities, plus all of our executive officers, to enter into agreements
with us restricting disclosure of confidential information and solicitation of our clients and prospects upon their termination of
employment. The confidentiality and non-solicitation provisions of such agreements terminate in the event of a hostile change in
control, as defined in the agreements.
Competition
Brokerage Segment
According to Business Insurance magazine’s July 15, 2013 edition, we were the fourth largest insurance broker worldwide based
on total revenues. The insurance brokerage and service business is highly competitive and there are many insurance brokerage
and service organizations and individuals throughout the world who actively compete with us in every area of our business.
Our retail and wholesale brokerage operations compete with Aon plc, Marsh & McLennan Companies, Inc. and Willis Group
Holdings, Ltd., each of which has greater worldwide revenues than us. In addition, various other competing firms, such as
Jardine Lloyd Thomson Group plc, Wells Fargo Insurance Services, Inc., Brown & Brown Inc., Hub International Ltd., Lockton
Companies, Inc. and USI Holdings Corporation, operate nationally or are strong in a particular region or locality and may have, in
that region or locality, an office with revenues as large as or larger than those of our corresponding local office. We believe that
the primary factors determining our competitive position with other organizations in our industry are the quality of the services
we render and the overall costs to our clients. In addition, for health/welfare products and benefit consultant services, we
compete with larger firms such as Aon Hewitt, Mercer (a subsidiary of Marsh & McLennan Companies, Inc.), Towers Watson &
Co., mid-market firms such as Lockton, USI Holdings, and Wells Fargo and the benefits consulting divisions of the national
public accounting firms, as well as a vast number of local and regional brokerages and agencies.
Our wholesale brokerage operations compete with large wholesalers such as CRC Insurance Services, Inc., RT Specialty,
AmWINS Group, Inc., Swett & Crawford Group, Inc., as well as a vast number of local and regional wholesalers.
We also compete with certain insurance companies that write insurance directly for their customers. Government benefits
relating to health, disability, and retirement are also alternatives to private insurance and indirectly compete with us.
Risk Management Segment
Our risk management operation currently ranks as the world’s largest property/casualty third party claims administrator based on
revenues, according to Business Insurance magazine’s April 22, 2013 edition. While many global and regional claims
administrators operate within this space, we compete directly with Sedgwick Claims Management Services, Inc., Broadspire
Services, Inc. (a subsidiary of Crawford & Company) and ESIS (a subsidiary of ACE Limited). Several large insurance
companies, such as AIG Insurance and Zurich Insurance, also maintain their own claims administration units, which can be strong
competitors. In addition, we compete with various smaller third party claims administrators on a regional level. We believe that
our competitive position is due to our strong reputation for outstanding service and our ability to resolve customers’ losses in the
most cost-efficient manner possible.
7
Regulation
We are required to be licensed or receive regulatory approval in nearly every state and foreign jurisdiction in which we do
business. In addition, most jurisdictions require individuals who engage in brokerage, claim adjusting and certain other insurance
service activities be personally licensed. These licensing laws and regulations vary from jurisdiction to jurisdiction. In most
jurisdictions, licensing laws and regulations generally grant broad discretion to supervisory authorities to adopt and amend
regulations and to supervise regulated activities.
Business Combinations
We completed and integrated 279 acquisitions from January 1, 2002 through December 31, 2013, almost exclusively within our
brokerage segment. The majority of these acquisitions have been smaller regional or local property/casualty retail or wholesale
operations with a strong middle-market client focus or significant expertise in one of our focus market areas. Over the last
decade, we have also increased our acquisition activity in the retail employee benefits brokerage and wholesale brokerage areas.
The total purchase price for individual acquisitions have typically ranged from $1 million to $50 million, although in 2013 we
completed two large acquisitions with total purchase price consideration that was in excess of $300.0 million each.
Through acquisitions, we seek to expand our talent pool, enhance our geographic presence and service capabilities, and/or
broaden and further diversify our business mix. We also focus on identifying:
A corporate culture that matches our sales-oriented culture;
A profitable, growing business whose ability to compete would be enhanced by gaining access to our greater
resources; and
Clearly defined financial criteria.
See Note 3 to our 2013 consolidated financial statements for a summary of our 2013 acquisitions, the amount and form of the
consideration paid and the dates of acquisition.
Employees
As of December 31, 2013, we had approximately 16,400 employees. We continuously review benefits and other matters of
interest to our employees and consider our relations with our employees to be satisfactory.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are available free of charge on our website at
www.ajg.com as soon as reasonably practicable after electronically filing or furnishing such material to the Securities and
Exchange Commission. Such reports may also be read and copied at the Securities and Exchange Commission’s Public
Reference Room at 100 F Street NE, Washington, D.C. 20549. Information regarding the operation of the Public Reference
Room may be obtained by calling the Securities and Exchange Commission at (800) SEC-0330. The Securities and Exchange
Commission also maintains a website (www.sec.gov) that includes our reports, proxy statements and other information.
Item 1A. Risk Factors.
Risks Relating to our Business Generally
An economic downturn, as well as uncertainty regarding the European debt crisis and market perceptions concerning the
instability of the Euro, could adversely affect our results of operations and financial condition.
An overall decline in economic activity could adversely impact us in future years as a result of reductions in the overall amount of
insurance coverage that our clients purchase due to reductions in their headcount, payroll, properties, and the market values of
assets, among other factors. Such reductions could also adversely impact future commission revenues when the carriers perform
exposure audits if they lead to subsequent downward premium adjustments. We record the income effects of subsequent
premium adjustments when the adjustments become known and, as a result, any improvement in our results of operations and
financial condition may lag an improvement in the economy. In addition, some of our clients may cease operations completely in
the event of a prolonged deterioration in the economy, or be acquired by other companies, which would have an adverse effect on
our results of operations and financial condition.
We also have a significant amount of trade accounts receivable from some of the insurance companies with which we place
insurance. If those insurance companies experience liquidity problems or other financial difficulties, we could encounter delays
or defaults in payments owed to us, which could have a significant adverse impact on our consolidated financial condition and
results of operations. In addition, if a significant insurer fails or withdraws from writing certain insurance coverages that we offer
our clients, overall capacity in the industry could be negatively affected, which could reduce our placement of certain lines and
types of insurance and, as a result, reduce our revenues and profitability. The failure of an insurer with whom we place business
8
could also result in errors and omissions claims against us by our clients, which could adversely affect our results of operations
and financial condition.
Despite a recent agreement by European Union officials on a system to wind down failed banks, continued concerns regarding the
ability of certain European countries to service their outstanding debt have given rise to instability in the global credit and
financial markets. A potential consequence may be stagnant growth, or even recession, in the Eurozone economies and beyond,
which could adversely affect our results of operations. The market instability caused by the Eurozone debt crisis has led to
questions regarding the future viability of the Euro as a single currency for the region. The dissolution of the Euro (in the
extreme case) could lead to further contraction in the Eurozone economies, adversely affecting our results of operations. In
addition, the value of our assets held in the Eurozone, including cash holdings, would decline if currencies in the region were
devalued.
Volatility or declines in premiums or other adverse trends in the insurance industry may seriously undermine our
profitability.
We derive much of our revenue from commissions and fees for our brokerage services. We do not determine the insurance
premiums on which our commissions are generally based. Moreover, insurance premiums are cyclical in nature and may vary
widely based on market conditions. For example, after three years of a “hard” market that began in late 2000 and was
strengthened by the events of September 11th, 2001, in which premium rates were stable or increasing, in late 2003 the market
experienced the return of flat or reduced premium rates (a “soft” market) in many lines and geographic areas. This put downward
pressure on our commission revenues. In 2012 and 2013, the market began “firming” (as opposed to traditional “hardening”)
across many lines and geographic areas. In this environment, rates increased at a moderate pace, clients could still obtain
coverage, businesses continued to stay in standard-line markets and there was adequate capacity in the market. It is not clear
whether this firming is sustainable given the uncertainty of the current economic environment. Because of these market cycles
for insurance product pricing, which we cannot predict or control, our brokerage revenues and profitability can be volatile or
remain depressed for significant periods of time.
As traditional risk-bearing insurance companies continue to outsource the production of premium revenue to non-affiliated
brokers or agents such as us, those insurance companies may seek to further minimize their expenses by reducing the commission
rates payable to insurance agents or brokers. The reduction of these commission rates, along with general volatility and/or
declines in premiums, may significantly affect our profitability. Because we do not determine the timing or extent of premium
pricing changes, we cannot accurately forecast our commission revenues, including whether they will significantly decline. As a
result, we may have to adjust our budgets for future acquisitions, capital expenditures, dividend payments, loan repayments and
other expenditures to account for unexpected changes in revenues, and any decreases in premium rates may adversely affect the
results of our operations.
In addition, there have been and may continue to be various trends in the insurance industry toward alternative insurance markets
including, among other things, greater levels of self-insurance, captives, rent-a-captives, risk retention groups and non-insurance
capital markets-based solutions to traditional insurance. While, historically, we have been able to participate in certain of these
activities on behalf of our customers and obtain fee revenue for such services, there can be no assurance that we will realize
revenues and profitability as favorable as those realized from our traditional brokerage activities. Our ability to generate
premium-based commission revenue may also be challenged by the growing desire of some clients to compensate brokers based
upon flat fees rather than variable commission rates. This could negatively impact us because fees are generally not indexed for
inflation and do not automatically increase with premium as does commission-based compensation.
We face significant competitive pressures in each of our businesses.
The insurance brokerage and service business is highly competitive and many insurance brokerage and service organizations, as
well as individuals, actively compete with us in one or more areas of our business around the world. We compete with three
firms in the global risk management and brokerage markets that have revenues significantly larger than ours. In addition, various
other competing firms that operate nationally or that are strong in a particular country, region or locality may have, in that
country, region or locality, an office with revenues as large as or larger than those of our corresponding local office. Our risk
management operation also faces significant competition from stand-alone firms as well as divisions of larger firms.
We believe that the primary factors in determining our competitive position with other organizations in our industry are the
quality of the services rendered and the overall costs to our clients. Losing business to competitors offering similar products at
lower prices or having other competitive advantages would adversely affect our business.
In addition, any increase in competition due to new legislative or industry developments could adversely affect us. These
developments include:
Increased capital-raising by insurance underwriting companies, which could result in new capital in the industry, which
in turn may lead to lower insurance premiums and commissions;
Insurance companies selling insurance directly to insureds without the involvement of a broker or other intermediary;
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Changes in our business compensation model as a result of regulatory developments (for example, the 2010 Health Care
Reform Legislation);
Federal and state governments establishing programs to provide health insurance or, in certain cases, property insurance
in catastrophe-prone areas or other alternative market types of coverage, that compete with, or completely replace,
insurance products offered by insurance carriers; and
Increased competition from new market participants such as banks, accounting firms and consulting firms offering risk
management or insurance brokerage services.
New competition as a result of these or other competitive or industry developments could cause the demand for our products and
services to decrease, which could in turn adversely affect our results of operations and financial condition.
We have historically acquired large numbers of insurance brokers, benefits consulting firms and risk management firms.
We may not be able to continue such an acquisition strategy in the future and there are risks associated with such
acquisitions, which could adversely affect our growth and results of operations.
Historically, we have acquired large numbers of insurance brokers, benefits consulting firms and risk management firms. Our
acquisition program has been an important part of our historical growth and we believe that similar acquisition activity will be
important to maintaining comparable growth in the future. Failure to successfully identify and complete acquisitions likely would
result in us achieving slower growth. Continuing consolidation in our industry and growing interest in acquiring insurance
brokers on the part of private equity firms and private equity-backed consolidators could make it more difficult for us to identify
appropriate targets and could make them more expensive. Even if we are able to identify appropriate acquisition targets, we may
not be able to execute transactions on favorable terms or integrate targets in a manner that allows us to realize the benefits we
have historically experienced from acquisitions. Our ability to finance and integrate acquisitions may also decrease if we
complete a greater number of large acquisitions than we have historically.
Post-acquisition risks include those relating to retention of personnel, entry into unfamiliar markets, unanticipated contingencies
or liabilities (such as violations of sanctions laws or anti-corruption laws including the FCPA and U.K. Bribery Act) tax and
accounting issues, and integration difficulties, relating to accounting, information technology, human resources, or organizational
culture and fit, some or all of which could have an adverse effect on our results of operations and growth. Post-acquisition
deterioration of targets could also result in lower or negative earnings contribution and/or goodwill impairment charges.
We own interests in firms where we do not exercise management control (such as Casanueva Perez S.A.P. de C.V. (Grupo CP) in
Mexico) and are therefore unable to direct or manage the business to realize the anticipated benefits, including mitigation of risks,
that could be achieved through full integration.
Our future success depends, in part, on our ability to attract and retain experienced and qualified personnel.
We believe that our future success depends, in part, on our ability to attract and retain experienced personnel, including our senior
management, brokers and other key personnel. In addition, we could be adversely affected if we fail to adequately plan for the
succession of members of our senior management team. The insurance brokerage industry has experienced intense competition
for the services of leading brokers, and we have lost key brokers to competitors in the past. The loss of our chief executive
officer or any of our other senior managers, brokers or other key personnel (including the key personnel that manage our interests
in our IRC Section 45 investments), or our inability to identify, recruit and retain such personnel, could materially and adversely
affect our business, operating results and financial condition.
Our growing international operations expose us to risks different than those we face in the U.S.
We conduct a growing portion of our operations outside the U.S., including in countries where the risk of political and economic
uncertainty is relatively greater than that present in the U.S. and more stable countries. Adverse geopolitical or economic
conditions may temporarily or permanently disrupt our operations in these countries. For example, we have operations in India to
provide certain back-office services. To date, the dispute between India and Pakistan involving the Kashmir region, incidents of
terrorism in India and general geopolitical uncertainties have not adversely affected our operations in India. However, such
factors could potentially affect our operations there in the future. Should our access to these services be disrupted, our business,
operating results and financial condition could be adversely affected.
Operating outside the U.S. may also present other risks that are different from, or greater than, the risks we face doing comparable
business in the U.S. These include, among others, risks relating to:
Maintaining awareness of and complying with a wide variety of labor practices and foreign laws, including those
relating to export and import duties, environmental policies and privacy issues, as well as laws and regulations
applicable to U.S. business operations abroad. These include rules relating to trade sanctions administered by the U.S.
Office of Foreign Assets Control, the European Union and the United Nations, trade sanction laws such as the Iran
Threat Reduction and Syria Human Rights Act of 2012, the requirements of the FCPA and other anti-bribery and
corruption rules and requirements in the countries in which we operate (such as the U.K. Bribery Act), as well as
unexpected changes in such regulatory requirements and laws;
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Difficulties in staffing and managing foreign operations;
Less flexible employee relationships, which may limit our ability to prohibit employees from competing with us after
their employment, and may make it more difficult and expensive to terminate their employment;
Political and economic instability (including the potential dissolution of the Euro, acts of terrorism and outbreaks of
war);
Coordinating our communications and logistics across geographic distances and multiple time zones, including during
times of crisis management;
Adverse trade policies, and adverse changes to any of the policies of the U.S. or any of the foreign jurisdictions in which
we operate;
Adverse changes in tax rates or discriminatory or confiscatory taxation in foreign jurisdictions;
Legal or political constraints on our ability to maintain or increase prices;
Cash balances held in foreign banks and institutions where governments have not specifically enacted formal guarantee
programs; and
Governmental restrictions on the transfer of funds to us from our operations outside the U.S.
If any of these developments occur, our results of operations and financial condition could be adversely affected.
We face a variety of risks in our risk management operations that are distinct from those we face in our brokerage
operations.
Our risk management operations face a variety of risks distinct from those faced by our brokerage operations, including the risk
that:
The favorable trend among both insurers and insureds toward outsourcing various types of claims administration and
risk management services will reverse or slow, causing our revenues or revenue growth to decline;
Concentration of large amounts of revenue with certain clients results in greater exposure to the potential negative
effects of changes in management at such clients or changes in state government policies, in the case of our government-
entity clients;
Contracting terms will become less favorable or that the margins on our services will decrease due to increased
competition, regulatory constraints or other developments;
We will not be able to satisfy regulatory requirements related to third party administrators or that regulatory
developments (including unanticipated regulatory developments relating to security and data privacy outside the United
States) will impose additional burdens, costs or business restrictions that make our business less profitable;
Continued economic weakness or a slow-down in economic activity could lead to a continued reduction in the number of
claims we process;
If we do not control our labor and technology costs, we may be unable to remain competitive in the marketplace and
profitably fulfill our existing contracts (other than those that provide cost-plus or other margin protection);
We may be unable to develop further efficiencies in our claims-handling business if we fail to make adequate
improvements in technology or operations; and
Insurance companies or certain insurance consumers may create in-house servicing capabilities that compete with our
third party administration and other administration, servicing and risk management products.
If any of these developments occur, our results of operations and financial condition could be adversely affected.
Contingent and supplemental commissions we receive from insurance companies are less predictable than standard
commissions, and any decrease in the amount of these kinds of commissions we receive could adversely affect our results
of operations.
A portion of our revenues consists of contingent and supplemental commissions we receive from insurance companies.
Contingent commissions are paid by insurance companies based upon the profitability, volume and/or growth of the business
placed with such companies during the prior year. Supplemental commissions are commissions paid by insurance companies that
are established annually in advance based on historical performance criteria. If, due to the current economic environment or for
any other reason, we are unable to meet insurance companies’ profitability, volume and/or growth thresholds, and/or insurance
companies increase their estimate of loss reserves (over which we have no control), actual contingent commissions and/or
supplemental commissions we receive could be less than anticipated, which could adversely affect our results of operations.
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Sustained increases in the cost of employee benefits could reduce our profitability.
The cost of current employees’ medical and other benefits, as well as pension retirement benefits and postretirement medical
benefits under our legacy defined benefit plans, substantially affects our profitability. In the past, we have occasionally
experienced significant increases in these costs as a result of macro-economic factors beyond our control, including increases in
health care costs, declines in investment returns on pension assets and changes in discount rates used to calculate pension and
related liabilities. A significant decrease in the value of our defined benefit pension plan assets or decreases in the interest rates
used to discount the pension plans’ liabilities could cause an increase in pension plan costs in future years. Although we have
actively sought to control increases in these costs, we can make no assurance that we will succeed in limiting future cost
increases, and continued upward pressure in these costs could reduce our profitability.
If we are unable to apply technology effectively in driving value for our clients through technology-based solutions or gain
internal efficiencies and effective internal controls through the application of technology and related tools, our client
relationships, growth strategy, compliance programs and operating results could be adversely affected.
Our future success depends, in part, on our ability to develop and implement technology solutions that anticipate and keep pace
with rapid and continuing changes in technology, industry standards, client preferences and internal control standards. We may
not be successful in anticipating or responding to these developments on a timely and cost-effective basis and our ideas may not
be accepted in the marketplace. Additionally, the effort to gain technological expertise and develop new technologies in our
business requires us to incur significant expenses. For example, certain of our competitors have launched consulting operations
that leverage global insurance placement data. If we cannot offer new technologies as quickly as our competitors, or if our
competitors develop more cost-effective technologies or product offerings, we could experience a material adverse effect on our
client relationships, growth strategy, compliance programs and operating results.
Our inability to recover successfully should we experience a disaster, material cybersecurity attack or other significant
disruption to business continuity could have a material adverse effect on our operations.
Our ability to conduct business may be adversely affected, even in the short-term, by a disruption in the infrastructure that
supports our business and the communities where we are located. For example, our risk management segment is highly
dependent on the continued and efficient functioning of RISX-FACS®, our proprietary risk management information system, to
provide clients with insurance claim settlement and administration services. Disruptions could be caused by, among other things,
restricted physical site access, terrorist activities, disease pandemics, material cybersecurity attacks, or outages to electrical,
communications or other services used by our company, our employees or third parties with whom we conduct business. We
have certain disaster recovery procedures in place and insurance to protect against such contingencies. However, such procedures
may not be effective and any insurance or recovery procedures may not continue to be available at reasonable prices and may not
address all such losses or compensate us for the possible loss of clients or increase in claims and lawsuits directed against us
because of any period during which we are unable to provide services. Our inability to successfully recover should we experience
a disaster or other significant disruption to business continuity could have a material adverse effect on our operations.
Regulatory, Legal and Accounting Risks
We are subject to regulation worldwide. If we fail to comply with regulatory requirements or if regulations change in a
way that adversely affects our operations, we may not be able to conduct our business or may be less profitable.
Many of our activities are subject to regulatory supervision, including insurance industry regulation, Federal and state
employment regulation and regulations promulgated by regulatory bodies such as the Securities and Exchange Commission
(SEC) and Department of Justice (DOJ) and Internal Revenue Service (IRS) in the U.S., and the Financial Services Authority
(FSA) in the U.K. Such regulations could reduce our profitability or growth by increasing the costs of compliance, restricting the
products or services we sell, the markets we enter, the methods by which we sell our products and services, or the prices we can
charge for our services and the form of compensation we can accept from our clients, carriers and third parties. As our operations
grow around the world, it is increasingly difficult to monitor and enforce regulatory compliance across the organization. A
compliance failure by even one of our smallest branches could lead to litigation and/or disciplinary actions that may include
compensating clients for loss, the imposition of penalties and the revocation of our authorization to operate. In all such cases, we
would also likely incur significant internal investigation costs.
In addition, changes in legislation or regulations and actions by regulators, including changes in administration and enforcement
policies, could from time to time require operational changes that could result in lost revenues or higher costs or hinder our ability
to operate our business. For example, we offer captive design and management services and group captive development services,
and expect to be able to continue offering such services. The National Association of Insurance Commissioners (NAIC) has
established a subgroup to study the use of captives and special purpose vehicles to transfer insurance risk in relation to existing
state laws and regulations. Any action by Federal, state or other regulators that adversely affects our ability to offer services in
relation to captives, either retroactively or prospectively, could have an adverse effect on our results of operations. Additionally,
the method by which insurance brokers are compensated has received substantial scrutiny in the past decade because of the
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potential for conflicts of interest. Adverse regulatory developments regarding the forms of compensation we can receive (for
example, continent commissions), could adversely affect our results of operations and financial condition.
We could be adversely affected by violations or alleged violations of the FCPA, the U.K. Bribery Act or other anti-
corruption laws.
The FCPA, U.K. Bribery Act and other anti-corruption laws generally prohibit companies and their intermediaries from making
improper payments (to foreign officials and otherwise) and require companies to keep accurate books and records and maintain
appropriate internal controls. Our training program and policies mandate compliance with such laws. We operate in some parts
of the world that have experienced governmental corruption to some degree, and, in certain circumstances, strict compliance with
anti-bribery laws may conflict with local customs and practices. In recent years, two of the five publicly traded insurance
brokerage firms were investigated in the U.K. by the FSA, and one was investigated in the U.S. by the SEC and DOJ, for
improper payments to foreign officials. These firms paid significant settlements and undertook internal investigations. If we are
alleged to have violated or found to be liable for violations of anti-corruption laws (either due to our own acts or our inadvertence,
or due to the acts or inadvertence of others, including employees of our third party partners or agents), we could be subject to civil
and criminal penalties or other sanctions, incur significant internal investigation costs and suffer reputational harm.
Our business could be negatively impacted if we are unable to adapt our services to changes resulting from the 2010
Health Care Reform Legislation.
The 2010 Health Care Reform Legislation, among other things, increases the level of regulatory complexity for companies that
offer health and welfare benefits to their employees, and continues to be amended through regulations issued by various
government agencies. Many clients of our brokerage segment purchase health and welfare products for their employees and,
therefore, are impacted by the 2010 Health Care Reform Legislation. We have made significant investments in product and
knowledge development to assist clients as they navigate the complex requirements of this legislation. Depending on future
changes to health legislation, these investments may not yield returns. In addition, if we are unable to adapt our services to
changes resulting from this law and any subsequent regulations, our ability to grow our business or to provide effective services,
particularly in our employee benefits consulting business, will be negatively impacted. In addition, if our clients reduce the role
or extent of employer sponsored health care in response to this law, particularly the “employer mandate” scheduled to enter into
effect in January 2015, our results of operations could be adversely impacted.
We are subject to a number of contingencies and legal proceedings which, if determined unfavorably to us, would
adversely affect our financial results.
We are subject to numerous claims, tax assessments, lawsuits and proceedings that arise in the ordinary course of business. Such
claims, lawsuits and other proceedings could, for example, include claims for damages based on allegations that our employees or
sub-agents improperly failed to procure coverage, report claims on behalf of clients, provide insurance companies with complete
and accurate information relating to the risks being insured, provide clients with appropriate consulting and claims handling
services, or appropriately apply funds that we hold for our clients on a fiduciary basis. We have established provisions against
these potential matters that we believe are adequate in light of current information and legal advice, and we adjust such provisions
from time to time based on current material developments. The damages claimed in these matters are or may be substantial,
including, in many instances, claims for punitive, treble or extraordinary damages. It is possible that, if the outcomes of these
contingencies and legal proceedings were not favorable to us, it could materially adversely affect our future financial results. In
addition, our results of operations, financial condition or liquidity may be adversely affected if, in the future, our insurance
coverage proves to be inadequate or unavailable or we experience an increase in liabilities for which we self-insure. We have
purchased errors and omissions insurance and other insurance to provide protection against losses that arise in such matters.
Accruals for these items, net of insurance receivables, when applicable, have been provided to the extent that losses are deemed
probable and are reasonably estimable. These accruals and receivables are adjusted from time to time as current developments
warrant.
As more fully described in Note 13 to our consolidated financial statements, we are subject to a number of legal proceedings,
regulatory actions and other contingencies. An adverse outcome in connection with one or more of these matters could have a
material adverse effect on our business, results of operations or financial condition in any given quarterly or annual period. In
addition, regardless of any eventual monetary costs, these matters could expose us to negative publicity, reputational damage,
harm to our client or employee relationships, or diversion of personnel and management resources, which could adversely affect
our ability to recruit quality brokers and other significant employees to our business, and otherwise adversely affect our results of
operations.
If our clients are not satisfied with our services, we may face additional cost, loss of profit opportunities and damage to
our professional reputation.
We depend, to a large extent, on our relationships with our clients and our reputation for high-quality brokerage and risk
management services, so that we can understand our clients' needs and deliver solutions and services that are tailored to their
needs. If a client is not satisfied with our services, it may be more damaging to our business than to other businesses and could
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cause us to incur additional costs and impair profitability. Many of our clients are businesses that band together in industry
groups and/or trade associations and actively share information amongst themselves about the quality of service they receive from
their vendors. Accordingly, poor service to one client may negatively impact our relationships with multiple other clients.
The nature of much of our work, especially our actuarial services in our benefits consulting business, involves assumptions and
estimates concerning future events, the actual outcome of which we cannot know with certainty in advance. Similarly, in our
institutional investment consulting and our retirement services consulting businesses, we may be measured based on our track
record regarding judgments and advice on investments that are susceptible to influences unknown at the time the advice was
given. In addition, we could make computational, software programming or data entry or management errors. A client may
nonetheless claim it suffered losses due to reliance on our consulting advice. In addition to the risks of liability exposure and
increased costs of defense and insurance premiums, claims arising from our professional services may produce publicity that
could hurt our reputation and business and adversely affect our ability to secure new business.
Improper disclosure of personal data could result in legal liability or harm our reputation.
One of our significant responsibilities is to maintain the security and privacy of our clients’ confidential and proprietary
information and the personal data of their employees and other benefit plan participants. We maintain policies, procedures and
technological safeguards designed to protect the security and privacy of this information from threats such as a cybersecurity
attack. Nonetheless, we cannot entirely eliminate the risk of improper access to or disclosure of personally identifiable
information. Such disclosure could harm our reputation and subject us to liability under our contracts and laws that protect
personal data, resulting in increased costs or loss of revenue. In the past, we have experienced attempts to wrongfully access our
computer and information systems, which, if successful, could have resulted in harm to our business. Our systems were
successful in identifying the risk and preventing unauthorized access, and management is not aware of a cybersecurity incident
that has had a material effect on our operations. However, there can be no assurance that cybersecurity incidents that could have
a material impact on our business will not occur.
Data privacy is subject to frequently changing rules and regulations that sometimes conflict among the various jurisdictions and
countries in which we provide services, and may be more stringent in some jurisdictions outside the U.S. Our failure to adhere to
or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability,
fines and penalties, and could damage our reputation.
Significant changes in foreign exchange rates may adversely affect our results of operations.
Some of our foreign subsidiaries receive revenues or incur obligations in currencies that differ from their functional currencies.
We must also translate the financial results of our foreign subsidiaries into U.S. dollars. Although we have used foreign currency
hedging strategies in the past and currently have some in place, such risks cannot be eliminated entirely, and significant changes
in exchange rates may adversely affect our results of operations.
Changes in our accounting estimates and assumptions could negatively affect our financial position and operating results.
We prepare our financial statements in accordance with U.S. generally accepted accounting principles (which we refer to as
GAAP). These accounting principles require us to make estimates and assumptions that affect the reported amounts of assets and
liabilities, and the disclosure of contingent assets and liabilities at the date of our consolidated financial statements. We are also
required to make certain judgments that affect the reported amounts of revenues and expenses during each reporting period. We
periodically evaluate our estimates and assumptions, including those relating to the valuation of goodwill and other intangible
assets, investments (including our IRC Section 45 investments), income taxes, stock-based compensation, claims handling
obligations, retirement plans, litigation and contingencies. We base our estimates on historical experience and various
assumptions that we believe to be reasonable based on specific circumstances. Actual results could differ from these estimates.
Additionally, changes in accounting standards could increase costs to the organization and could have an adverse impact on our
future financial position and results of operations.
Risks Relating to our Investments, Debt and Common Stock
Our clean energy investments are subject to various risks and uncertainties.
We have invested in clean energy operations capable of producing refined coal that we believe qualify for tax credits under IRC
Section 45.
See Note 12 to our consolidated financial statements for a description of these investments. Our ability to generate returns and
avoid write-offs in connection with these investments is subject to various risks and uncertainties. These include, but are not
limited to, the risks and uncertainties as set forth below.
Availability of the tax credits under IRC Section 45. Our ability to claim tax credits under IRC Section 45 depends
upon the operations in which we have invested satisfying certain ongoing conditions set forth in IRC Section 45. These
include, among others, the emissions reduction, “qualifying technology”, and “placed-in-service” requirements of IRC
Section 45, as well as the requirement that at least one of the operations’ owners qualifies as a “producer” of refined
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coal. While we have received some degree of confirmation from the IRS relating to our ability to claim these tax credits,
the IRS could ultimately determine that the operations have not satisfied, or have not continued to satisfy, the conditions
set forth in IRC Section 45. Additionally, Congress could modify or repeal IRC Section 45 and remove the tax credits
retroactively.
Business risks. We are working to negotiate and finalize arrangements with potential co-investors for the purchase of
equity stakes in one or more of the operations that are not currently producing refined coal. If no satisfactory
arrangements can be reached with these potential co-investors, or if in the future any one of our co-investors leaves a
project, we could have difficulty finding replacements in a timely manner. We could also be exposed to risk due to our
lack of control over the operations if future developments, for example a regulatory change affecting public and private
companies differently, causes our interests and those of our co-investors to diverge. Finally, our partners responsible for
operation and management could fail to run the operations in compliance with IRC Section 45. If any of these
developments occur, our investment returns may be negatively impacted.
Operational risks. Chem-Mod’s multi-pollutant reduction technologies (The Chem-ModTM Solution) require chemicals
that may not be readily available in the marketplace at reasonable costs. Utilities that use the technologies could be idled
for various reasons, including operational or environmental problems at the plants or in the boilers, disruptions in the
supply or transportation of coal, revocation of their Chem-Mod technologies environmental permits, labor strikes, force
majeure events such as hurricanes, or terrorist attacks, any of which could halt or impede the operations. Long-term
operations using Chem-Mod’s multi-pollutant reduction technologies could also lead to unforeseen technical or other
problems not evident in the short- or medium-term. A serious injury or death of a worker connected with the production
of refined coal using Chem-Mod’s technologies could expose the operations to material liabilities, jeopardizing our
investment, and could lead to reputational harm. In the event of any such operational problems, we may not be able to
take full advantage of the tax credits.
Market demand for coal. When the price of natural gas and/or oil declines relative to that of coal, some utilities may
choose to burn natural gas or oil instead of coal. Market demand for coal may also decline as a result of an economic
slowdown and a corresponding decline in the use of electricity. Sustained low natural gas prices may also cause utilities
to phase out or close existing coal-fired power plants. If utilities burn less coal or eliminate coal in the production of
electricity, the availability of the tax credits would also be reduced.
Incompatible coal. If utilities purchase coal of a quality or type incompatible with their boilers and operations, treating
such coal through a commercial refined coal plant could magnify the negative impacts of burning such coal. As a result,
refined coal plants at such utilities may be removed from production until the incompatible coal has all been burned,
which could cause us to be unable to take full advantage of the tax credits.
IRC Section 45 phase out provisions. IRC Section 45 contains phase out provisions based upon the market price of
coal, such that, if the price of coal rises to specified levels, we could lose some or all of the tax credits we expect to
receive from these investments.
Environmental concerns regarding coal. Environmental concerns about greenhouse gases, toxic wastewater
discharges and the potential hazardous nature of coal combustion waste could lead to regulations that discourage the
burning of coal. For example, such regulations could mandate that electric power generating companies purchase a
minimum amount of power from renewable energy sources such as wind, hydroelectric, solar and geothermal. This
could result in utilities burning less coal, which would reduce the generation of tax credits.
Moving a commercial refined coal plant. Changes in circumstances, such as those described above, may cause a
commercial refined coal plant to be moved to a different power generation facility, which could require us to invest
additional capital.
Demand for commercial refined coal plants. The implementation of environmental regulations regarding certain
pollution control and permitting requirements has been delayed from time to time due to various lawsuits. The
uncertainty created by litigation and reconsiderations of rule-making by the Environmental Protection Agency could
negatively impact power generational facilities’ demand for commercial refined coal plants, should we need to move
them as described above.
Intellectual property risks. Other companies may make claims of intellectual property infringement with respect to
The Chem-Mod™ Solution. Such intellectual property claims, with or without merit, could require that Chem-Mod (or
we and our investment and operational partners) obtain a license to use the intellectual property, which might not be
obtainable on favorable terms, if at all. If Chem-Mod (or we and our investment and operational partners) cannot defend
such claims or obtain necessary licenses on reasonable terms, the operations may be precluded from using The Chem-
Mod™ Solution.
Strategic alternatives risk. While we currently expect to continue to hold at least a portion of these refined coal
investments, if for any reason in the future we decide to sell more of our interests, the discount rate on future cash flows
could be excessive, and could result in an impairment on our investment.
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The IRC Section 45 operations in which we have invested and the by-products from such operations may result in
environmental and product liability claims and environmental compliance costs.
