Arthur J. Gallagher & Co. Business Information, Profile, and History

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History of Arthur J. Gallagher & Co.

Arthur J. Gallagher & Co., ranked among the largest insurance brokerages in the world, offers property and casualty, reinsurance, and surplus lines. The company also provides risk management services and manages employee benefits programs, including claims management, loss control consulting, and workers' compensation investigations. The brokerage grew steadily by way of acquisitions beginning in the mid-1980s.

Innovation Driving Growth: 1920s to Mid-1980s

Arthur J. Gallagher & Co. (AJG) was founded in 1927 by a native Chicago insurance agent ready to strike out on his own. In addition to offering commercial insurance, Gallagher helped his customers identify and reduce risks. The stock market crash of 1929 and subsequent economic depression elevated interest in the concept and Gallagher's business grew. In 1938, Gallagher helped The Hartford Group develop a system to reward customers minimizing losses. Late in the decade, Gallagher wrote a large-deductible fire policy written for a Chicago dairy. Both moves were innovative for the times.

The end of World War II brought Gallagher's three sons, John, Jim, and Bob, into the business. The company incorporated in 1950 when the revenues were $175,000. In 1957, Arthur J. Gallagher & Co. reached a high point of its history thus far, winning Beatrice Foods Company as a client and usurping the nation's largest brokerage.

The 1960s marked Gallagher's entry into the life and benefits business, planting the seeds for the company's employee benefits and human resources consultant division, Gallagher Benefit Services. Meanwhile, Beatrice Foods proposed a novel idea: a self-insurance program on multiple lines of coverage. The insurance broker brought in a top claims adjuster, Sterling Bassett, to direct the claims management aspects of the new program. In November 1962, Gallagher Bassett Services, Inc. was formed. In March 1963 Beatrice became self-insured. Bob Gallagher took over as president and CEO that year.

In 1965, Gallagher implemented the Bishop's Plan for Self-Insurance, a Lloyd's of London program. A deadly fire in a Chicago Catholic school in 1958 led to the development of the plan, one that took hold nationally and raised Gallagher's profile. Revenues exceeded $1 million in 1968.

Gallagher's expertise in the self-insurance market led to international expansion. In 1974 the company cofounded Lloyd's broker Gallagher, Hinton & Vereker Ltd. Gallagher later purchased the remaining interest in the entity. The American-owned subsidiary then broke ground when it was independently accepted as a Lloyd's broker in 1981.

During the mid-1970s, the company established a Bermuda office to engage in offshore alternative markets; laid the groundwork for the later development of Gallagher Captive Services; and wrote its first self-funded employee benefits plan.

The innovations drove growth. During the decade, average annual revenue grew 36 percent, earnings 56 percent, and employees 27 percent, Revenues climbed from $10 million to $25 million between 1976 and 1978.

Gallagher continued to evolve in the 1980s. By 1982, Business Insurance magazine had ranked Gallagher as the tenth largest broker in the United States. The company introduced an online risk management information system in 1983 to allow its ever-growing list of clients to instantly access claims and loss information.

Gallagher made its initial public offering in 1984 and a few years later joined the ranks of the New York Stock Exchange.

Acquisitions Driving Force: Late 1980s to 1999

Gallagher was ready for a shopping spree. An acquisition and merger plan set in place in 1985 would drive the company's growth for the next decade and a half.

As the company grew, it made structural changes. Late in the 1980s Gallagher Bassett services were unbundled and offered individually for the first time and then made available through other brokers and agents. Business skyrocketed.

Leadership shifted in 1990. CEO Bob Gallagher was named chair and his brother John, vice-chair. John's son J. Patrick Gallagher took over as president and would succeed his uncle as CEO.

The properties and casualty business was organized under the Brokerage Services Division about this time, replicating the structure under which Gallagher Bassett and Gallagher Benefits Services had been formed. A fourth division was established in 1997. AJG Financial Services managed the company's own investment portfolio and engaged in alternative investment strategies.

By 1998, Gallagher had climbed into the number four spot in the Business Insurance rankings of the world's brokerages and risk management services providers.

During the mid-to-late 1990s the Brokerage Services Division concentrated on growing its Specialty Marketing and International segment. The division engaged in new ventures in the United Kingdom, Canada, Australia, and elsewhere.

Meanwhile, stiff competition in a crowded domestic market had put steady downward pressure on property and casualty premiums during the 1990s and dating back to the late 1980s. But Gallagher was still able to secure double-digit growth in all but three years from 1990 through 2000, according to Investor's Business Daily.

Highs and Lows: 2000-05

Gallagher's size gave it an advantage and helped it gain larger, more profitable clients and outpace the thousands of small brokerages vying for a piece of the market. Those smaller firms also had been buyout targets for Gallagher. The firm scooped up 16 more during 2000. Gallagher had grown its presence to include about 50 U.S. cities.

A downswing in the economy in 2000 served to push rates higher and widen the profit margins for the property and casualty industry. "Higher prices help Gallagher because its brokerage commissions are tied to the amount of insurance it sells and brokerage commissions make up two-thirds of its revenue," wrote Steve Watkins for Investor's Business Daily.

