Arthur J. Gallagher & Co. (AJG)

Arthur J. Gallagher principal activity is the negotiation and placements of insurance for its clients. It finished the year 2006 with modest growth in revenue and had restructured its business model with more commitment to transparency. The industry has not seen any major catastrophe loss in the recent time to facilitate any rate competition across all geographies and has good amount of capital coming into the market.

Organizing itself into three operating segments as Brokerage, Risk Management and Financial Services it managed to resolve all claims owning to contingent commissions pending in New Jersey. Its commitment for transparency and moving more towards fee-based compensation as opposed to contingent commissions would hurt its margins. This has given its competitors the freedom to price more competitively and also place its brokers who collect them at a disadvantage.

The balance sheet is well positioned with no operating debt and total debt to capital ratio of just 4%. This along with the strong cash flows would help it support the share buy back program and the acquisitions. On the mergers and acquisition front it completed 11 deals in 2006 bring over $55 million in revenues. Recent focus of the management is on new business, client retention and expenses management.

The risk management business cost the company about $ 4 million pre tax due to decrease in claim frequency with slight overstaffing in the claims department and high cost of fixed expenses. Moreover the California market has become increasingly difficult with rising employment cost, price competition with lower premiums and bundling of claims work.

Asset base of its financial services division has been trimmed down owing to the rising one-time charges with positive hope of improving profitability in the coming year. However, a huge chunk of its investments are in a hedge fund manager and syn/coal plants making its return more volatile and more dependent on oil prices. Its aspirations for international expansions is challenged by its gigantic competitors and the prospects of the company is on the downturn.