The construction and operation of the IRC Section 45 operations are subject to Federal, state and local laws, regulations and
potential liabilities arising under or relating to the protection or preservation of the environment, natural resources and human
health and safety. Such laws and regulations generally require the operations and/or the utilities at which the operations are
located to obtain and comply with various environmental registrations, licenses, permits, inspections and other approvals. Such
laws and regulations also impose liability, without regard to fault or the legality of a party’s conduct, on certain entities that are
considered to have contributed to, or are otherwise involved in, the release or threatened release of hazardous substances into the
environment. Such hazardous substances could be released as a result of burning refined coal produced using The Chem-Mod™
Solution in a number of ways, including air emissions, waste water, and by-products such as fly ash. One party may, under
certain circumstances, be required to bear more than its share or the entire share of investigation and cleanup costs at a site if
payments or participation cannot be obtained from other responsible parties. By using The Chem-Mod™ Solution at locations
owned and operated by others, we and our partners may be exposed to the risk of becoming liable for environmental damage we
may have had little, if any, involvement in creating. Such risk remains even after production ceases at an operation to the extent
the environmental damage can be traced to the types of chemicals or compounds used or operations conducted in connection with
The Chem-Mod™ Solution. For example, we and our partners could face the risk of product and environmental liability claims
related to concrete incorporating fly ash produced using The Chem-Mod™ Solution. No assurances can be given that contractual
arrangements and precautions taken to ensure assumption of these risks by facility owners or operators will result in that facility
owner or operator accepting full responsibility for any environmental damage. It is also not uncommon for private claims by
third parties alleging contamination to also include claims for personal injury, property damage, diminution of property or similar
claims. Furthermore, many environmental, health and safety laws authorize citizen suits, permitting third parties to make claims
for violations of laws or permits and force compliance. Our insurance may not cover all environmental risk and costs or may not
provide sufficient coverage in the event of an environmental claim. If significant uninsured losses arise from environmental
damage or product liability claims, or if the costs of environmental compliance increase for any reason, our results of operations
and financial condition could be adversely affected.
We have historically benefited from IRC Section 29 tax credits and that law expired on December 31, 2007. The
disallowance of IRC Section 29 tax credits would likely cause a material loss.
The law permitting us to claim IRC Section 29 tax credits related to our synthetic coal operations expired on December 31, 2007.
We believe our claim for IRC Section 29 tax credits in 2007 and prior years is in accordance with IRC Section 29 and four private
letter rulings previously obtained by IRC Section 29-related limited liability companies in which we had an interest. We
understand these private letter rulings are consistent with those issued to other taxpayers and have received no indication from the
IRS that it will seek to revoke or modify them. However, while our synthetic coal operations are not currently under audit, the
IRS could place those operations under audit and an adverse outcome may cause a material loss or cause us to be subject to
liability under indemnification obligations related to prior sales of partnership interests in partnerships claiming IRC Section 29
tax credits. For additional information about the potential negative effects of adverse tax audits and related indemnification
contingencies, see the discussion on IRC Section 29 tax credits included in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
We are exposed to various risks relating to losses on investments held by our corporate segment.
Our corporate segment holds a variety of investments. These investments are subject to risk of loss due to a variety of causes,
including general overall economic conditions, the effects of changes in interest rates, various regulatory issues, credit risk,
potential litigation, tax audits and disputes, failure to monetize in an effective and/or cost-efficient manner and poor operating
results. Any of these consequences may diminish the value of our invested assets and adversely affect our net worth and
profitability. Additionally, our cash holdings, including cash held in our fiduciary capacity, are subject to the credit, liquidity and
other risks faced by our financial institution counterparties.
The agreements and instruments governing our debt contain restrictions and limitations that could significantly impact
our ability to operate our business.
The agreements governing our debt contain covenants that, among other things, restrict our ability to dispose of assets, incur
additional debt, prepay other debt or amend other debt instruments, pay dividends, engage in certain asset sales, mergers,
acquisitions or similar transactions, create liens on assets, engage in certain transactions with affiliates, change our business or
make investments.
The restrictions in the agreements governing our debt may prevent us from taking actions that we believe would be in the best
interest of our business and our stockholders and may make it difficult for us to execute our business strategy successfully or
effectively compete with companies that are not similarly restricted. We may also incur future debt obligations that might subject
us to additional or more restrictive covenants that could affect our financial and operational flexibility, including our ability to
pay dividends. We cannot make any assurances that we will be able to refinance our debt or obtain additional financing on terms
acceptable to us, or at all.
16
A failure to comply with the restrictions under the agreements governing our debt could result in a default under the financing
obligations or could require us to obtain waivers from our lenders for failure to comply with these restrictions. The occurrence of
a default that remains uncured or the inability to secure a necessary consent or waiver could cause our obligations with respect to
our debt to be accelerated and have a material adverse effect on our financial condition and results of operations.
In the event we issue common stock as consideration for certain acquisitions we may make, we could dilute share
ownership.
We grow our business organically as well as through acquisitions. One method of acquiring companies or otherwise funding our
corporate activities is through the issuance of additional equity securities. Should we issue additional equity securities, such
issuances could have the effect of diluting our earnings per share as well as existing stockholders’ individual ownership
percentages in our company.
Volatility of the price of our common stock could adversely affect our stockholders.
The market price of our common stock could fluctuate significantly as a result of:
General economic and political conditions such as recessions, economic downturns and acts of war or terrorism;
Quarterly variations in our operating results;
Seasonality of our business cycle;
Changes in the market’s expectations about our operating results;
Our operating results failing to meet the expectation of securities analysts or investors in a particular period;
Changes in financial estimates and recommendations by securities analysts concerning us or the financial services
industry in general;
Operating and stock price performance of other companies that investors deem comparable to us;
News reports relating to trends in our markets, including any expectations regarding an upcoming “hard” or “soft”
market;
Changes in laws and regulations affecting our business;
Material announcements by us or our competitors;
The impact or perceived impact of developments relating to our investments, including the possible perception by
securities analysts or investors that such investments divert management attention from our core operations;
Quarter-to-quarter volatility in the earnings impact of IRC Section 45 tax credits from our clean energy investments, due
to the application of accounting standards applicable to the recognition of tax credits; and
Sales of substantial amounts of common shares by our directors, executive officers or significant stockholders or the
perception that such sales could occur.
Shareholder class action lawsuits may be instituted against us following a period of volatility in our stock price. Any such
litigation could result in substantial cost and a diversion of management’s attention and resources.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
The executive offices of our corporate segment and certain subsidiary and branch facilities of our brokerage and risk management
segments are located at Two Pierce Place, Itasca, Illinois, where we lease approximately 306,000 square feet of space, or
approximately 60% of the building. The lease commitment on this property expires on February 28, 2018.
Elsewhere, we generally operate in leased premises related to the facilities of our brokerage and risk management operations. We
prefer to lease office space rather than own real estate. Certain of our office space leases have options permitting renewals for
additional periods. In addition to minimum fixed rentals, a number of our leases contain annual escalation clauses generally
related to increases in an inflation index. See Note 13 to our 2013 consolidated financial statements for information with respect
to our lease commitments as of December 31, 2013.
Item 3. Legal Proceedings.
Not applicable.
17
Item 4. Mine Safety Disclosures.
Not applicable.
Executive Officers
Our executive officers are as follows:
Name
Age
Position and Year First Elected
J. Patrick Gallagher, Jr.
Walter D. Bay
Richard C. Cary
James W. Durkin, Jr.
Thomas J. Gallagher
James S. Gault
Douglas K. Howell
Scott R. Hudson
Susan E. McGrath
David E. McGurn, Jr.
61
50
51
64
55
61
52
52
46
59
Chairman since 2006, President since 1990, Chief Executive Officer since 1995
Corporate Vice President, General Counsel, Secretary since 2007
Controller since 1997, Chief Accounting Officer since 2001
Corporate Vice President, President of our Employee Benefit Brokerage Operation
since 1985
Corporate Vice President since 2001, Chairman of our International Brokerage
Operation since 2010
Corporate Vice President since 1992, President of our Retail Property/Casualty
Brokerage Operation since 2002
Corporate Vice President, Chief Financial Officer since 2003
Corporate Vice President and President of our Risk Management Operation since
2010
Corporate Vice President, Chief Human Resource Officer since 2007
Corporate Vice President since 1993, President of our Wholesale Brokerage
Operation since 2001
With the exception of Mr. Hudson, we have employed each such person principally in management capacities for more than the
past five years. All executive officers are appointed annually and serve at the pleasure of our board of directors.
Prior to joining us on January 25, 2010, Mr. Hudson was a Director in the Insurance Practice of Bridge Strategy Group LLC, a
consulting firm he co-founded in 1998. Prior to that, Mr. Hudson worked as a business consultant specializing in the insurance
and financial services industry at Andersen Consulting LLP (now known as Accenture), and in senior roles at Information
Consulting Group, McKinsey & Co. and Renaissance Worldwide.
Part II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Our common stock is listed on the New York Stock Exchange, trading under the symbol “AJG.” The following table sets forth
information as to the price range of our common stock for the two-year period from January 1, 2012 through December 31, 2013
and the dividends declared per common share for such period. The table reflects the range of high and low sales prices per share
as reported on the New York Stock Exchange composite listing.
Quarterly Periods
2013
First
Second
Third
Fourth
2012
First
Second
Third
Fourth
Dividends
Declared
per Common
Share
$
.35
.35
.35
.35
$
.34
.34
.34
.34
High
Low
$
41.31
45.87
45.89
48.49
$
36.33
38.24
37.56
36.99
$
34.97
40.51
41.11
43.57
$
32.01
33.75
34.46
34.20
18
As of January 31, 2014, there were approximately 1,000 holders of record of our common stock.
(c) Issuer Purchases of Equity Securities
The following table shows the purchases of our common stock made by or on behalf of Gallagher or any “affiliated purchaser”
(as such term is defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) of Gallagher for each
fiscal month in the three-month period ended December 31, 2013:
Period
October 1 through October 31, 2013
November 1 through November 30, 2013
December 1 through December 31, 2013
Total
Total
Number of
Shares
Purchased (1)
44
50
17,219
17,313
Average
Price Paid
per Share (2)
$
45.92
47.09
45.96
$
45.97
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (3)
Maximum Number
of Shares that May
Yet be Purchased
Under the Plans
or Programs (3)
-
-
-
-
10,000,000
10,000,000
10,000,000
(1) Amounts in this column represent shares of our common stock purchased by the trustees of rabbi trusts established under our
Deferred Equity Participation Plan (which we refer to as the Age 62 Plan), our Deferred Cash Participation Plan (which we
refer to as the DCPP) and our Supplemental Savings and Thrift Plan (which we refer to as the Supplemental Plan),
respectively. The Age 62 Plan is an unfunded, non-qualified deferred compensation plan that generally provides for
distributions to certain of our key executives when they reach age 62 or upon or after their actual retirement. See Note 9 to
the consolidated financial statements in this report for more information regarding the Age 62 Plan. The DCPP is an
unfunded, non-qualified deferred compensation plan for certain key employees, other than executive officers, that generally
provides for distributions no sooner than five years from the date of awards. Under the terms of the Age 62 Plan and the
DCPP, we may contribute cash to the rabbi trust 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 fourth quarter
of 2013, we instructed the rabbi trustee for the Age 62 Plan and the DCPP to reinvest dividends paid into the plans in our
common stock. The Supplemental Plan is an unfunded, non-qualified deferred compensation plan that allows certain highly
compensated employees to defer amounts, including company match amounts, on a before-tax basis. Under the terms of the
Supplemental Plan, all cash deferrals and company match amounts may be deemed invested, at the employee’s election, in a
number of investment options that include various mutual funds, an annuity product and a fund representing our common
stock. When an employee elects to deem his or her amounts under the Supplemental Plan invested in the fund representing
our common stock, the trustee of the rabbi trust purchases the number of shares of our common stock equivalent to the
amount deemed invested in the fund representing our common stock. We established the rabbi trusts for the Age 62 Plan, the
DCPP and the Supplemental Plan to assist us in discharging our deferred compensation obligations under these plans. All
assets of the rabbi trusts, including any shares of our common stock purchased by the trustees, remain, at all times, assets of
the Company, subject to the claims of our creditors. The terms of the Age 62 Plan, the DCPP and the Supplemental Plan do
not provide for a specified limit on the number of shares of common stock that may be purchased by the respective trustees
of the rabbi trusts.
(2) The average price paid per share is calculated on a settlement basis and does not include commissions.
(3) We have a common stock repurchase plan that the board of directors adopted on May 10, 1988 and has periodically amended
since that date to authorize additional shares for repurchase (the last amendment was on January 24, 2008). We did not
repurchase any shares of our common stock under the repurchase plan during the fourth quarter of 2013. The repurchase
plan has no expiration date and we are under no commitment or obligation to repurchase any particular amount of our
common stock under the plan. At our discretion, we may suspend the repurchase plan at any time.
19
Item 6. Selected Financial Data.
The following selected consolidated financial data for each of the five years in the period ended December 31, 2013 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.
2013
Year Ended December 31,
2011
2012
2010
2009
Consolidated Statement of Earnings Data:
Commissions
Fees
Supplemental commissions
Contingent commissions
Investment income and other
Total revenues
Total expenses
Earnings before income taxes
Provision for income taxes
Earnings from continuing operations
Earnings (loss) from discontinued operations,
net of income taxes
(In millions, except per share and employee data)
$
1,553.1
1,059.5
77.3
52.1
437.6
$
1,302.5
971.7
67.9
42.9
135.3
$
1,127.4
870.2
56.0
38.1
43.0
$
957.3
735.0
60.8
36.8
74.3
$
912.9
733.8
37.4
27.6
17.6
3,179.6
2,905.1
274.5
5.9
268.6
2,520.3
2,275.0
245.3
50.3
195.0
2,134.7
1,926.9
207.8
63.7
144.1
-
-
-
1,864.2
1,661.2
203.0
39.7
163.3
10.8
1,729.3
1,518.2
211.1
78.0
133.1
(4.5)
Net earnings
$
268.6
$
195.0
$
144.1
$
174.1
$
128.6
Per Share Data:
Diluted earnings from continuing operations
per share (1)
Diluted net earnings per share (1)
Dividends declared per common share (2)
Share Data:
Shares outstanding at year end
Weighted average number of common shares
outstanding
Weighted average number of common and
common equivalent shares outstanding
Consolidated Balance Sheet Data:
Total assets
Long-term debt less current portion
Total stockholders' equity
$
2.06
2.06
1.40
$
1.59
1.59
1.36
$
1.28
1.28
1.32
$
1.56
1.66
1.28
$
1.32
1.28
1.28
133.6
128.9
130.5
125.6
121.0
122.5
114.7
111.7
112.5
108.4
104.8
105.1
102.5
100.5
100.6
$
6,860.5
825.0
2,085.5
$
5,352.3
725.0
1,658.6
$
4,483.5
675.0
1,243.6
$
3,596.0
550.0
1,106.7
$
3,250.3
550.0
892.9
Return on beginning stockholders' equity (3)
16%
16%
13%
20%
17%
Employee Data:
Number of employees - continuing operations
at year end
16,336
13,707
12,383
10,736
9,840
(1) Based on the weighted average number of common and common equivalent shares outstanding during the year.
(2) Based on the total dividends declared on a share of common stock outstanding during the entire year.
(3) Represents net earnings divided by total stockholders' equity, as of the beginning of the year.
20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
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 Measures and Other"
on page 26 for a reconciliation of the non-GAAP measures for adjusted total revenues, organic commission, fee and supplemental
commission revenues and adjusted EBITDAC to the comparable GAAP measures, as well as other important information
regarding these measures.
We are engaged in providing insurance brokerage and third-party property/casualty claims settlement and administration services
to entities in the U.S. and abroad. We believe that one of our major strengths is our ability to deliver comprehensively structured
insurance and risk management services to our clients. Our brokers, agents and administrators act as intermediaries between
insurers and their customers and we do not assume underwriting risks. We are headquartered in Itasca, Illinois, have operations
in 24 countries and offer client-service capabilities in more than 140 countries globally through a network of correspondent
brokers and consultants. We generate approximately 77% of our revenues for the combined brokerage and risk management
segments domestically, with the remaining 23% derived internationally, primarily in Australia, Bermuda, Canada, the Caribbean,
Singapore, New Zealand and the U.K. Substantially all of the revenues of the corporate segment are generated in the United
States. We have three reportable segments: brokerage, risk management and corporate, which contributed approximately 68%,
19% and 13%, respectively, to 2013 revenues. Our major sources of operating revenues are commissions, fees and supplemental
and contingent commissions from brokerage operations and fees from risk management operations. Investment income is
generated from our investment portfolio, which includes invested cash and fiduciary funds, as well as clean energy and other
investments.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains certain statements
relating to future results which are forward-looking statements as that term is defined in the Private Securities Litigation Reform
Act of 1995. Please see “Information Concerning Forward-Looking Statements” in Part I of this annual report, for certain
cautionary information regarding forward-looking statements and a list of factors that could cause our actual results to differ
materially from those predicted in the forward-looking statements.
Overview and 2013 Financial Highlights
We have generated positive organic growth in the last twelve quarterly periods in both our brokerage and risk management
segments. Based on our experience, we believe we are seeing continued evidence of moderate rate increases and our customers
are increasingly optimistic about their business prospects. The first quarter 2013 Council of Insurance Agents & Brokers (which
we refer to as the CIAB) survey indicated that rates were up, on average 5.2% across all sized accounts. The second quarter 2013
CIAB survey indicated that rates were up, on average 4.3% across all sized accounts. The third quarter 2013 CIAB survey
indicated that rates were up, on average 3.4% across all sized accounts. The fourth quarter 2013 CIAB survey had not been
published as of the filing date of this report, but we anticipate that the trends evident in the third quarter 2013 survey continued
into the fourth quarter. Rates continued to rise throughout 2013 as insurance carriers tightened their underwriting standards and
pressed for higher pricing and deductibles on renewals in critical areas such as property and workers compensation. In addition,
insurance carriers are still trying to reduce their exposure to property risks with catastrophic-loss exposure on the eastern coast of
the U.S. due to the on-going impact of “Superstorm Sandy.” The third quarter 2013 survey also indicated that carriers have
tightened terms and conditions and lowered limits for exposures, such as storm surge, flood and off-site power, among others.
However, the overall firming market appears to have moderated during the second half of 2013. The CIAB represents the leading
domestic and international insurance brokers, who write approximately 80% of the commercial property/casualty premiums in the
U.S.
Our operating results improved in 2013 compared to 2012 in both our brokerage and risk management segments:
In our brokerage segment, total revenues and adjusted total revenues were up 17% and 18%, respectively, base organic
commission and fee revenues were up 5.6%, net earnings were up 31%, adjusted EBITDAC was up 23% and adjusted
EBITDAC margins were up 110 basis points.
In our risk management segment, total revenues and adjusted total revenues were up 7% and 8%, respectively, organic
fees were up 9.3%, net earnings were up 9%, adjusted EBITDAC was up 6% and adjusted EBITDAC margins decreased
by 20 basis points.
In our combined brokerage and risk management segments, total revenues and adjusted total revenues were up 15% and
16%, respectively, organic commissions and fee revenues were up 6.5%, net earnings were up 27%, adjusted EBITDAC
was up 20% and adjusted EBITDAC margins increased by 90 basis points.
Our acquisition program finished strong and our integration efforts are on track. During the fourth quarter of 2013, the
brokerage segment completed 13 acquisitions with annualized revenues of $193.5 million, bringing the total for 2013 to
30 acquisitions with annualized revenues of $369.9 million.
21
Year Ended December 31,
Segment
Brokerage, as adjusted
Gains on book sales
Acquisition integration
Workforce and lease
termination
Acquisition related
adjustments
Levelized foreign currency
translation
The risk management segment also closed a claim portfolio transfer from an insurance company, and going forward we
expect to be their preferred administrator for certain claims. This transaction should generate another $12 to $15 million
of annualized revenues for the risk management segment.
As a result of our acquisition program and subsequent centralization efforts, during the fourth quarter of 2013 we took
actions to contract our management ranks and related support staff, mostly in our international operations. As a result,
pretax charges in the brokerage and risk management segments totaled $6.6 million and $1.5 million, respectively and
should generate annual workforce cost savings of $9.0 million and $2.3 million, respectively.
In our corporate segment, earnings from our clean energy investments contributed $63.7 million to net earnings in 2013.
We anticipate our clean energy investments to generate between $65.0 million and $80.0 million to net earnings in 2014.
We expect to use these additional earnings to continue our mergers and acquisition strategy in our core brokerage and
risk management operations.
The following provides non-GAAP information that management believes is helpful when comparing 2013 revenues, EBITDAC
and diluted net earnings (loss) per share to 2012.
Revenues
2012
2013
(in millions)
Chg
2013
EBITDAC
2012
(in millions)
Diluted Net Earnings
(Loss) Per Share
Chg
2013
2012
Chg
$
2,139.1
5.2
-
$
1,816.2
3.9
-
18%
$
510.7
5.2
(24.1)
$
414.2
3.9
(19.3)
23%
$
1.65
0.03
(0.11)
$
1.43
0.02
(0.10)
15%
-
-
-
-
-
7.5
Brokerage, as reported
2,144.3
1,827.6
Risk Management, as adjusted
New Zealand earthquake
claims administration
Workforce and lease
termination
South Australia and claim
portfolio transfer ramp up
Risk Management, as reported
Total Brokerage and Risk
609.5
563.1
8%
0.1
-
1.4
611.0
8.6
-
-
571.7
Management, as reported
2,755.3
2,399.3
Corporate, as reported
424.3
121.0
(7.8)
(14.4)
(0.04)
(0.07)
-
-
484.0
96.1
-
(1.1)
383.3
90.3
6%
-
1.5
0.04
-
1.57
0.36
-
-
(0.01)
1.27
0.36
0.01
0%
(1.7)
(2.7)
(0.01)
(0.01)
0.1
94.5
(2.1)
87.0
578.5
470.3
(73.6)
(38.2)
-
0.35
1.92
0.14
(0.01)
0.35
1.62
(0.03)
Total Company, as reported
$
3,179.6
$
2,520.3
$
504.9
$
432.1
$
2.06
$
1.59
We achieved these results by, among other things, demonstrating expense discipline and headcount control, continuing to pursue
our acquisition strategy and generating organic growth in our core businesses. In 2013, we continued to expand our international
operations through both acquisitions and organic growth. By the end of 2013, 23% of our revenues were generated
internationally in our combined brokerage and risk management segments, compared with 21% in 2012. We expect this
international revenue trend to continue in 2014.
Insurance Market Overview
Fluctuations in premiums charged by property/casualty insurance carriers 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 insurance carriers, 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 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.
22
As markets harden, certain insureds, who are the buyers of insurance (our brokerage clients), have historically resisted paying
increased premiums and the higher commissions these premiums generate. Such resistance often causes some buyers to raise
their deductibles and/or reduce the overall amount of insurance coverage they purchase. As the market softens, or costs decrease,
these trends have historically reversed. During a hard market, buyers may switch to negotiated fee in lieu of commission
arrangements to compensate us for placing their risks, or may consider the alternative insurance market, which includes self-
insurance, captives, rent-a-captives, risk retention groups and capital market solutions to transfer risk. According to industry
estimates, these mechanisms 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.
Recent Events
In 2013, the insurance market continued to show signs of “firming” (as opposed to traditional “hardening”) across many lines and
geographic areas. In this environment, rates increased at a moderate pace, clients could still obtain coverage, businesses
continued to stay in standard-line markets and there was adequate capacity in the insurance market. It is not clear whether this
firming is sustainable given the uncertainty of the current economic environment. Despite the official end of the recession and
recent signs of an economic recovery, the deterioration in the economy that began in the fall of 2008 continued to adversely
impact us in 2013, and could continue to do so in future years as a result of potential reductions in the overall amount of insurance
coverage that our clients may purchase due to reductions in, among other things, their headcount, payroll, properties and the
market value of their assets. Such reductions could also adversely impact our commission revenues in future years if the
property/casualty insurance carriers perform exposure audits that lead to subsequent downward premium adjustments. We record
the income effects of subsequent premium adjustments when the adjustments become known and, as a result, any improvement in
our results of operations and financial condition may lag an improvement in the economy.
Clean energy investments - In 2009 and 2011, we built a total of 29 commercial clean coal production plants to produce refined
coal using Chem-Mod’s (see below) proprietary technologies. In addition, on September 1, 2013, we purchased a 99% interest in
a limited liability company that has ownership interests in four limited liability companies that own five clean coal production
plants. We believe these operations produce refined coal that qualifies for tax credits under IRC Section 45. The law that
provides for IRC Section 45 tax credits expires in December 2019 for the fourteen plants we built and placed in service in 2009
(2009 Era Plants) and in December 2021 for the fifteen plants we built and placed in service in 2011, plus the five plants we
purchased interests in that were placed in service in 2011 (2011 Era Plants).
Twenty-eight plants are under long-term production contracts with several utilities. The remaining six plants are in various stages
of engineering, negotiating, finalizing and signing long-term production contracts. Several of the remaining six plants could be in
production starting in late 2014 with the balance expected to be in production in 2015.
We also own a 46.54% controlling interest in Chem-Mod, which has been marketing The Chem-Mod™ Solution proprietary
technologies principally to refined fuel plants that sell refined fuel to coal-fired power plants owned by utility companies,
including those plants in which we hold interests. Based on current production estimates provided by licensees, Chem-Mod could
generate for us approximately $3.6 million of net after-tax earnings per quarter.
Our current estimate of the 2014 annual after-tax earnings that could be generated from all of our clean energy investments in
2014 is between $65.0 million to $80.0 million. If we continue to have success in entering additional long-term production
contracts, we could generate more after-tax earnings in 2015 and beyond.
All estimates set forth above regarding the future results of our clean energy investments are subject to significant risks, including
those set forth in the risk factors regarding our IRC Section 45 investments under Item 1A, “Risk Factors.”
23
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (which we
refer to as GAAP), which require management to make estimates and assumptions that affect the amounts reported in our
consolidated financial statements and accompanying notes. We believe the following significant accounting policies may involve
a higher degree of judgment and complexity. See Note 1 to our consolidated financial statements for other significant accounting
policies.
Revenue Recognition - We recognize commission revenues at the later of the billing or the effective date of the related insurance
policies, net of an allowance for estimated policy cancellations. We recognize commission revenues related to installment
premiums as the installments are billed. We recognize supplemental commission revenues using internal data and information
received from insurance carriers that allows us to reasonably estimate the supplemental commissions earned in the period. A
supplemental commission is a commission paid by an insurance carrier that is above the base commission paid, is determined by
the insurance carrier based on historical performance criteria and is established annually in advance of the contractual period. We
recognize contingent commissions and commissions on premiums directly billed by insurance carriers as revenue when we have
obtained the data necessary to reasonably determine such amounts. Typically, we cannot reasonably determine these types of
commission revenues until we have received the cash or the related policy detail or other carrier specific information from the
insurance carrier. A contingent commission is a commission paid by an insurance carrier based on the overall profit and/or
volume of the business placed with that insurance carrier during a particular calendar year and is determined after the contractual
period. Commissions on premiums billed directly by insurance carriers to the insureds generally relate to a large number of
property/casualty insurance policy transactions, each with small premiums, and comprise a substantial portion of the revenues
generated by our employee benefit brokerage operations. Under these direct bill arrangements, the insurance carrier controls the
entire billing and policy issuance process. We record the income effects of subsequent premium adjustments when the
adjustments become known. Fee revenues generated from the brokerage segment primarily relate to fees negotiated in lieu of
commissions that we recognize in the same manner as commission revenues. Fee revenues generated from the risk management
segment relate to third party claims administration, loss control and other risk management consulting services, that we provide
over a period of time, typically one year. We recognize these fee revenues ratably as the services are rendered and record the
income effects of subsequent fee adjustments when the adjustments become known.
Premiums and fees receivable in our consolidated balance sheet are net of allowances for estimated policy cancellations and
doubtful accounts. We establish the allowance for estimated policy cancellations through a charge to revenues and the allowance
for doubtful accounts through a charge to other 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.
Income Taxes - Our tax rate reflects the statutory tax rates applicable to our taxable earnings and tax planning in the various
jurisdictions in which we operate. Significant judgment is required in determining the annual effective tax rate and in evaluating
uncertain tax positions. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or
expected to be taken in our tax return. We evaluate our tax positions using a two-step process. The first step involves
recognition. We determine whether it is more likely than not that a tax position will be sustained upon tax examination based
solely on the technical merits of the position. The technical merits of a tax position are derived from both statutory and judicial
authority (legislation and statutes, legislative intent, regulations, rulings and case law) and their applicability to the facts and
circumstances of the position. If a tax position does not meet the “more likely than not” recognition threshold, we do not
recognize the benefit of that position in the financial statements. The second step is measurement. A tax position that meets the
“more likely than not” recognition threshold is measured to determine the amount of benefit to recognize in the financial
statements. The tax position is measured as the largest amount of benefit that has a likelihood of greater than 50% of being
realized upon ultimate resolution with a taxing authority.
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 14 to our consolidated financial statements for a
discussion regarding the possibility that our gross unrecognized tax benefits balance may change within the next twelve months.
Tax law requires certain items to be included in our tax returns at different times than such items are reflected in the financial
statements. As a result, the annual tax expense reflected in our consolidated statements of earnings is different than that reported
in the tax returns. Some of these differences are permanent, such as expenses that are not deductible in the returns, and some
differences are temporary and reverse over time, such as depreciation expense and amortization expense deductible for income
tax purposes. Temporary differences create deferred tax assets and liabilities. Deferred tax liabilities generally represent tax
expense recognized in the financial statements for which a tax payment has been deferred, or expense which has been deducted in
the tax return but has not yet been recognized in the financial statements. Deferred tax assets generally represent items that can
be used as a tax deduction or credit in tax returns in future years for which a benefit has already been recorded in the financial
statements.
24
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. 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.
Intangible Assets/Earnout Obligations - 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 or trade names. Expiration lists, non-compete agreements and trade names are amortized using the straight-
line method over their estimated useful lives (three to fifteen years for expiration lists, three to five years for non-compete
agreements and five to fifteen years for trade names), while goodwill is not subject to amortization. The establishment of
goodwill, expiration lists, non-compete agreements and trade names and the determination of estimated useful lives are primarily
based on valuations we receive from qualified independent appraisers. The calculations of these amounts are based on estimates
and assumptions using historical and pro forma data and recognized valuation methods. Different estimates or assumptions could
produce different results. We carry intangible assets at cost, less accumulated amortization in our consolidated balance sheet.
We review all of our intangible assets for impairment at least annually and whenever events or changes in business circumstances
indicate that the carrying value of the assets may not be recoverable. We perform these impairment reviews at the reporting unit
level with respect to goodwill and at the business unit level for amortizable intangible assets. 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.
Based on the results of impairment reviews in 2013, 2012 and 2011, we wrote off $2.2 million, $3.5 million and $4.6 million,
respectively, of amortizable intangible assets primarily related to prior year acquisitions of our brokerage segment. The
determinations of impairment indicators and fair value are based on estimates and assumptions related to the amount and timing
of future cash flows and future interest rates. Different estimates or assumptions could produce different results.
Current accounting guidance related to business combinations requires us to estimate and recognize the fair value of liabilities
related to potential earnout obligations as of the acquisition dates for all of our acquisitions subject to earnout provisions. The
maximum potential earnout payables disclosed in the notes to our consolidated financial statements 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. We will record subsequent changes
in these estimated earnout obligations, including the accretion of discount, in our consolidated statement of earnings when
incurred.
The fair value of these earnout obligations is based on the present value of the expected future payments to be made to the sellers
of the acquired entities in accordance with the provisions outlined in the respective purchase agreements. In determining fair
value, we estimate the acquired entity’s future performance using financial projections that are developed by management for the
acquired entity and market participant assumptions that are derived for revenue growth and/or profitability. We estimate future
payments using the earnout formula and performance targets specified in each purchase agreement and these financial
projections. We then discount these payments to present value using a risk-adjusted rate that takes into consideration market-
based rates of return that reflect the ability of the acquired entity to achieve the targets. 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. See Note 3 to our consolidated financial statements for additional discussion on our
2013 business combinations.
Business Combinations and Dispositions
See Note 3 to our consolidated financial statements for a discussion of our 2013 business combinations. We did not have any
material dispositions in 2013, 2012 or 2011. Historically, we have used acquisitions to grow our brokerage segment’s
commission and fee revenues. Acquisitions allow us to expand into desirable geographic locations and further extend our
presence in the retail and wholesale insurance brokerage services industries. We expect that our brokerage segment’s
commission and fee revenues will continue to grow as a result of acquisitions. We intend to continue to consider, from time to
time, additional acquisitions for our brokerage and risk management segments on terms that we deem advantageous. At any
particular time, we are generally engaged in discussions with multiple acquisition candidates. However, we can make no
assurances that any additional acquisitions will be consummated, or, if consummated, that they will be advantageous to us.
25
Results of Operations
Information Regarding Non-GAAP Measures and Other
In the discussion and analysis of our results of operations that follows, in addition to reporting financial results in accordance with
GAAP, we provide information regarding EBITDAC, EBITDAC margin, adjusted EBITDAC, adjusted EBITDAC margin,
diluted net earnings per share (as adjusted) for the brokerage and risk management segments, adjusted revenues, adjusted
compensation and operating expenses, adjusted compensation expense ratio, adjusted operating expense ratio and organic revenue
measures for each operating segment. 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. Our industry peers may
provide similar supplemental non-GAAP information related to organic revenues and EBITDAC, although they may not use the
same or comparable terminology and may not make identical adjustments. The non-GAAP information we provide should be
used in addition to, but not as a substitute for, the GAAP information provided. Certain reclassifications have been made to the
prior-year amounts reported in this report in order to conform them to the current year presentation.
Adjusted presentation - We believe that the adjusted presentation of our 2013, 2012 and 2011 information, presented on the
following pages, provides stockholders and other interested persons with useful information regarding certain financial metrics
that may assist such persons in analyzing our operating results as they develop a future earnings outlook for us. The after-tax
amounts related to the adjustments were computed using the normalized effective tax rate for each respective period.
Adjusted revenues and expenses - We define these measures as revenues, compensation expense and operating
expense, respectively, each adjusted to exclude net gains realized from sales of books of business, acquisition integration
costs, New Zealand earthquake claims administration, South Australia and claim portfolio transfer ramp up fees/costs,
workforce related charges, lease termination related charges, acquisition related adjustments, litigation settlements and
the impact of foreign currency translation, as applicable. Integration costs include costs related to transactions not
expected to occur on an ongoing basis in the future once we fully assimilate the applicable acquisition. These costs are
typically associated with redundant workforce, extra lease space, duplicate services and external costs incurred to
assimilate the acquisition with our IT related systems.
Adjusted ratios - Adjusted compensation expense ratio and adjusted operating expense ratio are defined as adjusted
compensation expense and adjusted operating expense, respectively, each divided by adjusted revenues.
Earnings Measures - We believe that the presentation of EBITDAC, EBITDAC margin, adjusted EBITDAC, adjusted
EBITDAC margin and diluted net earnings per share (as adjusted) for the brokerage and risk management segment, each as
defined below, provides a meaningful representation of our operating performance. We consider EBITDAC and EBITDAC
margin as a way to measure financial performance on an ongoing basis. Adjusted EBITDAC, adjusted EBITDAC margin and
diluted net earnings per share (as adjusted) for the brokerage and risk management segments are presented to improve the
comparability of our results between periods by eliminating the impact of items that have a high degree of variability.
EBITDAC - We define this measure as net earnings before interest, income taxes, depreciation, amortization and the
change in estimated acquisition earnout payables.
EBITDAC margin - We define this measure as EBITDAC divided by total revenues.
Adjusted EBITDAC - We define this measure as EBITDAC adjusted to exclude net gains realized from sales of books
of business, acquisition integration costs, workforce related charges, lease termination related charges, New Zealand
earthquake claims administration costs, South Australia and claim portfolio transfer ramp up fees/costs, acquisition
related adjustments and the period-over-period impact of foreign currency translation, as applicable.
