Any Challenge. Any Risk. Any Time.
2014 ANNUAL REPORT 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
CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
This 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 growth in our company or any part of our
company, future rates of organic growth, 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 9, of our Annual Report
on Form 10-K for the year ended December 31, 2014, 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.
“We push for professional excellence.”
TENET 3 – THE GALLAGHER WAY
NON-GAAP FINANCIAL MEASURES
For 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 29 to 30) in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, and
“4th Quarter 2014 Reconciliation of Non-GAAP Measures and Supplemental Quarterly Financial Data” on our
website at www.ajg.com under “Investor Relations.”
SELECTED FINANCIAL DATA AS REPORTED
(in millions, except 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
Brokerage
Risk Management
BROKERAGE & RISK MANAGEMENT COMBINED
Corporate
TOTAL COMPANY
Percent net earnings growth
OTHER INFORMATION
Dividends declared per share
Total assets at end of year
Total stockholders’ equity at end of year
Workforce at end of year (includes acquisitions)
ACQUISITION ACTIVITY
Number of acquisitions closed
Annualized revenue acquired
Domestic
International
TOTAL
(1) See “Non-GAAP Financial Measures” on the inside front cover.
2014
2013
2012
$
2,914.3
$ 2,144.3
$ 1,827.6
664.3
3,578.6
1,047.9
611.0
2,755.3
424.3
571.7
2,399.3
121.0
$ 4,626.5
$ 3,179.6
$ 2,520.3
46%
26%
18%
$
664.5
$
484.0
$
383.3
89.4
753.9
(121.1)
94.5
578.5
(73.6)
87.0
470.3
(38.2)
$
632.8
$
504.9
$
432.1
25%
17%
21%
$
263.8
$
204.8
$
155.8
41.2
305.0
(1.6)
46.2
251.0
17.6
42.5
198.3
(3.3)
$
303.4
$
268.6
$
195.0
13%
38%
24%
$
1.44
$ 10,010.0
$ 3,229.4
20,240
$
1.40
$ 6,860.5
$ 2,085.5
16,336
$
1.36
$ 5,352.3
$ 1,658.6
13,707
60
141.5
619.7
761.2
$
$
31
193.3
190.6
383.9
$
$
60
$
169.5
62.2
$
231.7
BROKERAGE SEGMENT
TOTAL REVENUES – $2.9 BILLION
60%
65%
RETAIL P/C
RETAIL BENEFITS
WHOLESALE
23%
17%
DOMESTIC
INTERNATIONAL
35%
RISK MANAGEMENT SEGMENT
TOTAL REVENUES – $664.3 MILLION
71%
77%
WORKERS COMPENSATION
LIABILITY
PROPERTY
DOMESTIC
INTERNATIONAL
25%
4%
23%
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:
• Agribusiness
• Automotive
• Global Risks
• Healthcare
• Marine
• Personal
• Restaurant
• Scholastic
• Aviation & Aerospace
• Higher Education
• Private Equity
• Technology/Telecom
• Construction
• Energy
• Entertainment
• Environmental
• Hospitality
• Life Science
• Life Solutions
• Manufacturing
• Professional Groups
• Public Entity
• Real Estate
• Religious/Nonprofit
• Trade Credit/
Political Risk
• Transportation
2014 ANNUAL REPORT 3
To Our Stockholders
2014 was truly a transformative year for
Arthur J. Gallagher & Co.! In addition to
being a banner year for expansion through
acquisitions, we also saw outstanding
performance from all of our businesses
around the globe.
Adjusted total revenues from our Brokerage
and Risk Management operations grew 30%
in 2014 to nearly $3.6 billion and adjusted
EBITDAC was up 39% to $842.9 million.
Our Brokerage and Risk Management
adjusted EBITDAC margins increased by
163 basis points to 23.6%.
4
Gallagher’s clean energy investments
also performed very well in 2014,
exceeding our projections and
generating $90.5 million of adjusted
after-tax earnings, which we will use
to grow our core Brokerage and Risk
Management businesses.
Reflecting their confidence in our
company’s growth strategy and strong
financial position, the Board of
Directors increased the quarterly cash
dividend to $0.36 in January 2014 and
to $0.37 in January 2015.
Acquisitions have long been a key
component of our growth strategy.
In 2014, strategic opportunities arose
in Australia, Canada, New Zealand
and the United Kingdom to acquire
leading brokers and significantly expand
our presence in those countries. As a
result, 32% of our Brokerage and Risk
Management revenues were generated
outside of the U.S. in 2014, compared
with just 23% in 2013.
At the close of 2014, Gallagher
had more than 20,000 employees
operating from more than 650 sales
and service offices in 30 countries.
And, in combination with our
international network of independent
broker partners, we offer client-service
capabilities in more than 140 countries
around the world.
Our success is attributable to our team’s
ongoing focus on four key priorities:
• Organic revenue growth,
• Mergers and acquisitions,
• Productivity and quality
enhancements, and
• Maintaining our unique, team-
oriented sales culture.
BROKERAGE & RISK MANAGEMENT
ADJUSTED REVENUES
BROKERAGE & RISK MANAGEMENT
ADJUSTED EBITDAC
BROKERAGE & RISK MANAGEMENT
ADJUSTED EBITDAC MARGIN
(in millions)
$3,571
(in millions)
$843
23.6%
$2,749
$2,387
$607
$503
22.0%
21.2%
2012
2013
2014
2012
2013
2014
2012
2013
2014
See “Non-GAAP Financial Measures” on the inside
front cover.
30 years as a public company.
Y A S A
R
A
S
R
E
V
I
N
N
A
P U BLICLY T
R
A
D
E
D
C
O
M
P
A
N
Y
1984 – 2 0 1
4
We celebrated a significant milestone in 2014. June 20 marked the 30th anniversary of Arthur J. Gallagher & Co.’s initial
public offering.
The decision to take our company public was instrumental in bolstering Gallagher’s brand awareness and financial strength,
and in supporting our subsequent expansion throughout North America and around the world.
The following timeline illustrates the pace of change and growth that followed this critical point in our company’s history.
2014 ANNUAL REPORT 5
Organic Growth
Our Brokerage operations’ total organic
commission and fee revenue grew 4.3%
in 2014. This organic growth was driven
by high levels of account retention,
solid new business production and
increased cross-selling activity.
Our Risk Management operations’
total organic fee revenue grew
9.5% in 2014 through strong new
business development across our large
commercial and carrier units, high
client-retention levels and growth in
claim counts from our existing clients.
During 2014 we saw what we would
characterize as a stable and rational
property/casualty rate environment.
We are also seeing growing signs of
a recovering economy in the United
States and other countries in which
we operate. An increasing number
of clients have been discussing their
future growth and expansion plans
with us. Each of these trends bodes well
for continued growth opportunities
throughout 2015.
Mergers and Acquisitions
Acquisitions have long been a key
component of our growth strategy and
2014 was our strongest acquisition
year to-date. We completed 60 deals,
all within our Brokerage segment,
bringing our company a record $761.2
million in annualized revenues. These
acquisitions significantly expanded our
capabilities and geographic presence,
and secured our position as one of the
leading insurance brokers in the United
Kingdom, Australia, New Zealand and
Canada, as well as the United States.
In April, Gallagher acquired the Oval
Group of Companies in the United
Kingdom, bringing us more than 1,000
associates and operational synergies, and
bolstering our retail client base in the
U.K. middle market.
Our acquisition of the Crombie/
OAMPS operations, completed in
June, was the largest deal in Gallagher’s
history. It brought us an additional
1,700 employees across Australia, New
Zealand and the United Kingdom,
with strong market relationships and
solid name recognition within their
respective marketplaces.
In July, we acquired Noraxis Capital
Corporation, a top-five Canadian
insurance broker with more than 650
employees, solidifying our presence in
that country and bringing us additional
expertise in areas such as energy,
construction and mining.
These acquisitions immediately
provided us with much more robust
operating platforms in the United
Kingdom, Australia, New Zealand
and Canada. This better positions
us to pursue our ongoing strategy of
acquiring attractive, bolt-on brokerages
with similar cultures that, on average,
generate between $1 million and $15
million in annual revenues.
We completed 57 additional
acquisitions during 2014, 45 of which
were in the United States, with an
average size of about $4 million in
annual revenues. Those outstanding
new partners augmented our retail,
wholesale, alternative risk and affinity
group brokerage capabilities, and
further expanded our geographic
footprint.
We know that each of these fine
companies had options and we are
delighted that they chose to align
themselves with us.
1984
1986
1987
Arthur J. Gallagher & Co. became
a public company.
Gallagher split its stock for the first
time with a 2-for-1 stock split.
Gallagher joined the New York Stock
Exchange (NYSE:AJG).
1985
Gallagher held its first stockholders’
meeting with approximately 200
people in attendance.
6
1988
Gallagher’s property/casualty third-
party claims administrator, Gallagher
Bassett Services, Inc., unbundled its
services, making them available to
non-Gallagher brokers.
Productivity and Quality
We have been seeing great results from
the productivity and quality initiatives
that our company has implemented
over the last decade, as well as margin
expansion in every year since 2011. In
2014 the adjusted operating expense
ratio for our Brokerage segment was
just 17.6%, compared with 20.8% in
2008. Our Risk Management segment’s
adjusted operating expense ratio in
2014 was just 24.0%, compared with
27.0% in 2008. In 2014 alone, we
achieved a 163 bps improvement in our
Brokerage & Risk Management total
adjusted EBITDAC margins.
To optimize productivity, we have
invested in business intelligence and
sales force management tools. We utilize
sourcing to better manage expenses. In
addition, we have established client-
service operations within our U.S. retail
P/C brokerage business staffed with
dedicated service professionals who
handle client requests and generate
client applications and proposals. These
operations utilize technology and tools
that improve operating efficiencies and
turn-around time, and processes that
deliver consistent client service.
Our offshore centers of excellence,
which now employ more than 2,000
professionals, have expedited client
service, improved quality and enabled
our branch offices around the world
to concentrate on core activities,
enhancing productivity. These centers
provide back- and middle-office process
support, such as accounting, IT support,
policy review and the processing of
certificates of insurance and auto
insurance cards, to our branches.
Culture
We have a very strong and supportive
company culture that we celebrate
and work diligently to maintain. It
revolves around shared values instilled
in the company by our founder, Arthur
J. Gallagher, in 1927 that have been
steadily nurtured through subsequent
generations. These shared values are
encapsulated in a set of 25 tenets put in
writing in 1984 by Arthur’s son, Robert
E. Gallagher, which we collectively refer
to as the The Gallagher Way.
We foster and promote these shared
values internally and externally as a
true differentiator. Among them, our
culture is supportive and team-oriented.
TOTAL STOCKHOLDERS’ EQUITY
(in millions)
$3,229
$2,086
$1,659
2012
2013
2014
DIVIDENDS DECLARED PER SHARE
(in dollars)
$1.44
$1.40
$1.36
2012
2013
2014
1990
Robert E. Gallagher was named
Chairman of the Board, John P.
Gallagher was appointed Vice
Chairman of the Board and J. Patrick
Gallagher, Jr. became President and
Chief Operating Officer.
Based on 1989 revenues of more
than $173 million, Gallagher was
recognized as the eighth largest
broker in the United States by
Business Insurance magazine.
1991
Gallagher Bassett Services established
an International division in the
United Kingdom.
Gallagher moved to a new corporate
headquarters at Two Pierce Place,
Itasca, Illinois.
2014 ANNUAL REPORT 7
MERGERS & ACQUISITIONS ANNOUNCED IN 2014
Affinity Marketing Group
American Wholesalers
Underwriting, Ltd.
Baker Tilly’s Employee
Benefits Business
Benefit Development Group
Benfield Group
Bennett & Shade Co.
Blue Holdings Pty Ltd
Cowles & Connell
Crombie/OAMPS
Heritage Insurance Management
Limited
Independent Benefit Services, Inc.
Instrat Insurance Brokers
Insurance Associates, Inc.
Insurance Point LLC
JAO & Partners
(acquired 56% equity interest)
Kent, Kent & Tingle
L&R Benefits, LLC
MGA Insurance Group
Denman Consulting Services
Mike Henry Insurance Brokers Limited
O’Gorman & Young, Incorporated
Oval Group of Companies
Parmia Pty Ltd
Plus Companies, Inc.
SGB-NIA Insurance Brokers
Shilling Limited
Spataro Insurance Agency, Inc.
Sunderland Insurance Services, Inc.
Titan Group, LLC
Trip Mate, Inc.
Tri-State General
Discovery Benefit Solutions, Inc.
Miller-Harrison Insurance Services
Tudor Risk Services, LLC
Everett James, Inc.
Forker Company
Foundation Strategies, Inc.
Hagedorn & Company
Minvielle & Chastanet Insurance
Brokers
Noraxis Capital Corporation
1992
1996
1997
Gallagher’s benefit brokerage and
consulting operations celebrated
its fifth anniversary as a separate
division and generated $5.3 million
in revenues.
Gallagher established a
presence in Australia by
forming a claims-adjusting
joint venture.
Gallagher formed its U.S. wholesale
brokerage operation, Risk Placement
Services, Inc.
Robert E. Gallagher celebrated his
50th anniversary with the company.
1995
On January 1, J. Patrick Gallagher, Jr.
became CEO of the company.
8
We respect one another’s abilities. We
push for professional excellence. We’re
competitive and aggressive. We adhere
to the highest standards of moral and
ethical behavior. And, when meeting
with potential acquisition partners or
new associates, we seek out people who
share these same values.
to our Board more than 45 years of
insurance brokerage, management and
financial services experience, including
five years as Deputy Chairman and
a Member of Council of Lloyd’s of
London. John’s extensive international
insurance knowledge adds a valuable
perspective.
Reflecting our ongoing focus on
professional excellence and ethical
behavior, we were extremely pleased to
be recognized for the third year in a row
as one of the 2014 World’s Most Ethical
Companies® by the Ethisphere Institute.
Other News
Gallagher made two strategic executive
appointments in 2014. In May, Richard
Tallo joined our company as Chief
Marketing & Communications Officer
to lead our global marketing and
communications strategy. In July, Vishal
Jain was appointed Global Chief Service
Officer to lead our ongoing efforts
to enhance customer service, while
improving operational efficiency and
quality across divisions. Both were also
appointed corporate vice presidents.
In November, we elected a new
Director, D. John Coldman, who brings
To better support our business strategy
and further emphasize our corporate
responsibility and compliance efforts,
our Board appointed three additional
corporate vice presidents in 2014:
Curtis Anderson, President of the
MGA/Binding division of our domestic
wholesale brokerage business; Thomas
Tropp, Vice President of Corporate
Ethics and Sustainability; and Sarah
DiLorenzo, Chief Compliance Officer.
Looking Ahead
This was truly a seminal year for our
company. We significantly improved
our margins, achieved strong organic
growth, and continued to add to our
product and service offerings to address
our clients’ complex and growing
needs. Furthermore, the acquisitions
we completed during 2014 have
augmented or expanded our existing
capabilities and strengthened our
global base.
Our company is extremely well-
positioned for future growth, with
tremendous talent throughout the
organization and a culture that fosters
collaboration in delivering the best
solutions for our clients. We continue
to attract new talent and our acquisition
pipeline remains full, as potential
partners recognize the advantages to be
gained by joining forces with us.
I want to thank everyone on our team
for contributing to our excellent
performance in 2014 and enabling us to
deliver such outstanding results to you,
our valued shareholders. Their ongoing
efforts should continue to fuel our
profitable growth and strong shareholder
returns for many years to come.
Sincerely,
J. PATRICK GALLAGHER, JR.
Chairman, President and CEO
1999
2000
2002
Based on 1998 revenues of more than
$500 million, Gallagher was recognized
by Business Insurance magazine as the
world’s fourth largest broker.
Gallagher Bassett Services launched
www.risxfacs.com, a powerful
web-based claims and loss-control
information system that gives clients
access to current claims data.
Gallagher exceeded $1 billion
in revenues.
2014 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 pride
ourselves in a culture that embodies
both. That is why we recognize the
thousands of hours of community
service our employees around the
world undertake 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 our communities
by supporting their favorite charities
and organizations. And, to assist in
those efforts, the Gallagher Foundation
matches qualified employee donations
of up to $1,000 per employee per year.
In 2014, The Gallagher Foundation
matched nearly $1 million in employee
contributions to charitable causes.
Whether we are working to help our
communities, the environment or other
social causes, Gallagher employees are
making a difference around the world.
Cancer Council Australia
The team at our Sydney, Australia office held
their second annual charity golf day, raising
more than $35,000 for Cancer Council
Australia.
Employees volunteer to
improve local park
In June, employees of our brokerage team in
Indianapolis, Indiana volunteered their time
to the Hamilton County Parks & Recreation
Department. The team worked together to
remove an estimated 500 pounds of invasive
garlic mustard to improve the ecology of a
local recreation site, Cool Creek Park.
2004
2006
2009
Gallagher was named to Forbes
magazine’s Platinum 400 List of
Best Big Companies in America.
J. Patrick Gallagher, Jr. was
named Chairman of the Board.
2007
Risk Placement Services, Inc.,
Gallagher’s U.S. wholesale
brokerage operation, celebrated its
10th anniversary.
Gallagher celebrated the 25th
anniversary of The Gallagher Way
(see page 12).
2010
Gallagher Bassett Services acquired
the third-party administrator and
managed care service operations of
GAB Robins North America, Inc.
10
Scope UK
In July, six employees from the Birmingham, U.K. office collectively
Llantrisant team improves schools
In August, a team at our Llantrisant, Wales office supported a primary
cycled 280 miles from London to Paris, raising nearly £10,000 for
school by tending to their grounds and doing needed maintenance jobs.
Scope UK, a charity that supports disabled people by providing
assistance, information and advice to more than a quarter of a
million disabled people and their families.
Habitat for Humanity
In October, employees from our Tulsa, Oklahoma office spent a day
Relay for Life
In August, employees of Gallagher’s Home Office in Itasca, Illinois
painting a Habitat for Humanity house.
participated in a local American Cancer Society Relay for Life event for
the seventh consecutive year. The team raised nearly $18,000 in 2014.
2011
2012
2014
Gallagher exceeded $2 billion
in revenues.
In December, Gallagher released
its first Corporate Social
Responsibility report.
Gallagher was named a World’s Most
Ethical Company® by the Ethisphere
Institute for the first time, an honor
repeated in 2013 and 2014.
Gallagher launched a new, content-rich
and responsive www.ajg.com, integrating
the corporate and domestic retail
brokerage websites.
Gallagher completed a secondary stock
offering, raising nearly $1 billion.
™
®
2014 ANNUAL REPORT 11
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.
The Gallagher Way
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.
10. Interpersonal business relationships
20. We run to problems—not away
should be built.
from them.
11. We all need one another. We are all
cogs in a wheel.
21. We adhere to the highest standards
of moral and ethical behavior.
3. We push for professional excellence.
13. Professional courtesy is expected.
12. No department or person is an island.
22. People work harder and are more
effective when they’re turned on—
not turned off.
4. We can all improve and learn from
one another.
14. Never ask someone to do something
you wouldn’t do yourself.
23. We are a warm, close Company.
This is a strength—not a weakness.
5. There are no second-class citizens—
everyone is important and everyone’s
job is important.
6. We’re an open society.
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—
7. Empathy for the other person is
not dictated.
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.
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.
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, 2014
[ ] 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)
Two Pierce Place
Itasca, Illinois
(Address of principal executive offices)
36-2151613
(I.R.S. Employer Identification Number)
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, 2014 (the last day of the registrant’s most recently completed second
quarter) was $6,838,200,000.
The number of outstanding shares of the registrant’s Common Stock, $1.00 par value, as of January 31, 2015 was 164,744,000.
Documents incorporated by reference: Portions of Arthur J. Gallagher & Co.’s definitive 2015 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, 2014
Index
Page No.
Part I.
Item 1. Business ................................................................................................................................................................ 2-9
Item 1A. Risk Factors ........................................................................................................................................................ 9-20
Item 1B. Unresolved Staff Comments ................................................................................................................................... 20
Item 2. Properties ................................................................................................................................................................. 20
Item 3. Legal Proceedings ................................................................................................................................................... 20
Item 4. Mine Safety Disclosures . ........................................................................................................................................ 20
Executive Officers................................................................................................................................................................... 21
Part II.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities .......................................................................................................................... 21-22
Item 6. Selected Financial Data ........................................................................................................................................... 23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ............................ 23-49
Item 7A. Quantitative and Qualitative Disclosure about Market Risk ............................................................................. 50-51
Item 8. Financial Statements and Supplementary Data ................................................................................................. 52-94
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................................. 95
Item 9A. Controls and Procedures ......................................................................................................................................... 95
Item 9B. Other Information ................................................................................................................................................... 95
Part III.
Item 10. Directors, Executive Officers and Corporate Governance ...................................................................................... 95
Item 11. Executive Compensation ........................................................................................................................................ 95
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ............... 95
Item 13. Certain Relationships and Related Transactions, and Director Independence ........................................................ 96
Item 14. Principal Accountant Fees and Services ................................................................................................................. 96
Part IV.
Item 15. Exhibits and Financial Statement Schedules ..................................................................................................... 96-99
Signatures ..................................................................................................................................................................... 100
Schedule II - Valuation and Qualifying Accounts........................................................................................................................ 101
Exhibit Index ................................................................................................................................................................................ 102
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 consulting services and third-party claims settlement and administration services to both domestic and
international entities. We believe that our major strength is our ability to deliver comprehensively structured insurance, risk
management and consulting 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 21, 2014 edition, and the world’s largest property/casualty third-party
claims administrator, according to Business Insurance magazine’s March 31, 2014 edition. We have three reportable segments:
brokerage, risk management and corporate, which contributed approximately 63%, 14% and 23%, respectively, to 2014 revenues.
We generate approximately 68% of our revenues from the combined brokerage and risk management segments domestically, with
the remaining 32% derived internationally, primarily in Australia, Bermuda, Canada, the Caribbean, New Zealand and the United
Kingdom (U.K). Substantially all of the revenues of the corporate segment are generated in the United States (U.S.).
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, 2014 of approximately $7.7 billion. Information in this report is as of December 31, 2014 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; future capital expenditures; future debt to earnings ratios; the outcome of contingencies;
dividend policy; pension obligations; cash flow and liquidity; capital structure and financial losses; future actions by regulators;
the outcome of existing regulatory actions, investigations or litigation; the impact of changes in accounting rules; financial
markets; interest rates; foreign exchange rates; matters relating to our operations; income taxes; expectations regarding our
investments, including our clean energy investments; and integrating recent acquisitions. 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.
Many factors could affect our actual results, and variances from our current expectations regarding such factors could cause
actual results to differ materially from those expressed in our forward-looking statements. Potential factors that could impact
results include:
• Failure to successfully integrate recently acquired businesses and their operations or fully realize synergies from such
acquisitions in the expected time frame;
• Volatility or declines in premiums or other adverse trends in the insurance industry;
• An economic downturn;
• 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 (including the risks posed by protectionist local governments and underdeveloped or evolving legal
systems), risks related to maintaining regulatory and legal compliance across multiple jurisdictions (such as those relating to
2
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 failure to
gain internal efficiencies and effective internal controls through the application of technology and related tools;
• Our inability to recover successfully should we experience a disaster, cybersecurity attack or other disruption to business
continuity;
• Damage to our reputation;
• 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 (for example, relating to insurance broker
compensation methods);
• Violations or alleged violations of the U.S. Foreign Corrupt Practices Act (FCPA), the U.K. Bribery Act 2010 or other anti-
corruption laws and FATCA;
• The outcome of any existing or future investigation, regulatory action or litigation;
• 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;
Improper disclosure of confidential, personal or proprietary data;
• Unfavorable determinations related to contingencies and legal proceedings;
• Clients that are not satisfied with our services;
•
• Significant changes in foreign exchange rates;
• Changes in our accounting estimates and assumptions;
• Risks related to our clean energy investments, including the risk of intellectual property claims, utilities switching from coal
to natural gas, 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;
• The risk that our outstanding debt adversely affects our financial flexibility and restrictions and limitations in the
agreements and instruments governing our debt;
• The risk we may not be able to receive dividends or other distributions from subsidiaries;
• The risk of share ownership dilution when we issue common stock as consideration for acquisitions and for other reasons;
and
• Volatility of the price of our common stock.
Accordingly, you should not place undue reliance on forward-looking statements, which speak only as of, and are based on
information available to us on, the date of the applicable document. All subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements
contained or referred to in this section. We do not undertake any obligation to update any such statements or release publicly any
revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events.
Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions,
including the risk factors referred to above. Our future performance and actual results may differ materially from those expressed
in forward-looking statements. Many of the factors that will determine these results are beyond our ability to control or predict.
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update or revise
any forward-looking statement, 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.
