10-QPeriod: Q1 FY2007

Arthur J. Gallagher & Co. Quarterly Report for Q1 Ended Mar 31, 2007

Filed April 26, 2007For Securities:AJG

Summary

Arthur J. Gallagher & Co. (AJG) reported its first-quarter 2007 financial results, showing a year-over-year increase in total revenues to $388.2 million, up from $327.5 million in the prior year's quarter. This growth was driven by strong performance in both the Brokerage and Risk Management segments, with total revenues rising 9% in each. Net earnings increased to $19.8 million ($0.20 per diluted share) from $17.1 million ($0.17 per diluted share) in the first quarter of 2006. The company continued its acquisitive growth strategy, completing seven acquisitions in the first quarter of 2007. However, the company's Financial Services segment experienced a net loss before income taxes of $10.7 million, largely influenced by a significant decrease in investment income and an increase in investment expenses related to its alternative energy investments and the operations of IRC Section 29 Syn/Coal facilities. Despite challenges in the Financial Services segment, the core Brokerage and Risk Management businesses demonstrated resilience and continued growth.

Key Highlights

  • 1Total revenues increased by 18.5% to $388.2 million in Q1 2007 compared to $327.5 million in Q1 2006.
  • 2Net earnings rose to $19.8 million in Q1 2007, a 15.8% increase from $17.1 million in Q1 2006.
  • 3Diluted Earnings Per Share (EPS) improved to $0.20 in Q1 2007 from $0.17 in Q1 2006.
  • 4The Brokerage segment saw total revenues grow by 9% to $246.0 million, driven by acquisitions and new business.
  • 5The Risk Management segment also achieved a 9% increase in total revenues to $106.8 million, fueled by new business and renewal rate increases.
  • 6The company continued its acquisition strategy, completing seven acquisitions in the first quarter of 2007.
  • 7The Financial Services segment reported a loss before income taxes of $10.7 million, impacted by volatile investment income and increased expenses in alternative energy and Syn/Coal facilities.

Frequently Asked Questions

Revenue growth was primarily driven by the Brokerage and Risk Management segments. The Brokerage segment's revenue increased due to acquisitions completed in the past twelve months and new business production. The Risk Management segment saw growth from new business and renewal rate increases.

The Financial Services segment experienced a loss before income taxes of $10.7 million. This was mainly due to a significant decrease in investment income, particularly from Asset Alliance Corporation (AAC) related investments, and an increase in investment expenses associated with alternative energy investments and IRC Section 29 Syn/Coal facilities. However, the segment also recorded investment gains, including a gain from an oil price derivative.

Arthur J. Gallagher & Co. continues to pursue acquisitions as a key growth strategy. The company completed seven acquisitions in the first quarter of 2007 and expects to continue considering additional acquisitions on advantageous terms.

Following an Assurance of Voluntary Compliance (AVC) with Illinois State Agencies, the company has significantly reduced its retail contingent commission revenue. It now primarily earns contingent commissions from non-retail business (wholesalers, MGAs, MGUs) and from acquired entities where retail contingent compensation related to pre-acquisition contracts is allowed for up to three years. This reduction has had a substantial negative impact on pretax earnings.