Adjusted EBITDAC margin - We define this measure as adjusted EBITDAC divided by total adjusted revenues
(defined above).
Diluted net earnings per share (as adjusted) - We define this measure as net earnings adjusted to exclude the after-tax
impact of net gains realized from sales of books of business, acquisition integration costs, New Zealand earthquake
claims administration, South Australia and claim portfolio transfer ramp up fees/costs, workforce related charges, lease
termination related charges, acquisition related adjustments the period-over-period impact of foreign currency
translation, as applicable, divided by diluted weighted average shares outstanding.
26
Organic Revenues - For the brokerage segment, organic change in base commission and fee revenues excludes the first twelve
months of net commission and fee revenues generated from acquisitions accounted for as purchases and the net commission and
fee revenues related to operations disposed of in each year presented. These commissions and fees are excluded from organic
revenues in order to help interested persons analyze the revenue growth associated with the operations that were a part of our
business in both the current and prior year. In addition, change in organic growth excludes the impact of supplemental and
contingent commission revenues and the period-over-period impact of foreign currency translation and disposed of operations.
The amounts excluded with respect to foreign currency translation are calculated by applying current year foreign exchange rates
to the same prior year periods. For the risk management segment, organic change in fee revenues excludes the first twelve
months of fee revenues generated from acquisitions accounted for as purchases and the fee revenues related to operations
disposed of in each year presented. In addition, change in organic growth excludes the impact of South Australian ramp up fees,
New Zealand earthquake claims administration and the period-over-period impact of foreign currency translation to improve the
comparability of our results between periods by eliminating the impact of the items that have a high degree of variability or due to
the limited-time nature of these revenue sources.
These revenue items are excluded from organic revenues in order to determine a comparable measurement of revenue growth that
is associated with the revenue sources that are expected to continue in 2014 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 measure allows financial statement users to measure, analyze and compare the growth
from our brokerage and risk management segments in a meaningful and consistent manner.
Reconciliation of Non-GAAP Information Presented to GAAP Measures - This report includes tabular reconciliations to the
most comparable GAAP measures for adjusted revenues, adjusted compensation expense and adjusted operating expense,
EBITDAC, EBITDAC margin, adjusted EBITDAC, adjusted EBITDAC margin, diluted net earnings per share (as adjusted) and
organic revenue measures.
Other Information
Allocations of investment income and certain expenses are based on reasonable assumptions and estimates primarily using
revenue, headcount and other information. We allocate the provision for income taxes to the brokerage and risk management
segments as if those segments were computing income tax provisions on a separate company basis. 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. We anticipate reporting an effective tax
rate of approximately 37.0% to 39.0% in both our brokerage segment and our risk management segment for the foreseeable
future. Reported operating results by segment would change if different allocation methods were applied.
In the discussion that follows regarding our results of operations, we also provide the following ratios with respect to our
operating results: pretax profit margin, compensation expense ratio and operating expense ratio. Pretax profit margin represents
pretax net earnings divided by total revenues. The compensation expense ratio is compensation expense divided by total
revenues. The operating expense ratio is operating expense divided by total revenues.
Brokerage Segment
The brokerage segment accounted for 68% of our revenue in 2013. Our brokerage segment is primarily comprised of retail and
wholesale brokerage operations. Our retail brokerage operations negotiate and place property/casualty, employer-provided health
and welfare insurance and retirement solutions, principally for middle-market commercial, industrial, public entity, religious and
not-for-profit entities. Many of our retail brokerage customers choose to place their insurance with insurance underwriters, while
others choose to use alternative vehicles such as self-insurance pools, risk retention groups or captive insurance companies. Our
wholesale brokerage operations assist our brokers and other unaffiliated brokers and agents in the placement of specialized,
unique and hard-to-place insurance programs.
Our primary sources of compensation for our retail brokerage services are commissions paid by insurance companies, which are
usually based upon a percentage of the premium paid by insureds, and brokerage and advisory fees paid directly by our clients.
For wholesale brokerage services, we generally receive a share of the commission paid to the retail broker from the insurer.
Commission rates are dependent on a number of factors, including the type of insurance, the particular insurance company
underwriting the policy and whether we act as a retail or wholesale broker. Advisory fees are dependent on the extent and value
of services we provide. In addition, under certain circumstances, both retail brokerage and wholesale brokerage services receive
supplemental and contingent commissions. A supplemental commission is a commission paid by an insurance carrier that is
above the base commission paid, is determined by the insurance carrier and is established annually in advance of the contractual
period based on historical performance criteria. A contingent commission is a commission paid by an insurance carrier based on
the overall profit and/or volume of the business placed with that insurance carrier during a particular calendar year and is
determined after the contractual period.
27
Financial information relating to our brokerage segment results for 2013, 2012 and 2011 (in millions, except per share,
percentages and workforce data):
Statement of Earnings
2013
2012
Change
2012
2011
Change
Commissions
Fees
Supplemental commissions
Contingent commissions
Investment income
Gains realized on books of business sales
Total revenues
Compensation
Operating
Depreciation
Amortization
Change in estimated acquisition
earnout payables
Total expenses
Earnings before income taxes
Provision for income taxes
$
1,553.1
450.5
77.3
52.1
6.1
5.2
2,144.3
1,290.4
369.9
31.1
122.7
$
1,302.5
403.2
67.9
42.9
7.2
3.9
1,827.6
1,131.6
312.7
24.7
96.2
2.6
3.6
1,816.7
1,568.8
327.6
122.8
258.8
103.0
$
250.6
47.3
9.4
9.2
(1.1)
1.3
$
1,302.5
403.2
67.9
42.9
7.2
3.9
$
1,127.4
324.1
56.0
38.1
5.4
5.5
1,556.5
968.4
267.3
21.2
77.0
1,827.6
1,131.6
312.7
24.7
96.2
3.6
(6.2)
1,568.8
1,327.7
258.8
103.0
228.8
88.6
$
175.1
79.1
11.9
4.8
1.8
(1.6)
271.1
163.2
45.4
3.5
19.2
9.8
241.1
30.0
14.4
316.7
158.8
57.2
6.4
26.5
(1.0)
247.9
68.8
19.8
Net earnings
$
204.8
$
155.8
$
49.0
$
155.8
$
140.2
$
15.6
Diluted net earnings per share
$
1.57
$
1.27
$
0.30
$
1.27
$
1.25
$
0.02
Other Information
Change in diluted net earnings per share
Growth in revenues
Organic change in
commissions and fees
Compensation expense ratio
Operating expense ratio
Effective income tax rate
Workforce at end of
24%
17%
6%
60%
17%
37%
2%
17%
4%
62%
17%
40%
2%
17%
4%
62%
17%
40%
(3%)
16%
3%
62%
17%
39%
period (includes acquisitions)
Identifiable assets at December 31
11,193
5,522.7
$
9,002
4,196.8
$
9,002
4,196.8
$
7,868
3,346.6
$
EBITDAC
Net earnings
Provision for income taxes
Depreciation
Amortization
Change in estimated acquisition
earnout payables
EBITDAC
EBITDAC margin
EBITDAC growth
$
204.8
122.8
31.1
122.7
$
155.8
103.0
24.7
96.2
2.6
3.6
$
49.0
19.8
6.4
26.5
-
(1.0)
$
155.8
103.0
24.7
96.2
$
140.2
88.6
21.2
77.0
3.6
(6.2)
$
15.6
14.4
3.5
19.2
-
9.8
$
484.0
$
383.3
$
100.7
$
383.3
$
320.8
$
62.5
23%
26%
21%
19%
21%
19%
21%
7%
28
The following provides non-GAAP information that management believes is helpful when comparing 2013 EBITDAC and
adjusted EBITDAC to 2012, and 2012 EBITDAC and adjusted EBITDAC to 2011 (in millions):
Total EBITDAC - see computation above
$
484.0
$
383.3
$
320.8
2013
2012
2011
Net gains from books of business sales
Acquisition integration
Earnout related compensation charge
Workforce and lease termination related charges
Levelized foreign currency translation
Adjusted EBITDAC
Adjusted EBITDAC change
Adjusted EBITDAC margin - see page 22
(5.2)
24.1
-
7.8
-
(3.9)
19.3
-
14.4
1.1
(5.5)
16.0
7.0
2.6
0.8
$
510.7
$
414.2
$
341.7
23.3%
23.9%
21.2%
22.8%
17.7%
22.0%
Effective May 12, 2011, we acquired HLG Holdings, Ltd. (Heath Lambert) for cash, net of cash received, of £99.7 million
($164.0 million as of the acquisition date). Prior to our acquisition of Heath Lambert, it sold nearly all lines of property/casualty
and employee benefit insurance products through 1,200 professionals in 16 offices throughout the U.K. Acquisition integration
costs include costs related to our May 12, 2011 acquisition of Heath Lambert, our August 12, 2013 acquisition of Bollinger and
our November 14, 2013 acquisition of Giles that are not expected to occur on an ongoing basis in the future once we fully
assimilate these acquisitions. These costs relate to redundant workforce, extra lease space, duplicate services and external costs
incurred to assimilate the acquired businesses with our IT related systems. The Heath Lambert integration costs in 2013 totaled
$7.7 million and were primarily related to the consolidation of offices in London. The Bollinger integration costs in 2013 totaled
$5.7 million and were primarily related to technology costs, the onboarding of over 500 employees and incentive compensation.
The Giles integration costs in 2013 totaled $2.7 million and were primarily related to technology costs, the onboarding of over
1,100 employees and incentive compensation. The prior period integration costs relate to the Heath Lambert acquisition only.
The full integration of the Heath Lambert operations into our existing operations was completed in the third quarter of 2013.
Integration costs related to the Bollinger acquisition are expected to range between $2.0 million to $3.0 million per quarter
through 2014. Integration costs related to the Giles acquisition are expected to range between $2.5 million to $4.0 million per
quarter through 2014.
Commissions and fees - The aggregate increase in commissions and fees for 2013 was principally due to revenues associated
with acquisitions that were made during 2013 ($216.8 million). Commissions and fees in 2013 included new business production
and renewal rate increases of $246.8 million, which was offset by lost business of $165.7 million. The aggregate increase in
commissions and fees for 2012 was principally due to revenues associated with acquisitions that were made during 2012
($200.1 million). Commissions and fees in 2012 included new business production and renewal rate increases of $205.7 million,
which was offset by lost business of $151.6 million. The organic change in base commission and fee revenues was 6% in 2013,
4% in 2012 and 3% in 2011. Commission revenues increased 19% and fee revenues increased 12% in 2013 compared to 2012.
Commission revenues increased 16% and fee revenues increased 24% in 2012 compared to 2011.
Items excluded from organic revenue computations yet impacting revenue comparisons for 2013, 2012 and 2011 include the
following (in millions):
Commissions and Fees
Commission revenues as reported
Fee revenues as reported
Less commission and fee revenues
from acquisitions
Less disposed of operations
Levelized foreign currency translation
2013 Organic Revenue
2012 Organic Revenue
2011 Organic Revenue
2013
2012
2012
2011
2011
2010
$
1,553.1
450.5
$
1,302.5
403.2
$
1,302.5
403.2
$
1,127.4
324.1
$
1,127.4
324.1
$
957.3
274.9
(216.8)
-
-
-
(6.2)
(6.7)
(200.1)
-
-
-
(8.1)
(1.5)
(184.4)
-
-
-
(4.6)
5.5
Organic base commission and fee revenues
$
1,786.8
$
1,692.8
$
1,505.6
$
1,441.9
$
1,267.1
$
1,233.1
Organic change in base commission and
fee revenues
5.6%
4.4%
2.8%
29
Supplemental Commissions
Supplemental commissions as reported
Less supplemental commissions
from acquisitions
Net supplemental commission timing
2013 Organic Revenue
2012 Organic Revenue
2011 Organic Revenue
2013
2012
2012
2011
2011
2010
$
77.3
$
67.9
$
67.9
$
56.0
$
56.0
$
60.8
(5.4)
-
-
-
(10.7)
-
-
(0.6)
(4.0)
-
-
(14.7)
Organic supplemental commissions
$
71.9
$
67.9
$
57.2
$
55.4
$
52.0
$
46.1
Organic change in supplemental
commissions
Contingent Commissions
Contingent commissions as reported
Less contingent commissions
from acquisitions
5.9%
3.3%
12.8%
$
52.1
$
42.9
$
42.9
$
38.1
$
38.1
$
36.8
(8.8)
-
(5.2)
-
(3.6)
-
Organic contingent commissions
$
43.3
$
42.9
$
37.7
$
38.1
$
34.5
$
36.8
Organic change in contingent
commissions
Combination Calculations
Organic change in commissions and fees
and supplemental commissions
0.9%
5.6%
(1.1%)
(6.3%)
4.4%
3.1%
Supplemental and contingent commissions - Reported supplemental and contingent commission revenues recognized in 2013,
2012 and 2011 by quarter are as follows (in millions):
Q1
Q2
Q3
Q4
Full Year
2013
Reported supplemental commissions
Reported contingent commissions
Reported supplemental and
contingent commissions
2012
Reported supplemental commissions
Reported contingent commissions
Reported supplemental and
contingent commissions
2011
Reported supplemental commissions
Reported contingent commissions
Reported supplemental and
contingent commissions
$
17.3
22.5
$
18.3
14.5
$
17.8
6.5
$
23.9
8.6
$
77.3
52.1
$
39.8
$
32.8
$
24.3
$
32.5
$
129.4
$
17.1
19.0
$
16.6
10.3
$
16.6
7.7
$
17.6
5.9
$
67.9
42.9
$
36.1
$
26.9
$
24.3
$
23.5
$
110.8
$
13.5
16.8
$
14.0
7.9
$
14.5
9.9
$
14.0
3.5
$
56.0
38.1
$
30.3
$
21.9
$
24.4
$
17.5
$
94.1
Investment income and gains realized on books of business sales - This primarily represents interest income earned on cash,
cash equivalents and restricted funds and one-time gains related to sales of books of business, which were $5.2 million,
$3.9 million and $5.5 million in 2013, 2012 and 2011, respectively. Offsetting the one-time gains related to sales of books of
business in 2012 was a non-cash loss of $3.5 million we recognized related to our acquisition of an additional 41.5% equity
interest in CGM Gallagher Group Limited (which we refer to as CGM), which increased our ownership in CGM to 80%. The
loss represents the decrease in fair value of our initial 38.5% equity interest in CGM based on the purchase price paid to acquire
the additional 41.5% equity interest in CGM. Investment income in 2013 decreased compared to 2012 primarily due to lower
levels of invested assets in 2013. Investment income in 2012 increased compared to 2011 primarily due to higher levels of
invested assets in 2012.
30
Compensation expense - The following provides non-GAAP information that management believes is helpful when comparing
2013 compensation expense to 2012 and 2012 compensation expense to 2011 (in millions):
Reported compensation expense
$
1,290.4
$
1,131.6
$
968.4
2013
2012
2011
Acqusition integration
Earnout related compensation charge
Workforce and lease termination related charges
Levelized foreign currency translation
Adjusted compensation expense
Adjusted revenues - see page 22
Adjusted compensation expense ratio
(10.9)
-
(7.7)
-
(13.2)
-
(13.7)
(5.4)
(9.2)
(7.0)
(2.5)
(0.8)
$
1,271.8
$
1,099.3
$
948.9
$
2,139.1
$
1,816.2
$
1,549.3
59.5%
60.5%
61.3%
The increase in compensation expense in 2013 compared to 2012 was primarily due to an increase in the average number of
employees, salary increases, one-time compensation payments and increases in incentive compensation linked to our overall
operating results ($132.1 million in the aggregate), increases in employee benefits expense ($21.7 million), deferred
compensation ($8.4 million), stock compensation expense ($1.6 million) and temporary staffing ($0.9 million) offset by a
decrease in severance related costs ($5.9 million). The increase in employee headcount in 2013 compared to 2012 primarily
relates to the addition of employees associated with the acquisitions that we completed in 2013 and new production hires.
The increase in compensation expense in 2012 compared to 2011 was primarily due to an increase in the average number of
employees, salary increases, one-time compensation payments and increases in incentive compensation linked to our overall
operating results ($127.6 million in the aggregate), increases in employee benefits expense ($24.9 million), severance related
costs ($11.1 million), stock compensation expense ($1.8 million) and temporary staffing ($1.2 million), offset by a decrease in
deferred compensation ($3.4 million). These increases were partially offset by a decrease in the earnout compensation charge
$7.0 million discussed below. The increase in employee headcount in 2012 compared to 2011 primarily relates to the addition of
employees associated with the acquisitions that we completed in 2012 and new production hires.
During 2011, we recognized $7.0 million of compensation expense for an earnout obligation related to a prior year acquisition.
Pursuant to ASC Subtopic 805-10-55-25 (formerly EITF 95-8), the portion of the earnout obligation that will be paid to our
existing employees by the sellers once the earnout is settled, must be recorded as compensation expense in our consolidated
statement of earnings.
Operating expense - The following provides non-GAAP information that management believes is helpful when comparing 2013
operating expense to 2012 and 2012 operating expense to 2011 (in millions):
Reported operating expense
$
369.9
$
312.7
$
267.3
2013
2012
2011
Acquisition integration
Workforce and lease termination related charges
Levelized foreign currency translation
Adjusted operating expense
Adjusted revenues - see page 22
Adjusted operating expense ratio
(13.2)
(0.1)
-
(6.1)
(0.7)
(3.2)
(6.8)
(0.1)
(0.5)
$
356.6
$
302.7
$
259.9
$
2,139.1
$
1,816.2
$
1,549.3
16.7%
16.7%
16.8%
The increase in operating expense in 2013 compared to 2012 was due primarily to increases in technology expenses
($12.6 million), professional and banking fees ($8.7 million), outside consulting fees ($7.5 million), real estate expenses
($7.9 million), meeting and client entertainment expenses ($6.0 million), employee expense ($4.0 million), licenses and fees
($3.6 million), office supplies ($3.3 million), business insurance ($2.8 million), outside services expense ($2.4 million), bad debt
expense ($1.6 million), slightly offset by a favorable foreign currency translation ($2.1 million), lease termination charges
($0.6 million), interest expense ($0.4 million) and other expense ($0.1 million). Also contributing to the increase in operating
expense in 2013 were increased expenses associated with the acquisitions completed in 2013.
31
The increase in operating expense in 2012 compared to 2011 was due primarily to a unfavorable foreign currency translation
($1.6 million) and increases in technology expenses ($12.2 million), professional and banking fees ($6.8 million), meeting and
client entertainment expenses ($6.6 million), outside consulting fees ($5.1 million), real estate expenses ($4.3 million), office
supplies ($4.2 million), licenses and fees ($3.2 million), employee expense ($2.4 million), outside services expense
($1.4 million), bad debt expense ($0.8 million) and lease termination charges ($0.6 million), offset by decreases in business
insurance ($3.3 million) and other expense ($0.3 million), offset. Also contributing to the increase in operating expense in 2013
were increased expenses associated with the acquisitions completed in 2013.
Depreciation - The increases in depreciation expense in 2013 compared to 2012 and in 2012 compared to 2011 were due
primarily to the purchases of furniture, equipment and leasehold improvements related to office expansions and moves, and
expenditures related to upgrading computer systems. Also contributing to the increases in depreciation expense in 2013, 2012
and 2011 were the depreciation expenses associated with acquisitions completed during these years.
Amortization - The increases in amortization in 2013 compared to 2012 and in 2012 compared to 2011 were due primarily to
amortization expense of intangible assets associated with acquisitions completed during these years. Expiration lists, non-
compete agreements and trade names are amortized using the straight-line method over their estimated useful lives (three to
fifteen years for expiration lists and three to five years for non-compete agreements and five to fifteen years for trade names).
Based on the results of impairment reviews in 2013, 2012 and 2011, we wrote off $2.2 million, $3.4 million and $4.6 million of
amortizable intangible assets related to the brokerage segment acquisitions.
Change in estimated acquisition earnout payables - The change in the expense in 2013 compared to 2012 and 2012 compared
to 2011 was due primarily to adjustments made to the estimated fair value of earnout obligations related to revised projections of
future performance. During 2013, 2012 and 2011, we recognized $11.9 million, $9.3 million and $8.3 million, respectively, of
expense related to the accretion of the discount recorded for earnout obligations in connection with our 2013, 2012 and 2011
acquisitions. During 2013, 2012 and 2011, we recognized $9.3 million, $5.7 million and $14.5 million of income, respectively,
related to net adjustments in the estimated fair market values of earnout obligations in connection with revised projections of
future performance for 77, 45 and 22 acquisitions, respectively.
The amounts initially recorded as earnout payables for our 2011 to 2013 acquisitions were measured at fair value as of the
acquisition date and 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. The fair value of these earnout obligations is based on the present value of the
expected future payments to be made to the sellers of the acquired entities in accordance with the provisions outlined in the
respective purchase agreements. In determining fair value, we estimate the acquired entity’s future performance using financial
projections developed by management for the acquired entity and market participant assumptions that are derived for revenue
growth and/or profitability. We estimate future earnout payments using the earnout formula and performance targets specified in
each purchase agreement and these financial projections. Subsequent changes in the underlying financial projections or
assumptions will cause the estimated earnout obligations to change and such adjustments are recorded in our consolidated
statement of earnings when incurred. Increases in the earnout payable obligations will result in the recognition of expense and
decreases in the earnout payable obligations will result in the recognition of income.
The income generated from the net adjustments in the estimated fair value of earnout obligations in 2011, was primarily related to
our acquisition of the policy renewal rights from Liberty Mutual and the Wausau Signature Agency (which we refer to as Liberty
Mutual) in February 2009. As part of this transaction we acquired over 250 producers, account managers and service staff from
Liberty Mutual. Due to the underlying market conditions existing in early 2009 at the date of the transaction (a deteriorating
economy and uncertainty of when it would recover) and the significant uncertainties related to this transaction that could affect
the performance of the Liberty Mutual business (we purchased the policy renewal rights related to Liberty Mutual’s middle-
market commercial P/C business located in their Midwest and Southeast regions as opposed to buying a stand-alone brokerage
agency; a portion of the Liberty business was co-brokered, the extent of which was not known by Liberty Mutual at the time of
the acquisition; and the risks associated with moving captive agents to an open brokerage environment), we structured this
acquisition such that approximately 70% of the maximum purchase price was based on a three year earn-out period. We paid
approximately $45.0 million as of the acquisition date, with a potential maximum earnout payable of up to $120.0 million, to be
paid in second quarter 2012. As of the acquisition date, we initially estimated and recorded an earnout payable of approximately
$64.0 million based on financial projections that incorporated assumptions to address the risks noted above. We monitored and
updated the financial projections for this business using actual results during the earnout period and made adjustments to the
recorded earnout payable, when applicable. During 2011 and 2012, we had seen some deterioration in client retention related to
this business (primarily due to co-brokered business) and had been rationalizing staffing levels, which resulted in downward
adjustments to our estimated financial projections and a decrease in the recorded earnout payable in both 2011 and 2012. In
August 2012, we paid out $32.4 million ($24.8 million in our common stock and $7.6 million in cash) to Liberty Mutual related
to this earnout obligation.
Provision for income taxes - The brokerage segment’s effective tax rate in 2013, 2012 and 2011 was 37.5%, 39.8% and 38.7%,
respectively. We anticipate reporting an effective tax rate of approximately 37.0% to 39.0% in our brokerage segment for the
foreseeable future.
32
Risk Management Segment
The risk management segment accounted for 19% of our revenue in 2013. The risk management segment provides contract claim
settlement and administration services for enterprises that choose to self-insure some or all of their property/casualty coverages
and for insurance companies that choose to outsource some or all of their property/casualty claims departments. In addition, this
segment generates revenues from integrated disability management programs, information services, risk control consulting (loss
control) services and appraisal services, either individually or in combination with arising claims. Revenues for risk management
services are substantially in the form of fees that are generally negotiated in advance on a per-claim or per-service basis,
depending upon the type and estimated volume of the services to be performed.
Financial information relating to our risk management segment results for 2013, 2012 and 2011 (in millions, except per share,
percentages and workforce data):
Statement of Earnings
2013
2012
Change
2012
2011
Change
Fees
Investment income
Total revenues
Compensation
Operating
Depreciation
Amortization
Change in estimated acquisition
earnout payables
Total expenses
Earnings before income taxes
Provision for income taxes
$
609.0
2.0
$
568.5
3.2
$
40.5
(1.2)
$
568.5
3.2
$
546.1
2.7
$
22.4
0.5
611.0
370.5
146.0
19.4
2.5
(0.9)
537.5
73.5
27.3
571.7
347.0
137.7
16.0
2.8
(0.2)
503.3
68.4
25.9
39.3
23.5
8.3
3.4
(0.3)
(0.7)
34.2
5.1
1.4
571.7
347.0
137.7
16.0
2.8
(0.2)
503.3
68.4
25.9
548.8
344.1
135.8
14.2
2.3
-
496.4
52.4
19.1
22.9
2.9
1.9
1.8
0.5
(0.2)
6.9
16.0
6.8
Net earnings
$
46.2
$
42.5
$
3.7
$
42.5
$
33.3
$
9.2
Diluted earnings per share
$
0.35
$
0.35
$
-
$
0.35
$
0.29
$
0.06
Other information
Change in diluted earnings per share
Growth in revenues
Organic change in fees
Compensation expense ratio
Operating expense ratio
Effective income tax rate
Workforce at end of
period (includes acquisitions)
Identifiable assets at December 31
EBITDAC
Net earnings
Provision for income taxes
Depreciation
Amortization
Change in estimated acquisition
estimated payables
EBITDAC
EBITDAC margin
EBITDAC growth
0%
7%
9%
61%
24%
37%
21%
4%
6%
61%
24%
38%
21%
4%
6%
61%
24%
38%
(3%)
19%
6%
63%
25%
36%
4,806
544.7
$
4,390
498.6
$
4,390
498.6
$
4,264
529.1
$
$
46.2
27.3
19.4
2.5
$
42.5
25.9
16.0
2.8
$
3.7
1.4
3.4
(0.3)
$
42.5
25.9
16.0
2.8
$
33.3
19.1
14.2
2.3
$
9.2
6.8
1.8
0.5
(0.9)
(0.2)
(0.7)
(0.2)
-
(0.2)
$
94.5
$
87.0
$
7.5
$
87.0
$
68.9
$
18.1
15%
9%
15%
26%
15%
26%
13%
6%
33
The following provides non-GAAP information that management believes is helpful when comparing 2013 EBITDAC and
adjusted EBITDAC to 2012, and 2012 EBITDAC and adjusted EBITDAC to 2011 (in millions):
2013
2012
2011
Total EBITDAC - see computation above
$
94.5
$
87.0
$
68.9
New Zealand earthquake claims administration
GAB Robins integration
South Australia and claim portfolio transfer ramp up costs
Workforce and lease termination related charges
Adjusted EBITDAC
Adjusted EBITDAC change
Adjusted EBITDAC margin - see page 22
-
-
(0.1)
1.7
(1.5)
-
2.1
2.7
(6.1)
13.0
-
5.6
$
96.1
$
90.3
$
81.4
6.4%
15.8%
10.9%
16.0%
15.3%
15.4%
Fees - The increase in fees for 2013 compared to 2012 was primarily due to new business and the impact of increased claim
counts (total of $63.3 million), which were partially offset by lost business of $22.8 million in 2013. The increase in fees for
2012 compared to 2011 was primarily due to new business and the impact of increased claim counts (total of $38.8 million),
which were partially offset by lost business of $16.4 million in 2012. Organic change in fee revenues was 9% in 2013, 6% in
2012 and 6% in 2011.
Items excluded from organic fee computations yet impacting revenue comparisons in 2013, 2012 and 2011 include the following
(in millions):
Fees
International performance bonus fees
$
589.0
20.0
$
550.3
18.2
$
550.3
18.2
$
532.5
13.6
$
532.5
13.6
$
450.2
9.9
2013 Organic Revenue
2012 Organic Revenue
2011 Organic Revenue
2013
2012
2012
2011
2011
2010
Fees as reported
609.0
568.5
568.5
546.1
Less fees from acquisitions
Less South Australia ramp up fees
New Zealand earthquake claims
administration
Levelized foreign currency translation
Organic fees
Organic change in fees
Organic change in base domestic and
international fees only
(2.7)
(1.4)
(0.1)
-
-
-
(8.6)
(6.3)
(2.2)
-
(8.6)
-
-
-
(21.8)
(0.1)
546.1
(34.1)
-
(21.8)
-
460.1
-
-
(3.6)
7.8
$
604.8
$
553.6
$
557.7
$
524.2
$
490.2
$
464.3
9.3%
12.0%
6.4%
6.8%
5.6%
19.2%
Investment income - Investment income primarily represents interest income earned on our cash and cash equivalents.
Investment income in 2013 decreased compared to 2012 primarily due to lower levels of invested assets in 2013. Investment
income in 2012 remained relatively unchanged compared to 2011.
Compensation expense - The following provides non-GAAP information that management believes is helpful when comparing
2013 compensation expense to 2012 and comparing 2012 compensation expense to 2011 (in millions):
Reported compensation expense
$
370.5
$
347.0
$
344.1
2013
2012
2011
New Zealand earthquake claims administration
GAB Robins integration
South Australia and claim portfolio transfer ramp up costs
Workforce and lease termination related charges
Adjusted compensation expense
Adjusted revenues - see page 22
Adjusted compensation expense ratio
-
-
(1.2)
(1.7)
(5.5)
-
(1.5)
(2.5)
(13.1)
(9.2)
-
(3.9)
$
367.6
$
337.5
$
317.9
$
609.5
$
563.1
$
527.0
60.3%
59.9%
60.3%
34
The increase in compensation expense in 2013 compared to 2012 was primarily due to increased headcount and increases in
salaries ($30.0 million), employee benefits ($4.2 million), deferred compensation ($0.8 million), and stock compensation
($0.4 million), offset by a favorable foreign currency translation ($4.2 million), decreases in New Zealand earthquake claims
administration ($5.5 million), temporary-staffing expense ($1.1 million), severance related costs ($0.8 million) and South
Australia and claim portfolio transfer ramp up costs ($0.3 million).
The increase in compensation expense in 2012 compared to 2011 was primarily due to increased headcount, unfavorable foreign
currency translation ($0.3 million), increases in salaries ($19.3 million), increases in employee benefits ($3.7 million), South
Australia ramp up costs ($1.5 million) and stock compensation ($0.3 million), offset by decreases in GAB Robins integration
costs ($9.2 million), New Zealand earthquake claims administration ($7.6 million), temporary-staffing expense ($3.5 million) and
severance related costs ($1.4 million) and deferred compensation ($0.5 million).
Operating expense - The following provides non-GAAP information that management believes is helpful when comparing 2013
operating expense to 2012 and comparing 2012 operating expense to 2011 (in millions):
Reported operating expense
New Zealand earthquake claims administration
GAB Robins integration
South Australia and claim portfolio transfer ramp up costs
Workforce and lease termination related charges
Adjusted operating expense
Adjusted revenues - see page 22
Adjusted operating expense ratio
2013
2012
2011
$
146.0
$
137.7
$
135.8
(0.1)
-
(0.1)
-
(1.6)
-
(0.6)
(0.2)
(2.6)
(3.8)
-
(1.7)
$
145.8
$
135.3
$
127.7
$
609.5
$
563.1
$
527.0
23.9%
24.0%
24.2%
The increase in operating expense in 2013 compared to 2012 was primarily due to increases in outside consulting fees
($4.4 million), professional and banking fees ($3.5 million), technology expenses ($2.4 million), meeting and client entertainment
expense ($1.7 million), licenses and fees ($0.8 million), office supplies ($0.3 million), employee expense ($0.1 million) and bad
debt expense ($0.1 million), offset by decreases in real estate expenses ($1.8 million), New Zealand earthquake claims
administration ($1.5 million), other expense ($0.5 million), interest expense ($0.5 million), business insurance ($0.3 million),
lease termination charges ($0.2 million) and outside services ($0.1 million).
The increase in operating expense in 2012 compared to 2011 was primarily due to increases in professional and banking fees
($5.7 million), real estate expenses ($2.1 million), meeting and client entertainment expense ($0.7 million), office supplies
($0.6 million), employee expense ($0.5 million), outside services ($0.5 million) and bad debt expense ($0.3 million), offset by
decreases in GAB Robins integration costs ($3.8 million), lease termination charges ($1.5 million), business insurance
($1.0 million), New Zealand earthquake claims administration ($1.0 million), other expense ($0.6 million), outside consulting
fees ($0.5 million) and licenses and fees ($0.3 million).
Depreciation - Depreciation expense increased in 2013 compared to 2012 and in 2012 compared to 2011, 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 - Amortization expense remained relatively the same in 2013 compared to 2012 and in 2012 compared to 2011.
Historically, the risk management segment has made few acquisitions. We made no material acquisitions in this segment in 2013
or 2012. Based on the results of impairment reviews in 2012, we wrote off $0.1 million of amortizable intangible assets related to
the risk management segment acquisitions. No indicators of impairment were noted in 2013 or 2011.
Change in estimated acquisition earnout payables - The increase in income from the change in estimated acquisition earnout
payables in 2013 compared to 2012 was due primarily to an adjustment made in 2013 to the estimated fair value of an earnout
obligation related to a revised projection of future performance for two acquisitions. During 2013, we recognized $0.9 million of
income related to net adjustments in the estimated fair value of earnout obligations related to revised projections of future
performance for two acquisitions. The increase in income from the change in estimated acquisition earnout payables in 2012
compared to 2011 was due primarily to an adjustment made in 2012 to the estimated fair value of an earnout obligation related to
a revised projection of future performance for one acquisition.
Provision for income taxes - The risk management segment’s effective tax rate in 2013, 2012 and 2011 was 37.1%, 37.9% and
36.5%, respectively. We anticipate reporting an effective tax rate of approximately 37.0% to 39.0% in our risk management
segment for the foreseeable future.
35
Corporate Segment
The corporate segment reports the financial information related to our clean energy and other investments, our debt, and certain
corporate and acquisition-related activities. See Note 12 to our consolidated financial statements for a summary of our
investments at December 31, 2013 and 2012 and a detailed discussion of the nature of these investments. See Note 6 to our
consolidated financial statements for a summary of our debt at December 31, 2013 and 2012.
