Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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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 32 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 35 other countries and offer client-service capabilities in more than 150 countries globally through a network of correspondent brokers and consultants. In 2018, we expanded, and expect to continue to expand, our international operations through both acquisitions and organic growth. We generate approximately 70% of our revenues for the combined brokerage and risk management segments domestically, with the remaining 30% derived internationally, primarily in Australia, Bermuda, Canada, the Caribbean, New Zealand and the U.K. (based on 2018 revenues). We expect that our international revenue as a percentage of our total revenues in 2019 will be comparable to 2018. We have three reportable segments: brokerage, risk management and corporate, which contributed approximately 61%, 14% and 25%, respectively, to 2018 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.

Accounting Changes - Impact of New Revenue Recognition Accounting Standard

As a result of adopting a new revenue recognition accounting statement, we restated our consolidated financial statements and related information from amounts previously reported herein for 2017 and 2016. Notes 2 and 3 to our 2018 consolidated financial statements included in this report contains information regarding the impact the new revenue recognition accounting standard had on our financial presentation. We adopted the new standard as of January 1, 2018, using the full retrospective method to restate each prior reporting period presented. The cumulative effect of the adoption was an increase to retained earnings of $125.3 million as of January 1, 2016. While the adoption of the new standard did not have a material impact on the presentation of our consolidated results of operations on an annual basis, there was a material impact on the presentation of our results in certain quarters due to timing changes in the recognition of certain revenue and expenses. As a result, we did experience a different “seasonality” in our quarterly results after adoption of the new standard, with a shift in the timing of revenue recognized from the second, third and fourth quarters to the first quarter.

Summary of Financial Results - Year Ended December 31,

See the reconciliations of non-GAAP measures on pages 28 and 29.


	Year 2018						Year 2017						Change
	Reported			Adjusted			Reported			Adjusted			Reported			Adjusted
	GAAP			Non-GAAP			GAAP			Non-GAAP			GAAP			Non-GAAP
	(In millions, except per share data)
Brokerage Segment
Revenues	$	4,246.9		$	4,236.7		$	3,815.1		$	3,824.7			11	%		11	%
Organic revenues				$	3,960.2					$	3,749.0						5.6	%
Net earnings	$	573.2					$	414.7						38	%
Net earnings margin		13.5	%					10.9	%					+263 bpts
Adjusted EBITDAC				$	1,172.4					$	1,043.0						12	%
Adjusted EBITDAC margin					27.7	%					27.3	%					+40 bpts
Diluted net earnings per share	$	3.02		$	3.24		$	2.23		$	2.50			35	%		30	%
Risk Management Segment
Revenues	$	798.3		$	798.3		$	737.4		$	734.7			8	%		9	%
Organic revenues				$	786.3					$	734.2						7.1	%
Net earnings	$	70.4					$	55.7						26	%
Net earnings margin (before reimbursements)		8.8	%					7.6	%					+127 bpts
Adjusted EBITDAC				$	138.7					$	126.1						10	%
Adjusted EBITDAC margin (before reimbursements)					17.4	%					17.2	%					+21 bpts
Diluted net earnings per share	$	0.38		$	0.37		$	0.31		$	0.32			23	%		16	%
Corporate Segment
Diluted net earnings (loss) per share	$	—		$	(0.16	)	$	0.10		$	0.18
Total Company
Diluted net earnings per share	$	3.40		$	3.45		$	2.64		$	3.00			29	%		15	%

In our corporate segment, net after tax earnings from our clean energy investments was $118.6 million and $132.7 million in 2018 and 2017, respectively. Our current estimate of the 2019 annual net after tax earnings, including IRC Section 45 tax credits, which will be produced from all of our clean energy investments in 2019, is $105.0 million to $115.0 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.

The following provides information that management believes is helpful when comparing revenues, net earnings, EBITDAC and diluted net earnings per share for 2018 and 2017. In addition, these tables provide reconciliations to the most comparable GAAP measures for adjusted revenues, adjusted EBITDAC and adjusted diluted net earnings per share. Reconciliations of EBITDAC for the brokerage and risk management segments are provided on pages 35 and 41 of this filing.


Year Ended December 31 Reported GAAP to Adjusted Non-GAAP Reconciliation:
	Revenues Before Reimbursements						Net Earnings						EBITDAC						Diluted Net Earnings (Loss) Per Share
Segment	2018			2017			2018			2017			2018			2017			2018			2017			Chg
	(In millions, except per share data)
Brokerage, as reported	$	4,246.9		$	3,815.1		$	573.2		$	414.7		$	1,126.3		$	988.8		$	3.02		$	2.23			35	%
Gains on book sales		(10.2	)		(3.4	)		(7.9	)		(2.4	)		(10.2	)		(3.4	)		(0.04	)		(0.01	)
Acquisition integration		—			—			2.6			10.5			3.4			14.8			0.01			0.06
Workforce & lease termination		—			—			29.1			21.9			38.7			30.1			0.16			0.12
Acquisition related adjustments		—			—			16.3			16.7			14.2			9.1			0.09			0.09
Levelized foreign currency translation		—			13.0			—			1.8			—			3.6			—			0.01

Brokerage, as adjusted *		4,236.7			3,824.7			613.3			463.2			1,172.4			1,043.0			3.24			2.50			30	%

Risk Management, as reported		798.3			737.4			70.4			55.7			134.0			125.7			0.38			0.31			23	%
Workforce & lease termination		—			—			3.5			0.5			4.7			0.9			0.01			—
Acquisition related adjustments		—			—			(4.3	)		0.8			—			—			(0.02	)		0.01
Levelized foreign currency translation		—			(2.7	)		—			(0.2	)		—			(0.5	)		—			—

Risk Management, as adjusted *		798.3			734.7			69.6			56.8			138.7			126.1			0.37			0.32			16	%

Corporate, as reported		1,747.2			1,560.5			32.3			46.5			(213.9	)		(213.9	)		—			0.10
Corporate legal entity restructuring		—			—			(22.0	)		—			—			—			(0.12	)		—
Impact of U.S. tax reform		—			—			(8.9	)		(1.5	)		—			2.5			(0.04	)		(0.01	)
Litigation settlement		—			—			—			8.8			—			11.1			—			0.05
Home office lease termination/move		—			—			—			7.9			—			13.2			—			0.04

Corporate, as adjusted *		1,747.2			1,560.5			1.4			61.7			(213.9	)		(187.1	)		(0.16	)		0.18

Total Company, as reported	$	6,792.4		$	6,113.0		$	675.9		$	516.9		$	1,046.4		$	900.6		$	3.40		$	2.64			29	%

Total Company, as adjusted *	$	6,782.2		$	6,119.9		$	684.3		$	581.7		$	1,097.2		$	982.0		$	3.45		$	3.00			15	%

Total Brokerage & Risk
Management, as reported	$	5,045.2		$	4,552.5		$	643.6		$	470.4		$	1,260.3		$	1,114.5		$	3.40		$	2.54			34	%

Total Brokerage & Risk
Management, as adjusted *	$	5,035.0		$	4,559.4		$	682.9		$	520.0		$	1,311.1		$	1,169.1		$	3.61		$	2.82			28	%

For 2018, the pretax impact of the brokerage segment adjustments totals $53.5 million, with a corresponding adjustment to the provision for income taxes of $13.4 million relating to these items. The pretax impact of the risk management segment adjustments totals $(1.3) million, with a corresponding adjustment to the provision for income taxes of $(0.5) million relating to these items. There was no pretax impact of the corporate segment adjustments, with an adjustment to the benefit for income taxes of $30.9 million.

For 2017, the pretax impact of the brokerage segment adjustments totals $69.2 million, with a corresponding adjustment to the provision for income taxes of $20.7 million relating to these items. The pretax impact of the risk management segment adjustments totals $1.7 million, with a corresponding adjustment to the provision for income taxes of $0.6 million relating to these items. The pretax impact of the corporate segment adjustments totals $26.8 million, with a corresponding adjustment to the provision for income taxes of $11.6 million relating to these items.

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

(In millions except share and per share data)


										Net Earnings		Net Earnings
	Earnings			Provision						(Loss)		(Loss)			Diluted Net
	(Loss)			(Benefit)						Attributable to		Attributable to			Earnings
	Before Income			for Income			Net			Noncontrolling		Controlling			(Loss)
	Taxes			Taxes			Earnings			Interests		Interests			per Share
Year Ended Dec 31, 2018
Brokerage, as reported	$	764.2		$	191.0		$	573.2		$	10.7	$	562.5		$	3.02
Gains on book sales		(10.2	)		(2.3	)		(7.9	)		—		(7.9	)		(0.04	)
Acquisition integration		3.4			0.8			2.6			—		2.6			0.01
Workforce & lease termination		38.7			9.6			29.1			—		29.1			0.16
Acquisition related adjustments		21.6			5.3			16.3			—		16.3			0.09

Brokerage, as adjusted	$	817.7		$	204.3		$	613.3		$	10.7	$	602.6		$	3.24

Risk Management, as reported	$	95.7		$	25.3		$	70.4		$	—	$	70.4		$	0.38
Workforce & lease termination		4.7			1.2			3.5			—		3.5			0.01
Acquisition related adjustments		(6.0	)		(1.7	)		(4.3	)		—		(4.3	)		(0.02	)

Risk Management, as adjusted	$	94.4		$	24.8		$	69.6		$	—	$	69.6		$	0.37

Corporate, as reported	$	(380.5	)	$	(412.8	)	$	32.3		$	31.7	$	0.6		$	—
Corporate legal entity restructuring		—			22.0			(22.0	)		—		(22.0	)		(0.12	)
Impact of U.S. tax reform		—			8.9			(8.9	)		—		(8.9	)		(0.04	)

Corporate, as adjusted	$	(380.5	)	$	(381.9	)	$	1.4		$	31.7	$	(30.3	)	$	(0.16	)

Year Ended Dec 31, 2017
Brokerage, as reported	$	635.9		$	221.2		$	414.7		$	7.6	$	407.1		$	2.23
Gains on book sales		(3.4	)		(1.0	)		(2.4	)		—		(2.4	)		(0.01	)
Acquisition integration		14.8			4.3			10.5			—		10.5			0.06
Workforce & lease termination		30.1			8.2			21.9			—		21.9			0.12
Acquisition related adjustments		24.9			8.2			16.7			—		16.7			0.09
Levelized foreign currency translation		2.8			1.0			1.8			—		1.8			0.01

Brokerage, as adjusted	$	705.1		$	241.9		$	463.2		$	7.6	$	455.6		$	2.50

Risk Management, as reported	$	90.1		$	34.4		$	55.7		$	—	$	55.7		$	0.31
Workforce & lease termination		0.9			0.4			0.5			—		0.5			—
Acquisition related adjustments		1.1			0.3			0.8			—		0.8			0.01
Levelized foreign currency translation		(0.3	)		(0.1	)		(0.2	)		—		(0.2	)		—

Risk Management, as adjusted	$	91.8		$	35.0		$	56.8		$	—	$	56.8		$	0.32

Corporate, as reported	$	(366.2	)	$	(412.7	)	$	46.5		$	28.0	$	18.5		$	0.10
Impact of U.S. tax reform		2.5			4.0			(1.5	)		—		(1.5	)		(0.01	)
Litigation settlement		11.1			2.3			8.8			—		8.8			0.05
Home office lease termination/move		13.2			5.3			7.9			—		7.9			0.04

Corporate, as adjusted	$	(339.4	)	$	(401.1	)	$	61.7		$	28.0	$	33.7		$	0.18

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. According to industry estimates, these alternative markets now account for 50% of the total U.S. commercial property/casualty market. Our brokerage units are very active in these markets as well. While increased use by insureds of these alternative markets historically has reduced commission revenue to us, such trends generally have been accompanied by new sales and renewal increases in the areas of risk management, claims management, captive insurance and self-insurance services and related growth in fee revenue. Inflation tends to increase the levels of insured values and risk exposures, resulting in higher overall premiums and higher commissions. However, the impact of hard and soft market fluctuations has historically had a greater impact on changes in premium rates, and therefore on our revenues, than inflationary pressures.