3
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, 2014, is as follows (in millions):
Brokerage
Commissions
Fees
Supplemental commissions
Contingent commissions
Investment income and other
Risk Management
Fees
Investment income
Corporate
2014
2013
2012
Amount
$
2,083.0
595.0
104.0
84.7
47.6
2,914.3
% of
Total
45%
13%
2%
2%
1%
63%
663.3
1.0
664.3
14%
-%
14%
Amount
$
1,553.1
450.5
77.3
52.1
11.3
2,144.3
609.0
2.0
611.0
% of
Total
49%
14%
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%
Clean energy and other investment income
1,047.9
23%
424.3
13%
121.0
5%
Total revenues
$
4,626.5
100%
$
3,179.6
100%
$
2,520.3
100%
See Note 18 to our 2014 consolidated financial statements for additional financial information, including earnings before income
taxes and identifiable assets by segment for 2014, 2013 and 2012.
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 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 17 to our 2014 consolidated financial statements for unaudited quarterly operating results
for 2014 and 2013.
Brokerage Segment
The brokerage segment accounted for 63% of our revenues in 2014. 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 companies, which are
usually based upon either 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 the 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 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 550 sales and service offices located throughout the U.S.
and in 29 other countries. Most of these offices are fully staffed with sales and service personnel. In addition, we offer client-
service capabilities in approximately 140 countries around the world through a network of correspondent brokers and consultants.
4
Retail Insurance Brokerage Operations
Our retail insurance brokerage operations accounted for 83% of our brokerage segment revenues in 2014. 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:
Aviation
Casualty
Commercial Auto
Compensation
Cyber Liability
Dental
Directors & Officers Liability
Disability
Earthquake
Errors & Omissions
Exchange Solutions
Executive Benefits
Fiduciary Services
Fine Arts
Fire
General Liability
Health & Welfare
Healthcare Analytics
Human Resources
Institutional Investment
Marine
Medical
Products Liability
Professional Liability
Property
Retirement
Voluntary Benefits
Wind
Workers Compensation
Our retail brokerage operations are organized in more than 500 geographical profit centers primarily located in the U.S.,
Australia, Canada, the Caribbean, New Zealand and the U.K. and operate within certain key niche/practice groups, which account
for approximately 69% 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
Global Risks
Healthcare
Higher Education
Hospitality
Life Science
Life Solutions
Manufacturing
Marine
Personal
Private Equity
Professional Groups
Public Entity
Real Estate
Religious/Not-for-Profit
Restaurant
Scholastic
Technology/Telecom
Trade Credit/Political Risk
Transportation
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 17% of our brokerage segment revenues in 2014. 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 80% 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 15, 2014 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.
5
Risk Management Segment
Our risk management segment accounted for 14% of our revenues in 2014. 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 71% of our risk management segment’s revenues are from workers compensation related claims, 25% 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 110 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 March 31, 2014 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.
Corporate Segment
The corporate segment accounted for 23% of our revenues in 2014. 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 2014 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, 2014, significant investments managed by
this segment include:
Clean Coal Related Ventures
We have a 46.54% interest in Chem-Mod LLC (Chem-Mod), a privately-held enterprise that has commercialized multi-pollutant
reduction technologies to reduce mercury, sulfur dioxide and other emissions at coal-fired power plants. We also have a 12.0%
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 a 99% interest in a limited liability company
that has ownership interests in four limited liability companies that own 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).
6
International Operations
Our total revenues by geographic area for each of the three years in the period ended December 31, 2014 were as follows
(in millions):
Brokerage and risk management segments
United States
United Kingdom
Australia
Canada
Other foreign, principally New Zealand
2014
2013
2012
Amount
$
2,406.0
726.4
243.1
85.0
118.1
% of
Total
68%
20%
7%
2%
3%
Amount
$
2,118.3
427.9
152.6
32.6
23.9
% of
Total
77%
15%
6%
1%
1%
Amount
$
1,885.1
346.0
121.4
32.1
14.7
% of
Total
79%
14%
5%
1%
1%
Total brokerage and risk management
3,578.6
100%
2,755.3
100%
2,399.3
100%
Corporate segment, substantially all United States
1,047.9
424.3
121.0
Total revenues
$
4,626.5
$
3,179.6
$
2,520.3
See Notes 6, 15 and 18 to our 2014 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 2014, 2013 and
2012.
International Brokerage Operations
The majority of our international brokerage operations are in Australia, Bermuda, Canada, the Caribbean, New Zealand and the
U.K, targeting small to medium enterprise risks.
We operate primarily as a retail commercial property and casualty broker throughout more than 35 locations in Australia,
30 locations in Canada and 25 locations in New Zealand. In the U.K., we operate as a retail broker from more than 55 locations.
We also have 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.
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 approximately 140 countries, we are able to
fully serve our clients’ coverage and service needs in virtually any geographic area.
International Risk Management Operations
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 550 sales and service offices located throughout the U.S.
and in 29 other countries. We manage our third-party claims adjusting operations through a network of more than 110 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
2014, 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 4% 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.
7
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 21, 2014 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 March 31, 2014 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 Travelers 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.
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 to 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 339 acquisitions from January 1, 2002 through December 31, 2014, 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 $1.0 million to $50.0 million, although in 2014 we
completed three large acquisitions with an aggregate purchase price consideration in excess of $1,700.0 million.
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
8
• Clearly defined financial criteria.
See Note 3 to our 2014 consolidated financial statements for a summary of our 2014 acquisitions, the amount and form of the
consideration paid and the dates of acquisition.
Employees
As of December 31, 2014, we had approximately 20,200 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 overall economic downturn, as well as unstable economic conditions in the countries and regions in which we operate,
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 experience liquidity problems
or other financial difficulties in the event of a prolonged deterioration in the economy, which could have an adverse effect on our
results of operations and financial condition.
Our growing operations in countries and regions undergoing economic downturns, particularly in emerging markets, expose us to
risks and uncertainties that could materially adversely affect our results of operations and financial condition. In addition, 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 exit of Greece or another country from the Eurozone, or 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.
Economic conditions that result in financial difficulties for insurance companies or reduced insurer capacity could
adversely affect our results of operations and financial condition.
We 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 could
result in errors and omissions claims against us by our clients, and the failure of errors and omissions insurance carriers could
make the errors and omissions insurance we rely upon cost prohibitive or unavailable, which could adversely affect our results of
operations and financial condition.
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. Because of 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
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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;
• Changes in our business compensation model as a result of regulatory developments;
• 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, consulting firms and Internet or
other technology 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, retention of clients, entry into unfamiliar markets or lines of
business, contingencies or liabilities, such as violations of sanctions laws or anti-corruption laws including the Foreign Corrupt
Practices Act (FCPA) and U.K. Bribery Act, risks relating to ensuring compliance with licensing and regulatory requirements, tax
and accounting issues, the risk that the acquisition distracts management and personnel from our existing business, and
integration difficulties relating to accounting, information technology, human resources, or organizational culture and fit, some or
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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 Jiang Tai Re, our joint venture with Jiang Tai
Insurance Brokers in China, or 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 and groups of brokers to competitors in the past; for example,
the leader of our brokerage operations in the U.K., as well as the finance leader of those operations, recently left us. 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 operations outside the U.S. 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. The global nature of our business creates
operational and economic risks. Adverse geopolitical or economic conditions may temporarily or permanently disrupt our
operations in these countries or create difficulties in staffing and managing foreign operations. 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 enforced by the Internal Revenue Service (for
example, the Foreign Account Tax Compliance provisions of the Hiring Incentives to Restore Employment Act, which
we refer to as FATCA), rules issued by the SEC, 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;
• The potential costs, difficulties and risks associated with local regulations across the globe, including the risk of personal
liability for directors and officers and “piercing the corporate veil” risks under the corporate law regimes of certain
countries;
• Difficulties in staffing and managing foreign operations;
• Less flexible employee relationships, which may limit our ability to prohibit employees from competing with us after
they are no longer employed with us, and may make it more difficult and expensive to terminate their employment;
• Political and economic instability, particularly in the Eurozone (including the potential dissolution of the Euro) and in
emerging markets (including undeveloped or evolving legal systems, unstable governments, 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;
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• Lost business or other financial harm due to governmental actions affecting the flow of goods, services and currency,
including protectionist policies on the part of local governments that discriminate in favor of local competitors; 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 lost business due to changes in management at such clients or changes in state government policies, in the case
of our government-entity clients, or for other reasons;
• 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 U.S.)
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 and may be unable to obtain or retain
certain clients 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.
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 operating
results, client relationships, growth and compliance programs 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
12
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
operating results, client relationships, growth and compliance programs.
Our inability to recover successfully should we experience a disaster, cybersecurity attack or other 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, 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 disruption to business continuity could have a material adverse effect on our operations.
Damage to our reputation could have a material adverse effect on our business.
Our reputation is a key asset of the Company. We advise our clients on and provide services related to a wide range of subjects
and our ability to attract and retain clients is highly dependent upon the external perceptions of our level of service,
trustworthiness, business practices, financial condition and other subjective qualities. Negative perceptions or publicity regarding
these matters or others could erode trust and confidence and damage our reputation among existing and potential clients, which
could make it difficult for us to attract new clients and maintain existing ones. Negative public opinion could result from our
association with clients or business partners who themselves have a damaged reputation, actual or alleged conduct by us,
including unethical actions by “rogue” brokers, operations, regulatory compliance, and the use and protection of data and
systems, satisfaction of client expectations, and from actions taken by regulators or others in response to such conduct. This
damage to our reputation could further affect the confidence of our clients, regulators, stockholders and the other parties in a wide
range of transactions that are important to our business, having a material adverse effect on our business, financial condition and
results of 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 we may be less profitable.
Many of our activities throughout the world are subject to regulatory supervision, including insurance industry regulation and
regulations promulgated by bodies such as the Securities and Exchange Commission (SEC), Department of Justice (DOJ) and
Internal Revenue Service (IRS) in the U.S., the Financial Conduct Authority (FCA) in the U.K. and the Australian Securities and
Investments Commission in Australia. Our activities are also subject to a variety of other laws, rules and regulations addressing
licensing, data privacy, wage-and-hour standards, employment and labor relations, anti-competition, anti-corruption, currency,
reserves and the amount of local investment with respect to our operations in certain countries. This regulatory supervision 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 and legal fees.
The global nature of our operations increases the complexity and cost of compliance with laws and regulations, including the
development of new internal controls and providing training to employees in multiple locations, adding to our cost of doing
business. In addition, many of these laws and regulations may have differing or conflicting legal standards across jurisdictions,
increasing further the complexity and cost of compliance. In emerging markets and other jurisdictions with less developed legal
systems, local laws and regulations may not be established with sufficiently clear and reliable guidance to provide us with
adequate assurance that we are aware of all necessary licenses to operate our business, that we are operating our business in a
compliant manner, or that our rights are otherwise protected.
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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 and make
recommendations 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 potential for conflicts of interest. The potential for conflicts of interest arises when a broker is compensated by
two parties in connection with the same or similar transactions. The vast majority of the compensation we receive for our work as
insurance brokers is in the form of retail commissions and fees. We receive additional revenue from insurance companies,
separate from retail commissions and fees, including, among other things, contingent and supplemental commissions and
payments for consulting and analytics services provided to insurance carriers. Future changes in the regulatory environment may
impact our ability to collect these additional revenue streams. Adverse regulatory, legal or other developments regarding these
revenues could have a material adverse effect on our business, results of operations or financial condition, expose us to negative
publicity and reputational damage and harm our client, insurer or other relationships.
We could be adversely affected by violations or alleged violations of laws that impose requirements for the conduct of our
overseas operations, including the FCPA, the U.K. Bribery Act or other anti-corruption laws, sanctioned parties
restrictions, and FATCA.
In foreign countries where we operate, a risk exists that our employees, third party partners or agents could engage in business
practices prohibited by applicable laws and regulations, such as the FCPA and the U.K. Bribery Act. Such anti-corruption laws
generally prohibit companies from making improper payments to foreign officials and require companies to keep accurate books
and records and maintain appropriate internal controls. Our policies mandate strict compliance with such laws and we devote
substantial resources to our compliance program to ensure compliance. However, we operate in some parts of the world that have
experienced governmental corruption, and, in certain circumstances, local customs and practice might not be consistent with the
requirements of anti-corruption laws. In addition, in recent years, two of the five publicly traded insurance brokerage firms were
investigated in the U.S. and the U.K. for improper payments to foreign officials. These firms undertook internal investigations
and paid significant settlements.
We remain subject to the risk that our employees, third party partners or agents will engage in business practices that are
prohibited by our policies and violate such laws and regulations. Violations by our company or a third party could result in
significant internal investigation costs and legal fees, civil and criminal penalties, including prohibitions on the conduct of our
business, and reputational harm.
We may also be subject to legal liability and reputational damage if we violate U.S. trade sanctions on countries such as Iran,
North Korea, Cuba, Sudan and Syria.
In addition, FATCA requires certain of our subsidiaries, affiliates and other entities to obtain valid FATCA documentation from
payees prior to remitting certain payments to such payees. In the event we do not obtain valid FATCA documents, we may be
obliged to withhold a portion of such payments. This obligation is shared with our customers and clients who may fail to comply,
in whole or in part. In such circumstances, we may incur FATCA compliance costs including withholding taxes, interest and
penalties. In addition, regulatory initiatives and changes in the regulations and guidance promulgated under FATCA may
increase our costs of operations, and could adversely affect the market for our services as intermediaries, which could adversely
affect our results of operations and financial condition.
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 or any other law, our results of operations could be adversely
impacted.
14
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, or provide clients with appropriate consulting, advisory and claims
handling services. There is also the risk that our employees or sub-agents may fail to 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 other 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 14 to our consolidated financial statements, we are a defendant in various legal actions incidental
to the nature of our business and our clean energy investments, including but not limited to matters related to employment
practices, alleged breaches of non-compete or other restrictive covenants, theft of trade secrets, breaches of fiduciary duties,
intellectual property infringement 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. For example, our micro-captive
advisory services are currently the subject of an investigation by the IRS. In addition, we were named in a lawsuit asserting that
we, our subsidiary, Gallagher Clean Energy, LLC, and Chem-Mod LLC are liable for infringement of a patent held by Nalco
Company. 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, or on an ongoing basis. In addition,
regardless of any eventual monetary costs, any such matter 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 costs, loss of profit opportunities and damage to
our 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
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
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 confidential, personal or proprietary data, whether due to human error, misuse of information by
employees or vendors, or as a result of cyberattacks, could result in regulatory scrutiny, legal liability or reputational
harm, and could have an adverse effect on our business or operations.
We maintain confidential, personal and proprietary information relating to our company, our employees and our clients. This
information includes personally identifiable information, protected health information and financial information. In many
jurisdictions, particularly in the U.S. and the European Union, we are subject to laws and regulations relating to the collection,
use, retention, security and transfer of this information. These laws apply to transfers of information among our affiliates, as well
as to transactions we enter into with third-party vendors.
We have from time to time experienced cybersecurity breaches, such as computer viruses, unauthorized parties gaining access to
our information technology systems and similar incidents, which to date have not had a material impact on our business. In the
future, these types of incidents could disrupt the security of our internal systems and business applications, impair our ability to
15
provide services to our clients and protect the privacy of their data, compromise confidential business information, result in
intellectual property or other confidential information being lost or stolen, including client, employee or company data, which
could harm our competitive position or otherwise adversely affect our business. Cyber threats are constantly evolving, which
makes it more difficult to detect them, to assess their severity or impact in a timely manner, and to successfully defend against
them.
We maintain policies, procedures and technical safeguards designed to protect the security and privacy of confidential, personal
and proprietary information. Nonetheless, we cannot eliminate the risk of human error or inadequate safeguards against
employee or vendor malfeasance. It is possible that the steps we follow, including our security controls over personal data and
training of employees on data security, may not prevent improper access to, disclosure of, or misuse of confidential, personal or
proprietary information. This could cause harm to our reputation, create legal exposure, or subject us to liability under laws that
protect personal data, resulting in increased costs or loss of revenue.
Significant costs are involved with maintaining system safeguards for our technology infrastructure. If we are unable to
effectively maintain and upgrade our system safeguards, including in connection with the integration of acquisitions, we may
incur unexpected costs and certain of our systems may become more vulnerable to unauthorized access.
With respect to our commercial arrangements with third-party vendors, we have processes designed to require third-party IT
outsourcing, offsite storage and other vendors to agree to maintain certain standards with respect to the storage, protection and
transfer of confidential, personal and proprietary information. However, we remain at risk of a data breach due to the intentional
or unintentional non-compliance by a vendor’s employee or agent, the breakdown of a vendor’s data protection processes, or a
cyber attack on a vendor’s information systems.
Data privacy is subject to frequently changing laws, rules and regulations in the various jurisdictions and countries in which we
operate. There is a growing body of international data protection law, which, in part, includes security breach notification
obligations, more stringent operational requirements and significant penalties for non-compliance. In addition, legislators in the
U.S. are proposing new and more robust cybersecurity legislation in light of the recent broad-based cyberattacks at a number of
companies. These and similar initiatives around the world could increase the cost of developing, implementing or securing our
servers and require us to allocate more resources to improved technologies, adding to our IT and compliance costs. Our failure to
adhere to, or successfully implement processes in response to, changing legal or regulatory requirements in this area could result
in legal liability or damage to our reputation in the marketplace.
Significant changes in foreign exchange rates may adversely affect our results of operations.
A large and growing portion of our business is located outside the U.S. 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 (for example, new standards relating to revenue recognition and leases) 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 13 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
16
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
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 arrangements with potential co-investors for the purchase of equity stakes
in one or more of the operations 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 public pressure to reduce, or
regulations that discourage, the burning of coal. For example, 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. In addition, if the EPA classifies fly ash (a byproduct of burning coal) as a “hazardous waste,” commercial
users of fly ash may wish to avoid using material identified as such and seek alternative products. Any such
development 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. Eight plants do not currently have long-term production contracts, and may have to be moved once
negotiations for such contracts are finalized. In addition, if for any reason one or more of these operations are unable to
satisfy regulatory permitting requirements and the utilities at which they are installed are unable to timely obtain long-
term permits, we may not be able to generate additional earnings from these operations.
• 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. In July 2014, we were named in a lawsuit asserting that we, our subsidiary,
17
Gallagher Clean Energy, LLC, and Chem-Mod LLC are liable for infringement of a patent held by Nalco Company.
The complaint seeks a judgment of infringement, damages, costs and attorneys’ fees, and injunctive relief. We and the
other defendants dispute the allegations contained in the complaint and intend to defend this matter vigorously. On
September 30, 2014, we filed a motion to dismiss the complaint on behalf of all defendants. On February 4, 2015, our
motion to dismiss was granted by the court; however, the court also granted Nalco Company 30 days to file an amended
complaint. Although we believe that the probability of a material loss is remote, litigation is inherently uncertain and it
is not possible to predict the ultimate disposition of this proceeding. If Chem-Mod (or we and our investment and
operational partners) cannot defeat or defend this or other 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.
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 have debt outstanding that could adversely affect our financial flexibility and subjects us to restrictions and
limitations that could significantly impact our ability to operate our business.
As of December 31, 2014, we had total consolidated debt outstanding of approximately $2.4 billion. The level of debt
outstanding each period could adversely affect our financial flexibility. We also bear risk at the time debt matures. Our ability to
make interest and principal payments, to refinance our debt obligations and to fund our acquisition program and planned capital
expenditures will depend on our ability to generate cash from operations. This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are beyond our control, such as an environment of rising
interest rates. It will also reduce the ability to use that cash for other purposes, including working capital, dividends to
18
stockholders, acquisitions, capital expenditures, share repurchases, and general corporate purposes. If we cannot service our
indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital
expenditures, strategic acquisitions, and investments, any of which could impede the implementation of our business strategy or
prevent us from entering into transactions that would otherwise benefit our business. Additionally, we may not be able to effect
such actions, if necessary, on commercially reasonable terms, or at all. We may not be able to refinance any of our indebtedness
on commercially reasonable terms, or at all.
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. 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.
We are a holding company and, therefore, may not be able to receive dividends or other distributions in needed amounts
from our subsidiaries.
We are organized as a holding company, a legal entity separate and distinct from our operating subsidiaries. As a holding
company without significant operations of our own, we are dependent upon dividends and other payments from our operating
subsidiaries to meet our obligations for paying principal and interest on outstanding debt obligations, for paying dividends to
stockholders and for corporate expenses. In the event our operating subsidiaries are unable to pay sufficient dividends and other
payments to the Company, we may not be able to service our debt, pay our obligations or pay dividends on our common stock.
Further, we derive a significant portion of our revenue and operating profit from operating subsidiaries located outside the U.S.
Since the majority of financing obligations as well as dividends to stockholders are paid from the U.S., it is important to be able
to access the cash generated by our operating subsidiaries outside the U.S.
Funds from our operating subsidiaries outside the U.S. may be repatriated to the U.S. via stockholder distributions and
intercompany financings, where necessary. A number of factors may arise that could limit our ability to repatriate funds or make
repatriation cost prohibitive, including, but not limited to, foreign exchange rates and tax-related costs.
In the event we are unable to generate cash from our operating subsidiaries for any of the reasons discussed above, our overall
liquidity could deteriorate.
Future sales or other dilution of our equity could adversely affect the market price of our common stock.
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. The issuance of any additional shares of common or of
preferred stock or convertible securities could be substantially dilutive to holders of our common stock. Moreover, to the extent
that we issue restricted stock units, stock appreciation rights, options or warrants to purchase our shares of our common stock in
the future and those stock appreciation rights, options, or warrants are exercised or as the restricted stock units vest, our
shareholders may experience further dilution. Holders of our common stock have no preemptive rights that entitle holders to
purchase their pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in
increased dilution to our stockholders. The market price of our common stock could decline as a result of sales of shares of our
common stock or the perception that such sales could occur.
The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell shares of
common stock owned by you at times or at prices you find attractive.
The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our
control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market
prices of the shares of many companies. These broad market fluctuations have adversely affected and may continue to adversely
affect the market price of our common stock. Among the factors that could affect our stock price are:
• General economic and political conditions such as recessions, economic downturns and acts of war or terrorism;
• Quarterly variations in our operating results;
19
• 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;
• Market volatility;
• A negative market reaction to announced acquisitions;
• Competitive pressures in each of our segments;
• General conditions in the insurance industry;
• Legal proceedings;
• Regulatory requirements, including international sanctions and the U.S. Foreign Corrupt Practices Act, the U.K. Bribery
Act 2010 or other anti-corruption laws;
• 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 related to the branch facilities of our brokerage and risk management
segments. 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 14 to our 2014 consolidated financial statements for information with respect to our lease commitments as of December 31,
2014.
Item 3. Legal Proceedings.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
20
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. Pietrucha
David E. McGurn, Jr.
62
51
52
65
56
62
53
53
47
60
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
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.
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, 2013 through December 31, 2014
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
2014
First
Second
Third
Fourth
2013
First
Second
Third
Fourth
High
Low
Dividends
Declared
per Common
Share
$
49.46
48.38
47.95
49.24
$
44.02
42.97
44.22
43.36
$
.36
.36
.36
.36
$
41.31
45.87
45.89
48.49
$
34.97
40.51
41.11
43.57
$
.35
.35
.35
.35
As of January 31, 2015, there were approximately 1,000 holders of record of our common stock.
21
(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, 2014:
Period
October 1 through October 31, 2014
November 1 through November 30, 2014
December 1 through December 31, 2014
Total
Total
Number of
Shares
Purchased (1)
Average
Price Paid
per Share (2)
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)
-
$
-
5,674
19,168
24,842
47.68
47.86
$
47.81
-
-
-
-
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 10 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. In the fourth quarter of 2014, we instructed the
rabbi trustee for the Age 62 Plan and the DCPP to reinvest dividends paid into the plans in our common stock and to
purchase our common stock using the cash that was funded into these plans related to the 2014 awards. 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 2014. 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.
22
Item 6. Selected Financial Data.
The following selected consolidated financial data for each of the five years in the period ended December 31, 2014 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.
2014
Year Ended December 31,
2012
2013
2011
2010
Consolidated Statement of Earnings Data:
Commissions
Fees
Supplemental commissions
Contingent commissions
Investment income and other
Total revenues
Total expenses
Earnings before income taxes
Provision (benefit) for income taxes
Earnings from continuing operations
Earnings (loss) from discontinued operations,
net of income taxes
(In millions, except per share and employee data)
$
2,083.0
1,258.3
104.0
84.7
1,096.5
$
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
4,626.5
4,359.1
267.4
(36.0)
303.4
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
Net earnings
$
303.4
$
268.6
$
195.0
$
144.1
$
174.1
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
$
1.97
1.97
1.44
$
2.06
2.06
1.40
$
1.59
1.59
1.36
$
1.28
1.28
1.32
$
1.56
1.66
1.28
164.6
152.9
154.3
133.6
128.9
130.5
125.6
121.0
122.5
114.7
111.7
112.5
108.4
104.8
105.1
$
10,010.0
2,125.0
3,229.4
$
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
Return on beginning stockholders' equity (3)
15%
16%
16%
13%
24%
Employee Data:
Number of employees - continuing operations
at year end
20,240
16,336
13,707
12,383
10,736
(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.
