10-QPeriod: Q3 FY2002

Arthur J. Gallagher & Co. Quarterly Report for Q3 Ended Sep 30, 2002

Filed November 14, 2002For Securities:AJG

Summary

Arthur J. Gallagher & Co. (AJG) reported its financial results for the nine months and third quarter ended September 30, 2002. The company experienced significant growth in commission and fee revenues, driven by a "hard market" in the insurance industry characterized by rising premium rates, as well as new business production and acquisitions. Despite revenue growth, net earnings for the nine-month period were slightly down compared to the prior year, primarily due to a significant increase in expenses, including salaries and employee benefits related to headcount growth and acquisitions, as well as investment write-downs and impairments in the Financial Services segment. The "hard market" conditions, while boosting revenues, also contributed to higher operating expenses such as business insurance costs and commissions paid to sub-brokers. The company's Financial Services segment was particularly impacted by equity market declines and specific investment write-downs, leading to a net loss for the segment in the third quarter. AJG continues to actively pursue strategic acquisitions to expand its market presence and service offerings, as evidenced by eight acquisitions in the first nine months of 2002.

Key Highlights

  • 1Commission revenues increased by 30% to $178.2 million in Q3 2002 and by 24% to $478.3 million year-to-date, driven by a 'hard market' and new business.
  • 2Fee revenues also showed strong growth, up 20% to $101.3 million in Q3 2002 and 19% to $282.9 million year-to-date, primarily from the Insurance Brokerage Services segment.
  • 3Net earnings for the nine-month period decreased slightly by 3% to $91.4 million compared to $92.2 million in the prior year, with EPS falling from $1.09 to $1.05.
  • 4The Financial Services segment reported a loss of $16.4 million before income taxes for Q3 2002, impacted by investment impairments and write-downs totaling $15.4 million.
  • 5Salaries and employee benefits increased significantly by 28% in Q3 2002 and 24% year-to-date, reflecting increased headcount from new business growth and acquisitions.
  • 6AJG completed eight acquisitions during the first nine months of 2002, contributing to revenue growth and strategic expansion.
  • 7The company's liquidity remains strong, with $93.2 million in cash provided by operating activities year-to-date and $67.8 million available under its revolving credit facility.

Frequently Asked Questions

Revenue growth is primarily driven by a "hard market" in the insurance industry, leading to higher premium rates and consequently higher commission revenues. This is complemented by strong new business production and the contribution from eight acquisitions completed in the first nine months of 2002.

Despite revenue growth, net earnings for the nine-month period saw a slight decrease primarily due to increased operating expenses. This includes higher salaries and employee benefits stemming from a 17% increase in headcount and the integration of acquired companies, as well as investment write-downs and impairments within the Financial Services segment.

The Financial Services segment is facing challenges, reporting a loss before income taxes in the third quarter. This is largely due to other-than-temporary impairments on marketable securities ($9.5 million in Q3) and significant write-downs on venture capital investments ($15.4 million in Q3), resulting from a decline in equity markets.

Management believes the "hard market" conditions are likely to continue into 2003, which is generally positive for commission revenues. However, they also note that clients may resist higher premiums, potentially leading to reduced coverage or shifts towards fee-based arrangements or alternative insurance markets, which would impact revenue streams.