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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 34 for a reconciliation of the non-GAAP measures for adjusted total revenues, organic commission, fee and supplemental revenues and adjusted EBITDAC to the comparable GAAP measures, as well as other important information regarding these measures.

We are engaged in providing insurance brokerage and consulting services, 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 underwriting enterprises and our clients and we do not assume net underwriting risks. We are headquartered in Rolling Meadows, Illinois, have operations in 49 countries and offer client-service capabilities in more than 150 countries globally through a network of correspondent brokers and consultants. In 2020, 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% generated internationally, primarily in the U.K., Australia, Canada, New Zealand and Bermuda (based on 2020 revenues). We expect that our international revenue as a percentage of our total revenues in 2021 will be comparable to 2020. We have three reportable segments: brokerage, risk management and corporate, which contributed approximately 74%, 14% and 12%, respectively, to 2020 revenues. Our major sources of operating revenues are commissions, fees and supplemental and contingent revenues from brokerage operations and fees from risk management operations. Investment income is generated from invested cash and fiduciary funds, clean energy 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” at the beginning 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.

Prior Year Discussion of Results and Comparisons

For information on fiscal 2018 results and similar comparisons, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the fiscal year ended December 31, 2019.

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Summary of Financial Results - Year Ended December 31,

See the reconciliations of non-GAAP measures on page 30.

(In millions, except per share data)

Brokerage Segment

Adjusted EBITDAC margin 32.7 % 28.5 % +418 bpts

Risk Management Segment

Net earnings margin (before reimbursements) 8.1 % 7.9 % +24 bpts

Adjusted EBITDAC margin (before reimbursements) 18.2 % 17.4 % +77 bpts

Corporate Segment

Diluted net loss per share $ (0.56 ) $ (0.57 ) $ (0.51 ) $ (0.45 )

Total Company

Total Brokerage and Risk Management Segment

In our corporate segment, net after tax earnings from our clean energy investments was $69.8 million and $88.5 million in 2020 and 2019, respectively. Our current estimate of the 2021 annual net after tax earnings, including IRC Section 45 tax credits, which will be produced from all of our clean energy investments in 2021, is $60.0 million to $75.0 million. We expect to use the additional cash flow generated by these earnings to continue our mergers and acquisition strategy in our core brokerage and risk management operations.

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The following provides information that management believes is helpful when comparing revenues before reimbursements, net earnings, EBITDAC and diluted net earnings per share for 2020 and 2019. In addition, these tables provide reconciliations to the most comparable GAAP measures for adjusted revenues, adjusted EBITDACand adjusted diluted net earnings per share. Reconciliations of EBITDAC for the brokerage and risk management segments are provided on pages 37and 42of this filing.

Year Ended December 31 Reported GAAP to Adjusted Non-GAAP Reconciliation:

(In millions, except per share data)

Levelized foreign currency translation — (5.5 ) — (2.6 ) — (3.7 ) — (0.01 )

Acquisition related adjustments — — 0.4 (1.0 ) — — — (0.01 )

Levelized foreign currency translation — (0.5 ) — (0.1 ) — 0.2 — —

Clean energy related adjustments — 3.0 — 11.7 — 14.9 — 0.05

Income tax related and workforce — — (1.1 ) 2.3 — 3.0 (0.01 ) 0.01

Total Brokerage and Risk

Total Brokerage and Risk

For 2019, the pretax impact of the brokerage segment adjustments totals $6.9 million, with no corresponding adjustment to the provision for income taxes relating to these items. The pretax impact of the risk management segment adjustments totals $5.6 million, with a corresponding adjustment to the provision for income taxes of $1.5 million relating to these items. The pretax impact of the corporate segment adjustments totals $17.9 million, with an adjustment to the benefit for income taxes of $3.9 million. For the corporate segment, the clean energy related adjustments are described on page 47.

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Reconciliation of Non-GAAP Measures - Pre-tax Earnings and Diluted Net Earnings per Share

(In millions except share and per share data)

Acquisition related adjustments 0.6 0.2 0.4 — 0.4 —

Income tax related impact — 1.1 (1.1 ) — (1.1 ) (0.01 )

Levelized foreign currency translation (3.5 ) (0.9 ) (2.6 ) — (2.6 ) (0.01 )

Acquisition related adjustments (2.4 ) (1.4 ) (1.0 ) — (1.0 ) (0.01 )

Levelized foreign currency translation 0.1 0.2 (0.1 ) — (0.1 ) —

COVID-19 Impact

In our property/casualty brokerage operations, during fourth quarter 2020, (a) our customer retention remained at pre‐pandemic levels, (b) new business generation was above pre-pandemic levels, offset somewhat by non-recurring business that was below pre‐pandemic levels, (c) renewal exposure units (i.e., insured values, payrolls, employees, miles driven, etc.) declined; however, premium rates across most geographies and lines of coverage have continued to increase, effectively mitigating exposure unit declines, and (d) net positive mid-term policy modifications were slightly higher than fourth quarter 2019.

Thus far in the first quarter of 2021, property/casualty customer exposure unit renewals showed improvement compared to lows seen in April and May 2020, as our customers’ businesses continue to recover and economic activity increases. Full policy cancellations have remained similar to pre-pandemic levels, and we continue to see property/casualty premium rates move higher overall which may partially, or fully, offset future declines in exposure units, if any.

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In our employee benefits brokerage operations, during the fourth quarter of 2020 we saw a decrease in new consulting and special project work, while covered lives on renewal business were similar to the third quarter of 2020. Our January 1, 2021 health and welfare renewals have shown covered lives being consistent with levels seen in the fourth quarter of 2020, although still not at pre-pandemic levels. Consulting engagements and special project work improved slightly from fourth quarter levels, but are still below pre‐pandemic levels. We believe revenue softness related to reduced covered lives and lower frequency of special project work could persist over the next few quarters, and even deteriorate further, if the economy is slow to recover.

In our risk management operations, we began seeing a meaningful decline in new claims arising during the last two weeks of March 2020, which persisted into April. From May to December 2020, we saw an improving trend in new claims arising and higher COVID‐related workers compensation claims; yet the current level of weekly new claims so far in 2021 is still below pre-pandemic levels. A slower recovery or reversal in the number of workers employed could cause fewer claims to arise in future quarters.

Throughout 2020 and in the fourth quarter of 2020, our clean energy investments experienced the impact of lower electricity consumption in the U.S., when compared to the same periods in 2019, due to reduced economic activity (as well as, unrelated to COVID-19, milder temperatures, other than some brief periods of unusually warm weather, falling natural gas prices, and increased use of renewable energy sources). We expect reduced U.S. electricity consumption could persist at least through the first half of 2021, and could even continue throughout all of 2021.

Of our nearly 1,000 office locations, nearly 400 are open, but most at reduced capacity. Accordingly the vast majority of our employees continue to work remotely for some or all of their work week. We believe our service levels are unchanged from pre-pandemic levels. We have not had any office-wide outbreaks of COVID-19, and fewer than 300 confirmed cases among our 32,401 employees - all of which we believe contracted the virus outside of our office locations.

Given the deterioration in economic conditions, since the first quarter of 2020, we are actively managing costs by limiting discretionary spending such as travel, entertainment and advertising expenses, adjusting our real estate footprint, reducing capital expenditures, limiting use of outside labor and consultants, increasing utilization of our centers of excellence, and we have adjusted portions of our workforce where volumes have declined significantly and normal attrition was not sufficient.

The cost saving impact of these actions in the second, third and fourth quarters of 2020 was substantial; with estimated quarterly savings of approximately $65 million to $70 million pretax compared to the same quarters in 2019, as adjusted for pro forma full‐quarter costs related to acquisitions. Offsetting these savings were severance and lease termination costs related to these actions. We believe savings in the first quarter of 2021 compared to the first quarter of 2020 could again total approximately $60 million to $65 million pretax after adjusting for pro forma costs related to acquisitions. Offsetting possible future savings would be additional implementation and execution costs, which we estimate could total approximately $12 million to $15 million pretax. Future net savings may be lower if the economy recovers faster than we are forecasting or our costs to implement changes exceed our estimates.

We have not seen any meaningful decline in cash receipts from our clients to date and we have more than $1.6 billion of available liquidity. A prolonged period of economic weakness may cause future cash collections to deteriorate, but we believe our cost savings, reduced non-client facing capital expenditures and working capital improvements could mitigate a potential decline in our cash flows over the near‐term.

For a discussion of risk and uncertainties relating to COVID‐19 for our business, results of operations and financial condition, see Part II, Item 1A. Risk Factors in our Form 10-K page 9.

Update on Ransomware Incident

As previously disclosed, on September 26, 2020, we detected a ransomware incident impacting our internal systems. We implemented our incident response plan, took our global systems offline, isolated impacted systems, retained cyber security counsel and forensic experts and reported the event to the FBI. The incident has been contained, and all critical systems are back in service.

While we remain unaware of any actual or attempted misuse of information, our investigation into the incident remains ongoing. We are working to conclude our forensic investigation and determine the nature and extent of unauthorized access to information on our systems. We intend to comply with all applicable laws and regulations. Based on the results of the forensic investigation to date, we do not believe this incident will have a material adverse effect on our business, operations or financial condition.

We maintain cyber liability insurance coverage, but disputes over the extent of insurance coverage for claims are not uncommon. Furthermore, while we have not been the subject of any legal proceedings involving this incident, it is possible we could be the subject of claims from persons alleging they suffered damages from the incident, or actions by governmental authorities.

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Insurance Market Overview

Fluctuations in premiums charged by property/casualty underwriting enterprises have a direct and potentially material impact on the insurance brokerage industry. Commission revenues are generally based on a percentage of the premiums paid by insureds and normally follow premium levels. Insurance premiums are cyclical in nature and may vary widely based on market conditions. Various factors, including competition for market share among underwriting enterprises, increased underwriting capacity and improved economies of scale following consolidations, can result in flat or reduced property/casualty premium rates (a “soft” market). A soft market tends to put downward pressure on commission revenues. Various countervailing factors, such as greater than anticipated loss experience, unexpected loss exposure and capital shortages, can result in increasing property/casualty premium rates (a “hard” market). A hard market tends to favorably impact commission revenues. Hard and soft markets may be broad-based or more narrowly focused across individual product lines or geographic areas. As markets harden, buyers of insurance (such as our brokerage clients), have historically tried to mitigate premium increases and the higher commissions these premiums generate, including by raising their deductibles and/or reducing 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. Our brokerage units are very active in these markets as well. While increased use by insureds of these alternative markets historically has reduced commission revenue to us, such trends generally have been accompanied by new sales and renewal increases in the areas of risk management, claims management, captive insurance and self-insurance services and related growth in fee revenue. Inflation tends to increase the levels of insured values and risk exposures, resulting in higher overall premiums and higher commissions. However, the impact of hard and soft market fluctuations has historically had a greater impact on changes in premium rates, and therefore on our revenues, than inflationary pressures.