The Council of Insurance Agents & Brokers (which we refer to as the CIAB) fourth quarter 2018 survey had not been issued as of the date of this report. The first three 2018 quarterly surveys indicated that U.S. commercial property/casualty rates increased by 1.7%, 1.5%, and 1.6% on average across all lines, for the first, second and third quarters of 2018, respectively. We expect a similar trend to be noted when the CIAB fourth quarter 2018 survey report is issued, which would signal a relatively stable market. The CIAB represents the leading domestic and international insurance brokers, who write approximately 85% of the commercial property/casualty premiums in the U.S.

In 2019, we expect modest increases in property/casualty rates and exposures similar to the modest increases observed during 2018. Within our employee benefits and consulting brokerage operations, we believe that employment growth, a tightening labor market and the complexity surrounding the healthcare regulatory environment bode well for the continued demand of our solutions. In addition, our history of strong new business generation, solid retentions and enhanced value-added services for our carrier partners should all result in further organic growth opportunities around the world. Internationally, in the U.K. and Canadian retail property/casualty markets, pricing is similar to the U.S., pricing is flat in London Specialty, and we are experiencing an improving market in Australia and New Zealand. Overall, we believe that in a stable to modestly positive rate environment with growing exposure units, our professionals can demonstrate their expertise and high-quality, value-added capabilities by strengthening our clients’ insurance portfolios. Based on our experience, insurance carriers appear to be making rational pricing decisions. In lines and accounts where rate increases or decreases are warranted, the underwriters are pricing accordingly. As carriers reach their profitability targets in lines, rates may start to flatten in those lines. In summary, in this environment, clients can still obtain coverage, businesses continue to stay in standard-line markets and there is adequate capacity in the insurance market.

Clean energy investments - We have investments in limited liability companies that own 29 clean coal production plants developed by us and five clean coal production plants we purchased from a third party on September 1, 2013. All 34 plants produce refined coal using propriety technologies owned by Chem-Mod. We believe that the production and sale of refined coal at these plants are qualified to receive refined coal tax credits under IRC Section 45. The 14 plants which were placed in service prior to December 31, 2009 (which we refer to as the 2009 Era Plants) can receive tax credits through 2019 and the 20 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.

Thirty-one plants are under long-term production contracts with several utilities. We are not in current active negotiations for long-term production contracts for two of the 2009 Era Plants. For one of the 2011 Era Plants, we are in early stages of negotiations for a long-term production contract.

We also own a 46.5% controlling interest in Chem-Mod, which has been marketing The Chem-Mod™ Solution proprietary technologies principally to refined fuel plants that sell refined fuel to coal-fired power plants owned by utility companies, including those plants in which we hold interests. Based on current production estimates provided by licensees, Chem-Mod could generate for us approximately $5.0 million to $6.0 million of net after tax earnings per quarter.

Our current estimate of the 2019 annual net after tax earnings, including IRC Section 45 tax credits, which will be produced from all of our clean energy investments in 2019, is $105.0 million to $115.0 million.

All estimates set forth above regarding the future results of our clean energy investments are subject to significant risks, including those set forth in the risk factors regarding our IRC Section 45 investments under Item 1A, “Risk Factors.”

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (which we refer to as GAAP), which require management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We believe the following significant accounting policies may involve a higher degree of judgment and complexity. See Note 1 to our 2018 consolidated financial statements for other significant accounting policies.

Revenue Recognition - See Revenue Recognition in Notes 1, 2 and 3 to our 2018 consolidated financial statements for information with respect to the impacts a new accounting standard, relating to revenue recognition, had on our financial position and operating results.

Income Taxes - See Income Taxes in Notes 1 and 18 to our 2018 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 18 to our 2018 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. In fourth quarter 2017, new tax legislation was enacted in the U.S., which lowered the U.S. corporate tax rate from 35.0% to 21.0% effective January 1, 2018. Accordingly, we adjusted our deferred tax asset and liability balances in 2017 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 18 to our 2018 consolidated financial statements related to changes in our valuation allowances.

Intangible Assets/Earnout Obligations - See Intangible Assets in Note 1 to our 2018 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 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 4 to our 2018 consolidated financial statements for additional discussion on our 2018 business combinations.

Business Combinations and Dispositions

See Note 4 to our 2018 consolidated financial statements for a discussion of our 2018 business combinations. We did not have any material dispositions in 2018, 2017 and 2016.

On January 8, 2019, we sold a travel insurance brokerage operation that was initially purchased in 2014. In the first quarter of 2019, we expect to recognize a one-time, net gain between $0.20 and $0.23 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) for the brokerage and risk management segments, adjusted revenues, adjusted compensation and operating expenses, adjusted compensation expense ratio, adjusted operating expense ratio and organic revenue measures for each operating segment. These measures are not in accordance with, or an alternative to, the GAAP information provided in this report. We believe that these presentations provide useful information to management, analysts and investors regarding financial and business trends relating to our results of operations and financial condition. Our industry peers may provide similar supplemental non-GAAP information 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. As disclosed in our most recent Proxy Statement, 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 2018, 2017 and 2016 information, presented on the following pages, provides stockholders and other interested persons with useful information regarding certain financial metrics that may assist such persons in analyzing our operating results as they develop a future earnings outlook for us. The after-tax amounts related to the adjustments were computed using the normalized effective tax rate for each respective period.

	•		Adjusted revenues and expenses - We define these measures as revenues (for the brokerage segment), revenues before reimbursements (for the risk management segment) compensation expense and operating expense, respectively, each adjusted to exclude the following:

	•		Net gains realized from sales of books of business, which are primarily net proceeds received related to sales of books of business and other divestiture transactions.

	•		Acquisition integration costs, which include costs related to certain of our large acquisitions, outside the scope of our usual tuck-in strategy, not expected to occur on an ongoing basis in the future once we fully assimilate the applicable acquisition. These costs are typically associated with redundant workforce, extra lease space, duplicate services and external costs incurred to assimilate the acquisition with our IT related systems.

	•		Workforce related charges, which primarily include severance costs related to employee terminations and other costs associated with redundant workforce.

	•		Lease termination related charges, which primarily include costs related to terminations of real estate leases and abandonment of leased space.

	•		Acquisition related adjustments, which include change in estimated acquisition earnout payables adjustments, impacts of acquisition valuation true-ups, impairment charges and acquisition related compensation charges.

	•		The impact of foreign currency translation, as applicable. The amounts excluded with respect to foreign currency translation are calculated by applying current year foreign exchange rates to the same periods in the prior year.

	•		For the corporate legal entity restructuring, impact of U.S. tax reform, litigation settlement and home office lease termination/move for the corporate segment, see page 50 for a more detailed description of their nature.

	•		Adjusted ratios - Adjusted compensation expense ratio and adjusted operating expense ratio, respectively, each divided by adjusted revenues.

Non-GAAP Earnings Measures

	•		EBITDAC and EBITDAC Margin - EBITDAC is net earnings before interest, income taxes, depreciation, amortization and the change in estimated acquisition earnout payables and EBITDAC margin is EBITDAC divided by total revenues (for the brokerage segment) and revenues before reimbursements (for the risk management segment). These measures for the brokerage and risk management segments provide a meaningful representation of our operating performance and, for the overall business, provide a meaningful way to measure its financial performance on an ongoing basis.

	•		Adjusted EBITDAC and Adjusted EBITDAC Margin - Adjusted EBITDAC is EBITDAC adjusted to exclude net gains realized from sales of books of business, acquisition integration costs, workforce related charges, lease termination related charges, acquisition related adjustments, and the period-over-period impact of foreign currency translation, as applicable, and Adjusted EBITDAC margin is Adjusted EBITDAC divided by total adjusted revenues (defined above). These measures for the brokerage and risk management segments provide a meaningful representation of our operating performance, and are also presented to improve the comparability of our results between periods by eliminating the impact of the items that have a high degree of variability.

	•		Adjusted EPS for the Brokerage and Risk Management segments - Net earnings adjusted to exclude the after-tax impact of net gains realized from sales of books of business, acquisition integration costs, workforce related charges, lease termination related charges and acquisition related adjustments, the period-over-period impact of foreign currency translation, as applicable, divided by diluted weighted average shares outstanding. This measure provides a meaningful representation of our operating performance (and as such should not be used as a measure of our liquidity), and is also presented to improve the comparability of our results between periods by eliminating the impact of the items that have a high degree of variability.

Organic Revenues (a non-GAAP Measure) - For the brokerage segment, organic change in base commission and fee revenues, supplemental revenues and contingent revenues excludes the first twelve months of such revenues generated from acquisitions and such revenues related to operations disposed of 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 2019 and beyond. We have historically viewed organic revenue growth as an important indicator when assessing and evaluating the performance of our brokerage and risk management segments. We also believe that using this non-GAAP 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 and operating expenses, EBITDAC, EBITDAC margin, adjusted EBITDAC, adjusted EBITDAC margin, adjusted diluted net earnings per share and organic revenue measures.

Brokerage Segment

The brokerage segment accounted for 61% of our revenue in 2018. Our brokerage segment is primarily comprised of retail and wholesale brokerage operations. Our brokerage segment generates revenues by:

	(i)	Identifying, negotiating and placing all forms of insurance or reinsurance coverage, as well as providing risk-shifting, risk-sharing and risk-mitigation consulting services, principally related to property/casualty, life, health, welfare and disability insurance. We also provide these services through, or in conjunction with, other unrelated agents and brokers, consultants and management advisors.

	(ii)	Acting as an agent or broker for multiple underwriting enterprises by providing services such as sales, marketing, selecting, negotiating, underwriting, servicing and placing insurance coverage on their behalf.

	(iii)	Providing consulting services related to health and welfare benefits, voluntary benefits, executive benefits, compensation, retirement planning, institutional investment and fiduciary, actuarial, compliance, private insurance exchange, human resource technology, communications and benefits administration.

	(iv)	Providing management and administrative services to captives, pools, risk-retention groups, healthcare exchanges, small underwriting enterprises, such as accounting, claims and loss processing assistance, feasibility studies, actuarial studies, data analytics and other administrative services.

The primary source of revenues for our brokerage services is commissions from underwriting enterprises, based on a percentage of premiums paid by our clients, or fees received from clients based on an agreed level of service usually in lieu of commissions. Commissions are fixed at the contract effective date and generally are based on a percentage of premiums for insurance coverage or employee head count 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 investigation - A portion of our brokerage business includes the development and management of “micro-captives,” through operations we acquired in 2010 in our acquisition of the assets of Tribeca Strategic Advisors (which we refer to as Tribeca). A “captive” is an underwriting enterprise that insures the risks of its owner, affiliates or a group of companies. Micro-captives are captive underwriting enterprises that are subject to taxation only on net investment income under IRC Section 831(b). Our micro-captive advisory services are under investigation by the Internal Revenue Service (which we refer to as IRS). Additionally, the IRS has initiated audits for the 2012 tax year of over 100 of the micro-captive underwriting enterprises organized and/or managed by us. Among other matters, the IRS is investigating whether we have been acting as a tax shelter promoter in connection with these operations. While the IRS has not made specific allegations relating to our operations or the pre-acquisition activities of Tribeca, an adverse determination could subject us to penalties and negatively affect our defense of the class action lawsuit described below. We may also experience lost earnings due to the negative effect of an extended IRS investigation. From 2016 to 2018, our micro-captive operations contributed less than $3.2 million of net earnings and less than $5.0 million of EBITDAC to our consolidated results in any one year. Due to the fact that the IRS has not made any allegation against us, or completed all of its audits of our clients, we are not able to reasonably estimate the amount of any potential loss in connection with this investigation.

