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Commitments, Contingencies and Off-Balance Sheet Arrangements | 6 Months Ended
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Jun. 30, 2018
Commitments and Contingencies Disclosure [Abstract] |
Commitments, Contingencies and Off-Balance Sheet Arrangements |
14. |  | Commitments, Contingencies and Off-Balance Sheet Arrangements
In connection with our investing and operating activities, we have entered into certain contractual obligations and commitments. Our future minimum cash payments, including interest, associated with our contractual obligations pursuant to the note purchase agreements, Credit Agreement, Premium Financing Debt Facility, operating leases and purchase commitments at June 30, 2018 were as follows (in millions):
|  | Payments Due by Period |
Contractual Obligations |  | 2018 |  |  | 2019 |  |  | 2020 |  |  | 2021 |  |  | 2022 |  |  | Thereafter |  |  | Total |
Note purchase agreements |  | $ | 50.0 |  |  | $ | 100.0 |  |  | $ | 100.0 |  |  | $ | 75.0 |  |  | $ | 200.0 |  |  | $ | 2,723.0 |  |  | $ | 3,248.0 |
Credit Agreement |  |  | 135.0 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 135.0 |
Premium Financing Debt Facility |  |  | 111.1 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 111.1 |
Interest on debt |  |  | 70.4 |  |  |  | 137.4 |  |  |  | 132.7 |  |  |  | 127.9 |  |  |  | 122.4 |  |  |  | 557.6 |  |  |  | 1,148.4 |
Total debt obligations |  |  | 366.5 |  |  |  | 237.4 |  |  |  | 232.7 |  |  |  | 202.9 |  |  |  | 322.4 |  |  |  | 3,280.6 |  |  |  | 4,642.5 |
Operating lease obligations |  |  | 54.7 |  |  |  | 100.1 |  |  |  | 85.6 |  |  |  | 73.3 |  |  |  | 57.3 |  |  |  | 144.9 |  |  |  | 515.9 |
Less sublease arrangements |  |  | (0.8 | ) |  |  | (0.8 | ) |  |  | (0.6 | ) |  |  | (0.6 | ) |  |  | (0.4 | ) |  |  | (1.2 | ) |  |  | (4.4 | )
Outstanding purchase obligations |  |  | 24.4 |  |  |  | 38.0 |  |  |  | 26.5 |  |  |  | 14.2 |  |  |  | 10.8 |  |  |  | 28.7 |  |  |  | 142.6 |
Funding related to the acquistion of Reassurance Holdings, Inc., (see Note 4) |  |  | 122.1 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 122.1 |
Total contractual obligations |  | $ | 566.9 |  |  | $ | 374.7 |  |  | $ | 344.2 |  |  | $ | 289.8 |  |  | $ | 390.1 |  |  | $ | 3,453.0 |  |  | $ | 5,418.7 |
The amounts presented in the table above may not necessarily reflect our actual future cash funding requirements, because the actual timing of future payments may vary from the stated contractual obligation. Note Purchase Agreements, Credit Agreement and Premium Financing Debt Facility - See Note 7 to these unaudited consolidated financial statements for a summary of the amounts outstanding under the note purchase agreements, the Credit Agreement and Premium Financing Debt Facility. Operating Lease Obligations - Our corporate segment’s executive offices and certain subsidiary and branch facilities of our brokerage and risk management segments are located at 2850 Golf Road, Rolling Meadows, Illinois, where we have approximately 360,000 square feet of space and will accommodate approximately 2,000 employees at peak capacity. Our prior headquarters were located at Two Pierce Place, Itasca, Illinois, where we leased approximately 306,000 square feet of space, or approximately 60% of the building. The lease commitment on the Itasca property expired on February 28, 2018. During first quarter 2017, we relocated our corporate office headquarters to the Rolling Meadows location and totally exited the leased space in third quarter 2017. No move related charges were incurred in the first two quarters of 2018. Relating to the development of our new corporate headquarters, we expect to receive property tax related credits under a tax-increment financing note from Rolling Meadows and an Illinois state Economic Development for a Growing Economy (which we refer to as Edge) tax credit. Incentives from these two programs could total between $60.0 million and $80.0 million over a fifteen-year period. We have recognized approximately $10.0 million of Edge credits through June 30, 2018. We generally operate in leased premises at our other locations. Certain of these leases have options permitting renewals for additional periods. In addition to minimum fixed rentals, a number of leases contain annual escalation clauses which are generally related to increases in an inflation index. We have leased certain office space to several non-affiliated tenants under operating sublease arrangements. In the normal course of business, we expect that certain of these leases will not be renewed or replaced. We adjust charges for real estate taxes and common area maintenance annually based on actual expenses, and we recognize the related revenues in the year in which the expenses are incurred. These amounts are not included in the minimum future rentals to be received in the contractual obligations table above. Outstanding Purchase Obligations - We typically do not have a material amount of outstanding purchase obligations at any point in time. The amount disclosed in the contractual obligations table above represents the aggregate amount of unrecorded purchase obligations that we had outstanding at June 30, 2018. These obligations represent agreements to purchase goods or services that were executed in the normal course of business. Off-Balance Sheet Commitments - Our total unrecorded commitments associated with outstanding letters of credit, and financial guarantees as of June 30, 2018 were as follows (in millions):
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Total |
|  | Amount of Commitment Expiration by Period |  |  | Amounts |
Off-Balance Sheet Commitments |  | 2018 |  |  | 2019 |  |  | 2020 |  |  | 2021 |  |  | 2022 |  |  | Thereafter |  |  | Committed |
Letters of credit |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 16.5 |  |  | $ | 16.5 |
Financial guarantees |  |  | 0.1 |  |  |  | 0.2 |  |  |  | 0.2 |  |  |  | 0.2 |  |  |  | 0.2 |  |  |  | 0.8 |  |  |  | 1.7 |
Total commitments |  | $ | 0.1 |  |  | $ | 0.2 |  |  | $ | 0.2 |  |  | $ | 0.2 |  |  | $ | 0.2 |  |  | $ | 17.3 |  |  | $ | 18.2 |