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"
beginning on page 29 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.
23
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 30 countries and offer client-service capabilities in more than 140 countries globally through a network of correspondent
brokers and consultants. In 2014, we expanded, and expect to continue to expand, our international operations through both
acquisitions and organic growth. We generate approximately 68% of our revenues for the combined brokerage and risk
management segments domestically, with the remaining 32% derived internationally, primarily in Australia, Bermuda, Canada,
the Caribbean, New Zealand and the U.K (based on 2014 revenues). We expect that our international revenue will continue to
grow as a percentage of our total revenues in 2015 compared to 2014, given the number and size of the non-U.S. acquisitions that
we completed in the latter part of 2013 and in 2014. We have three reportable segments: brokerage, risk management and
corporate, which contributed approximately 63%, 14% and 23%, respectively, to 2014 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 invested cash and fiduciary funds, clean energy and other
investments, and interest income from premium financing.
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 2014 Financial Highlights
We have generated positive organic growth in the last sixteen quarterly periods in both our brokerage and risk management
segments. We believe our customers are increasingly optimistic about their business prospects. The first quarter 2014 Council of
Insurance Agents & Brokers (which we refer to as the CIAB) survey indicated that rates were up, on average 1.5% across all
sized accounts. The second quarter 2014 CIAB survey indicated that rates were down, on average 0.5% across all sized accounts.
The third quarter 2014 CIAB survey indicated that rates were virtually flat with rates up, on average 0.1% across all sized
accounts. The fourth quarter 2014 CIAB survey indicated that rates on average declined by 0.7% across all sized accounts.
Large accounts experienced a decrease of 2.2% and medium accounts decreased by 0.9%. Most of the brokers surveyed reported
no significant changes in the market; however, results varied somewhat by line, region and client loss experience. Competition
was a factor in keeping rates down in the fourth quarter. Rates were generally steady throughout 2014 as insurance carriers
remained disciplined in their underwriting standards. The CIAB represents the leading domestic and international insurance
brokers, who write approximately 85% of the commercial property/casualty premiums in the U.S.
Our operating results improved in 2014 compared to 2013 in both our brokerage and risk management segments:
• In our brokerage segment, total revenues and adjusted total revenues were up 36% and 35%, respectively, base organic
commission and fee revenues were up 3.9%, net earnings were up 29%, adjusted EBITDAC was up 44% and adjusted
EBITDAC margins were up 140 basis points.
• In our risk management segment, total revenues and adjusted total revenues were up 9% and 10%, respectively, organic
fees were up 9.5%, net earnings were down 11%, adjusted EBITDAC was up 16% and adjusted EBITDAC margins were
up 90 basis points.
• In our combined brokerage and risk management segments, total revenues and adjusted total revenues were both up 30%,
organic commissions and fee revenues were up 5.3%, net earnings were up 22%, adjusted EBITDAC was up 39% and
adjusted EBITDAC margins increased by 163 basis points.
• Our acquisition program and our integration efforts are meeting our expectations. During the fourth quarter of 2014, the
brokerage segment completed 15 acquisitions with annualized revenues of $67.6 million, bringing the total for 2014 to 60
acquisitions with annualized revenues of $761.2 million.
• In our corporate segment, earnings from our clean energy investments contributed $104.6 million to net earnings in 2014.
On March 1, 2014, we acquired additional ownership interests in seven of the 2009 Era Plants and five of the 2011 Era
Plants from a co-investor. These transactions resulted in a non-cash after-tax gain of $14.1 million, which resulted from
the fair value as of the transaction date. All but one of our investments in these plants had been accounted for under the
equity method of accounting. For all plants where our ownership is over 50%, as of March 1, 2014 we consolidated the
operations of the limited liability companies that own these plants. We anticipate our clean energy investments to generate
between $90.0 million and $110.0 million to net earnings in 2015. We expect to use these additional earnings to continue
our mergers and acquisition strategy in our core brokerage and risk management operations.
On April 1, 2014, we acquired the Oval Group of Companies (which we refer to as Oval). Under the acquisition agreement, we
agreed to purchase all of the outstanding equity of Oval for net cash consideration of approximately $338.0 million. Oval is a
commercial insurance broker operating out of 24 offices throughout the U.K., with over 1,000 employees. Oval generated nearly
£87.0 million in revenue for the year ended December 31, 2013.
24
On June 16, 2014, we acquired the Crombie/OAMPS operations (which we refer to as Crombie/OAMPS). The Crombie/OAMPS
transaction includes the OAMPS businesses in Australia and the U.K., Crombie in New Zealand and the associated premium
funding operations. Under the acquisition agreement, we purchased all of the outstanding shares of three operating companies for
net cash consideration of approximately $952.0 million, plus an additional $35.3 million on October 14, 2014 related to a true-up
of the excess of net current assets based on the final acquisition date balance sheet over the target amount set forth in the
acquisition agreement. The Crombie/OAMPS operations generated approximately AU$345.0 million in revenue for the year
ended December 31, 2013 and have approximately 1,700 employees operating out of more than 50 offices across Australia, New
Zealand and the U.K. We financed the Crombie/OAMPS transaction primarily from a secondary offering of 21.85 million shares
of our common stock for net proceeds of $911.4 million, as described in greater detail in Note 3 to our consolidated financial
statements included elsewhere in this report.
On July 2, 2014, we acquired Noraxis Capital Corporation (which we refer to as Noraxis), paying cash consideration of
approximately $420.0 million for approximately 89% of the equity of Noraxis. The remaining equity is held by various
management employees of Noraxis. Noraxis generated nearly CN$125.0 million in revenue for the year ended December 31,
2013 and has more than 650 employees in offices across Alberta, Manitoba, New Brunswick, Nova Scotia and Ontario. We
financed the acquisition using mostly additional long-term borrowings and borrowings on our line of credit.
Total revenues recorded in our consolidated statement of earnings for 2014 related to these three large 2014 acquisitions in the
aggregate were $328.5 million.
The following provides non-GAAP information that management believes is helpful when comparing 2014 and 2013 revenues,
EBITDAC and diluted net earnings (loss) per share.
Revenues
2013
2014
(in millions)
Chg
2014
EBITDAC
2013
(in millions)
Diluted Net Earnings
(Loss) Per Share
Chg
2014
2013
Chg
$
2,907.0
7.3
-
$
2,149.9
5.2
-
35%
$
733.4
7.3
(67.1)
$
510.5
5.2
(24.1)
44%
$
2.06
0.03
(0.33)
$
1.65
0.03
(0.11)
25%
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
-
-
-
-
-
(10.8)
Brokerage, as reported
2,914.3
2,144.3
Risk Management, as adjusted
664.3
604.1
10%
New South Wales
client run-off
Workforce and lease
termination
Claim portfolio transfer and
South Australia ramp up
Levelized foreign
currency translation
-
-
-
-
-
-
1.4
5.5
Risk Management, as reported
664.3
611.0
Total Brokerage and Risk
(8.0)
(7.8)
(0.03)
(0.04)
(1.1)
-
-
664.5
109.5
0.2
484.0
94.5
16%
(0.02)
-
1.71
0.35
0.04
-
1.57
0.35
0%
(12.9)
-
(0.05)
-
(0.8)
(1.7)
-
(0.01)
(6.4)
0.1
(0.03)
-
-
89.4
1.6
94.5
-
0.27
1.98
(0.02)
(0.08)
0.09
(0.01)
0.01
0.35
1.92
0.09
-
0.05
0.14
$
1.97
$
2.06
Management, as reported
$
3,578.6
$
2,755.3
$
753.9
$
578.5
Corporate, as adjusted
Retirement plan de-risking strategies
Non-cash gains on changes in ownership levels
Corporate, as reported
Total Company, as reported
Total Brokerage and Risk
Management, as adjusted
$
3,571.3
$
2,754.0
30%
$
842.9
$
605.0
39%
$
2.41
$
2.00
21%
Total Company, as adjusted
$
2.39
$
2.09
14%
25
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 2014, we continued to expand our international
operations through both acquisitions and organic growth. By the end of 2014, 32% of our revenues were generated
internationally in our combined brokerage and risk management segments, compared with 23% in 2013. We expect this
international revenue trend to continue in 2015.
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.
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 2014, 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.
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. 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. On
March 1, 2014, we purchased an additional ownership interest in seven of the 2009 Era Plants and five of the 2011 Era Plants
from a co-investor. For all seven of the 2009 Era Plants, our ownership increased from 49.5% to 100.0%. For the 2011 Era
Plants, our ownership increased from 48.8% to 90.0% for one of the plants, from 49.0% to 100.0% for three of the plants and
from 98.0% to 100.0% for one of the 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-six plants are under long-term production contracts with several utilities. The remaining eight plants are in various stages
of seeking and negotiating long-term production contracts. Several of the remaining eight plants could be in production starting
in late 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 $4.0 million of net after-tax earnings per quarter.
Our current estimate of the 2015 annual after-tax earnings that could be generated from all of our clean energy investments in
2015 is between $90.0 million to $110.0 million. If we continue to have success entering into additional long-term production
contracts, we estimate that we could generate more after-tax earnings in 2016 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.”
26
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 15 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.
27
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 2014, 2013 and 2012, we wrote off $1.8 million, $2.2 million and $3.5 million,
respectively, of amortizable intangible assets primarily related to prior year acquisitions in 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
2014 business combinations.
Business Combinations and Dispositions
See Note 3 to our consolidated financial statements for a discussion of our 2014 business combinations. We did not have any
material dispositions in 2014, 2013 and 2012. 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.
28
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 2014, 2013 and 2012 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, claim portfolio transfer and South Australia ramp up fees/costs, New South Wales client run-off costs, workforce
related charges, lease termination related charges, acquisition related adjustments 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 gains realized from sales of books of
business, acquisition integration costs, workforce related charges, lease termination related charges, claim portfolio
transfer and South Australia ramp up fees/costs, New South Wales client run-off 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 gains realized from sales of books of business, acquisition integration costs, claim portfolio transfer and South
Australia ramp up fees/costs, New South Wales client run-off costs, workforce related charges, lease termination related
charges and acquisition related adjustments, the period-over-period impact of foreign currency translation, as applicable,
divided by diluted weighted average shares outstanding.
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 base commission and fee revenue 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
29
related to operations disposed of in each year presented. In addition, change in organic growth excludes the impact of South
Australian ramp up fees 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 2015 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 using local statutory rates. As a result, the provision for income taxes for the corporate segment reflects the entire
benefit to us of the IRC Section 45 credits generated, because that is the segment which produced the credits. The law that
provides for IRC Section 45 tax credits substantially expires in December 2019 for our fourteen 2009 Era Plants and in December
2021 for our twenty 2011 Era Plants. We anticipate reporting an effective tax rate of approximately 35.0% to 37.0% 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 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 63% of our revenue in 2014. 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.
Within our retail brokerage operations, one area of growth in recent years has been organizing and managing “captives” and other
vehicles for self-insurance. A “captive” is an insurance company that insures the risks of its owner, affiliates or a group of
companies. A portion of our captive business includes the development and management of “micro-captives,” through operations
we acquired in 2010 in our acquisition of the assets of Tribeca Strategic Advisors (Tribeca). Micro-captives are captive insurance
companies that are subject to taxation only on net investment income under IRC Section 831(b). Our micro-captive advisory
services are the subject of an investigation by the Internal Revenue Service (IRS). Additionally, the IRS has initiated audits for
the 2012 tax year of over 100 of the micro-captive insurance companies organized and/or managed by us. Among other matters,
the IRS is investigating whether we have been acting as a tax shelter promoter in connection with these operations. While the
IRS has not made any specific allegations relating to our operations or the pre-acquisition activities of Tribeca, if the IRS were to
successfully assert that the micro-captives organized and/or managed by us do not meet the requirements of IRC Section 831(b),
we could be subject to monetary claims by the IRS and/or our micro-captive clients, and our future earnings from our micro-
captive operations could be materially adversely affected, any of which could negatively impact the overall captive business and
adversely affect our consolidated results of operations and financial condition. Even if the IRS were to conclude that the micro-
30
captives have been operated in accordance with applicable law, we may still experience lost earnings due to the negative effect of
an extended IRS investigation on our clients’ and potential clients’ businesses. Annual renewals for micro-captive clients
generally occur during the fourth quarter. Therefore, any negative impact from this investigation would likely have a
disproportionate impact on fourth-quarter results. In 2014 and 2013, our micro-captive operations contributed approximately
$5.0 million and $6.3 million, respectively, in EBITDAC and $2.5 million and $3.3 million, respectively, in net earnings to our
consolidated results. Due to the early stage of the investigation and the fact that the IRS has not made any allegation against us at
this time, we are not able to reasonably estimate the amount of any potential loss in connection with this investigation.
Financial information relating to our brokerage segment results for 2014, 2013 and 2012 (in millions, except per share,
percentages and workforce data):
Statement of Earnings
2014
2013
Change
2013
2012
Change
Commissions
Fees
Supplemental commissions
Contingent commissions
Investment income
Gains realized on books of business sales
$
2,083.0
595.0
104.0
84.7
40.3
7.3
$
1,553.1
450.5
77.3
52.1
6.1
5.2
$
529.9
144.5
26.7
32.6
34.2
2.1
Total revenues
Compensation
Operating
Depreciation
Amortization
Change in estimated acquisition
earnout payables
Total expenses
Earnings before income taxes
Provision for income taxes
2,914.3
1,715.7
534.1
44.7
186.7
17.5
2,498.7
415.6
151.8
2,144.3
1,290.4
369.9
31.1
122.7
2.6
1,816.7
327.6
122.8
770.0
425.3
164.2
13.6
64.0
14.9
682.0
88.0
29.0
$
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
316.7
158.8
57.2
6.4
26.5
(1.0)
247.9
68.8
19.8
Net earnings
$
263.8
$
204.8
$
59.0
$
204.8
$
155.8
$
49.0
Diluted net earnings per share
$
1.71
$
1.57
$
0.14
$
1.57
$
1.27
$
0.30
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
9%
36%
4%
59%
18%
37%
24%
17%
6%
60%
17%
37%
24%
17%
6%
60%
17%
37%
2%
17%
4%
62%
17%
40%
period (includes acquisitions)
Identifiable assets at December 31
14,952
8,413.4
$
11,193
5,522.7
$
11,193
5,522.7
$
9,002
4,196.8
$
EBITDAC
Net earnings
Provision for income taxes
Depreciation
Amortization
Change in estimated acquisition
earnout payables
EBITDAC
EBITDAC margin
EBITDAC growth
$
263.8
151.8
44.7
186.7
$
204.8
122.8
31.1
122.7
17.5
2.6
$
59.0
29.0
13.6
64.0
-
14.9
$
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)
$
664.5
$
484.0
$
180.5
$
484.0
$
383.3
$
100.7
23%
37%
23%
26%
31
23%
26%
21%
19%
The following provides non-GAAP information that management believes is helpful when comparing 2014 and 2013 EBITDAC
and adjusted EBITDAC and 2013 and 2012 EBITDAC and adjusted EBITDAC (in millions):
Total EBITDAC - see computation above
$
664.5
$
484.0
$
383.3
2014
2013
2012
Gains from books of business sales
Acquisition integration
Acquisition related adjustments
Workforce and lease termination related charges
Levelized foreign currency translation
Adjusted EBITDAC
Adjusted EBITDAC change
Adjusted EBITDAC margin - see page 25
(7.3)
67.1
1.1
8.0
-
(5.2)
24.1
-
7.8
(0.2)
(3.9)
19.3
-
14.4
1.1
$
733.4
$
510.5
$
414.2
43.7%
25.2%
23.3%
23.8%
21.2%
22.8%
Acquisition integration costs include costs related to our July 2, 2014 acquisition of Noraxis Capital Corporation (which we refer
to as Noraxis), our June 16, 2014 acquisition of Crombie/OAMPS, our April 1, 2014 acquisition of Oval, our November 14, 2013
acquisition of Giles Group of Companies (which we refer to as Giles), our August 12, 2013 acquisition of Bollinger, Inc. (which
we refer to as Bollinger) and our May 12, 2011 acquisition of HLG Holdings, Ltd. (which we refer to as Heath Lambert) that are
not expected to occur on an ongoing basis in the future once we fully assimilate these acquisitions. These costs relate to on-
boarding of employees, communication system conversion costs, related performance compensation, redundant workforce, extra
lease space, duplicate services and external costs incurred to assimilate the acquired businesses with our IT related systems. The
Giles and Oval integration costs in 2014 totaled $37.1 million and were primarily related to the consolidation of offices in the
U.K., technology costs, the onboarding of over 2,000 employees and incentive compensation. The Bollinger integration costs in
2014 totaled $10.7 million and were primarily related to technology costs, the onboarding of over 500 employees and incentive
compensation. The full integration of the Bollinger operations into our existing operations was completed in the fourth quarter of
2014. The Crombie/OAMPS integration costs in 2014 totaled $16.5 million and were primarily related to technology costs, the
onboarding of over 1,700 employees and incentive compensation. The Noraxis integration costs in 2014 totaled $2.8 million and
were primarily related the onboarding of over 650 employees. 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 full integration of the Heath Lambert operations into our existing operations was
completed in the third quarter of 2013. Integration costs related to 2014 acquisitions are expected to range between $8.0 million
to $11.0 million per quarter in 2015 and approximately $2.0 million per quarter in 2016.
Commissions and fees - The aggregate increase in commissions and fees for 2014 was principally due to revenues associated
with acquisitions that were made during 2014 ($595.2 million). Commissions and fees in 2014 included new business production
and renewal rate increases of $281.9 million, which was offset by lost business of $202.7 million. 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 organic change in base commission and fee revenues was 4% in 2014,
6% in 2013 and 4% in 2012. Commission revenues increased 34% and fee revenues increased 32% in 2014 compared to 2013,
respectively. Commission revenues increased 19% and fee revenues increased 12% in 2013 compared to 2012, respectively.
Items excluded from organic revenue computations yet impacting revenue comparisons for 2014, 2013 and 2012 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
2014 Organic Revenue
2013 Organic Revenue
2012 Organic Revenue
2014
2013
2013
2012
2012
2011
$
2,083.0
595.0
$
1,553.1
450.5
$
1,553.1
450.5
$
1,302.5
403.2
$
1,302.5
403.2
$
1,127.4
324.1
(595.2)
-
-
-
(8.5)
9.7
(216.8)
-
-
-
(6.2)
(6.7)
(200.1)
-
-
-
(8.1)
(1.5)
Organic base commission and fee revenues
$
2,082.8
$
2,004.8
$
1,786.8
$
1,692.8
$
1,505.6
$
1,441.9
Organic change in base commission and
fee revenues
3.9%
5.6%
4.4%
32
Supplemental Commissions
Supplemental commissions as reported
Less supplemental commissions
from acquisitions
Net supplemental commission timing
2014 Organic Revenue
2013 Organic Revenue
2012 Organic Revenue
2014
2013
2013
2012
2012
2011
$
104.0
$
77.3
$
77.3
$
67.9
$
67.9
$
56.0
(25.2)
-
-
-
(5.4)
-
-
-
(10.7)
-
-
(0.6)
Organic supplemental commissions
$
78.8
$
77.3
$
71.9
$
67.9
$
57.2
$
55.4
Organic change in supplemental
commissions
Contingent Commissions
Contingent commissions as reported
Less contingent commissions
from acquisitions
1.9%
5.9%
3.3%
$
84.7
$
52.1
$
52.1
$
42.9
$
42.9
$
38.1
(19.9)
-
(8.8)
-
(5.2)
-
Organic contingent commissions
$
64.8
$
52.1
$
43.3
$
42.9
$
37.7
$
38.1
Organic change in contingent
commissions
Total organic change in commissions and
fees, supplemental commissions and
contingent commissions
24.4%
4.3%
0.9%
5.5%
(1.1%)
4.2%
Supplemental and contingent commissions - Reported supplemental and contingent commission revenues recognized in 2014,
2013 and 2012 by quarter are as follows (in millions):
Q1
Q2
Q3
Q4
Full Year
2014
Reported supplemental commissions
Reported contingent commissions
Reported supplemental and
contingent commissions
2013
Reported supplemental commissions
Reported contingent commissions
Reported supplemental and
contingent commissions
2012
Reported supplemental commissions
Reported contingent commissions
Reported supplemental and
contingent commissions
$
25.4
32.2
$
27.9
21.8
$
24.2
14.4
$
26.5
16.3
$
104.0
84.7
$
57.6
$
49.7
$
38.6
$
42.8
$
188.7
$
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
Investment income and gains realized on books of business sales - This primarily represents interest income earned on cash,
cash equivalents and restricted funds, interest income from premium financing and one-time gains related to sales of books of
business, which were $7.3 million, $5.2 million and $3.9 million in 2014, 2013 and 2012, 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 2014 increased compared
to 2013 primarily due to the interest income from premium financing generated by the Crombie/OAMPS operations which were
acquired on June 16, 2014. Investment income in 2013 decreased compared to 2012 primarily due to lower levels of invested
assets in 2013.
33
The reported investment income and gains realized on books of business sales for 2014 include premium financing income
primarily generated by the Crombie/OAMPS operations which were acquired on June 16, 2014. Operating results of the
Crombie/OAMPS premium financing business recognized by us in 2014 are as follows (in millions):
Premium financing interest and fee income (included in investment income line)
Revenues
Compensation and commissions (included in compensation expense line)
Operating costs and premium financing interest (included in operating expense line)
Expenses
EBITDAC
2014
$
26.7
26.7
9.9
10.8
20.7
$
6.0
Compensation expense - The following provides non-GAAP information that management believes is helpful when comparing
2014 and 2013 compensation expense and 2013 and 2012 compensation expense (in millions):
Reported amounts
Acquisition integration
Workforce and lease termination related charges
Acquisition related adjustments
Levelized foreign currency translation
Adjusted amounts
Adjusted revenues - see page 25
Adjusted ratios
2014
2013
2012
$
1,715.7
$
1,290.4
$
1,131.6
(45.3)
(7.4)
(1.1)
-
(10.9)
(7.7)
-
8.6
(13.2)
(13.7)
-
(5.4)
$
1,661.9
$
1,280.4
$
1,099.3
$
2,907.0
$
2,149.9
$
1,816.2
57.2%
59.6%
60.5%
The increase in compensation expense in 2014 compared to 2013 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 ($373.8 million in the aggregate), increases in employee benefits expense ($43.9 million), stock compensation
expense ($4.3 million), deferred compensation ($1.9 million) and temporary staffing ($1.7 million) offset by a decrease in
severance related costs ($0.3 million). The increase in employee headcount in 2014 compared to 2013 primarily relates to the
addition of employees associated with the acquisitions that we completed in 2014 and new production hires.
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.
Operating expense - The following provides non-GAAP information that management believes is helpful when comparing 2014
and 2013 operating expense and 2013 and 2012 operating expense (in millions):
Reported amounts
Acquisition integration
Workforce and lease termination related charges
Levelized foreign currency translation
Adjusted amounts
Adjusted revenues - see page 25
Adjusted ratios
2014
2013
2012
$
534.1
$
369.9
$
312.7
(21.8)
(0.6)
-
(13.2)
(0.1)
2.4
(6.1)
(0.7)
(3.2)
$
511.7
$
359.0
$
302.7
$
2,907.0
$
2,149.9
$
1,816.2
17.6%
16.7%
16.7%
The increase in operating expense in 2014 compared to 2013 was due primarily to increases in real estate expenses
($35.0 million), technology expenses ($26.7 million), meeting and client entertainment expenses ($21.6 million), professional and
banking fees ($12.9 million), business insurance ($11.2 million), office supplies ($10.5 million), other expense ($10.5 million),
employee expense ($10.3 million), outside consulting fees ($10.0 million), licenses and fees ($8.4 million), premium financing
interest expense ($3.6 million), outside services expense ($3.3 million), lease termination charges ($0.5 million), interest expense
34
($0.4 million) slightly offset by a favorable foreign currency translation ($0.6 million) and a decrease in bad debt expense
($0.6 million). Also contributing to the increase in operating expense in 2014 were increased expenses associated with the
acquisitions completed in 2014.
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), and decreases in 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.
Depreciation - The increases in depreciation expense in 2014 compared to 2013 and in 2013 compared to 2012 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 2014, 2013
and 2012 were the depreciation expenses associated with acquisitions completed during these years.
