01—Abstract
Summary
Summary of the 10-K filed February 7, 2020. Cited figures are marked; the original filing is the authoritative source.
Arthur J.
Gallagher & Co. (AJG) reported solid performance in its 2019 10-K filing, demonstrating continued growth across its core brokerage and risk management segments. The company's diversified revenue streams, primarily from commissions and fees, are driven by its global reach and specialized niche/practice groups within its brokerage operations. The Risk Management segment also contributes significantly through claims settlement and administration services.
Acquisitions remain a key driver of growth, with 46 acquisitions closed in 2019, augmenting its talent pool, geographic presence, and service capabilities. The 'Corporate' segment, largely driven by clean energy investments (IRC Section 45 tax credits), contributed significantly to earnings, though the expiry of some tax credits presents a future consideration.
Despite economic headwinds and the inherent cyclicality of the insurance market, AJG's strong client relationships, expertise, and strategic acquisitions position it for sustained future performance. The company highlighted its robust financial position, including a significant credit facility, and a commitment to shareholder returns through dividends.
02—Key points
Key Highlights
- AJG operates with a diversified business model, comprising Brokerage (68% of 2019 revenue), Risk Management (14%), and Corporate (18%).
- The company's growth strategy is heavily reliant on mergers and acquisitions, having completed 46 acquisitions in 2019 and a total of 556 since 2002.
- International operations contributed 31% of combined brokerage and risk management segment revenues in 2019, with primary contributions from Australia, Canada, New Zealand, and the UK.
- Clean energy investments, specifically IRC Section 45 tax credits from refined coal production facilities, generated significant revenue and tax benefits, though the expiry of some credits by the end of 2019 and 2021 presents a future factor.
- The company's financial performance is influenced by insurance market cycles (soft vs. hard markets), with Q1-Q3 2019 showing an average commercial property/casualty rate increase of 3.5% to 6.2%, indicating a 'harder' market.
- AJG reported a total of $7,195.0 million in total revenues for 2019, an increase from $6,934.0 million in 2018.
- Diluted net earnings per share for 2019 was $3.52, an increase from $3.40 in 2018, reflecting positive operational performance.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 7, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $7.20B$6.93B | +3.8% |
| Cost of Revenue | $1.35B$1.82B | −25.5% |
| Gross Profit | $5.84B$5.12B | +14.2% |
| Operating Expenses | $6.57B$6.45B | +1.8% |
| Interest Expense | $179.80M$138.40M | +29.9% |
| Net Income | $668.80M$633.50M | +5.6% |
| EPS (Basic) | $3.60$3.47 | +3.7% |
| EPS (Diluted) | $3.52$3.40 | +3.5% |
| Shares Outstanding (Basic) | 186.00M182.70M | +1.8% |
05—Questions
Frequently Asked Questions
What are the primary revenue drivers for Arthur J. Gallagher & Co.?
Arthur J. Gallagher & Co.'s primary revenue drivers are commissions and fees from its brokerage segment, and fees from its risk management segment. Supplemental and contingent revenues from underwriting enterprises also contribute to overall revenue.
How does AJG approach growth?
AJG pursues growth through a dual strategy of organic growth and strategic acquisitions. The company has a long history of acquiring smaller regional or local brokerages, benefit consulting firms, and risk management firms to expand its talent pool, geographic presence, and service capabilities.
What is the significance of the 'Corporate' segment, particularly the clean energy investments?
The Corporate segment encompasses various financial activities, including debt management, other corporate costs, and clean energy investments. The clean energy investments, specifically related to IRC Section 45 tax credits from refined coal production, contributed significantly to the company's earnings. However, the expiration of these tax credits for certain facilities by the end of 2019 and the remaining credits expiring by 2021 are factors to monitor.
What are the key risks identified by AJG in its 2019 10-K?
Key risks identified include economic downturns affecting client purchasing behavior, the impact of Brexit on UK operations, competition, volatility in insurance premiums, cybersecurity threats, changes in data privacy laws, and potential adverse outcomes from litigation and regulatory investigations, such as the IRS investigation into micro-captive advisory services.
06—Continue