Since commitments may expire unused, the amounts presented in the table above do not necessarily reflect our actual future cash funding requirements. See the Off-Balance Sheet Debt section below for a discussion of our letters of credit. All of the letters of credit represent multiple year commitments that have annual, automatic renewing provisions and are classified by the latest commitment date. Since January 1, 2002, we have acquired 478 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 $552.3 million, of which $266.9 million was recorded in our consolidated balance sheet as of June 30, 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 June 30, 2018 or December 31, 2017, that was recourse to us. At June 30, 2018, we had posted two letters of credit totaling $9.7 million, in the aggregate, related to our self-insurance deductibles, for which we had a recorded liability of $14.9 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 June 30, 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, 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. Litigation, Regulatory and Taxation Matters - We are a defendant in various legal actions incidental to the nature of our business including but not limited to matters related to employment practices, alleged breaches of non-compete or other restrictive covenants, theft of trade secrets, breaches of fiduciary duties and related causes of action. We are also periodically the subject of inquiries, investigations and reviews by regulatory and taxing authorities into various matters related to our business, including our operational, compliance and finance functions. Neither the outcomes of these matters nor their effect upon our business, financial condition or results of operations can be determined at this time. On April 18, 2018, Nalco Company (Nalco) filed patent infringement lawsuits in the Western District of Wisconsin against two unaffiliated power plants that burn refined coal using the Chem-Mod LLC process. The filing of these complaints followed Nalco’s voluntary dismissal of a complaint originally filed in the Northern District of Illinois in July 2014 against Chem-Mod LLC and other defendants, as previously disclosed in our SEC filings. On July 16, 2018, Nalco amended its complaints to name as additional defendants the two refined coal facilities licensed by Chem-Mod LLC to use the Chem-Mod process to produce and supply refined coal to the two power plants. The newly filed complaints allege that the named defendants have infringed a patent held by Nalco and seek unspecified damages and injunctive relief. Although neither Gallagher nor Chem-Mod LLC is named as a defendant in these lawsuits, we anticipate the defense of these lawsuits will be tendered to Chem-Mod LLC. If so tendered, Chem-Mod LLC intends to defend these matters vigorously. Litigation is inherently uncertain and, accordingly, it is not possible to predict the ultimate disposition of these matters. Our micro-captive advisory services are under investigation by the 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, if the IRS were to successfully assert that the micro-captives organized and/or managed by us do not meet the requirements of IRC Section 831(b), we could be held liable to pay monetary claims by the IRS and/or our micro-captive clients, and our future earnings from our micro-captive operations could be materially adversely affected, any of which events could negatively impact the overall captive business and adversely affect our consolidated results of operations and financial condition. In the period from 2015 to 2017, our micro-captive operations contributed less than $3.5 million of net earnings and less than $5.0 million in 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 its audits of our clients, we are not able to reasonably estimate the amount of any potential loss in connection with this investigation. Contingent Liabilities - We purchase insurance to provide protection from errors and omissions (which we refer to as E&O) claims that may arise during the ordinary course of business. We currently retain the first $5.0 million of each and every E&O claim. Our E&O insurance provides aggregate coverage for E&O losses up to $175.0 million in excess of our retained amounts. We have historically maintained self-insurance reserves for the portion of our E&O exposure that is not insured. We periodically determine a range of possible reserve levels using actuarial techniques that rely heavily on projecting historical claim data into the future. Our E&O reserve in the June 30, 2018 consolidated balance sheet is above the lower end of the most recently determined actuarial range by $1.6 million and below the upper end of the actuarial range by $7.1 million. We can make no assurances that the historical claim data used to project the current reserve levels will be indicative of future claim activity. Thus, the E&O reserve level and corresponding actuarial range could change in the future as more information becomes known, which could materially impact the amounts reported and disclosed herein. Tax-advantaged Investments No Longer Held - Between 1996 and 2007, we developed and then sold portions of our ownership in various energy related investments, many of which qualified for tax credits under IRC Section 29. We recorded tax benefits in connection with our ownership in these investments. At June 30, 2018, we had exposure on $108.2 million of previously earned tax credits. Under the Tax Act, we expect that these previously earned tax credits will be refunded for tax years beginning 2018 and ending in 2021, according to a specific formula. In 2004, 2007 and 2009, the IRS examined several of these investments and all examinations were closed without any changes being proposed by the IRS. However, any future adverse tax audits, administrative rulings or judicial decisions could disallow previously claimed tax credits. Due to the contingent nature of this exposure and our related assessment of its likelihood, no reserve has been recorded in our June 30, 2018 consolidated balance sheet related to this exposure.

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