We typically cite the Council of Insurance Agents & Brokers (which we refer to as the CIAB) insurance pricing quarterly survey at this time as an indicator of the current insurance rate environment. The fourth quarter 2020 survey had not been published as of the filing date of this report. The first three 2020 quarterly surveys indicated that U.S. commercial property/casualty rates increased by 9.3%, 10.8%, and 11.7% on average, for the first, second and third quarters of 2020, respectively. We expect a similar trend to be noted when the CIAB fourth quarter 2020 survey report is issued, which would signal overall continued price firming and hardening in some items. The CIAB represents the leading domestic and international insurance brokers, who write approximately 85% of the commercial property/casualty premiums in the U.S.

We believe the increases in property/casualty rates experienced in 2020, will continue in 2021; however, loss trends could deteriorate, leading to a more difficult environment and, in certain lines and geographies, a hard market. The economies of the U.S. and other countries around the world contracted during 2020 as a result of COVID-19 and have yet to rebound to pre-pandemic levels. Weaker economic activity is leading to, and is likely to continue to lead to, reduced exposure units and elevated unemployment. We expect that our history of strong new business generation, solid retentions and enhanced value-added services for our carrier partners should help offset, to a degree, softer global economic conditions. Overall, we believe that in a positive rate environment with reduced exposure units, our professionals can demonstrate their expertise and high-quality, value-added capabilities by strengthening our clients’ insurance portfolios and delivering insurance and risk management solutions within our clients’ budget. Based on our experience, there is adequate capacity in the insurance market for most lines of coverage, terms and conditions are tightening, most insurance carriers appear to be making rational pricing decisions and clients can broadly still obtain coverage.

Clean energy investments - We have investments in limited liability companies that own 29 clean coal production plants developed by us and six clean coal production plants we purchased from a third party. All 35 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 plants which were placed in service prior to December 31, 2009(which we refer to as the 2009 Era Plants) received tax credits through 2019 and the 21 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. All twenty-one of the 2011 Era Plants are under long‐term production contracts with several utilities.

We also own a 46.5% controlling interest in Chem-Mod, which has been marketing The Chem‐ModTM 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 $5.0 million to $6.0 million of net after tax earnings per quarter for the first three quarters of 2021.

Our current estimate of the 2021 annual net after tax earnings, including IRC Section 45 tax credits, which will be produced from all of our clean energy investments in 2020, is $60.0 million to $75.0 million.

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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 45investments under Item 1A, “Risk Factors.”

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with U.S. 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 2020 consolidated financial statements for other significant accounting policies.

Revenue Recognition - See Revenue Recognition in Notes 1 and 4 to our 2020 consolidated financial statements.

Income Taxes - See Income Taxes in Notes 1 and 19 to our 2020 consolidated financial statements.

Uncertain tax positions are measured based upon the facts and circumstances that exist at each reporting period and involve significant management judgment. Subsequent changes in judgment based upon new information may lead to changes in recognition, derecognition and measurement. Adjustments may result, for example, upon resolution of an issue with the taxing authorities, or expiration of a statute of limitations barring an assessment for an issue. We recognize interest and penalties, if any, related to unrecognized tax benefits in our provision for income taxes. See Note 19 to our 2020 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 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. On July 22, 2020, the U.K. enacted the Finance Act and Stamp Duty Land Tax which maintained the U.K. corporate tax rate at 19% from April 1, 2020 (previously planned to be reduced to 17% on that date). Accordingly, we adjusted our deferred tax asset and liability balances in third quarter 2020 to reflect this rate change.

We establish or adjust valuation allowances for deferred tax assets when we estimate that it is more likely than not that future taxable income will be insufficient to fully use a deduction or credit in a specific jurisdiction. In assessing the need for the recognition of a valuation allowance for deferred tax assets, we consider whether it is more likely than not that some portion, or all, of the deferred tax assets will not be realized and adjust the valuation allowance accordingly. We evaluate all significant available positive and negative evidence as part of our analysis. Negative evidence includes the existence of losses in recent years. Positive evidence includes the forecast of future taxable income by jurisdiction, tax-planning strategies that would result in the realization of deferred tax assets and the presence of taxable income in prior carryback years. The underlying assumptions we use in forecasting future taxable income require significant judgment and take into account our recent performance. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which temporary differences are deductible or creditable. See Note 19 to our 2020 consolidated financial statements related to changes in our valuation allowances.

Intangible Assets/Earnout Obligations - See Intangible Assets in Note 1 to our 2020 consolidated financial statements.

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, which is a Level 3 fair value

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measurement. 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 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 3to our 2020consolidated financial statements for additional discussion on our 2020business combinations.

Business Combinations and Dispositions

See Note 3 to our 2020 consolidated financial statements for a discussion of our 2020 business combinations. We did not have any material dispositions in 2018.

On January 8, 2019, we sold a travel insurance brokerage operation that was initially purchased in 2014. In first quarter 2019, we recognized a one-time, net gain of $0.17 of diluted net earnings per share as a result of the sale.

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 (adjusted EPS), adjusted revenues, adjusted compensation and operating expenses, adjusted compensation expense ratio, adjusted operating expense ratio and organic revenue. These measures are not in accordance with, or an alternative to, the GAAP information provided in this report. We believe that these presentations provide useful information to management, analysts and investors regarding financial and business trends relating to our results of operations and financial condition because they provide investors with measures that our chief operating decision maker uses when reviewing the company’s performance, and for the other reasons described below. Our industry peers may provide similar supplemental non-GAAP information with respect to one or more of these measures, although they may not use the same or comparable terminology and may not make identical adjustments. The non-GAAP information we provide should be used in addition to, but not as a substitute for, the GAAP information provided. We make determinations regarding certain elements of executive officer incentive compensation, performance share awards and annual cash incentive awards, partly on the basis of measures related to adjusted EBITDAC.

Adjusted Non-GAAP presentation - We believe that the adjusted non-GAAP presentation of our 2020 and 2019 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.

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Non-GAAP Earnings Measures

We believe that the presentation of EBITDAC, EBITDAC margin, adjusted EBITDAC, adjusted EBITDAC margin and adjusted EPS for the brokerage and risk management segment, each as defined below, provides a meaningful representation of our operating performance. Adjusted EPS is a performance measure and should not be used as a measure of our liquidity. We also consider EBITDAC and EBITDAC margin as ways to measure financial performance on an ongoing basis. In addition, adjusted EBITDAC, adjusted EBITDAC margin and adjusted EPS for the brokerage and risk management segments are presented to improve the comparability of our results between periods by eliminating the impact of the items that have a high degree of variability.

Organic Revenues (a non-GAAP measure) - For the brokerage segment, organic change in base commission and fee revenues, supplemental revenues and contingent revenues excludes the first twelve months of such revenues generated from acquisitions and such revenues related to divested operations in each year presented. These revenues are excluded from organic revenues in order to help interested persons analyze the revenue growth associated with the operations that were a part of our business in both the current and prior year. In addition, organic change in base commission and fee revenues, supplemental revenues and contingent revenues exclude the period-over-period impact of foreign currency translation. For the risk management segment, organic change in fee revenues excludes the first twelve months of fee revenues generated from acquisitions and the fee revenues related to operations disposed of in each year presented. In addition, change in organic growth excludes the period-over-period impact of foreign currency translation to improve the comparability of our results between periods by eliminating the impact of the items that have a high degree of variability, or are due to the limited-time nature of these revenue sources.

These revenue items are excluded from organic revenues in order to determine a comparable, but non-GAAP, measurement of revenue growth that is associated with the revenue sources that are expected to continue in 2021 and beyond. We have historically viewed organic revenue growth as an important indicator when assessing and evaluating the performance of our brokerage and risk

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management segments. We also believe that using this non-GAAP measure allows readers of our financial statements to measure, analyze and compare the growth from our brokerage and risk management segments in a meaningful and consistent manner.

Reconciliation of Non-GAAP Information Presented to GAAP Measures - This 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, adjusted EBITDAC (before acquisitions), diluted net earnings per share (as adjusted) and organic revenue measures.

Brokerage

The brokerage segment accounted for 74% of our revenue in 2020. Our brokerage segment is primarily comprised of retail and wholesale brokerage operations. Our brokerage segment generates revenues by:

The primary source of revenues for our brokerage services is commissions from underwriting enterprises, based on a percentage of premiums paid by our clients, or fees received from clients based on an agreed level of service usually in lieu of commissions. Commissions are fixed at the contract effective date and generally are based on a percentage of premiums for insurance coverage or employee headcount for employer sponsored benefit plans. Commissions depend upon a large number of factors, including the type of risk being placed, the particular underwriting enterprise’s demand, the expected loss experience of the particular risk of coverage, and historical benchmarks surrounding the level of effort necessary for us to place and service the insurance contract. Rather than being tied to the amount of premiums, fees are most often based on an expected level of effort to provide our services. In addition, under certain circumstances, both retail brokerage and wholesale brokerage services receive supplemental and contingent revenues. Supplemental revenue is revenue paid by an underwriting enterprise that is above the base commission paid, is determined by the underwriting enterprise and is established annually in advance of the contractual period based on historical performance criteria. Contingent revenue is revenue paid by an underwriting enterprise based on the overall profit and/or volume of the business placed with that underwriting enterprise during a particular calendar year and is determined after the contractual period.

Litigation, Regulatory and Taxation Matters

IRS and DOJ investigations- As previously disclosed, our IRC 831(b) (or “micro-captive”) advisory services business has been under investigation by the IRS since 2013. Among other matters, the IRS is investigating whether we have been acting as a tax shelter promoter in connection with these operations. Additionally, the IRS has initiated audits for the 2012 tax year, and subsequent tax years, of over 100 of the micro-captive underwriting enterprisesorganized and/or managed by us. In May 2020, we learned that the DOJ is conducting a criminal investigation related to IRC 831(b) micro-captive underwriting enterprises. We have been advised that we are not currently a target of the investigation. In June 2020, our subsidiary Artex Risk Solutions, Inc. (which we refer to as Artex) received a grand jury subpoena requesting documents relating to its micro-captive advisory business. We have produced documents in response to the subpoena. We are fully cooperating with both the IRS investigation and the DOJ investigation. We are not able to reasonably estimate the amount of any potential loss in connection with these investigations.

Class action lawsuit -On December 7, 2018, a class action lawsuit was filed against us, Artex and other defendants, in the United States District Court for the District of Arizona. The named plaintiffs are micro-captives and their related entities and owners who had IRC Section 831(b) tax benefits disallowed by the IRS. On August 5, 2019, the trial court granted the defendants’ motion to compel arbitration and dismissed the class action lawsuit. Plaintiffs appealed this ruling to the United States Court of Appeals for the Ninth Circuit. On September 9, 2020, the Ninth Circuit affirmed the ruling of the trial court dismissing the class action lawsuit. We will continue to defend against the lawsuit vigorously. Litigation is inherently uncertain, however, and it is not possible for us to predict

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the ultimate outcome of this matter and the financial impact to us, nor are we able to reasonably estimate the amount of any potential loss in connection with this lawsuit.

