Arthur J. Gallagher & Co. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed February 10, 2023. Gallagher provides insurance and reinsurance brokerage, consulting, and third-party claims administration. It generally does not assume net underwriting risk. Brokerage, risk management, and corporate contributed approximately 85%, 14%, and 1% of 2022 revenue, respectively.
Financial performance
| Metric | 2022 | 2021 | Change / context |
|---|---|---|---|
| Total revenue, GAAP | $8.551 billion | $8.209 billion | +4.2%; includes reimbursements and legacy clean-energy activity |
| Revenue before reimbursements | $8.420 billion | $8.076 billion | +4.3% |
| Adjusted revenue, non-GAAP | $8.407 billion | $7.886 billion | +6.6% |
| Net earnings attributable to controlling interests | $1.114 billion | $906.8 million | +22.9% |
| Diluted EPS, GAAP | $5.19 | $4.37 | +18.8% |
| Adjusted diluted EPS, non-GAAP | $7.74 | $6.81 | +13.7% |
| Cash provided by operating activities | $2.125 billion | $1.704 billion | Increase partly reflected fiduciary-balance timing and clean-energy tax-credit utilization |
| Capital expenditures | $182.7 million | $128.6 million | Company expects approximately $200 million in 2023 |
Segment highlights: Brokerage revenue was $7.304 billion, up 22%; organic revenue growth was 9.7%. Brokerage reported net earnings of $1.202 billion, up 18%, while adjusted EBITDAC rose 26% to $2.491 billion; adjusted EBITDAC margin was 34.2% versus 34.1%. Risk management revenue before reimbursements was $1.093 billion, up 13%, with 13.3% organic growth. Reported net earnings increased 29% to $115.8 million; adjusted EBITDAC was $201.5 million, up 11%, and adjusted margin was 18.5% versus 19.0%.
Margins, costs and tax: Brokerage reported net earnings margin was 16.5%, down from 17.0%; risk management margin before reimbursements was 10.6%, up from 9.3%. Compensation expense rose to $4.800 billion from $3.928 billion. Consolidated effective tax rate was 15.9%, compared with 2.1% in 2021; both periods were affected by tax items, including clean-energy credits in 2021 and discrete tax benefits and charges in 2022.
Debt and liquidity
- At year-end, total corporate and other debt was approximately $6.150 billion gross and $6.115 billion net of unamortized discounts and issuance costs. Cash and cash equivalents were $342.3 million.
- Gallagher had $60 million drawn on its revolving credit agreement, with $1.151 billion available. It reported compliance with debt covenants.
- Operating cash flow exceeded investing cash outflow of $1.005 billion and financing cash outflow of $523 million. Acquisition cash payments were $764.9 million, versus $3.251 billion in 2021, which included the Willis Re acquisition.
- Restricted cash was $4.622 billion, largely fiduciary client and premium funds and not generally available for corporate use. Premiums and fees receivable were $16.409 billion and premiums payable to underwriting enterprises were $18.698 billion; these balances are significantly affected by fiduciary timing.
- Dividends declared were $2.04 per share in 2022. In January 2023, Gallagher announced a first-quarter dividend of $0.55 per share. No common shares were repurchased under the authorized $1.5 billion program in 2022.
Material changes and unusual items
- Brokerage and risk management growth reflected organic expansion, acquisitions, stronger customer retention and new business, as well as rising renewal premiums and exposures. Brokerage organic commission and fee growth was 9%; risk management organic fee growth was 13%.
- The Willis Re acquisition, completed in December 2021 for an initial gross $3.17 billion, continued to drive integration activity. Up to $750 million of additional consideration may be payable in 2025 based on acquired-operation revenue in 2024.
- Legacy clean-energy revenue fell to $23.0 million from $1.141 billion as the Section 45 tax-credit program expired. After-tax clean-energy results were a $9.2 million loss in 2022, versus $97.4 million of earnings in 2021. No new Section 45 credits were generated in 2022, although previously earned credits remained available for future tax liabilities.
- Adjusted measures exclude selected items, including acquisition integration and transaction costs, amortization, workforce and lease charges, and certain tax and legal items. Adjusted results are non-GAAP and should be considered alongside reported results.
- Acquisition accounting involved significant estimates. The company recorded $709.9 million of goodwill and $564.0 million of expiration lists from 2022 acquisitions; the auditor identified business-combination accounting as a critical audit matter.
Outlook, risks and contingencies
- Management expected insurance pricing to remain firm and rates to continue rising in 2023, citing loss-cost inflation, higher reinsurance pricing, catastrophe frequency and social inflation. It cautioned that worsening economic conditions could soften revenue growth; U.S. property catastrophe renewals could face higher prices and tighter terms.
- Management expected favorable retention, new business and exposure trends to support organic growth, and expected risk-management claim volumes to remain above pandemic lows. The filing provides no company-wide EPS or revenue guidance.
- Gallagher signed an agreement to acquire Buck for $660 million gross, or approximately $585 million net of agreed seller-funded expenses and working capital. Closing was expected in the first half of 2023, subject to approvals; estimated integration expense was approximately $125 million.
- Principal risks include recession and inflation, compensation and benefit costs, insurance-market pricing and underwriting capacity, dependence on acquisitions and integration, talent retention, international and currency exposure, debt and refinancing, cybersecurity and data privacy, and regulatory change. The company also identifies risks from remote work and climate-related market transition.
- In 2022, the DOJ sought information by subpoena concerning Gallagher’s insurance business with public entities in Ecuador; Gallagher said it was cooperating. Its micro-captive advisory business remained under IRS audit, and Gallagher said it was not a target of the related criminal investigation. A patent-infringement case involving Chem-Mod was scheduled for trial in November 2023. Gallagher said it believed the disclosed proceedings would not materially harm its financial position, results or cash flows, while noting legal outcomes remain uncertain.
- IRS audits of certain Section 45 operations could affect previously claimed credits. The filing also reports $108 million of exposure related to previously earned Section 29 credits and environmental, product-liability and intellectual-property risks involving legacy clean-energy investments.
Important facts for investors to verify
- Reconcile GAAP performance with adjusted results, especially the unusually low effective tax rates and the effect of expired clean-energy operations and tax-credit utilization.
- Track organic growth, compensation and operating-cost trends, and whether the favorable retention, pricing and exposure conditions cited by management continue.
- Assess Willis Re integration progress, the potential 2025 contingent payment, and Buck’s closing, funding and integration costs.
- Review debt maturities, interest expense, available revolver capacity, dividend commitments and the distinction between unrestricted cash and fiduciary restricted cash.
- Monitor the DOJ Ecuador inquiry, IRS micro-captive and clean-energy matters, and the Chem-Mod patent litigation for developments or changes in estimated exposure.
- Confirm acquisition-count and acquisition-data reconciliations: portions of the filing cite differing 2022 acquisition counts, and the filing describes acquisition activity using different measures.