Financial information relating to our corporate segment results for 2013, 2012 and 2011 (in millions, except per share and
percentages):
Statement of Earnings
2013
2012
Change
2012
2011
Change
Revenues from consolidated clean
coal production plants
$
387.1
$
98.0
$
289.1
$
98.0
$
27.3
$
70.7
Royalty income from clean coal
licenses
Loss from unconsolidated
clean coal production plants
Other net revenues
Total revenues
Cost of revenues from consolidated
clean coal production plants
Compensation
Operating
Interest
Depreciation
Total expenses
Loss before income taxes
Benefit for income taxes
Net income (loss)
32.0
27.6
4.4
27.6
(6.6)
11.8
424.3
437.3
24.1
36.5
50.1
2.9
550.9
(126.6)
(144.2)
(6.0)
1.4
121.0
111.6
14.8
32.8
43.0
0.7
202.9
(81.9)
(78.6)
(0.6)
10.4
303.3
325.7
9.3
3.7
7.1
2.2
348.0
(44.7)
(65.6)
(6.0)
1.4
121.0
111.6
14.8
32.8
43.0
0.7
202.9
(81.9)
(78.6)
4.5
(2.6)
0.2
29.4
32.0
13.6
15.9
40.8
0.5
102.8
(73.4)
(44.0)
23.1
(3.4)
1.2
91.6
79.6
1.2
16.9
2.2
0.2
100.1
(8.5)
(34.6)
$
17.6
$
(3.3)
$
20.9
$
(3.3)
$
(29.4)
$
26.1
Diluted net earnings (loss) per share
$
0.14
$
(0.03)
$
0.17
$
(0.03)
$
(0.26)
$
0.23
Identifiable assets at December 31
$
793.1
$
656.9
$
656.9
$
607.8
EBITDAC
Net income (loss)
Benefit for income taxes
Interest
Depreciation
EBITDAC
$
17.6
(144.2)
50.1
2.9
$
(3.3)
(78.6)
43.0
0.7
$
20.9
(65.6)
7.1
2.2
$
(3.3)
(78.6)
43.0
0.7
$
(29.4)
(44.0)
40.8
0.5
$
26.1
(34.6)
2.2
0.2
$
(73.6)
$
(38.2)
$
(35.4)
$
(38.2)
$
(32.1)
$
(6.1)
Revenues - Revenues in the corporate segment consist of the following:
Revenues from consolidated clean coal production plants represents revenues from the consolidated IRC Section 45
facilities that we operate and control under lease arrangements, and the investments in which we have a majority
ownership position and maintain control over the operations of the related plants, including those that are currently not
operating. When we relinquish control in connection with the sale of majority ownership interests in our investments,
we deconsolidate these operations.
The increase in 2013 is due to increased production at both the leased facilities and facilities in which we have a majority
ownership position. The increase in 2012 is due primarily to increased production from the leased facilities.
Royalty income from clean coal licenses represents revenues related to Chem-Mod. We had a 42% controlling interest
in Chem-Mod through October 31, 2012. On November 1, 2012, we purchased an additional 4.54% ownership interest,
and now own 46.54%. Further, as Chem-Mod’s manager, we are required to consolidate its operations.
The increases in royalty income in 2013 and 2012 were due to increases in the production of refined coal by
Chem-Mod’s licensees.
36
Expenses related to royalty income of Chem-Mod were $21.2 million, $16.5 million and $3.2 million in 2013, 2012 and
2011, respectively, which include non-controlling interest of $19.2 million, $14.6 million and $1.7 million, respectively.
Loss from unconsolidated clean coal production plants represents our equity portion of the pretax operating results from
the unconsolidated clean coal production plants, partially offset by the production based income from majority investors.
The production of refined coal generates pretax operating losses.
The increased pretax loss in 2013 compared to 2012 was due primarily to increased production which generates
increased pretax operating losses. The increased pretax loss in 2012 compared to 2011 was due primarily to increased
production which generates increased pretax operating losses.
In 2013, other net revenues primarily consisted of a gain of $9.6 million that we recognized in connection with the
acquisition of an additional ownership interest in twelve of the 2009 Era Plants from one of the co-investors. See
Note 12 to the consolidated financial statements for additional discussion of this acquisition transaction. We have
consolidated the operations of the limited liability company that owns these plants effective March 1, 2013. In 2013,
other net revenues also includes a gain of $2.6 million related to three foreign currency derivative investment contracts
that Gallagher executed in September 2013 in connection with the signing of an agreement to acquire The Giles Group
of Companies, headquartered in London, England. These contracts were designed to hedge a portion of the GBP
denominated purchase price consideration of this acquisition. The derivative investment contracts were exercised on
October 31, 2013 and the Giles transaction closed in early November 2013. In 2012, other net revenues of $1.4 million
consisted of equity income from our venture capital fund investments. In 2011, $0.5 million of equity income from our
venture capital fund investments was offset by the net $0.3 million impairment write-down of our investment in a
biomass energy venture.
Cost of revenues - Cost of revenues from consolidated clean coal production plants in 2013, 2012 and 2011 consists of the
expenses incurred by the clean coal production plants to generate the consolidated revenues discussed above, including the costs
to run the leased facilities.
Compensation expense - Compensation expense for 2013, 2012 and 2011, respectively, includes salary and benefit expenses of
$11.4 million, $9.8 million and $6.2 million and incentive compensation of $12.7 million, $5.0 million and $7.4 million,
respectively.
The increase in salary and benefit expenses in 2013 compared to 2012 was primarily due to additional headcount and salary and
benefits expense increases. The increase in salary and benefit expenses in 2012 compared to 2011 was primarily due to a
$2.4 million increase in pension expense and additional headcount and salary and benefits expense increases.
The increase in incentive compensation in 2013 compared to 2012 was due to the increased compensation in 2013 related to the
sales and operations of the facilities in 2013 that qualify for tax credits under IRC Section 45 and the efforts made on corporate
related matters including the three 2013 debt transactions and the level of acquisition activity in 2013. The decrease in incentive
compensation in 2012 compared to 2011 was due to the higher compensation in 2011 related to the sales and operations of the
facilities that qualify for tax credits under IRC Section 45.
Operating expense - Operating expense for 2013 includes banking and related fees of $3.0 million, external professional fees
and other due diligence costs related to 2013 acquisitions of $7.5 million, operating expenses, professional fees and
non-controlling interest related to royalty income of $21.2 million and other corporate and clean energy related expenses of
$1.0 million and a biannual company-wide meeting ($3.8 million).
Operating expense for 2012 includes banking and related fees of $3.1 million, external professional fees and other due diligence
costs related to 2012 acquisitions of $7.1 million, operating expenses, professional fees and non-controlling interest related to
royalty income of $16.5 million and other corporate and clean energy related expenses of $6.1 million.
Operating expense for 2011 includes banking and related fees of $3.1 million, company-wide award and sales meeting expense of
$0.7 million, external professional fees and other due diligence costs related to 2011 acquisitions of $4.6 million, operating
expenses, professional fees and non-controlling interest related to royalty income of $3.2 million and other corporate and clean
energy related expenses of $4.3 million.
Interest expense - The increase in interest expense in 2013 compared to 2012 is due to interest on the $200.0 million note
purchase agreement entered into on September 19, 2013 ($4.0 million), interest on the $50.0 million note purchase agreement
entered into on July 10, 2012 ($1.1 million) and increased interest on borrowings from our Credit Agreement ($2.0 million). The
increase in interest expense in 2012 compared to 2011 is primarily due to interest on the $125.0 million and $50.0 million note
purchase agreements entered into on February 10, 2011 and July 10, 2012, respectively ($1.7 million), and increased interest on
borrowings from our Credit Agreement ($0.5 million).
Depreciation - The depreciation expense in 2013 increased significantly compared to 2012, and primarily relates to the assets of
the additional ownership interests in the twelve 2009 Era Plants that we acquired from a co-investor in first quarter 2013. The
depreciation expense in 2012 and 2011 were relatively unchanged and primarily relate to corporate-related office build outs and
expenditures related to upgrading computer systems.
37
Benefit for income taxes - Our consolidated effective tax rate was 2.2%, 20.5% and 30.6% for 2013, 2012 and 2011,
respectively. The tax rates for 2013 and 2012 were lower than the statutory rate primarily due to the amount of IRC Section 45
tax credits recognized during the year. There were $93.7 million, $43.8 million and $13.2 million of tax credits generated and
recognized in 2013, 2012 and 2011, respectively.
The following provides non-GAAP information that we believe is helpful when comparing 2013 operating results for the
corporate segment with 2012 and 2011 (in millions):
2013
Income
Tax
Benefit
Pretax
Loss
Net
Earnings
(Loss)
Pretax
Loss
2012
Income
Tax
Benefit
Net
Earnings
(Loss)
Pretax
Loss
2011
Income
Tax
Benefit
Net
Earnings
(Loss)
Description
Interest and banking
costs
$
(53.0)
$
21.2
$
(31.8)
$
(46.1)
$
18.4
$
(27.7)
$
(43.8)
$
17.5
$
(26.3)
Clean energy
investments
Acquisition costs
Corporate
Legacy investments
(49.3)
(5.6)
(18.7)
-
113.0
0.2
9.8
-
63.7
(5.4)
(8.9)
-
(17.3)
(7.1)
(11.4)
-
50.0
0.7
9.5
-
32.7
(6.4)
(1.9)
-
(14.8)
(4.7)
(9.8)
(0.3)
18.7
0.6
5.5
1.7
3.9
(4.1)
(4.3)
1.4
Total
$
(126.6)
$
144.2
$
17.6
$
(81.9)
$
78.6
$
(3.3)
$
(73.4)
$
44.0
$
(29.4)
Interest and banking primarily includes expenses related to our debt. Clean energy investments include the operating results
related to our investments in clean coal production and Chem-Mod. Acquisition costs include professional fees, due diligence
and other costs incurred related to our acquisitions. In 2013, acquisition costs include a gain of $2.6 million on the derivative
investment contract discussed above. Corporate consists of overhead allocations mostly related to corporate staff compensation
and, in 2013 and 2011, costs related to a biannual company-wide award, cross-selling and motivational meeting for our
production staff and field management. Legacy investments include the operating results related to the wind-down of our legacy
investment portfolio.
Clean energy investments - 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. 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 fourteen plants which were placed in
service prior to December 31, 2009 (which we refer to as the 2009 Era Plants) can receive tax credits through 2019 and the
twenty plants which were placed in service prior to December 31, 2011 (which we refer to as the 2011 Era Plants) can receive tax
credits through 2021.
The following table provides a summary of our clean coal plant investments as of December 31, 2013 (in millions):
Investments that own 2009 Era Plants
12 Under long-term production contracts
2 In negotiations for long-term production contracts
Investments that own 2011 Era Plants
16 Under long-term production contracts
4 In negotiations for long-term production contracts
Our Portion of Estimated
Our
Tax-Effected
Book Value At
December 31, 2013
Additional
Required
Tax-Effected
Capital
Investment
Ultimate
Annual
After-tax
Earnings
$
10.3
0.7
$
2.0
Not Estimable
$
23.0
Not Estimable
34.8
1.4
1.6
Not Estimable
73.5
Not Estimable
The information in the table above under the caption Our Portion of Estimated Ultimate Annual After-Tax Earnings reflects
management’s current best estimate of the ultimate future annual after-tax earnings based on production estimates from the host
utilities. However, host utilities do not consistently utilize the refined coal plants at ultimate production levels due to seasonal
electricity demand, as well as many operational, regulatory and environmental compliance reasons.
Our investment in Chem-Mod generates royalty income from refined coal plants owned by those limited liability companies in
which we invest as well as refined coal plants owned by other unrelated parties. Based on current production estimates provided
by licensees, Chem-Mod could potentially generate for us approximately $3.6 million of net after-tax earnings per quarter.
38
There is a provision in IRC Section 45 that phases out the tax credits if the coal reference price per ton, based on market prices,
reaches certain levels as follows:
Calendar Year
IRS Reference
Price
per Ton
IRS Beginning
Phase Out
Price
IRS 100%
Phase Out
Price
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
$36.36
42.78
48.35
45.56
39.72
54.74
55.66
58.49
58.23
(1)
$67.94
70.40
72.85
75.13
76.84
77.78
78.41
80.25
81.69
(1)
$76.69
79.15
81.60
83.88
85.59
86.53
87.16
89.00
90.44
(1)
Conclusion
No phase out
No phase out
No phase out
No phase out
No phase out
No phase out
No phase out
No phase out
No phase out
(1)
(1) The IRS will not release the factors for 2014 until April 2014. Based on our analysis of the factors used in the IRS’ phase
out calculations, it is our belief that there will be no phase out in 2014.
See the risk factors regarding our IRC Section 45 investments under Item 1A, “Risk Factors.” for a more detailed discussion of
these and other factors could impact the information above. See Note 12 to the consolidated financial statements for more
information regarding risks and uncertainties related to these investments.
Financial Condition and Liquidity
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business
operations. The insurance brokerage industry is not capital intensive. Historically, our capital requirements have primarily
included dividend payments on our common stock, repurchases of our common stock, funding of our investments, acquisitions of
brokerage and risk management operations and capital expenditures.
Cash Flows From Operating Activities
Historically, we have depended on our ability to generate positive cash flow from operations to meet our cash requirements. We
believe that our cash flows from operations and borrowings under our Credit Agreement will provide us with adequate resources
to meet our liquidity needs in the foreseeable future. To fund acquisitions made during 2013 and 2012, we relied to a large extent
on proceeds from borrowings under our Credit Agreement. In addition, for acquisitions made in 2013, we used proceeds from the
$200.0 million note purchase agreement we entered into on September 19, 2013 and for acquisitions made in 2012, we used
proceeds from the $50.0 million note purchase agreement we entered into on July 10, 2012.
Cash provided by operating activities was $349.9 million, $343.0 million and $284.0 million for 2013, 2012 and 2011,
respectively. The increase in cash provided by operating activities in 2013 compared to 2012 was primarily due to favorable
timing differences in the payment of accrued liabilities and an increased amount of non-cash charges in 2013 compared to 2012,
partially offset by cash used in 2013 in the production and sale of refined coal at the plants qualified to receive refined coal tax
credits under IRC Section 45. The increase in cash provided by operating activities in 2012 compared to 2011 was primarily due
to favorable timing differences in the payment of accrued liabilities and the realization of other current assets, and an increased
amount of non-cash charges in 2012 compared to 2011. Our cash flows from operating activities are primarily derived from our
earnings from operations, as adjusted for realized gains and losses, and our non-cash 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 by the amount of IRC
Section 45 tax credits recognized compared to the amount of tax credits actually used during the respective periods. Excess tax
credits generated during the period result in an increase to our deferred tax assets, which is a net use of cash related to 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 $504.9 million and $432.1 million for 2013 and 2012, 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
39
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.
Our policy for funding our defined benefit pension plan is to contribute amounts at least sufficient to meet the minimum funding
requirements under the IRC. The Employee Retirement Security Act of 1974, as amended (which we refer to as ERISA), could
impose a minimum funding requirement for our plan. We were not required to make any minimum contributions to the plan for
the 2013 and 2012 plan years. The minimum funding requirement under the IRC was $0.3 million in 2011. This level of
required funding is based on the plan being frozen and the aggregate amount of our historical funding. The plan’s actuaries
determine contribution rates based on our funding practices and requirements. Funding amounts may be influenced by future
asset performance, the level of discount rates and other variables impacting the assets and/or liabilities of the plan. In addition,
amounts funded in the future, to the extent not due under regulatory requirements, may be affected by alternative uses of our cash
flows, including dividends, acquisitions and common stock repurchases. During 2013, 2012 and 2011, we made discretionary
contributions to the plan of $6.3 million, $7.2 million and $7.2 million, respectively. We are considering making additional
discretionary contributions to the plan in 2014 and may be required to make significantly larger minimum contributions to the
plan in future periods. See Note 11 to our consolidated financial statements for additional information required to be disclosed
relating to our defined benefit postretirement plans. We are required to recognize an accrued benefit plan liability for our
underfunded defined benefit pension and unfunded retiree medical plans (which we refer to together as the Plans). The offsetting
adjustment to the liabilities required to be recognized for the Plans is recorded in “Accumulated Other Comprehensive Earnings
(Loss),” net of tax, in our consolidated balance sheet. We will recognize subsequent changes in the funded status of the Plans
through the income statement and as a component of comprehensive earnings, as appropriate, in the year in which they occur.
Numerous items may lead to a change in funded status of the Plans, including actual results differing from prior estimates and
assumptions, as well as changes in assumptions to reflect information available at the respective measurement dates. In 2013, the
funded status of the Plans was significantly impacted by an increase in the discount rates used in the measurement of the pension
liabilities at December 31, 2013 (resulting in a $19.5 million decrease in the benefit obligation at December 31, 2013). In
addition, also favorably impacting the funded status were favorable returns on the plan’s assets in 2013, which, combined with
the $6.3 million of discretionary contributions made to the plan in 2013, resulted in an increase in the plan’s invested assets of
$27.5 million at December 31, 2013. The net change in the funded status of the Plan in 2013 resulted in a decrease in noncurrent
liabilities in 2013 of $47.0 million. While the change in funded status of the Plans had no direct impact on our cash flows from
operations in 2013, 2012 and 2011, 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.
Cash Flows From Investing Activities
Capital Expenditures - Net capital expenditures were $93.6 million, $51.0 million and $45.9 million for 2013, 2012 and 2011,
respectively. In 2014, we expect total expenditures for capital improvements to be approximately $90.0 million, primarily related
to office moves and expansions and updating computer systems and equipment. The increase in net capital expenditures in 2013
from 2012 and in 2012 from 2011 primarily related to capitalized costs associated with the implementation of new accounting and
financial reporting systems and several other system initiatives that occurred in 2013 and 2012, respectively.
Acquisitions - Cash paid for acquisitions, net of cash acquired, was $727.7 million, $344.1 million and $264.8 million in 2013,
2012 and 2011, respectively. The increased use of cash for acquisitions made in 2013 compared to 2012 was primarily due to two
large acquisitions that occurred in 2013. The increased use of cash for acquisitions made in 2012 compared to 2011 was
primarily due to the increase in the number of acquisition that occurred in 2012. In addition, during 2013, 2012 and 2011 we
issued 5.1 million shares ($223.1 million), 6.0 million shares ($203.6 million) and 3.2 million shares ($90.6 million), respectively,
of our common stock as consideration paid for acquisitions. We completed 31, 60 and 32 acquisitions in 2013, 2012 and 2011,
respectively. Annualized revenues of entities acquired in 2013, 2012 and 2011 totaled approximately $383.9 million,
$231.7 million and $277.0 million, respectively. In 2014, we expect to fund our acquisitions using debt and cash from operations
and our common stock on occasion (for example, to effect a tax-free exchange, or if our overall acquisition activity warrants it).
During 2012, we issued 425,000 shares of our common stock and paid $3.5 million in cash related to earnout obligations of five
acquisitions made prior to 2009 and recorded additional goodwill of $0.1 million. During 2011, we issued 245,000 shares of our
common stock, paid $8.2 million in cash and accrued $18.3 million in liabilities related to earnout obligations of 19 acquisitions
made prior to 2009 and recorded additional goodwill of $30.0 million.
Dispositions - During 2013, 2012 and 2011, we sold several books of business and recognized one-time gains of $5.2 million,
$3.9 million and $5.5 million, respectively. We received cash proceeds of $5.5 million, $11.4 million and $14.0 million,
respectively, related to these transactions. Offsetting the one-time gains related to sales of books of business in 2012, was a non-
cash loss of $3.5 million recognized in second quarter 2012 related to our acquisition of an additional 41.5% equity interest in
CGM Gallagher Group Limited (which we refer to as CGM), which increased our ownership in CGM to 80%. The loss
represents the decrease in fair value of our initial 38.5% equity interest in CGM based on the purchase price paid to acquire the
additional 41.5% equity interest in CGM.
Clean Energy Investments - During the period from 2009 through 2013, we made significant investments in clean energy
operations capable of producing refined coal that we believe qualifies for tax credits under IRC Section 45. Our current estimate
40
of the 2014 annual after-tax earnings, including IRC Section 45 tax credits, that will be generated from all of our clean energy
investments in 2014 is $65.0 million to $80.0 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 capital expenditures related to the redeployment, and in some cases
relocation of refined coal plants. We anticipate positive net cash flow related to IRC Section 45 activity in 2014. With the
expected increased earnings from the IRC Section 45 investments in 2015 through 2021, and the anticipated minimal capital
expenditures during that same period, we anticipate that the annual positive net cash flow during those years will continue to
increase. We anticipate that this favorable impact on the amount we will pay the IRS in 2014 and in future years from IRC
Section 45 investments will allow us to use these positive cash flows to fund acquisitions. Please see "Clean energy investments"
beginning on page 38 for a more detailed description of these investments (including the reference therein to risks and
uncertainties).
Cash Flows From Financing Activities
On September 19, 2013 we entered into an unsecured multicurrency credit agreement (which we refer to as the Credit
Agreement), which expires on September 19, 2018, with a group of fifteen financial institutions. The Credit Agreement replaced
a $500.0 million unsecured revolving credit facility (that was scheduled to expire on July 14, 2014), which was terminated upon
the execution of the Credit Agreement. All indebtedness, liabilities and obligations outstanding under the previous facility were
fully paid and satisfied, except for outstanding letters of credit which became letters of credit under the Credit Agreement.
Our Credit Agreement provides for a revolving credit commitment of up to $600.0 million, of which up to $75.0 million may be
used for issuances of standby or commercial letters of credit and up to $50.0 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 up to a maximum aggregate revolving credit commitment of $850.0 million.
In 2007, 2009, 2011, 2012 and 2013, we entered into separate note purchase agreements, with certain accredited institutional
investors, pursuant to which we issued and sold to the investors $400.0 million, $150.0 million, $125.0 million, $50.0 million and
$200.0 million in aggregate debt, respectively, totaling $925.0 million which was outstanding at December 31, 2013, and a cash
and cash equivalent balance of $298.1 million. We also use our Credit Agreement from time to time to borrow funds to
supplement operating cash flows. See Note 6 to our consolidated financial statements for a discussion of the terms of the note
purchase agreements and the Credit Agreement. There were $530.5 million of borrowings outstanding under the Credit
Agreement at December 31, 2013. Due to the outstanding borrowing and letters of credit, $53.5 million remained available for
potential borrowings under the Credit Agreement at December 31, 2013.
On December 20, 2013, we entered into a note purchase agreement for a private placement of $600.0 million of senior unsecured
notes. Under the agreement, funding is expected to occur on February 27, 2014. We intend to use the proceeds of the debt
transaction primarily to pay down our line of credit facility.
During 2013, we borrowed an aggregate of $890.5 million and repaid $489.0 million under our Credit Agreement. Principal uses
of the 2013 borrowings under the Credit Agreement were to fund acquisitions, earnout payments related to acquisitions and
general corporate purposes. During 2012, we borrowed $303.0 million and repaid $184.0 million under our Credit Agreement.
Principal uses of the 2012 borrowings under the Credit Agreement were to fund acquisitions, earnout payments related to
acquisitions and general corporate purposes. During 2011, we borrowed $151.0 million and repaid $141.0 million under the
Credit Agreement. Principal uses of the 2011 borrowings under the Credit Agreement were to fund acquisitions, earnout
payments related to acquisitions and general corporate purposes.
The note purchase agreements and the Credit Agreement contain various financial covenants that require us to maintain specified
levels of net worth and financial leverage ratios. We were in compliance with these covenants as of December 31, 2013.
Dividends - Our board of directors determines our dividend policy. Our board of directors declares dividends on a quarterly basis
after considering our available cash from earnings, our anticipated cash needs and current conditions in the economy and financial
markets.
In 2013, we declared $182.6 million in cash dividends on our common stock, or $1.40 per common share. On December 20,
2013, we paid a fourth quarter dividend of $.35 per common share to shareholders of record as of December 4, 2013. On
January 23, 2014, we announced a quarterly dividend for first quarter 2014 of $.36 per common share. If the dividend is
maintained at $.36 per common share throughout 2014, this dividend level would result in an annualized net cash used by
financing activities in 2014 of approximately $190.9 million (based on the outstanding shares as of December 31, 2013), or an
anticipated increase in cash used of approximately $8.3 million. We can make no assurances regarding the amount of any future
dividend payments.
41
Common Stock Repurchases - We have in place a common stock repurchase plan approved by our board of directors. We did
not repurchase any shares in 2013, 2012 and 2011. We generally hold repurchased shares for reissuance in connection with our
equity compensation and stock option plans. Under the provisions of the repurchase plan, we were authorized to repurchase
approximately 10,000,000 additional shares at December 31, 2013. The plan authorizes the repurchase of our common stock at
such times and prices as we may deem advantageous, in transactions on the open market or in privately negotiated transactions.
We are under no commitment or obligation to repurchase any particular amount of common stock, and the share repurchase plan
can be suspended at any time at our discretion. Funding for share repurchases may come from a variety of sources, including
cash from operations, short-term or long-term borrowings under our Credit Agreement or other sources. There were no common
stock repurchases made in 2013 that impacted our consolidated financial statements. The common stock repurchases reported in
our consolidated statement of cash flows for 2012 and 2011 include 82,000 shares (at a cost of $1.5 million) and 41,000 shares (at
a cost of $1.2 million), respectively, that we repurchased from our employees to cover their income tax withholding obligations in
connection with restricted stock distributions in each of those years. Under these circumstances, we withhold the proceeds from
the repurchases and remit them to the taxing authorities on the employees’ behalf to cover their income tax withholding
obligations.
At-the-Market Equity Program - On November 20, 2013, we entered into an Equity Distribution Agreement with Morgan
Stanley & Co. LLC, pursuant to which we may offer and sell, from time to time, up to $200 million of our common stock through
Morgan Stanley as sales agent. Pursuant to the agreement, shares may be sold by means of ordinary brokers’ transactions,
including on the New York Stock Exchange, at market prices prevailing at the time of sale, at prices related to the prevailing
market prices, or at negotiated prices, in block transactions, or as otherwise agreed upon by us and Morgan Stanley.
During the quarter ended December 31, 2013, we sold 91,572 shares of our common stock under the program at a weighted
average price of $47.41 per share, resulting in net proceeds, after sales commissions of approximately $43,000 to Morgan
Stanley, of approximately $4.3 million.
Shelf Registration Statement - On November 20, 2013, we filed a shelf registration statement on Form S-3 with the SEC,
registering the offer and sale from time to time of an indeterminate amount of our common stock. We have used this registration
statement, and expect to continue using this registration statement, to register shares sold under our at-the-market equity program
referred to above. The availability of the potential liquidity under this shelf registration statement depends on investor demand,
market conditions and other factors. We can make no assurances regarding when, or if, we will issue any additional shares under
this registration statement.
Common Stock Issuances - 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 $76.2 million in 2013,
$82.3 million in 2012 and $73.9 million in 2011. Prior to 2009, we issued stock options under four stock option-based employee
compensation plans. The options were primarily granted at the fair value of the underlying shares at the date of grant and
generally become exercisable at the rate of 10% per year beginning the calendar year after the date of grant. In May 2008, all of
these plans expired. On May 10, 2011, our stockholders approved the 2011 Long-Term Incentive Plan (which we refer to as the
LTIP), which replaced our previous stockholder-approved 2009 Long-Term Incentive Plan. All of our officers, employees and
non-employee directors are eligible to receive awards under the LTIP. Awards which may be granted under the LTIP include
non-qualified 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 8.0 million shares
(less any shares of restricted stock issued under the LTIP - 0.5 million shares of our common stock were available for this
purpose) were available for grant under the LTIP at December 31, 2013. In addition, we have an employee stock purchase plan
which 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 2013 and we
believe this favorable trend will continue in the foreseeable future.
Outlook - We believe that we have sufficient capital to meet our short- and long-term cash flow needs. Except for 2008 and
2005, our earnings before income taxes, adjusted for non-cash items (i.e., EBITDAC), have increased year over year since 1991.
In 2008, earnings before income taxes were adversely impacted by charges related to real estate lease terminations, severance,
litigation, impairments of intangible assets and the adverse impact of foreign currency translation. In 2005, earnings before
income taxes were adversely impacted by charges incurred for litigation and retail contingent commission related matters and
claims handling obligations. We expect the historically favorable trend in earnings before income taxes, adjusted for non-cash
items, to continue in the foreseeable future because we intend to continue to expand our business through organic growth from
existing operations and growth through acquisitions. Additionally, we anticipate a favorable impact on the amount we will pay
the IRS in 2014 and in future years based on anticipated tax credits from IRC Section 45 investments. We also anticipate that we
will continue to use cash flows from operations and, if needed, borrowings under the Credit Agreement and private placement
debt (described above under “Cash Flows From Financing Activities”) and our common stock to fund acquisitions. In addition,
we may from time to time consider other alternatives for longer-term funding sources. Such alternatives could include raising
additional capital through public or private debt offerings, equity markets, or restructuring our operations in the event that cash
flows from operations are reduced dramatically due to lost business or if our acquisition program continues at, or increases from
the same level as 2013.
42
Contractual Obligations and Commitments
In connection with our investing and operating activities, we have entered into certain contractual obligations and commitments.
See Notes 6, 12 and 13 to our consolidated financial statements for additional discussion of these obligations and commitments.
Our future minimum cash payments, including interest, associated with our contractual obligations pursuant to our note purchase
agreements and Credit Agreement, operating leases and purchase commitments as of December 31, 2013 are as follows
(in millions):
Contractual Obligations
2014
2015
Payments Due by Period
2018
2017
2016
Thereafter
Total
Note Purchase Agreements
Credit Agreement
Interest expense on debt
Total debt obligations
Operating lease obligations
Less sublease arrangements
Outstanding purchase obligations
$
100.0
530.5
51.1
-
$
-
44.1
$
50.0
-
44.1
681.6
74.0
(1.8)
22.6
44.1
65.7
(0.8)
15.4
94.1
53.4
(0.1)
9.3
$
300.0
-
41.2
341.2
42.0
-
0.9
$
50.0
-
21.9
$
425.0
-
54.7
$
925.0
530.5
257.1
71.9
28.3
-
0.3
479.7
86.9
-
-
1,712.6
350.3
(2.7)
48.5
Total contractual obligations
$
776.4
$
124.4
$
156.7
$
384.1
$
100.5
$
566.6
$
2,108.7
The amounts presented in the table above may not necessarily reflect our actual future cash funding requirements, because the
actual timing of the future payments made may vary from the stated contractual obligation. In addition, due to the uncertainty
with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2013, we are unable
to make reasonably reliable estimates of the period in which cash settlements may be made with the respective taxing authorities.
Therefore, $9.2 million of unrecognized tax benefits have been excluded from the contractual obligations table above. See
Note 14 to our consolidated financial statements for a discussion on income taxes.
Note Purchase Agreements - On August 3, 2007, we entered into a note purchase agreement, as amended and restated on
December 19, 2007, with certain accredited institutional investors, pursuant to which we issued and sold $100.0 million in
aggregate principal amount of our 6.26% Senior Notes, Series A, due August 3, 2014 and $300.0 million in aggregate principal
amount of our 6.44% Senior Notes, Series B, due August 3, 2017, in a private placement.
On November 30, 2009, we entered into a note purchase agreement, with certain accredited institutional investors, pursuant to
which we issued and sold $150.0 million in aggregate principal amount of our 5.85% Senior Notes, Series C, due in three equal
installments on November 30, 2016, November 30, 2018 and November 30, 2019, in a private placement.
On February 10, 2011, we entered into a note purchase agreement, with certain accredited institutional investors, pursuant to
which we issued and sold $75.0 million in aggregate principal amount of our 5.18% Senior Notes, Series D, due February 10,
2021 and $50.0 million in aggregate principal amount of our 5.49% Senior Notes, Series E, due February 10, 2023, in a private
placement.
On July 10, 2012, we entered into a note purchase agreement, with certain accredited institutional investors, pursuant to which we
issued and sold $50.0 million in aggregate principal amount of our 3.99% Senior Notes, Series F, due July 10, 2020, in a private
placement.
On June 14, 2013, we entered into a note purchase agreement, with certain accredited institutional investors, pursuant to which
we issued and sold $200.0 million in aggregate principal amount of our 3.69% Senior Notes, Series G, due June 14, 2022, in a
private placement.
On December 20, 2013, we entered into a note purchase agreement for a private placement of $600.0 million of Senior Notes.
The agreement provides for three series of notes: Series H is $325 million at 4.58% due in 2024, Series I is $175 million at 4.73%
due in 2026 and Series J is $100 million at 4.98% due 2029. Under the agreement, funding is expected to occur on February 27,
2014.
See Note 6 to our consolidated financial statements for a discussion of the terms of the note purchase agreements
Credit Agreement - On September 19, 2013, we entered into a $600.0 million unsecured multicurrency credit agreement (which
we refer to as the Credit Agreement), which expires on September 19, 2018, with a group of fifteen financial investors. The
Credit Agreement replaced a $500.0 million unsecured revolving credit facility, (that was scheduled to expire on July 14, 2014),
which was terminated upon the execution of the Credit Agreement. All indebtedness, liabilities and obligations outstanding under
the previous facility were fully paid and satisfied, except for outstanding letters of credit which became letters of credit under the
Credit Agreement.
43
We use the Credit Agreement to post letters of credit and to borrow funds to supplement our operating cash flows from time to
time. At December 31, 2013, $16.0 million of letters of credit (see below under Off-Balance Sheet Debt) were outstanding under
the Credit Agreement. There were $530.5 million of borrowings outstanding under the Credit Agreement at December 31, 2013.
Accordingly, at December 31, 2013, $53.5 million remained available for potential borrowings, of which $53.5 million may be in
the form of additional letters of credit. We are under no obligation to use the Credit Agreement in performing our normal
business operations. See Note 6 to our consolidated financial statements for a discussion of the terms of the Credit Agreement.
Operating Lease Obligations - We generally operate in leased premises at our other locations. Certain of these leases have
options permitting renewals for additional periods. In addition to minimum fixed rentals, a number of leases contain annual
escalation clauses which are generally related to increases in an inflation index.
We have leased certain office space to several non-affiliated tenants under operating sublease arrangements. In the normal course
of business, we expect that the 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.
Outstanding Purchase Obligations - As a service company, 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 have outstanding as of December 31, 2013. These obligations represent agreements
to purchase goods or services that were executed in the normal course of business.
Off-Balance Sheet Arrangements
Off-Balance Sheet Commitments - Our total unrecorded commitments associated with outstanding letters of credit, financial
guarantees and funding commitments as of December 31, 2013 are as follows (in millions):
Off-Balance Sheet Commitments
2014
Amount of Commitment Expiration by Period
2015
2016
2018
2017
Total
Amounts
Thereafter Committed
Letters of credit
Financial guarantees
Funding commitments
Total commitments
-
$
-
8.5
-
$
-
-
-
$
-
-
-
$
-
-
-
$
-
-
$
16.0
9.1
2.9
$
16.0
9.1
11.4
$
8.5
$
-
$
-
$
-
$
-
$
28.0
$
36.5
Since commitments may expire unused, the amounts presented in the table above do not necessarily reflect our actual future cash
funding requirements. See Note 13 to our consolidated financial statements for a discussion of our funding commitments related
to our corporate segment and the Off-Balance Sheet Debt section below for a discussion of other letters of credit. All of the
letters of credit represent multiple year commitments that have annual, automatic renewing provisions and are classified by the
latest commitment date.
Since January 1, 2002, we have acquired 279 companies, all of which were accounted for using the acquisition method for
recording business combinations. Substantially all of the purchase agreements related to these acquisitions contain provisions for
potential earnout obligations. For all of our 2011 to 2013 acquisitions that contain potential earnout obligations, such obligations
are measured at fair value as of the acquisition date and are included on that basis in the recorded purchase price consideration for
the respective acquisition. The amounts recorded as earnout payables are primarily based upon estimated future operating results
of the acquired entities over a two- to three-year period subsequent to the acquisition date. The aggregate amount of the
maximum potential earnout obligations related to these acquisitions was $462.3 million, of which $162.7 million was recorded in
our consolidated balance sheet as of December 31, 2013 based on the estimated fair value of the expected future payments to be
made.
Off-Balance Sheet Debt - 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, 2013 and 2012 that was recourse to us.