Amortization - The increases in amortization in 2014 compared to 2013 and in 2013 compared to 2012 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, three to five years for non-compete agreements and five to ten years for trade names). Based on
the results of impairment reviews in 2014, 2013 and 2012, we wrote off $1.8 million, $2.2 million and $3.4 million of amortizable
intangible assets related to the brokerage segment acquisitions.
Change in estimated acquisition earnout payables - The change in the expense in 2014 compared to 2013 and 2013 compared
to 2012 was due primarily to adjustments made to the estimated fair value of earnout obligations related to revised projections of
future performance. During 2014, 2013 and 2012, we recognized $14.5 million, $11.9 million and $9.3 million, respectively, of
expense related to the accretion of the discount recorded for earnout obligations in connection with our 2014, 2013 and 2012
acquisitions. During 2014, 2013 and 2012, we recognized $3.0 million of expense and $9.3 million and $5.7 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 67, 77 and 45 acquisitions, respectively.
The amounts initially recorded as earnout payables for our 2011 to 2014 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 were 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.
Provision for income taxes - The brokerage segment’s effective tax rate in 2014, 2013 and 2012 was 36.5%, 37.5% and 39.8%,
respectively. We anticipate reporting an effective tax rate of approximately 35.0% to 37.0% in our brokerage segment for the
foreseeable future.
35
Risk Management Segment
The risk management segment accounted for 14% of our revenue in 2014. 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.
On November 18, 2014, we announced that a contract for the administration of workers’ compensation claims with the New
South Wales Workers Compensation Scheme in Australia would move to run-off status on December 31, 2014. Our estimated
net earnings from this contract were $3.5 million in 2014. We took a $12.9 million charge in the fourth quarter of 2014 primarily
relating to a non-cash impairment of capitalized software and personnel costs dedicated to servicing the New South Wales run-off
contract, and we estimate that we will break even on this contract in 2015 during the run-off period.
Financial information relating to our risk management segment results for 2014, 2013 and 2012 (in millions, except per share,
percentages and workforce data):
Statement of Earnings
2014
2013
Change
2013
2012
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
$
663.3
1.0
$
609.0
2.0
$
54.3
(1.0)
$
609.0
2.0
$
568.5
3.2
$
40.5
(1.2)
664.3
401.6
173.3
20.9
2.8
-
598.6
65.7
24.5
611.0
370.5
146.0
19.4
2.5
(0.9)
537.5
73.5
27.3
53.3
31.1
27.3
1.5
0.3
0.9
61.1
(7.8)
(2.8)
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
Net earnings
$
41.2
$
46.2
$
(5.0)
$
46.2
$
42.5
$
3.7
Diluted earnings per share
$
0.27
$
0.35
$
(0.08)
$
0.35
$
0.35
$
-
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
(23%)
9%
10%
60%
26%
37%
0%
7%
9%
61%
24%
37%
0%
7%
9%
61%
24%
37%
21%
4%
6%
61%
24%
38%
4,889
547.7
$
4,806
544.7
$
4,806
544.7
$
4,390
498.6
$
$
41.2
24.5
20.9
2.8
$
46.2
27.3
19.4
2.5
$
(5.0)
(2.8)
1.5
0.3
$
46.2
27.3
19.4
2.5
$
42.5
25.9
16.0
2.8
$
3.7
1.4
3.4
(0.3)
-
(0.9)
0.9
(0.9)
(0.2)
(0.7)
$
89.4
$
94.5
$
(5.1)
$
94.5
$
87.0
$
7.5
13%
(5%)
15%
9%
36
15%
9%
15%
26%
The following provides non-GAAP information that management believes is helpful when comparing 2014 and 2013 EBITDAC
and adjusted EBITDAC and 2013 and 2012 EBITDAC and adjusted EBITDAC (in millions):
Total EBITDAC - see computation above
$
89.4
$
94.5
$
87.0
2014
2013
2012
New South Wales client run-off
Workforce and lease termination related charges
Claim portfolio transfer and South Australia ramp up
Levelized foreign currency translation
Adjusted EBITDAC
Adjusted EBITDAC change
Adjusted EBITDAC margin - see page 25
12.9
0.8
6.4
-
-
1.7
(0.1)
(1.6)
(1.5)
2.7
2.1
(1.5)
$
109.5
$
94.5
$
88.8
15.9%
16.5%
6.4%
15.6%
9.1%
15.8%
Fees - The increase in fees for 2014 compared to 2013 was primarily due to new business and the impact of increased claim
counts (total of $73.8 million), which were partially offset by lost business of $23.6 million in 2014. 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. Organic change in fee revenues was 10% in 2014, 9% in
2013 and 6% in 2012.
Items excluded from organic fee computations yet impacting revenue comparisons in 2014, 2013 and 2012 include the following
(in millions):
2014 Organic Revenue
2013 Organic Revenue
2012 Organic Revenue
2014
2013
2013
2012
2012
2011
Fees
International performance bonus fees
$
644.6
18.7
$
589.0
20.0
$
589.0
20.0
$
550.3
18.2
$
550.3
18.2
$
532.5
13.6
Fees as reported
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
663.3
(4.1)
-
-
-
609.0
609.0
568.5
568.5
546.1
-
(1.4)
(0.1)
(5.3)
(2.7)
(1.4)
(0.1)
-
-
-
(8.6)
(6.3)
(2.2)
-
(8.6)
-
-
-
(21.8)
(0.1)
$
659.2
$
602.2
$
604.8
$
553.6
$
557.7
$
524.2
9.5%
13.6%
9.3%
12.0%
6.4%
6.8%
Investment income - Investment income primarily represents interest income earned on our cash and cash equivalents.
Investment income in 2014 decreased compared to 2013 primarily due to lower levels of invested assets in 2014. Investment
income in 2013 decreased compared to 2012 primarily due to lower levels of invested assets in 2013.
Compensation expense - The following provides non-GAAP information that management believes is helpful when comparing
2014 and 2013 compensation expense and comparing 2013 and 2012 compensation expense (in millions):
Reported amounts
New South Wales client run-off
Claim portfolio transfer and South Australia ramp up costs
Workforce and lease termination related charges
Levelized foreign currency translation
Adjusted amounts
Adjusted revenues - see page 25
Adjusted ratios
37
2014
2013
2012
$
401.6
$
370.5
$
347.0
(1.7)
(3.6)
(0.6)
-
-
(1.2)
(1.7)
(3.2)
(5.5)
(1.5)
-
(2.5)
$
395.7
$
364.4
$
337.5
$
664.3
$
604.1
$
563.1
59.6%
60.3%
59.9%
The increase in compensation expense in 2014 compared to 2013 was primarily due to an unfavorable foreign currency
translation ($3.0 million), New South Wales client run-off costs ($1.7 million), increased headcount and increases in salaries
($27.4 million in the aggregate), claim portfolio transfer and South Australia ramp up costs ($2.4 million), employee benefits
($1.6 million), temporary-staffing expense ($1.6 million), stock compensation ($0.5 million), deferred compensation
($0.1 million), offset by a decrease in severance related costs ($1.1 million).
The increase in compensation expense in 2013 compared to 2012 was primarily due to increased headcount and increases in
salaries ($30.0 million in the aggregate), 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 claim portfolio transfer and South Australia ramp up costs ($0.3 million).
Operating expense - The following provides non-GAAP information that management believes is helpful when comparing 2014
and 2013 operating expense and comparing 2013 and 2012 operating expense (in millions):
Reported amounts
New South Wales client run-off
Claim portfolio transfer and South Australia ramp up costs
Workforce and lease termination related charges
Levelized foreign currency translation
Adjusted amounts
Adjusted revenues - see page 25
Adjusted operating expense ratio
2014
2013
2012
$
173.3
$
146.0
$
137.7
(11.2)
(2.8)
(0.2)
-
-
(0.1)
-
(0.7)
(1.6)
(0.6)
-
(0.2)
$
159.1
$
145.2
$
135.3
$
664.3
$
604.1
$
563.1
24.0%
24.0%
24.0%
The increase in operating expense in 2014 compared to 2013 was primarily due to New South Wales client run-off costs
($11.2 million) and increases in other expense ($6.0 million), outside consulting fees ($3.0 million), claim portfolio transfer and
South Australia ramp up costs ($2.7 million), office supplies ($1.7 million), technology expenses ($1.2 million), employee
expense ($0.7 million), licenses and fees ($0.7 million), interest expense ($0.4 million), bad debt expense ($0.3 million), meeting
and client entertainment expense ($0.2 million) and outside services ($0.1 million) offset by decreases in professional and
banking fees ($0.7 million), real estate expenses ($0.2 million) and business insurance ($0.1 million).
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).
Depreciation - Depreciation expense increased in 2014 compared to 2013 and in 2013 compared to 2012, 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 2014 compared to 2013 and in 2013 compared to 2012.
Historically, the risk management segment has made few acquisitions. We made no material acquisitions in this segment in 2014
or 2013. 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 2014 or 2013.
Change in estimated acquisition earnout payables - The decrease in income from the change in estimated acquisition earnout
payables in 2014 compared to 2013 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.
Provision for income taxes - The risk management segment’s effective tax rate in 2014, 2013 and 2012 was 37.3%, 37.1%, and
37.9%, respectively. We anticipate reporting an effective tax rate of approximately 35.0% to 37.0% in our risk management
segment for the foreseeable future.
Diluted net earnings per share - On April 16, 2014, we closed on a secondary public offering of our common stock issuing
21.85 million shares of stock for net proceeds of $911.4 million to fund the purchase of Crombie/OAMPS, a brokerage segment
acquisition. The impact to diluted net earnings per share in the risk management segment for 2014 related to the shares issued
under this secondary offering was a reduction of approximately $0.03 per share.
38
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 13 to our consolidated financial statements for a summary of our
investments at December 31, 2014 and 2013 and a detailed discussion of the nature of these investments. See Note 7 to our
consolidated financial statements for a summary of our debt at December 31, 2014 and 2013.
Financial information relating to our corporate segment results for 2014, 2013 and 2012 (in millions, except per share and
percentages):
Statement of Earnings
2014
2013
Change
2013
2012
Change
Revenues from consolidated clean
coal production plants
$
975.5
$
387.1
$
588.4
$
387.1
$
98.0
$
289.1
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
57.4
(3.4)
18.4
1,047.9
1,058.9
50.3
59.8
89.0
3.8
1,261.8
(213.9)
(212.3)
32.0
(6.6)
11.8
424.3
437.3
24.1
36.5
50.1
2.9
550.9
(126.6)
(144.2)
25.4
3.2
6.6
623.6
621.6
26.2
23.3
38.9
0.9
710.9
(87.3)
(68.1)
32.0
27.6
4.4
(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)
Net income (loss)
$
(1.6)
$
17.6
$
(19.2)
$
17.6
$
(3.3)
$
20.9
Diluted net earnings (loss) per share
$
(0.01)
$
0.14
$
(0.15)
$
0.14
$
(0.03)
$
0.17
Identifiable assets at December 31
$
1,048.9
$
793.1
$
793.1
$
656.9
EBITDAC
Net income (loss)
Benefit for income taxes
Interest
Depreciation
EBITDAC
$
(1.6)
(212.3)
89.0
3.8
$
17.6
(144.2)
50.1
2.9
$
(19.2)
(68.1)
38.9
0.9
$
17.6
(144.2)
50.1
2.9
$
(3.3)
(78.6)
43.0
0.7
$
20.9
(65.6)
7.1
2.2
$
(121.1)
$
(73.6)
$
(47.5)
$
(73.6)
$
(38.2)
$
(35.4)
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 increases in 2014 and 2013 are due to increased production at both the leased facilities and facilities in which we
have a majority ownership position, including the impact of the facilities we consolidated in 2014 and 2013.
• Royalty income from clean coal licenses represents revenues related to Chem-Mod LLC. We held a 46.54% controlling
interest in Chem-Mod. As Chem-Mod’s manager, we are required to consolidate its operations.
The increases in royalty income in 2014 and 2013 were due to increases in the production of refined coal by
Chem-Mod’s licensees.
39
Expenses related to royalty income of Chem-Mod were $38.4 million, $21.2 million and $16.5 million in 2014, 2013 and
2012, respectively, which include non-controlling interest of $35.3 million, $19.2 million and $14.6 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 losses in 2014 compared to 2013, were lower because the vast majority of our operations are now consolidated. The
increased pretax loss in 2013 compared to 2012 was due primarily to increased production which generates increased
pretax operating losses.
•
In 2014 and 2013, other net revenues primarily included pretax gains of $25.6 million and $9.6 million, respectively,
related to the 2014 acquisition of an additional ownership interest in seven 2009 Era Plants and five 2011 Era Plants
from a co-investor, and the 2013 acquisition of an additional ownership interest in twelve 2009 Era Plants from a co-
investor. See Note 13 to the consolidated financial statements for additional discussion of these acquisition transactions.
We have consolidated the operations of the limited liability companies that own these plants effective as of the
acquisition dates. In addition, in 2014 we recognized a $1.8 million gain adjustment related to the 2013 acquisition of
the additional ownership interest in twelve 2009 Era Plants, a $2.0 million impairment loss, under equity method
accounting, of an additional 4% investment in the global operations of C-Quest Technologies LLC and C-Quest
Technologies International LLC, and a $10.9 million impairment loss related to two of our clean coal production plants
which permanently stopped operations. In 2014 we also realized a $1.9 million hedge gain related to the funding of the
Crombie/OAMPS acquisition and earned $2.5 million of interest on cash deposited in Australia to fund the
Crombie/OAMPS acquisition. In 2013, other net revenues also included a gain of $2.6 million related to 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. In 2012, other net revenues of $1.4 million consisted of
equity income from our venture capital fund investments.
Cost of revenues - Cost of revenues from consolidated clean coal production plants in 2014, 2013 and 2012 consists of the cost
of coal, labor, equipment maintenance, chemicals, supplies, management fees and depreciation incurred by the clean coal
production plants to generate the consolidated revenues discussed above, including the costs to run the leased facilities.
Compensation expense - Compensation expense for 2014, 2013 and 2012, respectively, includes salary and benefit expenses of
$20.7 million, $11.4 million and $9.8 million and incentive compensation of $29.6 million, $12.7 million and $5.0 million,
respectively.
The increase in salary and benefit expenses in 2014 compared to 2013 was primarily due to a $12.0 million charge related to the
de-risking strategy of our U.S. defined benefit plan, offset by a reduction in pension expense of $3.6 million. In the period from
September 12, 2014 to November 30, 2014, we offered a one-time voluntary lump sum window to eligible deferred vested
participants in our U.S. defined benefit plan in an effort to reduce our long-term pension obligations and the volatility of these
obligations on our balance sheet. The aggregate lump sum payout made in fourth quarter 2014 was $43.3 million. This lump
sum payout project reduced the plan’s pension benefit obligation by approximately $60.0 million, while improving its pension
underfunding by almost $17.0 million as of December 31, 2014. Due to this significant obligation settlement, we incurred a non-
cash pre-tax charge of approximately $12.0 million in fourth quarter 2014, as a result of the U.S. GAAP requirement to expense
the portion of the unrealized actuarial losses currently recognized as accumulated other comprehensive loss, based on a ratio of
the liability settled to the total liability within the plan at December 31, 2014. 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 incentive compensation in 2014 compared to 2013 was due to the efforts in 2014 related to the transaction for the
additional interests in the twelve clean coal plants, the work on corporate related matters including the 2014 debt and secondary
stock offering transactions and the level of acquisition activity in 2014. The increase in incentive compensation in 2013
compared to 2012 was due to the efforts in 2013 related to the sales and operations of the facilities in 2013 that qualify for tax
credits under IRC Section 45, the work on corporate related matters including the 2013 debt transactions and the level of
acquisition activity in 2013.
Operating expense - Operating expense for 2014 includes banking and related fees of $2.7 million, external professional fees
and other due diligence costs related to 2014 acquisitions of $18.9 million, operating expenses, professional fees and
non-controlling interest related to royalty income of $26.8 million, other corporate and clean energy related expenses of
$9.2 million and a biannual company-wide meeting ($2.2 million).
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 $15.2 million, other corporate and clean energy related expenses of $7.0 million and a biannual company-wide
meeting ($3.8 million).
40
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.
Interest expense - The increase in interest expense in 2014 compared to 2013 and 2013 compared to 2012 was due to the
following:
Change in interest expense related to
Interest on the $50.0 million note funded on July 10, 2012
Interest on the $200.0 million note funded on June 14, 2013
Interest on the $600.0 million note funded on February 27, 2014
Interest on the $700.0 million note funded on June 24, 2014
Interest on borrowings from our Credit Agreement
Interest on the $100.0 million Series A Note that was paid off
on August 3, 2014
Capitalization of interest costs related to the purchase and development
of our new headquarters building
Net change in interest expense
2014 / 2013
2013 / 2012
-
$
3.4
23.5
14.6
0.5
$
1.1
4.0
-
-
2.0
(2.6)
(0.5)
-
-
$
38.9
$
7.1
The capitalization of interest costs related to the purchase and development of our new corporate headquarters building will occur
until the development of it is completed, which is estimated to be done in the latter part of 2016.
Depreciation - The increase in depreciation expense in 2014 compared to 2013, primarily relates to the assets of the additional
ownership interests in the plants that we acquired from co-investors in first quarters of 2013 and 2014. The depreciation expense
in 2013 increased compared to 2012, which primarily relates to the additional ownership interests in the plants that we acquired
from a co-investor in first quarter 2013.
Benefit for income taxes - Our consolidated effective tax rate was (13.5)%, 2.2% and 20.5% for 2014, 2013 and 2012,
respectively. The tax rates for 2014, 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 $145.5 million, $93.7 million and $43.8 million of tax credits
generated and recognized in 2014, 2013 and 2012, respectively.
The following provides non-GAAP information that we believe is helpful when comparing 2014, 2013 and 2012 operating results
for the corporate segment (in millions):
2014
Income
Tax
Benefit
Net
Earnings
(Loss)
Pretax
Loss
2013
Income
Tax
Benefit
Net
Earnings
(Loss)
2012
Income
Tax
Benefit
Net
Earnings
(Loss)
Pretax
Loss
Pretax
Loss
Description
Interest and banking
costs
$
(91.2)
$
36.5
$
(54.7)
$
(53.0)
$
21.2
$
(31.8)
$
(46.1)
$
18.4
$
(27.7)
Clean energy
investments
Acquisition costs
Corporate
(88.7)
(23.1)
(21.5)
179.2
3.3
2.3
90.5
(19.8)
(19.2)
(1)
(2)
(58.9)
(5.6)
(18.7)
116.8
0.2
9.8
57.9
(1)
(5.4)
(8.9)
(17.3)
(7.1)
(11.4)
50.0
0.7
9.5
32.7
(6.4)
(1.9)
Adjusted full year
$
(224.5)
$
221.3
$
(3.2)
$
(136.2)
$
148.0
$
11.8
$
(81.9)
$
78.6
$
(3.3)
Diluted net earnings per share, as adjusted
Non-cash gains on changes in ownership levels
Retirement plan de-risking strategies
Diluted net earnings per share, as reported
$
(0.02)
0.09
(0.08)
$
(0.01)
(1)
(2)
(1)
$
0.09
0.05
-
$
0.14
$
(0.03)
-
-
$
(0.03)
(1) Excludes non-cash after tax gains of $14.1 million and $5.8 million from re-consolidation accounting gains related to clean-
energy investments recorded in first quarters of 2014 and 2013, respectively.
(2) Excludes a non-cash after-tax settlement charge of $12.5 million, or approximately $0.08 per share, related to retirement plan
de-risking strategies. As announced in our third quarter 2014 earnings release and conference call, and more fully discussed
on page 54 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, we were in the process of
pursuing retirement plan de-risking strategies. The window for accepting the offers closed in early December 2014 and the
payouts were completed prior to December 31, 2014.
41
Interest and banking costs includes expenses related to our debt. Clean energy investments include the operating results related to
our investments in clean coal production plants 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 2014 and 2013, costs related to biannual company-wide award, cross-selling and motivational meetings for our production
staff and field management.
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 (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, 2014 (in millions):
Investments that own 2009 Era Plants
10 Under long-term production contracts
4 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, 2014
Additional
Required
Tax-Effected
Capital
Investment
Ultimate
Annual
After-tax
Earnings
$
9.0
1.4
$
-
Not Estimable
$
20.0
Not Estimable
31.9
1.4
3.8
Not Estimable
75.0
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 for many operational, regulatory and environmental compliance reasons.
Our investment in Chem-Mod generates royalty income from refined coal production plants owned by those limited liability
companies in which we invest as well as refined coal production plants owned by other unrelated parties. Based on current
production estimates provided by licensees, Chem-Mod could generate for us an average of approximately $4.0 million of net
after-tax earnings per quarter.
We may sell ownership interests in some or all of the plants to co-investors and relinquish control of the plants, thereby becoming
a non-controlling, minority investor. In any limited liability company where we are a non-controlling, minority investor, the
membership agreement for the operations contains provisions that preclude an individual member from being able to make major
decisions that would denote control. As of any date we become a non-controlling, minority investor, we deconsolidate the entity
and subsequently account for the investment 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 currently have no commitments related to our refined coal plants. We
further estimate that we will invest an additional $35.0 million to $45.0 million to redeploy the remainder of the refined coal
plants later in 2015 and into 2016, before co-investor contributions.
We are aware that some of the coal-fired power plants that purchase the refined coal are considering changing to burning natural
gas rather than coal, or shutting down completely for economic reasons. The entities that own such plants are prepared to move
the refined coal 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.
42
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
2015
$36.36
42.78
48.35
45.56
39.72
54.74
55.66
58.49
58.23
56.88
(1)
$67.94
70.40
72.85
75.13
76.84
77.78
78.41
80.25
81.69
81.82
(1)
$76.69
79.15
81.60
83.88
85.59
86.53
87.16
89.00
90.44
90.57
(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
No phase out
(1)
(1) The IRS will not release the factors for 2015 until April or May 2015. 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 2015.
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 13 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 2014 and 2013, we relied to a large extent
on proceeds from borrowings under our Credit Agreement. In addition, for acquisitions made in 2014 we used proceeds from
$600.0 million and $700.0 million of senior unsecured notes issued in February 2014 and June 2014, respectively, plus a
secondary public offering of our common stock in April 2014, whereby 21.85 million shares of our stock were issued for net
proceeds, after underwriting discounts and other expenses related to this offering, of $911.4 million. For acquisitions made in
2013, we also used proceeds from $200.0 million of senior unsecured notes issued in September 2013.
Cash provided by operating activities was $402.3 million, $349.9 million and $343.0 million for 2014, 2013 and 2012,
respectively. The increase in cash provided by operating activities in 2014 compared to 2013 was primarily due to favorable
timing differences in the payment of accrued liabilities and an increased amount of non-cash charges in 2014 compared to 2013,
partially offset by cash used in 2014 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 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. 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 $632.8 million and $504.9 million for 2014 and 2013, respectively.
Consolidated net earnings were $303.4 million and $268.6 million. 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
43
quarter and year to year because of the variability in the timing of premiums and fees receivable and premiums payable. We
believe that in order to consider these items in assessing our trends in liquidity, they should be looked at in a combined manner,
because changes in these balances are interrelated and are based on the timing of premium payments, both to and from us. In
addition, funds legally restricted as to our use relating to premiums and clients’ claim funds held by us in a fiduciary capacity are
presented in our consolidated balance sheet as “Restricted Cash” and have not been included in determining our overall liquidity.
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 2014 and 2013 plan years. Funding requirements are 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 2014
we did not make discretionary contributions to the plan. During 2013 and 2012, we made discretionary contributions to the plan
of $6.3 million and $7.2 million, respectively. We are not considering making additional discretionary contributions to the plan
in 2015, but may be required to make significantly larger minimum contributions to the plan in future periods.
See Note 12 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 August 2014, we decided to pursue a pension de-risking strategy to reduce the size of our long-term U.S. defined benefit
pension plan obligations and the volatility of these obligations on our balance sheet. On September 12, 2014, the fiduciaries of
the plan began offering certain former employees who were participants in the plan, the option of receiving the value of their
pension benefit in a lump sum payment or as an accelerated reduced annuity, in lieu of monthly annuity payments when they
retire. The voluntary offer was made to approximately 2,500 terminated, vested participants in the plan whose employment
terminated with the company prior to August 1, 2014 and who had not commenced benefit payments as of November 1, 2014.
Eligible participants had from September 12, 2014 to November 30, 2014 to accept the offer, and the lump-sum payments were
made in November and December of 2014, and the accelerated reduced annuity payments began as of December 1, 2014. The
aggregate lump sum payout made in fourth quarter 2014 was $43.3 million. All payouts related to this offer were made using
assets from the plan. This lump sum payout project reduced the Plan’s pension benefit obligation by approximately
$60.0 million, while improving its pension underfunding by almost $17.0 million as of December 31, 2014. Due to this
significant obligation settlement, we incurred a non-cash pre-tax charge of approximately $12.0 million in fourth quarter 2014, as
a result of the U.S. GAAP requirement to expense the portion of the unrealized actuarial losses currently recognized as
accumulated other comprehensive loss, based on a ratio of the liability settled to the total liability within the plan at December 31,
2014.
