How did Gallagher perform financially in 1998?

Total revenues grew 8% to $540.7 million and net earnings grew 3% to $56.5 million. Diluted EPS was $3.10, down from $3.17 in 1997, because 1997 included $9.0 million of non-recurring gains and the share count rose after acquisitions.

Which business segments drove growth?

Risk Management Services led, with revenues up 18% to $168.8 million on new business and favorable retention. Insurance Brokerage Services grew 9% to $362.5 million, driven by new business production and acquisitions, partly offset by lost business.

What risks do investors should consider?

Management expects property/casualty premium rates to stay under pressure through 1999 in a soft market, which can keep renewal commissions flat or lower. The investment portfolio is also exposed to equity market swings, and roughly 10% of pretax earnings from UK operations is exposed to currency movements, with a 10% dollar weakening estimated to reduce pretax earnings by about $2.0 million.

How is the company returning capital to shareholders?

Dividends paid in 1998 totaled $23.2 million, and the quarterly dividend rose to $0.35 per share during the year. The first-quarter 1999 dividend was increased to $0.40. The company also repurchased 215,000 shares for $8.7 million in 1998, and it has authorization for about 535,000 more shares through June 30, 1999.

How is Gallagher growing through acquisitions?

In 1998 the company acquired twelve insurance brokerage firms and one benefits consulting company, mostly in exchange for 681,000 shares. In February 1999 it completed three more poolings of interest, issuing about 404,000 shares in total. Management says acquisitions mainly expand its service volume and geographic reach without substantially changing the nature of its services.

AJG 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 26, 1999. Cited figures are marked; the original filing is the authoritative source.

Arthur J.

Gallagher & Co. (AJG) reported solid 1998 results, with total revenues up 8% to $540.7 million^a (from $500.5 million in 1997, restated for poolings) and net earnings up 3% to $56.5 million. Diluted EPS (net earnings per common and common equivalent share) was $3.10, versus $3.17 in 1997, a decline driven by a larger share count after acquisitions and by the absence of 1997's non-recurring gains of $9.0 million. Growth came mainly from Risk Management Services, where revenues rose 18% to $168.8 million, and from Insurance Brokerage Services, where revenues rose 9% to $362.5 million.

Investment income fell 23% to $18.5 million^b because of weaker returns from outside fund managers during volatile 1998 equity markets. The balance sheet expanded: total assets grew to $746.0 million and stockholders' equity rose to $202.5 million, while the company carried no borrowings under its $20 million revolving credit facility at year end. Management expects soft property/casualty premium pricing to persist into 1999, which could pressure commission revenues, and it points to alternative-market risk management and self-insurance services as the main growth drivers.

The company also raised its dividend, with the first-quarter 1999 payment set at $0.40^c per share, up 14%, and it completed three poolings of interest acquisitions in February 1999. For investors, the filing shows a steady, cash-generative brokerage franchise with high return on beginning equity (34%), a modest but growing dividend, and an acquisition strategy funded mostly with stock. Watch for the investment portfolio's sensitivity to market volatility, the cyclical soft-market pressure on commissions, and the slight dilution in per-share earnings.

02—Key points

Key Highlights

Total revenues rose 8% to $540.7 million in 1998, with commissions up 10% to $313.1 million and fees up 15% to $209.0 million.
Net earnings grew 3% to $56.5 million, but diluted EPS fell slightly to $3.10 from $3.17 after 1997's non-recurring gains did not repeat.
Risk Management Services was the fastest-growing segment, with revenues up 18% to $168.8 million on new business and strong retention.
Investment income and other fell 23% to $18.5 million due to weaker returns from outside managers and a $24.0 million reduction in portfolio value from liquidations.
Return on beginning stockholders' equity was 34%, and stockholders' equity reached $202.5 million at year end.
The company had no borrowings under its $20 million revolving credit facility at year end and generated $56.4 million in operating cash flow.
The dividend was raised to $1.40 per share for 1998, and the first-quarter 1999 dividend was increased 14% to $0.40 per share.

03—Questions

Frequently Asked Questions

How did Gallagher perform financially in 1998?
Total revenues grew 8% to $540.7 million and net earnings grew 3% to $56.5 million. Diluted EPS was $3.10, down from $3.17 in 1997, because 1997 included $9.0 million of non-recurring gains and the share count rose after acquisitions.
Which business segments drove growth?
Risk Management Services led, with revenues up 18% to $168.8 million on new business and favorable retention. Insurance Brokerage Services grew 9% to $362.5 million, driven by new business production and acquisitions, partly offset by lost business.
What risks do investors should consider?
Management expects property/casualty premium rates to stay under pressure through 1999 in a soft market, which can keep renewal commissions flat or lower. The investment portfolio is also exposed to equity market swings, and roughly 10% of pretax earnings from UK operations is exposed to currency movements, with a 10% dollar weakening estimated to reduce pretax earnings by about $2.0 million.
How is the company returning capital to shareholders?
Dividends paid in 1998 totaled $23.2 million, and the quarterly dividend rose to $0.35 per share during the year. The first-quarter 1999 dividend was increased to $0.40. The company also repurchased 215,000 shares for $8.7 million in 1998, and it has authorization for about 535,000 more shares through June 30, 1999.
How is Gallagher growing through acquisitions?
In 1998 the company acquired twelve insurance brokerage firms and one benefits consulting company, mostly in exchange for 681,000 shares. In February 1999 it completed three more poolings of interest, issuing about 404,000 shares in total. Management says acquisitions mainly expand its service volume and geographic reach without substantially changing the nature of its services.

04—Continue

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