Arthur J. Gallagher & Co. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone fourth-quarter filing. Gallagher provides insurance and reinsurance brokerage, consulting, and third-party claims administration; it generally does not assume net underwriting risk. Brokerage generated about 86% of revenue and risk management 14%; approximately 36% of combined segment revenue came from outside the U.S.
Financial performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Total revenue | $10.072 billion | $8.551 billion | +18% |
| Revenue before reimbursements | $9.927 billion | $8.420 billion | +18% |
| Net earnings | $966.0 million | $1.116 billion | -13% |
| Net earnings attributable to controlling interests | $969.5 million | $1.114 billion | -13% |
| Diluted EPS, GAAP | $4.42 | $5.19 | -15% |
| Diluted EPS, adjusted non-GAAP | $8.76 | $7.54 | +16% |
| Cash from operating activities | $2.032 billion | $1.390 billion | +46% |
- Reported consolidated net margin was approximately 9.6% of total revenue. Brokerage reported net margin was 13.5% versus 16.5%; risk management margin before reimbursements rose to 12.0% from 10.6%.
- Adjusted EBITDAC, a company-defined non-GAAP measure, was $3.010 billion, up 19%; adjusted EBITDAC margin was 34.3% for brokerage and 20.0% for risk management before reimbursements. These measures exclude selected items and are not substitutes for GAAP results.
- Brokerage organic revenue growth was 8.9%; risk management organic revenue growth was 15.8%. Brokerage commissions rose 13% and fees 28%; risk management fees rose 15.5% as reported.
Liquidity, cash flow, and debt
- Operating cash flow was $2.032 billion. Investing activities used $3.293 billion, including $3.042 billion of net cash paid for acquisitions; financing activities provided $2.874 billion.
- Capital expenditures were $193.6 million. Management expects approximately $175 million in 2024, primarily for office moves and technology/software projects, with lower integration-related spending.
- At year-end, cash and cash equivalents were $971.5 million. Gross corporate and other debt was approximately $8.032 billion ($7.965 billion net of unamortized costs and discounts), compared with $6.500 billion gross a year earlier. Fiduciary assets of $26.908 billion were matched by fiduciary liabilities and should not be viewed as freely available liquidity.
- The revolving credit commitment was increased to $1.7 billion; $245 million was drawn and $1.443 billion remained available at year-end. Gallagher reported compliance with debt covenants.
- Interest expense was $296.7 million, up from $256.9 million. 2023 debt issuance included $950 million of notes in March and $1.0 billion in November; proceeds supported acquisitions, earnouts, and general corporate purposes.
- Cash dividends declared were $2.20 per share ($478.8 million). In January 2024, Gallagher announced a first-quarter dividend of $0.60 per share; maintaining that rate through 2024 would imply about $519.8 million of annual cash dividends, based on year-end shares.
Changes, outlook, and notable items
- Revenue growth reflected organic expansion, higher interest income, and acquisitions. Gallagher completed 51 acquisitions in 2023, with approximately $885 million of annualized acquired revenue. Larger transactions included Buck, Cadence Insurance, Eastern Insurance, and My Plan Manager. Net cash paid for acquisitions increased to $3.042 billion from $765 million.
- Despite revenue growth, GAAP earnings and EPS declined. Brokerage earnings were affected by higher expenses, including a $377.3 million increase in estimated acquisition earnout payables and higher amortization. The company recorded $300.7 million of net fair-value adjustments to earnout obligations and $76.6 million of earnout discount accretion. Adjusted earnings exclude multiple acquisition, amortization, and other items; assess the reconciliations when comparing performance.
- Management expects property/casualty rates to continue increasing in 2024, citing loss-cost trends, a hard reinsurance market, catastrophe losses, and social inflation. It also expects continued organic growth, supported by new business, retention, and client exposures, but cautions that weaker economic conditions or slower rate increases could soften revenue growth. Risk management’s favorable claims trends are also expected to continue, subject to economic and employment conditions.
- Gallagher expects sufficient capital and access to capital to meet near- and long-term needs. It anticipates positive net cash flow related to legacy IRC Section 45 tax credits in 2024, but says the timing and amount cannot be precisely predicted. It anticipates after-tax losses from clean energy investments in 2024.
- Buck integration is expected to cost approximately $125 million. Integration of larger acquisitions, retention of key personnel and clients, and realization of projected benefits remain important execution risks.
- Legacy refined-coal tax credits remain a material tax uncertainty: $814.7 million was unused and available for future U.S. federal tax liabilities at year-end. Two IRC Section 45 operations were under IRS audit; Gallagher is contesting the matter. The IRS micro-captive advisory-services audit has been ongoing since 2013; Gallagher says it is cooperating and is not a target of the related criminal investigation.
- The DOJ closed its Ecuador FCPA inquiry in the fourth quarter of 2023 without pursuing enforcement action. Gallagher also settled a patent-infringement case for an amount it described as not material, without admitting wrongdoing.
- Key risks include acquisition integration and earnout estimates, compensation and benefit cost inflation, competition, premium and contingent-revenue volatility, cybersecurity and data privacy, AI, international regulation and currency exposure, climate-related risks, and debt and refinancing needs. The filing reports effective internal control over financial reporting and an unqualified audit opinion.
Important facts for investors to verify
- Track organic growth, retention, renewal pricing, exposure growth, and the split between acquisition-driven and organic revenue.
- Review GAAP-to-adjusted earnings reconciliations, especially earnout remeasurement, amortization, integration expenses, and other excluded costs.
- Monitor debt maturities, borrowing costs, covenant headroom, cash generation, acquisition funding mix, and the impact of additional share issuance.
- Assess acquisition integration progress, including Buck’s expected integration costs, acquired-business performance, and the $1.294 billion recorded fair value of earnout obligations.
- Follow IRS developments on the refined-coal credits and micro-captive matters, and confirm future tax-credit utilization and cash-flow assumptions.
- Confirm whether 2024 pricing, claims-volume, and margin expectations are borne out, and whether the announced dividend level is maintained.