In 2014, 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, 2014. The net impact of the change in the discount rate at December 31, 2014 and the
lump sum payout in fourth quarter 2014 in the benefit obligation at December 31, 2014 is flat in comparison to December 31,
2013. In addition, also favorably impacting the funded status were favorable returns on the plan’s assets in 2014. The net change
in the funded status of the Plan in 2014 resulted in an increase in noncurrent liabilities in 2014 of $37.2 million. While the
change in funded status of the Plans had no direct impact on our cash flows from operations in 2014, 2013 and 2012, 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 $81.5 million, $93.6 million and $51.0 million for 2014, 2013 and 2012,
respectively. In 2015, we expect total expenditures for capital improvements to be approximately $120.0 million, primarily
related to expenditures on our new corporate headquarters building, office moves and expansions and updating computer systems
and equipment. The increase in net capital expenditures in 2014 from 2013 and in 2013 from 2012 primarily related to
capitalized costs associated with the implementation of new accounting and financial reporting systems and several other system
initiatives that occurred in 2014, 2013 and 2012.
44
Acquisitions - Cash paid for acquisitions, net of cash acquired, was $1,918.3 million, $727.7 million and $344.1 million in 2014,
2013 and 2012, respectively. The increased use of cash for acquisitions in 2014 compared to 2013 was primarily due to three
large acquisitions that occurred in 2014. The increased use of cash for acquisitions made in 2013 compared to 2012 was
primarily due to two large acquisitions that occurred in 2013. In addition, during 2014, 2013 and 2012 we issued 6.5 million
shares ($292.8 million), 5.2 million shares ($227.0 million) and 7.8 million shares ($268.5 million), respectively, of our common
stock as payment for a portion of the total consideration paid for acquisitions and earnout payments. We completed 60, 31 and 60
acquisitions in 2014, 2013 and 2012, respectively. Annualized revenues of businesses acquired in 2014, 2013 and 2012 totaled
approximately $761.2 million, $383.9 million and $231.7 million, respectively. In 2015, we expect to use our debt, cash from
operations and our common stock to fund all or a portion of acquisitions we complete.
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.
Dispositions - During 2014, 2013 and 2012, we sold several books of business and recognized one-time gains of $7.3 million,
$5.2 million and $3.9 million, respectively. We received cash proceeds of $8.2 million, $5.5 million and $11.4 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
represented 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 2014, we have 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
of the 2015 annual after-tax earnings, including IRC Section 45 tax credits, which will be generated from all of our clean energy
investments is $90.0 million to $110.0 million. The IRC Section 45 tax credits generate positive cash flow by reducing the
amount of Federal income taxes we pay, which is offset by the operating expenses of the plants, by capital expenditures related to
the redeployment, and in some cases the relocation of refined coal plants. We anticipate positive net cash flow related to IRC
Section 45 activity in 2015. However, there are several variables that can impact net cash flow from clean energy investments in
any given year. Therefore, accurately predicting positive or negative cash flow in particular future periods is not possible at this
time. Nonetheless, if current ownership interests remain the same, if capital expenditures related to redeployment and relocation
of refined coal plants remain at current levels, and if we continue to generate sufficient taxable income to use the tax credits
generated by our IRC Section 45 investments, we anticipate that these investments will continue to generate positive net cash
flows for the period 2015 through 2021. While we cannot accurately forecast the cash flow impact in any particular period, we
anticipate that the net cash flow impact of these investments will be positive overall. Please see "Clean energy investments" on
pages 42 and 43 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.
We have a secured revolving loan facility (which we refer to as the Premium Financing Debt Facility), that provides funding for
the three Australian (AU) and New Zealand (NZ) premium finance subsidiaries that we acquired on June 16, 2014. The Premium
Financing Debt Facility is comprised of: (i) Facility B with separate AU$150.0 million and NZ$35.0 million tranches,
(ii) Facility C is an AU$25.0 million equivalent multi-currency overdraft tranche and (iii) Facility D is a NZ$15.0 million
equivalent multi-currency overdraft tranche. The Premium Financing Debt Facility expires June 15, 2016. At December 31,
2014, $127.9 million of borrowings were outstanding under the Premium Financing Debt Facility.
We use the Premium Financing Debt Facility to borrow funds from time to time to fund the premium financing activities of three
of our Australian (AU) and New Zealand (NZ) subsidiaries. In 2014, we had net borrowings of $127.9 million on the Premium
Financing Debt Facility, of which $112.9 million were used to pay down a facility that Crombie/OAMPS had with its former
owner.
In 2007, 2009, 2011, 2012, 2013 and 2014, 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, $200.0 million and $1,300.0 million in aggregate debt, respectively, totaling $2,225.0 million. On August 3, 2014,
$100.0 million of our private placement debt matured and was paid off. At December 31, 2014, we had $2,125.0 million of
corporate-related borrowings outstanding and a cash and cash equivalent balance of $314.4 million. We also use our Credit
45
Agreement from time to time to borrow funds to supplement operating cash flows. See Note 7 to our consolidated financial
statements for a discussion of the terms of the note purchase agreements and the Credit Agreement. There were $140.0 million of
borrowings outstanding under the Credit Agreement at December 31, 2014. Due to the outstanding borrowing and letters of
credit, $437.4 million remained available for potential borrowings under the Credit Agreement at December 31, 2014.
During 2014, we borrowed an aggregate of $1,109.9 million and repaid $1,500.4 million under our Credit Agreement. Principal
uses of the 2014 borrowings under the Credit Agreement were to fund acquisitions, earnout payments related to acquisitions and
general corporate purposes. 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.
The note purchase agreements, the Credit Agreement and the Premium Financing Debt Facility contain various financial
covenants that require us to maintain specified financial ratios. We were in compliance with these covenants as of December 31,
2014.
Dividends - Our board of directors determines our dividend policy. Our board of directors determines dividends on our common
stock on a quarterly basis after considering our available cash from earnings, our anticipated cash needs and current conditions in
the economy and financial markets.
In 2014, we declared $223.8 million in cash dividends on our common stock, or $1.44 per common share. On December 19,
2014, we paid a fourth quarter dividend of $.36 per common share to shareholders of record as of December 5, 2014. On
January 29, 2015, we announced a quarterly dividend for first quarter 2015 of $.37 per common share. If the dividend is
maintained at $.37 per common share throughout 2015, this dividend level would result in an annualized net cash used by
financing activities in 2015 of approximately $241.5 million (based on the outstanding shares as of December 31, 2014), or an
anticipated increase in cash used of approximately $18.4 million compared to 2014. We can make no assurances regarding the
amount of any future dividend payments.
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 2014, 2013 and 2012. Under the provisions of the repurchase plan, we were authorized to
repurchase approximately 10,000,000 additional shares at December 31, 2014. 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 2014 or 2013 that impacted our consolidated financial statements. The
common stock repurchases reported in our consolidated statement of cash flows for 2012 include 82,000 shares (at a cost of
$1.5 million) that we repurchased from our employees to cover their income tax withholding obligations in connection with
restricted stock distributions. Under those circumstances, we withheld the proceeds from the repurchases and remitted them to
the taxing authorities on the employees’ behalf to cover their income tax withholding obligations.
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 to register shares sold under our at-the-market equity program and the secondary offering referred to below. 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.
Secondary Public Offering - On April 7, 2014, we entered into an Underwriting Agreement with Morgan Stanley & Co. LLC to
issue 19.0 million shares of our common stock in a public offering. On April 10, 2014, we agreed to price the offering of
19.0 million shares of our common stock at $43.25 and granted the underwriters in the offering a 30-day option to purchase up to
an additional 2.85 million shares of our common stock at the same price. On April 11, 2014, the underwriters exercised the
option to purchase an additional 2.85 million shares. The offering closed on April 16, 2014 and 21.85 million shares of our stock
were issued for net proceeds, after underwriting discounts and other expenses related to this offering, of $911.4 million. We used
the net proceeds of the offering to fund acquisitions.
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 which $166.3 million is
available) 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.
46
During the quarter and year ended December 31, 2014, we sold 609,886 shares of our common stock under the program at a
weighted average price of $48.11 per share, resulting in net proceeds, after sales commissions of approximately $0.3 million to
Morgan Stanley, of approximately $29.3 million.
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 $56.3 million in 2014,
$76.2 million in 2013 and $82.3 million in 2012. 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 9.3 million shares
(less any shares of restricted stock issued under the LTIP – 2.0 million shares of our common stock were available for this
purpose as of December 31, 2014) were available for grant under the LTIP at December 31, 2014. Our employee stock purchase
plan allows our employees to purchase our common stock at 95% of its fair market value. Proceeds from the issuance of our
common stock related to these plans have contributed favorably to net cash provided by financing activities in 2014 and we
believe will continue to do so 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, 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 2015 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. Our micro-captive advisory services are
the subject of an investigation by the IRS. See “Results of Operations - Brokerage” above for more information regarding this
investigation. Due to the early stage of this investigation and the fact that the IRS has not made any allegations against us at this
time, we are not able to reasonably estimate the amount of any potential loss or impact on our liquidity in connection with this
investigation.
Contractual Obligations and Commitments
In connection with our investing and operating activities, we have entered into certain contractual obligations and commitments.
See Notes 7, 13 and 14 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, 2014 are as follows
(in millions):
Contractual Obligations
2015
2016
Payments Due by Period
2019
2018
2017
Note purchase agreements
Credit Agreement
Premium Financing Debt Facility
Interest on debt
Total debt obligations
Operating lease obligations
Less sublease arrangements
Outstanding purchase obligations
$
-
140.0
127.9
100.9
368.8
99.0
(1.4)
29.7
$
50.0
-
-
100.4
150.4
81.7
(0.7)
5.4
$
300.0
-
-
97.5
397.5
68.7
(0.3)
0.9
$
100.0
-
-
77.5
177.5
49.8
(0.1)
0.3
$
100.0
-
-
73.2
173.2
38.8
-
-
Thereafter
Total
$
1,575.0
-
-
323.9
1,898.9
131.3
-
-
$
2,125.0
140.0
127.9
773.4
3,166.3
469.3
(2.5)
36.3
Total contractual obligations
$
496.1
$
236.8
$
466.8
$
227.5
$
212.0
$
2,030.2
$
3,669.4
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, 2014, we are unable
to make reasonably reliable estimates of the period in which cash settlements may be made with the respective taxing authorities.
47
Therefore, $12.5 million of unrecognized tax benefits have been excluded from the contractual obligations table above. See
Note 15 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 $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, with certain accredited institutional investors, pursuant to
which, on February 27, 2014, we issued and sold $325.0 million in aggregate principle amount of our 4.58% Senior Notes, Series
H due February 27, 2024, $175.0 million in aggregate principle amount of our 4.73% Senior Notes, Series I due February 27,
2026 and $100.0 million in aggregate principle amount of our 4.98% Senior Notes, Series J due February 27, 2029, in a private
placement.
On June 24, 2014, 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 2.80% Senior Notes, Series K, due June 24, 2018,
$50.0 million in aggregate principal amount of our 3.20% Senior Notes, Series L, due June 24, 2019, $50.0 million in aggregate
principal amount of our 3.48% Senior Notes, Series M, due June 24, 2020, $200.0 million in aggregate principal amount of our
4.13% Senior Notes, Series N, due June 24, 2023, $200.0 million in aggregate principal amount of our 4.31% Senior Notes,
Series O, due June 24, 2025 and $150.0 million in aggregate principal amount of our 4.36% Senior Notes, Series P, due June 24,
2026, in a private placement.
See Note 7 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.
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, 2014, $22.6 million of letters of credit (see below under Off-Balance Sheet Debt) were outstanding under
the Credit Agreement. There were $140.0 million of borrowings outstanding under the Credit Agreement at December 31, 2014.
Accordingly, at December 31, 2014, $437.4 million remained available for potential borrowings, of which $52.4 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 7 to our consolidated financial statements for a discussion of the terms of the Credit Agreement.
Premium Financing Debt Facility - On June 16, 2014 we entered into a Syndicated Facility Agreement, revolving loan facility,
which we refer to as the Premium Financing Debt Facility, that provides funding for the three acquired Australian (AU) and New
Zealand (NZ) premium finance subsidiaries. See Note 3 “Business Combinations.” The Premium Financing Debt Facility is
comprised of: (i) Facility B is separate AU$150.0 million and NZ$35.0 million tranches, (ii) Facility C is an AU$25.0 million
equivalent multi-currency overdraft tranche and (iii) Facility D is a NZ$15.0 million equivalent multi-currency overdraft tranche.
The Premium Financing Debt Facility expires June 15, 2016. The Premium Financing Debt Facility provides funding for the
three acquired Australian and New Zealand premium finance subsidiaries. These premium funding related borrowings are fully
collateralized by the underlying premium finance related receivables and as such are excluded from our debt covenant
computations.
48
At December 31, 2014, AU$117.0 million and NZ$23.0 million of borrowings were outstanding under Facility B,
AU$9.4 million of borrowings were outstanding under Facility C and NZ$9.6 million of borrowings were outstanding under
Facility D. Accordingly, as of December 31, 2014, AU$33.0 million and NZ$12.0 million remained available for potential
borrowing under Facility B, and AU$15.6 million and NZ$5.4 million under Facilities C and D, respectively. See Note 7 to our
consolidated financial statements for a discussion of the terms of the Premium Financing Debt Facility.
Operating Lease Obligations - We generally operate in leased premises at all of our 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 certain of these leases will not be renewed or replaced. We adjust charges for real estate taxes and
common area maintenance annually based on actual expenses, and we recognize the related revenues in the year in which the
expenses are incurred. These amounts are not included in the minimum future rentals to be received in the contractual obligations
table above.
Outstanding Purchase Obligations - 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, 2014. 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, 2014 are as follows (in millions):
Off-Balance Sheet Commitments
2015
Amount of Commitment Expiration by Period
2016
2017
2019
2018
Total
Amounts
Thereafter Committed
Letters of credit
Financial guarantees
Funding commitments
Total commitments
-
$
0.8
-
-
$
0.8
-
-
$
0.8
-
-
$
0.8
-
-
$
0.9
-
$
22.6
16.5
2.9
$
22.6
20.6
2.9
$
0.8
$
0.8
$
0.8
$
0.8
$
0.9
$
42.0
$
46.1
Since commitments may expire unused, the amounts presented in the table above do not necessarily reflect our actual future cash
funding requirements. See Note 14 to 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 339 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 2014 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 earnout obligations related to these acquisitions was $549.8 million, of which $205.3 million
was recorded in our consolidated balance sheet as of December 31, 2014 based on the estimated fair value of the expected future
payments to be made. See Note 3 to our consolidated financial statements for a discussion of our funding commitments related to
a large acquisition we signed in April 2014 and completed in July 2014.
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, 2014 and 2013 that was recourse to us.
At December 31, 2014, we had posted two letters of credit totaling $11.3 million, in the aggregate, related to our self-insurance
deductibles, for which we have recorded a liability of $9.7 million. At December 31, 2014, we had posted seven letters of credit
totaling $6.3 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. At December 31, 2014, we had posted one letter of
credit totaling $5.0 million to support our potential obligation under a client’s insurance program. These letters of credit have
never been drawn upon.
49
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, 2014 that are sensitive
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, 2014 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, 2014.
As of December 31, 2014, we had $2,125.0 million of borrowings outstanding under our various note purchase agreements. The
aggregate estimated fair value of these borrowings at December 31, 2014 was $2,281.0 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 the income valuation approach, which is a valuation
technique that converts future amounts (for example, cash flows or income and expenses) to a single current (that is, discounted)
amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about those
future amounts. Because our debt issuances generate a measurable income stream for each lender, the income approach was
deemed to be an appropriate methodology for valuing the private placement long-term debt. The methodology used calculated
the original deal spread at the time of each debt issuance, which was equal to the difference between the yield of each issuance
(the coupon rate) and the equivalent benchmark treasury yield at that time. The market spread as of the valuation date was
calculated, which is equal to the difference between an index for investment grade insurers and the equivalent benchmark treasury
yield today. An implied premium or discount to the par value of each debt issuance based on the difference between the
origination deal spread and market as of the valuation date was then calculated. The index we relied on to represent investment
graded insurers was the Bloomberg Valuation Services (BVAL) U.S. Insurers BBB index. This index is comprised primarily of
insurance brokerage firms and was representative of the industry in which we operate. For the purposes of our analysis, the
average BBB rate was assumed to be the appropriate borrowing rate for us based on the our current credit rating.
We estimated market risk as the potential impact on the value of the private placement long-term 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, 2014 and the resulting fair values would be $309.3 million higher than their carrying value (or $2,434.3 million).
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 increase in our weighted average borrowing rate as of December 31, 2014 and the
resulting fair values would be $15.2 million higher than their carrying value (or $2,140.2 million).
As of December 31, 2014, we had $140.0 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, 2014 and the resulting fair value is not be materially
different from their carrying value.
At December 31, 2014, we had $127.9 million of borrowings outstanding under our Premium Financing Debt Facility. 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, 2014, and the resulting fair
value is not 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, Jamaican, New Zealand,
Norwegian, Singaporean 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 2014 (a weakening of the U.S.
dollar), earnings before income taxes would have decreased by approximately $16.3 million. Assuming a hypothetical favorable
change of 10% in the average foreign currency exchange rate for 2014 (a strengthening of the U.S. dollar), earnings before
income taxes would have increased by approximately $9.5 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. 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. However, our consolidated financial position is exposed
50
to foreign currency exchange risk related to intra-entity loans between our U.S. based subsidiaries and our non-U.S. based
subsidiaries that are denominated in the respective local foreign currency. A transaction that is in a foreign currency is first
remeasured at the entity’s functional (local) currency, where applicable, (which is an adjustment to consolidated earnings) and
then translated to the reporting (U.S. dollar) currency (which is an adjustment to consolidated stockholders’ equity) for
consolidated reporting purposes. If the transaction is already denominated in the foreign entity’s functional currency, only the
translation to U.S. dollar reporting is necessary. The remeasurement process required by U.S. GAAP for such foreign currency
loan transactions will give rise to a consolidated unrealized foreign exchange gain or loss, which could be material, that is
recorded in accumulated other comprehensive earnings (loss).
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 India and the U.K., we have periodically purchased
financial instruments when market opportunities arose to minimize our exposure to this risk. During 2014, 2013 and 2012, 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 2014) and disbursements (in 2013) through various future payment dates. In addition,
during 2014, we had several monthly put/call options in place with an external financial institution that were designed to hedge a
significant portion of our Indian currency disbursements through various future payment dates. Although these hedging strategies
were designed to protect us against significant U.K. and India currency exchange rate movements, 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 2014, 2013 and 2012. See Note 16 to our
consolidated financial statements for the changes in fair value of these derivative instruments reflected in comprehensive earnings
in 2014, 2013 and 2012. We entered into a AU$400.0 million foreign currency derivative investment contract that we executed
on April 16, 2014 in connection with the signing of the agreement to acquire the Crombie/OAMPS operations. This contract was
designed to hedge a portion of the AU$ denominated purchase price consideration of this acquisition. The derivative investment
contract was exercised on June 16, 2014, the date that the Crombie/OAMPS transaction closed. In second quarter 2014, we
recorded a pretax gain of $1.9 million related to this derivative investment contract. 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. In the future, we expect to continue hedging these types of transactions and other currencies, as needed.
51
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
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 (benefit) for income taxes
Net earnings
Basic net earnings per share:
Diluted net earnings per share:
Dividends declared per common share
Year Ended December 31,
2014
2013
2012
$
2,083.0
1,258.3
104.0
84.7
41.3
7.3
1,029.5
18.4
$
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
4,626.5
2,167.6
767.2
1,058.9
89.0
69.4
189.5
17.5
4,359.1
267.4
(36.0)
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
$
303.4
$
268.6
$
195.0
$
1.98
$
2.08
$
1.61
1.97
1.44
2.06
1.40
1.59
1.36
See notes to consolidated financial statements.
52
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,
2014
2013
2012
$
303.4
$
268.6
$
195.0
(18.6)
(238.4)
(1.0)
26.8
1.6
1.8
(3.4)
16.1
1.7
Comprehensive earnings
$
45.4
$
298.8
$
209.4
See notes to consolidated financial statements
53
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
Premium financing borrowings
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 164.6 shares in 2014 and 133.6 shares in 2013
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
December 31,
2014
2013
$
314.4
1,367.6
1,462.5
666.7
$
298.1
1,027.4
1,288.8
261.3
3,811.2
195.4
392.6
385.2
3,449.6
1,776.0
2,875.6
160.4
279.8
320.7
2,145.2
1,078.8
$
10,010.0
$
6,860.5
$
2,623.3
623.7
66.1
61.7
127.9
140.0
$
2,154.7
370.6
84.5
44.5
-
630.5
3,642.7
2,125.0
1,012.9
6,780.6
164.6
2,649.4
676.0
(260.6)
3,229.4
3,284.8
825.0
665.2
4,775.0
133.6
1,358.1
596.4
(2.6)
2,085.5
Total liabilities and stockholders' equity
$
10,010.0
$
6,860.5
See notes to consolidated financial statements.
54
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 changes in foreign exchange rate
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/books of business
Net (funding) proceeds 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
Net borrowings on premium financing debt facility
Borrowings on line of credit facilities
Repayments on line of credit facilities
Net borrowings of corporate related long-term debt
Net cash provided by financing activities
Effect of changes in foreign exchange rates on cash and cash equivalents
Net increase (decrease) 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,
2013
2014
2012
$
303.4
$
268.6
$
195.0
(23.0)
258.9
17.5
22.9
10.6
(0.5)
(62.1)
95.3
60.0
(150.5)
184.2
(26.0)
4.9
(126.1)
(167.2)
402.3
(81.5)
(1,918.3)
8.2
(20.1)
(2,011.7)
997.0
6.9
-
(223.1)
7.5
1,109.9
(1,500.4)
1,200.0
1,597.8
27.9
16.3
298.1
(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
$
314.4
$
298.1
$
302.1
$
82.5
72.9
$
49.2
49.2
$
42.2
47.5
See notes to consolidated financial statements.
55
Arthur J. Gallagher & Co.
Consolidated Statement of Stockholders’ Equity
(In millions)
Balance at December 31, 2011
114.7
$
114.7
$
693.2
Common Stock
Share s
Amount
Capital in
Exce ss of
Par Value
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
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
Net earnings
Net change in pension asset/liability,
net of taxes of $(12.4) million
Foreign currency translation
Change in fair value of derivative
instruments, net of taxes of $(0.7) million
Compensation expense related
to stock option plan grants
T ax impact from issuance of
common stock
Common stock issued in:
Fifty-three purchase transactions
Stock option plans
Employee stock purchase plan
Deferred compensation/restricted stock
Stock issuance under dribble-out program
Stock issuance from public offering
Other compensation expense
Cash dividends declared on common stock
-
-
-
-
-
-
6.5
1.6
0.3
0.1
0.6
21.9
-
-
-
-
-
-
-
-
6.5
1.6
0.3
0.1
0.6
21.9
-
-
-
-
-
-
9.5
6.9
292.8
42.6
12.1
8.4
28.4
889.5
1.1
-
Balance at December 31, 2014
164.6
$
164.6
$
2,649.4
Re taine d
Earnings
$
482.9
195.0
Accumulate d O the r
Compre he nsive
Earnings (Loss)
$
(47.2)
-
Total
$
1,243.6
195.0
-
-
-
-
-
-
-
-
-
-
-
(167.5)
510.4
268.6
-
-
-
-
-
-
-
-
-
-
(182.6)
596.4
303.4
-
-
-
-
-
-
-
-
-
-
-
-
(223.8)
676.0
$
(3.4)
16.1
1.7
-
-
-
-
-
-
-
-
-
(32.8)
-
26.8
1.6
1.8
-
-
-
-
-
-
-
-
(2.6)
-
(18.6)
(238.4)
(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
232.2
61.8
10.2
(13.0)
4.3
(182.6)
2,085.5
303.4
(18.6)
(238.4)
(1.0)
(1.0)
-
-
-
-
-
-
-
-
-
-
$
(260.6)
9.5
6.9
299.3
44.2
12.4
8.5
29.0
911.4
1.1
(223.8)
3,229.4
$
See notes to consolidated financial statements.
56
Arthur J. Gallagher & Co.
Notes to Consolidated Financial Statements
December 31, 2014
1. Summary of Significant Accounting Policies
Nature of Operations - Arthur J. Gallagher & Co. and its subsidiaries, collectively referred to herein as we, our, 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
premium financing operations and 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 30 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, 2014, 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.
57
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 $6.8 million and $4.2 million at
December 31, 2014 and 2013, 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 $10.7 million and $6.7 million at December 31, 2014 and 2013, 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 (including interest income from our premium financing
operations), 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.
