Arthur J. Gallagher & Co.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

A global insurance brokerage, risk management, and consulting services firm, connecting clients and insurance providers through a network of broker and consulting services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Arthur J. Gallagher & Co. (AJG) is a global insurance brokerage, risk management, and consulting services firm. It operates through three segments: Brokerage, Risk Management, and Corporate. Their brokerage business primarily acts as an intermediary between insurance clients and insurance providers, helping clients find coverage suited to their needs. Risk management provides claims settlement, administration, and consulting. The Corporate segment includes the company’s executive leadership, financial administration, and related operations. The insurance brokerage industry is highly competitive but has high barriers to entry due to required licensing, regulation and the complexity of building out expansive broker networks.

In simple terms, AJG acts as a middleman between clients (who need insurance) and insurers, with some risk management & other auxiliary services on the side.

Revenue Distribution:

Brokerage: This segment accounts for roughly 70-80% of the company’s revenue and can be further segmented into Retail Brokerage (working directly with clients) and Wholesale Brokerage (providing services to brokers). A substantial portion of revenues is commission-based, depending on volume of business, policy types, and carrier contracts. Additionally, a portion of this business segment’s revenues are supplemental, consisting of fees collected from clients for services like policy consulting and policy endorsements.
Risk Management: This segment typically generates the other 20%-30% of revenue. It is derived primarily from fees from claim and risk assessment and settlement, rather than commission-based income like the Brokerage segment.
Corporate: This segment, though not a profit-generating segment, contributes slightly to revenue. It’s designed to cover the operating expenses of the company.

Brokerage revenues are earned based on a variety of factors including premium volume, policy types, and the nature of the arrangements with various carriers. These factors help explain the wide range of profit margins for various players.

Industry Trends:

Consolidation: The insurance brokerage industry is undergoing consolidation, with larger firms like AJG acquiring smaller ones for market share. Recent acquisitions will be mentioned later.
Technology: The insurance industry, which is a pretty old, traditional industry, is being heavily disrupted with emerging technology.
Rising Premiums: Premiums are rising in multiple sectors within insurance, providing some pricing power to players in this industry.
Globalization: Businesses are increasingly global in scope, which means that insurance brokers with international capabilities are going to be more valuable.

Competitive Landscape:

The insurance brokerage industry is highly fragmented, with many players ranging from small independent brokers to large multinationals.
Large players like Marsh McLennan, Aon, and Willis Towers Watson compete directly with Arthur J. Gallagher on a global scale.
Other notable players include Brown & Brown, Alliant, and Lockton, who present competition with respect to specific market niches, or on a local scale.
The overall brokerage industry has fairly high barriers to entry, due to the need for regulatory licensing and expansive global networks.

What Makes AJG Different?

Global Scale: AJG is a well-established, global player. It is a large, established insurance brokerage with a large network and relationships and has an ability to leverage international business.
Long-Term Relationships: AJG prides itself on long-term relationships, especially with large, multinational clients.
Niche Expertise: AJG has grown a presence in niche markets like healthcare, construction, and transportation. These niches are likely to have higher margins, compared to the general market.
Proprietary Data: The company is leveraging a proprietary data platform, which gives them an edge in helping their clients make business decisions based on insights.
Acquisitive Growth: AJG grows both organically and through mergers and acquisitions.

Financial Analysis:

Revenue Growth: AJG’s revenues have been exhibiting consistent growth over the past few years, though there have been indications of deceleration in the most recent quarters due to economic factors.
Profitability: AJG has exhibited consistent growth in profitability over the past several years, and its adjusted EBITDAC margin has remained above 20%. Also worth noting is the company’s increasing level of profitability with more emphasis on cost-cutting and operational efficiency.
Leverage: Historically, AJG has remained highly leveraged, but this is not uncharacteristic of the insurance brokerage industry. In recent filings, AJG noted that it plans on reducing its level of debt over time.
Cash Flows: AJG has healthy cash flows, giving them the capacity for debt repayment, buybacks, and acquisitions.
Acquisitions: The firm has been highly acquisitive over the last several years. For instance, in the last year it has acquired a host of new companies. For the 9-month period ended September 30, 2023, AJG made acquisitions of roughly $1.6 billion (see list of acquisitions on page 16-17 of the most recent 10-Q form).
Share Repurchases and Dividends: AJG regularly buys back shares, and recently declared a dividend, reflecting a positive attitude toward shareholder returns.

Stock repurchase increases the share price of a company, provided the company is well-managed and has enough free cash.

Non-GAAP Adjustments: Like many companies, AJG has certain Non-GAAP adjustments, including adjustments to acquisition and integration costs, which may affect the underlying picture of profitability. Be aware of these types of adjustments, which can make profitability appear higher than it actually is. However, companies like AJG do report these numbers consistently and with the same definitions, and so they can provide some useful insight into the business.

Recent Concerns / Controversies:

Integration Risk: The company is growing heavily through acquisition, which carries its own share of risks (notably, integration risk). Failure to properly implement these acquisitions will lead to problems for the company.
Legal and Tax Changes: Legal and regulatory risk is something that insurance companies must always be concerned with. Changes in taxation and legal frameworks are not uncommon, and will pose some risk to the business.
High-Level of Debt: AJG has a high level of debt, though they have committed to paying that debt off over the coming years.

AJG is in a period of integration and consolidation, and there are significant risks in trying to successfully implement this strategy. Investors must consider if the company is able to navigate this period safely while keeping its financial health in order.

