01—Abstract
Summary
Summary of the 10-K filed March 4, 1996. Cited figures are marked; the original filing is the authoritative source.
Arthur J.
Gallagher & Co. reported solid 1995 results, with total revenues up 12% to $412.0 milliona from $367.7 million. Commissions rose 9% to $235.9 million on $30.4 million of new business production, and fees rose 13% to $160.1 million, led by Gallagher Bassett Services. Net earnings grew 21% to $41.5 million, and earnings per share rose 20% to $2.54.
Pretax margin improved to about 15%b from 14%, and the effective tax rate fell to 34%. Management attributes the growth to risk management and self-insurance services, which it expects to remain a major contributor to fee growth in 1996. The company's acquisitions are accounted for as poolings of interests, so prior periods are restated, which makes year-over-year comparisons less direct.
The balance sheet is conservative. Total assets were $495.8 millionc and stockholders' equity was $118.1 million, up from $96.2 million, largely from retained earnings. Long-term debt was only $3.4 million, and the $20 million revolving credit facility had no borrowings outstanding.
Much of the balance sheet consists of fiduciary premium funds, with $263.4 milliond of premiums payable to insurers offset by $193.7 million of receivables and $67.7 million of restricted cash. Management says internally generated cash is sufficient for foreseeable needs. Dividends were raised to $1.00 per share for 1995 from $0.88, and the first-quarter 1996 dividend was increased 16% to $0.29.
Risks remain. Management describes a prolonged soft property and casualty market with flat-to-reduced renewal commissions, lower interest income, and intense competition from larger brokers. Revenue is also seasonal, driven by policy renewal timing.
Other considerations include the sudden death of Vice Chairman John P. Gallagher in February 1996, the Levitt/Kristan pooling acquisition in February 1996, and the company's reliance on continued acquisitions to grow.
02—Key points
Key Highlights
- Total revenues grew 12% to $412.0 million in 1995, with commissions up 9% to $235.9 million and fees up 13% to $160.1 million.
- Net earnings rose 21% to $41.5 million and diluted EPS rose 20% to $2.54, with net margin improving to 10% from 9%.
- Fee revenue growth was led by Gallagher Bassett Services, with $26.3 million of new fee business production in 1995.
- Balance sheet is conservative: long-term debt of $3.4 million, no borrowings under the $20 million revolving credit facility, and stockholders' equity up 23% to $118.1 million.
- Dividends per share increased to $1.00 in 1995 from $0.88, and the first-quarter 1996 dividend was raised 16% to $0.29.
- Management expects the soft property and casualty pricing environment to persist, with insurance pricing unlikely to change significantly in the foreseeable future.
- The company repurchased 437,000 shares for $15.1 million in 1995 and continues a buyback program authorized for about 360,000 more shares through June 1996.
03—Questions
Frequently Asked Questions
What drove revenue growth in 1995?
Commission revenue increased $19.4 million (9%), mainly from $30.4 million of new business production partly offset by lost business. Fee revenue increased $18.6 million (13%), driven primarily by Gallagher Bassett Services and $26.3 million of new business. Investment income and other rose 66% to $16.1 million, helped by higher returns from outside fund managers and a $2.0 million gain on a subsidiary sale.
Is the company's profitability improving?
Yes. Pretax earnings rose 19% to $62.9 million, and pretax margin reached about 15% versus 14% in 1994. The effective tax rate fell to 34% from 35%, helped by investment tax benefits, and net earnings grew 21%. Salaries and benefits and other operating costs grew more slowly than revenue overall, though other operating expenses rose 11% on new office space and higher insurance costs.
How financially sound is the company?
Quite sound. Long-term debt was only $3.4 million at year-end 1995, and the company said internally generated funds are sufficient for its foreseeable needs, including dividends, capital spending, and debt repayment. Its $20 million revolving credit facility is undrawn, and its $17.5 million and $10.0 million lines of credit are also unused. Most of the balance sheet reflects premiums held in fiduciary trust funds, which are excluded from the company's liquidity calculation.
What are the main risks to future earnings?
Key risks include the prolonged soft market, which keeps renewal commissions flat to lower; low interest rates, which reduce investment income; intense competition from larger brokers and insurers that sell directly; quarterly revenue volatility tied to policy renewal timing; and reliance on acquisitions for growth. Management also flagged turmoil at Lloyd's of London. The company's pending integration of recent poolings and the February 1996 death of Vice Chairman John P. Gallagher are additional items to monitor.
04—Continue