Financial information relating to our brokerage segment results for 2020 and 2019 (in millions, except per share, percentages and workforce data):

Net (losses) gains on divestitures (5.8 ) 75.3 (81.1 )

Change in estimated acquisition earnout payables (29.7 ) 16.9 (46.6 )

Net earnings attributable to noncontrolling interests 4.9 17.2 (12.3 )

Net earnings attributable to controlling interests $ 861.1 $ 700.1 $ 161.0

Diluted net earnings per share $ 4.42 $ 3.68 $ 0.74

Other Information

Change in diluted net earnings per share 20 % 22 %

Growth in revenues 5 % 15 %

Organic change in commissions and fees 3 % 6 %

Compensation expense ratio 56 % 56 %

Operating expense ratio 13 % 16 %

Effective income tax rate 24 % 24 %

Workforce at end of period (includes acquisitions) 24,717 25,211

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The following provides information that management believes is helpful when comparing EBITDAC and adjusted EBITDAC for 2020 and 2019 (in millions):

Change in estimated acquisition earnout payables (29.7 ) 16.9

Net losses (gains) on divestitures 5.8 (62.3 )

Acquisition integration 25.1 20.4

Acquisition related adjustments 19.2 16.8

Workforce and lease termination related charges 43.9 44.8

Levelized foreign currency translation — (3.7 )

Net earnings margin, as reported 16.8 % 14.6 % +213 bpts

EBITDAC margin, as adjusted 32.7 % 28.5 % +418 bpts

Commissions and fees - The aggregate increase in base commissions and fees for 2020 was due to revenues associated with acquisitions that were made during 2020 and 2019 ($234.9 million) and organic revenue growth. Commission revenues increased 8% and fee revenues increased 6% in 2020 compared to 2019, respectively. The organic change in base commission and fee revenues was 3% in 2020 and 6% in 2019.

In our property/casualty brokerage operations, during the three-month period ended December 31, 2020, relative to same period in 2019, our customer (a) retention and new business generation both remained at pre-pandemic levels, (b) non-recurring business was lower than pre-pandemic levels, (c) renewal exposure units (i.e., insured values, payrolls, employees, miles driven, etc.) showed some decline; however, premium rates across most geographies and lines of coverage have continued to increase, effectively mitigating exposure unit decline, and (d) net positive mid-term policy modifications were also lower. Thus far in the first quarter of 2021, property/casualty renewal customer exposure units and showed improvement compared to lows seen in April and May as our customers’ businesses continue to recover. Full policy cancellations have remained similar to pre-pandemic levels, and we continue to see property/casualty premium rates move higher overall which may partially, or fully, offset future declines in exposure units, if any. In our employee benefits brokerage operations, during the three-month period ended December 31, 2020 relative to same period in 2019, and thus far in the first quarter of 2021, we saw a decrease in new consulting and frequency of special project work (although we did sell a large life insurance pension funding product) and a decrease in covered lives on renewal business, although not to the same extent as headline unemployment levels. We believe the decline in covered lives and lower frequency of special project work could persist over the next few quarters, and even deteriorate further, if the economy is slow to recover.

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Items excluded from organic revenue computations yet impacting revenue comparisons for 2020 and 2019 include the following (in millions):

2020 Organic Revenues

Base Commissions and Fees

Less commission and fee revenues from acquisitions (234.9 ) —

Less divested operations — (29.6 )

Levelized foreign currency translation — (4.8 )

Supplemental revenues

Supplemental revenues, as reported $ 221.9 $ 210.5 5.4 %

Less supplemental revenues from acquisitions (3.5 ) —

Levelized foreign currency translation — (0.2 )

Organic supplemental revenues $ 218.4 $ 210.3 3.9 %

Contingent revenues

Contingent revenues, as reported $ 147.0 $ 135.6 8.4 %

Less contingent revenues from acquisitions (4.9 ) —

Less divested operations — —

Levelized foreign currency translation — (0.2 )

Less commission and fee revenues from acquisitions (243.3 ) —

Less divested operations — (29.6 )

Levelized foreign currency translation — (5.2 )

Number of acquisitions closed 27 46

Estimated annualized revenues acquired (in millions) $ 251.4 $ 452.3

For 2020 and 2019, we issued 1,857,000 and 1,908,000 shares of our common stock at the request of sellers and/or in connection with tax-free exchange acquisitions, respectively.

Supplemental and contingent revenues - Reported supplemental and contingent revenues recognized in 2020 and 2019 by quarter are as follows (in millions):

Q1 Q2 Q3 Q4 Full Year

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Investment incomeand net gains on divestitures - This primarily represents (1) interest income earned on cash, cash equivalents and restricted funds and interest income from premium financing and (2) net (losses) gains related to divestitures and sales of books of business, which were $(5.8) million and $75.3 million in 2020 and 2019, respectively. On December 16, 2020, we completed the sale of a U.K. wealth management business we purchased over four years ago that no longer strategically fit in our benefits operations. In fourth quarter 2020, we recognized a net pretax non-cash loss on the sale of approximately $12.0 million, primarily due to the write‐off of the remaining net book value of the amortizable intangible assets. During 2019, we recognized a one-time, net gain of $0.17 of diluted net earnings per share related to the divestiture of a travel insurance brokerage and four other smaller brokerage operations.

Investment income in 2020 decreased compared to 2019 primarily due to decreases in interest income from our U.S. operations due to decreases in interest rates earned on client held funds.

Compensation expense - The following provides non-GAAP information that management believes is helpful when comparing 2020 and 2019 compensation expense (in millions):

Compensation expense, as reported $ 2,882.5 $ 2,745.9

Acquisition integration (14.9 ) (12.4 )

Workforce related charges (35.7 ) (35.2 )

Acquisition related adjustments (19.2 ) (16.8 )

Levelized foreign currency translation — (2.9 )

Compensation expense, as adjusted $ 2,812.7 $ 2,678.6

Reported compensation expense ratios 55.8 % 56.0 %

Adjusted compensation expense ratios 54.4 % 55.6 %

The $136.6 million increase in compensation expense in 2020 compared to 2019 was primarily due to compensation associated with the acquisitions completed in 2020 - $26.3 million, producer compensation - $69.4 million, and other incentive compensation linked to operating results and deferred compensation ($45.8 million in the aggregate), partially offset by decreases in temporary-staffing and other related costs - $4.9 million.

Operating expense - The following provides non-GAAP information that management believes is helpful when comparing 2020 and 2019 operating expense (in millions):

Operating expense, as reported $ 687.2 $ 796.5

Acquisition integration (10.2 ) (8.0 )

Workforce and lease termination related charges (8.2 ) (9.6 )

Costs related to divestures — (13.0 )

Levelized foreign currency translation — 1.1

Operating expense, as adjusted $ 668.8 $ 767.0

Reported operating expense ratios 13.3 % 16.3 %

Adjusted operating expense ratios 12.9 % 15.9 %

The decrease in operating expense in 2020 compared to 2019 was due primarily to savings in meeting and client entertainment expense, office supplies and other occupancy costs, professional and banking fees and marketing expense - $135.3 million, partially offset by expenses associated with the acquisitions completed in 2020 - $6.7 million and increased business insurance - $19.3 million.

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Depreciation - The increase in depreciation expense in 2020 compared to 2019 was due primarily to the impact of 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 2020 was the depreciation expense associated with acquisitions completed in 2020.

Amortization - The increase in amortization in 2020 compared to 2019 was due primarily to the write-off of amortizable assets in 2020 and additional amortization expense of intangible assets associated with acquisitions completed in 2020 and 2019. Expiration lists, non‐compete agreements and trade names are amortized using the straight-line method over their estimated useful lives (two to fifteen years for expiration lists, two to six years for non-compete agreements and two to fifteen years for trade names). Based on the results of impairment reviews performed on amortizable intangible assets in 2020 and 2019, we wrote off $51.5 million and $0.1 million, respectively, of amortizable intangible assets related to the brokerage segment. 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 amortizable intangible assets, if the undiscounted future cash flows 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. In consideration of the potentialimpacts of COVID-19 on our reporting units, we performed a qualitative impairmentreview oncarrying value of our goodwill for all of our reporting units as of December 31, 2020 and no indicators of impairment were noted.

Change in estimated acquisition earnout payables - The change in the expense from the change in estimated acquisition earnout payables in 2020 compared to 2019 was due primarily to adjustments made to the estimated fair value of earnout obligations related to revised projections of future performance. During 2020 and 2019, we recognized $32.0 million and $26.2 million, respectively, of expense related to the accretion of the discount recorded for earnout obligations in connection with our 2020 and 2019 acquisitions. During 2020 and 2019, we recognized $61.7 million and $9.3 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 131 and 112 acquisitions, respectively.

The amounts initially recorded as earnout payables for our 2016 to 2020 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 2020 and 2019 was 24.2% and 24.2% respectively. We anticipate reporting an effective tax rate of approximately 23.0% to 25.0% in our brokerage segment for the foreseeable future.

Net earnings attributable to noncontrolling interests - The amounts reported in this line for 2020 and 2019 include noncontrolling interest earnings of $4.9 million and $17.2 million, respectively, of which for 2019 primarily related to our investment in Capsicum Reinsurance Brokers LLP (which we refer to as Capsicum Re). Prior to December 31, 2019, we were partners in this venture with Grahame Chilton, the former CEO of our International Brokerage Division (who stepped down from the role effective July 1, 2018). We were the controlling partner, participating in 33% of Capsicum Re’s net operating results and Mr. Chilton owned approximately 50% of Capsicum Re. In January 2020, we increased our ownership interest in Capsicum Re from 33% to 100%. Founded in December 2013 through a strategic partnership with Gallagher, Capsicum Re has since grown to become the world’s fifth largest reinsurance broker with offices in the U.K., U.S., Bermuda and South America.

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Risk Management

The risk management segment accounted for 14% of our revenue in 2020. Our risk management segment operations provide contract claim settlement, claim administration, loss control services and risk management consulting for commercial, not for profit, captive and public entities, and various other organizations that choose to self-insure property/casualty coverages or choose to use a third-party claims management organization rather than the claim services provided by underwriting enterprises. Revenues for the risk management segment are comprised of fees generally negotiated (i) on a per-claim or per-service basis, (ii) on a cost-plus basis, or (iii) as performance-based fees. We also provide risk management consulting services that are recognized as the services are delivered.

Financial information relating to our risk management segment results for 2020 and 2019 (in millions, except per share, percentages and workforce data):

Investment income 0.7 1.6 (0.9 )

Change in estimated acquisition earnout payables (3.2 ) (1.6 ) (1.6 )

Earnings before income taxes 89.4 88.4 1.0

Net earnings attributable to noncontrolling interests — — —

Net earnings attributable to

controlling interests $ 66.9 $ 66.2 $ 0.7

Diluted earnings per share $ 0.34 $ 0.35 $ (0.01 )

Other information

Change in diluted earnings per share (3 %) (8 %)

Growth in revenues (before reimbursements) (2 %) 5 %

Organic change in fees (before reimbursements) (3 %) 4 %

Compensation expense ratio (before reimbursements) 63 % 62 %

Operating expense ratio (before reimbursements) 20 % 22 %

Effective income tax rate 25 % 25 %

Workforce at end of period (includes acquisitions) 6,378 6,753

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The following provides non-GAAP information that management believes is helpful when comparing 2020 and 2019 EBITDAC and adjusted EBITDAC in millions):

Net earnings, as reported $ 66.9 $ 66.2 1.1 %

Provision for income taxes 22.5 22.2

Change in estimated acquisition earnout payables (3.2 ) (1.6 )

Workforce and lease termination related charges 7.9 7.9

Levelized foreign currency translation — 0.2

Net earnings margin, before reimbursements, as reported 8.1 % 7.9 % +24 bpts

EBITDAC margin, before reimbursements, as adjusted 18.2 % 17.4 % +77 bpts

Reported revenues before

Adjusted revenues - before reimbursements - see page 29 $ 821.7 $ 838.0

Fees - The decrease in fees for 2020 compared to 2019 was due primarily to the impact of COVID-19. In our risk management operations, we began seeing a meaningful decline in new claims arising during the last two weeks of March 2020, which persisted into April. From May to December, and thus far in the first quarter of 2021, we are seeing an improving trend in new claims arising; yet the current level of weekly new claims are still well below pre-pandemic levels. A slower recovery or reversal in the number of workers employed could cause fewer claims to arise in future quarters. Organic change in fee revenues was (3%) in 2020 and 4% in 2019.