Moat Rating Justification: 3/5

AJG benefits from scale advantages through its extensive global brokerage network, which provides a source of cost advantage.
The company enjoys a network effect within its brokerage businesses due to their highly entrenched client relationships, which make it much more difficult for a competitor to break in.
AJG’s large size and history, plus various regulations and licensing requirements, act as barriers to entry, and give the company some unique proprietary assets.
However, as with any insurance brokerage, competition is always present. In fact, the company notes that “competition is intense.” This keeps their pricing power relatively limited.
While AJG has some ability to generate long-term stable profits due to its business, there is no large amount of innovation or creativity within its space, making growth a little harder to come by.

Due to a lack of high degree of defensibility, despite solid returns on capital, the moat is a 3/5.

Business Resilience:

The insurance brokerage industry has historically proven to be resilient, so AJG is likely to show good returns even through an economic downturn.
The business serves a very large range of clients, meaning that it is well diversified and thus less subject to business-specific headwinds.
The company has a large and growing customer base, and high retention rates, which bodes well for the future.

Understandability Rating Justification: 3/5

While at its core, the business model is quite simple (acting as a middleman between insurers and clients), there are some complexities to the business. Understanding the different sources of revenue, plus how a wide variety of insurance contracts work, can be a hurdle to overcome.
The reliance on legal and regulatory policy also adds some complexity.
Having a working knowledge of finance and accounting is helpful in better understanding the financial statements of AJG.

Balance Sheet Health Justification: 4/5

While AJG’s level of debt is high, the business is very profitable and exhibits healthy levels of cash flow.
The company has significant amount of tangible and intangible assets.
The company notes that management is “committed to reducing leverage”, which signals more positive future changes in its balance sheet.
Despite debt, AJG’s financial metrics are relatively stable.

The Essays of Warren Buffett: Lessons for Corporate America | Moat: 5 / 5 | Understandability: 1 / 5 | Balance Sheet Health: N/A

A collection of letters written by Warren Buffett to shareholders of Berkshire Hathaway, giving insight into his investment, accounting and management principles.

Business Overview: This is not a company, but rather a collection of letters written by Warren Buffett to shareholders of Berkshire Hathaway. It provides insights into Buffett’s investment philosophy, his thoughts on corporate governance and accounting, and his general view of the business world. It covers a variety of topics from investing, to corporate governance, to accounting, to even reflections on life. The letters serve as a guide for how businesses should be run, or how investments should be viewed.

These essays are the basis of much of modern investing and are a very important read for anyone interested in business and finance.

Moat Rating Justification: 5/5

This is not a company but a collection of essays from the “Oracle of Omaha,” who has had over 50 years of very successful investing and is revered in the business world.
Given the authority that the author commands, and the insight contained within, it is a virtually irreplaceable work that has no competitor and is highly unique.

It is important to note that this is not a traditional competitive advantage, since this is not a company. This is more like “intellectual defensibility.”

Understandability Rating Justification: 1/5

The book’s message can be easily summed up in a few concepts (buy good businesses at good prices, focus on the long term, know what you’re buying).
These are written in the most simple terms, and use analogies and metaphors to make their points.
The text is a very easy read and does not require a deep understanding of financial terminology.

Balance Sheet Health Justification: N/A

This is not a company and therefore has no balance sheet.

Note: This is simply a book, which is why it is not appropriate to rate its financial performance.

The Little Book That Builds Wealth | Moat: 3 / 5 | Understandability: 2 / 5 | Balance Sheet Health: N/A

A book on investment strategy, which details how to use an “economic moat” as a factor in choosing good businesses for long-term returns.

Business Overview: This book is written by Pat Dorsey, director of stock research for Morningstar. The book provides an overview of “economic moats” as a concept, which are defined as sustainable competitive advantages that allow a company to defend high returns on capital. This book outlines the four different types of moats and provides clear steps and a framework for analyzing companies. Its focus is on how companies create value and where to invest money.

This is an investment strategy book, focusing on long-term returns based on fundamental analysis.

Moat Rating Justification: 3/5

The book’s “moat” framework is valuable, although not completely unique. It provides an easy way to think about competitive advantages.
It has well researched case studies, including real examples to back up its claims.
While a valuable resource, many other books and investors have similar or even better insights, so it is not unassailable.

Understandability Rating Justification: 2/5

The language in this book is relatively simple and easy to understand, though it sometimes includes more complex financial concepts, which may be confusing to those without experience.
Overall, the book is not hard to read and can be understood by most people with a little business knowledge.

Balance Sheet Health Justification: N/A

This is not a company and therefore has no balance sheet.

Note: This is simply a book, which is why it is not appropriate to rate its financial performance.

The Intelligent Investor | Moat: 5 / 5 | Understandability: 4 / 5 | Balance Sheet Health: N/A

A classic investing text, introducing the concepts of value investing and offering a detailed analysis of securities, with commentary by Jason Zweig that applies them to today’s market.

Business Overview: A landmark book in investing written by Benjamin Graham. This book lays out the core principles of value investing. It is known as the definitive book on value investing. It covers concepts such as margin of safety, diversification, as well as providing historical data and examples to back up its claims. Included is commentary by Jason Zweig, which makes these fundamental concepts relevant for today’s market.

This book is a critical work on value investing and the basis for many of Warren Buffett’s principles.

Moat Rating Justification: 5/5

This book is the “definitive book on value investing” and has set a foundation for many other investment texts.
It is the first work to present the most fundamental principles of value investing, which has not changed much in the ensuing decades.
Given its revolutionary ideas and immense importance, it is virtually unassailable and a textbook in finance.

Understandability Rating Justification: 4/5

Although Graham writes the main body of text, his language is mostly clear and simple.
Zweig’s commentary helps to clarify some of the more difficult concepts and put them in a more modern, understandable perspective.
Some aspects, such as stock analysis, may require a basic degree of finance knowledge.

Balance Sheet Health Justification: N/A

This is not a company and therefore has no balance sheet.

Note: This is simply a book, which is why it is not appropriate to rate its financial performance.