Gallagher's 2000 revenue climbed 13 percent to $740.6 million. Earnings climbed 25 percent to $87.8 million, the biggest gain since 1993. Premiums rose 6 to 10 percent on most policies during the year.

The risk management segment of the business continued to bring in earnings as more companies self-insured and hired third parties to pay claims. The consulting end of Gallagher's business helped companies determine whether or not to take on the risk of self-insurance.

Since 1986, Gallagher had acquired 92 companies, primarily brokerages with sales of $5 million to $10 million. The company had been making six to 12 purchases per year, according to a 2001 Crain's Chicago Business article.

During 2001, Gallagher made its biggest acquisition to date, purchasing The Galtney Group Inc., a Houston-based property and casualty broker for healthcare providers. The company's largest division brought in $30.4 million in brokerage revenue during 1999.

The vast majority of purchases had been in the property/casualty area, but not all. During 2000, for example, Gallagher bought New Jersey-based John P. Woods Co., Inc., the world's ninth largest reinsurance broker, according to Business Insurance rankings. The deal put Gallagher in position to compete with Marsh and Aon in the treaty reinsurance sector, Dave Lenckus reported.

Gallagher Bassett Services Inc., meanwhile, offering claims and information management services, risk control, security consulting and surveillance, had been ranked by Business Insurance as the nation's third largest claims administrator based on claims paid for self-insured clients during 2000.

The years 2000 and 2001 saw stock prices of brokerages rise in response to the positive pricing trend. Gallagher's more than doubled over the period. But its acquisition strategy was threatened by the rising sale price of small firms. Regional bankers had entered into the bidding.

Continued favorable pricing could ease the pressure on Gallagher to drive growth through acquisitions. Claims processing and other services to the self-insured, which brought in about one-quarter of the company's income, was less affected by the insurance business cycles. Another 10 percent was generated by tax-advantaged investments, primarily alternative fuel plants and low-income housing, according to Crain's Chicago Business.

Gallagher's stock price sank as the company hit choppy waters. Late 2002 into early 2003 Gallagher's Financial Services segment wrote off $59 million in bad investments, primarily venture capital business, which it subsequently dropped. Then profit margins suffered when an unusually large number of new brokers came aboard. The company was criticized for the slow start-up of earnings generation by the new hires and questioned about its choice to hire large account brokers from companies such as Marsh and Aon, according to Crain's.

Gallagher's recruitment expenditures began paying off in 2003: revenue per employee and total brokerage commissions and fees climbed. Concurrently, risk management services, benefits consulting, and wholesale operations experienced growth.

The brokerage business increased its revenue via expansion in niche businesses. New business areas such as higher education and agribusiness risks joined more established niches of church and real estate risks. J. Patrick Gallagher told Business Insurance he expected niche areas to bring in more than 90 percent of business, up from 67 percent, over the next five years. Although brokerage growth in 2003 lagged behind its peer group leaders, profits were up by more than 12.5 percent versus 3.7 percent in 2002.

During 2004, Gallagher completed a record 19 acquisitions, bringing the total since 1986 up to 144.

Gallagher began 2005 mired in uncertainty on two fronts. Insurance companies, including Gallagher, were under the scrutiny of investigators looking into contingency commissions and the likelihood of conflict of interest. Gallagher stopped making the agreements in January 2005.

In addition, Gallagher found itself in a Utah court, being sued for failure to pay license fees and royalties promised in an alternative fuel licensing agreement with Headwaters Inc. Synthetic coal tax credits related to the plants built reduced Gallagher's corporate tax rate to 20 percent in 2004. In February 2005, Gallagher was ordered to pay $175 million in damages to Headwaters.

In May, the investigation by the Illinois Attorney General Lisa Madigan ended when Gallagher agreed to pay $27 million in restitution to policyholders nationwide and reform its business practices. Sally Roberts reported for Business Insurance: "While no lawsuit was filed against Gallagher, the Illinois investigation revealed that Gallagher accepted millions of contingent commissions from insurers in return for steering business their way, according to a statement from Ms. Madigan's office."

Marsh & McLennan Co. Inc., Aon Corp., and Willis Group Holdings Ltd., the top three brokerages in the world, had already made similar agreements. The company hoped the agreement could be used as leverage to bring the more than dozen other investigations to an end. The loss of contingent commissions would reduce Gallagher revenues and hamper the company's ability to buy smaller brokers still able to accept the highly profitable but controversial payments, according to Crain's.

Principal Subsidiaries: Gallagher Bassett; Gallagher Benefit Services.

Principal Competitors: Aon Corporation; Marsh & McLennan Co. Inc.; Willis Group Holding Ltd.

Chronology

• Key Dates:
• 1927: Arthur Gallagher founds an insurance agency in Chicago.
• 1950: Gallagher's three sons come on board following World War II.
• 1962: Gallagher Bassett Services, Inc. is formed.
• 1963: Bob Gallagher steps in as head of the firm.
• 1968: Revenues top $1 million.
• 1974: International expansion begins.
• 1976: Revenues top $10 million.
• 1984: The company makes its initial public offering.
• 1995: The grandson of the founder becomes the third leader in company history.
• 2002: Revenues top $1 billion.
• 2004: The company completes a record 19 acquisitions.