10-KPeriod: FY2006

Arthur J. Gallagher & Co. Annual Report, Year Ended Dec 31, 2006

Filed February 5, 2007For Securities:AJG

Summary

Arthur J. Gallagher & Co. (AJG) reported total revenues of $1,534.0 million for the fiscal year ended December 31, 2006, a slight increase from the prior year, driven primarily by its Brokerage and Risk Management segments. While commission and fee revenues showed growth, the company's financial performance was notably impacted by the ongoing reduction and elimination of contingent commissions, as well as significant litigation and settlement charges in 2005. The company also highlighted its strategic focus on expanding its international presence, particularly in the UK, Australia, and Bermuda, and continued its acquisition strategy, completing ten acquisitions in 2006 and two in early 2007 to broaden its service offerings and geographical reach. Despite these efforts, AJG faces ongoing challenges including competitive market pressures, regulatory scrutiny, and the volatility inherent in the insurance industry's premium cycles. The company is actively managing its business compensation model and legal proceedings related to contingent commissions, which have resulted in substantial charges. Management emphasizes its core strengths in delivering comprehensive risk management and brokerage services and its strategy of integrating risk management services to enhance brokerage business. Investors should monitor the company's ability to navigate the evolving regulatory landscape, integrate acquisitions effectively, and mitigate risks associated with market cycles and legal matters.

Key Highlights

  • 1Total revenues for 2006 reached $1,534.0 million, a 3.4% increase from 2005, demonstrating continued top-line growth.
  • 2The Brokerage segment remains the largest revenue generator, accounting for 56% of total revenues through commissions and fees, followed by the Risk Management segment at 26%.
  • 3The company continued its active acquisition strategy, completing ten acquisitions in 2006 and two in early 2007, aimed at expanding service offerings and geographical presence.
  • 4AJG is actively addressing the impact of the elimination of U.S.-domiciled retail contingent commissions and related litigation, which resulted in significant charges in prior years and ongoing management efforts.
  • 5International operations contributed 13% of total revenues in 2006, with significant presence in the United Kingdom, Australia, and Bermuda, indicating a strategic focus on global expansion.
  • 6The company repurchased 696,000 shares of its common stock during the fourth quarter of 2006 under its ongoing repurchase program.
  • 7Significant investments in tax-advantaged financial services offerings present both opportunities and risks, particularly concerning Section 29 tax credits and potential disallowances or phase-outs.

Frequently Asked Questions

Arthur J. Gallagher & Co.'s revenue growth in 2006 was primarily driven by its Brokerage and Risk Management segments. Commissions from brokerage operations and service fees from brokerage and risk management activities showed an increase year-over-year.

AJG continued to manage the effects of the elimination of U.S.-domiciled retail contingent commissions. This included ongoing litigation and settlement accruals. Notably, a large class-action lawsuit settlement related to contingent commissions was reached in December 2006, requiring a payment of $28.0 million plus attorney fees. Additionally, a fund established from a previous Assurance of Voluntary Compliance (AVC) with Illinois State Agencies still had $8.6 million remaining as of December 31, 2006, to cover potential claims.

AJG is pursuing growth through both organic means and acquisitions. In 2006, the company completed ten acquisitions of insurance brokerage firms and a premium finance company. Furthermore, in early 2007, it completed two more acquisitions and entered into an agreement for a significant Canadian acquisition, aimed at expanding its service capabilities and geographic reach.

Key risks highlighted include the volatility of insurance premiums and market conditions, potential adverse impacts from regulatory investigations and legal proceedings (particularly concerning contingent commissions), intense competition, risks associated with international operations including currency fluctuations, and potential losses on investments held by its Financial Services segment, including exposure to Section 29 tax credits.