Class action lawsuit - On December 7, 2018, a class action lawsuit was filed against us, our subsidiary Artex Risk Solutions, Inc. (which we refer to as Artex) and other defendants including Tribeca. The named plaintiffs are micro-captive clients of Artex or Tribeca and their related entities and owners who had IRC Section 831(b) tax benefits disallowed by the IRS. The complaint attempts to state various causes of action and alleges that the defendants defrauded the plaintiffs by marketing and managing micro-captives with the knowledge that the captives did not constitute bona fide insurance and thus would not qualify for tax benefits. The named plaintiffs are seeking to certify a class of all persons who were assessed back taxes, penalties or interest by the IRS as a result of their ownership of or involvement in an IRS Section 831(b) micro-captive formed or managed by Artex or Tribeca during the time period January 1, 2015 to the present. The complaint does not specify the amount of damages sought by the named plaintiffs or the putative class. The defendants’ response to the complaint is due on March 8, 2019. The court has not otherwise set a case schedule. We will vigorously defend against the lawsuit. Litigation is inherently uncertain, however, and it is not possible for us to predict the ultimate outcome of this matter and the financial impact to us.

Financial information relating to our brokerage segment results for 2018, 2017 and 2016 (in millions, except per share, percentages and workforce data):


Statement of Earnings	2018			2017			Change			2017			2016			Change
Commissions	$	2,920.7		$	2,641.0		$	279.7		$	2,641.0		$	2,409.9		$	231.1
Fees		958.5			855.1			103.4			855.1			794.7			60.4
Supplemental revenues		189.9			158.0			31.9			158.0			139.9			18.1
Contingent revenues		98.0			99.5			(1.5	)		99.5			97.9			1.6
Investment income		69.6			58.1			11.5			58.1			52.6			5.5
Gains realized on books of business sales		10.2			3.4			6.8			3.4			6.6			(3.2	)

Total revenues		4,246.9			3,815.1			431.8			3,815.1			3,501.6			313.5

Compensation		2,447.1			2,212.3			234.8			2,212.3			2,040.2			172.1
Operating		673.5			614.0			59.5			614.0			598.2			15.8
Depreciation		60.9			61.8			(0.9	)		61.8			57.2			4.6
Amortization		286.9			261.8			25.1			261.8			244.7			17.1
Change in estimated acquisition earnout payables		14.3			29.3			(15.0	)		29.3			32.1			(2.8	)

Total expenses		3,482.7			3,179.2			303.5			3,179.2			2,972.4			206.8

Earnings before income taxes		764.2			635.9			128.3			635.9			529.2			106.7
Provision for income taxes		191.0			221.2			(30.2	)		221.2			186.6			34.6

Net earnings		573.2			414.7			158.5			414.7			342.6			72.1
Net earnings attributable to noncontrolling interests		10.7			7.6			3.1			7.6			6.5			1.1

Net earnings attributable to controlling interests	$	562.5		$	407.1		$	155.4		$	407.1		$	336.1		$	71.0

Diluted net earnings per share	$	3.02		$	2.23		$	0.79		$	2.23		$	1.89		$	0.34

Other Information
Change in diluted net earnings per share		35	%		19	%					19	%
Growth in revenues		11	%		9	%					9	%
Organic change in commissions and fees		5	%		4	%					4	%
Compensation expense ratio		58	%		58	%					58	%		58	%
Operating expense ratio		16	%		16	%					16	%		17	%
Effective income tax rate		25	%		35	%					35	%		35	%
Workforce at end of period (includes acquisitions)		22,934			20,049						20,049			18,635
Identifiable assets at December 31	$	13,785.1		$	12,404.3					$	12,404.3		$	11,308.6

The following provides information that management believes is helpful when comparing EBITDAC and adjusted EBITDAC for 2018, 2017 and 2016 (in millions):


	2018			2017			Change			2017			2016			Change
Net earnings, as reported	$	573.2		$	414.7			38.2	%	$	414.7		$	342.6			21.0	%
Provision for income taxes		191.0			221.2						221.2			186.6
Depreciation		60.9			61.8						61.8			57.2
Amortization		286.9			261.8						261.8			244.7
Change in estimated acquisition earnout payables		14.3			29.3						29.3			32.1

EBITDAC		1,126.3			988.8			13.9	%		988.8			863.2			14.5	%
Gains from books of business sales		(10.2	)		(3.4	)					(3.4	)		(6.6	)
Acquisition integration		3.4			14.8						14.8			45.7
Acquisition related adjustments		14.2			9.1						9.1			3.7
Workforce and lease termination related charges		38.7			30.1						30.1			20.7
Levelized foreign currency translation		—			3.6						—			(3.4	)

EBITDAC, as adjusted	$	1,172.4		$	1,043.0			12.4	%	$	1,039.4		$	923.3			12.6	%

Net earnings margin, as reported		13.5	%		10.9	%		+263 bpts			10.9	%		9.8	%		+108 bpts

EBITDAC margin, as adjusted		27.7	%		27.3	%		+40 bpts			27.3	%		26.5	%		+77 bpts

Reported revenues	$	4,246.9		$	3,815.1					$	3,815.1		$	3,501.6

Adjusted revenues - see page 28	$	4,236.7		$	3,824.7					$	3,811.7		$	3,485.3

Acquisition integration costs include costs related to our July 2, 2014 acquisition of Noraxis Capital Corporation (which we refer to as Noraxis), our June 16, 2014 acquisition of the Crombie/OAMPS operations (which we refer to as Crombie/OAMPS), our April 1, 2014 acquisition of Oval Group of Companies (which we refer to as Oval), our November 14, 2013 acquisition of the Giles Group of Companies (which we refer to as Giles) and our August 1, 2015 acquisition of William Gallagher Associates Insurance Brokers (which we refer to WGA) that we incurred until we fully assimilated these acquisitions into our operations. These costs related to on-boarding of employees, communication system conversion costs, related performance compensation, redundant workforce, extra lease space, duplicate services and external costs incurred to assimilate the acquired businesses with our IT related systems. The WGA integration costs in 2017 totaled $1.3 million and were primarily related to retention and incentive compensation. The Crombie/OAMPS integration costs in 2017 totaled $1.3 million, and were primarily related to technology costs and incentive compensation. The Giles and Oval integration costs in 2017 totaled $12.2 million and were primarily related to the consolidation of offices in the U.K., technology costs, branding and incentive compensation. The WGA integration costs in 2016 totaled $5.0 million and were primarily related to retention and incentive compensation. The Noraxis integration costs in 2016 totaled $1.9 million and were primarily related to the consolidation of offices, technology costs and incentive compensation. The Crombie/OAMPS integration costs in 2016 totaled $3.2 million, and were primarily related to technology costs and incentive compensation. The Giles and Oval integration costs in 2016 totaled $35.6 million and were primarily related to the consolidation of offices in the U.K., technology costs, branding and incentive compensation.

Commissions and fees - The aggregate increase in base commissions and fees for 2018 was due to revenues associated with acquisitions that were made during 2018 and 2017 ($200.4 million) and organic revenue growth. Commissions and fees in 2018 included new business production and renewal rate increases of $456.6 million, which was offset by lost business of $273.9 million. The aggregate increase in commissions and fees for 2017 was due to revenues associated with acquisitions that were made during 2017 and 2016 ($169.6 million) and organic revenue growth. Commissions and fees in 2017 included new business production of $378.9 million, which was offset by lost business and renewal rate decreases of $264.3 million. The aggregate increase in commissions and fees for 2016 was principally due to revenues associated with acquisitions that were made during 2016 and 2015 ($173.2 million). Commissions and fees in 2016 included new business production of $359.7 million, which was offset by lost business and renewal rate decreases of $362.6 million. Commission revenues increased 11% and fee revenues increased 12% in 2018 compared to 2017, respectively. The organic change in base commission and fee revenues was 5% in 2018 and 4% in 2017.

Items excluded from organic revenue computations yet impacting revenue comparisons for 2018 and 2017 include the following (in millions):


	2018 Organic Revenue									2017 Organic Revenue
	2018			2017			Change			2017			2016			Change
Base Commissions and Fees
Commission and fees, as reported	$	3,879.2		$	3,496.1			11.0	%	$	3,496.1		$	3,204.6			9.1	%
Less commission and fee revenues from acquisitions		(200.4	)		—						(169.6	)		—
Less disposed of operations		—			(18.2	)					—			(4.1	)
Levelized foreign currency translation		—			13.3						—			(9.3	)

Organic base commission and fees	$	3,678.8		$	3,491.2			5.4	%	$	3,326.5		$	3,191.2			4.2	%

Supplemental revenues
Supplemental revenues, as reported	$	189.9		$	158.0			20.2	%	$	158.0		$	139.9			12.9	%
Less supplemental revenues from acquisitions		(1.5	)		—						(1.6	)		—
Levelized foreign currency translation		—			0.8						—			(0.9	)

Organic supplemental revenues	$	188.4		$	158.8			18.6	%	$	156.4		$	139.0			12.5	%

Contingent revenues
Contingent revenues, as reported	$	98.0		$	99.5			-1.5	%	$	99.5		$	97.9			1.6	%
Less contingent revenues from acquisitions		(5.0	)		—						(5.7	)		—
Less disposed of operations		—			(0.6	)					—			—
Levelized foreign currency translation		—			0.1						—			(0.2	)

Organic contingent revenues	$	93.0		$	99.0			-6.1	%	$	93.8		$	97.7			-4.0	%

Total reported commissions, fees, supplemental revenues and contingent revenues	$	4,167.1		$	3,753.6			11.0	%	$	3,753.6		$	3,442.4			9.0	%
Less commission and fee revenues from acquisitions		(206.9	)		—						(176.9	)		—
Less disposed of operations		—			(18.8	)					—			(4.1	)
Levelized foreign currency translation		—			14.2						—			(10.4	)

Total organic commissions, fees supplemental revenues and contingent revenues	$	3,960.2		$	3,749.0			5.6	%	$	3,576.7		$	3,427.9			4.3	%


Acquisition Activity	2018		2017		2016
Number of acquisitions closed		44		36		37
Estimated annualized revenues acquired (in millions)	$	317.9	$	159.0	$	137.9

For 2018, 2017 and 2016, we issued 881,000, 1,041,000 shares and 1,998,000 shares, respectively, in connection with tax-free exchange acquisitions and repurchased 175,000, 273,000 shares and 2,265,000 shares, respectively, to partially offset the impact of the issued shares.

Supplemental and contingent revenues - Reported supplemental and contingent revenues recognized in 2018, 2017 and 2016 by quarter are as follows (in millions):


	Q1		Q2		Q3		Q4		Full Year
2018
Reported supplemental revenues	$	52.0	$	48.1	$	43.9	$	45.9	$	189.9
Reported contingent revenues		34.9		21.8		25.7		15.6		98.0

Reported supplemental and contingent revenues	$	86.9	$	69.9	$	69.6	$	61.5	$	287.9

2017
Reported supplemental revenues	$	47.3	$	35.8	$	36.9	$	38.0	$	158.0
Reported contingent revenues		35.0		21.3		21.8		21.4		99.5

Reported supplemental and contingent revenues	$	82.3	$	57.1	$	58.7	$	59.4	$	257.5

2016
Reported supplemental revenues	$	41.8	$	31.9	$	34.5	$	31.7	$	139.9
Reported contingent revenues		31.9		21.7		22.2		22.1		97.9

Reported supplemental and contingent revenues	$	73.7	$	53.6	$	56.7	$	53.8	$	237.8

Investment income and gains realized on books of business sales - This primarily represents interest income earned on cash, cash equivalents and restricted funds, interest income from premium financing and one-time gains related to sales of books of business, which were $10.2 million, $3.4 million and $6.6 million in 2018, 2017 and 2016, respectively. Investment income in 2018 increased compared to 2017 primarily due to increases in interest income from our Australia and New Zealand premium financing business, which relates to an increase in the volume of premium financing business written in 2018, and increases in interest income earned on client held funds in the U.S due to an increase in interest rates. Investment income in 2017 increased compared to 2016 primarily due to increases in interest income from our premium financing business.