Items excluded from organic fee computations yet impacting revenue comparisons in 2020 and 2019 include the following (in millions):

International performance bonus fees 5.7 3.2

Less fees from acquisitions (7.4 ) —

Levelized foreign currency translation — (0.6 )

Reimbursements - Reimbursements represent amounts received from clients reimbursing us for certain third-party costs associated with providing our claims management services. In certain service partner relationships, we are considered a principal because we direct the third party, control the specified service and combine the services provided into an integrated solution. Given this principal relationship, we are required to recognize revenue on a gross basis and service partner vendor fees in the operating expense line in our consolidated statement of earnings. The increase in reimbursements in 2020 compared to 2019 was primarily due to a change in business mix that is processed internally versus using outside service partners.

Investment income - Investment income primarily represents interest income earned on our cash and cash equivalents. Investment income in 2020 decreased compared to 2019 primarily due to decreases in interest income from our U.S. operations due to decreases in interest rates earned on our funds.

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Compensation expense- The following provides non-GAAP information that management believes is helpful when comparing 2020 and 2019 compensation expense compensation expense (in millions):

Compensation expense, as reported $ 517.5 $ 515.7

Workforce and lease termination related charges (7.5 ) (5.9 )

Levelized foreign currency translation — (0.5 )

Compensation expense, as adjusted $ 510.0 $ 509.3

Reported compensation expense ratios (before reimbursements) 63.0 % 61.5 %

Adjusted compensation expense ratios (before reimbursements) 62.1 % 60.8 %

Reported revenues (before reimbursements) $ 821.7 $ 838.5

Adjusted revenues (before reimbursements) - see page 29 $ 821.7 $ 838.0

The $1.8 million increase in compensation expense in 2020 compared to 2019 was primarily due to other incentive compensation linked to operating results and deferred compensation - ($7.4 million in the aggregate), partially offset by a decrease in temporary‐staffing expense - $5.6 million.

Operating expense - The following provides non-GAAP information that management believes is helpful when comparing 2020 and 2019 operating expense operating expense (in millions):

Operating expense, as reported $ 162.6 $ 184.9

Workforce and lease termination related charges (0.4 ) (2.0 )

Levelized foreign currency translation — (0.2 )

Operating expense, as adjusted $ 162.2 $ 182.7

Reported compensation expense ratios (before reimbursements) 19.8 % 22.1 %

Adjusted compensation expense ratios (before reimbursements) 19.7 % 21.8 %

Reported revenues (before reimbursements) $ 821.7 $ 838.5

Adjusted revenues - (before reimbursements) see page 29 $ 821.7 $ 838.0

The $22.3 million decrease in operating expense in 2020 compared to 2019 was primarily due to savings in meeting and client entertainment expense, office supplies and other occupancy costs, professional and banking fees and marketing expense ‐ $24.8 million in the aggregate, partially offset by an increase in technology expense - $2.5 million.

Depreciation - Depreciation expense increased in 2020 compared to 2019, 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 increased in 2020 compared to 2019. Based on the results of impairment reviews performed on amortizable intangible assets during 2020, we wrote off $0.2 million of amortizable assets. No indicators of impairment were noted in 2019.

Change in estimated acquisition earnout payables - The change in expense from the change in estimated acquisition earnout payables in 2020 compared to 2019, were due primarily to adjustments made in 2020 and 2019 to the estimated fair value of an earnout obligation related to revised projections of future performance. During 2020 and 2019, we recognized $0.5 million and $0.8 million, respectively, of expense related to the accretion of the discount recorded for earnout obligations in connection with our 2018 and 2017 acquisitions, respectively. During 2020, we recognized $3.7 million of income related to net adjustments in the estimated fair value of earnout obligations related to revised projections of future performance for four acquisitions. During 2019, we recognized $2.4 million of income related to net adjustments in the estimated fair value of earnout obligations related to revised projections of future performance for four acquisitions.

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Provision for income taxes -We allocate the provision for income taxes to the risk management segment using local statutory rates. The risk management segment’s effective tax rate in 2020 and 2019 was 25.2% and25.1%, respectively. We anticipate reporting an effective tax rate on adjusted results of approximately 24.0% to 26.0% in our risk management segment for the foreseeable future.

Corporate

The corporate segment reports the financial information related to our clean energy and other investments, our debt, certain corporate and acquisition-related activities and the impact of foreign currency translation. See Note 14 to our 2020 consolidated financial statements for a summary of our investments at December 31, 2020 and 2019 and a detailed discussion of the nature of these investments. See Note 8 to our 2020 consolidated financial statements for a summary of our debt at December 31, 2020 and 2019.

Financial information relating to our corporate segment results for 2020 and 2019 (in millions, except per share and percentages):

Revenues from facilities coal production plants $ 802.0 $ 1,255.1 $ (453.1 )

Royalty income from clean coal licenses 62.4 66.7 (4.3 )

Loss from unconsolidated clean coal facilities (0.9 ) (2.5 ) 1.6

Other net losses (0.4 ) (2.9 ) 2.5

Cost of revenues from consolidated clean coal facilities 882.1 1,352.8 (470.7 )

Net earnings attributable to noncontrolling interests 34.4 29.8 4.6

Net loss attributable to controlling interests $ (109.2 ) $ (97.5 ) $ (11.7 )

Diluted net loss per share $ (0.56 ) $ (0.51 ) $ (0.05 )

EBITDAC

Revenues - Revenues in the corporate segment consist of the following:

The decrease in 2020 and 2019 was due to decreased production of refined coal.

The decrease in royalty income in 2020 compared to 2019 was due to decreased production of refined coal by Chem-Mod LLC’s licensees.

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Expenses related to royalty income of Chem‐Mod LLC were $10.6 million and $17.5millionin 2020 and 2019, respectively. These expenses are included in the operating expenses discussed below. In 2019, Chem-Mod LLC, incurred costs related to settling certain patent infringement litigation.

The losses in 2020 and 2019 were low because the vast majority of our operations are consolidated.

Cost of revenues - Cost of revenues from consolidated clean coal production plants in 2020 and 2019 consists of the cost of coal, labor, equipment maintenance, chemicals, supplies, management fees and depreciation incurred by the clean coal production plants to generate the consolidated revenues discussed above. The decreases in cost of revenues in 2020 compared to 2019, were primarily due to decreased production.

Compensation expense - Compensation expense for 2020 and 2019, respectively, was $66.5 million and $77.9 million. The $11.4 million decrease in 2020 compensation expense compared to 2019 was primarily due to lower clean energy results in 2020.

Operating expense -Operating expense for 2020 includes banking and related fees of $5.1 million, external professional fees and other due diligence costs related to 2020 acquisitions of $9.4 million, other corporate and clean energy related expenses, including legal fees, and costs related to corporate data and branding initiatives, of $41.9 million, and a net unrealized foreign exchange remeasurement loss of $0.3 million

Operating expense for 2019 includes banking and related fees of $4.7 million, external professional fees and other due diligence costs related to 2019 acquisitions of $17.4 million, other corporate and clean energy related expenses of $35.8 million, $11.9 million of clean energy related costs as described on page 47, corporate related data and branding initiatives of $11.9 million, a net realized loss related to foreign exchange hedge contacts of $3.3 million and a net unrealized foreign exchange remeasurement loss of $2.1 million.

Interest expense - The increase in interest expense in 2020 compared to 2019 was due to the following (in millions):

Change in interest expense related to: 2020 / 2019

Interest on borrowings from our Credit Agreement $ (8.6 )

Interest on the maturity of the Series C notes (2.7 )

Interest on the maturity of the Series K and L notes (2.6 )

Interest on the $348.0 million notes funded on August 2 and 4, 2017 (1.0 )

Interest on the $500.0 million notes funded on June 13, 2018 (0.9 )

Interest on the $340.0 million notes funded on February 13, 2019 2.0

Interest on the $260.0 million notes funded on March 13, 2019 2.7

Interest on the $175.0 million notes funded on June 12, 2019 3.4

Interest on the $50.0 million notes funded on December 2, 2019 1.7

Interest on the $575.0 million notes funded on January 30, 2020 21.6

Amortization of hedge gains 1.0

Net change in interest expense $ 16.6

Depreciation - Depreciation expense in 2020 was lower compared to 2019.

Net earnings attributable to noncontrolling interests- The amounts reported in this line for 2020 and 2019 primarily include noncontrolling interest earnings of $34.4 million and $29.8 million, respectively, related to our investment in Chem-Mod LLC. As of December 31, 2020 and 2019, we held a 46.5% controlling interest in Chem-Mod LLC. Also, included in net earnings attributable to noncontrolling interests are offsetting amounts related to non-Gallagher owned interests in several clean energy investments.

Benefit for income taxes - 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 expired in December 2019 for our fourteen 2009 Era Plants and is scheduled to expire in December 2021 for our twenty-one 2011 Era Plants. Our consolidated effective tax rate was 1.5%, and (14.3)% for 2020 and 2019, respectively. The tax rates for 2020 and 2019 were lower than the statutory rate primarily due to the amount of IRC Section 45 tax credits recognized during the year. There were $148.6 million and $196.0 million of Section 45 tax credits generated and recognized in 2020 and 2019, respectively. The

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income tax benefit of stock based awards that vested or were settled in the years ended December31, 2020 and 2019was $25.3million and $17.4 million, respectively.

U.S. federal income tax law changes- On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act contains several significant business tax provisions that could affect a company’s accounting for income taxes. See discussion of the various impact of the CARES Act below.

U.S. Federal Income Tax Law Changes Items Impacting the Company Going Forward

Alternative Minimum Tax Credit- The CARES Act amends Section 53(e) of the TCJA so that all prior year minimum tax credits are available for refund for the first taxable year of a corporation beginning in 2018. We have adjusted the classification of the remaining Alternative Minimum Tax (which we refer to as AMT) credits as a result of the AMT credit acceleration. All remaining AMT credits were utilized as part of our 2019 Federal Income Tax return or refunded in 2020.

Interest Expense Limitation- The CARES Act contains modifications on the limitations of business interest for tax years beginning in 2019 and 2020. The modifications to Section 163(j) increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income. This modification would significantly increase the allowable interest expense deduction of the company. We have evaluated the impact and determined there is no limit on our interest deductibility for federal income tax purposes for the years ended December 31, 2020 and 2019.