At December 31, 2013, we had posted two letters of credit totaling $9.8 million, in the aggregate, related to our self-insurance
deductibles, for which we have recorded a liability of $9.0 million. At December 31, 2013, we had posted five letters of credit
totaling $6.2 million to allow certain of our captive operations to meet minimum statutory surplus requirements and for additional
collateral related to premium and claim funds held in a fiduciary capacity. These letters of credit have never been drawn upon.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to various market risks in our day to day operations. Market risk is the potential loss arising from adverse
changes in market rates and prices, such as interest and foreign currency exchange rates and equity prices. The following
analyses present the hypothetical loss in fair value of the financial instruments held by us at December 31, 2013 that are sensitive
44
to changes in interest rates. The range of changes in interest rates used in the analyses reflects our view of changes that are
reasonably possible over a one-year period. This discussion of market risks related to our consolidated balance sheet includes
estimates of future economic environments caused by changes in market risks. The effect of actual changes in these market risk
factors may differ materially from our estimates. In the ordinary course of business, we also face risks that are either nonfinancial
or unquantifiable, including credit risk and legal risk. These risks are not included in the following analyses.
Our invested assets are primarily held as cash and cash equivalents, which are subject to various market risk exposures such as
interest rate risk. The fair value of our portfolio of cash and our cash equivalents as of December 31, 2013 approximated its
carrying value due to its short-term duration. We estimated market risk as the potential decrease in fair value resulting from a
hypothetical one-percentage point increase in interest rates for the instruments contained in the cash and cash equivalents
investment portfolio. The resulting fair values were not materially different from their carrying values at December 31, 2013.
We have other investments that have valuations that are indirectly influenced by equity market and general economic conditions,
which can change rapidly. In addition, some investments require direct and active financial and operational support from us. A
future material adverse effect may result from changes in market conditions or if we elect to withdraw financial or operational
support.
As of December 31, 2013, we had $925.0 million of borrowings outstanding under our various note purchase agreements. The
aggregate estimated fair value of these borrowings at December 31, 2013 was $979.4 million due to the long-term duration and
fixed interest rates associated with these debt obligations. No active or observable market exists for our private placement long-
term debt. Therefore, the estimated fair value of this debt is based on discounted future cash flows using current interest rates
available for debt with similar terms and remaining maturities. To estimate an all-in interest rate for discounting, we obtained
market quotes for notes with the same terms as ours, which we have deemed to be the closest approximation of current market
rates. We have not adjusted this rate for risk profile changes, covenant issues or credit rating changes. We estimated market risk
as the potential impact on the value of the debt recorded in our consolidated balance sheet resulting from a hypothetical one-
percentage point decrease in our weighted average borrowing rate as of December 31, 2013 and the resulting fair values would be
$42.3 million higher than their carrying value (or $967.3 million).
As of December 31, 2013, we had $530.5 million of borrowings outstanding under our Credit Agreement. The fair value of these
borrowings approximate their carrying value due to their short-term duration and variable interest rates associated with these debt
obligations. Market risk is estimated as the potential increase in fair value resulting from a hypothetical one-percentage point
decrease in our weighted average short-term borrowing rate at December 31, 2013 and the resulting fair value is not be materially
different from their carrying value.
We are subject to foreign currency exchange rate risk primarily from one of our larger U.K. based brokerage subsidiaries that
incurs expenses denominated primarily in British pounds while receiving a substantial portion of its revenues in U.S. dollars. In
addition, we are subject to foreign currency exchange rate risk from our Australian, Canadian, Indian, Singaporean, Jamaican, and
various Caribbean operations because we transact business in their local denominated currencies. Foreign currency gains (losses)
related to this market risk are recorded in earnings before income taxes as transactions occur. Assuming a hypothetical adverse
change of 10% in the average foreign currency exchange rate for 2013 (a weakening of the U.S. dollar), earnings before income
taxes would decrease by approximately $4.1 million. Assuming a hypothetical favorable change of 10% in the average foreign
currency exchange rate for 2013 (a strengthening of the U.S. dollar), earnings before income taxes would increase by
approximately $4.3 million. We are also subject to foreign currency exchange rate risk associated with the translation of local
currencies of our foreign subsidiaries into U.S. dollars. However, it is management’s opinion that this foreign currency exchange
risk is not material to our consolidated operating results or financial position. We manage the balance sheets of our foreign
subsidiaries, where practical, such that foreign liabilities are matched with equal foreign assets, maintaining a “balanced book”
which minimizes the effects of currency fluctuations. Historically, we have not entered into derivatives or other similar financial
instruments for trading or speculative purposes. However, with respect to managing foreign currency exchange rate risk in the
U.K., we have periodically purchased financial instruments when market opportunities arose to minimize our exposure to this
risk. During 2013, 2012 and 2011, we had several monthly put/call options in place with an external financial institution that are
designed to hedge a significant portion of our future U.K. currency revenues (in 2013) and disbursements (in 2012) through
various future payment dates. In addition, during 2013, we had several monthly put/call options in place with an external
financial institution that were designed to hedge a significant portion of our future Indian currency disbursements through various
future payment dates. These hedging strategies were designed to protect us against significant U.K. and India currency exchange
rate movements, but we are still exposed to some foreign currency exchange rate risk for the portion of the payments and
currency exchange rate that are unhedged. The impact of these hedging strategies was not material to our consolidated financial
statements for 2013, 2012 and 2011. See Note 15 to our consolidated financial statements for the changes in fair value of these
derivative instruments reflected in comprehensive earnings in 2013, 2012 and 2011. In the third quarter of 2013, we entered into
three foreign currency derivative investment contracts in connection with the signing of an agreement to acquire The Giles Group
of Companies headquartered in London, England. These contracts were designed to hedge a portion of the GBP denominated
purchase price consideration of this acquisition. The derivative investment contracts were exercised on October 31, 2013 and the
Giles transaction closed in early November 2013. In 2013, we recorded a pretax gain of $2.6 million related to these derivative
investment contracts.
45
Item 8. Financial Statements and Supplementary Data.
Arthur J. Gallagher & Co.
Consolidated Statement of Earnings
(In millions, except per share data)
Commissions
Fees
Supplemental commissions
Contingent commissions
Investment income
Net gains on books of business sales
Revenues from clean coal activities
Other net revenues
Total revenues
Compensation
Operating
Cost of revenues from clean coal activities
Interest
Depreciation
Amortization
Change in estimated acquisition earnout payables
Total expenses
Earnings before income taxes
Provision for income taxes
Net earnings
Basic net earnings per share:
Diluted net earnings per share:
Dividends declared per common share
Year Ended December 31,
2013
2012
2011
$
1,553.1
1,059.5
77.3
52.1
8.1
5.2
412.5
11.8
$
1,302.5
971.7
67.9
42.9
10.4
3.9
119.6
1.4
$
1,127.4
870.2
56.0
38.1
8.1
5.5
29.2
0.2
3,179.6
1,685.0
552.4
437.3
50.1
53.4
125.2
1.7
2,905.1
274.5
5.9
2,520.3
1,493.4
483.2
111.6
43.0
41.4
99.0
3.4
2,275.0
245.3
50.3
2,134.7
1,326.1
419.0
32.0
40.8
35.9
79.3
(6.2)
1,926.9
207.8
63.7
$
268.6
$
195.0
$
144.1
$
2.08
$
1.61
$
1.29
2.06
1.40
1.59
1.36
1.28
1.32
See notes to consolidated financial statements.
46
Arthur J. Gallagher & Co.
Consolidated Statement of Comprehensive Earnings
(In millions)
Net earnings
Change in pension liability, net of taxes
Foreign currency translation
Change in fair value of derivative instruments, net of taxes
Year Ended December 31,
2013
2012
2011
$
268.6
$
195.0
$
144.1
26.8
1.6
1.8
(3.4)
16.1
1.7
(30.6)
(16.1)
(2.7)
Comprehensive earnings
$
298.8
$
209.4
$
94.7
See notes to consolidated financial statements
47
Arthur J. Gallagher & Co.
Consolidated Balance Sheet
(In millions)
Cash and cash equivalents
Restricted cash
Premiums and fees receivable
Other current assets
Total current assets
Fixed assets - net
Deferred income taxes
Other noncurrent assets
Goodwill - net
Amortizable intangible assets - net
Total assets
Premiums payable to insurance and reinsurance companies
Accrued compensation and other accrued liabilities
Unearned fees
Other current liabilities
Corporate related borrowings - current
Total current liabilities
Corporate related borrowings - noncurrent
Other noncurrent liabilities
Total liabilities
Stockholders' equity:
Common stock - authorized 400.0 shares; issued and
outstanding 133.6 shares in 2013 and 125.6 shares in 2012
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
December 31,
2013
2012
$
298.1
1,027.4
1,288.8
261.3
$
302.1
851.6
1,096.1
179.7
2,875.6
160.4
279.8
320.7
2,145.2
1,078.8
2,429.5
105.4
251.8
283.3
1,472.7
809.6
$
6,860.5
$
5,352.3
$
2,154.7
370.6
84.5
44.5
630.5
$
1,819.7
306.7
70.6
36.9
129.0
3,284.8
825.0
665.2
4,775.0
133.6
1,358.1
596.4
(2.6)
2,085.5
2,362.9
725.0
605.8
3,693.7
125.6
1,055.4
510.4
(32.8)
1,658.6
Total liabilities and stockholders' equity
$
6,860.5
$
5,352.3
See notes to consolidated financial statements.
48
Arthur J. Gallagher & Co.
Consolidated Statement of Cash Flows
(In millions)
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Net gain on investments and other
Depreciation and amortization
Change in estimated acquisition earnout payables
Amortization of deferred compensation and restricted stock
Stock-based and other noncash compensation expense
Effect of exchange rate changes
Net change in restricted cash
Net change in premiums receivable
Net change in premiums payable
Net change in other current assets
Net change in accrued compensation and other accrued liabilities
Net change in fees receivable/unearned fees
Net change in income taxes payable
Net change in deferred income taxes
Net change in other noncurrent assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Net additions to fixed assets
Cash paid for acquisitions, net of cash acquired
Net proceeds from sales of operations
Net proceeds (funding) of investment transactions
Net cash used by investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock
Tax impact from issuance of common stock
Repurchases of common stock
Dividends paid
Borrowings on line of credit facilities
Repayments on line of credit facilities
Borrowings of corporate related long-term debt
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information:
Interest paid
Income taxes paid
Year Ended December 31,
2012
2013
2011
$
268.6
$
195.0
$
144.1
(17.1)
178.6
1.7
19.0
7.7
(0.2)
(58.6)
(85.4)
114.3
(57.4)
36.3
(5.9)
4.3
(53.8)
(2.2)
349.9
(93.6)
(727.7)
5.5
(35.9)
(851.7)
76.2
7.5
-
(182.6)
890.5
(489.0)
200.0
502.6
(4.8)
(4.0)
302.1
(3.9)
140.4
3.4
8.3
7.5
1.9
(90.2)
11.5
33.3
52.4
19.2
4.3
14.0
(20.4)
(33.7)
343.0
(51.0)
(344.1)
11.4
1.5
(382.2)
82.3
0.5
(1.5)
(204.4)
303.0
(184.0)
50.0
45.9
4.2
10.9
291.2
(5.5)
115.2
(6.2)
6.8
14.3
0.3
31.9
52.1
(55.8)
(8.1)
12.8
(4.1)
(10.4)
21.5
(24.9)
284.0
(45.9)
(264.8)
14.0
(14.5)
(311.2)
73.9
3.7
(1.2)
(145.8)
151.0
(141.0)
125.0
65.6
3.0
41.4
249.8
$
298.1
$
302.1
$
291.2
$
49.2
49.2
$
42.2
47.5
$
38.4
32.0
See notes to consolidated financial statements.
49
Arthur J. Gallagher & Co.
Consolidated Statement of Stockholders’ Equity
(In millions)
Common Stock
Share s
Amount
Capital in
Exce ss of
Par Value
Re taine d
Earnings
Balance at December 31, 2010
108.4
$
108.4
$
507.8
$
Net earnings
Net change in pension asset/liability,
net of taxes of ($20.4) million
Foreign currency translation
Change in fair value of derivative
instruments, net of taxes of ($1.8 million)
Compensation expense related
to stock option plan grants
T ax impact from issuance of
common stock
Common stock issued in:
T wenty-four purchase transactions
Stock option plans
Employee stock purchase plan
Deferred compensation/restricted stock
Common stock repurchases
Cash dividends declared on common stock
-
-
-
-
-
-
3.4
2.6
0.3
-
-
-
-
-
-
-
-
-
3.4
2.6
0.3
-
-
-
-
-
-
-
7.1
3.7
98.9
64.1
6.9
5.9
(1.2)
-
Balance at December 31, 2011
114.7
114.7
693.2
Net earnings
Net change in pension asset/liability,
net of taxes of ($0.2 million)
Foreign currency translation
Change in fair value of derivative
instruments, net of taxes of $1.1 million
Compensation expense related
to stock option plan grants
T ax impact from issuance of
common stock
Common stock issued in:
Forty purchase transactions
Stock option plans
Employee stock purchase plan
Deferred compensation/restricted stock
Other compensation expense
Common stock repurchases
Cash dividends declared on common stock
-
-
-
-
-
-
7.8
2.8
0.3
0.1
-
(0.1)
-
-
-
-
-
-
-
7.8
2.8
0.3
0.1
-
(0.1)
-
-
-
-
-
7.2
0.5
268.5
71.1
8.1
7.9
0.3
(1.4)
-
Balance at December 31, 2012
125.6
125.6
1,055.4
Net earnings
Net change in pension asset/liability,
net of taxes of $17.9 million
Foreign currency translation
Change in fair value of derivative
instruments, net of taxes of $1.3 million
Compensation expense related
to stock option plan grants
T ax impact from issuance of
common stock
Common stock issued in:
T hirteen purchase transactions
Stock option plans
Employee stock purchase plan
Deferred compensation/restricted stock
Stock issuance under dribble-out program
Common stock repurchases
Cash dividends declared on common stock
-
-
-
-
-
-
5.2
2.3
0.3
0.1
0.1
-
-
-
-
-
-
-
-
5.2
2.3
0.3
0.1
0.1
-
-
-
-
-
-
7.7
7.5
227.0
59.5
9.9
(13.1)
4.2
-
-
Balance at December 31, 2013
133.6
$
133.6
$
1,358.1
See notes to consolidated financial statements.
50
Accumulate d
O the r
Compre he nsive
Earnings (Loss)
$
2.2
-
Total
$
1,106.7
144.1
(30.6)
(16.1)
(2.7)
-
-
-
-
-
-
-
-
(47.2)
-
(3.4)
16.1
1.7
-
-
-
-
-
-
-
-
-
(32.8)
-
26.8
1.6
1.8
-
-
(30.6)
(16.1)
(2.7)
7.1
3.7
102.3
66.7
7.2
5.9
(1.2)
(149.5)
1,243.6
195.0
(3.4)
16.1
1.7
7.2
0.5
276.3
73.9
8.4
8.0
0.3
(1.5)
(167.5)
1,658.6
268.6
26.8
1.6
1.8
7.7
7.5
488.3
144.1
-
-
-
-
-
-
-
-
-
-
(149.5)
482.9
195.0
-
-
-
-
-
-
-
-
-
-
-
(167.5)
510.4
268.6
-
-
-
-
-
-
-
-
-
-
-
(182.6)
596.4
$
-
-
-
-
-
-
-
(2.6)
$
232.2
61.8
10.2
(13.0)
4.3
-
(182.6)
2,085.5
$
Arthur J. Gallagher & Co.
Notes to Consolidated Financial Statements
December 31, 2013
1. Summary of Significant Accounting Policies
Nature of Operations - Arthur J. Gallagher & Co. and its subsidiaries, collectively referred to herein as we, our or us or the
company, provide insurance brokerage and risk management services to a wide variety of commercial, industrial, institutional and
governmental organizations through three reportable operating segments. Commission and fee revenue generated by the
brokerage segment is primarily related to the negotiation and placement of insurance for our clients. Fee revenue generated by
the risk management segment is primarily related to claims management, information management, risk control consulting (loss
control) services and appraisals in the property/casualty market. Investment income and other revenue are generated from our
investment portfolio, which includes invested cash and restricted funds, as well as clean energy and other investments. We are
headquartered in Itasca, Illinois, have operations in 24 countries and offer client-service capabilities in more than 140 countries
globally through a network of correspondent insurance brokers and consultants.
Basis of Presentation - The accompanying consolidated financial statements include our accounts and all of our majority-owned
subsidiaries (50% or greater ownership). Substantially all of our investments in partially owned entities in which our ownership
is less than 50% are accounted for using the equity method based on the legal form of our ownership interest and the applicable
ownership percentage of the entity. However, in situations where a less than 50%-owned investment has been determined to be a
variable interest entity (which we refer to as a VIE) and we are deemed to be the primary beneficiary in accordance with the
variable interest model of consolidation, we will consolidate the investment into our consolidated financial statements. For
partially owned entities accounted for using the equity method, our share of the net earnings of these entities is included in
consolidated net earnings. All material intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the amounts reported in prior years’ consolidated financial statements in order to
conform to the current year presentation.
In the preparation of our consolidated financial statements as of December 31, 2013, 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 thereto.
Use of Estimates - The preparation of our consolidated financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known,
which could impact the amounts reported and disclosed herein.
Revenue Recognition - Our revenues are derived from commissions, fees and investment income.
We recognize commission revenues at the later of the billing or the effective date of the related insurance policies, net of an
allowance for estimated policy cancellations. We recognize commission revenues related to installment premiums as the
installments are billed. We recognize supplemental commission revenues using internal data and information received from
insurance carriers that allows us to reasonably estimate the supplemental commissions earned in the period. A supplemental
commission is a commission paid by an insurance carrier that is above the base commission paid, is determined by the insurance
carrier, and is established annually in advance of the contractual period based on historical performance criteria. We recognize
contingent commissions and commissions on premiums directly billed by insurance carriers as revenue when we have obtained
the data necessary to reasonably determine such amounts. Typically, we cannot reasonably determine these types of commission
revenues until we have received the cash or the related policy detail or other carrier specific information from the insurance
carrier. A contingent commission is a commission paid by an insurance carrier based on the overall profit and/or volume of the
business placed with that insurance carrier during a particular calendar year and is determined after the contractual period.
Commissions on premiums billed directly by insurance carriers to the insureds generally relate to a large number of
property/casualty insurance policy transactions, each with small premiums, and comprise a substantial portion of the revenues
generated by our employee benefit brokerage operations. Under these direct bill arrangements, the insurance carrier controls the
entire billing and policy issuance process. We record the income effects of subsequent premium adjustments when the
adjustments become known.
Fee revenues generated from the brokerage segment primarily relate to fees negotiated in lieu of commissions that we recognize
in the same manner as commission revenues. Fee revenues generated from the risk management segment relate to third party
claims administration, loss control and other risk management consulting services, which we provide over a period of time,
typically one year. We recognize these fee revenues ratably as the services are rendered, and record the income effects of
subsequent fee adjustments when the adjustments become known.
51
We deduct brokerage expense from gross revenues in our determination of our total revenues. Brokerage expense represents
commissions paid to sub-brokers related to the placement of certain business by our brokerage segment. We recognize this
expense in the same manner as commission revenues.
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 $4.2 million and $4.0 million at
December 31, 2013 and 2012, 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 $6.7 million and $6.6 million at December 31, 2013 and 2012, 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.
Investment income primarily includes interest and dividend income, which is accrued as it is earned. Gains on books of business
sales represent one-time gains related to sales of brokerage related businesses, which are primarily recognized on a cash received
basis. Revenues from clean coal activities include revenues from consolidated clean coal production plants, royalty income from
clean coal licenses and income (loss) related to unconsolidated clean coal production plants, all of which are recognized as
earned. Revenues from consolidated clean coal production plants represent sales of refined coal. Royalty income from clean coal
licenses represents fee income related to the use of clean coal technologies. Income (loss) from unconsolidated clean coal
production plants includes income (losses) related to our equity portion of the pretax results of the clean coal production plants
and production based installment sale income from majority investors. Other net revenues primarily consist of our equity
portions of the earnings from our investments in venture capital funds.
Claims Handling Obligations - We are obligated under certain circumstances to provide future claims handling and certain
administrative services for our former global risks brokerage clients in the U.K. Our obligation is the result of following the
industry practice of insurance brokers providing future claims handling and administrative services to former clients. In addition,
under certain circumstances, our risk management segment operations are contractually obligated to provide contract claim
settlement and administration services to our former clients. Accordingly, we record a liability for these deferred run-off
obligations based on the estimated costs to provide these future services to former clients. This liability is 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 (at
least annually) the adequacy of this liability and will make adjustments as necessary.
Earnings per Share - 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.
Cash and Cash Equivalents - Short-term investments, consisting principally of cash and money market accounts that have
average maturities of 90 days or less, are considered cash equivalents.
Restricted Cash - In our capacity as an insurance broker, we collect premiums from insureds and, after deducting our
commissions and/or fees, remit these premiums to insurance carriers. We hold unremitted insurance premiums in a fiduciary
capacity until we disburse them, and the use of such funds is restricted by laws in certain states and foreign jurisdictions in which
our subsidiaries operate. Various state and foreign agencies regulate insurance brokers and provide specific requirements that
limit the type of investments that may be made with such funds. Accordingly, we invest these funds in cash and U.S. Treasury
fund accounts. We can earn interest income on these unremitted funds, which is included in investment income in the
accompanying consolidated statement of earnings. These unremitted amounts are reported as restricted cash in the accompanying
consolidated balance sheet, with the related liability reported as premiums payable to insurance and reinsurance companies.
Additionally, several of our foreign subsidiaries are required by various foreign agencies to meet certain liquidity and solvency
requirements. We were in compliance with these requirements at December 31, 2013.
Related to our third party administration business, we are responsible for client claim funds that we hold in a fiduciary capacity.
We do not earn any interest income on the funds held. These client funds have been included in restricted cash, along with a
corresponding liability in premiums payable to insurance and reinsurance companies in the accompanying consolidated balance
sheet.
52
Derivative Instruments - In the normal course of business, we are exposed to the impact of foreign currency fluctuations that
impact our results of operations and cash flows. We utilize a foreign currency risk management program involving foreign
currency derivatives that consist of several monthly put/call options designed to hedge a significant portion of our future foreign
currency disbursements through various future payment dates. To mitigate the counterparty credit risk we only enter into
contracts with carefully selected major financial institutions based upon their credit ratings and other factors. These derivative
instrument contracts are cash flow hedges that qualify for hedge accounting and primarily hedge against fluctuations between
changes in the British Pound Sterling and Indian Rupee versus the U.S. Dollar. Changes in fair value of the derivative
instruments are reflected in other comprehensive earnings in the accompanying consolidated balance sheet. The impact of the
hedge at maturity is recognized in the income statement as a component of compensation and operating expenses. These
derivative instrument contracts are periodically monitored for hedge ineffectiveness, the amount of which has not been material to
the accompanying consolidated financial statements. We do not use derivatives for trading or speculative purposes. In 2013,
other net revenues also includes a gain of $2.6 million related to three foreign currency derivative investment contracts that we
executed in September 2013 in connection with the signing of an agreement to acquire The Giles Group of Companies,
headquartered in London, England. These contracts were designed to hedge a portion of the GBP denominated purchase price
consideration of this acquisition. The derivative investment contracts were exercised on October 31, 2013 and the Giles
transaction closed in early November 2013.
Investments - We have a management investment committee that meets four to six times per year to review the valuation of our
investments. For investments that do not have quoted market prices, we use various valuation techniques to estimate fair value
and look for indicators of impairment. Factors that may indicate that an impairment could exist include, but are not limited to,
reductions or changes to dividend payments, sustained operating losses or a trend of poor operating performance, recent
refinancings or recapitalizations, unfavorable press reports, significant customer or revenue loss, litigation, losses by other
companies in a similar industry, overall economic conditions, management changes and significant changes in strategy. In
addition, in cases where the ultimate value of an investment is directly dependent on us for future financial support, we assess our
willingness and intent to provide future funding in determining impairment.
If an indicator of impairment exists, we compare the investment’s carrying value to an estimate of its fair value. To estimate the
fair value of our equity-method investments, we compare values established in recent recapitalizations or appraisals conducted by
third parties. In some cases, no such recapitalizations or appraisals exist and we must perform our own valuations. This also
requires us to exercise significant judgment. Even if impairment indicators exist, no impairment may be required if the estimated
fair value is not less than the current carrying value or the decline in value is determined to be temporary and we have no intent to
sell the investment, and it is more likely than not that we will not be required to sell the investment prior to a recovery in value.
When we determine that an impairment is required, we record the impairment as a realized loss against current period earnings.
Both the process to review for indicators of impairment and, if such indicators exist, the method to compute the amount of
impairment incorporates quantitative data and qualitative criteria including the receipt of new information that can significantly
change the decision about the valuation of an investment in a short period of time. The determination of whether an impairment
is required is necessarily a matter of subjective judgment. The timing and amount of realized losses reported in earnings could
vary if management’s conclusions were different.
Because of the inherent risk of investments, we can make no assurances that there will not be impairments in the future should
economic and other conditions change.
Premium Financing - Four 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 considered delinquent after seven days of the payment due date. Generally, 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 interest “level-yield” method. Unearned interest related to
contracts receivable is included in the receivable balance in the accompanying consolidated balance sheet. The outstanding
contracts receivable balance was $2.3 million and $2.2 million at December 31, 2013 and 2012, respectively.
Fixed Assets - We carry fixed assets at cost, less accumulated depreciation, in the accompanying consolidated balance sheet.
We periodically review long-lived assets for impairment whenever events or changes in business circumstances indicate that the
carrying value of the assets may not be recoverable. Under those circumstances, if the fair value were less than the carrying
amount of the asset, we would recognize a loss for the difference. Depreciation for fixed assets is computed using the straight-
line method over the following estimated useful lives:
Computer equipment
Furniture and fixtures
Office equipment
Software
Leasehold improvements
Useful Life
Three to five years
Three to ten years
Three to ten years
Three to five years
Shorter of the lease term or useful life of the asset
53
Intangible Assets - 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 or trade
names. Expiration lists, non-compete agreements and trade names are amortized using the straight-line method over their
estimated useful lives (three to fifteen years for expiration lists, three to five years for non-compete agreements and five to fifteen
years for trade names), while goodwill is not subject to amortization. The establishment of goodwill, expiration lists, non-
compete agreements and trade names and the determination of estimated useful lives are primarily based on valuations we receive
from qualified independent appraisers. The calculations of these amounts are based on estimates and assumptions using historical
and projected financial information and recognized valuation methods. Different estimates or assumptions could produce different
results. We carry intangible assets at cost, less accumulated amortization, in the accompanying consolidated balance sheet.
We review all of our intangible assets for impairment periodically (at least annually for goodwill) and whenever events or
changes in business circumstances indicate that the carrying value of the assets may not be recoverable. We perform such
impairment reviews at the division (i.e., reporting unit) level with respect to goodwill and at the business unit level for
amortizable intangible assets. 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 2013, 2012 and 2011, we wrote off $2.2 million, $3.5 million and $4.6 million, respectively, of
amortizable intangible assets primarily related to prior year acquisitions of our brokerage segment, which is included in
amortization expense in the accompanying consolidated statement of earnings. The determinations of impairment indicators and
fair value are based on estimates and assumptions related to the amount and timing of future cash flows and future interest rates.
Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts
reported and disclosed herein.
Income Taxes - Our tax rate reflects the statutory tax rates applicable to our taxable earnings and tax planning in the various
jurisdictions in which we operate. Significant judgment is required in determining the annual effective tax rate and in evaluating
uncertain tax positions. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or
expected to be taken in our tax return. We evaluate our tax positions using a two-step process. The first step involves
recognition. We determine whether it is more likely than not that a tax position will be sustained upon tax examination based
solely on the technical merits of the position. The technical merits of a tax position are derived from both statutory and judicial
authority (legislation and statutes, legislative intent, regulations, rulings and case law) and their applicability to the facts and
circumstances of the position. If a tax position does not meet the “more likely than not” recognition threshold, we do not
recognize the benefit of that position in the financial statements. The second step is measurement. A tax position that meets the
“more likely than not” recognition threshold is measured to determine the amount of benefit to recognize in the financial
statements. The tax position is measured as the largest amount of benefit that has a likelihood of greater than 50% of being
realized upon ultimate resolution with a taxing authority.
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.
Tax law requires certain items to be included in our tax returns at different times than such items are reflected in the financial
statements. As a result, the annual tax expense reflected in our consolidated statements of earnings is different than that reported
in our tax returns. Some of these differences are permanent, such as expenses that are not deductible in our tax returns, and some
differences are temporary and reverse over time, such as depreciation expense and amortization expense deductible for income
tax purposes. Temporary differences create deferred tax assets and liabilities. Deferred tax liabilities generally represent tax
expense recognized in the financial statements for which a tax payment has been deferred, or expense which has been deducted in
the tax return but has not yet been recognized in the financial statements. Deferred tax assets generally represent items that can
be used as a tax deduction or credit in tax returns in future years for which a benefit has already been recorded in the financial
statements.
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.
54
Fair Value of Financial Instruments - 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 classification of a financial instrument within the valuation hierarchy is based upon the transparency of inputs to the
valuation of an asset or liability on the measurement date. The three levels of the hierarchy in order of priority of inputs to the
valuation technique are defined as follows:
Level 1 - Valuations are based on unadjusted quoted prices in active markets for identical financial instruments;
Level 2 - Valuations are based on quoted market prices, other than quoted prices included in Level 1, in markets that are
not active or on inputs that are observable either directly or indirectly for the full term of the financial instrument; and
Level 3 - Valuations are based on pricing or valuation techniques that require inputs that are both unobservable and
significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management’s own
assumptions about the assumptions a market participant would use in pricing the financial instrument.
The level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level
input that is significant to the fair value measure in its entirety.
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, premiums payable to insurance carriers, accrued salaries and bonuses,
accounts payable and other accrued liabilities, unearned fees and income taxes payable, at December 31, 2013 and 2012,
approximate fair value because of the short-term duration of these instruments. See Note 3 to our consolidated financial
statements for the fair values related to the establishment of intangible assets and the establishment and adjustment of earnout
payables. See Note 6 to our consolidated financial statements for the fair values related to borrowings outstanding at
December 31, 2013 and 2012 under our debt agreements. See Note 11 to our consolidated financial statements for the fair values
related to investments at December 31, 2013 and 2012 under our defined benefit pension plan.
Litigation - We are the defendant in various legal actions related to claims, lawsuits and proceedings incident to the nature of our
business. We record liabilities for loss contingencies, including legal costs (such as fees and expenses of external lawyers and
other service providers) to be incurred, when it is probable that a liability has been incurred on or before the balance sheet date
and the amount of the liability can be reasonably estimated. We do not discount such contingent liabilities. To the extent
recovery of such losses and legal costs is probable under our insurance programs, we record estimated recoveries concurrently
with the losses recognized. Significant management judgment is required to estimate the amounts of such contingent liabilities
and the related insurance recoveries. In order to assess our potential liability, we analyze our litigation exposure based on
available information, including consultation with outside counsel handling the defense of these matters. As these liabilities are
uncertain by their nature, the recorded amounts may change due to a variety of different factors, including new developments in,
or changes in approach, such as changing the settlement strategy as applicable to each matter.
Stock-Based Compensation - 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 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. 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 restricted stock units outstanding. Furthermore, we record the liability for withholding amounts to be paid by us
as a reduction to additional paid-in capital when paid.
Cash-settled share-based payments to employees include grants of performance units 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 recognize share-based compensation expense over the requisite service period for awards expected to ultimately vest.
Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture activity differs from original estimates.
Employee Stock Purchase Plan - We have an employee stock purchase plan (which we refer to as the ESPP), under which the
sale of 4.0 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, 2013, 0.5 million shares of our common
stock are reserved for future issuance under the ESPP.
55
Defined Benefit Pension and Other Postretirement Plans - We recognize in our consolidated balance sheet, an asset for our
defined benefit postretirement plans’ overfunded status or a liability for our plans’ underfunded status. We recognize changes in
the funded status of our defined benefit postretirement plans in comprehensive earnings in the year in which the changes occur.
We use December 31 as the measurement date for our plans’ assets and benefit obligations. See Note 11 to our consolidated
financial statements for additional information required to be disclosed related to our defined benefit postretirement plans.
2. Effect of New Accounting Pronouncements
Presentation of Unrecognized Tax Benefits
In July 2013, the Financial Accounting Standards Board (which we refer to as the FASB) issued ASU 2013-11, “Presentation of
an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward
Exists,” which provides explicit guidance on the presentation of certain unrecognized tax benefits in the financial statements that
did not previously exist. The ASU provides that a liability related to an unrecognized tax benefit would be offset against a
deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is
required or expected in the event the uncertain tax position is disallowed. In that case, the liability associated with the
unrecognized tax benefit is presented in the financial statements as a reduction to the related deferred tax asset. In situations in
which a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date under
the tax law of the jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred
tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be
combined with deferred tax assets. This new guidance is effective for annual and interim periods beginning after December 15,
2013. Early adoption is permitted. Management has decided not to adopt this guidance early and has determined that the impact
of the new guidance upon adoption, will not be material to the consolidated financial statements.
Other Comprehensive Income
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220), “Reporting of Amounts Reclassified Out
of Accumulated Other Comprehensive Income,” which requires significant items reclassified out of accumulated other
comprehensive income (which we refer to as AOCI) to net income in their entirety in the same reporting period, to be reported to
show the effect of the reclassifications on the respective line items of the statement where net income is presented. These
reclassifications can be presented either on the face of the statement where net income is presented or in the notes to the financial
statements. For items that are not reclassified to net income in their entirety in the same reporting period, a cross reference to
other disclosures currently required under U.S. GAAP is required in the notes to the consolidated financial statements. The new
guidance also requires companies to report changes in the accumulated balances of each component of AOCI. This new guidance
was effective for annual and interim periods beginning after December 15, 2012. We adopted the new guidance effective
January 1, 2013. The adoption affected the disclosures made in our consolidated financial statements and notes thereto, but did
not have any impact on our results of operations or financial position.
56
3. Business Combinations
During 2013, we acquired substantially all of the net assets of the following firms in exchange for our common stock and/or cash.
These acquisitions have been accounted for using the acquisition method for recording business combinations (in millions except
share data):
Common
Shares
Issued
(000s)
Common
Share
Value
Cash
Paid
Accrued
Liability
Escrow
Deposited
Recorded
Earnout
Payable
Total
Recorded
Purchase
Price
Maximum
Potential
Earnout
Payable
$
-
$
3.4
$
-
$
0.4
$
0.7
$
4.5
$
1.4
Name and Effective
Date of Acquisition
Metzler Brothers
Insurance
February 1, 2013
Advanced Benefit
Advisors, Inc.
April 1, 2013
Property & Commercial
Limited (PCL)
April 1, 2013
Garza Long
Group, LLC
May 1, 2013
Bollinger, Inc. (BOL)
August 1, 2013
Dickinson &
Associates, Inc.
August 1, 2013
Belmont
International (BEL)
September 1, 2013
R.W. Scobie, Inc.
G.S. Levine Insurance
Services, Inc. (GSL)
October 1, 2013
R.J. Dutton Incorporated
October 1, 2013
Employee Benefits
Analysis Corporation
November 1, 2013
Parks Johnson
Agency, LLC
November 1, 2013
Giles Group of
Companies (GGC)
November 14, 2013
Barmore Insurance
Agency, Inc.
