Arthur J. Gallagher & Co. 2009 10-K Summary
Business Context and Reporting Period
This filing covers the fiscal year ended December 31, 2009. Arthur J. Gallagher & Co. (AJG) is the world's fifth-largest insurance broker and the largest third-party property/casualty (P/C) claims administrator. The company operates three segments: Brokerage (74% of revenue), Risk Management (26% of revenue), and Financial Services and Corporate (<1% of revenue). Approximately 89% of revenues are generated domestically, with the remainder from operations in Australia, Bermuda, Canada, New Zealand, and the U.K.
Key Financial Metrics
| Metric (in millions) | 2009 | 2008 |
|---|---|---|
| Total Revenues | $1,729.3 | $1,645.0 |
| Net Earnings | $128.6 | $77.3 |
| Earnings from Continuing Operations | $133.1 | $111.4 |
| Diluted EPS (Continuing Ops) | $1.32 | $1.18 |
| Operating Cash Flow | $211.5 | $160.6 |
| Total Assets | $3,250.3 | $3,271.3 |
| Long-Term Debt | $550.0 | $400.0 |
| Stockholders' Equity | $892.9 | $738.5 |
Segment Performance: Brokerage earnings from continuing operations increased 19% to $123.7 million. Risk Management earnings increased 9% to $30.7 million. The Financial Services segment reported a loss of $21.3 million, primarily due to the expiration of IRC Section 29 tax credits in 2007 and ongoing investment losses.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 5.1% year-over-year, driven by acquisitions ($142.8 million in Brokerage revenue) and fee growth, despite a 3% organic decline in Brokerage commissions and fees due to a soft insurance market.
- Profitability: Net earnings increased 66% compared to 2008, largely due to a significant loss from discontinued operations in 2008 ($34.1 million) related to the exit of reinsurance and Irish wholesale brokerage businesses, which was minimal in 2009 ($4.5 million).
- Debt Structure: Long-term debt increased by $150 million following the issuance of $150 million in 5.85% Senior Notes in November 2009. The company had no borrowings outstanding under its $450 million Credit Agreement at year-end.
- Cost Reduction: In Q4 2009, the company recorded $11.8 million in pretax charges for workforce reductions (approx. 400 positions) and lease terminations, targeting $34 million in annual savings.
Guidance, Outlook, and Risks
Outlook: Management expects historically favorable earnings trends to continue, driven by organic growth and acquisitions. The company anticipates an effective tax rate of 39% to 41% for the Brokerage and Risk Management segments. Gallagher expects to generate up to $40 million in aggregate annual after-tax income from new IRC Section 45 clean-energy facilities once fully operational, though this is subject to significant regulatory and operational risks.
Key Risks:
- Insurance Market Cycles: Commission revenues are highly dependent on premium rates, which are currently in a "soft" market with downward pressure on rates.
- Contingent Commissions: Revenue from contingent commissions is less predictable and dependent on insurer profitability.
- IRC Section 45 Investments: Significant uncertainties exist regarding the ability to recoup investments in clean-energy facilities, including regulatory permitting, coal price fluctuations, and operational risks.
- Credit Market Disruption: While currently compliant with covenants, disruptions in credit markets could limit access to capital or increase financing costs.
- Legal Proceedings: The company is subject to various lawsuits and regulatory actions, including those related to contingent commission arrangements (MDL settlement finalized in Dec 2009).
Investor Verification Checklist
- Organic Growth vs. Acquisitions: Verify the sustainability of revenue growth given the 3% organic decline in Brokerage commissions and fees, which was offset by acquisition activity.
- Discontinued Operations Impact: Confirm that the 2008 comparison is skewed by the $34.1 million loss from discontinued operations, making the 2009 earnings improvement appear larger than operational performance alone suggests.
- IRC Section 45 Viability: Assess the risks associated with the $31.4 million investment in clean-energy facilities, specifically the requirement for long-term permits and the potential for coal price phase-outs of tax credits.
- Debt Covenants: Review the financial covenants in the Note Purchase Agreements and Credit Agreement to ensure continued compliance given the economic environment.
- Contingent Commission Exposure: Evaluate the volatility of revenue streams tied to insurer profitability and the impact of the Illinois settlement ending in October 2009.