No signs of a slow down for insurance M&A: Arthur J. Gallagher

by Insurance Business Wholesale10 Sep 2015

The favorable environment for mergers and acquisitions in the insurance broker sector is not lost on Illinois-based insurance firm Arthur J. Gallagher & Co., as it reports 13 new acquisitions in the second quarter of 2015 alone. With a total of 24 acquisitions year-to-date, the company is poised to reach—and even exceed—its 60 completed acquisitions last year.

Most of the company's acquisitions during the second quarter were within the brokerage segment, although it also completed transactions in the retail employee benefits brokerage and wholesale brokerage areas. The most recently completed acquisition was William Gallagher Associate Insurance Brokers, Inc., which provides insurance brokerage and consulting services to middle market and large clients with complex insurance needs.

Similarly, AJG's organic growth remains strong, thanks to the company's risk management and brokerage segments. Its geographically diverse domestic and international operations are also enhancing its revenues and competitive position, especially after the completion of deals across the United Kingdom, Australia, New Zealand, and Canada. AJG posted an organic growth of 5.8 percent in the second quarter, 140 basis points higher than last year and with enough margin for expansion.

But in spite of AJG's robust M&A activity and better-than-expected revenues from acquisitions, operating expenses and higher compensation are eating into the margins. In addition, foreign currency translations are also taking its toll on the company's earnings, and there are expectations that AJG's prices will drop 2-3 cents per share during the third quarter and one cent per share in the fourth quarter.

Still, long-term outlook for AGJ remains positive. Zacks expects the stock's long-term growth rate to be at 10.6 percent. The company's dividend payout ratio at 3.5 percent is also attractive to potential investors, as it is one of the highest in the sector. Coupled with solid operational performance, the company is poised to generate cash flows that will enhance the wealth of its current shareholders.