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, 2014.
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.
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
58
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 2014,
other net revenues also includes a gain of $1.9 million related to a AU$400.0 million foreign currency derivative investment
contract that we executed on April 16, 2014 in connection with the signing of the agreement to acquire the Crombie/OAMPS
operations, headquartered in Australia. This contract was designed to hedge a portion of the AU$ denominated purchase price
consideration of this acquisition. The derivative investment contract was exercised on June 16, 2014, the date that the
Crombie/OAMPS transaction closed. 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.
Premium Financing - Seven subsidiaries of the brokerage segment make short-term loans (generally with terms of twelve
months or less) to our clients to finance premiums. These premium financing contracts are structured to minimize potential bad
debt expense to us. Such receivables are generally considered delinquent after seven days of the payment due date. In normal
course, insurance policies are cancelled within one month of the contractual payment due date if the payment remains delinquent.
We recognize interest income as it is earned over the life of the contract using the “level-yield” method. Unearned interest related
to contracts receivable is included in the receivable balance in the accompanying consolidated balance sheet. The outstanding
loan receivable balance was $232.6 million and $2.3 million at December 31, 2014 and 2013, 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
Refined fuel plants
Leasehold improvements
Useful Life
Three to five years
Three to ten years
Three to ten years
Three to five years
Ten years
Shorter of the lease term or useful life of the asset
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 2014, 2013 and 2012, we wrote off $1.8 million, $2.2 million and $3.5 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.
59
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.
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, 2014 and 2013,
approximate fair value because of the short-term duration of these instruments. See Note 3 to our consolidated financial
60
statements for the fair values related to the establishment of intangible assets and the establishment and adjustment of earnout
payables. See Note 7 to our consolidated financial statements for the fair values related to borrowings outstanding at
December 31, 2014 and 2013 under our debt agreements. See Note 12 to our consolidated financial statements for the fair values
related to investments at December 31, 2014 and 2013 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, 2014, 0.3 million shares of our common
stock are reserved for future issuance under the ESPP.
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 12 to our consolidated
financial statements for additional information required to be disclosed related to our defined benefit postretirement plans.
61
2. Effect of New Accounting Pronouncements
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (which we refer to as the FASB) issued new accounting guidance on
revenue from contracts with customers, which will supersede nearly all existing revenue recognition guidance under U.S. GAAP.
The core principal of the new guidance is that an entity should recognize revenue when it transfers promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash
flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from
costs incurred to obtain or fulfill a contract. This new guidance is effective for the first quarter of 2017 and early adoption is not
permitted. The guidance permits two methods of transition upon adoption; full retrospective and modified retrospective. Under
the full retrospective method, prior periods would be restated under the new revenue standard, providing a comparable view
across all periods presented. Under the modified retrospective method, prior periods would not be restated. Rather, revenues and
other disclosures for pre-2017 periods would be provided in the notes to the financial statements as previously reported under the
current revenue standard. Management is currently reviewing the guidance, and the impact from its adoption on our consolidated
financial statements cannot be determined at this time.
Presentation of Unrecognized Tax Benefits
In July 2013, 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 guidance 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 was effective in first
quarter 2014. We adopted the new guidance effective January 1, 2014. The impact of the new guidance upon adoption was not
material to our 2014 consolidated financial statements.
62
3. Business Combinations
During 2014, 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
Name and Effective
Date of Acquisition
Benefit Development
Group, Inc.
February 1, 2014
46
$
2.0
$
0.7
$
-
$
0.1
$
0.6
$
3.4
$
2.0
Kent, Kent &
Tingle
February 1, 2014
L&R Benefits, LLC
March 1, 2014
Spataro Insurance
Agency, Inc.
March 1, 2014
Tudor Risk
Services, LLC
March 1, 2014
American Wholesalers
Underwriting Ltd
April 1, 2014
Mike Henry Insurance
Brokers Limited
April 1, 2014
Oval Group of
Companies (OGC)
April 1, 2014
Heritage Insurance
Management
Limited (HIM)
May 1, 2014
MGA Insurance
Group (MGA)
May 1, 2014
Shilling Limited
May 1, 2014
Sunderland Insurance
Services, Inc.
May 1, 2014
Plus Companies, Inc.
June 1, 2014
Tri-State General
Insurance Agency, Inc.
June 1, 2014
Crombie/OAMPS (CO)
June 16, 2014
Foundation Strategies, Inc.
July 1, 2014
Insurance Point, LLC
July 1, 2014
229
115
47
-
9.1
5.3
2.0
-
133
6.0
-
-
-
547
198
204
221
47
-
46
-
-
-
25.1
8.9
9.2
9.3
2.2
-
2.0
255
11.2
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3.5
1.8
-
2.1
5.7
9.6
338.4
33.9
26.8
1.7
2.4
3.4
0.6
993.1
0.7
3.9
63
1.4
0.1
0.2
0.2
0.5
1.7
11.8
3.8
2.5
1.2
0.6
0.8
0.1
-
0.1
0.5
3.5
1.0
0.4
0.1
-
17.5
8.2
2.6
2.4
12.2
4.2
15.5
-
-
11.9
1.0
-
-
-
-
0.4
2.6
350.2
37.7
66.3
12.8
12.2
13.5
2.9
993.1
3.2
18.2
7.8
6.0
0.6
1.3
-
5.0
-
-
20.0
8.4
-
-
-
-
3.0
24.4
Common
Shares
Issued
(000s)
Common
Share
Value
Cash Paid
Accrued
Liability
Escrow
Deposited
Recorded
Earnout
Payable
Total
Recorded
Purchase
Price
Maximum
Potential
Earnout
Payable
209
$
8.4
$
3.9
-
$
$
1.0
$
3.7
$
17.0
$
12.5
Name and Effective
Date of Acquisition
Trip Mate, Inc.
July 1, 2014
Noraxis Capital
Corporation (NCC)
July 2, 2014
Cowles & Connell
-
-
413.3
August 1, 2014
331
14.8
Denman Consulting
Services
August 1, 2014
Minvielle & Chastanet
Insurance Brokers
August 8, 2014
Baker Tilly Financial
Management Limited
August 29, 2014
Benfield Group
September 1, 2014
Everett James, Inc.
September 1, 2014
Hagedorn & Company
40
-
185
82
52
1.7
-
8.7
3.8
2.4
September 1, 2014
281
11.5
Parmia Pty Ltd.
September 1, 2014
-
-
Bennett and Shade
Company
October 1, 2014
Insurance Associates, Inc.
October 1, 2014
Forker Company
October 31, 2014
Discovery Benefit
Solutions, Inc.
November 1, 2014
Miller-Harrison
Insurance Services
November 1, 2014
SGB-NIA Insurance
Brokers (SGB)
November 1, 2014
Titan Group LLC
November1, 2014
Instrat Insurance
Brokers
35
169
24
115
38
449
49
1.5
7.2
1.1
5.4
1.8
18.7
2.4
4.2
0.6
5.0
2.3
1.1
0.7
-
1.7
0.5
-
0.3
-
-
7.2
-
December 1, 2014
-
-
16.2
O'Gorman & Young
Incorporated (OGY)
December 1, 2014
554
23.8
-
64
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1.9
0.8
0.1
-
0.7
0.1
0.1
1.3
-
0.2
0.8
0.1
0.1
-
2.9
0.1
-
2.7
-
-
0.3
3.0
4.7
0.9
0.8
-
1.2
-
1.1
1.6
1.4
0.6
4.2
0.4
9.5
6.4
415.2
19.8
2.7
8.0
16.4
5.9
4.0
12.8
2.9
2.2
9.1
3.1
6.9
2.4
33.0
2.9
25.7
-
-
1.6
5.0
5.4
3.5
4.0
-
1.2
-
3.0
2.2
4.5
1.0
5.2
2.0
9.5
32.9
12.5
Common
Shares
Issued
(000s)
Common
Share
Value
Name and Effective
Date of Acquisition
Independent Benefit
Services, Inc. (IBS)
Cash Paid
Accrued
Liability
Escrow
Deposited
Recorded
Earnout
Payable
Total
Recorded
Purchase
Price
Maximum
Potential
Earnout
Payable
December 1, 2014
395
$
17.8
$
6.2
$
-
$
0.8
$
1.3
$
26.1
$
14.3
Affinity Marketing Group
December 1, 2014
72
3.1
-
Blue Holdings Group
of Companies
December 5, 2014
227
10.9
4.5
Twenty-one other
acquisitions
completed in 2014
344
14.8
18.5
-
-
-
0.3
1.7
2.2
1.2
5.6
18.3
5.2
6.6
1.1
10.3
44.7
21.1
5,739
$
252.1
$
1,914.5
$
-
$
42.4
$
80.5
$
2,289.5
$
198.8
On April 1, 2014, we closed on an agreement to acquire the Oval Group of Companies (which we refer to as Oval). Under the
agreement, we agreed to purchase all of the outstanding equity of Oval for net cash consideration of approximately
$338.0 million. Oval was an independent commercial insurance broker operating out of 24 offices throughout the U.K., with over
1,000 employees.
On April 16, 2014, we closed on a secondary public offering of our common stock whereby 21.85 million shares of our stock
were issued for net proceeds, after underwriting discounts and other expenses related to this offering, of $911.4 million. We used
the net proceeds of the offering to fund acquisitions.
On June 16, 2014, we closed on an agreement to acquire the Wesfarmers Insurance Brokerage operations (which we refer to as
Crombie/OAMPS). The Crombie/OAMPS transaction, includes the OAMPS businesses in Australia and the U.K., Crombie in
New Zealand and the associated premium funding operations. Under the agreement, we agreed to purchase all of the outstanding
shares of these three operating companies for net cash consideration of approximately $952.0 million, plus an additional
$35.3 million on October 14, 2014 related to a true-up of the excess of net current assets based on the final acquisition date
balance sheet over the target amount as set forth in the acquisition agreement. The Crombie/OAMPS operations have
approximately 1,700 employees operating out of more than 50 offices across Australia, New Zealand and the U.K.
On July 2, 2014, we closed on an agreement to acquire Noraxis Capital Corporation (which we refer to as Noraxis), paying cash
consideration of approximately $415.0 million for approximately 89% of the equity of Noraxis. The remaining equity is held by
various management employees of Noraxis. Noraxis has more than 650 employees in offices across Alberta, Manitoba, New
Brunswick, Nova Scotia and Ontario.
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 4.0% to 12.0% for our 2014 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 8.5% to 9.5% for our 2014 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.
65
During 2014, 2013 and 2012, we recognized $14.5 million, $11.9 million and $9.3 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 2014, 2013 and 2012 we recognized $3.0 million of expense, $10.2 million and $5.9 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 67, 79 and 46 acquisitions, respectively. The aggregate amount of maximum
earnout obligations related to acquisitions made in 2011 and subsequent years was $549.8 million as of December 31, 2014, of
which $205.3 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
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 following is a summary of the estimated fair values of the net assets acquired at the date of each acquisition made in 2014
(in millions):
OGC
HIM
MGA
CO
NCC
S GB
OGY
IBS
Fifty-Two
Other
Acquisitions
Total
Cash
$
23.1
$
2.9
$
0.2
$
26.6
$
10.1
$
-
$
-
$
-
$
5.8
$
68.7
Other current assets
129.6
2.1
-
245.7
129.9
1.0
0.6
532.0
129.5
52.3
181.8
4.9
0.3
-
14.8
20.3
1.3
-
8.9
0.8
-
27.0
33.2
0.3
-
695.5
17.1
7.0
619.6
325.3
4.2
4.2
44.5
70.4
1,699.5
490.0
216.4
6.8
-
6.8
4.1
-
4.1
Fixed assets
Noncurrent assets
Goodwill
Expiration lists
Non-compete
agreements
Trade names
Total assets
acquired
Current liabilities
Noncurrent liabilities
Total liabilities
assumed
Total net assets
acquired
73.0
4.9
3.5
314.9
178.6
2.6
2.2
589.8
72.5
102.1
0.7
0.1
0.1
14.9
17.8
0.1
-
33.7
0.7
-
2.8
0.2
-
25.8
18.7
0.3
-
47.8
4.1
10.8
0.5
-
-
12.7
13.1
0.2
-
26.5
0.4
-
59.2
4.3
4.9
172.9
159.0
1.9
2.4
975.1
29.8
15.5
1,448.3
895.9
11.9
9.4
410.4
3,454.6
63.0
12.4
771.1
394.0
706.4
174.6
0.7
14.9
0.4
75.4
1,165.1
$
350.2
$
37.7
$
66.3
$
993.1
$
415.2
$
33.0
$
32.9
$
26.1
$
335.0
$
2,289.5
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, expiration lists, non-compete agreements and trade names in the amounts of
$1,448.3 million, $895.9 million, $11.9 million and $9.4 million, respectively, within the brokerage 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 3.0% and 5.0% to 11.5% for our 2014 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 15.0% for
our 2014 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 $895.9 million of expiration lists, $11.9 million of non-compete agreements and $9.4 million of trade names related to the
2014 acquisitions, $679.3 million, $9.9 million and $7.1 million, respectively, is not expected to be deductible for income tax
purposes. Accordingly, we recorded a deferred tax liability of $173.9 million, and a corresponding amount of goodwill, in 2014
related to the nondeductible amortizable intangible assets.
66
Our consolidated financial statements for the year ended December 31, 2014 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, 2013 (in millions, except per share data):
Total revenues
Net earnings
Basic earnings per share
Diluted earnings per share
Year Ended December 31,
2014
2013
$ 4,984.2
$ 3,968.1
316.1
298.4
1.94
1.91
1.93
1.89
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, 2013, nor are they
necessarily indicative of future operating results. Annualized revenues of entities acquired in 2014 totaled approximately
$761.2 million. Total revenues and net earnings recorded in our consolidated statement of earnings for 2014 related to the 2014
acquisitions in the aggregate were $413.0 million and $37.8 million, respectively.
4. Other Current Assets
Major classes of other current assets consist of the following (in millions):
Premium finance advances and loans
Accrued supplemental, direct bill and other receivables
Refined coal production related receivables
Deferred income taxes - current
Prepaid expenses
Total other current assets
December 31,
2014
2013
$
232.6
156.3
103.5
102.2
72.1
$
2.3
69.0
56.6
84.9
48.5
$
666.7
$
261.3
The premium finance loans represent short-term loans which we make to many of our brokerage related clients and other
non-brokerage clients to finance their premiums paid to insurance carriers. These premium finance loans are primarily generated
by the Crombie/OAMPS operations which were acquired on June 16, 2014. Financing receivables are carried at amortized cost.
Given that these receivables are collateralized, carry a fairly rapid delinquency period of only seven days post payment date, and
that contractually the underlying insurance policies will be cancelled within one month of the payment due date, there historically
has not been any risk of receiving payment and therefore we do not maintain any significant allowance for losses against this
balance.
5. 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
December 31,
2014
2013
$
23.0
89.6
133.9
102.9
187.8
11.5
$
16.3
78.3
117.2
77.9
147.6
8.5
548.7
(353.3)
445.8
(285.4)
$
195.4
$
160.4
67
6. Intangible Assets
The carrying amount of goodwill at December 31, 2014 and 2013 allocated by domestic and foreign operations is as follows
(in millions):
At December 31, 2014
United States
United Kingdom
Canada
Australia
Other foreign, principally New Zealand
Total goodwill - net
At December 31, 2013
United States
United Kingdom
Canada
Australia
Other foreign
Total goodwill - net
Brokerage
Risk
Management
Corporate
Total
$
1,652.6
818.7
318.5
336.8
300.9
$
20.2
1.9
-
-
-
-
$
-
-
-
-
$
1,672.8
820.6
318.5
336.8
300.9
$
3,427.5
$
22.1
$
-
$
3,449.6
$
1,449.6
582.8
26.8
37.1
26.6
$
20.2
2.1
-
-
-
$
-
-
-
-
-
$
1,469.8
584.9
26.8
37.1
26.6
$
2,122.9
$
22.3
$
-
$
2,145.2
The changes in the carrying amount of goodwill for 2014 and 2013 are as follows (in millions):
Balance as of January 1, 2013
Goodwill acquired during the year
Goodwill adjustments related to appraisals
and other acquisition adjustments
Foreign currency translation adjustments
during the year
Balance as of December 31, 2013
Goodwill acquired during the year
Goodwill adjustments related to appraisals
and other acquisition adjustments
Goodwill written-off related to sales of business
Foreign currency translation adjustments
during the year
Brokerage
Risk
Management
Corporate
Total
$
1,451.4
664.1
$
21.3
0.9
$
-
-
$
1,472.7
665.0
3.3
4.1
2,122.9
1,448.3
(8.8)
(0.6)
-
0.1
22.3
-
-
-
(134.3)
(0.2)
-
-
-
-
-
-
-
3.3
4.2
2,145.2
1,448.3
(8.8)
(0.6)
(134.5)
Balance as of December 31, 2014
$
3,427.5
$
22.1
$
-
$
3,449.6
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,
2014
2013
$
2,461.9
(719.3)
$
1,563.5
(511.3)
1,742.6
1,052.2
43.2
(29.5)
13.7
29.7
(10.0)
19.7
37.3
(25.9)
11.4
22.1
(6.9)
15.2
Net amortizable assets
$
1,776.0
$
1,078.8
68
Estimated aggregate amortization expense for each of the next five years is as follows (in millions):
2015
2016
2017
2018
2019
Total
7. Credit and Other Debt Agreements
The following is a summary of our corporate and other 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 2.80%, balloon due 2018
Semi-annual payments of interest, fixed rate of 3.20%, balloon due 2019
Semi-annual payments of interest, fixed rate of 5.85%, $50 million due
in 2016, 2018 and 2019
Semi-annual payments of interest, fixed rate of 3.99%, balloon due 2020
Semi-annual payments of interest, fixed rate of 3.48%, balloon due 2020
Semi-annual payments of interest, fixed rate of 5.18%, balloon due 2021
Semi-annual payments of interest, fixed rate of 3.69%, balloon due 2022
Semi-annual payments of interest, fixed rate of 5.49%, balloon due 2023
Semi-annual payments of interest, fixed rate of 4.13%, balloon due 2023
Semi-annual payments of interest, fixed rate of 4.58%, balloon due 2024
Semi-annual payments of interest, fixed rate of 4.31%, balloon due 2025
Semi-annual payments of interest, fixed rate of 4.73%, balloon due 2026
Semi-annual payments of interest, fixed rate of 4.36%, balloon due 2026
Semi-annual payments of interest, fixed rate of 4.98%, balloon due 2029
Total Note Purchase Agreements
Credit Agreement:
Periodic payments of interest and principal, prime or LIBOR plus up
to 1.45%, expires September 19, 2018
Premium Financing Debt Facility - expires June 15, 2016:
Periodic payments of interest and principal, Interbank rates plus 1.65%
for Facility B; plus 0.85% for Facilities C and D
Facility B
AUD denominated tranche
NZD denominated tranche
Facility C and D
AUD denominated tranche
NZD denominated tranche
Total Premium Financing Debt Facility
Total corporate and other debt
$
214.6
208.5
198.7
187.2
173.6
$
982.6
December 31,
2014
2013
-
$
300.0
50.0
50.0
$
100.0
300.0
-
-
150.0
50.0
50.0
75.0
200.0
50.0
200.0
325.0
200.0
175.0
150.0
100.0
2,125.0
150.0
50.0
-
75.0
200.0
50.0
-
-
-
-
-
-
925.0
140.0
530.5
95.0
17.8
7.7
7.4
127.9
-
-
-
-
-
$
2,392.9
$
1,455.5
Note Purchase Agreements - 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 $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.
69
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
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.
We are a party to a note purchase agreement dated December 20, 2013, with certain accredited investors, pursuant to which we
issued and sold $325.0 million in aggregate principle amount of our 4.58% Senior Notes, Series H, due February 27, 2024,
$175.0 million in aggregate principle amount of our 4.73% Senior Notes, Series I, due February 27, 2026 and $100.0 million in
aggregate principle amount of our 4.98% Senior Notes, Series J, due February 27, 2029. These notes will require semi-annual
payments of interest that due in February and August of each year. The funding of this note purchase agreement occurred on
February 27, 2014. We incurred approximately $1.4 million of debt acquisition costs that was capitalized and will be amortized
on a pro rata basis over the life of the debt.
We are a party to a note purchase agreement dated June 24, 2014, with certain accredited institutional investors, pursuant to
which we issued and sold $50.0 million in aggregate principal amount of our 2.80% Senior Notes, Series K, due June 24, 2018,
$50.0 million in aggregate principal amount of our 3.20% Senior Notes, Series L, due June 24, 2019, $50.0 million in aggregate
principal amount of our 3.48% Senior Notes, Series M, due June 24, 2020, $200.0 million in aggregate principal amount of our
4.13% Senior Notes, Series N, due June 24, 2023, $200.0 million in aggregate principal amount of our 4.31% Senior Notes,
Series O, due June 24, 2025 and $150.0 million in aggregate principal amount of our 4.36% Senior Notes, Series P, due June 24,
2026. These notes require semi-annual payments of interest that are due in June and December of each year. We incurred
approximately $2.6 million of debt acquisition costs that was capitalized and will be amortized on a pro rata basis over the life of
the debt.
Under the terms of the note purchase agreements described above, 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 described above 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, 2014. 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 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
70
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.
The terms of the Credit Agreement include various financial covenants, including covenants that require us to maintain specified
financial leverage ratios. We were in compliance with these covenants as of December 31, 2014. The Credit Agreement also
includes customary provisions for transactions of this type, including events of default, with corresponding grace periods, cross-
defaults to other agreements evidencing our indebtedness.
At December 31, 2014, $22.6 million of letters of credit (for which we had $9.7 million of liabilities recorded at December 31,
2014) were outstanding under the Credit Agreement. See Note 14 to our consolidated financial statements for a discussion of the
letters of credit. There were $140.0 million of borrowings outstanding under the Credit Agreement at December 31, 2014.
Accordingly, at December 31, 2014, $437.4 million remained available for potential borrowings, of which $52.4 million was
available for additional letters of credit.
Premium Financing Debt Facility - On June 16, 2014 we entered into a Syndicated Facility Agreement, revolving loan facility,
which we refer to as the Premium Financing Debt Facility, that provides funding for the three acquired Australian (AU) and New
Zealand (NZ) premium finance subsidiaries. See Note 3 “Business Combinations.” The Premium Financing Debt Facility is
comprised of: (i) Facility B is separate AU$150.0 million and NZ$35.0 million tranches, (ii) Facility C is an AU$25.0 million
equivalent multi-currency overdraft tranche and (iii) Facility D is a NZ$15.0 million equivalent multi-currency overdraft tranche.
The Premium Financing Debt Facility expires June 15, 2016.
The interest rates on Facility B are Interbank rates, which vary by tranche, duration and currency, plus a margin of 1.65%. The
interest rates on Facilities C and D are 30 day Interbank rates, plus a margin of 0.85%. The annual fee for Facility B is 0.7425%
of the undrawn commitments for the two tranches of the facility. The annual fee for Facilities C and D is 0.80% of the total
commitments of the facilities. In connection with entering into the Premium Financing Debt Facility, we incurred an upfront fee
of 0.30% of the principal amount of the committed facilities.
The terms of our Premium Financing Debt Facility include various financial covenants, including covenants that require us to
maintain specified financial ratios. We were in compliance with these covenants as of December 31, 2014. The Premium
Financing Debt Facility also includes customary provisions for transactions of this type, including events of default, with
corresponding grace periods and cross-defaults to other agreements evidencing our indebtedness. Facilities B, C and D are
secured by the premium finance receivables of the Australian and New Zealand premium finance subsidiaries.
At December 31, 2014, AU$117.0 million and NZ$23.0 million of borrowings were outstanding under Facility B,
AU$9.4 million of borrowings were outstanding under Facility C and NZ$9.6 million of borrowings were outstanding under
Facility D. Accordingly, as of December 31, 2014, AU$33.0 million and NZ$12.0 million remained available for potential
borrowing under Facility B, and AU$15.6 million and NZ$5.4 million under Facilities C and D, respectively.
See Note 13 to these unaudited consolidated financial statements for additional discussion on our contractual obligations and
commitments as of December 31, 2014.