Compensation expense - The following provides non-GAAP information that management believes is helpful when comparing 2018 and 2017 compensation expense and 2017 and 2016 compensation expense (in millions):


	2018			2017			2017			2016
Compensation expense, as reported	$	2,447.1		$	2,212.3		$	2,212.3		$	2,040.2

Acquisition integration		(2.5	)		(7.6	)		(7.6	)		(16.9	)
Workforce related charges		(32.3	)		(21.4	)		(21.4	)		(17.5	)
Acquisition related adjustments		(14.2	)		(9.1	)		(9.1	)		(3.7	)
Levelized foreign currency translation		-			8.7			-			(11.7	)

Compensation expense, as adjusted	$	2,398.1		$	2,182.9		$	2,174.2		$	1,990.4

Reported compensation expense ratios		57.6	%		58.0	%		58.0	%		58.3	%

Adjusted compensation expense ratios		56.6	%		57.1	%		57.0	%		57.1	%

Reported revenues	$	4,246.9		$	3,815.1		$	3,815.1		$	3,501.6

Adjusted revenues - see page 28	$	4,236.7		$	3,824.7		$	3,811.7		$	3,485.3

The increase in compensation expense in 2018 compared to 2017 was primarily due to an increase in the average number of employees, salary increases, one-time compensation payments and increases in incentive compensation linked to our overall operating results ($197.1 million in the aggregate), increases in employee benefits expense - $24.4 million, severance related costs - $10.9 million, deferred compensation - $2.4 million, temporary staffing - $1.2 million, partially offset by decreases in stock compensation expense - $0.8 million and earnout related compensation charges - $0.4 million. The increase in employee headcount in 2018 compared to 2017 primarily relates to the addition of employees associated with the acquisitions that we completed in 2018 and new production hires. The increase in severance related costs is due to the elimination or restructuring of approximately 325 positions that took place during 2018.

The increase in compensation expense in 2017 compared to 2016 was primarily due to an increase in the average number of employees, salary increases, one-time compensation payments and increases in incentive compensation linked to our overall operating results $146.3 million in the aggregate, increases in employee benefits expense - $15.8 million, deferred compensation -

$6.4 million, severance related costs - $3.9 million and stock compensation expense - $0.9 million, partially offset by decreases in temporary staffing - $1.2 million. The increase in employee headcount in 2017 compared to 2016 primarily relates to the addition of employees associated with the acquisitions that we completed in 2017 and new production hires.

Operating expense - The following provides non-GAAP information that management believes is helpful when comparing 2018 and 2017 operating expense and 2017 and 2016 operating expense (in millions):


	2018			2017			2017			2016
Operating expense, as reported	$	673.5		$	614.0		$	614.0		$	598.2

Acquisition integration		(0.9	)		(7.2	)		(7.2	)		(28.8	)
Workforce and lease termination related charges		(6.4	)		(8.7	)		(8.7	)		(3.2	)
Levelized foreign currency translation		—			0.7			—			5.4

Operating expense, as adjusted	$	666.2		$	598.8		$	598.1		$	571.6

Reported operating expense ratios		15.9	%		16.1	%		16.1	%		17.1	%

Adjusted operating expense ratios		15.7	%		15.7	%		15.7	%		16.4	%

Reported revenues	$	4,246.9		$	3,815.1		$	3,815.1		$	3,501.6

Adjusted revenues - see page 28	$	4,236.7		$	3,824.7		$	3,811.7		$	3,485.3

The increase in operating expense in 2018 compared to 2017 was due primarily to increases in technology expenses - $30.5 million, marketing expense - $9.4 million, meeting and client entertainment expenses - $8.9 million, real estate expenses - $4.3 million, office supplies - $3.4 million, employee related expense - $3.2 million, outside services expense - $3.2 million, licenses and fees - $2.3 million, professional and banking fees - $2.2 million, other expense - $1.9 million, business insurance - $1.8 million and premium financing interest expense - $0.5 million, partially offset by favorable foreign currency translation - $2.0 million and decreases in bad debt expense - $3.5 million, outside consulting fees - $3.4 million, lease termination charges - $2.3 million and change in deferred operating expense - $2.2 million. Also contributing to the increase in operating expense in 2018 were increased expenses associated with the acquisitions completed in 2018.

The increase in operating expense in 2017 compared to 2016 was due primarily to unfavorable foreign currency translation - $7.2 million, increases in lease termination charges - $5.5 million, technology expenses - $4.8 million, employee expense - $4.3 million, meeting and client entertainment expenses - $3.1 million, outside consulting fees - $2.8 million, bad debt expense - $2.7 million, marketing expense - $1.8 million, licenses and fees - $0.9 million, outside services expense - $0.8 million, professional and banking fees - $0.2 million, partially offset by decreases in other expense - $6.6 million, real estate expenses - $5.2 million, business insurance - $3.7 million, office supplies - $2.4 million and premium financing interest expense - $0.1 million. Also contributing to the increase in operating expense in 2017 were increased expenses associated with the acquisitions completed in 2017.

Depreciation - The decrease in depreciation expense in 2018 compared to 2017 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 being offset by fixed assets being fully depreciated in 2018. The increase in depreciation expense in 2017 compared to 2016 was due primarily to the purchases of furniture, equipment and leasehold improvements related to office expansions and moves, and expenditures related to upgrading computer systems. Also contributing to the increases in depreciation expense in 2018, 2017 and 2016 were the depreciation expenses associated with acquisitions completed during these years.

Amortization - The increases in amortization in 2018 compared to 2017 and 2017 compared to 2016 were due primarily to amortization expense of intangible assets associated with acquisitions completed during these years. Expiration lists, non-compete agreements and trade names are amortized using the straight-line method over their estimated useful lives (two to fifteen years for expiration lists, three to five years for non-compete agreements and two to fifteen years for trade names). Based on the results of impairment reviews in 2018, 2017 and 2016, we wrote off $10.6 million, $6.2 million and $1.8 million of amortizable intangible assets related to the brokerage segment acquisitions.

Change in estimated acquisition earnout payables - The change in the expense from the change in estimated acquisition earnout payables in 2018 compared to 2017 and 2017 compared to 2016 was due primarily to adjustments made to the estimated fair value of earnout obligations related to revised projections of future performance. During 2018, 2017 and 2016, we recognized $17.5 million, $19.7 million and $16.9 million, respectively, of expense related to the accretion of the discount recorded for earnout obligations in connection with our 2018, 2017 and 2016 acquisitions. During 2018, 2017 and 2016, we recognized $3.2 million of income and $9.6 million and $15.2 million of expense, respectively, related to net adjustments in the estimated fair market values of earnout obligations in connection with revised projections of future performance for 109, 106 and 101 acquisitions, respectively.

The amounts initially recorded as earnout payables for our 2015 to 2018 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 - We allocate the provision for income taxes to the brokerage segment using local statutory rates. The brokerage segment’s effective tax rate in 2018, 2017 and 2016 was 25.0% (25.3 on a controlling basis), 34.8% (35.2% on a controlling basis) and 35.3% (35.7% on a controlling basis), respectively. In fourth quarter 2017, new tax legislation was enacted in the U.S., which lowered the U.S. corporate tax rate from 35.0% to 21.0% effective January 1, 2018. The impact of the adjustment of our deferred tax asset and liability balances in 2017 to reflect the U.S. rate change on the provision for income taxes in the brokerage segment was immaterial. See the U.S. federal income tax law changes and SEC Staff Accounting Bulletin No. 118 in the Corporate Segment below for an additional discussion of the impact of the U.S. enacted tax legislation, commonly referred to as the Tax Cuts and Jobs Act. We anticipate reporting an effective tax rate of approximately 24.0% to 26.0% in our brokerage segment for the foreseeable future.

Net earnings attributable to noncontrolling interests - The amounts reported in this line for 2018, 2017 and 2016 include noncontrolling interest earnings of $10.7 million, $7.6 million and $6.5 million, respectively, primarily related to our investment in Capsicum Reinsurance Brokers LLP (which we refer to as Capsicum). We are partners in this venture with Grahame Chilton, the former CEO of our International Brokerage Division (he stepped down from that role effective July 1, 2018). We are the controlling partner, participating in 33% of Capsicum’s net operating results and Mr. Chilton owns approximately 50% of Capsicum.

Risk Management Segment

The risk management segment accounted for 14% of our revenue in 2018. 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 2018, 2017 and 2016 (in millions, except per share, percentages and workforce data):


Statement of Earnings	2018			2017			Change			2017			2016			Change
Fees	$	797.8		$	736.8		$	61.0		$	736.8		$	697.0		$	39.8
Investment income		0.5			0.6			(0.1	)		0.6			1.0			(0.4	)

Revenues before reimbursements		798.3			737.4			60.9			737.4			698.0			39.4
Reimbursements		141.6			136.0			5.6			136.0			132.1			3.9

Total revenues		939.9			873.4			66.5			873.4			830.1			43.3
Compensation		489.7			446.9			42.8			446.9			424.4			22.5
Operating		174.6			164.8			9.8			164.8			152.7			12.1
Reimbursements		141.6			136.0						136.0			132.1
Depreciation		38.7			31.1			7.6			31.1			27.2			3.9
Amortization		4.3			2.9			1.4			2.9			2.5			0.4
Change in estimated acquisition
earnout payables		(4.7	)		1.6			(6.3	)		1.6			—			1.6

Total expenses		844.2			783.3			60.9			783.3			738.9			44.4

Earnings before income taxes		95.7			90.1			5.6			90.1			91.2			(1.1	)
Provision for income taxes		25.3			34.4			(9.1	)		34.4			34.5			(0.1	)

Net earnings		70.4			55.7			14.7			55.7			56.7			(1.0	)
Net earnings attributable to
noncontrolling interests		—			—			—			—			—			—

Net earnings attributable to
controlling interests	$	70.4		$	55.7		$	14.7		$	55.7		$	56.7		$	(1.0	)

Diluted earnings per share	$	0.38		$	0.31		$	0.07		$	0.31		$	0.32		$	(0.01	)

Other information
Change in diluted earnings per share		23	%		(3	%)					(3	%)
Growth in revenues (before reimbursements)		8	%		6	%					6	%
Organic change in fees (before reimbursements)		7	%		4	%					4	%
Compensation expense ratio (before reimbursements)		61	%		61	%					61	%		61	%
Operating expense ratio (before reimbursements)		22	%		22	%					22	%		22	%
Effective income tax rate		26	%		38	%					38	%		38	%
Workforce at end of period (includes acquisitions)		6,269			5,872						5,872			5,449
Identifiable assets at December 31	$	748.1		$	738.6					$	738.6		$	670.9

The following provides non-GAAP information that management believes is helpful when comparing 2018 and 2017 EBITDAC and adjusted EBITDAC and 2017 and 2016 EBITDAC and adjusted EBITAC (in millions):


	2018			2017			Change			2017			2016			Change
Net earnings, as reported	$	70.4		$	55.7			26.4	%	$	55.7		$	56.7			-1.8	%
Provision for income taxes		25.3			34.4						34.4			34.5
Depreciation		38.7			31.1						31.1			27.2
Amortization		4.3			2.9						2.9			2.5
Change in estimated acquisition earnout payables		(4.7	)		1.6						1.6			—

Total EBITDAC		134.0			125.7			6.6	%		125.7			120.9			3.9	%
Workforce and lease termination related charges		4.7			0.9						0.9			2.2
Levelized foreign currency translation		—			(0.5	)					—			0.7

EBITDAC, as adjusted	$	138.7		$	126.1			10.0	%	$	126.6		$	123.8			2.2	%

Net earnings margin, before reimbursements, as reported		8.8	%		7.6	%		+127 bpts			7.6	%		8.1	%		+57 bpts

EBITDAC margin, before reimbursements, as adjusted		17.4	%		17.2	%		+21 bpts			17.2	%		17.7	%		+53 bpts

Reported revenues before reimbursements	$	798.3		$	737.4					$	737.4		$	698.0

Adjusted revenues - before reimbursements - see page 28	$	798.3		$	734.7					$	737.4		$	700.0

Fees - The increase in fees for 2018 compared to 2017 was primarily due to new business of $78.8 million and higher international performance bonus fees, which were partially offset by lost business of $29.3 million. The increase in fees for 2017 compared to 2016 was primarily due to new business of $69.5 million and higher international performance bonus fees, which were partially offset by lost business of $30.5 million. Organic change in fee revenues was 7% in 2018 and 4% in 2017.