December 1, 2013
Bergvall
Marine A.S. (BMA)
December 1, 2013
-
-
-
-
-
-
-
10.9
62.0
4.3
3,177
140.0
157.6
-
-
-
-
10.9
21.7
4.4
7.0
5.5
1.8
413
112
16.8
5.2
148
6.9
-
-
-
95
-
-
-
5.4
387.9
4.4
1.1
-
11.3
57
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
0.1
3.1
0.1
22.0
0.1
2.5
1.5
-
2.7
0.1
0.1
0.1
3.8
0.3
1.2
1.8
12.8
7.0
-
65.1
0.5
4.9
-
-
2.9
2.5
8.5
3.8
1.2
0.6
0.6
319.6
11.0
27.1
16.4
28.8
8.3
7.6
6.1
-
6.7
-
4.8
3.2
5.0
8.0
4.9
5.0
5.2
-
-
391.7
1.6
9.2
7.4
3.5
21.7
11.9
September 1, 2013
223
8.0
Jeffrey Haber &
Michael Fischman
September 20, 2013
-
-
15.5
10.3
Common
Shares
Issued
(000s)
Common
Share
Value
101
-
4.1
-
461
20.5
Name and Effective
Date of Acquisition
Cleaveland Insurance
Group, Inc.
December 1, 2013
The Jenkins Group, Inc.
December 1, 2013
Longfellow Financial,
LLC (LGF)
December 1, 2013
McIntyre Risk
Management,
LLC (MRM)
December 1, 2013
Eleven other acquisitions
completed in 2013
296
77
13.6
3.6
Cash
Paid
Accrued
Liability
Escrow
Deposited
Recorded
Earnout
Payable
Total
Recorded
Purchase
Price
Maximum
Potential
Earnout
Payable
1.5
1.2
7.0
4.3
10.4
-
3.8
-
-
-
0.6
-
0.5
0.2
0.4
1.2
1.0
3.4
2.2
8.6
7.4
6.0
2.7
4.0
31.4
17.0
20.3
23.0
5.5
13.1
5,103
$
223.1
$
719.6
$
3.8
$
39.8
$
50.3
$
1,036.6
$
119.2
Effective November 14, 2013 we acquired the Giles Group of Companies (which we refer to as Giles) headquartered in London,
England. Under the agreement, we purchased all of the outstanding shares of Giles for net cash consideration of approximately
£233.0 million. Giles was the fifth largest independent retail insurance broker in the United Kingdom with over 1,100 employees
operating out of 43 offices in England, Scotland, Wales, Northern Ireland, Isle of Man and the Channel Islands. In 2013, we
recognized a pretax gain of $2.6 million resulting from three foreign currency derivative investment contracts that we executed in
September 2013 and exercised on October 31, 2013 in connection with the signing of the agreement to acquire Giles. This gain
was included in other net revenues in the consolidated statement of earnings.
Common shares issued in connection with acquisitions are valued at closing market prices as of the effective date of the
applicable acquisition. 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.
The fair value of these earnout obligations is based on the present value of the expected future payments to be made to the sellers
of the acquired entities in accordance with the provisions outlined in the respective purchase agreements, which is a Level 3 fair
value measurement. In determining fair value, we estimated the acquired entity’s future performance using financial projections
developed by management for the acquired entity and market participant assumptions that were derived for revenue growth
and/or profitability. Revenue growth rates generally ranged from 2.0% to 12.0% for our 2013 acquisitions. We estimated future
payments using the earnout formula and performance targets specified in each purchase agreement and these financial
projections. We then discounted these payments to present value using a risk-adjusted rate that takes into consideration market-
based rates of return that reflect the ability of the acquired entity to achieve the targets. These discount rates generally ranged
from 8.0% to 9.0% for our 2013 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 2013, 2012 and 2011, we recognized $11.9 million, $9.3 million and $8.3 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 2013, 2012 and 2011 we recognized $10.2 million, $5.9 million and $14.5 million of income,
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 79, 46 and 22 acquisitions, respectively. The aggregate amount of maximum
earnout obligations related to acquisitions made in 2010 and subsequent years was $462.3 million as of December 31, 2013, of
which $162.7 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
2009 and subsequent years was $384.8 million as of December 31, 2012, of which $139.8 million was recorded in the
consolidated balance sheet as of that date.
58
The following is a summary of the estimated fair values of the net assets acquired at the date of each acquisition made in 2013
(in millions):
GSL
GGC
BMA
LGF MRM Acquisitions
Total
Twenty-three
Other
Cash
Other current assets
Fixed assets
Noncurrent assets
Goodwill
Expiration lists
Non-compete
agreements
Trade names
Total assets
acquired
PCL
2.4
$
32.9
2.2
0.4
45.1
25.6
-
0.1
BOL
$
7.6
39.5
2.4
2.3
200.2
132.5
0.4
1.7
108.7
386.6
Current liabilities
Noncurrent liabilities
35.5
8.1
51.1
15.9
BEL
5.3
$
19.1
0.4
-
11.4
14.4
-
-
50.6
20.6
2.9
$
0.4
1.1
0.3
0.9
8.0
20.1
0.1
-
30.9
2.1
-
$
25.9
135.7
4.1
-
301.5
89.8
3.7
-
560.7
149.1
19.9
0.8
$
16.2
0.1
-
13.4
8.8
0.2
-
39.5
15.3
2.5
43.6
67.0
23.5
2.1
169.0
17.8
Total liabilities
assumed
Total net assets
acquired
-$
0.2
-
-
12.9
17.5
0.8
-
-$
4.0
0.2
-
10.7
9.8
0.1
-
$
7.9
12.7
0.8
-
61.8
75.7
$
50.3
261.4
10.5
3.6
665.0
394.2
1.8
-
7.1
1.8
31.4
24.8
160.7
1,393.9
-
-
-
4.5
-
4.5
24.0
5.8
302.2
55.1
29.8
357.3
$
65.1
$
319.6
$
27.1
$
28.8
$
391.7
$
21.7
$
31.4
$
20.3
$
130.9
$
1,036.6
Among other things, these acquisitions allow us to expand into desirable geographic locations, further extend our presence in the
retail and wholesale insurance brokerage services and risk management industries and increase the volume of general services
currently provided. The excess of the purchase price over the estimated fair value of the tangible net assets acquired at the
acquisition date was allocated to goodwill, trade names, expiration lists and non-compete agreements in the amounts of
$664.1 million, $1.8 million, $392.6 million and $7.1 million, respectively, within the brokerage segment and allocated to
goodwill and expiration lists in the amounts of $0.9 million and $1.6 million, respectively, within the risk management segment.
Provisional estimates of fair value are established at the time of the acquisition and are subsequently reviewed within the first
year of operations subsequent to the acquisition date to determine the necessity for adjustments. The fair value of the tangible
assets and liabilities for each applicable acquisition at the acquisition date approximated their carrying values. The fair value of
expiration lists was established using the excess earnings method, which is an income approach based on estimated financial
projections developed by management for each acquired entity using market participant assumptions. Revenue growth and
attrition rates generally ranged from 2.0% to 10.0% and 5.0% to 15.0% for our 2013 acquisitions, respectively, for which a
valuation was performed. We estimate the fair value as the present value of the benefits anticipated from ownership of the
subject customer list in excess of returns required on the investment in contributory assets necessary to realize those benefits. 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 10.5% to 14.5% for
our 2013 acquisitions, for which a valuation was performed. The fair value of non-compete 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 scenarios.
Of the $1.8 million of trade names, $394.2 million of expiration lists and $7.1 million of non-compete agreements related to the
2013 acquisitions, $1.8 million, $287.7 million and $4.6 million, respectively, is not expected to be deductible for income tax
purposes. Accordingly, we recorded a deferred tax liability of $48.4 million, and a corresponding amount of goodwill, in 2013
related to the nondeductible amortizable intangible assets.
During 2012, we issued 425,000 shares of our common stock and paid $3.5 million in cash related to earnout obligations of five
acquisitions made prior to 2009, and recorded additional goodwill of $0.1 million. During 2011, we issued 245,000 shares of our
common stock, paid $8.2 million in cash and accrued $18.3 million in liabilities related to earnout obligations of 19 acquisitions
made prior to 2009, and recorded additional goodwill of $30.0 million.
59
Our consolidated financial statements for the year ended December 31, 2013 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, 2012 (in millions, except per share data):
Total revenues
Net earnings
Basic earnings per share
Diluted earnings per share
Year Ended December 31,
2013
2012
$ 3,461.2
$ 2,903.6
286.3
212.9
2.17
1.69
2.14
1.67
The unaudited pro forma results above have been prepared for comparative purposes only and do not purport to be indicative of
the results of operations which actually would have resulted had these acquisitions occurred at January 1, 2012, nor are they
necessarily indicative of future operating results. Annualized revenues of entities acquired in 2013 totaled approximately
$383.9 million. Total revenues and net earnings recorded in our consolidated statement of earnings for 2013 related to the 2013
acquisitions in the aggregate were $107.4 million and $2.1 million, respectively.
4. Fixed Assets
Major classes of fixed assets consist of the following (in millions):
Office equipment
Furniture and fixtures
Computer equipment
Leasehold improvements
Software
Other
Accumulated depreciation
Net fixed assets
5. Intangible Assets
December 31,
2013
2012
$
16.3
78.3
117.2
77.9
147.6
8.5
$
15.1
74.2
116.7
52.2
102.7
2.9
445.8
(285.4)
363.8
(258.4)
$
160.4
$
105.4
The carrying amount of goodwill at December 31, 2013 and 2012 allocated by domestic and foreign operations is as follows
(in millions):
Brokerage
Risk
Management
Corporate
Total
At December 31, 2013
United States
United Kingdom
Other foreign, principally Australia and Canada
$
1,449.6
595.1
78.2
$
20.2
2.1
-
-
$
-
-
$
1,469.8
597.2
78.2
Total goodwill - net
$
2,122.9
$
22.3
$
-
$
2,145.2
At December 31, 2012
United States
United Kingdom
Other foreign, principally Australia and Canada
$
1,158.1
223.9
69.4
$
19.2
2.1
-
$
-
-
-
$
1,177.3
226.0
69.4
Total goodwill - net
$
1,451.4
$
21.3
$
-
$
1,472.7
60
The changes in the carrying amount of goodwill for 2013 and 2012 are as follows (in millions):
Balance as of January 1, 2012
Goodwill acquired during the year
Goodwill related to earnouts recognized during
the year
Goodwill adjustments related to appraisals
and other acquisition adjustments
Goodwill related to transfers of operations
between segments
Foreign currency translation adjustments
during the year
Balance as of December 31, 2012
Goodwill acquired during the year
Goodwill adjustments related to appraisals
and other acquisition adjustments
Foreign currency translation adjustments
during the year
Brokerage
Risk
Management
Corporate
Total
$
1,136.6
308.1
$
18.7
0.7
-
$
-
$
1,155.3
308.8
0.1
(0.6)
(2.0)
9.2
1,451.4
664.1
3.3
4.1
-
(0.2)
2.0
0.1
21.3
0.9
-
0.1
-
-
-
-
-
-
-
-
0.1
(0.8)
-
9.3
1,472.7
665.0
3.3
4.2
Balance as of December 31, 2013
$
2,122.9
$
22.3
$
-
$
2,145.2
Major classes of amortizable intangible assets consist of the following (in millions):
Expiration lists
Accumulated amortization - expiration lists
Non-compete agreements
Accumulated amortization - non-compete agreements
Trade names
Accumulated amortization - trade names
December 31,
2013
2012
$
1,563.5
(511.3)
$
1,175.0
(390.8)
1,052.2
37.3
(25.9)
11.4
22.1
(6.9)
15.2
784.2
30.9
(23.3)
7.6
23.0
(5.2)
17.8
Net amortizable assets
$
1,078.8
$
809.6
Estimated aggregate amortization expense for each of the next five years is as follows (in millions):
2014
2015
2016
2017
2018
Total
$
146.3
141.1
135.5
126.3
115.0
$
664.2
6. Credit and Other Debt Agreements
Note Purchase Agreement - We are a party to an amended and restated note purchase agreement dated December 19, 2007, with
certain accredited institutional investors, pursuant to which we issued and sold $100.0 million in aggregate principal amount of
our 6.26% Senior Notes, Series A, due August 3, 2014 and $300.0 million in aggregate principal amount of our 6.44% Senior
Notes, Series B, due August 3, 2017, in a private placement. These notes require semi-annual payments of interest that are due in
February and August of each year.
We are a party to a note purchase agreement dated November 30, 2009, with certain accredited institutional investors, pursuant to
which we issued and sold $150.0 million in aggregate principal amount of our 5.85% Senior Notes, Series C, due in three equal
61
installments on November 30, 2016, November 30, 2018 and November 30, 2019, in a private placement. These notes require
semi-annual payments of interest that are due in May and November of each year.
We are a party to a note purchase agreement dated February 10, 2011, with certain accredited institutional investors, pursuant to
which we issued and sold $75.0 million in aggregate principal amount of our 5.18% Senior Notes, Series D, due February 10,
2021 and $50.0 million in aggregate principal amount of our 5.49% Senior Notes, Series E, due February 10, 2023, in a private
placement. These notes require semi-annual payments of interest that are due in February and August of each year.
We are a party to a note purchase agreement dated July 10, 2012, with certain accredited institutional investors, pursuant to which
we issued and sold $50.0 million in aggregate principal amount of our 3.99% Senior Notes, Series F, due July 10, 2020, in a
private placement. These notes require semi-annual payments of interest that are due in January and July of each year.
We are a party to a note purchase agreement dated June 14, 2013, with certain accredited institutional investors, pursuant to
which we issued and sold $200.0 million in aggregate principal amount of our 3.69% Senior Notes, Series G, due June 14, 2022,
in a private placement. These notes require semi-annual payments of interest that are due in June and December of each year.
On December 20, 2013, we entered into a note purchase agreement with certain accredited investors, for a private placement of
$600.0 million of Senior Notes. The agreement provides for three series of notes: Series H is $325.0 million at 4.58% due in
2024, Series I is $175.0 million at 4.73% due in 2026 and Series J is $100.0 million at 4.98% due 2029. Under the agreement,
funding is expected to occur on February 27, 2014. These notes will require semi-annual payments of interest that will be due in
February and August of each year. We will incur approximately $1.3 million of debt acquisition costs that will be capitalized and
amortized on a pro rata basis over the life of the debt.
Under the terms of the note purchase agreements, we may redeem the notes at any time, in whole or in part, at 100% of the
principal amount of such notes being redeemed, together with accrued and unpaid interest and a “make-whole amount”. The
“make-whole amount” is derived from a net present value computation of the remaining scheduled payments of principal and
interest using a discount rate based on the U.S. Treasury yield plus 0.5% and is designed to compensate the purchasers of the
notes for their investment risk in the event prevailing interest rates at the time of prepayment are less favorable than the interest
rates under the notes. We do not currently intend to prepay any of the notes.
The note purchase agreements contain customary provisions for transactions of this type, including representations and warranties
regarding us and our subsidiaries and various financial covenants, including covenants that require us to maintain specified
financial ratios. We were in compliance with these covenants as of December 31, 2013. The note purchase agreements also
provide customary events of default, generally with corresponding grace periods, including, without limitation, payment defaults
with respect to the notes, covenant defaults, cross-defaults to other agreements evidencing our or our subsidiaries’ indebtedness,
certain judgments against us or our subsidiaries and events of bankruptcy involving us or our material subsidiaries.
The notes issued under the note purchase agreement are senior unsecured obligations of ours and rank equal in right of payment
with our Credit Agreement discussed below.
Credit Agreement - On September 19, 2013, we entered into a $600.0 million unsecured multicurrency credit agreement (which
we refer to as the Credit Agreement), which expires on September 19, 2018, with a group of fifteen financial institutions. The
Credit Agreement replaced a $500.0 million unsecured revolving credit facility (that was scheduled to expire on July 14, 2014),
which was terminated upon the execution of the Credit Agreement. All indebtedness, liabilities and obligations outstanding under
the previous facility were fully paid and satisfied, except for the letters of credit (which we refer to as LOCs) which became
LOCs under the Credit Agreement. We incurred no early termination fees in connection with replacing the previous credit
facility.
The Credit Agreement provides for a revolving credit commitment of up to $600.0 million, of which up to $75.0 million may be
used for issuances of standby or commercial letters of credit and up to $50.0 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 up to a maximum aggregate revolving credit commitment of $850.0 million.
The Credit Agreement provides that we may elect that each borrowing in U.S. dollars be either base rate loans or Eurocurrency
loans, as defined in the Credit Agreement. All loans denominated in currencies other than U.S. dollars will be Eurocurrency
loans. Interest rates on base rate loans and outstanding drawings on letters of credit in U.S. dollars under the Credit Agreement
are based on the base rate, as defined in the Credit Agreement. Interest rates on Eurocurrency loans or outstanding drawings on
letters of credit in currencies other than U.S. dollars are based on an adjusted London Interbank Offered Rate (which we refer to
as LIBOR), as defined in the Credit Agreement, plus a margin of 0.85%, 0.95%, 1.05%, 1.25% or 1.45%, depending on the
financial leverage ratio we maintain. Interest rates on swing loans are based, at our election, on either the base rate, as defined in
the Credit Agreement, or such alternate rate as may be quoted by the lead lender. The annual facility fee related to the Credit
Agreement is 0.15%, 0.175%, 0.20%, 0.25% or 0.30% of the used and unused portions of the revolving credit commitment,
depending on the financial leverage ratio we maintain. In connection with entering into the Credit Agreement, we incurred
approximately $2.1 million of debt acquisition costs that were capitalized and will be amortized on a pro rata basis over the term
of the Credit Agreement.
62
The terms of the Credit Agreement include various financial covenants, including covenants that require us to maintain specified
levels of net worth and financial leverage ratios. We were in compliance with these covenants as of December 31, 2013. The
Credit Agreement also includes customary events of default, with corresponding grace periods, including, without limitation,
payment defaults, cross-defaults to other agreements evidencing indebtedness and bankruptcy-related defaults.
At December 31, 2013, $16.0 million of letters of credit (for which we had $9.0 million of liabilities recorded at December 31,
2013) were outstanding under the Credit Agreement. See Note 13 to our consolidated financial statements for a discussion of the
letters of credit. There were $530.5 million of borrowings outstanding under the Credit Agreement at December 31, 2013.
Accordingly, at December 31, 2013, $53.5 million remained available for potential borrowings, of which $53.5 million may be in
the form of additional letters of credit.
The following is a summary of our corporate debt (in millions):
Note Purchase Agreements:
Semi-annual payments of interest, fixed rate of 6.26%, balloon due 2014
Semi-annual payments of interest, fixed rate of 6.44%, balloon due 2017
Semi-annual payments of interest, fixed rate of 5.85%, $50.0 million due
in 2016, 2018 and 2019
Semi-annual payments of interest, fixed rate of 5.18%, balloon due 2021
Semi-annual payments of interest, fixed rate of 5.49%, balloon due 2023
Semi-annual payments of interest, fixed rate of 3.99%, balloon due 2020
Semi-annual payments of interest, fixed rate of 3.69%, balloon due 2022
Total Note Purchase Agreements
Credit Agreement:
Periodic payments of interest and principal, prime or LIBOR plus up
to 1.45%, expires September 19, 2018
December 31,
2013
2012
$
100.0
300.0
$
100.0
300.0
150.0
75.0
50.0
50.0
200.0
925.0
150.0
75.0
50.0
50.0
-
725.0
530.5
129.0
$
1,455.5
$
854.0
The estimated fair value of the $925.0 million in debt under the note purchase agreements at December 31, 2013 was
$979.4 million due to the long-term duration and fixed interest rates associated with these debt obligations. No active or
observable market exists for our private long-term debt. Therefore, the estimated fair value of this debt is based on discounted
future cash flows, which is a Level 3 fair value measurement, using current interest rates available for debt with similar terms and
remaining maturities. To estimate an all-in interest rate for discounting, we obtain market quotes for notes with the same terms as
ours, which we have deemed to be the closest approximation of current market rates. We have not adjusted this rate for risk
profile changes, covenant issues or credit rating changes. The estimated fair value of the $530.5 million of borrowings
outstanding under our Credit Agreement approximate their carrying value due to their short-term duration and variable interest
rates.
7. Earnings per Share
The following table sets forth the computation of basic and diluted net earnings per share (in millions, except per share data):
Net earnings
Weighted average number of common shares outstanding
Dilutive effect of stock options using the treasury stock method
Weighted average number of common and common equivalent
shares outstanding
Basic net earnings per share
Diluted net earnings per share:
Year Ended December 31,
2013
2012
2011
$
268.6
$
195.0
$
144.1
128.9
1.6
130.5
121.0
1.5
122.5
111.7
0.8
112.5
$
2.08
$
1.61
$
1.29
$
2.06
$
1.59
$
1.28
Options to purchase 1.3 million, 1.1 million and 3.8 million shares of our common stock were outstanding at December 31, 2013,
2012 and 2011, respectively, but were not included in the computation of the dilutive effect of stock options for the year then
ended. These stock options were excluded from the computation because the options’ exercise prices were greater than the
63
average market price of our common shares during the respective period and, therefore, would be anti-dilutive to earnings per
share under the treasury stock method.
8. Stock Option Plans
Long-Term Incentive Plan
On May 10, 2011, our stockholders approved the Arthur J. Gallagher 2011 Long-Term Incentive Plan (which we refer to as the
LTIP), which replaced our previous stockholder-approved Arthur J. Gallagher & Co. 2009 Long-Term Incentive Plan (which we
refer to as the 2009 LTIP). The LTIP term began May 10, 2011 and it terminates on the date of the annual meeting of
stockholders that occurs during 2018, unless terminated earlier by our board of directors. All of our officers, employees and non-
employee directors are eligible to receive awards under the LTIP. The compensation committee of our board of directors
determines the participants under the LTIP. The LTIP provides for non-qualified and incentive stock options, stock appreciation
rights, restricted stock, restricted stock units and performance units, any or all of which may be made contingent upon the
achievement of performance criteria. A stock appreciation right entitles the holder to receive, upon exercise and subject to
withholding taxes, cash or shares of our common stock (which may be restricted stock) with a value equal to the difference
between the fair market value of our common stock on the exercise date and the base price of the stock appreciation right.
Subject to the LTIP limits, the compensation committee has the discretionary authority to determine the size of an award.
Shares of our common stock available for issuance under the LTIP include authorized and unissued shares of common stock or
authorized and issued shares of common stock reacquired and held as treasury shares or otherwise, or a combination thereof. The
number of available shares will be reduced by the aggregate number of shares that become subject to outstanding awards granted
under the LTIP. To the extent that shares subject to an outstanding award granted under either the LTIP or the 2009 LTIP are not
issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or by reason of the settlement
of such award in cash, then such shares will again be available for grant under the LTIP. Shares that are subject to a stock
appreciation right and were not issued upon the net settlement or net exercise of such stock appreciation right, shares that are used
to pay the exercise price of an option, delivered to or withheld by us to pay withholding taxes, and shares that are purchased on
the open market with the proceeds of an option exercise, may not again be made available for issuance.
The maximum number of shares available under the LTIP for restricted stock, restricted stock unit awards and performance unit
awards settled with stock (i.e., all awards other than stock options and stock appreciation rights) is 0.5 million as of December 31,
2013. To the extent necessary to be qualified performance-based compensation under Section 162(m) of the Internal Revenue
Code (which we refer to as the IRC); (i) the maximum number of shares with respect to which options or stock appreciation rights
or a combination thereof that may be granted during any fiscal year to any person is 200,000; (ii) the maximum number of shares
with respect to which performance-based restricted stock or restricted stock units that may be granted during any fiscal year to
any person is 100,000; and (iii) the maximum amount that may be payable with respect to performance units granted during any
fiscal year to any person is $3.0 million.
The LTIP provides for the grant of stock options, which may be either tax-qualified incentive stock options or non-qualified
options and stock appreciation rights. The compensation committee determines the period for the exercise of a non-qualified
stock option, tax-qualified incentive stock option or stock appreciation right, provided that no option or stock appreciation right
can be exercised later than seven years after its date of grant. The exercise price of a non-qualified stock option or tax-qualified
incentive stock option and the base price of a stock appreciation right cannot be less than 100% of the fair market value of a share
of our common stock on the date of grant, provided that the base price of a stock appreciation right granted in tandem with an
option will be the exercise price of the related option.
Upon exercise, the option exercise price may be paid in cash, by the delivery of previously owned shares of our common stock,
through a net-exercise arrangement, or through a broker-assisted cashless exercise arrangement. The compensation committee
determines all of the terms relating to the exercise, cancellation or other disposition of an option or stock appreciation right upon
a termination of employment, whether by reason of disability, retirement, death or any other reason. Stock option and stock
appreciation right awards under the LTIP are non-transferable.
In addition to any discretionary stock options, each non-employee director is eligible under the LTIP to receive all or part of his
or her annual retainer in the form of stock options, in lieu of cash. An option granted in lieu of a cash retainer will have an
exercise price per share equal to the fair market value of a share of our common stock on the date the option is granted. The
number of shares of common stock subject to each such option grant has a fair market value as of the date of the grant equal to a
multiple of the forgone retainer. The board of directors determines the multiple from time to time based on the Black-Scholes
model. We calculate the number of shares by multiplying the forgone cash retainer amount by the designated multiple, and then
dividing that amount by the value of a share of common stock on the date of grant. Such options become exercisable in equal
installments over the four quarters succeeding the date of grant and remain exercisable until the seventh anniversary of the date of
grant.
On March 13, 2013, the compensation committee granted 1,665,000 options 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 2016, 2017 and 2018, respectively. On
March 16, 2012, the compensation committee granted 1,355,000 options 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 2015, 2016 and 2017, respectively. On
64
March 8, 2011, the compensation committee granted 851,000 options under the 2009 LTIP to our officers and key employees that
become exercisable at the rate of 20% per year on the anniversary date of the grant. The 2013, 2012 and 2011 options expire
seven years from the date of grant, or earlier in the event of termination of the employee. For certain of our executive officers age
55 or older, stock options awarded in 2013 are no longer subject to forfeiture upon such officers’ departure from the company
after two years from the date of grant.
Prior Stock Option Plans
Prior to 2009, we issued stock options under four stock option-based employee compensation plans. In May 2008, all of these
plans expired. Under the expired plans, we granted both incentive and nonqualified stock options to our officers and key
employees. Most options granted under the incentive plan prior to 2007 become exercisable at the rate of 10% per year beginning
the calendar year after the date of grant. Most options granted under the nonqualified plan prior to 2007 become exercisable at
the rate of 10% per year beginning the calendar year after the date of grant or provided for accelerated vesting to 100% in the
event of death, disability or retirement (if the retirement eligible age requirement is met). Options granted prior to 2009 expire
ten years from the date of grant, or earlier in the event of termination of the employee (if the retirement eligible age requirement
is not met).
Other Information
All of our stock option plans provide for the immediate vesting of all outstanding stock option grants in the event of a change in
control of our company, as defined in the applicable plan documents.
During 2013, 2012 and 2011, we recognized $7.7 million, $7.2 million and $7.1 million, respectively, of compensation expense
related to our stock option grants.
For purposes of expense recognition in 2013, 2012 and 2011, 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:
Expected dividend yield
Expected risk-free interest rate
Volatility
Expected life (in years)
Year Ended December 31,
2012
2011
2013
3.5%
1.2%
29.6%
6.0
4.0%
1.2%
26.9%
5.0
4.5%
2.7%
26.8%
6.0
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. Because our employee and director stock options have characteristics significantly
different from those of traded options, and because changes in the selective input assumptions can materially affect the fair value
estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of
our employee and non-employee director stock options. The weighted average fair value per option for all options granted during
2013, 2012 and 2011, as determined on the grant date using the Black-Scholes option pricing model, was $7.51, $5.49 and $5.25,
respectively.
The following is a summary of our stock option activity and related information for 2013, 2012 and 2011 (in millions, except
exercise price and year data):
Year Ended December 31, 2013
Beginning balance
Granted
Exercised
Forfeited or canceled
Ending balance
Exercisable at end of year
Ending vested and expected to vest
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
3.62
2.15
3.59
$
129.4
$
72.5
$
128.3
Weighted
Average
Exercise
Price
$
28.80
39.17
27.11
26.01
$
31.35
$
27.64
$
31.28
Shares
Under
Option
9.0
1.7
(2.3)
(0.1)
8.3
3.8
8.2
65
Year Ended December 31, 2012
Beginning balance
Granted
Exercised
Forfeited or canceled
Ending balance
Exercisable at end of year
Ending vested and expected to vest
Year Ended December 31, 2011
Beginning balance
Granted
Exercised
Forfeited or canceled
Ending balance
Exercisable at end of year
Ending vested and expected to vest
Shares
Under
Weighted
Average
Exercise
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
10.6
1.4
(2.8)
(0.2)
9.0
5.1
8.9
12.5
0.9
(2.6)
(0.2)
10.6
6.8
10.5
$
27.20
35.71
26.14
29.46
$
28.80
$
27.50
$
28.76
$
26.71
30.95
25.87
29.03
$
27.20
$
27.10
$
27.20
3.41
2.52
3.39
$
53.9
$
36.3
$
53.8
3.42
2.83
3.41
$
66.3
$
43.2
$
66.1
Options with respect to 8.0 million shares (less any shares of restricted stock issued under the LTIP - see Note 10 to our
consolidated financial statements) were available for grant under the LTIP at December 31, 2013.
The total intrinsic value of options exercised during 2013, 2012 and 2011 amounted to $32.0 million, $26.0 million and
$10.8 million, respectively. At December 31, 2013, we had approximately $20.7 million of total unrecognized compensation cost
related to nonvested options. We expect to recognize that cost over a weighted average period of approximately four years.
Other information regarding stock options outstanding and exercisable at December 31, 2013 is summarized as follows
(in millions, except exercise price and year data):
Options Exercisable
Options Outstanding
Weighted
Average
Remaining
Contractual
Term
(in years)
Number
Outstanding
Weighted
Average
Exercise
Price
Number
Exercisable
2.8
2.3
1.5
-
1.7
8.3
2.53
2.34
4.71
5.58
6.20
3.62
$
25.86
29.74
35.43
35.95
39.17
$
31.35
2.0
1.6
0.2
-
-
3.8
Weighted
Average
Exercise
Price
$
25.86
29.43
32.97
-
-
$
27.64
Range of Exercise Prices
$
10.58
27.35
31.24
35.95
39.17
$
10.58
-
-
-
-
-
-
$
27.25
30.95
35.71
35.95
39.17
$
39.17
9. Deferred Compensation
We have a Deferred Equity Participation Plan, which is a non-qualified plan that generally provides for distributions to certain of
our key executives when they reach age 62 (or the one-year anniversary of the date of the grant for participants over the age of 61
as of the grant date) or upon or after their actual retirement. Under the provisions of the plan, we typically contribute shares of
our common stock or cash, in an amount approved by the compensation committee, to a rabbi trust on behalf of the executives
participating in the plan. Alternatively, we may contribute cash to the rabbi trust 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.
Distributions under the plan may not normally be made until the participant reaches age 62 (or the one-year anniversary of the
66
date of the grant for participants over the age of 61 as of the grant date) and are subject to forfeiture in the event of voluntary
termination of employment prior to then. All contributions to the plan deemed to be invested in shares of our common stock are
distributed in the form of our common stock and all other distributions are paid in cash.
Our common stock that is issued to or purchased by the rabbi trust as a contribution under the Plan is valued at historical cost,
which equals its fair market value at the date of grant or date of purchase. When common stock is issued, we record an unearned
deferred compensation obligation as a reduction of capital in excess of par value in the accompanying consolidated balance sheet,
which is amortized to compensation expense ratably over the vesting period of the participants. Future changes in the fair market
value of our common stock owed to the participants do not have any impact on the amounts recorded in our consolidated financial
statements.
In the first quarter of each of 2013, 2012 and 2011, the compensation committee approved $8.0 million, $7.3 million and
$6.5 million, respectively, of cash awards in the aggregate to certain key executives under the Deferred Equity Participation Plan
that were contributed to the rabbi trust in the second quarter of 2013 and the first quarters of 2012 and 2011, respectively. The
fair value of the funded cash award assets at December 31, 2012 was $41.6 million and has been included in other noncurrent
assets in the accompanying consolidated balance sheet. In the second quarter of 2013, we instructed the trustee for the Plan to
liquidate all investments held under the Plan, other than our common stock, and use the proceeds to purchase additional shares of
our common stock on the open market. As a result, the Plan sold all of the funded cash award assets and purchased 1.2 million
shares of our common stock at an aggregate cost of $52.4 million during the second quarter of 2013. During 2013, 2012 and
2011, we charged $7.2 million, $5.4 million and $4.6 million, respectively, to compensation expense related to these awards.
At December 31, 2013, and 2012, we recorded $26.3 million (related to 2.1 million shares) and $5.6 million (related to
0.8 million shares), respectively, of unearned deferred compensation as an offset to capital in excess of par value in the
accompanying consolidated balance sheet. The total intrinsic value of our unvested common stock under the plan at
December 31, 2013 and 2012 was $96.4 million and $21.1 million, respectively. During 2013, 2012 and 2011, cash and equity
awards with an aggregate fair value of $1.4 million, $0.7 million and $0.5 million, respectively, were vested and distributed to
employees under this plan.
10. Restricted Stock and Cash Awards
Restricted Stock Awards
As discussed in Note 8 to our consolidated financial statements, on May 10, 2011, our stockholders approved the LTIP, which
replaced our previous stockholder-approved 2009 LTIP. The LTIP provides for the grant of a stock award either as restricted
stock or as restricted stock units. 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 compensation committee may grant unrestricted shares of
common stock or units representing the right to receive shares of common stock to employees who have attained age 62.
The agreements awarding restricted stock units 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 1.2 million. At December 31, 2013, 0.5 million shares were available for grant under the LTIP for such
awards.
Prior to May 12, 2009, we had a restricted stock plan for our directors, officers and certain other employees, which was
superseded by the 2009 LTIP. Under the provisions of that plan, we were authorized to issue 4.0 million restricted shares or
related stock units of our common stock. The compensation committee was responsible for the administration of the plan. Each
award granted under the plan represented a right of the holder of the award to receive shares of our common stock, cash or a
combination of shares and cash, subject to the holder’s continued employment with us for a period of time after the date the
award is granted. The compensation committee determined each recipient of an award under the plan, the number of shares of
common stock subject to such award and the period of continued employment required for the vesting of such award.
In 2013, 2012 and 2011, we granted 362,500, 352,000 and 224,000 units, respectively, of our common stock to employees under
the LTIP, 2009 LTIP or restricted stock plan, as applicable, with an aggregate fair value of $14.3 million, $12.6 million and
$6.9 million, respectively, at the date of grant.
The 2013, 2012 and 2011 restricted stock awards (consisting of restricted stock or restricted stock units) vest as follows: 345,000
shares granted in first quarter 2013, 332,000 shares granted in first quarter 2012 and 200,000 shares granted in first quarter 2011,
vest in full based on continued employment through March 13, 2017, March 16, 2016 and March 8, 2015, respectively, while the
other 2013, 2012 and 2011 restricted stock awards generally vest annually on a pro rata basis.