The following provides non-GAAP information that we believe is helpful when comparing 2020 and 2019 operating results for the corporate segment (in millions):

Net Earnings Net Earnings

(Loss) (Loss)

Income Attributable to Income Attributable to

Pretax Tax Controlling Pretax Tax Controlling

Loss Benefit Interests Loss Benefit Interests

Components of Corporate Segment, as reported

Adjustments

Clean energy related (4) — — — 12.4 (3.2 ) 9.2

Income tax related and workforce (2) — (1.1 ) (1.1 ) 3.0 (0.7 ) 2.3

Components of Corporate Segment, as adjusted

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Interest and banking costs and debt -Interest and banking costs includes expenses related to our debt.

Clean energy related - Includes the operating results related to our investments in clean coal production plants and Chem-Mod LLC.

Acquisition costs - Consists of professional fees, due diligence and other costs incurred related to our acquisitions.

Corporate - Consists of overhead allocations mostly related to corporate staff compensation and other corporate level activities, costs related to biennial company-wide award event, cross-selling and motivational meetings for our production staff and field management, expenses related to our new corporate headquarters, corporate related data and branding initiatives, expenses for systems and consulting related to the implementation of the new revenue recognition accounting and tax reform rules and the impact of foreign currency translation.

The income tax benefit of stock based awards that vested or were settled in the years ended December 31, 2020 and 2019 was $25.3 million and $17.4 million, respectively, and is included in the table above in the Corporate line.

Impact of U.K. Brexit decision- During the third and fourth quarters of 2020, our U.K. operations completed the transfer of its EEA books of business to a Gallagher EU affiliate in connection with the U.K. exiting the EU on December 31, 2020. The transfer related after-tax charges reported in 2020 were a net $1.1 million of income tax benefit, reflecting the amortization of those assets at the Swedish tax rate and utilization of historical U.K. capital losses that previously had valuation allowances against them.

Clean energy investments - We have investments in limited liability companies that own 29 clean coal production plants developed by us and six clean coal production plants we purchased from a third party. All 35 plants produce refined coal using propriety technologies owned by Chem-Mod LLC. We believe that the production and sale of refined coal at these plants are qualified to receive refined coal tax credits under IRC Section 45. The 14 2009 Era Plants received tax credits through 2019 and the 21 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, 2020 (in millions):

Our Portion of Estimated

Low Range High Range

Book Value At After-tax After-tax

December 31, 2020 Earnings Earnings

Investments that own 2009 Era Plants

14 2009 Not in active production during 2020 $ — $ — $ —

Investments that own 2011 Era Plants

Chem-Mod royalty income, net of noncontrolling interests 4.0 12.0 15.0

The estimated earnings information in the table reflects management’s current best estimate of the 2020 low and high ranges of after-tax earnings based on early production estimates from the host utilities, other operating assumptions, including current U.S. federal income tax laws. However, coal-fired power plants may not ultimately produce refined fuel at estimated levels due to seasonal electricity demand, production costs, natural gas prices, weather conditions, as well as many other operational, regulatory and environmental compliance reasons. Future changes in EPA regulations or U.S. federal income tax laws might materially impact these estimates.

Our investment in Chem-Mod LLC generates royalty income from refined coal production plants owned by those limited liability companies in which we invest as well as refined coal production plants owned by other unrelated parties. Future changes in EPA regulations or U.S. federal income tax laws might materially impact these estimates.

We may sell ownership interests in some or all of the plants to co-investors and relinquish control of the plants, thereby becoming a noncontrolling, minority investor. In any limited liability company where we are a noncontrolling, 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 future date we become a noncontrolling, minority investor, we would deconsolidate the entity and subsequently account for the investment using equity method accounting.

We currently have construction commitments related to our refined coal plants of approximately $0.9 million.

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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:

IRS Reference IRS Beginning IRS 100%

Price Phase Out Phase Out

Calendar Year per Ton Price Price Conclusion

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 14 to our 2020 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.

In light of the economic uncertainty caused by COVID-19, subsequent to the first quarter of 2020, we preserved liquidity during 2020 by reducing capital expenditures for the remainder of the year and made working capital process changes such as moved more cash into the U.S. from our international operations, pursued collections on receivables from our customers and partners and renegotiated longer payment terms on vendor payables. We also slowed down our acquisition program in the second and third quarters of 2020. We believe we have sufficient liquidity on hand to continue business operations during this uncertain period. If we experience a significant reduction in revenue in the future, we have additional alternatives to maintain liquidity, including use of common stock to fund future acquisitions.

Cash Flows From Operating Activities

Historically, we have depended on our ability to generate positive cash flow from operations to meet a substantial portion of 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 2020, 2019 and 2018, we relied on a combination of net cash flows from operations, proceeds from borrowings under our Credit Agreement, proceeds from issuances of senior unsecured notes and issuances of our common stock.

Cash provided by operating activities was $1,752.5 million, $1,119.2 million and $765.1 million for 2020, 2019 and 2018, respectively. The increase in cash provided by operating activities during 2020 compared to the same period in 2019 was primarily due to timing differences between periods in the collection of other current receivables and payments on current liabilities. During 2020, we managed our working capital in terms of receivables and payables as a cautionary step to protect liquidity during this uncertain period. In addition, during 2020, the company filed a refund claim under a CARES Act provision that accelerates the ability of companies to recover AMT credits and we received a $28.5 million refund related to our AMT credit carryovers, which was the remaining amount owed to us. Under the CARES Act we also elected to defer the payment of $51.6 million of employer payroll tax obligations incurred in 2020 into 2021 and 2022. This also defers our income tax deduction related to these employer payroll taxes,

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which results in an unfavorable temporary income tax adjustment of $12.9 million that will reverse in the year that the payroll taxes are paid. We also deferred $18.0million of estimated federal income tax payments from second quarter 2020 to third quarter 2020.

The increase in cash provided by operating activities in 2019 compared to 2018 was due to the following items: decreases in 2019 compared to 2018 of $48.0 million of payments on acquisition earnouts in excess of original estimates, $45.9 million of income tax payments and $30.0 million discretionary contribution made to our defined benefit plan in 2018. Also contributing to the increase in cash provided by operating activities in 2019 compared to 2018 were timing differences between years in the collection of receivables and direct bill revenues, and the payment of accrued liabilities.

In addition, cash provided by operating activities in 2020 was favorably impacted by timing differences in the receipts and disbursements of client fiduciary related balances in 2020 compared to 2019. The following table summarizes two lines from our consolidated statement of cash flows and provides information that management believes is helpful when comparing changes in client fiduciary related balances for 2020, 2019 and 2018 (in millions):

Net change in premiums and fees receivable $ (796.5 ) $ (434.7 ) $ (783.1 )

Net change in premiums payable to underwriting enterprises 1,154.2 461.6 819.7

Net cash provided by the above $ 357.7 $ 26.9 $ 36.6

Our cash flows from operating activities are primarily derived from our earnings from operations, as adjusted, for 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 if the amount of IRC Section 45 tax credits generated (which is the amount we recognize for financial reporting purposes) is greater than the amount of tax credits actually used to reduce our tax cash obligations. Excess tax credits produced during the period result in an increase to our deferred tax assets, which is a net use of cash related to operating activities. Please see “Clean energy investments” below for more information on their potential future impact on cash provided by operating activities.

When assessing our overall liquidity, we believe that the focus should be on net earnings as reported in our consolidated statement of earnings, adjusted for non-cash items (i.e., EBITDAC), and cash provided by operating activities in our consolidated statement of cash flows. Consolidated EBITDAC was $1,596.8 million, $1,295.6 million and $1,046.4 million for 2020, 2019 and 2018, respectively. Net earnings attributable to controlling interests were $818.8 million, $668.8 million and $633.5 million for 2020, 2019 and 2018, respectively. We believe that EBITDAC items are indicators of trends in liquidity. From a balance sheet perspective, we believe the focus should not be on premium and fees receivable, premiums payable or restricted cash for trends in liquidity. Net cash flows provided by operations will vary substantially from quarter to quarter and year to year because of the variability in the timing of premiums and fees receivable and premiums payable. We believe that in order to consider these items in assessing our trends in liquidity, they should be looked at in a combined manner, because changes in these balances are interrelated and are based on the timing of premium payments, both to and from us. In addition, funds legally restricted as to our use relating to premiums and clients’ claim funds held by us in a fiduciary capacity are presented in our consolidated balance sheet as “Restricted cash” and have not been included in determining our overall liquidity.

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 2020, 2019 and 2018 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 2018 we made a $30.0 million discretionary contribution to the plan in order to minimize the potential impact of having to make required minimum contributions to the plan in future periods. During 2020 and 2019 we did not make discretionary contributions to the plan.

See Note 13 to our 2020 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

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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 2020, the funded status of the Plan was unfavorably impacted by a decrease in the discount rates used in the measurement of the pension liabilities at December 31, 2020, the net impact of which was approximately $15.0 million. However, the funded status was favorably impacted by returns on the plan’s assets being higher in 2020 than anticipated by approximately $17.9 million. The net change in the funded status of the Plan in 2020 resulted in a decrease in noncurrent liabilities in 2020 of $2.9 million. In 2019, the funded status of the Plan was unfavorably impacted by a decrease in the discount rates used in the measurement of the pension liabilities at December 31, 2019, the net impact of which was approximately $21.3 million. However, the funded status was favorably impacted by returns on the plan’s assets being higher in 2019 than anticipated by approximately $23.8 million. The net change in the funded status of the Plan in 2019 resulted in a decrease in noncurrent liabilities in 2019 of $2.5 million. While the change in funded status of the Plan had no direct impact on our cash flows from operations in 2020, 2019 and 2018, 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 - Capital expenditures were $99.3 million, $138.8 million and $124.4 million for 2020, 2019 and 2018, respectively. In addition, 2020 and 2019 capital expenditures include amounts incurred related to investments made in information technology and software development projects. Relating to the development of our new corporate headquarters, we received property tax related credits under a tax-increment financing note from Rolling Meadows, Illinois and an Illinois state EDGE tax credit. Incentives from these two programs could total between $60.0 million and $90.0 million over a fifteen-year period. In 2021, we expect total expenditures for capital improvements to be approximately $150.0 million, part of which is related to expenditures on office moves and expansions and updating computer systems and equipment.

Acquisitions - Cash paid for acquisitions, net of cash and restricted cash acquired, was $324.3 million, $1,266.8 million and $784.8 million in 2020, 2019 and 2018, respectively. The decreased use of cash for acquisitions in 2020 compared to 2019 was primarily due to a decrease in the number and size of acquisitions in 2020 than occurred in 2019. The increased use of cash for acquisitions in 2019 compared to 2018 was primarily due to an increase in the number and size of acquisitions in 2019 than occurred in 2018. In addition, during 2020, 2019 and 2018 we issued 3.0 million shares ($306.1 million), 1.9 million shares ($166.1 million) and 0.8 million shares ($60.8 million), respectively, of our common stock as payment for a portion of the total consideration paid for acquisitions and earnout payments. We completed 27, 49 and 48 acquisitions in 2020, 2019 and 2018, respectively. Annualized revenues of businesses acquired in 2020, 2019 and 2018 totaled approximately $251.4 million, $468.2 million and $339.8 million, respectively. In 2021, we expect to use new debt, our Credit Agreement, cash from operations and our common stock to fund all, or a portion of acquisitions we complete.