Items excluded from organic fee computations yet impacting revenue comparisons in 2018 and 2017 include the following (in millions):


	2018 Organic Revenue									2017 Organic Revenue
	2018			2017			Change			2017			2016		Change
Fees	$	789.3		$	732.2			7.8	%	$	732.2		$	693.4		5.6	%
International performance bonus fees		8.5			4.6						4.6			3.6

Fees as reported		797.8			736.8			8.3	%		736.8			697.0		5.7	%
Less fees from acquisitions		(11.5	)		—						(11.9	)		—
Levelized foreign currency translation		—			(2.6	)					—			2.0

Organic fees	$	786.3		$	734.2			7.1	%	$	724.9		$	699.0		3.7	%

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 2018 compared to 2017 and 2017 compared to 2016 were primarily due to the net increase in new business discussed above.

Investment income - Investment income primarily represents interest income earned on our cash and cash equivalents. Investment income in 2018 decreased compared to 2017 primarily due to lower levels of invested assets in 2018. Investment income in 2017 decreased compared to 2016 primarily due to lower levels of invested assets in 2017.


	2018			2017			2017			2016
Compensation expense, as reported	$	489.7		$	446.9		$	446.9		$	424.4

Workforce and lease termination related charges		(4.3	)		(0.9	)		(0.9	)		(1.9	)
Levelized foreign currency translation		—			(1.7	)		—			1.1

Compensation expense, as adjusted	$	485.4		$	444.3		$	446.0		$	423.6

Reported compensation expense ratios (before reimbursements)		61.3	%		60.6	%		60.6	%		60.8	%

Adjusted compensation expense ratios (before reimbursements)		60.8	%		60.5	%		60.5	%		60.5	%

Reported revenues (before reimbursements)	$	798.3		$	737.4		$	737.4		$	698.0

Adjusted revenues (before reimbursements) - see page 28	$	798.3		$	734.7		$	737.4		$	700.0

The increase in compensation expense in 2018 compared to 2017 was primarily due to increased headcount and increases in salaries ($36.8 million in the aggregate), severance related costs - $3.4 million, employee benefits - $3.1 million, temporary-staffing expense - $2.4 million and deferred compensation - $0.1 million, partially offset by a favorable foreign currency translation $1.6 million and a decrease in stock compensation expense $1.4 million. The increase in severance related costs is due to the elimination or restructuring of approximately 75 positions that took place during 2018.

The increase in compensation expense in 2017 compared to 2016 was primarily due to increased headcount and increases in salaries ($17.3 million in the aggregate), unfavorable foreign currency translation - $1.1 million, temporary-staffing expense -$2.1 million, deferred compensation - $1.3 million, employee benefits - $1.0 million and stock compensation expense -$0.7 million, partially offset by a decrease in severance related costs - $1.0 million.


	2018			2017			2017			2016
Operating expense, as reported	$	174.6		$	164.8		$	164.8		$	152.7

Workforce and lease termination related charges		(0.4	)		—			—			(0.3	)
Levelized foreign currency translation		—			(0.5	)		—			0.2

Operating expense, as adjusted	$	174.2		$	164.3		$	164.8		$	152.6

Reported compensation expense ratios (before reimbursements)		21.9	%		22.4	%		22.3	%		21.9	%

Adjusted compensation expense ratios (before reimbursements)		21.8	%		22.4	%		22.3	%		21.8	%

Reported revenues (before reimbursements)	$	798.3		$	737.4		$	737.4		$	698.0

Adjusted revenues - (before reimbursements) see page 28	$	798.3		$	734.7		$	737.4		$	700.0

The increase in operating expense in 2018 compared to 2017 was primarily due to an adverse make-whole settlement - $1.5 million and increases in technology expenses - $5.6 million, outside consulting fees - $3.0 million, business insurance - $1.4 million, meeting and client entertainment expense - $1.0 million, employee expense - $0.9 million, bad debt expense -$0.6 million, lease termination related charges - $0.4 million and outside services - $0.2 million, partially offset by decreases in other expense - $2.8 million, professional and banking fees - $1.7 million and licenses and fees - $0.4 million and office supplies - $0.1 million.

The increase in operating expense in 2017 compared to 2016 was primarily due to increases in outside consulting fees - $3.6 million, other expense - $2.2 million, professional and banking fees - $2.1 million, employee expense - $1.7 million, technology expenses - $0.9 million, meeting and client entertainment expense - $0.8 million, licenses and fees - $0.6 million, business insurance - $0.6 million, office supplies - $0.6 million, outside services - $0.4 million, partially offset by decreases in real estate expenses - $1.0 million, bad debt expense - $0.3 million and lease termination related charges - $0.3 million.

Depreciation - Depreciation expense increased in 2018 compared to 2017 and 2017 compared to 2016, 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 2018 compared to 2017 and increased in 2017 compared to 2016. Historically, the risk management segment has made few acquisitions. In 2018, we made four acquisitions with annualized revenues of approximately $21.9 million. In 2017, we made three acquisitions with annualized revenues of approximately $13.3 million. We made no material acquisitions in this segment in 2016. No indicators of impairment were noted in 2018, 2017 or 2016.

Change in estimated acquisition earnout payables - The change in expense from the change in estimated acquisition earnout payables in 2018 compared to 2017 and 2017 compared to 2016, were due primarily to adjustments made in 2018 and 2017 to the estimated fair value of an earnout obligation related to revised projections of future performance. During 2018 and 2017, we recognized $1.3 million and $0.5 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 2018, we recognized $6.0 million of income related to net adjustments in the estimated fair value of earnout obligations related to revised projections of future performance for three acquisitions. During 2017, we recognized $1.1 million of expense related to net adjustments in the estimated fair value of earnout obligations related to revised projections of future performance for two acquisitions.

Provision for income taxes - 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 2018, 2017 and 2016 was 26.4%, 38.2% and 37.8%, respectively. In fourth quarter 2017, new tax legislation was enacted in the U.S., which lowered the U.S. corporate tax rate from 35.0% to 21.0% effective January 1, 2018. The impact of the adjustment of our deferred tax asset and liability balances in 2017 to reflect the U.S. rate change on the provision for income taxes in the brokerage segment was immaterial. See the U.S. federal income tax law changes and SEC Staff Accounting Bulletin No. 118 in the Corporate Segment below for an additional discussion of the impact of the U.S. enacted tax legislation commonly referred to as the Tax Cuts and Jobs Act. We anticipate reporting an effective tax rate on adjusted results of approximately 25.0% to 27.0% in our risk management segment for the foreseeable future.

Corporate Segment

The corporate segment reports the financial information related to our clean energy investments, our debt, certain corporate and acquisition-related activities and the impact of foreign currency translation. See Note 14 to our 2018 consolidated financial statements for a summary of our investments at December 31, 2018 and 2017 and a detailed discussion of the nature of these investments. See Note 8 to our 2018 consolidated financial statements for a summary of our debt at December 31, 2018 and 2017.

Financial information relating to our corporate segment results for 2018, 2017 and 2016 (in millions, except per share and percentages):


Statement of Earnings	2018			2017			Change			2017			2016			Change
Revenues from consolidated clean coal production plants	$	1,694.6		$	1,515.6		$	179.0		$	1,515.6		$	1,303.8		$	211.8
Royalty income from clean coal licenses		54.1			46.4			7.7			46.4			48.1			(1.7	)
Loss from unconsolidated clean coal production plants		(2.4	)		(1.5	)		(0.9	)		(1.5	)		(1.8	)		0.3
Other net revenues		0.9			—			0.9			—			(1.3	)		1.3

Total revenues		1,747.2			1,560.5			186.7			1,560.5			1,348.8			211.7

Cost of revenues from consolidated clean coal production plants		1,816.0			1,635.9			180.1			1,635.9			1,408.6			227.3
Compensation		89.5			88.2			1.3			88.2			72.6			15.6
Operating		55.6			50.3			5.3			50.3			25.4			24.9
Interest		138.4			124.1			14.3			124.1			109.8			14.3
Depreciation		28.2			28.2			—			28.2			19.2			9.0

Total expenses		2,127.7			1,926.7			201.0			1,926.7			1,635.6			291.1

Loss before income taxes		(380.5	)		(366.2	)		(14.3	)		(366.2	)		(286.8	)		(79.4	)
Benefit for income taxes		(412.8	)		(412.7	)		(0.1	)		(412.7	)		(317.8	)		(94.9	)

Net earnings		32.3			46.5			(14.2	)		46.5			31.0			15.5
Net earnings attributable to noncontrolling interests		31.7			28.0			3.7			28.0			27.0			1.0

Net earnings attributable to controlling interests	$	0.6		$	18.5		$	(17.9	)	$	18.5		$	4.0		$	14.5

Diluted net earnings per share	$	—		$	0.10		$	(0.10	)	$	0.10		$	0.02		$	0.08

Identifiable assets at December 31	$	1,800.8		$	1,766.8					$	1,766.8		$	1,548.7

EBITDAC
Net earnings	$	32.3		$	46.5		$	(14.2	)	$	46.5		$	31.0		$	15.5
Benefit for income taxes		(412.8	)		(412.7	)		(0.1	)		(412.7	)		(317.8	)		(94.9	)
Interest		138.4			124.1			14.3			124.1			109.8			14.3
Depreciation		28.2			28.2			—			28.2			19.2			9.0

EBITDAC	$	(213.9	)	$	(213.9	)	$	—		$	(213.9	)	$	(157.8	)	$	(56.1	)

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

	•		Revenues from consolidated clean coal production plants represents revenues from the consolidated IRC Section 45 facilities in which we have a majority ownership position and maintain control over the operations at the related facilities.

The increases in 2018, 2017 and 2016 are due to increased production of clean coal.

	•		Royalty income from clean coal licenses represents revenues related to Chem-Mod LLC. We held a 46.5% controlling interest in Chem-Mod LLC. As Chem-Mod LLC’s manager, we are required to consolidate its operations.

The increase in royalty income in 2018 compared to 2017 was due to increased production of refined coal by Chem-Mod LLC’s licensees. The decrease in royalty income in 2017 compared to 2016, was due to reductions in production of refined coal by Chem-Mod LLC’s licensees.

