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Arthur J. Gallagher & Co. Annual Report, Year Ended Dec 31, 2003

Filing Date
Filed February 9, 2004
Period End
December 31, 2003
Security
AJG
In the record · 2016–202610-K1110-Q328-K136

AJG filed 11 annual reports (10-K), 32 quarterly reports (10-Q) and 136 current reports (8-K) between 2016 and 2026.

  1. Leadership change8-K · May ’17May ’17
  2. Material agreement8-K · Jun ’19Jun ’19
  3. Material agreement8-K · Dec ’21Dec ’21
  4. Deal closed8-K · Aug ’25Aug ’25

01—Abstract

Summary

Summary of the 10-K filed February 9, 2004. Cited figures are marked; the original filing is the authoritative source.

Arthur J.

Gallagher & Co. (AJG) reported strong 2003 results in its 10-K filed February 9, 2004. Total revenues rose 19% to $1,263.8 milliona from $1,060.3 million, and net earnings increased 13% to $146.2 million, or $1.57 diluted EPS (up from $1.41). Growth was driven by the Brokerage segment, where commissions rose 13% and fees rose 24%, and by Risk Management fees, which grew 14%.

Organic commission and fee growth was 10%b in Brokerage and 14% in Risk Management. The hard insurance market after September 11 boosted premium rates and commissions, though management noted that the rate of premium increases had begun to moderate, which could pressure future brokerage revenue. The Financial Services segment was a drag on the quarter's results.

Gallagher took a $25.7 millionc pretax write-down on venture capital investments in Q1 2003, and the segment posted a pretax loss of $21.9 million. Its revenue figures were also distorted by the early adoption of FIN 46, which consolidated a Syn/Coal partnership and added $46.4 million of investment income offset by $44.1 million of investment expenses. Gallagher is also exposed to a contingent liability tied to Section 29 synthetic fuel tax credits, which are under IRS and Senate scrutiny; its stated maximum after-tax exposure is $81.3 million net of insurance.

Balance sheet strength improved: the company had no corporate borrowings at year end, $193.6 milliond in cash, and stockholders' equity of $619.1 million. Gallagher also raised its quarterly dividend 39% to $0.25 for 2004.

For investors, the core brokerage and risk management franchise remains healthy, with a return on beginning equity of 28% and sustained organic growth. The main watch items are the durability of the hard market, the volatility and regulatory risk of the investment portfolio, and the tax credit exposure.

02—Key points

Key Highlights

  1. Total revenues increased 19% to $1,263.8 million in 2003, up from $1,060.3 million in 2002.
  2. Net earnings rose 13% to $146.2 million; diluted EPS was $1.57, versus $1.41 in 2002.
  3. Brokerage commissions grew 13% to $746.2 million and fees grew 24%; organic commission and fee growth was 10%.
  4. Risk Management fees rose 14% to $320.7 million, with organic growth of 14%, and Gallagher Bassett claim counts returned to pre-September 11 levels.
  5. Financial Services posted a pretax loss of $21.9 million, driven by a $25.7 million venture capital write-down and FIN 46 consolidation effects.
  6. Gallagher carried no corporate borrowings at year end, held $193.6 million in cash, and had equity of $619.1 million. The quarterly dividend was raised 39% to $0.25 for 2004.
  7. Potential exposure of up to $81.3 million after tax (net of insurance) relates to disallowance of Section 29 synthetic coal tax credits, which remain under IRS and Senate investigation.

03—Questions

Frequently Asked Questions

  1. Why did Gallagher's Financial Services segment post a loss in 2003 despite strong brokerage results?

    The segment recorded a $25.7 million pretax write-down in Q1 2003 after management withdrew support from its venture capital investments, and investment gains and losses totaled a net $24.5 million loss. Consolidating a Syn/Coal partnership under FIN 46 also added offsetting income and expenses that distorted the reported segment results.

  2. Is the strong pricing environment in insurance expected to continue?

    Management said that premium rate increases had moderated in late 2003 and that carriers were becoming more competitive on selective risks. It cautioned that a softer market could negatively affect brokerage revenues, although it could not predict the timing or magnitude with precision.

  3. What is the main contingent risk tied to the investment portfolio?

    Gallagher's Syn/Coal investments generate Section 29 tax credits that are under IRS review and a Senate Subcommittee investigation. If the credits were disallowed, Gallagher's maximum after-tax exposure is $231.7 million before insurance and $81.3 million net of insurance, assuming full collection of its policies, which is not guaranteed.

  4. How strong is Gallagher's balance sheet and capital return to shareholders?

    At December 31, 2003, Gallagher had no corporate borrowings outstanding under its $250 million credit agreement, $193.6 million in cash, and stockholders' equity of $619.1 million. It repurchased $80.8 million of stock in 2003 and announced a 39% increase in its quarterly dividend to $0.25 for 2004.

04—Continue

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