We significantly reduced our acquisition activity in the second and third quarters of 2020 because of the economic uncertainty brought on by COVID-19, and if liquidity concerns arise, we could use common stock to fund future acquisitions.

Dispositions - During 2020, 2019 and 2018, we sold several books of business and recognized one-time (losses) gains of $(5.8) million of losses and $75.3 million and $10.2 million of gains, respectively. On December 16, 2020, we completed the sale of a U.K. wealth management business that we purchased over four years ago that no longer strategically fit in our benefits operations. In fourth quarter 2020, we recognized a net pretax non-cash loss on sale of approximately $12.0 million, primarily due to the write-off of the remaining net book value of the amortizable intangible assets.

We received cash proceeds of $8.2 million, $81.0 million and $14.5 million, respectively, related to these transactions.

On January 8, 2019, we sold a travel insurance brokerage operation that was initially purchased in 2014. In first quarter 2019, we recognized a one-time, net gain of $0.17 of diluted net earnings per share as a result of the sale.

Clean Energy Investments - During the period from 2009 through 2020, 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 2021 annual net after-tax earnings, including IRC Section 45 tax credits, which will be produced from all of our clean energy investments in 2020, is $60.0 million to $75.0 million. The IRC Section 45 tax credits generate positive cash flow by reducing the amount of federal income taxes we pay, which is offset by the operating expenses of the plants, by any capital expenditures related to the redeployment, and in some cases the relocation of refined coal plants. We anticipate positive net cash flow related to IRC Section 45 activity in 2021. 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

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coal plants remain as currently anticipated, and if we continue to generate sufficient taxable income to use the tax credits produced by our IRC Section 45 investments, we anticipate that these investments will continue to generate positive net cash flows for the period 2021 through at least 2025. While we cannot precisely forecast the cash flow impact in any particular period, we anticipate that the net cash flow impact of these investments will be positive overall. Please see "Clean energy investments" on pages48and49for a more detailed description of these investments and their risks and uncertainties.

Cash Flows From Financing Activities

On June 7, 2019, we entered into an amendment and restatement to our multicurrency credit agreement dated April 8, 2016 (which we refer to as the Credit Agreement) with a group of fifteen financial institutions. The amendment and restatement, among other things, extended the expiration date of the Credit Agreement from April 8, 2021 to June 7, 2024 and increased the revolving credit commitment from $800.0 million to $1,200.0 million, of which $75.0 million may be used for issuances of standby or commercial letters of credit and up to $75.0 million may be used for the making of swing loans, (as defined in the Credit Agreement). We may from time to time request, subject to certain conditions, an increase in the revolving credit commitment under the Credit Agreement up to a maximum aggregate revolving credit commitment of $1,700.0 million. On August 27, 2020, we entered into an amendment to the Credit Agreement providing that the obligations of each subsidiary of Gallagher that was a borrower, guarantor and/or obligor under the Credit Agreement, ceased to apply and that each such subsidiary was released from all of its obligations under the Credit Agreement. The amendment also replaced the minimum asset covenant with a priority indebtedness covenant, substantially similar to other priority indebtedness covenants applicable to us under our private placement note purchase agreements.

There were no borrowings outstanding under the Credit Agreement at December 31, 2020. Due to the outstanding borrowing and letters of credit, $1,182.6 million remained available for potential borrowings under the Credit Agreement at December 31, 2020.

We use the Credit Agreement to post letters of credit and to borrow funds to supplement our operating cash flows from time to time. During 2020, we borrowed an aggregate of $2,630.0 million and repaid $3,150.0 million under our Credit Agreement. During 2019, we borrowed an aggregate of $4,315.0 million and repaid $4,060.0 million under our Credit Agreement. During 2018, we borrowed an aggregate of $3,075.0 million and repaid $3,000.0 million under our Credit Agreement. Principal uses of the 2020, 2019 and 2018 borrowings under the Credit Agreement were to fund acquisitions, earnout payments related to acquisitions and general corporate purposes.

On September 30, 2020, we entered into an amendment to our revolving loan facility (which we refer to as the Premium Financing Debt Facility) that provides funding for the three Australian (AU) and New Zealand (NZ) premium finance subsidiaries. The amendment, among other things, extended the expiration date of the Premium Financing Debt Facility from July 18, 2021 to September 15, 2022, added six-months of variable limits to Facility B NZ$ beginning in 2021 and increased the total commitment for the AU$ denominated tranche from AU$245.0 million to AU$310.0 million. The Premium Financing Debt Facility is comprised of: (i) Facility B is separated into AU$260.0 million and NZ$25.0 million tranches, (ii) Facility C, an AU$50.0 million equivalent multi‐currency overdraft tranche and (iii) Facility D, a NZ$15.0 million equivalent multi-currency overdraft tranche.

At December 31, 2020, we had $4,348.0 million of corporate-related borrowings outstanding under separate note purchase agreements entered into in the period 2009 to 2020, no borrowings outstanding under our credit facility, $203.6 million outstanding under our Premium Financing Debt Facility and a cash and cash equivalent balance of $664.6 million. See Note 8 to our 2020 consolidated financial statements for a discussion of the terms of the note purchase agreements, the Credit Agreement and the Premium Financing Debt Facility.

On January 30, 2020, we closed and funded an offering of $575.0 million aggregate principal amount of fixed rate private placement unsecured senior notes. The weighted average maturity of these notes is 11.7 years and the weighted average interest rate is 4.23% per annum after giving effect to underwriting costs and the net hedge loss. In 2017 and 2018, we entered into pre-issuance interest rate hedging transactions related to this private placements. We realized a net cash loss of approximately $8.9 million on the hedging transactions that will be recognized on a pro rata basis as an increase to our reported interest expense over ten years.

The notes consist of the following tranches:

• $79.0 million of 4.24% senior notes due in 2035; and

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We used these offerings to repay certain existing indebtedness and for general corporate purposes, including to fund acquisitions.

Consistent with past practice, as of December 31, 2020 we had pre-issuance hedges open for $350.0 million for 2021 and $200.0 million for 2022.

On February 13, 2019, we closed an offering of $600.0 million aggregate principal amount of fixed rate private placement senior unsecured notes. This offering was funded on February 13, 2019 ($340.0 million) and March 13, 2019 ($260.0 million). The weighted average maturity of these notes is 10.1 years and the weighted average interest rate is 5.04% after giving effect to a net hedging loss. In 2017 and 2018, we entered into pre-issuance interest rate hedging transactions related to this private placement. We realized a net cash loss of approximately $1.2 million on the hedging transactions that will be recognized on a pro rata basis as an increase in our reported interest expense over the life of the debt.

The notes consist of the following tranches:

• $40.0 million of 5.29% senior notes due in 2034; and

We used the proceeds of these offerings to repay certain existing indebtedness and fund acquisitions.

On June 12, 2019, we closed a private placement of $175.0 million aggregate principal amount of unsecured senior notes. The unsecured senior notes were issued with an interest rate of 4.48% and are due in 2034. We used the proceeds of these offerings in part to fund the $50.0 million June 24, 2019 Series L note maturity, and for acquisitions and general corporate purposes. The weighted average interest rate is 4.68% after giving effect to a net hedging loss. In 2017 and 2018, we entered into pre-issuance interest rate hedging transactions related to this private placement. We realized a net cash loss of approximately $5.2 million on the hedging transactions that will be recognized on a pro rata basis as an increase in our reported interest expense over ten years of the total 15‐year notes.

On December 2, 2019 we closed a private placement of $50.0 million aggregate principal amount of unsecured senior notes. The unsecured senior notes were issued with an interest rate and weighted average interest rate of 3.48% and are due in 2029. We used the proceeds of those offerings to fund the $50.0 million November 30, 2019 Series C note maturity.

On June 13, 2018, we closed and funded offerings of $500.0 million aggregate principal amount of private placement senior unsecured notes (both fixed and floating rate), which was used in part to fund the $50.0 million June 24, 2018 Series K notes maturity. The weighted average maturity of the $450.0 million of senior fixed rate notes is 13.6 years and their weighted average interest rate is 4.42% after giving effect to net hedging gains. The interest rate on the $50.0 million of floating rate notes would be 3.14% using three-month LIBOR on February 3, 2020. In 2017 and 2018, we entered into pre-issuance interest rate hedging transactions related to the $500.0 million private placement funded on June 13, 2018. We realized a net cash gain of approximately $2.9 million on the hedging transaction that will be recognized on a pro rata basis as a reduction in our reported interest expense over the life of the debt. We used the proceeds of these offerings to repay certain existing indebtedness and fund acquisitions.

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, 2020.

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 2020, we declared $348.4 million in cash dividends on our common stock, or $1.80 per common share. On December 18, 2020, we paid a fourth quarter dividend of $0.45 per common share to shareholders of record as of December 4, 2020. On January 27, 2021, we announced a quarterly dividend for first quarter 2021 of $0.48 per common share. If the dividend is maintained at $0.48 per common share throughout 2021, this dividend level would result in an annualized net cash used by financing activities in 2021 of

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approximately $370.5 million (based on the outstanding shares as of December 31, 2020), or ananticipated increase in cash used of approximately $23.1million compared to 2020.We can make no assurances regarding the amount of any future dividend payments.

Shelf Registration Statement - On November 15, 2019, 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. The availability of the potential liquidity under this shelf registration statement depends on investor demand, market conditions and other factors. We make no assurances regarding when, or if, we will issue any shares under this registration statement. On November 15, 2016, we also filed a shelf registration statement on Form S-4 with the SEC, registering 10.0 million shares of our common stock that we may offer and issue from time to time in connection with future acquisitions of other businesses, assets or securities. At December 31, 2020, 4.3 million shares remained available for issuance under this registration statement.

Common Stock Repurchases - We have in place a common stock repurchase plan approved by our board of directors. During the years ended December 31, 2020 and 2019, we did not repurchase shares of our common stock. During the year ended December 31, 2018, we repurchased 0.1 million shares of our common stock at cost of $11.3 million. Under the provisions of the repurchase plan, we are authorized to repurchase approximately 7.3 million additional shares at December 31, 2020. 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 number of shares, and the plan may 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.

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 $111.9 million in 2020, $101.2 million in 2019 and $81.9 million in 2018. On May 16, 2017, our stockholders approved the 2017 Long-Term Incentive Plan (which we refer to as the LTIP), which replaced our previous stockholder-approved 2014 Long-Term Incentive Plan. All of our officers, employees and non-employee 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 11.4 million shares (less any shares of restricted stock issued under the LTIP - 2.3 million shares of our common stock were available for this purpose as of December 31, 2020) were available for grant under the LTIP at December 31, 2020. Our employee stock purchase plan allows our employees to purchase our common stock at 95% of its fair market value. Proceeds from the issuance of our common stock related to these plans have contributed favorably to net cash provided by financing activities in the years ended December 31, 2020, 2019 and 2018, and we believe this favorable trend will continue in the foreseeable future.