Expenses related to royalty income of Chem-Mod LLC were $4.1 million, $2.3 million and $2.4 million in 2018, 2017 and 2016, respectively. These expenses are included in the operating expenses discussed below.

	•		Loss from unconsolidated clean coal production plants represents our equity portion of the pretax operating results from the unconsolidated IRC Section 45 facilities. The production of refined coal generates pretax operating losses.

The losses in 2018, 2017 and 2016 were low because the vast majority of our operations are now consolidated.

	•		Other net revenues include the following:

In 2018, we recorded $0.9 million of gain from our legacy investments.

In 2017, we recorded a $0.2 million equity accounting loss related to one of our legacy investments, a $0.1 million gain related to the liquidation of legacy investments and a $0.1 million gain on the sale of shares in a partially owned entity.

In 2016, we recorded $0.8 million of rental income related to our new headquarters facility. We also recognized $0.8 million of equity basis accounting losses related to our legacy investments and we recognized a $1.3 million impairment loss related to clean coal production plants, including engineering costs of $0.7 million incurred for two locations that will not be used.

Cost of revenues - Cost of revenues from consolidated clean coal production plants in 2018, 2017 and 2016 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 increases in cost of revenues in 2018 compared to 2017 and 2017 compared to 2016, were primarily due to increased production.

Compensation expense - Compensation expense for 2018, 2017 and 2016, respectively, was $89.5 million, $88.2 million and $72.6 million.

The $1.3 million increase in 2018 compensation expense compared to 2017 was primarily due to increased staffing and salary increases, clean-energy performance and efforts related to implementation of the new ASC 606 accounting standard, partially offset by a decrease in the net pension cost related to our legacy U.S. defined pension plan and a decrease in incentive compensation in 2018 compared to 2017 due to efforts on the new headquarters in 2017.

The $15.6 million increase in 2017 compensation expense compared to 2016 was primarily due to increased staffing, salary increases and incentive compensation related to the implementation of a new accounting standard for revenue recognition, efforts related to tax reform, efforts related to the new headquarters and clean-energy performance, and an increase in benefits expense.

Operating expense - Operating expense for 2018 includes banking and related fees of $3.8 million, external professional fees and other due diligence costs related to 2018 acquisitions of $13.2 million, other corporate and clean energy related expenses of $22.4 million, corporate related marketing costs of $15.6 million, expenses of $2.8 million for systems and consulting related to implementation of the new revenue recognition accounting standard rules, and a net unrealized foreign exchange remeasurement gain of $2.2 million.

Operating expense for 2017 includes banking and related fees of $3.5 million, external professional fees and other due diligence costs related to 2017 acquisitions of $10.6 million, other corporate and clean energy related expenses of $10.0 million, $2.2 million for a biennial corporate-wide meeting, corporate related marketing costs of $4.0 million, one-time costs of $12.2 million related to the new headquarters, $5.3 million of consulting expenses related to the new revenue recognition accounting standard and tax reform and a $2.5 million net unrealized foreign exchange remeasurement loss.

Operating expense for 2016 includes banking and related fees of $3.2 million, external professional fees and other due diligence costs related to 2016 acquisitions of $3.9 million, other corporate and clean energy related expenses of $5.7 million, $4.8 million for a biennial corporate-wide meeting, corporate related marketing costs of $7.0 million and $0.8 million related to the litigation settlement.

Interest expense - The increase in interest expense in 2018 compared to 2017 and 2017 compared to 2016 was due to the following:


Change in interest expense related to:	2018 / 2017			2017 / 2016
Interest on borrowings from our Credit Agreement	$	(0.1	)	$	1.9
Interest on the maturity of the Series B notes		(11.2	)		(8.1	)
Interest on the maturity of the Series C notes		(0.3	)		(2.7	)
Interest on the maturity of the Series K notes		(0.7	)		—
Interest on the $275.0 million notes funded on June 2, 2016		—			5.1
Interest on the $100.0 million notes funded on December 1, 2016		—			3.2
Interest on the $250.0 million notes funded on June 27, 2017		5.1			5.3
Interest on the $398.0 million notes funded on August 2 and 4, 2017		9.9			6.5
Interest on the $500.0 million notes funded on June 13, 2018		12.2			—
Amortization of hedge gains		(0.6	)		(0.4	)
Capitalization of interest costs related to the purchase and development of our new headquarters building and other		—			3.5

Net change in interest expense	$	14.3		$	14.3

The capitalization of interest costs related to the purchase and development of our new corporate headquarters building that was completed in early 2017.

Depreciation - Depreciation expense in 2018 was flat compared to 2017. The increase in depreciation expense in 2017 compared to 2016 primarily relates to the new corporate headquarters that was placed in service in first quarter 2017 and to clean coal plants re-deployed in 2017 and 2016.

Net earnings attributable to noncontrolling interests - The amounts reported in this line for 2018, 2017 and 2016 primarily include noncontrolling interest earnings of $37.1 million, $33.1 million and $32.7 million, respectively, related to our investment in Chem-Mod LLC. As of December 31, 2018, 2017 and 2016, 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 substantially expires in December 2019 for our fourteen 2009 Era Plants and in December 2021 for our twenty 2011 Era Plants. Our consolidated effective tax rate was (41.0)%, (43.7)% and (29.0)% for 2018, 2017 and 2016, respectively. The tax rates for 2018, 2017 and 2016 were lower than the statutory rate primarily due to the amount of IRC Section 45 tax credits recognized during the year. There were $252.9 million, $229.7 million and $194.4 million of Section 45 tax credits generated and recognized in 2018, 2017 and 2016, respectively. Also impacting the benefit for the income taxes line is the adoption of a new accounting pronouncement in 2017, whereby it requires that the income tax effects of awards be recognized in the income statement when the awards vest or are settled, rather than recognizing the tax benefits in excess of compensation costs through stockholders’ equity. The income tax benefit of stock based awards that vested or were settled in the years ended December 31, 2018 and 2017 was $15.0 million and $15.1 million, respectively.

U.S. federal income tax law changes - On December 22, 2017, the U.S. enacted tax legislation commonly referred to as the Tax Cuts and Jobs Act (which we refer to as the Tax Act), which significantly revises the U.S. tax code by, among other things, lowering the corporate income tax rate from 35.0% to 21.0%, limiting the deductibility of interest expense, implementing a territorial tax system and imposing a repatriation tax on earnings of foreign subsidiaries. See discussion of the various impacts of the Tax Act below.

SEC Staff Accounting Bulletin No. 118

SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (which we refer to as SAB 118) describes three scenarios associated with a company’s status of accounting for income tax reform. Under the SAB 118 guidance, we made reasonable estimates for certain effects of tax reform in our 2017 consolidated financial statements. We recognized provisional amounts for our deferred income taxes and repatriation tax based on reasonable estimates. As of the date of this Annual Report on Form 10-K, we have completed our analysis and finalized our estimates under SAB 118. Finalization of the previous estimates under SAB 118 have been recorded as discrete items in 2018.

See Note 18 to our consolidated financial statements for a discussion of our assessment of the impact of the Tax Act.

Tax Act Items Impacting the Company Going Forward

Alternative Minimum Tax Credit - The Tax Act repealed the corporate Alternative Minimum Tax (which we refer to as AMT) for years beginning January 1, 2018, and provides that existing AMT credit carryovers will be utilized or refunded beginning in 2018 and ending in 2021, according to a specific formula. We have AMT credit carryovers that are currently reflected as deferred tax assets in the December 31, 2018 consolidated balance sheet, which we expect to be fully utilized or refunded to us by tax year 2021.

Global Intangible Low Taxed Income - The Tax Act requires U.S. shareholders to include in income certain “global intangible low-taxed income” (which we refer to as GILTI) beginning in 2018. We have adopted a policy to include the GILTI income in the future period when the tax arises and we recorded income tax expense on such income for the year ended December 31, 2018.

Base Erosion Anti-Abuse Tax - The Tax Act introduced the U.S. Base Erosion and Anti-Abuse Tax (which we refer to as BEAT), effective January 1, 2018. We have finalized our analysis and determined that our base erosion payments do not exceed the threshold for applicability for the year ended December 31, 2018, and we do not currently anticipate any significant long-term impact from the BEAT on our effective income tax rate in future periods.

Interest Expense Limitation - Under the Tax Act, the deductibility of “net interest” for a business is limited to 30% of adjusted taxable income. Interest that is disallowed can be carried forward indefinitely. We have evaluated the impact and determined there is no limit on our interest deductibility for federal income tax purposes for the year ended December 31, 2018.

Executive Compensation - The Tax Act contains provisions that may limit deductions for executive compensation. We determined that our ability to deduct executive compensation will be limited as a result of the Tax Act.

Entertainment Expenses - The Tax Act contains provisions that may further limit deductions for entertainment expenses. We determined that our ability to deduct entertainment expenses will be further limited as a result of the Tax Act.

The following provides non-GAAP information that we believe is helpful when comparing 2018, 2017 and 2016 operating results for the corporate segment (in millions):


	2018									2017									2016
Components of Corporate Segment	Pretax Loss			Income Tax Benefit			Net Earnings (Loss)			Pretax Loss			Income Tax Benefit			Net Earnings (Loss)			Pretax Loss			Income Tax Benefit			Net Earnings (Loss)
As Reported
Interest and banking costs	$	(141.9	)	$	36.9		$	(105.0	)	$	(126.8	)	$	50.8		$	(76.0	)	$	(112.8	)	$	45.1		$	(67.7	)
Clean energy related (1)		(188.1	)		306.7			118.6			(161.3	)		294.0			132.7			(133.2	)		247.6			114.4
Acquisition costs		(13.9	)		1.5			(12.4	)		(11.2	)		2.9			(8.3	)		(4.6	)		0.7			(3.9	)
Corporate		(65.8	)		70.9			5.1			(68.1	)		53.4			(14.7	)		(43.0	)		20.3			(22.7	)
Impact of U.S. tax reform		(2.5	)		(3.2	)		(5.7	)		(2.5	)		4.0			1.5			—			—			—
Litigation settlement		—			—			—			(11.1	)		2.3			(8.8	)		(20.2	)		4.1			(16.1	)
Home office lease termination/move		—			—			—			(13.2	)		5.3			(7.9	)		—			—			—

Reported full year Adjustments		(412.2	)		412.8			0.6			(394.2	)		412.7			18.5			(313.8	)		317.8			4.0
Impact of U.S. tax reform		—			(8.9	)		(8.9	)		2.5			(4.0	)		(1.5	)		—			—			—
Corporate legal entity restructuring		—			(22.0	)		(22.0	)		—			—			—			—			—			—
Litigation settlement		—			—			—			11.1			(2.3	)		8.8			20.2			(4.1	)		16.1
Home office lease termination/move		—			—			—			13.2			(5.3	)		7.9			—			—			—

As Adjusted
Interest and banking costs		(141.9	)		36.9			(105.0	)		(126.8	)		50.8			(76.0	)		(112.8	)		45.1			(67.7	)
Clean energy related (1)		(188.1	)		306.7			118.6			(161.3	)		294.0			132.7			(133.2	)		247.6			114.4
Acquisition costs		(13.9	)		1.5			(12.4	)		(11.2	)		2.9			(8.3	)		(4.6	)		0.7			(3.9	)
Corporate		(65.8	)		48.9			(16.9	)		(68.1	)		53.4			(14.7	)		(43.0	)		20.3			(22.7	)
Impact of U.S. tax reform		(2.5	)		(12.1	)		(14.6	)		—			—			—			—			—			—
Litigation settlement		—			—			—			—			—			—			—			—			—
Home office lease termination/move		—			—			—			—			—			—			—			—			—

Adjusted full year	$	(412.2	)	$	381.9		$	(30.3	)	$	(367.4	)	$	401.1		$	33.7		$	(293.6	)	$	313.7		$	20.1

(1)	Pretax earnings (loss) are presented net of amounts attributable to noncontrolling interests of $31.7 million in 2018, $28.0 million in 2017 and $27.0 million in 2016.

