10-QPeriod: Q3 FY2005

Arthur J. Gallagher & Co. Quarterly Report for Q3 Ended Sep 30, 2005

Filed October 27, 2005For Securities:AJG

Summary

Arthur J. Gallagher & Co. (AJG) reported its financial results for the third quarter and the first nine months of 2005. The company experienced a significant decline in net earnings for the nine-month period compared to the prior year, primarily driven by a large litigation and contingent commission related charge. Total revenues saw a modest increase year-over-year, with commissions and fees showing growth. However, higher expenses, particularly related to compensation and operating costs, along with the significant charge, impacted profitability. The company's Brokerage segment showed revenue growth but a decline in pretax earnings due to increased expenses and the aforementioned charge. The Risk Management segment demonstrated consistent revenue and earnings growth. The Financial Services segment experienced a revenue decline and a net loss, largely due to changes in investment income and a substantial litigation charge related to synthetic coal tax credits. The company also highlighted its new $450 million credit agreement, providing significant liquidity, and continued its strategy of growth through acquisitions.

Key Highlights

  • 1Total revenues increased by 10% to $264.1 million for the Brokerage segment in the third quarter, driven by acquisitions and new business production.
  • 2Net earnings for the nine-month period decreased significantly to $28.3 million compared to $139.4 million in the same period of 2004, largely due to a $131.0 million pretax charge for litigation and contingent commission matters.
  • 3A substantial charge of $35.0 million (pretax) was recorded in Q1 2005 related to the Assurance of Voluntary Compliance (AVC) with Illinois State Agencies concerning contingent commissions.
  • 4The company entered into a new $450 million unsecured multicurrency credit agreement, replacing its previous facility, enhancing liquidity with $417.8 million available as of early October 2005.
  • 5The Financial Services segment reported a pretax loss of $142.3 million for the nine-month period, impacted by a large litigation charge and lower investment income.
  • 6Organic growth in commissions and fees for the Brokerage segment was 1% for the nine-month period, indicating moderate growth from existing operations.
  • 7The company continues to pursue growth through acquisitions, completing eight in the first nine months of 2005, contributing to revenue increases.

Frequently Asked Questions

The significant decrease in net earnings is primarily attributable to a large pretax charge of $131.0 million recorded in the first quarter of 2005 related to litigation and contingent commission matters, including a $35.0 million charge associated with an Assurance of Voluntary Compliance (AVC) with Illinois State Agencies.

The Brokerage segment saw a 10% increase in total revenues for the third quarter, driven by acquisitions and new business. The Risk Management segment also reported revenue growth of 7% in the third quarter. However, the Financial Services segment experienced a revenue decline of 12% in the third quarter due to lower investment income.

The company entered into a new $450 million credit agreement in October 2005, which provides substantial liquidity with $417.8 million available as of early October. While the company had a significant payment related to litigation matters in May 2005, and anticipates payments related to contingent commissions, it believes its operating cash flows and available credit facility are sufficient to meet its obligations.

The company has significantly reduced its reliance on retail contingent commissions due to industry-wide investigations and regulatory changes, agreeing not to accept U.S.-domicile retail contingent compensation. This is expected to have a substantial negative impact on pretax earnings beginning in 2006, although contingent compensation from non-retail business and acquired entities is still permitted.