67
The vesting periods of the 2013, 2012 and 2011 restricted stock awards are as follows (in actual shares):
Vesting Period
One year
Four years
Five years
Total shares granted
2013
19,375
345,000
5,600
369,975
Shares Granted
2012
20,000
332,000
-
352,000
2011
20,000
200,000
4,000
224,000
We account for restricted stock at historical cost, which equals its fair market value at the date of grant. When restricted shares
are issued, we record an unearned restricted stock obligation as a reduction of capital in excess of par value in the accompanying
consolidated balance sheet, 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 2013, 2012 and 2011, we charged $9.8 million, $7.1 million and
$5.5 million, respectively, to compensation expense related to restricted stock awards granted in 2006 through 2013. The total
intrinsic value of unvested restricted stock at December 31, 2013 and 2012 was $49.5 million and $32.5 million, respectively.
Cash Awards
On March 13, 2013, pursuant to our Performance Unit Program (which we refer to as the Program), the compensation committee
approved provisional cash awards of $10.5 million in the aggregate for future grants to our officers and key employees that are
denominated in units (269,000 units in the aggregate), each of which was equivalent to the value of one share of our common
stock on the date the provisional award was approved. The Program consists of a one-year performance period based on our
financial performance and a two-year vesting period. At the discretion of the compensation committee and determined based on
our performance, the eligible officer or key employee will be granted a percentage of the provisional cash award units that
equates to the EBITAC growth achieved (as defined in the Program). At the end of the performance period, eligible participants
will be granted a number of units based on achievement of the performance goal and subject to approval by the compensation
committee. Granted units for the 2013 provisional award will fully vest based on continuous employment through January 1,
2016. For certain of our executive officers age 55 or older, awards granted under the Program in 2013 are no longer subject to
forfeiture upon such officers’ departure from the company after two years from the date of grant. The ultimate award value will
be equal to the trailing twelve-month stock price on December 31, 2015, multiplied by the number of units subject to the award,
but limited to between 0.5 and 1.5 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 2016. 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 2013 related to the 2013 provisional
award under the Program. Based on company performance for 2013, we expect to grant 263,000 units under the Program in first
quarter 2014 that will fully vest on January 1, 2016.
On March 16, 2012, pursuant to the Program, the compensation committee approved the provisional cash awards of $13.1 million
in the aggregate for future grants to our officers and key employees that are denominated in units (368,000 units in the aggregate),
each of which was equivalent to the value of one share of our common stock on the date the provisional award was approved.
Terms of the 2012 provisional award were similar to the terms discussed above for the 2013 provisional award. Based on our
performance for 2012, we granted 365,000 units under the Program in the first quarter of 2013 that will fully vest on January 1,
2015. During 2013, we charged $7.6 million to compensation expense related to these awards.
On March 8, 2011, pursuant to the Program, the compensation committee approved the provisional cash awards of $14.4 million
in the aggregate for future grants to our officers and key employees that are denominated in units (464,000 units in the aggregate),
each of which is equivalent to the value of one share of our common stock on the date the provisional award was approved.
Terms of the 2011 provisional award were similar to the terms discussed above for the 2012 provisional award. Based on our
performance for 2011, we granted 432,000 units under the Program in the first quarter of 2012 that will fully vest on January 1,
2014. During 2013 and 2012, we charged $10.1 million and $7.5 million, respectively, to compensation expense related to these
awards.
During 2012, cash awards related to the 2009 provisional award with an aggregate fair value of $26.5 million (1.1 million units in
the aggregate) were vested and distributed to employees under the Program. No cash awards were vested or distributed during
2011 related to the 2008 provisional award because, based on our performance for 2008, we did not grant any units in 2009
related to the 2008 provisional award under the Program.
68
11. Retirement Plans
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, 2013 and 2012. 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):
Change in pension benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Net actuarial (gain) loss
Benefits paid
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Contributions by Gallagher
Benefits paid
Fair value of plan assets at end of year
Funded status of the plan (underfunded)
Amounts recognized in the consolidated balance sheet consist of:
Noncurrent liabilities - accrued benefit liability
Accumulated other comprehensive loss - net actuarial loss
Net amount included in retained earnings
Year Ended December 31,
2013
2012
$
292.0
0.6
11.7
(22.4)
(9.4)
$
267.1
0.4
11.8
20.9
(8.2)
$
272.5
$
292.0
$
227.4
30.6
6.3
(9.4)
$
202.9
25.5
7.2
(8.2)
$
254.9
$
227.4
$
(17.6)
$
(64.6)
$
(17.6)
47.0
$
(64.6)
90.9
$
29.4
$
26.3
The components of the net periodic pension benefit cost for the plan and other changes in plan assets and obligations recognized
in other comprehensive earnings consist of the following (in millions):
Year Ended December 31,
2012
2013
2011
Net periodic pension cost (earnings):
Service cost
Interest cost on benefit obligation
Expected return on plan assets
Amortization of net loss
Net periodic benefit cost (earnings)
Other changes in plan assets and obligations recognized in other
comprehensive earnings:
Net (gain) loss incurred
Amortization of net loss
Total recognized in other comprehensive (earnings) loss
Total recognized in net periodic pension cost (earnings) and other
comprehensive (earnings) loss
Estimated amortization for the following year:
Amortization of net loss
69
$
0.6
11.7
(17.0)
7.9
$
0.4
11.8
(15.2)
7.2
$
0.4
11.9
(14.9)
1.6
3.2
4.2
(1.0)
(36.0)
(7.9)
(43.9)
10.6
(7.2)
3.4
53.8
(1.6)
52.2
$
(40.7)
$
7.6
$
51.2
$
2.4
$
7.7
$
2.3
The following weighted average assumptions were used at December 31 in determining the plan’s pension benefit obligation:
Discount rate
Weighted average expected long-term rate of return on plan assets
December 31,
2013
2012
4.75%
7.50%
4.00%
7.50%
The following weighted average assumptions were used at January 1 in determining the plan’s net periodic pension benefit cost:
Year Ended December 31,
2012
2013
2011
Discount rate
Weighted average expected long-term rate of return on plan assets
4.00%
7.50%
4.50%
7.50%
5.50%
7.50%
The following benefit payments are expected to be paid by the plan (in millions):
2014
2015
2016
2017
2018
Years 2019 to 2023
$
10.1
11.0
11.8
12.6
13.3
79.0
The following is a summary of the plan’s weighted average asset allocations at December 31 by asset category:
Asset Category
Equity securities
Debt securities
Real estate
Total
December 31,
2013
2012
69.0%
24.0%
7.0%
66.0%
27.0%
7.0%
100.0%
100.0%
Plan assets are invested in various pooled separate accounts under annuity contracts managed by two life insurance carriers. 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 return
assumptions for all of the asset classes in which the plan was invested at December 31, 2013 and 2012. The ten-year return
assumptions used in the valuation were based on data provided by the plan’s external investment advisors.
The following is a summary of the plan’s assets carried at fair value as of December 31 by level within the fair value hierarchy
(in millions):
Fair Value Hierarchy
Level 1
Level 2
Level 3
Total fair value
December 31,
2013
2012
-
$
158.8
96.1
$
-
136.3
91.1
$
254.9
$
227.4
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 carrier 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 carrier. 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
70
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.
The following is a reconciliation of the beginning and ending balances for the Level 3 assets of the plan measured at fair value
(in millions):
Fair value at January 1
Settlements
Unrealized gains
Fair value at December 31
Year Ended December 31,
2013
2012
$
91.1
-
5.0
$
79.6
-
11.5
$
96.1
$
91.1
We were not required under the Internal Revenue Code (which we refer to as IRC) to make any minimum contributions to the
plan for each of the 2013 and 2012 plan years. We were required under the IRC to make minimum contributions of $0.3 million
to the plan for the 2011 plan year. This level of required funding is based on the plan being frozen and the aggregate amount of
our historical funding. During 2013, 2012 and 2011, we made discretionary contributions of $6.3 million, $7.2 million and
$7.2 million, respectively, to the plan.
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 contributed $36.8 million, $33.0 million and $30.5 million to the plan in 2013, 2012 and 2011, respectively.
We also have a nonqualified deferred compensation plan, the Supplemental Savings and Thrift Plan, for certain employees who,
due to Internal Revenue Service (which we refer to as the 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 contributed $2.8 million, $2.5 million and
$2.1 million to a rabbi trust maintained under the plan in 2013, 2012 and 2011, respectively. The fair value of the assets in the
plan’s rabbi trust at December 31, 2013 and 2012, including employee contributions and investment earnings, was $148.2 million
and $116.7 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.
We also have several foreign benefit plans, the largest of which is a defined contribution plan that provides for us to make
contributions of 5.0% of eligible compensation. In addition, the plan allows for voluntary contributions by U.K. employees,
which we match 100%, up to a maximum of an additional 5.0% of eligible compensation. Net expense for foreign retirement
plans amounted to $18.1 million, $16.0 million and $12.3 million in 2013, 2012 and 2011, respectively.
In 1992, we amended our health benefits plan to eliminate retiree coverage, except for retirees and those employees who had
already attained a specified age and length of service at the time of the amendment. The retiree health plan is contributory, with
contributions adjusted annually, and is funded on a pay-as-you-go basis. The postretirement benefit obligation and the unfunded
status of the plan as of December 31, 2013 and 2012 were $3.1 million and $3.1 million, respectively. The net periodic
postretirement benefit (income) cost of the plan amounted to ($0.5 million), ($0.1 million) and $0.1 million in 2013, 2012 and
2011, respectively.
71
12. Investments
The following is a summary of our investments and the related funding commitments (in millions):
Chem-Mod LLC
Chem-Mod International LLC
C-Quest Technology LLC
Clean-coal investments:
Non-controlling interest in three limited liability companies
that own seven 2009 Era Clean Coal Plants
Controlling interest in three limited liability companies
that own seven 2009 Era Clean Coal Plants
Non-controlling interest in six limited liability
companies that own five 2011 Era Clean Coal Plants
Controlling interest in six limited liability companies
that own eleven 2011 Era Clean Coal Plants
Controlling interest in a limited liability company
that owns four 2011 Era Clean Coal Plants
Notes receivable and interest from co-investor
related to the sales of three 2009 Era Plants
Other investments
Total investments
December 31, 2013
Assets
Funding
Commitments
December 31,
2012
Assets
$
4.0
$
-
$
4.0
2.0
2.0
4.5
13.8
12.1
46.0
2.3
-
3.7
-
-
0.6
2.7
-
2.7
-
-
5.4
2.0
-
2.8
6.3
13.2
9.2
5.1
8.5
3.0
$
90.4
$
11.4
$
54.1
Chem-Mod LLC - At December 31, 2013, we had a 46.54% controlling interest in Chem-Mod. Chem-Mod possesses the
exclusive marketing rights in the U.S. and Canada, for technologies used to reduce emissions created during the combustion of
coal. The refined coal production plants discussed below, as well as those owned by other unrelated parties, license and use
Chem-Mod’s proprietary technologies, The Chem-Mod™ Solution, in the production of refined coal. The Chem-Mod™ Solution
uses a dual injection sorbent system to reduce mercury, sulfur dioxide and other emissions at coal-fired power plants.
We believe that the application of The Chem-Mod™ Solution qualifies for refined coal tax credits under IRC Section 45 when
used with refined coal production plants placed in service by December 31, 2011 or 2009. Chem-Mod 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 is determined to be a VIE. We are the controlling manager of Chem-Mod and therefore consolidate its operations
into our consolidated financial statements. At December 31, 2013, total assets and total liabilities of this VIE included in our
consolidated balance sheet were $8.0 million and $0.8 million, respectively. For 2013, total revenues and expenses were
$37.9 million and $21.2 million (including non-controlling interest of $19.2 million), respectively. We are under no obligation to
fund Chem-Mod’s operations in the future.
Chem-Mod International LLC - At December 31, 2013, we held a 31.52% non-controlling ownership interest in Chem-Mod
International. Chem-Mod International has the rights to market The Chem-Mod™ Solution in countries other than the U.S. and
Canada. Such marketing activity has been limited to date.
C-Quest Technology LLC - At December 31, 2013, we held a non-controlling 8% interest in C-Quest’s global operation.
C-Quest possesses rights, information and technology for the reduction of carbon dioxide emissions created by burning fossil
fuels. Thus far, C-Quest’s operations have been limited to laboratory testing. C-Quest is determined to be a VIE, but due to our
lack of control over the operation of C-Quest, we do not consolidate this investment into our consolidated financial statements.
We also have options to acquire an additional 19% interest in C-Quest’s global operations for $9.5 million at any time on or prior
to August 15, 2016. On August 1, 2013, we loaned the majority owner $2.0 million at a 2% interest rate, which matures on
May 15, 2014. The loan can be paid in cash or by delivery of an additional 4% ownership interest in C-Quest’s global operations.
If the loan is paid by delivery of the additional 4% ownership interest, our option would be reduced to 15% and the remaining
purchase price would be reduced to $7.5 million.
72
Clean Coal Investments -
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. 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 fourteen plants placed in service prior to
December 31, 2009 (which we refer to as the 2009 Era Plants) can receive tax credits through 2019 and the twenty plants
placed in service prior to December 31, 2011 (which we refer to as the 2011 Era Plants) can receive tax credits through 2021.
On March 1, 2013, we purchased an additional ownership interest in twelve of the 2009 Era Plants from one of the co-
investors. For nine of the plants, our ownership increased from 24.5% to 49.5%. Our investment in these plants had been
accounted for under the equity method of accounting and will continue to be accounted for under the equity method. For
three of the plants, our ownership went from 25.0% to 60.0%. Our investment in these plants had been accounted for under
the equity method of accounting. As of March 1, 2013, we consolidated the operations of the limited liability company that
owns these three plants. For 2013, total revenues and expenses recorded in our consolidated statement of earnings related to
this acquisition were $128.3 million and $133.5 million, respectively.
Our purchase price for the additional ownership interests in these twelve plants was the assumption of the promissory note
that we received as consideration for the co-investor’s purchase of ownership interests in three of the 2009 Era Plants on
March 1, 2010, which had a carrying value, including accrued interest, of $8.0 million at March 1, 2013, plus the payment of
cash and other consideration of $5.0 million. We recognized a gain of $9.6 million, which included the increase in fair value
of our prior 25% equity interest in the limited liability company upon the acquisition of the additional 35% equity interest,
and recorded $26.3 million of fixed and other amortizable intangible assets and $5.0 million of other assets in connection
with this transaction. The carrying value of our prior non-controlling interest in the limited liability company was
$4.8 million as of the acquisition date. The fair value of our prior non-controlling interest in the limited liability company
was determined by allocating, on a pro rata basis, the fair value of the limited liability company as adjusted for our lack of
control in our prior ownership position. We determined the fair value of the limited liability company based on provisional
estimates of fair value using similar valuation techniques to those discussed in Note 3 to these consolidated financial
statements.
On September 1, 2013, we purchased a 99% interest in a limited liability company that has ownership interests in four
limited liability companies that own five 2011 Era Plants. The purchase price was $4.0 million in cash plus a $10.0 million
note with 3% interest due in installments through December 19, 2021. Total revenues and expenses recorded in our
consolidated statement of earnings, for 2013 related to the acquisition, were $33.7 million and $36.9 million, respectively.
On December 13, 2013, we purchased a co-investor’s 50.5% interest in one refined fuel plant for $2.5 million in cash. After
this transaction, we own 100% of this plant and consolidate its results. Total revenues and expenses recorded in our
consolidated statement of earnings, for 2013 related to the acquisition, were zero and $0.1 million, respectively.
As of December 31, 2013:
o Twenty-eight of the plants have long-term production contracts.
o The remaining six plants are in various stages of seeking and negotiating long-term production contracts.
o We have a non-controlling, minority interest in twelve plants. We also have agreements in principle with co-
investors for the sale of majority ownership interests in six additional plants. We may sell ownership interests in
some or all of the remaining plants to co-investors.
o Seven of the 2009 Era Plants and five of the 2011 Era Plants that are owned by limited liability companies have
been determined to be VIEs, for which we are not the primary beneficiary. At December 31, 2013, total assets and
total liabilities of these VIEs were $76.3 million and $41.3 million, respectively. For 2013, total revenues and
expenses of these VIEs were $342.2 million and $390.1 million, respectively.
In all limited liability companies where we are a non-controlling, minority investor, the membership agreements for the
operations of each of these entities contain provisions that preclude an individual member from being able to make major
decisions that would denote control. As of the date we became a non-controlling, minority investor, we deconsolidated these
entities and subsequently accounted for the investments using equity method accounting.
For all plants that are not under long-term production contracts, we estimate that we will invest, on average, an additional
$5.0 million per plant to connect and house each of them. For those plants that will have majority ownership co-investors,
the average additional investment will be $2.5 million. We plan to sell majority ownership interests in such plants to co-
investors and relinquish control of the plants, thereby becoming a non-controlling, minority investor. We are currently
committed to fund an additional $6.0 million under engineering and construction contracts related to moving, connecting and
housing the refined coal plants that we plan to redeploy during 2014. We further estimate that we will invest an additional
$30.0 million to $35.0 million to redeploy the remainder of the refined coal plants later in 2014 and into 2015, before co-
investor contributions.
73
Each investor funds its portion of the on-going operations of the limited liability companies in proportion to its investment
ownership percentage. 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.
We are aware that some of the coal-fired power plants that purchase the refined coal are considering changing to burning
natural gas or shutting down completely for economic reasons. We and our partners are prepared to move the refined coal
productions plants to other, generally higher volume, coal-fired power plants. If these potential developments were to occur,
we estimate those plants will not operate for 12 to18 months during their movement and redeployment, which could have a
material impact on the amount of tax credits that are generated by these plants.
Until March 1, 2013, we had a promissory note from a co-investor that was received as part of the consideration for the
March 1, 2010 sale of ownership interests in three of the 2009 Era Plants. The note assumed by us as part of our purchase of
additional ownership interests in twelve of the 2009 Era Plants as described above.
Other Investments - At December 31, 2013, we owned a non-controlling, minority interest in five venture capital funds totaling
$3.2 million, a 20% non-controlling interest in an investment management company totaling $0.5 million, twelve certified low-
income housing developments with zero carrying value and two real estate entities with zero carrying value. The low-income
housing developments and real estate entities have been determined to be VIEs, but are not required to be consolidated due to our
lack of control over their respective operations. At December 31, 2013, total assets and total liabilities of these VIEs were
approximately $60.0 million and $20.0 million, respectively.
13. Commitments, Contingencies and Off-Balance Sheet Arrangements
In connection with our investing and operating activities, we have entered into certain contractual obligations and commitments.
See Notes 6 and 12 to our consolidated financial statements for additional discussion of these obligations and commitments. Our
future minimum cash payments, including interest, associated with our contractual obligations pursuant to the note purchase
agreements and Credit Agreement, operating leases and purchase commitments at December 31, 2013 were as follows
(in millions):
Contractual Obligations
Note purchase agreements
Credit Agreement
Interest on debt
Total debt obligations
Operating lease obligations
Less sublease arrangements
Outstanding purchase obligations
2014
2015
$
100.0
530.5
51.1
-
$
-
44.1
681.6
74.0
(1.8)
22.6
44.1
65.7
(0.8)
15.4
Payments Due by Period
2018
2017
2016
Thereafter
Total
$
50.0
-
44.1
94.1
53.4
(0.1)
9.3
$
300.0
-
41.2
341.2
42.0
-
0.9
$
50.0
-
21.9
$
425.0
-
54.7
$
925.0
530.5
257.1
71.9
28.3
-
0.3
479.7
86.9
-
-
1,712.6
350.3
(2.7)
48.5
Total contractual obligations
$
776.4
$
124.4
$
156.7
$
384.1
$
100.5
$
566.6
$
2,108.7
The amounts presented in the table above may not necessarily reflect our actual future cash funding requirements, because the
actual timing of the future payments made may vary from the stated contractual obligation.
Note Purchase Agreements and Credit Agreement - See Note 6 to our consolidated financial statements for a discussion of the
terms of the note purchase agreements and the Credit Agreement.
Operating Lease Obligations - Our corporate segment’s executive offices and certain subsidiary and branch facilities of our
brokerage and risk management segments are located at Two Pierce Place, Itasca, Illinois, where we lease approximately 306,000
square feet of space, or approximately 60% of the building. The lease commitment on this property expires February 28, 2018.
We generally operate in leased premises at our other locations. Certain of these leases have options permitting renewals for
additional periods. In addition to minimum fixed rentals, a number of leases contain annual escalation clauses which are
generally related to increases in an inflation index.
Total rent expense, including rent relating to cancelable leases and leases with initial terms of less than one year, amounted to
$91.3 million in 2013 and $91.0 million in each of 2012 and 2011.
We have leased certain office space to several non-affiliated tenants under operating sublease arrangements. In the normal course
of business, we expect that the 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.
Outstanding Purchase Obligations - As a service company, 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
74
of unrecorded purchase obligations that we had outstanding at December 31, 2013. These obligations represent agreements to
purchase goods or services that were executed in the normal course of business.
Off-Balance Sheet Commitments - Our total unrecorded commitments associated with outstanding letters of credit, financial
guarantees and funding commitments at December 31, 2013 were as follows (in millions):
Off-Balance Sheet Commitments
Letters of credit
Financial guarantees
Funding commitments
Total commitments
2014
-
$
-
8.5
-
$
-
-
$
8.5
$
-
-
$
-
-
$
-
-
$
-
-
$
-
-
$
-
-
$
-
Amount of Commitment Expiration by Period
2015
2017
2018
2016
Total
Amounts
Thereafter Committed
$
16.0
9.1
2.9
$
16.0
9.1
11.4
$
28.0
$
36.5
Since commitments may expire unused, the amounts presented in the table above do not necessarily reflect our actual future cash
funding requirements. See Note 12 to our consolidated financial statements for a discussion of our funding commitments related
to our corporate segment and the Off-Balance Sheet Debt section below for a discussion of other letters of credit. All of the
letters of credit represent multiple year commitments that have annual, automatic renewing provisions and are classified by the
latest commitment date.
Since January 1, 2002, we have acquired 279 companies, all of which were accounted for using the acquisition method for
recording business combinations. Substantially all of the purchase agreements related to these acquisitions contain provisions for
potential earnout obligations. For all of our acquisitions made in the period from 2011 to 2013 that contain potential earnout
obligations, such obligations are measured at fair value as of the acquisition date and are included on that basis in the recorded
purchase price consideration for the respective acquisition. The amounts recorded as earnout payables are primarily based upon
estimated future potential operating results of the acquired entities over a two- to three-year period subsequent to the acquisition
date. The aggregate amount of the maximum earnout obligations related to these acquisitions was $462.3 million, of which
$162.7 million was recorded in our consolidated balance sheet as of December 31, 2013 based on the estimated fair value of the
expected future payments to be made.
Off-Balance Sheet Debt - 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, 2013 or 2012 that was recourse to us.
At December 31, 2013, we had posted two letters of credit totaling $9.8 million in the aggregate, related to our self-insurance
deductibles, for which we had a recorded liability of $9.0 million. At December 31, 2013, we had posted five letters of credit
totaling $6.2 million to allow certain of our captive operations to meet minimum statutory surplus requirements and for additional
collateral related to premium and claim funds held in a fiduciary capacity. These letters of credit have never been drawn upon.
Our commitments associated with outstanding letters of credit, financial guarantees and funding commitments at December 31,
2013 were as follows (all dollar amounts in table are in millions):
Description, Purpose and Trigger
IRC Section 45 project capital commitments
Funding commitments to construct refined
coal plants into permanent operations
Trigger - Construction contract terms
Venture capital fund
Collateral
Compensation
to Us
Maximum
Exposure
Liability
Recorded
None
None
$
6.0
$
-
Funding commitment to three funds - $2.5 million, $1.5 million and
None
None
5.4
-
$1.4 million expire in 2014, 2019 and 2023, respectively
Trigger - Agreed conditions met
Other
Credit support under letters of credit for deductibles due by
None
None
9.8
9.0
us on our own insurance coverages - expires after 2018
Trigger - We do not reimburse the insurance companies for
deductibles the insurance companies advance on behalf of us
75
Compensation
to Us
Maximum
Exposure
Liability
Recorded
Description, Purpose and Trigger
Credit enhancement under letters of credit for our
captive insurance operations to meet minimum
statutory capital requirements - expires after 2018
Trigger - Dissolution or catastrophic financial
results of the operation
Collateral
None
Credit support under letters of credit for clients' claim funds
None
held by our Bermuda captive insurance operation
in a fiduciary capacity - expires after 2018
Trigger - Investments fall below prescribed levels
Reimbursement of
LOC fees
Reimbursement of
LOC fees
Financial guarantee of a mortgage loan to a U.K.-based employee -
(1)
None
expires when mortgage balance is reduced to $6.4 million
Trigger - Default on mortgage payments
4.2
2.0
9.1
-
-
-
$
36.5
$
9.0
(1) The guarantee has no collateral. The mortgage loan has a lien on real property with an appraised value of approximately $11.0 million.
Since commitments may expire unused, the amounts presented in the table above do not necessarily reflect our actual future cash
funding requirements.
Litigation, Regulatory and Taxation Matters - We are the defendant in various legal actions incidental to the nature of our
business, including matters related to employment practices, alleged breaches of non-compete or other restrictive covenants, theft
of trade secrets, breaches of fiduciary duties and related causes of action. We are also periodically the subject of inquiries and
investigations by regulatory and taxing authorities into various matters related to our business. Neither the outcomes of these
matters nor their effect upon our business, financial condition or results of operations can be determined at this time.
Contingent Liabilities - We purchase insurance to provide protection from errors and omissions (which we refer to as E&O)
claims that may arise during the ordinary course of business. We currently retain the first $5.0 million of each and every E&O
claim. Our E&O insurance provides aggregate coverage for E&O losses up to $175.0 million in excess of our retained amounts.
We have historically maintained self-insurance reserves for the portion of our E&O exposure that is not insured. We periodically
determine a range of possible reserve levels using actuarial techniques that rely heavily on projecting historical claim data into the
future. Our E&O reserve in the December 31, 2013 consolidated balance sheet is above the lower end of the most recently
determined actuarial range by $1.6 million and below the upper end of the actuarial range by $4.2 million. We can make no
assurances that the historical claim data used to project the current reserve levels will be indicative of future claim activity. Thus,
the E&O reserve level and corresponding actuarial range could change in the future as more information becomes known, which
could materially impact the amounts reported and disclosed herein.
Tax-advantaged Investments No Longer Held - Between 1996 and 2007, we developed and then sold portions of our
ownership in various energy related investments, many of which qualified for tax credits under IRC Section 29. In connection
with the sales to other investors, we provided various indemnifications. At December 31, 2013, the maximum potential amount
of future payments that we could be required to make under these indemnifications totaled approximately $45.0 million, net of the
applicable income tax benefit. In addition, we recorded tax benefits in connection with our ownership in these investments. At
December 31, 2013, we had exposure on $130.0 million of previously earned tax credits. In 2004, 2007 and 2009, the IRS
examined several of these investments and all examinations were closed without any changes being proposed by the IRS.
However, any future adverse tax audits, administrative rulings or judicial decisions could disallow previously claimed tax credits
or cause us to be subject to liability under our indemnification obligations. Because of the contingent nature of these exposures,
no liabilities have been recorded in our December 31, 2013 consolidated balance sheet related to these indemnification
obligations.
76
14. Income Taxes
We and our principal domestic subsidiaries are included in a consolidated U.S. Federal income tax return. Our international
subsidiaries file various income tax returns in their jurisdictions. Significant components of earnings before income taxes and the
provision for income taxes are as follows (in millions):
Year Ended December 31,
2012
2013
2011
Earnings before income taxes:
Domestic
Foreign, principally Australia, Bermuda, Canada and the U.K.
Provision for income taxes:
Federal:
Current
Deferred
State and local:
Current
Deferred
Foreign:
Current
Deferred
$
230.8
43.7
$
234.7
10.6
$
194.7
13.1
$
274.5
$
245.3
$
207.8
$
29.0
(47.7)
$
45.4
(14.6)
$
7.8
38.4
(18.7)
10.6
(0.6)
10.0
28.5
(13.9)
14.6
30.8
17.3
(2.9)
14.4
8.7
(3.6)
5.1
46.2
7.2
5.9
13.1
7.4
(3.0)
4.4
Total provision for income taxes
$
5.9
$
50.3
$
63.7
A reconciliation of the provision for income taxes with the U.S. Federal statutory income tax rate is as follows (in millions,
except percentages):
Federal statutory rate
State income taxes - net of
Federal benefit
Foreign taxes
Alternative energy, foreign and other
tax credits
Foreign dividends and other
permanent differences
Changes in unrecognized tax benefits
related to resolution of Federal and
state audits, expiration of various
statutes of limitations and other items
Change in valuation allowance
Other
2013
Year Ended December 31,
2012
% of
Pretax
Earnings
% of
Pretax
Earnings
Amount
2011
% of
Pretax
Earnings
Amount
35.0
$
85.9
35.0
$
72.7
Amount
$
96.1
6.5
(0.8)
2.4
(0.3)
9.4
0.9
3.8
0.4
9.8
0.6
(93.8)
(34.2)
(45.3)
(18.5)
(13.2)
(2.5)
(0.9)
(2.7)
(1.1)
0.2
1.5
0.5
(1.6)
0.5
0.2
(0.6)
0.6
0.3
1.2
0.2
0.1
0.6
(1.9)
(0.7)
(3.8)
35.0
4.7
0.3
(6.4)
0.1
(0.9)
(0.3)
(1.8)
30.7
Provision for income taxes
$
5.9
2.1
$
50.3
20.5
$
63.7
77
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows
(in millions):
Gross unrecognized tax benefits at January 1
Increases in tax positions for current year
Settlements
Lapse in statute of limitations
Increases in tax positions for prior years
Decreases in tax positions for prior years
Gross unrecognized tax benefits at December 31
December 31,
2013
2012
$
6.7
2.9
-
(1.4)
2.3
(1.3)
$
5.8
1.7
(0.3)
(1.6)
1.1
-
$
9.2
$
6.7
The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $5.9 million and
$4.5 million at December 31, 2013 and 2012, respectively. We accrue interest and penalties related to unrecognized tax benefits
in our provision for income taxes. At December 31, 2013 and 2012, we had accrued interest and penalties related to
unrecognized tax benefits of $0.6 million and $0.6 million, respectively.
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, 2013, we had been examined by the IRS through calendar year 2010.
Subsequent to December 31, 2013, we have been contacted by the IRS to commence an examination of calendar years 2011 and
2012. A number of foreign, state and local 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.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets
and liabilities are as follows (in millions):
Deferred tax assets:
Alternative minimum tax and other credit carryforwards
Accrued and unfunded compensation and employee benefits
Compensation expense related to stock options
Investments
Accrued liabilities
Accrued pension liability
Net operating loss carryforwards
Deferred rent liability
Other
Total deferred tax assets
Valuation allowance for deferred tax assets
Deferred tax assets
Deferred tax liabilities:
Nondeductible amortizable intangible assets
Depreciable fixed assets
Other prepaid items
Investment-related partnerships
Accrued liabilities
Total deferred tax liabilities
Net deferred tax assets
December 31,
2013
2012
$
147.4
136.6
14.2
9.0
30.2
9.2
11.9
8.2
6.8
$
112.3
107.1
15.7
16.3
27.3
27.3
12.2
6.2
4.1
373.5
(8.8)
364.7
184.0
5.2
4.7
13.2
2.4
209.5
328.5
(8.3)
320.2
139.2
-
5.2
17.5
2.0
163.9
$
155.2
$
156.3
At December 31, 2013 and 2012, $84.9 million and $68.4 million, respectively, of deferred tax assets have been included in other
current assets in the accompanying consolidated balance sheet. At December 31, 2013 and 2012, $5.0 million and $5.2 million,
respectively, of deferred tax liabilities have been included in other current liabilities and $204.5 million and $158.7 million,
respectively, have been included in noncurrent liabilities in the accompanying consolidated balance sheet. Alternative minimum
tax credits of $108.2 million have an indefinite life, general business tax credits of $33.5 million expire, if not utilized, in 2033
78
and other tax credits of $5.7 million begin to expire, if not utilized, in 2018. We expect the historically favorable trend in
earnings before income taxes to continue in the foreseeable future. Accordingly, we expect to make full use of the net deferred
tax assets. Valuation allowances have been established primarily with respect to various state net operating loss carryforwards
that may not be utilized in the future.
We do not provide for U.S. Federal income taxes on the undistributed earnings ($224.2 million and $173.8 million at
December 31, 2013 and 2012, respectively) of foreign subsidiaries which are considered permanently invested outside of the U.S.
The amount of unrecognized deferred tax liability on these undistributed earnings was $35.2 million and $22.9 million at
December 31, 2013 and 2012, respectively.
15. Accumulated Other Comprehensive Earnings
The after-tax components of our accumulated comprehensive earnings (loss) consist of the following:
Balance as of January 1, 2011
Net change in period
Balance as of December 31, 2011
Net change in period
Balance as of December 31, 2012
Net change in period
Balance as of December 31, 2013
Pension
Liability
Foreign
Currency
Translation
Fair Value
of Derivative
Instruments
Accumulated
Comprehensive
Earnings (Loss)
$
(18.4)
(30.6)
$
20.5
(16.1)
$
0.1
(2.7)
$
2.2
(49.4)
$
(49.0)
(3.4)
$
4.4
16.1
$
(2.6)
1.7
$
(47.2)
14.4
$
(52.4)
26.8
$
20.5
1.6
$
(0.9)
1.8
$
(32.8)
30.2
$
(25.6)
$
22.1
$
0.9
$
(2.6)
The foreign currency translation in 2013, 2012 and 2011 primarily relates to the net impact of changes in the value of the local
currencies relative to the U.S. dollar for our operations in Australia, Canada, India, Singapore and the U.K.
During 2013, 2012 and 2011, $7.9 million, $7.2 million and $1.6 million, respectively, of expense related to the pension liability
was reclassified from accumulated other comprehensive loss to compensation expense in the statement of earnings. During 2013,
2012 and 2011, $0.9 million, $0.2 million and ($0.4 million), respectively, of expense (income) related to the fair value of
derivative investments was reclassified from accumulated other comprehensive loss to the statement of earnings. During 2013,
2012 and 2011, no amounts related to foreign currency translation were reclassified from accumulated other comprehensive loss
to the statement of earnings.
16. Quarterly Operating Results (unaudited)
Quarterly operating results for 2013 and 2012 were as follows (in millions, except per share data):
2013
Total revenues
Total expenses
Earnings before income taxes
Net earnings
Basic net earnings per share:
Diluted net earnings per share:
2012
Total revenues
Total expenses
Earnings before income taxes
Net earnings
Basic net earnings per share:
Diluted net earnings per share:
1st
2nd
3rd
4th
$
674.1
$
779.5
$
835.8
$
890.2
631.8
682.1
750.3
840.9
$
42.3
$
97.4
$
85.5
$
49.3
$
40.5
$
93.5
$
74.6
$
60.0
$
0.32
$
0.73
$
0.57
$
0.45
$
0.32
$
0.73
$
0.57
$
0.45
$
546.8
$
649.9
$
650.4
$
673.2
514.3
558.8
574.1
627.8
$
32.5
$
91.1
$
76.3
$
45.4
$
28.1
$
71.7
$
61.7
$
33.5
$
0.24
$
0.60
$
0.50
$
0.27
$
0.24
$
0.59
$
0.50
$
0.27
79
17. Segment Information
We have three reportable operating segments: brokerage, risk management and corporate. The brokerage segment is primarily
comprised of retail and wholesale insurance brokerage operations. The brokerage segment generates revenues through
commissions paid by insurance underwriters and through fees charged to our clients. Our brokers, agents and administrators act
as intermediaries between insurers and their customers and we do not assume underwriting risks. The risk management segment
provides contract claim settlement and administration services for enterprises that choose to self-insure some or all of their
property/casualty coverages and for insurance companies 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 or per-service fee basis. The corporate segment manages
our clean energy and other investments. This segment also holds all of our corporate debt. Allocations of investment income and
certain expenses are based on reasonable assumptions and estimates primarily using revenue, headcount and other information.