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 marketing costs, expenses for systems and consulting related to the implementation of the new revenue recognition accounting and tax reform rules and the impact of foreign currency translation.

During the year ended December 31, 2018 and 2017, we incurred $5.9 million and $8.9 million, respectively, of pre-tax costs related to implementing a new accounting standard related to how companies recognize revenue, which was effective beginning in January 2018. These charges are included in the table above in the corporate line. A new accounting pronouncement, ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, was effective January 1, 2017. It requires that the income tax effects of awards be recognized in the income statement (in the Income Tax Benefit column above) when the awards vest or are settled, rather than recognizing the tax benefits in excess of compensation costs through stockholders’ equity. The income tax benefit of stock based awards that vested or were settled in the year ended December 31, 2018 and 2017 was $15.0 million and $15.1 million, respectively, and is included in the table above in the Corporate line. The income tax benefit of stock based awards that vested or were settled in the year ended December 31, 2016 was $6.5 million and is not included in the Income Tax Benefit column above.

Litigation settlement - During the third quarter of 2015, we settled litigation against certain former U.K. executives and their advisors for a pretax gain of $31.0 million ($22.3 million net of costs and taxes in third quarter). Incremental after-tax expenses that arose in connection with this matter were $8.8 million and $16.1 million in 2017 and 2016, respectively.

Home office lease termination/move - During 2017, we relocated our corporate office headquarters to a nearby suburb of Chicago. Move related after-tax charges were $7.9 million in 2017. These charges are presented in the corporate segment.

Impact of U.S. tax reform - Consists of the tax expense from (a) adjusting December 31, 2017 initial estimates from the U.S. tax legislation passed in the fourth quarter of 2017 and (b) the on-going impact of such legislation - principally the partial taxation of foreign earnings, nondeductible executive compensation and entertainment expenses. Under the SEC Staff Accounting Bulletin No. 118 guidance, in our December 31, 2017 consolidated financial statements, we recognized provisional amounts for deferred income taxes and repatriation tax based on reasonable estimates and interpretations of the new tax legislation. The ultimate impact of the new tax legislation did differ from our estimated amounts as of December 31, 2017 amounts, due to, among other things, changes in interpretations and assumptions we made, or additional regulatory or accounting guidance that was issued with respect to the new tax legislation. In fourth quarter 2018, the IRS issued clarifying guidance related to the new tax legislation which resulted in us recognizing a tax benefit of $8.9 million in the quarter. Any additional taxes associated with the ongoing impact of the tax legislation had a de minimis impact on our cash taxes paid due to tax credits generated from our clean energy investments.

Corporate legal entity restructuring - Consists of the tax benefit related to the release of valuation allowances that resulted from moving a legal entity within our subsidiary structure.

Clean energy investments - We have investments in limited liability companies that own 29 clean coal production plants developed by us and five clean coal production plants we purchased from a third party on September 1, 2013. All 34 plants produce refined coal using propriety technologies owned by Chem-Mod 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 plants which were placed in service prior to December 31, 2009 (which we refer to as the 2009 Era Plants) can receive tax credits through 2019 and the 20 plants which were placed in service prior to December 31, 2011 (which we refer to as the 2011 Era Plants) can receive tax credits through 2021.

The following table provides a summary of our clean coal plant investments as of December 31, 2018 (in millions):


			Our Portion of Estimated
	Our Book Value At December 31, 2018		Low Range 2019 After-tax Earnings		High Range 2019 After-tax Earnings
Investments that own 2009 Era Plants
12 Under long-term production contracts	$	5.1	$	13.0	$	15.0
2 Not currently active in negotiations for long-term production contracts		—		Not Estimable		Not Estimable
Investments that own 2011 Era Plants
19 Under long-term production contracts		43.2		70.0		75.0
1 In early stages of negotiations for long-term production contract		0.2		Not Estimable		Not Estimable
Chem-Mod royalty income, net of noncontrolling interests		4.0		22.0		25.0

The estimated earnings information in the table reflects management’s current best estimate of the 2019 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 no construction commitments related to our refined coal plants.

We are aware that some of the coal-fired power plants that purchase the refined coal are considering changing to burning natural gas rather than coal, or shutting down completely for economic reasons. The entities that own such plants are prepared to move the refined coal plants to another coal-fired power plant, if necessary. If these potential developments were to occur, we estimate those refined coal plants will not operate for 12 to 18 months during their movement and redeployment (this would result in only the 2011 Era Plants being able to be moved and deployed in the future), and the new coal-fired power plant may be a higher or lower volume plant, all of which could have a material impact on the amount of tax credits that are generated by these plants.

There is a provision in IRC Section 45 that phases out the tax credits if the coal reference price per ton, based on market prices, reaches certain levels as follows:


Calendar Year	IRS Reference Price per Ton			IRS Beginning Phase Out Price			IRS 100% Phase Out Price			Conclusion
2010	$	54.74		$	77.78		$	86.53		No phase out
2011		55.66			78.41			87.16		No phase out
2012		58.49			80.25			89.00		No phase out
2013		58.23			81.69			90.44		No phase out
2014		56.88			81.82			90.57		No phase out
2015		57.64			83.17			91.92		No phase out
2016		53.74			84.38			93.13		No phase out
2017		51.09			85.64			94.39		No phase out
2018		49.68			86.94			95.69		No phase out
2019		(1	)		(1	)		(1	)	(1)

(1)	The IRS will not release the factors for 2019 until April or May 2019. Based on our analysis of the factors used in the IRS’ phase out calculations, it is our belief that there will be no phase out in 2019.

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 2018 consolidated financial statements for more information regarding risks and uncertainties related to these investments.

Financial Condition and Liquidity

Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations. The insurance brokerage industry is not capital intensive. Historically, our capital requirements have primarily included dividend payments on our common stock, repurchases of our common stock, funding of our investments, acquisitions of brokerage and risk management operations and capital expenditures.

Cash Flows From Operating Activities

Historically, we have depended on our ability to generate positive cash flow from operations to meet 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 2018, 2017 and 2016, 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 $765.1 million, $854.2 million and $649.6 million for 2018, 2017 and 2016, respectively. The decrease in cash provided by operating activities in 2018 compared to 2017 was primarily due to the following items: $30.0 million discretionary contribution made to our defined benefit plan in 2018, and increases in 2018 compared to 2017 of $14.3 million of severance related payments, $9.4 million of prepaid marketing costs and $6.7 million of payments on acquisition earnouts in excess of original estimates. Also contributing to the decrease in cash provided by operating activities in 2018 compared to 2017 were timing differences between years in the collection of receivables related to accrued supplemental, contingent and direct bill revenues, and income taxes. The increase in cash provided by operating activities in 2017 compared to 2016 was primarily due to improved cash flow generated from our core brokerage and risk management operating units.

In addition, cash provided by operating activities in 2018 was unfavorably impacted by timing differences in the receipt and disbursements of client fiduciary balances in 2018 compared to 2017. 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 2018, 2017 and 2016 (in millions):


	2018			2017			2016
Net change in premiums and fees receivable	$	(783.1	)	$	(47.7	)	$	(777.2	)
Net change in premiums payable to underwriting enterprises		819.7			166.9			770.0

Net cash provided (used) by the above	$	36.6		$	119.2		$	(7.2	)

In addition, cash provided by operating activities for 2016 were unfavorably impacted by acquisition related integration costs. During second quarter 2015, we entered into compensation-based retention agreements with certain key employees of our international brokerage operations. These retention agreements added after-tax charges of $7.3 million and $15.4 million for 2017 and 2016, respectively, to our compensation expense.

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 $1,046.4 million, $900.6 million and $826.5 million for 2018, 2017 and 2016, respectively. Net earnings attributable to controlling interests were $633.5 million, $481.3 million and $396.5 million for 2018, 2017 and 2016, 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 2018, 2017 and 2016 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 2017 and 2016 we did not make discretionary contributions to the plan.

See Note 13 to our 2018 consolidated financial statements for additional information required to be disclosed relating to our defined benefit postretirement plans. We are required to recognize an accrued benefit plan liability for our underfunded defined benefit pension and unfunded retiree medical plans (which we refer to together as the Plans). The offsetting adjustment to the liabilities required to be recognized for the Plans is recorded in “Accumulated Other Comprehensive Earnings (Loss),” net of tax, in our consolidated balance sheet. We will recognize subsequent changes in the funded status of the Plans through the income statement and as a component of comprehensive earnings, as appropriate, in the year in which they occur. Numerous items may lead to a change in funded status of the Plans, including actual results differing from prior estimates and assumptions, as well as changes in assumptions to reflect information available at the respective measurement dates.

In 2018, the funded status of the Plans was favorably impacted by the $30.0 million contribution discussed above and an increase in the discount rate used in the measurement of the pension liabilities at December 31, 2018, which resulted in a decrease of approximately $20.2 million. However, the funded status was unfavorably impacted by returns on the plan’s assets being lower in 2018 than anticipated by approximately $31.4 million. The net change in the funded status of the Plan in 2018 resulted in a decrease in noncurrent liabilities in 2018 of $18.8 million. In 2017, the funded status of the Plans was unfavorably impacted by a decrease in the discount rates used in the measurement of the pension liabilities at December 31, 2017, the impact of which was approximately $9.2 million. However, the funded status was favorably impacted by returns on the plan’s assets being higher in 2017 than anticipated by approximately $10.7 million. The net change in the funded status of the Plan in 2017 resulted in a decrease in noncurrent liabilities in 2017 of $1.5 million. While the change in funded status of the Plans had no direct impact on our cash flows from operations in 2018, 2017 and 2016, 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 $124.4 million, $129.2 million and $217.8 million for 2018, 2017 and 2016, respectively, of which $11.8 million in 2017, $112.1 million in 2016 related to expenditures on our new corporate headquarters building. In addition, 2018 capital expenditures include amounts incurred related to investments made in information technology and software development projects. Relating to the development of our new corporate headquarters, we received property tax related credits under a tax-increment 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. The net capital expenditures in 2017 primarily related to capitalized costs associated with expenditures on the implementation of new accounting and financial reporting systems and several other system initiatives that occurred in 2017. The net capital expenditures in 2016 primarily related to capitalized costs associated with expenditures on our new corporate headquarters building and the implementation of new accounting and financial reporting systems and several other system initiatives that occurred in 2016. In 2019, we expect total expenditures for capital improvements to be approximately $128.0 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 $784.8 million, $376.1 million and $243.4 million in 2018, 2017 and 2016, respectively. The increased use of cash for acquisitions in 2018 compared to 2017 was primarily due to an increase in the number and size of acquisitions in 2018 than occurred in 2017 and we used less of our common stock to fund acquisitions in 2018. The increased use of cash for acquisitions in 2017 compared to 2016 was primarily due to an increase in the number and size of acquisitions in 2017 than occurred in 2016 and we used less of our common stock to fund acquisitions in 2017. In addition, during 2018, 2017 and 2016 we issued 0.8 million shares ($60.8 million), 1.0 million shares ($59.6 million) and 2.0 million shares ($89.6 million), respectively, of our common stock as payment for a portion of the total consideration paid for acquisitions and earnout payments. We completed 48, 39 and 37 acquisitions in 2018, 2017 and 2016, respectively. Annualized revenues of businesses acquired in 2018, 2017 and 2016 totaled approximately $339.8 million, $172.3 million and $137.9 million, respectively. In 2019, 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.