The aggregate estimated fair value of the $2,125.0 million in debt under the note purchase agreements at December 31, 2014 was
$2,281.0 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. The estimated fair value of this debt is based on the income valuation approach, which is a valuation
technique that converts future amounts (for example, cash flows or income and expenses) to a single current (that is, discounted)
amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about those
future amounts. Because our debt issuances generate a measurable income stream for each lender, the income approach was
deemed to be an appropriate methodology for valuing the private placement long-term debt. The methodology used calculated
the original deal spread at the time of each debt issuance, which was equal to the difference between the yield of each issuance
(the coupon rate) and the equivalent benchmark treasury yield at that time. The market spread as of the valuation date was
calculated, which is equal to the difference between an index for investment grade insurers and the equivalent benchmark treasury
yield today. An implied premium or discount to the par value of each debt issuance based on the difference between the
origination deal spread and market as of the valuation date was then calculated. The index we relied on to represent investment
graded insurers was the Bloomberg Valuation Services (BVAL) U.S. Insurers BBB index. This index is comprised primarily of
insurance brokerage firms and was representative of the industry in which we operate. For the purposes of our analysis, the
average BBB rate was assumed to be the appropriate borrowing rate for us based on the our current credit rating.. The estimated
fair value of the $140.0 million of borrowings outstanding under our Credit Agreement approximate their carrying value due to
their short-term duration and variable interest rates. The estimated fair value of the $127.9 million of borrowings outstanding
under our Premium Financing Debt Facility approximates their carrying value due to their short-term duration and variable
interest rates.
71
8. 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,
2014
2013
2012
$
303.4
$
268.6
$
195.0
152.9
1.4
154.3
128.9
1.6
130.5
121.0
1.5
122.5
$
1.98
$
2.08
$
1.61
$
1.97
$
2.06
$
1.59
Options to purchase 1.6 million, 1.3 million and 1.1 million shares of our common stock were outstanding at December 31, 2014,
2013 and 2012, 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
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.
9. Stock Option Plans
Long-Term Incentive Plan
On May 13, 2014, our stockholders approved the Arthur J. Gallagher 2014 Long-Term Incentive Plan (which we refer to as the
LTIP), which replaced our previous stockholder-approved Arthur J. Gallagher & Co. 2011 Long-Term Incentive Plan (which we
refer to as the 2011 LTIP). The LTIP term began May 13, 2014 and terminates on the date of the annual meeting of stockholders
in 2021, 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 2011 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 withheld to satisfy tax
withholding requirements upon the vesting of awards other than stock options and stock appreciation rights will also 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 related to stock options or stock appreciation rights, 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 2.0 million as of December 31,
2014. 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 cash-settled performance units granted
during any fiscal year to any person is $5.0 million; and (iv) the maximum number of shares with respect to which stock-settled
performance units may be granted during any fiscal year to any person is 100,000.
72
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 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 12, 2014, the compensation committee granted 1,923,000 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 2017, 2018 and 2019, respectively. 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. The
2014, 2013 and 2012 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 2014 and 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 2014, 2013 and 2012, we recognized $9.5 million, $7.7 million and $7.2 million, respectively, of compensation expense
related to our stock option grants.
For purposes of expense recognition in 2014, 2013 and 2012, 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,
2013
2012
2014
3.0%
1.8%
28.9%
5.5
3.5%
1.2%
29.6%
6.0
4.0%
1.2%
26.9%
5.0
73
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
2014, 2013 and 2012, as determined on the grant date using the Black-Scholes option pricing model, was $9.66, $7.51 and $5.49,
respectively.
The following is a summary of our stock option activity and related information for 2014, 2013 and 2012 (in millions, except
exercise price and year data):
Year Ended December 31, 2014
Beginning balance
Granted
Exercised
Forfeited or canceled
Ending balance
Exercisable at end of year
Ending vested and expected to vest
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
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
Shares
Under
Option
8.3
1.9
(1.7)
(0.1)
8.4
2.6
8.3
9.0
1.7
(2.3)
(0.1)
8.3
3.8
8.2
10.6
1.4
(2.8)
(0.2)
9.0
5.1
8.9
Weighted
Average
Exercise
Price
$
31.35
46.86
28.80
28.36
$
35.49
$
26.91
$
35.38
$
28.80
39.17
27.11
26.01
$
31.35
$
27.64
$
31.28
$
27.20
35.71
26.14
29.46
$
28.80
$
27.50
$
28.76
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
3.96
1.87
3.93
$
97.2
$
52.8
$
96.6
3.62
2.15
3.59
$
129.4
$
72.5
$
128.3
3.41
2.52
3.39
$
53.9
$
36.3
$
53.8
Options with respect to 9.3 million shares (less any shares of restricted stock issued under the LTIP - see Note 11 to our
consolidated financial statements) were available for grant under the LTIP at December 31, 2014.
The total intrinsic value of options exercised during 2014, 2013 and 2012 amounted to $30.5 million, $32.0 million and
$26.0 million, respectively. At December 31, 2014, we had approximately $28.8 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.
74
Other information regarding stock options outstanding and exercisable at December 31, 2014 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
2.3
2.5
1.7
1.9
8.4
1.59
3.59
5.20
6.19
3.96
$
25.78
33.18
39.19
46.87
$
35.49
1.9
0.7
-
-
-
2.6
Weighted
Average
Exercise
Price
$
25.76
29.83
-
-
$
26.91
Range of Exercise Prices
$
21.28
27.35
35.95
46.87
$
21.28
-
-
-
-
-
$
27.25
35.71
46.16
46.87
$
46.87
10. Deferred Compensation
We have a Deferred Equity Participation Plan, (which we refer to as the Age 62 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 Age 62 plan, we typically contribute cash in an amount approved by the compensation committee to a rabbi trust
on behalf of the executives participating in the Age 62 plan, 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
Age 62 plan may not normally be made until the participant reaches 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) 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 Age 62 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 2014, 2013 and 2012, the compensation committee approved $9.2 million, $8.0 million and
$7.3 million, respectively, of awards in the aggregate to certain key executives under the Age 62 Plan that were contributed to the
rabbi trust in the second quarter of 2013 and the first quarters of 2014 and 2012. We contributed cash to the rabbi trust and
instructed the trustee to acquire a specified number of shares of our common stock on the open market to fund these 2014, 2013
and 2012 awards. In the second quarter of 2013, we instructed the trustee for the Age 62 Plan to liquidate all investments held
under the Age 62 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 Age 62 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 2014, 2013 and 2012, we charged
$7.4 million, $7.2 million and $5.4 million, respectively, to compensation expense related to these awards.
At December 31, 2014 and 2013, we recorded $28.2 million (related to 1.9 million shares) and $26.3 million (related to
2.1 million shares), respectively, of unearned deferred compensation as an reduction of capital in excess of par value in the
accompanying consolidated balance sheet. The total intrinsic value of our unvested equity based awards under the plan at
December 31, 2014 and 2013 was $89.1 million and $96.4 million, respectively. During 2014, 2013 and 2012, cash and equity
awards with an aggregate fair value of $18.8 million, $1.4 million and $0.7 million, respectively, were vested and distributed to
employees under the Age 62 plan.
We have a Deferred Cash Participation Plan (which we refer to as the DCPP), which is a 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, with full vesting after thirteen months from the date of awards. Under the provisions of the DCPP, we
typically contribute cash in an amount approved by compensation committee to the rabbi trust on behalf of the executives
participating in the DCPP, and instruct the trustee to acquire a specified number of shares of our common stock on the open
market or in privately negotiated transactions based on participant elections. In the first quarter of each of 2014 and 2013, the
compensation committee approved $2.9 million and $2.7 million, respectively, of awards in the aggregate to certain key
executives under the DCPP that were contributed to the rabbi trust in first quarter 2014 and second quarter 2013. During 2014 we
75
charged $2.8 million to compensation expense related to these awards. During 2014, cash and equity awards with an aggregate
fair value of $0.1 million were vested and distributed to executives under the DCPP.
11. Restricted Stock, Performance Share and Cash Awards
Restricted Stock Awards
As discussed in Note 9 to our consolidated financial statements, on May 13, 2014, our stockholders approved the LTIP, which
replaced our previous stockholder-approved 2011 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 under the LTIP will specify whether such awards may be settled in shares of our
common stock, cash or a combination of shares and cash and whether the holder will be entitled to receive dividend equivalents,
on a current or deferred basis, with respect to such award. Prior to the settlement of a restricted stock unit, the holder of a
restricted stock unit will have no rights as a stockholder of the company. The maximum number of shares available under the
LTIP for restricted stock, restricted stock units and performance unit awards settled with stock (i.e., all awards other than stock
options and stock appreciation rights) is 2.0 million. At December 31, 2014, 2.0 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 2014, 2013 and 2012, we granted 342,850, 369,975 and 361,400 units, respectively, of our common stock to employees under
the LTIP, with an aggregate fair value of $16.0 million, $14.6 million and $12.9 million, respectively, at the date of grant.
The 2014, 2013 and 2012 restricted stock awards (consisting of restricted stock or restricted stock units) vest as follows: 323,550
shares granted in first quarter 2014, 345,000 shares granted in first quarter 2013 and 332,000 shares granted in first quarter 2012,
vest in full based on continued employment through March 12, 2018, March 13, 2017 and March 16, 2016, respectively, while
the other 2014, 2013 and 2012 restricted stock awards generally vest in full based on continued employment through the vesting
period on the anniversary date of the grant. In the third quarter of 2014, we granted 33,741 restricted stock units to employees
with an aggregate fair value of $1.5 million at the date of grant. These grants vest at the rate of 34%, 33% and 33% on the
anniversary date of the grant in 2015, 2016 and 2017, respectively from the date of grant. For certain of our executive officers
age 55 or older, restricted stock units awarded in 2014 and 2013 are no longer subject to forfeiture upon such officers’ departure
from the company after two years from the date of grant.
The vesting periods of the 2014, 2013 and 2012 restricted stock awards are as follows (in actual shares):
Vesting Period
One year
Three years
Four years
Five years
Total shares granted
Shares Granted
2013
19,375
-
345,000
5,600
369,975
2014
19,250
33,741
323,550
-
376,541
2012
20,000
-
332,000
9,400
361,400
We account for restricted stock awards at historical cost, which equals its fair market value at the date of grant, which is
amortized to compensation expense ratably over the vesting period of the participants. Future changes in the fair value of our
common stock that is owed to the participants do not have any impact on the amounts recorded in our consolidated financial
statements. During 2014, 2013 and 2012, we charged $12.7 million, $9.8 million and $7.1 million, respectively, to compensation
expense related to restricted stock awards granted in 2006 through 2014. The total intrinsic value of unvested restricted stock at
December 31, 2014 and 2013 was $57.3 million and $49.5 million, respectively. During 2014 and 2013, equity awards (including
accrued dividends) with an aggregate fair value of $10.0 million and $8.4 million were vested and distributed to employees under
this plan.
76
Performance Share Awards
On March 12, 2014, pursuant to the LTIP, the compensation committee approved 48,800 provisional performance share unit
awards, with an aggregate fair value of $2.3 million, for future grants to our officers. Each performance unit award was
equivalent to the value of one share of our common stock on the date such provisional award was approved. These awards are
subject to 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 will be granted a percentage of the
provisional performance unit award that equates to the EBITAC growth achieved (as specified in the applicable grant agreement).
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 2014 provisional award will
fully vest based on continuous employment through January 1, 2017, and will be settled in shares of our common stock on a one-
for-one basis as soon as practicable in 2017. For certain of our executive officers age 55 or older, awards granted in 2014 are no
longer subject to forfeiture upon such officers’ departure from the company after two years from the date of grant. If an eligible
employee leaves us prior to the vesting date, the entire award will be forfeited. During 2014, we charged $0.5 million to
compensation expense related to performance share unit awards granted in 2014. The total intrinsic value of unvested restricted
stock at December 31, 2014 was $2.3 million.
Cash Awards
On March 12, 2014, pursuant to our Performance Unit Program (which we refer to as the Program), the compensation committee
approved provisional cash awards of $10.8 million in the aggregate for future grants to our officers and key employees that are
denominated in units (229,000 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 2014 provisional award will fully vest based on continuous employment through January 1,
2017. For certain of our executive officers age 55 or older, awards granted under the Program in 2014 are no longer subject to
forfeiture upon such officers’ departure from the company after two years from the date of the provisional award. The ultimate
award value will be equal to the trailing twelve-month stock price on December 31, 2016, 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 2017. 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 2014 related to the
2014 provisional award under the Program. Based on company performance for 2013, we expect to grant 220,000 units under the
Program in first quarter 2015 that will fully vest on January 1, 2017.
On March 13, 2013, pursuant to the Program, the compensation committee approved the 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.
Terms of the 2013 provisional award were similar to the terms of the 2014 provisional awards. Based on our performance for
2013, we granted 263,000 units under the Program in the first quarter of 2014 that will fully vest on January 1, 2016. During
2014, we charged $5.9 million to compensation expense related to these awards.
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 2014 and 2013, we charged $8.4 million and $7.6 million, respectively, 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 fully vested 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. We did not recognize any compensation expense during 2014 related to the 2011 awards. During 2014, cash awards
related to the 2011 provisional award with an aggregate fair value of $17.6 million (411,000 units in the aggregate) were vested
and distributed to employees under the Program.
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.
77
12. 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, 2014 and 2013. 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 loss (gain)
Partial plan settlement 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 the company
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,
2014
2013
$
272.5
0.7
12.7
56.8
(16.7)
(54.0)
$
292.0
0.6
11.7
(22.4)
-
(9.4)
$
272.0
$
272.5
$
254.9
16.3
-
(54.0)
$
227.4
30.6
6.3
(9.4)
$
217.2
$
254.9
$
(54.8)
$
(17.6)
$
(54.8)
75.2
$
(17.6)
47.0
$
20.4
$
29.4
The components of the net periodic pension benefit cost for the plan and other changes in plan assets and obligations recognized
in earnings and other comprehensive earnings consist of the following (in millions):
Year Ended December 31,
2013
2014
2012
Net periodic pension cost (earnings):
Service cost
Interest cost on benefit obligation
Expected return on plan assets
Amortization of net loss
Settlement
Net periodic benefit cost (earnings)
Other changes in plan assets and obligations recognized in other
comprehensive earnings:
Net loss (gain) incurred
Settlement recognition
Amortization of net loss
Total recognized in other comprehensive loss (earnings)
Total recognized in net periodic pension cost (earnings) and other
comprehensive loss (earnings)
Estimated amortization for the following year:
Amortization of net loss
78
$
0.7
12.7
(18.7)
2.3
12.0
$
0.6
11.7
(17.0)
7.9
-
$
0.4
11.8
(15.2)
7.2
-
9.0
3.2
4.2
42.5
(12.0)
(2.3)
28.2
(36.0)
-
(7.9)
(43.9)
10.6
-
(7.2)
3.4
$
37.2
$
(40.7)
$
7.6
$
6.0
$
2.4
$
7.7
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,
2014
2013
4.00%
7.50%
4.75%
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,
2013
2012
2014
Discount rate
Weighted average expected long-term rate of return on plan assets
4.75%
7.50%
4.00%
7.50%
4.50%
7.50%
The following benefit payments are expected to be paid by the plan (in millions):
2015
2016
2017
2018
2019
Years 2020 to 2024
$
10.8
11.3
11.8
12.3
12.9
73.3
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,
2014
2013
65.0%
26.0%
9.0%
69.0%
24.0%
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, 2014 and 2013. 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,
2014
2013
$
-
116.1
101.1
$
-
158.8
96.1
$
217.2
$
254.9
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
79
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,
2014
2013
$
96.1
-
5.0
$
91.1
-
5.0
$
101.1
$
96.1
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 2014, 2013 and 2012 plan years. This level of required funding is based on the plan being frozen and the
aggregate amount of our historical funding. During 2014, we did not make discretionary contributions to the plan. During 2013
and 2012, we made discretionary contributions of $6.3 million and $7.2 million, respectively, to the plan.
In August 2014, we decided to pursue a pension de-risking strategy to reduce the size of our long-term U.S. defined benefit
pension plan obligations and the volatility of these obligations on our balance sheet. On September 12, 2014, the fiduciaries of
the plan began offering certain former employees who were participants in the plan, the option of receiving the value of their
pension benefit in a lump sum payment or as an accelerated reduced annuity, in lieu of monthly annuity payments when they
retire. The voluntary offer was made to approximately 2,500 terminated, vested participants in the plan whose employment
terminated with the company prior to August 1, 2014 and who had not commenced benefit payments as of November 1, 2014.
Eligible participants had from September 12, 2014 to November 30, 2014 to accept the offer, and the lump-sum payments were
made in November and December of 2014, and the accelerated reduced annuity payments began as of December 1, 2014. The
aggregate lump sum payout made in fourth quarter 2014 was $43.3 million. All payouts related to this offer were made using
assets from the plan. This lump sum payout project reduced the Plan’s pension benefit obligation by approximately
$60.0 million, while improving its pension underfunding by almost $17.0 million as of December 31, 2014. We recorded a non-
cash pretax settlement charge of $12.0 million in the fourth quarter of 2014 based on the number of participants accepting the
lump sum payment option, the actual return on plan assets and various actuarial assumptions, including discount rate, long-term
rate of return on assets, retirement age and mortality at the remeasurement date.
We also have a qualified contributory savings and thrift (401(k)) plan covering the majority of our domestic employees. For
eligible employees who have met the plan’s age and service requirements to receive matching contributions, we match 100% of
pre-tax and Roth elective deferrals up to a maximum of 5.0% of eligible compensation, subject to Federal limits on plan
contributions and not in excess of the maximum amount deductible for Federal income tax purposes. Effective January 1, 2014,
employees must be employed and eligible for the plan on the last day of the plan year to receive a matching contribution, subject
to certain exceptions enumerated in the plan document. Matching contributions are subject to a five-year graduated vesting
schedule. We expensed $38.0 million, $36.8 million and $33.0 million related to the plan in 2014, 2013 and 2012, 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 $3.7 million, $2.8 million and
$2.5 million to a rabbi trust maintained under the plan in 2014, 2013 and 2012, respectively. The fair value of the assets in the
plan’s rabbi trust at December 31, 2014 and 2013, including employee contributions and investment earnings, was $177.5 million
and $148.2 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 $29.7 million, $18.1 million and $16.0 million in 2014, 2013 and 2012, 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, 2014 and 2013 were $4.1 million and $3.1 million, respectively. The net periodic
postretirement benefit (income) cost of the plan amounted to ($0.5 million), ($0.5 million) and ($0.1 million) in 2014, 2013 and
2012, respectively.
80
13. 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 and C-Quest Technologies
International LLC
Clean-coal investments:
Controlling interest in five limited liability companies
that own fourteen 2009 Era Clean Coal Plants
Non-controlling interest in one limited liability
companies that owns one 2011 Era Clean Coal Plants
Controlling interest in thirteen limited liability companies
that own nineteen 2011 Era Clean Coal Plants
Other investments
Total investments
December 31, 2014
Assets
Funding
Commitments
December 31,
2013
Assets
$
4.0
$
-
$
4.0
2.0
-
17.3
1.0
54.5
3.2
-
-
-
-
-
2.9
2.0
2.0
18.3
1.1
59.3
3.7
$
82.0
$
2.9
$
90.4
Chem-Mod LLC - At December 31, 2014, we held 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 variable interest entity (which we refer to as a VIE). We are the controlling manager of
Chem-Mod and therefore consolidate its operations into our consolidated financial statements. At December 31, 2014, total
assets and total liabilities of this VIE included in our consolidated balance sheet were $10.2 million and $1.2 million,
respectively. For 2014, total revenues and expenses were $69.1 million and $38.4 million (including non-controlling interest of
$35.3 million), respectively. We are under no obligation to fund Chem-Mod’s operations in the future.
Chem-Mod International LLC - At December 31, 2014, 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 and C-Quest Technologies International LLC (together, C-Quest) - At December 31, 2014, we
held a non-controlling 12% interest in C-Quest’s global entities, which is an increase of 4% resulting from the transaction
described below. 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. Prior to August 1, 2013, we had an option to acquire an additional 19% interest in C-Quest’s global entities for
$9.5 million at any time on or prior to August 1, 2016. On August 1, 2013, we loaned the majority owner $2.0 million at a 2%
interest rate, which was to mature on May 15, 2014. Also on August 1, 2013, the option to acquire the 19% interests was
extended to August 15, 2016. The loan was to be repaid in cash or by delivery of an additional 4% ownership interest in
C-Quest’s global entities. On March 31, 2014, we accepted payment of the loan by delivery of the additional 4% ownership
interest, therefore our remaining option was reduced to 15% and the remaining purchase price was reduced to $7.5 million.
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) are eligible to 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) are eligible to receive tax
credits through 2021.
81
• On March 1, 2013, we purchased an additional ownership interest in twelve of the 2009 Era Plants from a co-investor. For
nine of the plants, our ownership increased from 24.5% to 49.5%. For the other three of the plants, our ownership increased
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 2014, total
revenues and expenses recorded in our consolidated statement of earnings related to this acquisition were $260.9 million and
$264.3 million, respectively. 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 $11.4 million as a component of other net revenues in
the accompanying consolidated statement of earnings, 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 $6.8 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 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 2014 related to the acquisition, were $84.0 million and $93.0 million, respectively.
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 March 1, 2014, we purchased additional ownership interests from a co-investor in four limited liability companies that
own seven 2009 Era Plants and five 2011 Era Plants. We recognized a gain of $25.6 million as a component of other net
revenues in the accompanying consolidated statement of earnings, which included the increase in fair value of our prior
equity interests in the limited liability companies upon the acquisition of the additional equity interests, and recorded
$26.3 million of fixed and other amortizable intangible assets in connection with this transaction. The carrying value of our
prior non-controlling interest in the limited liability company was $15.6 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 using similar valuation techniques to those discussed in Note 3 to these
consolidated financial statements. For seven of the 2009 Era Plants, our ownership increased from 49.5% to 100%. For the
2011 Era plants, our ownership increased from 48.8% to 90.0% for one of the plants, from 49.0% to 100.0% for three of the
plants and from 98.0% to 100.0% for one of the plants. Our investments in the plants where our ownership was less than
50% had been accounted for under the equity method of accounting. As of March 1, 2014 we consolidate the operations of
the limited liability companies that own these plants. Total revenues and expenses recorded in our consolidated statement of
earnings, for 2014 related to the acquisition, were $381.6 million and $405.7 million, respectively.
• As of December 31, 2014:
o Twenty-six of the plants have long-term production contracts.
o The remaining eight plants are in various stages of seeking and negotiating long-term production contracts.
o We have a non-controlling interest in one plant, which is owned by a limited liability company (which we refer to as a
LLC). We have determined that this LLC is a VIE, for which we are not the primary beneficiary. At December 31,
2014, total assets and total liabilities of this VIE were $4.4 million and $1.4 million, respectively. For 2014, total
revenues and expenses of this VIE were $33.4 million and $41.0 million, respectively.
• We and our co-investors each fund our portion of the on-going operations of the limited liability companies in proportion to
our investment ownership percentages. Other than our portion of the on-going operational funding, there are no additional
amounts that we are committed to related to funding these investments.
Other Investments - At December 31, 2014, we owned a non-controlling, minority interest in four 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, 2014, total assets and total liabilities of these VIEs were
approximately $60.0 million and $20.0 million, respectively.
82
14. 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 7 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 the note purchase
agreements and Credit Agreement, Premium Financing Debt Facility, operating leases and purchase commitments at
December 31, 2014 were as follows (in millions):
Contractual Obligations
2015
2016
Payments Due by Period
2019
2018
2017
Note purchase agreements
Credit Agreement
Premium Financing Debt Facility
Interest on debt
Total debt obligations
Operating lease obligations
Less sublease arrangements
Outstanding purchase obligations
-
$
140.0
127.9
100.9
368.8
99.0
(1.4)
29.7
$
50.0
-
-
100.4
150.4
81.7
(0.7)
5.4
$
300.0
-
-
97.5
397.5
68.7
(0.3)
0.9
$
100.0
-
-
77.5
177.5
49.8
(0.1)
0.3
$
100.0
-
-
73.2
173.2
38.8
-
-
Thereafter
Total
$
1,575.0
-
-
323.9
1,898.9
131.3
-
-
$
2,125.0
140.0
127.9
773.4
3,166.3
469.3
(2.5)
36.3
Total contractual obligations
$
496.1
$
236.8
$
466.8
$
227.5
$
212.0
$
2,030.2
$
3,669.4
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, Credit Agreement and Premium Financing Debt Facility - See Note 7 to our consolidated
financial statements for a discussion of the terms of the note purchase agreements, the Credit Agreement and Premium Debt
Facility.
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
$122.0 million in 2014, $91.3 million in 2013 and $91.0 million in 2012.
We have leased certain office space to several non-affiliated tenants under operating sublease arrangements. In the normal course
of business, we expect that certain of these leases will not be renewed or replaced. We adjust charges for real estate taxes and
common area maintenance annually based on actual expenses, and we recognize the related revenues in the year in which the
expenses are incurred. These amounts are not included in the minimum future rentals to be received in the contractual obligations
table above.