We allocate the provision for income taxes to the brokerage and risk management segments as if those segments were preparing
income tax provisions on a separate company basis. Reported operating results by segment would change if different methods
were applied. Financial information relating to our segments for 2013, 2012 and 2011 is as follows (in millions):
Year Ended December 31, 2013
Revenues:
Commissions
Fees
Supplemental commissions
Contingent commissions
Investment income
Gains on books of business sales and other
Revenue from clean coal activities
Other - net gain
Total revenues
Compensation
Operating
Cost of revenues from clean coal activities
Interest
Depreciation
Amortization
Change in estimated acquisition earnout payables
Total expenses
Earnings (loss) before income taxes
Provision (benefit) for income taxes
Net earnings
Risk
Brokerage Management
Corporate
Total
$
1,553.1
450.5
77.3
52.1
6.1
5.2
-
-
-
$
609.0
-
-
2.0
-
-
-
-
$
-
-
-
-
-
412.5
11.8
$
1,553.1
1,059.5
77.3
52.1
8.1
5.2
412.5
11.8
2,144.3
1,290.4
369.9
-
-
31.1
122.7
2.6
1,816.7
327.6
122.8
611.0
370.5
146.0
-
-
19.4
2.5
(0.9)
537.5
73.5
27.3
424.3
24.1
36.5
437.3
50.1
2.9
-
-
550.9
(126.6)
(144.2)
3,179.6
1,685.0
552.4
437.3
50.1
53.4
125.2
1.7
2,905.1
274.5
5.9
$
204.8
$
46.2
$
17.6
$
268.6
Net foreign exchange gain (loss)
$
0.6
$
-
$
(0.4)
$
0.2
Revenues:
United States
United Kingdom
Other foreign, principally Australia, Bermuda and Canada
$
1,644.8
407.0
92.5
$
473.5
27.4
110.1
$
424.3
-
-
$
2,542.6
434.4
202.6
Total revenues
$
2,144.3
$
611.0
$
424.3
$
3,179.6
At December 31, 2013
Identifiable assets:
United States
United Kingdom
Other foreign, principally Australia, Bermuda and Canada
$
3,219.6
1,819.5
483.6
$
419.0
58.8
66.9
$
783.8
-
9.3
$
4,422.4
1,878.3
559.8
Total identifiable assets
$
5,522.7
$
544.7
$
793.1
$
6,860.5
Goodwill - net
Amortizable intangible assets - net
$
2,122.9
1,061.6
$
22.3
17.2
$
-
-
$
2,145.2
1,078.8
80
Year Ended December 31, 2012
Revenues:
Commissions
Fees
Supplemental commissions
Contingent commissions
Investment income
Gains on books of business sales and other
Revenue from clean coal activities
Other - net gain
Total revenues
Compensation
Operating
Cost of revenues from clean coal activities
Interest
Depreciation
Amortization
Change in estimated acquisition earnout payables
Total expenses
Earnings (loss) before income taxes
Provision (benefit) for income taxes
Net earnings (loss)
Net foreign exchange loss
Revenues:
Risk
Brokerage Management
Corporate
Total
$
1,302.5
403.2
67.9
42.9
7.2
3.9
-
-
-
$
568.5
-
-
3.2
-
-
-
-
$
-
-
-
-
-
119.6
1.4
$
1,302.5
971.7
67.9
42.9
10.4
3.9
119.6
1.4
1,827.6
1,131.6
312.7
-
-
24.7
96.2
3.6
1,568.8
258.8
103.0
571.7
347.0
137.7
-
-
16.0
2.8
(0.2)
503.3
68.4
25.9
121.0
14.8
32.8
111.6
43.0
0.7
-
-
202.9
(81.9)
(78.6)
2,520.3
1,493.4
483.2
111.6
43.0
41.4
99.0
3.4
2,275.0
245.3
50.3
$
155.8
$
42.5
$
(3.3)
$
195.0
$
(1.6)
$
(0.1)
$
(0.2)
$
(1.9)
United States
United Kingdom
Other foreign, principally Australia, Bermuda and Canada
$
1,431.6
324.1
71.9
$
453.5
28.2
90.0
$
121.0
-
-
$
2,006.1
352.3
161.9
Total revenues
$
1,827.6
$
571.7
$
121.0
$
2,520.3
At December 31, 2012
Identifiable assets:
United States
United Kingdom
Other foreign, principally Australia, Bermuda and Canada
$
2,637.1
1,117.6
442.1
$
390.9
52.4
55.3
$
647.9
-
9.0
$
3,675.9
1,170.0
506.4
Total identifiable assets
$
4,196.8
$
498.6
$
656.9
$
5,352.3
Goodwill - net
Amortizable intangible assets - net
$
1,451.4
791.6
$
21.3
18.0
-
$
-
$
1,472.7
809.6
81
Year Ended December 31, 2011
Revenues:
Commissions
Fees
Supplemental commissions
Contingent commissions
Investment income
Gains on books of business sales and other
Revenues from clean coal activities
Other - net gain
Total revenues
Compensation
Operating
Cost of revenues from clean coal activities
Interest
Depreciation
Amortization
Change in estimated acquisition earnout payables
Total expenses
Earnings (loss) before income taxes
Provision (benefit) for income taxes
Net earnings (loss)
Net foreign exchange loss
Revenues:
Risk
Brokerage Management
Corporate
Total
$
1,127.4
324.1
56.0
38.1
5.4
5.5
-
-
-
$
546.1
-
-
2.7
-
-
-
-
$
-
-
-
-
-
29.2
0.2
$
1,127.4
870.2
56.0
38.1
8.1
5.5
29.2
0.2
1,556.5
968.4
267.3
-
-
21.2
77.0
(6.2)
1,327.7
228.8
88.6
548.8
344.1
135.8
-
-
14.2
2.3
-
496.4
52.4
19.1
29.4
13.6
15.9
32.0
40.8
0.5
-
-
102.8
(73.4)
(44.0)
2,134.7
1,326.1
419.0
32.0
40.8
35.9
79.3
(6.2)
1,926.9
207.8
63.7
$
140.2
$
33.3
$
(29.4)
$
144.1
$
-
$
-
$
(0.2)
$
(0.2)
United States
United Kingdom
Other foreign, principally Australia, Bermuda and Canada
$
1,266.2
236.2
54.1
$
429.5
24.3
95.0
$
29.4
-
-
$
1,725.1
260.5
149.1
Total revenues
$
1,556.5
$
548.8
$
29.4
$
2,134.7
At December 31, 2011
Identifiable assets:
United States
United Kingdom
Other foreign, principally Australia, Bermuda and Canada
$
2,215.3
874.8
256.5
$
384.5
71.4
73.2
$
602.7
-
5.1
$
3,202.5
946.2
334.8
Total identifiable assets
$
3,346.6
$
529.1
$
607.8
$
4,483.5
Goodwill - net
Amortizable intangible assets - net
$
1,136.6
542.3
$
18.7
19.2
-
$
-
$
1,155.3
561.5
82
Report of Independent Registered Public Accounting Firm on Financial Statements
Board of Directors and Stockholders
Arthur J. Gallagher & Co.
We have audited the accompanying consolidated balance sheet of Arthur J. Gallagher & Co. (Gallagher) as of December 31, 2013
and 2012, and the related consolidated statements of earnings, comprehensive earnings, stockholders’ equity and cash flows for
each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in
the Index at Item 15(2)(a). These financial statements and schedule are the responsibility of Gallagher’s management. Our
responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Arthur J. Gallagher & Co. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Gallagher’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework)
and our report, dated February 7, 2014, expressed an unqualified opinion thereon.
Chicago, Illinois
February 7, 2014
/s/ Ernst & Young LLP
Ernst & Young LLP
83
Management’s Report on Internal Control Over Financial Reporting
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 issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
In conducting our assessment of the effectiveness of its internal control over financial reporting, we have excluded eighteen of the
thirty-one entities acquired in 2013, which are included in our 2013 consolidated financial statements. Collectively, these
acquired entities constituted approximately 6.2% of total assets as of December 31, 2013 and approximately 2.3% of total
revenues and approximately 1.3% of net earnings for the year then ended.
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, 2013. In addition, the effectiveness of our internal
control over financial reporting as of December 31, 2013 has been audited by Ernst & Young LLP, an independent registered
public accounting firm, as stated in their attestation report which is included herein.
Arthur J. Gallagher & Co.
Itasca, Illinois
February 7, 2014
/s/ J. Patrick Gallagher, Jr.
J. Patrick Gallagher, Jr.
Chairman, President and Chief Executive Officer
/s/ Douglas K. Howell
Douglas K. Howell
Chief Financial Officer
84
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Board of Directors and Stockholders
Arthur J. Gallagher & Co.
We have audited Arthur J. Gallagher & Co.’s (Gallagher) internal control over financial reporting as of December 31, 2013,
based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (1992 framework) (the COSO criteria). Gallagher’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on Gallagher’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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 eighteen of the thirty-one entities acquired in 2013, which are included in the 2013 consolidated financial statements of
Gallagher. Collectively, these acquired entities constituted approximately 6.2% of total assets as of December 31, 2013 and
approximately 2.3% of total revenues and approximately 1.3% 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.
In our opinion, Arthur J. Gallagher & Co. maintained in all material respects, effective internal control over financial reporting as
of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Arthur J. Gallagher & Co. as of December 31, 2013 and 2012, and the related consolidated
statements of earnings, comprehensive earnings, stockholders’ equity and cash flows for each of the three years in the period
ended December 31, 2013 of Arthur J. Gallagher & Co. and our report dated February 7, 2014 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Ernst & Young LLP
Chicago, Illinois
February 7, 2014
85
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There were no changes in or disagreements with our accountants on matters related to accounting and financial disclosure.
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures.
As of December 31, 2013, our management, including our chief executive officer and chief financial officer, have conducted an
evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act. Based
on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures
were effective as of December 31, 2013.
Design and Evaluation of Internal Control Over Financial Reporting.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included a report of management’s assessment of the design and
effectiveness of our internal controls as part of this annual report for the fiscal year ended December 31, 2013. Our independent
registered public accounting firm also attested to, and reported on, the effectiveness of internal control over financial reporting.
Management’s report and the independent registered public accounting firm’s attestation report are included in Item 8, “Financial
Statements and Supplementary Data,” under the captions entitled “Management’s Report on Internal Control Over Financial
Reporting” and “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting.”
Changes in Internal Control Over Financial Reporting.
There has been no change in our internal control over financial reporting during the fourth fiscal quarter ended December 31,
2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
Not applicable.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Our 2014 Proxy Statement will include the information required by this item under the headings “Proposal 1 - Election of
Directors,” “Security Ownership by Certain Beneficial Owners and Management - Section 16 (a) Beneficial Ownership Reporting
Compliance” and “Corporate Governance,” which we incorporate herein by reference.
Item 11. Executive Compensation.
Our 2014 Proxy Statement will include the information required by this item under the headings “Compensation Committee
Report” and “Compensation Discussion and Analysis,” which we incorporate herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Our 2014 Proxy Statement will include the information required by this item under the headings “Security Ownership by Certain
Beneficial Owners and Management” and “Equity Compensation Plan Information,” which we incorporate herein by reference.
86
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Our 2014 Proxy Statement will include the information required by this item under the headings “Certain Relationships and
Related Transactions” and “Corporate Governance - Board of Directors,” which we incorporate herein by reference.
Item 14. Principal Accountant Fees and Services.
Our 2014 Proxy Statement will include the information required by this item under the heading “Principal Accountant Fees and
Services,” which we incorporate herein by reference.
Part IV
Item 15. Exhibits and Financial Statement Schedules.
The following documents are filed as a part of this report:
1. Consolidated Financial Statements:
(a) Consolidated Statement of Earnings for each of the three years in the period ended December 31, 2013.
(b) Consolidated Balance Sheet as of December 31, 2013 and 2012.
(c) Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2013.
(d) Consolidated Statement of Stockholders’ Equity for each of the three years in the period ended December 31,
2013.
(e) Notes to Consolidated Financial Statements.
(f) Report of Independent Registered Public Accounting Firm on Financial Statements.
(g) Management’s Report on Internal Control Over Financial Reporting.
(h) Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting.
2. Consolidated Financial Statement Schedules required to be filed by Item 8 of this Form:
(a) Schedule II - Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable, or not required, or because the required information is
included in our consolidated financial statements or the notes thereto.
3. Exhibits:
Included in this Form 10-K.
*10.15
The Arthur J. Gallagher & Co. Supplemental Savings and Thrift Plan, as amended and restated effective
January 21, 2014.
*10.16
Arthur J. Gallagher & Co. Deferred Equity Participation Plan, amended and restated as of January 22, 2014.
*10.16.1 Form of Deferred Equity Participation Plan Award Agreement.
21.1
23.1
24.1
Subsidiaries of Arthur J. Gallagher & Co., including state or other jurisdiction of incorporation or organization
and the names under which each does business.
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
Power of Attorney.
87
31.1
31.2
32.1
32.2
Rule 13a-14(a) Certification of Chief Executive Officer.
Rule 13a-14(a) Certification of Chief Financial Officer.
Section 1350 Certification of Chief Executive Officer.
Section 1350 Certification of Chief Financial Officer.
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
Incorporated by reference into this Form 10-K.
2.1
2.2
3.1
3.2
4.1
Agreement and Plan of Reorganization, dated as of August 12, 2013, by and among Arthur J. Gallagher & Co.,
Bollinger Holdings, Inc., Bollinger, Inc., JPGAC, LLC, Evercore Capital Partners II L.P., Evercore Partners
Inc. and Management Group, LLC (incorporated by reference to the same exhibit number to the post-effective
amendment No. 2 to our Form S-4 Registration Statement dated September 6, 2013, File No. 333-188651).
Share Purchase Agreement, dated September 4, 2013, between Gallagher, Giles and the Seller (incorporated
by reference to Exhibit 2.1 to our Form 8-K Current Report dated September 6, 2013, File No. 1 09761).
Amended and Restated Certificate of Incorporation of Arthur J. Gallagher & Co. (incorporated by reference to
the same exhibit number to our Form 10-Q Quarterly Report for the quarterly period ended June 30, 2008, File
No. 1-09761).
Amended and Restated By-Laws of Arthur J. Gallagher & Co. (incorporated by reference to the same exhibit
number to our Form 10-K Annual Report for 2008, File No. 1-09761).
Multicurrency Credit Agreement, dated as of September 19, 2013, among Arthur J. Gallagher & Co., the other
borrowers party thereto, the lenders party thereto, Bank of Montreal, as administrative agent, BMO Capital
Markets, as joint lead arranger and joint book runner, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Citibank N.A., Barclays Bank PLC, and J.P. Morgan Securities LLC, as joint lead arrangers, joint book
runners and co-syndication agents and U.S. Bank National Association, as documentation agent (incorporated
by reference to the same exhibit number to our Form 8-K Current Report dated September 19, 2013, File No.
1-09761).
10.5
Lease Agreement between Arthur J. Gallagher & Co. and Itasca Center III Limited Partnership, a Texas
limited partnership, dated July 26, 1989 (incorporated by reference to the same exhibit number to our
Form 10-K Annual Report for 1989, File No. 1-09761).
10.5.1 Amendments No. 1 to No. 15 to the Lease Agreement between Arthur J. Gallagher & Co. and HGC/Two
Pierce Limited Partnership, an Illinois limited partnership, as successor to Itasca Center III Limited
Partnership, a Texas limited partnership, dated May 20, 1991 to October 15, 2005 (incorporated by reference
to the same exhibit number to our Form 10-K Annual Report for 2005, File No. 1-09761).
10.5.2 Amendment No. 16 to the Lease Agreement between Arthur J. Gallagher & Co. and Wells REIT-Two Pierce
Place, LLC, a Delaware limited liability company, dated December 7, 2006 (incorporated by reference to the
same exhibit number to our Form 8-K Current Report dated December 7, 2006, File No. 1-09761).
*10.11
*10.12
Form of Indemnity Agreement between Arthur J. Gallagher & Co. and each of our directors and corporate
officers (incorporated by reference to the same exhibit number to our Form 10-Q Quarterly Report for the
quarterly period ended March 31, 2009, File No. 1-09761).
Arthur J. Gallagher & Co. Deferral Plan for Nonemployee Directors (amended and restated as of January 1,
2011) (incorporated by reference to the same exhibit number to our Form 10-K Annual Report for 2010,
File No. 1-09761).
88
*10.14.1 Form of Change in Control Agreement between Arthur J. Gallagher & Co. and those Executive Officers hired
prior to January 1, 2008 (incorporated by reference to the same exhibit number to our Form 10-K Annual
Report for 2011, File No. 1-09761).
*10.14.2 Form of Change in Control Agreement between Arthur J. Gallagher & Co. and those Executive Officers hired
after January 1, 2008 (incorporated by reference to the same exhibit number to our Form 10-K Annual Report
for 2011, File No. 1-09761).
*10.17
Arthur J. Gallagher & Co. Severance Plan (effective September 15, 1997, as amended and restated effective
January 1, 2010) (incorporated by reference to the same exhibit number to our Form 10-K Annual Report for
2008, File No. 1-09761).
*10.17.1 First Amendment to the Arthur J. Gallagher & Co. Severance Plan (effective September 15, 1997, as amended
and restated effective January 1, 2009) (incorporated by reference to Exhibit 10.1 to our Form 10-Q Quarterly
Report for the quarterly period ended June 30, 2010, File No. 1-09761).
*10.25
*10.26
*10.27
*10.28
*10.29
*10.30
10.38
10.40
Arthur J. Gallagher & Co. United Kingdom Incentive Stock Option Plan, Amended and restated as of
January 22, 1998 and approved by the Inland Revenue on June 12, 1998 (incorporated by reference to the
same exhibit number to our Form 10-Q Quarterly Report for the quarterly period ended June 30, 1998, File
No. 1-09761).
Conformed copy of the Arthur J. Gallagher & Co. 1988 Incentive Stock Option Plan, through Amendment
No. 1 as of January 19, 2005 (incorporated by reference to the same exhibit number to our Form 10-K Annual
Report for 2009, File No. 1-09761).
Conformed copy of the Arthur J. Gallagher & Co. 1988 Nonqualified Stock Option Plan, through Amendment
No. 6 as of January 19, 2005 (incorporated by reference to the same exhibit number to our Form 10-K Annual
Report for 2009, File No. 1-09761).
Conformed copy of the Arthur J. Gallagher & Co. 1989 Non-Employee Directors’ Stock Option Plan, through
Amendment No. 6 as of May 17, 2005 (incorporated by reference to the same exhibit number to our
Form 10-K Annual Report for 2009, File No. 1-09761).
Arthur J. Gallagher & Co. Restricted Stock Plan (incorporated by reference to Exhibit 4.6 to our Form S-8
Registration Statement, File No. 333-106539).
The Arthur J. Gallagher & Co. Employee Stock Purchase Plan, amended and restated as of September 17,
2012 (incorporated by reference to the same exhibit number to our Form 10-Q Quarterly Report for the
quarterly period ended September 30, 2012, File No. 1-09761).
Operating Agreement of Chem-Mod LLC dated as of June 23, 2004, by and among NOx II, Ltd., an Ohio
limited liability company, AJG Coal, Inc., a Delaware corporation, and IQ Clean Coal LLC, a Delaware
limited liability company (incorporated by reference to the same exhibit number to our Form 10-K Annual
Report for 2005, File No. 1-09761).
Operating Agreement of Chem-Mod International LLC dated as of July 8, 2005, between NOx II International,
Ltd., an Ohio limited liability company and AJG Coal, Inc., a Delaware corporation, together with
Amendment No. 1 dated August 2, 2005 (incorporated by reference to the same exhibit number to our
Form 10-K Annual Report for 2005, File No. 1-09761).
*10.42
Arthur J. Gallagher & Co. 2009 Long-Term Incentive Plan (incorporated by reference to Exhibit 4.4 to our
Form S-8 Registration Statement, File No. 333-159150).
*10.42.1 Form of Long-Term Incentive Plan Restricted Stock Unit Award Agreement (incorporated by reference to the
same exhibit number to our Form 10-K Annual Report for 2010, File No. 1-09761).
*10.42.2 Form of Long-Term Incentive Plan Stock Option Award Agreement (incorporated by reference to the same
exhibit number to our Form 10-K Annual Report for 2010, File No. 1-09761).
*10.42.3 Form of Long-Term Incentive Plan Stock Appreciation Rights Award Agreement (incorporated by reference
to the same exhibit number to our Form 10-K Annual Report for 2010, File No. 1-09761).
*10.42.4 Form of Long-Term Incentive Plan Restricted Stock Unit Award Agreement for executive officers over the
age of 55 (incorporated by reference to the same exhibit number to our Form 10 Q Quarterly Report for the
quarterly period ended March 31, 2013, File No. 1-09761).
89
*10.42.5 Form of Long-Term Incentive Plan Stock Option Award Agreement for executive officers over the age of 55
(incorporated by reference to the same exhibit number to our Form 10 Q Quarterly Report for the quarterly
period ended March 31, 2013, File No. 1-09761),
*10.43
Arthur J. Gallagher & Co. Performance Unit Program (incorporated by reference to the same exhibit number
to our Form 10-Q Quarterly Report for the quarterly period ended June 30, 2007, File No. 1-09761).
*10.43.1 Form of Performance Unit Grant Agreement under the Performance Unit Program (incorporated by reference
to the same exhibit number to our Form 10-K Annual Report for 2010, File No. 1-09761).
*10.43.2 Form of Performance Unit Grant Agreement under the Performance Unit Program for executive officers over
the age of 55 (incorporated by reference to the same exhibit number to our Form 10 Q Quarterly Report for the
quarterly period ended March 31, 2013, File No. 1-09761),
*10.44
*10.45
10.46
Senior Management Incentive Plan (incorporated by reference to Exhibit 10.2 to our Form 10-Q Quarterly
Report for the quarterly period ended June 30, 2010, File No. 1-09761).
Arthur J. Gallagher & Co. 2011 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 to our
Form S-8 Registration Statement, File No. 333-174497).
Share Purchase Agreement, dated May 12, 2011, between Gallagher Holdings Two (UK) Limited, HLG
Holdings Limited and the Shareholders of HLG Holdings Limited named therein (incorporated by reference to
Exhibit 2.1 to our Form 8-K Current Report dated May 17, 2011, File No. 1-09761).
All other exhibits are omitted because they are not applicable, or not required, or because the required information is
included in our consolidated financial statements or the notes thereto. The registrant agrees to furnish to the Securities
and Exchange Commission upon request a copy of any long-term debt instruments that have been omitted pursuant to
Item 601(b)(4)(iii)(A) of Regulation S-K.
---------------
* Such exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this
form pursuant to item 601 of Regulation S-K.
90
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 7th day of February, 2014.
ARTHUR J. GALLAGHER & CO.
/S/ J. PATRICK GALLAGHER, JR.
By
J. Patrick Gallagher, Jr.
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 7th day of
February, 2014 by the following persons on behalf of the Registrant in the capacities indicated.
Name
Title
/S/ J. PATRICK GALLAGHER, JR.
Chairman, President and Director (Principal Executive Officer)
J. Patrick Gallagher, Jr.
/S/ DOUGLAS K. HOWELL
Douglas K. Howell
/S/ RICHARD C. CARY
Richard C. Cary
*Sherry S. Barrat
Sherry S. Barrat
*WILLIAM L. BAX
William L. Bax
* FRANK E. ENGLISH, JR.
Frank E. English, Jr.
*ELBERT O. HAND
Elbert O. Hand
*DAVID S. JOHNSON
David S. Johnson
*KAY W. MC CURDY
Kay W. Mc Curdy
*NORMAN L. ROSENTHAL
Norman L. Rosenthal
* JAMES R. WIMMER
James R. Wimmer
/S/ WALTER D. BAY
*By:
Walter D. Bay, Attorney-in-Fact
Vice President and Chief Financial Officer (Principal Financial Officer)
Controller (Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
91
Schedule II
Arthur J. Gallagher & Co.
Valuation and Qualifying Accounts
Balance
at
Beginning
of Year
Amounts
Recorded
in
Earnings
Adjustments
Balance
at
End
of Year
(In millions)
$
6.6
4.0
$
2.7
(0.2)
$
(2.6)
0.4
(1)
(2)
$
6.7
4.2
Year ended December 31, 2013
Allowance for doubtful accounts
Allowance for estimated policy cancellations
Accumulated amortization of expiration
lists, noncompete agreements and trade names
419.3
125.2
(0.4)
(3)
544.1
Year ended December 31, 2012
Allowance for doubtful accounts
Allowance for estimated policy cancellations
Accumulated amortization of expiration
$
4.8
5.2
$
1.0
(1.6)
$
0.8
0.4
(1)
(2)
$
6.6
4.0
lists, noncompete agreements and trade names
321.3
99.0
(1.0)
(3)
419.3
Year ended December 31, 2011
Allowance for doubtful accounts
Allowance for estimated policy cancellations
Accumulated amortization of expiration
$
4.4
4.3
$
0.5
0.9
$
(0.1)
-
(1)
(2)
$
4.8
5.2
lists, noncompete agreements and trade names
247.7
79.3
(5.7)
(3)
321.3
(1) Net activity of bad debt write offs and recoveries.
(2) Additions to allowance related to acquired businesses.
(3) Elimination of fully amortized expiration lists, non-compete agreements and trade names, intangible asset/amortization
reclassifications and disposal of acquired businesses.
92
Arthur J. Gallagher & Co.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2013
Exhibit Index
*10.15
The Arthur J. Gallagher & Co. Supplemental Savings and Thrift Plan, as amended and restated effective
January 21, 2014.
*10.16
Arthur J. Gallagher & Co. Deferred Equity Participation Plan, amended and restated as of January 22, 2014.
*10.16.1
Form of Deferred Equity Participation Plan Award Agreement.
21.1
23.1
24.1
31.1
31.2
32.1
32.2
Subsidiaries of Arthur J. Gallagher & Co., including state or other jurisdiction of incorporation or
organization and the names under which each does business.
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
Power of Attorney.
Rule 13a-14(a) Certification of Chief Executive Officer.
Rule 13a-14(a) Certification of Chief Financial Officer.
Section 1350 Certification of Chief Executive Officer.
Section 1350 Certification of Chief Financial Officer.
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
* Such exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this
form pursuant to item 601 of Regulation S-K.
93
Rule 13a-14(a) Certification of Chief Executive Officer
Exhibit 31.1
Certification
I, J. Patrick Gallagher, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Arthur J. Gallagher & Co.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a.) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b.) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c.) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d.) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
(a.) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b.) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 7, 2014
/s/ J. Patrick Gallagher, Jr.
J. Patrick Gallagher, Jr.
Chairman, President and Chief Executive
Officer
(principal executive officer)
Rule 13a-14(a) Certification of Chief Financial Officer
Exhibit 31.2
Certification
I, Douglas K. Howell, certify that:
1. I have reviewed this annual report on Form 10-K of Arthur J. Gallagher & Co.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a.) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b.) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c.) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d.) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
(a.) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b.) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting
Date: February 7, 2014
/s/ Douglas K. Howell
Douglas K. Howell
Vice President
Chief Financial Officer
(principal financial officer)
Section 1350 Certification of Chief Executive Officer
Exhibit 32.1
I, J. Patrick Gallagher, Jr., the chief executive officer of Arthur J. Gallagher & Co., certify that (i) the
Annual Report on Form 10-K of Arthur J. Gallagher & Co. for the twelve month period ended December 31,
2013 (the “Form 10-K”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and (ii) the information contained in the Form 10-K fairly presents, in all material respects,
the financial condition and results of operations of Arthur J. Gallagher & Co. and its subsidiaries.
Date: February 7, 2014
/s/ J. Patrick Gallagher, Jr.
J. Patrick Gallagher, Jr.
Chairman, President and Chief Executive
Officer
(principal executive officer)
Section 1350 Certification of Chief Financial Officer
Exhibit 32.2
I, Douglas K. Howell, the chief financial officer of Arthur J. Gallagher & Co., certify that (i) the Annual
Report on Form 10-K of Arthur J. Gallagher & Co. for the twelve month period ended December 31, 2013 (the
“Form 10-K”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and (ii) the information contained in the Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of Arthur J. Gallagher & Co. and its subsidiaries.
Date: February 7, 2014
/s/ Douglas K. Howell
Douglas K. Howell
Vice President
Chief Financial Officer
(principal financial officer)
BOARD OF DIRECTORS
EXECUTIVE MANAGEMENT COMMITTEE
Walter D. Bay
General Counsel and Secretary
James W. Durkin, Jr.
president, employee Benefit Consulting
and Brokerage
Thomas J. Gallagher
Chairman, International Brokerage
James S. Gault
president, Retail property/Casualty and
International Brokerage
Douglas K. Howell
Chief Financial officer
Scott R. Hudson
president and Chief executive officer,
Risk Management Services
Susan E. McGrath
Chief Human Resources officer
David E. McGurn, Jr.
president, u.S. Wholesale Brokerage
J. Patrick Gallagher, Jr.
Chairman of the Board
president and Chief executive officer
Sherry S. Barrat2
Former Vice Chairman
northern trust Corporation
William L. Bax1
Former Managing partner of
pricewaterhouseCoopers’ Chicago office
Frank E. English, Jr.1
Former Managing Director and Vice Chairman of
Investment Banking, Morgan Stanley & Co.
Elbert O. Hand2,3
Former Director and Chairman of the Board
Hartmarx Corporation
David S. Johnson2,3
president and Chief executive officer of the
Americas, Barry Callebaut AG
Kay W. McCurdy2,3
of Counsel, locke, lord llp
Norman L. Rosenthal, Ph.D.1
president, norman l. Rosenthal & Associates, Inc.
James R. Wimmer1,3
Attorney and Former partner, lord, Bissell & Brook
1 Member of the Audit Committee
2 Member of the Compensation Committee
3 Member of the nominating/Governance Committee
2013 ANNuAl REPORT
Stockholder Information
ANNUAL MEETING
Arthur J. Gallagher & Co.’s 2014 Annual Meeting of
Stockholders will be held on Tuesday, May 13, 2014, at
9:00 a.m. CDT at The Gallagher Centre, Two Pierce Place,
Itasca, Illinois 60143.
REGISTRAR AND TRANSFER AGENT
Computershare Investor Services
211 Quality Circle, Suite 210
College Station, TX 77845
312.360.5386
www.computershare.com/investor
AUDITORS
Ernst & Young llP
STOCKHOLDER INQUIRIES
Communications regarding direct stock purchases, dividends,
lost stock certificates, direct deposit of dividends, dividend
reinvestment and changes of address should be directed to
Shareholder Services, Computershare Investor Services (see
contact information below).
STOCKHOLDER SERVICES
Computershare Investor Services
P.O. Box 30170
College Station, TX 77842-3170
312.360.5386
www.computershare.com/investor
Online Inquiries:
https://www-us.computershare.com/investor/contact
TRADING INFORMATION
Our common stock is listed on the NYSE, trading under the
symbol AJG. The following table sets forth the information as
to the price range of our common stock for the two-year period
ending December 31, 2013, and the dividends declared per
common share for the same period. The table reflects the range
of high and low sales prices per share as reported on the NYSE
composite listing.
QUARTERLY PERIODS
2013
First
Second
Third
Fourth
2012
First
Second
Third
Fourth
High
Low
$41.31
$34.97
$45.87
$40.51
$45.89
$41.11
$48.49
$43.57
$36.33
$32.01
$38.24
$33.75
$37.56
$34.46
$36.99
$34.20
Dividends Declared
Per Common Share
$0.35
$0.35
$0.35
$0.35
$0.34
$0.34
$0.34
$0.34
FINANCIAL INFORMATION REQUESTS
Any stockholder wishing to obtain a copy of our Annual
Report and Form 10-K may do so without charge by writing
to the Corporate Secretary at the address listed on the back
cover. These documents are also available on our website at
www.ajg.com.
COMPARATIVE PERFORMANCE GRAPH
The following graph demonstrates a five-year comparison of cumulative total returns for our company, the S&P 500 and a Peer
Group consisting of Arthur J. Gallagher & Co.; Aon plc; Marsh & Mclennan Companies, Inc.; Willis Group Holdings ltd.; and
Brown & Brown, Inc. The chart shows the performance of $100 invested in our company, the S&P 500 and the Peer Group on
December 31, 2008, with dividend reinvestment.
Comparison of 5-year Cumulative total Return
Assumes Initial Investment of $100
December 2013
$240
220
200
160
120
80
40
0
Arthur J. Gallagher & Co.
peer Group
S&p 500 Index – total Returns
2008
2009
2010
2011
2012
2013
Pakistan
Panama
Paraguay
Peru
Philippines
Poland
Portugal
Puerto Rico
Qatar
Reunion
Romania
Russia
Rwanda
Saint Kitts
Saint Lucia
Saint Marten
Saint Vincent
Saudi Arabia
Scotland
Senegal
Serbia
Singapore
Slovakia
Slovenia
South Africa
INTERNATIONAL CORRESPONDENT BROKERS
Curacao
Cyprus
Italy
Ivory Coast
Czech Republic
Jamaica
Japan
Jordan
Kazakhstan
Kenya
Kuwait
Kyrgyzstan
Latvia
Lebanon
Lithuania
Luxembourg
Macedonia
Madagascar
Malawi
Malaysia
Mali
Malta
Mauritania
Mauritius
Mexico
Monaco
Montenegro
Morocco
Abu Dhabi
Albania
Anguilla
Antigua
Argentina
Aruba
Australia
Austria
Bahamas
Bahrain
Bangladesh
Barbados
Belarus
Belgium
Benin
Bermuda
Bolivia
Bosnia-Herzegovina
Botswana
Brazil
British Virgin Islands
Bulgaria
Burkino-Faso
Cameroon
Canada
Cayman Islands
Central Africa
Chad
Chile
China
Colombia
Congo
Costa Rica
Croatia
Democratic Republic
of Congo
Denmark
Dominica
Dominican Republic
Dubai
Ecuador
Egypt
England
Equatorial Guinea
Estonia
Fiji
Finland
France
French Guiana
French Polynesia
Gabon
Germany
Ghana
Greece
Grenada
The Grenadines
Guam
Guatemala
Guinee Conakry
Hong Kong
Hungary
India
Indonesia
Iraq
Ireland
Israel
Mozambique
South Korea
Namibia
Spain
Netherlands
Sri Lanka
Netherlands Antilles
Swaziland
Nevis
Sweden
New Zealand
Switzerland
Niger
Norway
Oman
Taiwan
Tajikistan
Thailand
Togo
Trinidad and Tobago
Turkey
Turkmenistan
Turks And Caicos
Islands
Uganda
Ukraine
United Arab Emirates
United Republic of
Tanzania
Uruguay
Uzbekistan
Venezuela
Vietnam
Virgin Islands (U.S.)
Zambia
Zimbabwe
MoRe tHAn
140
CountRIeS WItH
ClIent-SeRVICe
CApABIlItIeS
2013 ANNuAl REPORT
GLOBAL HEADQUARTERS
the Gallagher Centre
two pierce place
Itasca, Il 60143-3141
630.773.3800
www.ajg.com