Dispositions - During 2018, 2017 and 2016, we sold several books of business and recognized one-time gains of $10.2 million, $3.4 million and $6.6 million, respectively. We received cash proceeds of $14.5 million, $3.2 million and $7.8 million, respectively, related to these transactions.

On January 8, 2019, we sold a travel insurance brokerage operation that was initially purchased in 2014. In the first quarter 2019, we expect to recognize a one-time, net gain between $0.20 and $0.23 of diluted net earnings per share as a result of the sale.

Clean Energy Investments - During the period from 2009 through 2018, 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 2019 annual net after-tax earnings, including IRC Section 45 tax credits, which will be produced from all of our clean energy investments in 2019, is $105.0 million to $115.0 million. The IRC Section 45 tax credits generate positive cash flow by reducing the amount of federal income taxes we pay, which is offset by the operating expenses of the plants, by capital expenditures related to the redeployment, and in some cases the relocation of refined coal plants. We anticipate positive net cash flow related to IRC Section 45 activity in 2019. However, there are several variables that can impact net cash flow from clean energy investments in any given year. Therefore, accurately predicting positive or negative cash flow in particular future periods is not possible at this time. Nonetheless, if current ownership interests remain the same, if capital expenditures related to

redeployment and relocation of refined coal plants remain as currently anticipated, and if we continue to generate sufficient taxable income to use the tax credits produced by our IRC Section 45 investments, we anticipate that these investments will continue to generate positive net cash flows for the period 2019 through at least 2025. While we cannot precisely forecast the cash flow impact in any particular period, we anticipate that the net cash flow impact of these investments will be positive overall. Please see “Clean energy investments” on pages 50 to 51 for a more detailed description of these investments and their risks and uncertainties.

Cash Flows From Financing Activities

On April 8, 2016, we entered into an amendment and restatement to our multicurrency credit agreement dated September 19, 2013 (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 September 19, 2018 to April 8, 2021 and increased the revolving credit commitment from $600.0 million to $800.0 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 $1,100.0 million. There were $265.0 million of borrowings outstanding under the Credit Agreement at December 31, 2018. Due to the outstanding borrowing and letters of credit, $518.0 million remained available for potential borrowings under the Credit Agreement at December 31, 2018.

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 2018, we borrowed an aggregate of $3,075.0 million and repaid $3,000.0 million under our Credit Agreement. During 2017, we borrowed an aggregate of $3,643.0 million and repaid $3,731.0 million under our Credit Agreement. During 2016, we borrowed an aggregate of $2,740.0 million and repaid $2,657.0 million under our Credit Agreement. Principal uses of the 2018, 2017 and 2016 borrowings under the Credit Agreement were to fund acquisitions, earnout payments related to acquisitions and general corporate purposes.

We have a secured revolving loan facility (which we refer to as the Premium Financing Debt Facility), that provides funding for the three Australian (AU) and New Zealand (NZ) premium finance subsidiaries. The Premium Financing Debt Facility is comprised of: (i) Facility B, which is separated into AU$160.0 million and NZ$25.0 million tranches, (ii) Facility C, an AU$25.0 million equivalent multi-currency overdraft tranche and (iii) Facility D, a NZ$15.0 million equivalent multi-currency overdraft tranche. There was a three month increase in the AU $160.0 million tranche to AU $190.0 million, which expired on January 31, 2019. The Premium Financing Debt Facility expires May 18, 2020. At December 31, 2018, $154.0 million of borrowings were outstanding under the Premium Financing Debt Facility.

At December 31, 2018, we had $3,198.0 million of corporate-related borrowings outstanding under separate note purchase agreements entered into in the period 2009 to 2018, $265.0 million outstanding under our credit facility, $154.0 million outstanding under our Premium Financing Debt Facility and a cash and cash equivalent balance of $607.2 million. See Note 8 to our 2018 consolidated financial statements for a discussion of the terms of the note purchase agreements, the Credit Agreement and the Premium Financing Debt Facility.

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 4.14% using three-month LIBOR on February 4, 2019. 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.

The notes consist of the following tranches:

	•		$125.0 million of 4.34% senior notes due in 2028 (4.00% after giving effect to hedging gains);

	•		$125.0 million of 4.44% senior notes due in 2030;

	•		$125.0 million of 4.59% senior notes due in 2033;

	•		$75.0 million of 4.69% senior notes due in 2038; and

	•		$50.0 million of floating rate notes due in 2024, at an interest rate of 1.40% plus three-month LIBOR, calculated quarterly.

On June 24, 2018 we funded the $50.0 million maturity of our Series K notes, and on November 30, 2018 we funded the $50.0 million maturity of our Series C notes.

Consistent with past practice, as of December 31, 2018 we had pre-issuance hedges open for $350.0 million for 2019, $250.0 million for 2020 and $250.0 million for 2021.

On June 13, 2017, we completed a $648.0 million aggregate principal amount of private placement senior unsecured notes (both fixed and floating rate). We funded $250.0 million on June 27, 2017, $300.0 million on August 2, 2017 and $98.0 million on August 4, 2017, which was used in part to fund the $300.0 million August 3, 2017 Series B notes maturity. The weighted average maturity of the $598.0 million of senior fixed rate notes is 11.6 years and their weighted average interest rate is 4.04% after giving effect to hedging gains. The interest rate on the $50.0 million of floating rate notes would be 4.39% using three-month LIBOR on February 4, 2019. In 2016 and 2017, we entered into pre-issuance interest rate hedging transactions related to the $300.0 million August 3, 2017 notes maturity. We realized a cash gain of approximately $8.3 million on the hedging transaction that will be recognized on a pro rata basis as a reduction in our reported interest expense over the life of the debt.

We completed a $275.0 million, ten year maturity, private placement debt transaction on June 2, 2016, with a weighted average interest rate of 4.47%. In 2016, we entered into a pre-issuance interest rate hedging transaction related to the $175.0 million, ten year tranche, of the $275.0 million private placement debt. We realized a cash gain of approximately $1.0 million on the hedging transaction that will be recognized on a pro rata basis as a reduction in our reported interest expense over the ten year life of the debt.

On November 30, 2016, we funded the $50.0 million 2016 maturity of our Series C notes.

We completed a $100.0 million, eleven year maturity, private placement debt transaction on December 1, 2016, with an interest rate of 3.46%. A portion of the proceeds was used to fund the $50.0 million of private placement debt that matured on November 30, 2016.

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, 2018.

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 2018, we declared $303.3 million in cash dividends on our common stock, or $1.64 per common share. On December 21, 2018, we paid a fourth quarter dividend of $0.41 per common share to shareholders of record as of December 7, 2018. On January 30, 2019, we announced a quarterly dividend for first quarter 2019 of $0.43 per common share. If the dividend is maintained at $0.43 per common share throughout 2019, this dividend level would result in an annualized net cash used by financing activities in 2019 of approximately $316.3 million (based on the outstanding shares as of December 31, 2018), or an anticipated increase in cash used of approximately $14.5 million compared to 2018. We can make no assurances regarding the amount of any future dividend payments.

Shelf Registration Statement - On November 15, 2016, 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, 2018, 9.2 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 year ended December 31, 2018, we repurchased 0.1 million shares of our common stock at cost of $11.3 million. During the year ended December 31, 2017, we repurchased 0.3 million shares of our common stock at cost of $17.7 million. During the year ended December 31, 2016, we repurchased 2.3 million shares of our common stock at cost of $101.0 million. Under the provisions of the repurchase plan, we are authorized to repurchase approximately 7.3 million additional shares at December 31, 2018. 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 $81.9 million in 2018, $60.4 million in 2017 and $45.6 million in 2016. 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 14.4 million shares (less any shares of restricted stock issued under the LTIP – 3.3 million shares of our common stock were available for this purpose as of December 31, 2018) were available for grant under the LTIP at December 31, 2018. 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, 2018, 2017 and 2016, and we believe this favorable trend will continue in the foreseeable future.

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

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 16 to our 2018 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, 2018 are as follows (in millions):


	Payments Due by Period
Contractual Obligations	2019			2020			2021			2022			2023			Thereafter			Total
Note purchase agreements	$	100.0		$	100.0		$	75.0		$	200.0		$	300.0		$	2,423.0		$	3,198.0
Credit Agreement		265.0			—			—			—			—			—			265.0
Premium Financing Debt Facility		154.0			—			—			—			—			—			154.0
Interest on debt		138.0			132.5			127.9			122.5			113.1			444.5			1,078.5

Total debt obligations		657.0			232.5			202.9			322.5			413.1			2,867.5			4,695.5
Operating lease obligations		106.8			92.0			78.8			61.1			44.3			87.4			470.4
Less sublease arrangements		(0.8	)		(0.6	)		(0.6	)		(0.3	)		(0.3	)		(1.0	)		(3.6	)
Outstanding purchase obligations		32.1			14.6			11.3			2.1			—			—			60.1

Total contractual obligations	$	795.1		$	338.5		$	292.4		$	385.4		$	457.1		$	2,953.9		$	5,222.4

The amounts presented in the table above may not necessarily reflect our actual future cash funding requirements, because the actual timing of the future payments made may vary from the stated contractual obligation. In addition, due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2018, we are unable to make reasonably reliable estimates of the period in which cash settlements may be made with the respective taxing authorities. Therefore, $10.7 million of unrecognized tax benefits have been excluded from the contractual obligations table above. See Note 18 to our 2018 consolidated financial statements for a discussion on income taxes.

On December 22, 2018, we signed a definitive agreement to acquire 100% of the equity of Stackhouse Poland Group Limited (which we refer to as Stackhouse Poland) headquartered in Guildford, Surrey, U.K., for approximately $350.0 million of cash consideration. The transaction is subject to regulatory approval and is expected to close in the first quarter of 2019.

See Note 8 to our 2018 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, 2018 are as follows (in millions):


													Total
	Amount of Commitment Expiration by Period												Amounts
Off-Balance Sheet Commitments	2019		2020		2021		2022		2023		Thereafter		Committed
Letters of credit	$	—	$	1.3	$	—	$	—	$	—	$	17.0	$	18.3
Financial guarantees		0.2		0.2		0.2		0.2		0.2		0.6		1.6

Total commitments	$	0.2	$	1.5	$	0.2	$	0.2	$	0.2	$	17.6	$	19.9

Since commitments may expire unused, the amounts presented in the table above do not necessarily reflect our actual future cash funding requirements. See Note 16 to our 2018 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.

Since January 1, 2002, we have acquired 507 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 2013 to 2018 that contain potential earnout obligations, such obligations are measured at fair value as of the acquisition date and are included on that basis in the recorded purchase price consideration for the respective acquisition. The amounts recorded as earnout payables are primarily based upon

estimated future operating results of the acquired entities over a two- to three-year period subsequent to the acquisition date. The aggregate amount of the maximum earnout obligations related to these acquisitions was $558.1 million, of which $258.8 million was recorded in our consolidated balance sheet as of December 31, 2018, based on the estimated fair value of the expected future payments to be made.

Off-Balance Sheet Debt - Our unconsolidated investment portfolio includes investments in enterprises where our ownership interest is between 1% and 50%, in which management has determined that our level of influence and economic interest is not sufficient to require consolidation. As a result, these investments are accounted for under the equity method. None of these unconsolidated investments had any outstanding debt at December 31, 2018 and 2017 that was recourse to us.

At December 31, 2018, we had posted two letters of credit totaling $10.2 million, in the aggregate, related to our self-insurance deductibles, for which we have recorded a liability of $15.8 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, 2018, we had posted seven letters of credit totaling $6.3 million to allow certain of our captive operations to meet minimum statutory surplus requirements plus additional collateral related to premium and claim funds held in a fiduciary capacity, one letter of credit totaling $1.3 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.

Previous: Item 6. Selected Financial Data. · Next: Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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