We 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 historically have matched 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. Beginning in 2021, the amount matched by the company will be discretionary and annually determined by management. 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 and can be funded in cash or company stock. We expensed (net of plan forfeitures) $63.6 million, $59.4 million and $53.9 million related to the plan in 2020, 2019 and 2018, respectively. Our board of directors has authorized the use of common stock to fund our 2020 employer matching contributions to the 401(k) plan, which we plan to do in February 2021.

Outlook - We believe that we have sufficient capital and access to additional capital to meet our short- and long-term cash flow needs.

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Contractual Obligations and Commitments

In connection with our investing and operating activities, we have entered into certain contractual obligations and commitments. See Notes 8, 14 and 17 to our 2020 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, 2020 are as follows (in millions):

Payments Due by Period

Credit Agreement — — — — — — —

Premium Financing Debt Facility 203.6 — — — — — 203.6

Less sublease arrangements (0.3 ) (0.3 ) (0.2 ) (0.2 ) (0.2 ) (0.5 ) (1.7 )

The amounts presented in the table above may not necessarily reflect our actual future cash funding requirements, because the actual timing of the future payments made may vary from the stated contractual obligation. As of December 31, 2020, we had a $48.2 million accrued liability related to the Ashton Tiffany acquisition, that is not in the foregoing table, that may be settled using shares of our common stock in early February 2021.

In addition, due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2020, we are unable to make reasonably reliable estimates of the period in which cash settlements may be made with the respective taxing authorities. See Note 19 to our 2020 consolidated financial statements for a discussion on income taxes.

See Note 8 to our 2020 consolidated financial statements for a discussion of the terms of the Credit Agreement and note purchase agreements.

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, 2020 are as follows (in millions):

Amount of Commitment Expiration by Period

Letters of credit $ — $ — $ — $ — $ — $ 18.4 $ 18.4

Since commitments may expire unused, the amounts presented in the table above do not necessarily reflect our actual future cash funding requirements. See Note 17 to our 2020 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 but one of the letters of credit represent multiple year commitments that have annual, automatic renewing provisions and are classified by the latest commitment date.

On December 23, 2020, we signed a definitive agreement to acquire 100% of the equity of The Bollington Wilson Group (which we refer to as Bollington) headquartered in Sale, Greater Manchester, U.K., for approximately $330.0 million of cash consideration. The transaction is subject to regulatory approval, which we received on January 26, 2021, and is expected to close in February 2021.

Since January 1, 2002, we have acquired 583 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 2016 to 2020 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

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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 $1,128.1 million, of which $592.2 million was recorded in our consolidated balance sheet as of December 31, 2020, based on the estimated fair value of the expected future payments to be made, of which approximately $493.7 million can be settled in cash or stock at our option and $98.5 million must be settled in cash.

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, 2020 and 2019 that was recourse to us.

At December 31, 2020, we had posted two letters of credit totaling $9.4 million, in the aggregate, related to our self-insurance deductibles, for which we have recorded a liability of $17.5 million. We have an equity investment in a rent-a-captive facility, which we use as a placement facility for certain of our insurance brokerage operations. At December 31, 2020, we had posted seven letters of credit totaling $7.5 million to allow certain of our captive operations to meet minimum statutory surplus requirements plus additional collateral related to premium and claim funds held in a fiduciary capacity, one letter of credit totaling $1.0 million for collateral related to claim funds held in a fiduciary capacity by a recent acquisition and one letter of credit totaling $0.5 million as a security deposit for a 2015 acquisition’s lease. These letters of credit have never been drawn upon.

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, 2020 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 cash equivalents as of December 31, 2020 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, 2020.

As of December 31, 2020, we had $4,348.0 million of borrowings outstanding under our various note purchase agreements. The aggregate estimated fair value of these borrowings at December 31, 2020 was $5,018.9 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 purpose of our analysis, the average BBB rate was assumed to be the appropriate borrowing rate for us.

We estimated market risk as the potential impact on the value of the debt recorded in our consolidated balance sheet based on a hypothetical one-percentage point change in our weighted average borrowing rate as of December 31, 2020. A one-percentage point decrease would result in an estimated fair value of $5,345.9 million, or $997.9 million more than their current carrying value. A one-percentage point increase would result in an estimated fair value of $4,720.0 million, or $372.0 million more than their current carrying value.

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As of December 31, 2020, we had no borrowings outstanding under our Credit Agreement and $203.6 million of borrowings outstanding under our Premium Financing Debt Facility. 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, 2020. Because these are short-term borrowings with variable interest rates, the estimated fair values of these borrowings approximate 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. Please see Item 1A, “Risk Factors,” for additional information regarding potential foreign exchange rate risks arising from Brexit. In addition, we are subject to foreign currency exchange rate risk from our Australian, Canadian, Indian, Jamaican, New Zealand, Norwegian, Singaporean and various Caribbean and Latin American 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 2020 (a weakening of the U.S. dollar), earnings before income taxes would have increased by approximately $25.1 million. Assuming a hypothetical favorable change of 10% in the average foreign currency exchange rate for 2020 (a strengthening of the U.S. dollar), earnings before income taxes would have decreased by approximately $19.8 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 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, Norway and the U.K., we have periodically purchased financial instruments to minimize our exposure to this risk. During 2020, 2019 and 2018, we had several monthly put/call options in place with an external financial institution that were designed to hedge a significant portion of our future U.K. currency revenues through various future payment dates. In addition, during 2020, 2019 and 2018, 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 Indian 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. All of these hedges are accounted for in accordance with ASC Topic 815, “Derivatives and Hedging”, and periodically are tested for effectiveness in accordance with such guidance. In the scenario where such hedge does not pass the effectiveness test, the hedge will be re-measured at the stated point and the appropriate loss, if applicable, would be recognized. For the year ended December 31, 2020 there has been no such effect on our consolidated financial presentation. The impact of these hedging strategies was not material to our consolidated financial statements for 2020, 2019 and 2018. See Note 21 to our 2020 consolidated financial statements for the changes in fair value of these derivative instruments reflected in comprehensive earnings in 2020, 2019 and 2018.

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Item 8. Financial Statements and Supplementary Data.

Arthur J. Gallagher & Co.

Consolidated Statement of Earnings

(In millions, except per share data)

Year Ended December 31,

Net (losses) gains on divestitures (5.8 ) 75.3 10.2

Other net (losses) revenue (0.4 ) (2.9 ) 0.9

Change in estimated acquisition earnout payables (32.9 ) 15.3 9.6

Provision (benefit) for income taxes 12.8 (89.7 ) (196.5 )

Net earnings attributable to noncontrolling interests 39.3 47.0 42.4

Net earnings attributable to controlling interests $ 818.8 $ 668.8 $ 633.5

Basic net earnings per share $ 4.29 $ 3.60 $ 3.47

Dividends declared per common share 1.80 1.72 1.64

See notes to consolidated financial statements.

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Arthur J. Gallagher & Co.

Consolidated Statement of Comprehensive Earnings

(In millions)

Year Ended December 31,

Change in pension liability, net of taxes 0.4 4.7 (10.3 )

Comprehensive earnings attributable to noncontrolling interests 39.7 47.3 40.4

See notes to consolidated financial statements

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Arthur J. Gallagher & Co.

Consolidated Balance Sheet

(In millions)

December 31,

Cash and cash equivalents $ 664.6 $ 604.8

Amortizable intangible assets - net 2,399.9 2,318.7

Premiums payable to underwriting enterprises $ 7,784.6 $ 6,348.5

Accrued compensation and other accrued liabilities 1,596.2 1,347.8

Corporate related borrowings - current 75.0 620.0

Corporate related borrowings - noncurrent 4,266.0 3,816.1

Deferred revenue - noncurrent 65.7 69.7

Lease liabilities - noncurrent 320.9 340.9

Stockholders' equity:

Accumulated other comprehensive loss (643.6 ) (759.6 )

Stockholders' equity attributable to controlling interests 6,186.2 5,155.5

Stockholders' equity attributable to noncontrolling interests 46.5 60.0

Total liabilities and stockholders' equity $ 22,331.4 $ 19,634.8

See notes to consolidated financial statements.

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Arthur J. Gallagher & Co.

Consolidated Statement of Cash Flows

(In millions)

Year Ended December 31,

Cash flows from operating activities:

Net loss (gain) on investments and other 6.3 (72.0 ) (8.4 )

Change in estimated acquisition earnout payables (32.9 ) 15.3 9.6

Amortization of deferred compensation and restricted stock 60.9 47.2 41.6

Stock-based and other noncash compensation expense 13.6 14.0 13.7

Effect of changes in foreign exchange rate 2.9 6.7 (2.9 )

Net change in premium and fees receivable (796.5 ) (434.7 ) (783.1 )

Net change in premiums payable to underwriting enterprises 1,154.2 461.6 819.7

Net change in other current assets (77.1 ) (60.5 ) (134.7 )

Net change in accrued compensation and other accrued liabilities 91.8 77.0 44.9

Net change in income taxes payable 51.8 35.5 (46.0 )

Net change in deferred income taxes (175.6 ) (150.7 ) (216.0 )

Net change in other noncurrent assets and liabilities 28.6 (6.6 ) (22.0 )

Cash flows from investing activities:

Net proceeds from sales of operations/books of business 8.2 81.0 14.5

Net funding of investment transactions (1.4 ) (52.0 ) (15.6 )

Net cash used by investing activities (416.8 ) (1,376.6 ) (910.3 )

Cash flows from financing activities:

Payments on acquisition earnouts (38.8 ) (46.3 ) (62.1 )

Repurchases of common stock - - (11.3 )

Payments to noncontrolling interests (84.4 ) (75.4 ) (54.2 )

Net borrowings on premium financing debt facility 16.0 19.2 32.9

Net borrowings of corporate related long-term debt 424.9 725.0 400.0

Debt acquisition costs (1.3 ) (3.9 ) (1.3 )

Settlements on terminated interest rate swaps (66.0 ) (15.3 ) 2.9

Net cash (used) provided by financing activities (505.1 ) 638.4 162.0

See notes to consolidated financial statements.

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Arthur J. Gallagher & Co.

Consolidated Statement of Stockholders’ Equity

(In millions)

Capital in Accumulated Other

Common Stock Excess of Retained Comprehensive Noncontrolling

Shares Amount Par Value Earnings Earnings (Loss) Interests Total

Dividends paid to noncontrolling interests - - - - - (38.0 ) (38.0 )

Foreign currency translation - - - - (197.7 ) (2.0 ) (199.7 )

Compensation expense related to stock option plan grants - - 13.7 - - - 13.7

Common stock issued in:

Employee stock purchase plan 0.4 0.4 22.9 - - - 23.3

Deferred compensation and restricted stock 0.3 0.3 15.5 - - - 15.8

Common stock repurchases (0.1 ) (0.1 ) (11.2 ) - - - (11.3 )

Cash dividends declared on common stock - - - (303.3 ) - - (303.3 )

Dividends paid to noncontrolling interests - - - - - (43.0 ) (43.0 )

Foreign currency translation - - - - 44.2 0.3 44.5

Compensation expense related to stock option plan grants - - 14.0 - - - 14.0

Common stock issued in:

Employee stock purchase plan 0.3 0.3 27.2 - - - 27.5

Deferred compensation and restricted stock 0.1 0.1 4.6 - - - 4.7

Cash dividends declared on common stock - - - (323.9 ) - - (323.9 )

See notes to consolidated financial statements.