Outstanding Purchase Obligations - We typically do not have a material amount of outstanding purchase obligations at any
point in time. The amount disclosed in the contractual obligations table above represents the aggregate amount of unrecorded
purchase obligations that we had outstanding at December 31, 2014. 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, 2014 were as follows (in millions):
Off-Balance Sheet Commitments
Letters of credit
Financial guarantees
Funding commitments
Total commitments
Amount of Commitment Expiration by Period
2016
2017
2018
2019
Total
Amounts
Thereafter Committed
-
$
0.8
-
-
$
0.8
-
-
$
0.8
-
-
$
0.9
-
$
22.6
16.5
2.9
$
22.6
20.6
2.9
2015
-
$
0.8
-
$
0.8
$
0.8
$
0.8
$
0.8
$
0.9
$
42.0
$
46.1
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
83
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 339 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 2014 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 $549.8 million, of which
$205.3 million was recorded in our consolidated balance sheet as of December 31, 2014 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, 2014 or 2013 that was recourse to us.
At December 31, 2014, we had posted two letters of credit totaling $11.3 million in the aggregate, related to our self-insurance
deductibles, for which we had a recorded liability of $9.7 million. We have an equity investment in a rent-a-captive facility,
which we use as a placement facility for certain of our insurance brokerage operations. At December 31, 2014, we had posted
seven letters of credit totaling $6.3 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. At December 31,
2014, we had posted one letter of credit totaling $5.0 million to support our potential obligation under a client’s insurance
program. 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,
2014 were as follows (all dollar amounts in table are in millions):
Description, Purpose and Trigger
Venture capital funds
Funding commitment to two funds - $1.5 million and
$1.4 million expire in 2019 and 2023, respectively
Trigger - Agreed conditions met
Other
Collateral
Compensation
to Us
Maximum
Exposure
Liability
Recorded
None
None
$
2.9
$
-
Credit support under letters of credit for deductibles due by
None
None
11.3
9.7
us on our own insurance coverages - expires after 2019
Trigger - We do not reimburse the insurance companies for
deductibles the insurance companies advance on behalf of us
Credit enhancement under letters of credit for our
None
captive insurance operations to meet minimum
statutory capital requirements - expires after 2019
Trigger - Dissolution or catastrophic financial
results of the operation
Credit support under letters of credit for clients' claim funds
None
held by our Bermuda captive insurance operation
in a fiduciary capacity - expires after 2019
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
6.3
5.0
9.1
Financial guarantees of loans to 37 Canadian-based employees -
(2)
None
11.5
expires when loan balances are reduced to zero from 2017
through 2029 - Principal and interest payments are paid quarterly
Trigger - Default on loan payments
-
-
-
-
(1) The guarantee has no collateral. The mortgage loan has a lien on real property with an appraised value of approximately $11.0 million.
(2) The guarantees are collateralized by shares in minority holdings of our Canadian operating companies.
84
$
46.1
$
9.7
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 a defendant in various legal actions incidental to the nature of our
business including but not limited to 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.
Our micro-captive advisory services are the subject of an investigation by the Internal Revenue Service (IRS). Additionally, the
IRS has initiated audits for the 2012 tax year of over 100 of the micro-captive insurance companies organized and/or managed by
us. Among other matters, the IRS is investigating whether we have been acting as a tax shelter promoter in connection with these
operations. While the IRS has not made any specific allegations relating to our operations, if the IRS were to successfully assert
that the micro-captives organized and/or managed by us do not meet the requirements of IRC Section 831(b), we could be subject
to monetary claims by the IRS and/or our micro-captive clients, and our future earnings from our micro-captive operations could
be materially adversely affected, any of which could negatively impact the overall captive business and adversely affect our
consolidated results of operations and financial condition. Due to the early stage of the investigation and the fact that the IRS has
not made any allegation against us at this time, we are not able to reasonably estimate the amount of any potential loss in
connection with this investigation.
In July 2014, we were named in a lawsuit which asserts that us, our subsidiary, Gallagher Clean Energy, LLC, and Chem-Mod
LLC are liable for infringement of a patent held by Nalco Company. The complaint seeks a judgment of infringement, damages,
costs and attorneys’ fees, and injunctive relief. We and the other defendants dispute the allegations contained in the complaint
and intend to defend this matter vigorously. On September 30, 2014, we filed a motion to dismiss the complaint on behalf of all
defendants. On February 4, 2015, our motion to dismiss was granted by the court; however, the court also granted Nalco
Company 30 days to file an amended complaint. We believe that the probability of a material loss is remote. However, litigation
is inherently uncertain and it is not possible to predict the ultimate disposition of this proceeding.
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, 2014 consolidated balance sheet is above the lower end of the most recently
determined actuarial range by $1.4 million and below the upper end of the actuarial range by $6.2 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, 2014, the maximum potential amount
of future payments that we could be required to make under these indemnifications totaled approximately $32.0 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, 2014, we had exposure on $117.0 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, 2014 consolidated balance sheet related to these indemnification
obligations.
85
15. 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. The foreign earnings before income taxes are $2.5 million in
2014 as compared to $43.7 million in 2013. Earnings before income taxes include the impact of intercompany interest expense
between domestic and foreign legal entities. Foreign intercompany interest expense was $76.5 million in 2014 compared to
$16.6 million in 2013. Domestic intercompany interest income was $76.5 million in 2014 compared to $16.6 million in 2013.
Significant components of earnings before income taxes and the provision for income taxes are as follows (in millions):
Year Ended December 31,
2013
2014
2012
Earnings before income taxes:
Domestic
Foreign, principally Australia, Canada, New Zealand and the U.K.
Provision (benefit) for income taxes:
Federal:
Current
Deferred
State and local:
Current
Deferred
Foreign:
Current
Deferred
$
264.9
2.5
$
230.8
43.7
$
234.7
10.6
$
267.4
$
274.5
$
245.3
$
38.8
(96.6)
$
29.0
(47.7)
$
45.4
(14.6)
(57.8)
(18.7)
19.5
(1.1)
18.4
30.5
(27.1)
3.4
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
Total provision (benefit) for income taxes
$
(36.0)
$
5.9
$
50.3
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
Nondeductible employee compensation
Changes in unrecognized tax benefits
Change in valuation allowance
Other
2014
Year Ended December 31,
2013
% of
Pretax
Earnings
% of
Pretax
Earnings
Amount
2012
% of
Pretax
Earnings
Amount
35.0
$
96.1
35.0
$
85.9
Amount
$
93.6
12.0
0.8
4.5
0.3
6.5
(0.8)
2.4
(0.3)
9.4
0.9
(145.5)
(54.4)
(93.8)
(34.2)
(45.3)
(18.5)
(6.1)
5.4
2.4
-
1.4
(2.3)
2.0
0.9
-
0.5
(2.5)
-
1.5
0.5
(1.6)
(0.9)
-
0.5
0.2
(0.6)
(2.7)
-
0.6
0.3
1.2
35.0
3.8
0.4
(1.1)
-
0.2
0.1
0.6
20.5
Provision (benefit) for income taxes
$
(36.0)
(13.5)
$
5.9
2.1
$
50.3
86
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,
2014
2013
$
9.2
2.6
-
(1.0)
1.7
-
$
6.7
2.9
-
(1.4)
2.3
(1.3)
$
12.5
$
9.2
The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $8.2 million and
$5.9 million at December 31, 2014 and 2013, respectively. We accrue interest and penalties related to unrecognized tax benefits
in our provision for income taxes. At December 31, 2014 and 2013, we had accrued interest and penalties related to
unrecognized tax benefits of $0.8 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, 2014, we had been examined by the IRS through calendar year 2010. The IRS
is currently conducting a routine 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
Amortizable intangible assets
Compensation expense related to stock options
Accrued liabilities
Accrued pension liability
Investments
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
Investment-related partnerships
Depreciable fixed assets
Other prepaid items
Accrued liabilities
Total deferred tax liabilities
Net deferred tax assets
December 31,
2014
2013
$
233.4
166.9
66.7
14.7
31.0
24.3
10.0
10.0
8.5
4.8
$
147.4
136.6
12.5
14.2
30.2
9.2
9.0
11.9
8.2
6.8
570.3
(75.5)
494.8
338.7
26.6
8.8
4.3
-
378.4
386.0
(21.3)
364.7
184.0
13.2
5.2
4.7
2.4
209.5
$
116.4
$
155.2
At December 31, 2014 and 2013, $102.2 million and $84.9 million, respectively, of deferred tax assets have been included in
other current assets in the accompanying consolidated balance sheet. At December 31, 2014 and 2013, $4.3 million and
$5.0 million, respectively, of deferred tax liabilities have been included in other current liabilities and $374.1 million and
$204.5 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 $124.3 million expire, if
87
not utilized, in 2033 and other tax credits of $0.9 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 for certain foreign intangible assets and 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 ($279.9 million and $224.2 million at
December 31, 2014 and 2013, 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 $36.2 million and $35.2 million at
December 31, 2014 and 2013, respectively.
16. Accumulated Other Comprehensive Earnings
The after-tax components of our accumulated comprehensive earnings (loss) consist of the following:
Balance as of January 1, 2012
Net change in period
Balance as of December 31, 2012
Net change in period
Balance as of December 31, 2013
Net change in period
Balance as of December 31, 2014
Pension
Liability
Foreign
Currency
Translation
Fair Value
of Derivative
Instruments
Accumulated
Comprehensive
Earnings (Loss)
$
(49.0)
(3.4)
$
4.4
16.1
$
(2.6)
1.7
$
(47.2)
14.4
(52.4)
26.8
(25.6)
(18.6)
20.5
1.6
22.1
(238.4)
(0.9)
1.8
0.9
(1.0)
(32.8)
30.2
(2.6)
(258.0)
$
(44.2)
$
(216.3)
$
(0.1)
$
(260.6)
The foreign currency translation in 2014, 2013 and 2012 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, the Caribbean, India, New Zealand and the U.K.
During 2014, 2013 and 2012, $14.3 million, $7.9 million and $7.2 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 2014,
2013 and 2012, $0.6 million, $0.9 million and $0.2 million, respectively, of expense related to the fair value of derivative
investments was reclassified from accumulated other comprehensive loss to the statement of earnings. During 2014, 2013 and
2012, no amounts related to foreign currency translation were reclassified from accumulated other comprehensive loss to the
statement of earnings.
17. Quarterly Operating Results (unaudited)
Quarterly operating results for 2014 and 2013 were as follows (in millions, except per share data):
2014
Total revenues
Total expenses
Earnings before income taxes
Net earnings
Basic net earnings per share:
Diluted net earnings per share:
2013
Total revenues
Total expenses
Earnings before income taxes
Net earnings
Basic net earnings per share:
Diluted net earnings per share:
1st
2nd
3rd
4th
$
915.0
$
1,179.3
$
1,286.8
$
1,245.4
868.7
1,072.2
1,199.1
1,219.1
$
46.3
$
107.1
$
87.7
$
26.3
$
49.3
$
109.0
$
93.6
$
51.5
$
0.37
$
0.71
$
0.58
$
0.32
$
0.36
$
0.70
$
0.58
$
0.31
$
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
88
18. Segment Information
We have three reportable operating segments: brokerage, risk management and corporate. The brokerage segment is primarily
comprised of our 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 using the local county statutory rates.
Reported operating results by segment would change if different methods were applied. Financial information relating to our
segments for 2014, 2013 and 2012 is as follows (in millions):
Year Ended December 31, 2014
Brokerage
Risk Management
Corporate
Total
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
$
2,083.0
595.0
104.0
84.7
40.3
7.3
-
-
-
$
663.3
-
-
1.0
-
-
-
-
$
-
-
-
-
-
1,029.5
18.4
$
2,083.0
1,258.3
104.0
84.7
41.3
7.3
1,029.5
18.4
2,914.3
1,715.7
534.1
-
-
44.7
186.7
17.5
2,498.7
415.6
151.8
664.3
401.6
173.3
-
-
20.9
2.8
-
598.6
65.7
24.5
1,047.9
50.3
59.8
1,058.9
89.0
3.8
-
-
1,261.8
(213.9)
(212.3)
4,626.5
2,167.6
767.2
1,058.9
89.0
69.4
189.5
17.5
4,359.1
267.4
(36.0)
Net earnings
$
263.8
$
41.2
$
(1.6)
$
303.4
Net foreign exchange gain (loss)
$
1.1
$
-
$
(0.6)
$
0.5
Revenues:
United States
United Kingdom
Australia
Canada
Other foreign, principally New Zealand
$
1,891.3
697.1
128.9
81.8
115.2
$
514.7
29.3
114.2
3.2
2.9
$
1,048.9
-
-
-
(1.0)
$
3,454.9
726.4
243.1
85.0
117.1
Total revenues
$
2,914.3
$
664.3
$
1,047.9
$
4,626.5
At December 31, 2014
Identifiable assets:
United States
United Kingdom
Australia
Canada
Other foreign, principally New Zealand
$
3,584.3
2,376.4
639.2
992.2
821.3
$
430.3
74.0
2.8
39.0
1.6
$
1,032.0
-
-
-
16.9
$
5,046.6
2,450.4
642.0
1,031.2
839.8
Total identifiable assets
$
8,413.4
$
547.7
$
1,048.9
$
10,010.0
Goodwill - net
Amortizable intangible assets - net
$
3,427.5
1,761.2
$
22.1
14.8
$
-
-
$
3,449.6
1,776.0
89
Year Ended December 31, 2013
Brokerage
Risk Management
Corporate
Total
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
$
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
Net earnings
$
204.8
$
46.2
$
17.6
$
268.6
Net foreign exchange gain (loss)
$
0.6
-
$
$
(0.4)
$
0.2
Revenues:
United States
United Kingdom
Australia
Canada
Other foreign, principally Bermuda
$
1,644.8
400.5
47.1
29.5
22.4
$
473.5
27.4
105.5
3.1
1.5
$
424.3
-
-
-
-
$
2,542.6
427.9
152.6
32.6
23.9
Total revenues
$
2,144.3
$
611.0
$
424.3
$
3,179.6
At December 31, 2013
Identifiable assets:
United States
United Kingdom
Australia
Canada
Other foreign, principally Bermuda
$
3,219.6
1,819.5
214.3
107.3
162.0
$
419.0
58.8
63.6
1.5
1.8
$
783.8
-
-
-
9.3
$
4,422.4
1,878.3
277.9
108.8
173.1
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
90
Year Ended December 31, 2012
Brokerage
Risk Management
Corporate
Total
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:
United States
United Kingdom
Australia
Canada
Other foreign, principally Bermuda
$
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)
$
1,431.6
317.8
35.1
28.9
14.2
$
453.5
28.2
86.3
3.2
0.5
$
121.0
-
-
-
-
$
2,006.1
346.0
121.4
32.1
14.7
Total revenues
$
1,827.6
$
571.7
$
121.0
$
2,520.3
At December 31, 2012
Identifiable assets:
United States
United Kingdom
Australia
Canada
Other foreign, principally Bermuda
$
2,637.1
1,117.6
208.4
100.7
133.0
$
390.9
52.4
52.1
1.7
1.5
$
647.9
-
-
-
9.0
$
3,675.9
1,170.0
260.5
102.4
143.5
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
91
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, 2014
and 2013, 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, 2014. 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, 2014 and 2013, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 2014, 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, 2014, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)
and our report, dated February 12, 2015, expressed an unqualified opinion thereon.
Chicago, Illinois
February 12, 2015
/s/ Ernst & Young LLP
Ernst & Young LLP
92
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 (2013 framework).
In conducting our assessment of the effectiveness of its internal control over financial reporting, we have excluded twenty-four of
the sixty entities acquired in 2014, which are included in our 2014 consolidated financial statements. Collectively, these acquired
entities constituted approximately 9.1% of total assets as of December 31, 2014 and approximately 7.4% of total revenues and
approximately 2.9% 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, 2014. In addition, the effectiveness of our internal
control over financial reporting as of December 31, 2014 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 12, 2015
/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
93
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, 2014,
based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (2013 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 twenty-four of the sixty entities acquired in 2014, which are included in the 2014 consolidated financial statements of
Gallagher. Collectively, these acquired entities constituted approximately 9.1% of total assets as of December 31, 2014 and
approximately 7.4% of total revenues and approximately 2.9% 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, 2014, 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, 2014 and 2013, 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, 2014 of Arthur J. Gallagher & Co. and our report dated February 12, 2015 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Ernst & Young LLP
Chicago, Illinois
February 12, 2015
94
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, 2014, 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, 2014.
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, 2014. 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,
2014, 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 2015 Proxy Statement will include the information required by this item under the headings “Board 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 2015 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 2015 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.
95
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Our 2015 Proxy Statement will include the information required by this item under the headings “Certain Relationships and
Related Transactions” and “Corporate Governance,” which we incorporate herein by reference.
Item 14. Principal Accountant Fees and Services.
Our 2015 Proxy Statement will include the information required by this item under the heading “Ratification of Appointment of
Independent Auditor - 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, 2014.
(b) Consolidated Balance Sheet as of December 31, 2014 and 2013.
(c) Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2014.
(d) Consolidated Statement of Stockholders’ Equity for each of the three years in the period ended December 31,
2014.
(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 1, 2015.
*10.16
Arthur J. Gallagher & Co. Deferred Equity Participation Plan, amended and restated as of January 16, 2015.
*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.
96
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
2.3
2.4
2.5
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).
Share Purchase Agreement, dated April 1, 2014, between Arthur J. Gallagher & Co., Oval Limited, Oval EBT
Trustees Limited and certain institutional sellers, individual sellers and option holders (incorporated by
reference to Exhibit 2.1 to our Form 10-Q Quarterly Report for the quarterly period ended March 31, 2014,
File No. 1-09761).
Share Sale Agreement, amended and restated as of June 15, 2014, by and among Arthur J. Gallagher & Co.,
Wesfarmers Insurance Investments Pty Ltd, OAMPS Ltd, Wesfarmers Limited and Pastel Purchaser Party
Limited (incorporated by reference to Exhibit 2.1 to our Form 8-K Current Report dated June 16, 2014, File
No. 1 09761).
Share Purchase Agreement, dated as of May 19, 2014, by and among Arthur J. Gallagher & Co., Roins
Financial Services Limited and Noraxis Capital Corporation (incorporated by reference to Exhibit 2.1 to our
Form 8-K Current Report dated May 19, 2014, 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
97
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).
*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
10.38
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).
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).
98
*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).
*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 Exhibit 10.45.1 to our Form 10-Q Quarterly Report for the quarterly period ended March 31, 2014,
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).
*10.47 Arthur J. Gallagher & Co. 2014 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.46 to our
Form 10-Q Quarterly Report for the quarterly period ended June 30, 2014, 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.
99
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 12th day of February, 2015.
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 12th day of
February, 2015 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
* D. JOHN COLDMAN
D. John Coldman
* 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
/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
100
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)
$
6.7
4.2
$
2.7
(0.2)
$
1.3
2.8
(1)
(2)
$
10.7
6.8
Year ended December 31, 2014
Allowance for doubtful accounts
Allowance for estimated policy cancellations
Accumulated amortization of expiration
lists, noncompete agreements and trade names
544.1
189.5
25.2
(3)
758.8
Year ended December 31, 2013
Allowance for doubtful accounts
Allowance for estimated policy cancellations
Accumulated amortization of expiration
$
6.6
4.0
$
2.7
(0.2)
$
(2.6)
0.4
(1)
(2)
$
6.7
4.2
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
(1) Net activity of bad debt write offs and recoveries and acquired businesses.
(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.
101
Arthur J. Gallagher & Co.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2014
Exhibit Index
*10.15
The Arthur J. Gallagher & Co. Supplemental Savings and Thrift Plan, as amended and restated effective
January 1, 2015.
*10.16
Arthur J. Gallagher & Co. Deferred Equity Participation Plan, amended and restated as of January 16, 2015.
*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.
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.
102
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 12, 2015
/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 12, 2015
/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,
2014 (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 12, 2015
/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, 2014 (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 12, 2015
/s/ Douglas K. Howell
Douglas K. Howell
Vice President
Chief Financial Officer
(principal financial officer)
Page Intentionally Blank
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 Brokerage
Douglas K. Howell
Chief Financial Officer
Scott R. Hudson
President and Chief Executive Officer,
Risk Management Services
David E. McGurn, Jr.
Chairman, U.S. Wholesale Brokerage
Susan E. Pietrucha
Chief Human Resources Officer
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
D. John Coldman1
Former Chairman of The Benfield Group
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.
1 Member of the Audit Committee
2 Member of the Compensation Committee
3 Member of the Nominating/Governance Committee
™
®
Arthur J. Gallagher & Co. has been recognized as a World’s Most
Ethical Company in 2012, 2013 and 2014.
2014 ANNUAL REPORT
Stockholder Information
ANNUAL MEETING
Arthur J. Gallagher & Co.’s 2015 Annual Meeting of Stockholders
will be held on Monday, June 1, 2015, at 3:00 p.m. BST at The
Walbrook Building, 25 Walbrook, London EC4N 8AW, England.
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, 2014, 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
2014
First
Second
Third
Fourth
2013
First
Second
Third
Fourth
High
$49.46
48.38
47.95
49.24
$41.31
45.87
45.89
48.49
Low
$44.02
42.97
44.22
43.36
$34.97
40.51
41.11
43.57
Dividends Declared
Per Common Share
$0.36
0.36
0.36
0.36
$0.35
0.35
0.35
0.35
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, 2009, with dividend reinvestment.
Comparison of 5-Year Cumulative Total Return
Assumes Initial Investment of $100
December 2014
$260
240
220
200
160
120
80
40
0
Arthur J. Gallagher & Co.
Peer Group
S&P 500 Index – Total Returns
2009
2010
2011
2012
2013
2014
CLIENT CAPABILITIES IN THE FOLLOWING COUNTRIES:
ABU DHABI
CONGO
ALBANIA
ANGUILLA
ANTIGUA
ARGENTINA
ARUBA
AUSTRALIA
AUSTRIA
AZERBAIJAN
BAHAMAS
BAHRAIN
BARBADOS
BELGIUM
BENIN
BERMUDA
BOLIVIA
BONAIRE,
NETHERLAND
ANTILLES
BOSNIA
BRAZIL
BRITISH VIRGIN
ISLANDS
BULGARIA
BURKINA FASO
CAMEROON
CANADA
CAYMAN ISLANDS
CENTRAL AFRICA
CHAD
CHILE
CHINA
COLOMBIA
COSTA RICA
CROATIA
CURACAO,
NETHERLANDS
ANTILLES
CZECH REPUBLIC
DEMOCRATIC
REPUBLIC OF
CONGO
DENMARK
DOMINICA
DOMINICAN
REPUBLIC
DUBAI
ECUADOR
EGYPT
ENGLAND
EQUATORIAL GUINEA
ESTONIA
FIJI
FINLAND
FRANCE
GABON
GERMANY
GHANA
GIBRALTAR
GREECE
GRENADA
GRENADINES, THE
GUAM
GUATEMALA
GUINEE CONAKRY
GUERNSEY
HONG KONG
HUNGARY
ICELAND
INDIA
MYANMAR
NETHERLANDS
NEVIS
SCOTLAND
SENEGAL
SERBIA
NEW ZEALAND
SINGAPORE
NIGER
SLOVAKIA
INDONESIA
NORTHERN IRELAND
SLOVENIA
IRAQ
IRELAND
ISLE OF MAN
ISRAEL
ITALY
NORWAY
OMAN
PAKISTAN
PANAMA
SOUTH AFRICA
SOUTH KOREA
SPAIN
SRI LANKA
PAPUA NEW GUINEA
SWEDEN
IVORY COAST
PARAGUAY
SWITZERLAND
JAMAICA
JAPAN
JERSEY
JORDAN
PERU
PHILIPPINES
POLAND
PORTUGAL
KAZAKHSTAN
PUERTO RICO
KUWAIT
LATVIA
LEBANON
LITHUANIA
LUXEMBOURG
MACAU
MADAGASCAR
MALAYSIA
MALI
MALTA
MAURITANIA
MAURITIUS
MEXICO
MONACO
MONTENEGRO
QATAR
ROMANIA
RUSSIA
RWANDA
SABA, NETHERLANDS
ANTILLES
SAINT EUSTATIUS,
NETHERLANDS
ANTILLES
SAINT KITTS
SAINT LUCIA
ST. MAARTEN,
NETHERLANDS
ANTILLES
SAINT VINCENT
SAUDI ARABIA
TAIWAN
TANZANIA
THAILAND
TOGO
TRINIDAD AND
TOBAGO
TUNISIA
TURKEY
TURKS AND CAICOS
ISLANDS
UGANDA
UKRAINE
UNITED ARAB
EMIRATES
UNITED STATES
URUGUAY
VENEZUELA
VIETNAM
VIRGIN ISLANDS (U.S.)
WALES
2014 ANNUAL REPORT
WellingtonCalgarySantiagoEdinburghHonolulu GLOBAL HEADQUARTERS
The Gallagher Centre
Two Pierce Place
Itasca, IL 60143-3141
630.773.3800
www.ajg.com