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Arthur J. Gallagher & Co.

Consolidated Statement of Stockholders’ Equity (continued)

(In millions)

Capital in Accumulated Other

Common Stock Excess of Retained Comprehensive Noncontrolling

Shares Amount Par Value Earnings Earnings (Loss) Interests Total

Dividends paid to noncontrolling interests - - - - - (46.8 ) (46.8 )

Foreign currency translation - - - - 183.7 0.4 184.1

Compensation expense related to stock option plan grants - - 13.6 - - - 13.6

Common stock issued in:

Employee stock purchase plan 0.5 0.5 33.7 - - - 34.2

Deferred compensation and restricted stock 0.3 0.3 9.4 - - - 9.7

Cash dividends declared on common stock - - - (348.4 ) - - (348.4 )

See notes to consolidated financial statements.

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Arthur J. Gallagher & Co.

Notes to Consolidated Financial Statements

December 31, 2020

1. Summary of Significant Accounting Policies

Terms Used in Notes to Consolidated Financial Statements

ASC - Accounting Standards Codification.

ASU - Accounting Standards Update.

FASB - The Financial Accounting Standards Board.

GAAP - U.S. generally accepted accounting principles.

IRC - Internal Revenue Code.

IRS - Internal Revenue Service.

Topic 606 - ASU No. 2014-09, Revenue from Contracts with Customers.

Underwriting enterprises - Insurance companies, reinsurance companies and various other forms of risk-taking entities, including intermediaries of underwriting enterprises.

VIE - Variable interest entity.

Nature of Operations

Arthur J. Gallagher & Co. and its subsidiaries, collectively referred to herein as we, our, us or the company, provide insurance brokerage, consulting and third party claims settlement and administration services to both domestic and international entities. We have three reportable segments: brokerage, risk management and corporate. Our brokers, agents and administrators act as intermediaries between underwriting enterprises and our clients.

Our brokerage segment operations provide brokerage and consulting services to companies and entities of all types, including commercial, not-for-profit, public entities, and, to a lesser extent, individuals, in the areas of insurance placement, risk of loss management, and management of employer sponsored benefit programs. Our risk management segment operations provide contract claim settlement, claim administration, loss control services and risk management consulting for commercial, not‐for‐profit, captive and public entities, and various other organizations that choose to self-insure property/casualty coverages or choose to use a third-party claims management organization rather than the claim services provided by underwriting enterprises. The corporate segment reports the financial information related to our debt and other corporate costs, clean energy investments, external acquisition-related expenses and the impact of foreign currency translation. Clean energy investments consist of our investments in limited liability companies that own35 commercial clean coal production facilities producing refined coal using Chem-Mod LLC’s proprietary technologies. We believe these operations produce refined coal that qualifies for tax credits under IRC Section 45.

We do not assume underwriting risk on a net basis, other than with respect to de minimis amounts necessary to provide minimum or regulatory capital to organize captives, pools, specialized underwriters or risk-retention groups. Rather, capital necessary for covering losses is provided by underwriting enterprises.

Investment income and other revenues are primarily generated from our premium financing operations, our invested cash and restricted cash we hold on behalf of our clients, as well as clean energy investments. In addition, our share of the net earnings related to partially owned entities that are accounted for using the equity method is included in investment income.

We are headquartered in Rolling Meadows, Illinois, have operations in 49 countries and offer client-service capabilities in more than 150 countries globally through a network of correspondent insurance brokers and consultants.

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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 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.

In the preparation of our consolidated financial statements as of December 31, 2020, 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 and/or disclosure in the notes therein.

Use of Estimates

The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These accounting principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses, and the disclosure of contingent assets and liabilities at the date of our consolidated financial statements. We periodically evaluate our estimates and assumptions, including those relating to the valuation of goodwill and other intangible assets, right-of-use assets, investments (including our IRC Section 45 investments), income taxes, revenue recognition, deferred costs, 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. 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 and fees as primarily specified in a written contract, or unwritten business understanding, with our clients or underwriting enterprises. We also recognize investment income over time from our invested assets and invested assets we hold on behalf of our clients or underwriting enterprises.

BROKERAGE SEGMENT

Our brokerage segment generates revenues by:

The vast majority of our brokerage contracts and service understandings are for a period of one year or less.

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Commissions and fees

The primary source of revenues for our brokerage services is commissions from underwriting enterprises, based on a percentage of premiums paid by our clients, or fees received from clients based on an agreed level of service usually in lieu of commissions. These commissions and fees revenues are substantially recognized at a point in time on the effective date of the associated policies when control of the policy transfers to the client, as well as deferring certain revenues to reflect delivery of services over the contract period.

Commissions are fixed at the contract effective date and generally are based on a percentage of premiums for insurance coverage or employee headcount for employer sponsored benefit plans. Commissions depend upon a large number of factors, including the type of risk being placed, the particular underwriting enterprise’s demand, the expected loss experience of the particular risk of coverage, and historical benchmarks surrounding the level of effort necessary for us to place and service the insurance contract. Rather than being tied to the amount of premiums, fees are most often based on an expected level of effort to provide our services.

Whether we are paid a commission or a fee, the vast majority of our services are associated with the placement of an insurance (or insurance-like) contract. Accordingly, we recognize approximately 80% of our commission and fee revenues on the effective date of the underlying insurance contract. The amount of revenue we recognize is based on our costs to provide our services up and through that effective date, including an appropriate estimate of our profit margin on a portfolio basis (a practical expedient as defined in Topic 606). Based on the proportion of additional services we provide in each period after the effective date of the insurance contract, including an appropriate estimate of our profit margin, we recognize approximately 15% of our commission and fee revenues in the first three months, and the remaining 5% thereafter. These periods may be different than the underlying premium payment patterns of the insurance contracts, but the vast majority of our services are fully provided within one year of the insurance contract effective date.

For consulting and advisory services, we recognize our revenue in the period in which we provide the service or advice. For management and administrative services, our revenue is recognized ratably over the contract period consistent with the performance of our obligations, mostly over an annual term.

Supplemental revenues

Certain underwriting enterprises may pay us additional revenues for the volume of premium placed with them and for insights into our sales pipeline, our sales capabilities or our risk selection knowledge. These amounts are in excess of the commission and fee revenues discussed above, and not all business we place with underwriting enterprises is eligible for supplemental revenues. Unlike contingent revenues, discussed below, these revenues are primarily a fixed amount or fixed percentage of premium of the underlying eligible insurance contracts. For supplemental revenue contracts based on a fixed percentage of premium, our obligation to the underwriting enterprise is substantially completed upon the effective date of the underlying insurance contract and revenue is fully earned at that time. For supplemental revenue contracts based on a fixed amount, revenue is recognized ratably over the contract period consistent with the performance of our obligations, almost always over an annual term. We receive these revenues on a quarterly or annual basis.

Contingent revenues

Certain underwriting enterprises may pay us additional revenues for our sales capabilities, our risk selection knowledge, or our administrative efficiencies. These amounts are in excess of the commission or fee revenues discussed above, and not all business we place with participating underwriting enterprises is eligible for contingent revenues. Unlike supplemental revenues, also discussed above, these revenues are variable, generally based on growth, the loss experience of the underlying insurance contracts, and/or our efficiency in processing the business. We generally operate under calendar year contracts, but we do not receive these revenues from the underwriting enterprises until the following calendar year, generally in the first and second quarters, after verification of the performance indicators outlined in the contracts. Accordingly, during each reporting period, we must make our best estimate of amounts we have earned using historical averages and other factors to project such revenues. We base our estimates each period on a contract-by-contract basis where available. In certain cases, it is impractical to assess a very large number of smaller contingent revenue contracts, so we use a historical portfolio estimate in aggregate (a practical expedient as defined in Topic 606). Because our expectation of the ultimate contingent revenue amounts to be earned can vary from period to period, especially in contracts sensitive to loss ratios, our estimates might change significantly from quarter to quarter. For example, in circumstances where our revenues are dependent on a full calendar year loss ratio, adverse loss experience in the fourth quarter could not only negate revenue earnings in the fourth quarter, but also trigger the need to reverse revenues previously recognized during the prior quarters. Variable consideration is recognized when we conclude, based on all the facts and information available at the reporting date, that it is probable that a significant revenue reversal will not occur in future periods.

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Sub-brokerage costs

Sub-brokerage costs are excluded from our gross revenues in our determination of total revenues. Sub-brokerage cost represents commissions paid to sub-brokers related to the placement of certain business by our brokerage segment operations. We recognize this contra revenue in the same manner as the commission revenue to which it relates.

RISK MANAGEMENT SEGMENT

Revenues for our risk management segment are comprised of fees generally negotiated (i) on a per-claim basis, (ii) on a cost‐plus basis, or (iii) as performance-based fees. We also provide risk management consulting services that are recognized as the services are delivered.

Per-claim fees

Where we operate under a contract with our fee established on a per-claim basis, our obligation is to process claims for a term specified within the contract. Because it is impractical to recognize our revenues on an individual claim-by-claim basis, we recognize revenue plus an appropriate estimate of our profit margin on a portfolio basis by grouping claims with similar characteristics (a practical expedient as defined in Topic 606). We apply actuarially-determined, historical-based patterns to determine our future service obligations, without applying a present value discount.

Cost-plus fees

Where we provide services and generate revenues on a cost-plus basis, we recognize revenue over the contract period consistent with the performance of our obligations.

Performance-based fees

Certain clients pay us additional fee revenues for our efficiency in managing claims or on the basis of claim outcome effectiveness. These amounts are in excess of the fee revenues discussed above. These revenues are variable, generally based on performance metrics set forth in the underlying contracts. We generally operate under multi-year contracts with fiscal year measurement periods. We do not receive these fees, if earned, until the following year after verification of the performance metrics outlined in the contracts. Each period we base our estimates on a contract-by-contract basis. We must make our best estimate of amounts we have earned using historical averages and other factors to project such revenues. Variable consideration is recognized when we conclude that is it probable that a significant revenue reversal will not occur in future periods.

Reimbursements

Reimbursements represent amounts received from clients reimbursing us for certain third-party costs associated with providing our claims management services. In certain service partner relationships, we are considered a principal because we direct the third party, control the specified service and combine the services provided into an integrated solution. Given this principal relationship, we are required to recognize revenue gross and service partner vendor fees in the operating expense in our consolidated statement of earnings.

Deferred Costs

We incur costs to provide brokerage and risk management services. Those costs are either (i) costs to obtain a contract or (ii) costs to fulfill such contract, or (iii) all other costs.

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Investment income

Investment income primarily includes interest and dividend income (including interest income from our premium financing operations), which is accrued as it is earned. Net gains on divestitures 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 losses related to our equity portion of the pretax results of the clean coal production plants.

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 underwriting enterprises. 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 underwriting enterprises. 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, 2020.

Related to our third party administration business and in certain of our brokerage operations, 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 underwriting enterprises in the accompanying consolidated balance sheet.

Premiums and fees receivable

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 $9.9 million and $8.3 million at December 31, 2020 and 2019, 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 $10.1 million and $8.7 million at December 31, 2020 and 2019, 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.

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