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A.J. Gallagher Earnings Show Insurance Brokers Are Anything but Humdrum The broker’s CEO says business isn’t slowing down. By Teresa Rivas July 25, 2024 5:18 pm ET AJ Gallagher’s headquarters in Illinois. AJ GALLAGHER Insurance may have a stodgy reputation, but the returns from A.J. Gallagher are anything but. Its CEO says the insurance broker isn’t slowing down either, despite concerns about premiums and interest rate cuts. On Thursday, A.J. Gallagher reported second-quarter earnings of $2.26 a share, two cents ahead of the consensus estimate, while revenue of $2.73 billion was in line with what analysts predicted. Organic revenue grew 7.7% in the quarter, a period that saw a dozen new acquisitions with a combined $72 million of estimated annualized revenue. That’s a key consideration given how M&A propels profit for insurance brokers. A.J. Gallagher said it has a pipeline of more than $500 million of annualized revenue in potential purchases. Chief Executive Patrick Gallagher spoke with Barron’s Thursday about the results, calling the quarter a “smash hit.” He also says the report shouldn’t come as much of a surprise, given the company’s consistency. “It’s a natural continuation of our incredible number of quarters, years, decades—if you will—of success.” That success has been shared with investors, given A.J. Gallagher’s total shareholder return of 500% over the past decade, he notes. That should provide some comfort to investors worried about a decline in insurance premiums or interest rates. As a broker, A.J. Gallagher doesn’t assume any risk or pay out claims like a traditional insurer. The company gets its revenue from the fees paid as a percentage of premiums. Those have been rising with inflation, but some have feared they will slow down as inflation cools. Likewise, a cut to interest rates would lower profitability, given some of the company’s portfolio of highly liquid premiums and claims is invested in U.S. Treasuries. However, Gallagher says it’s disingenuous to talk about insurance premiums as a monolith, as rates for one kind of coverage often fall as those for another rise. In addition, while higher interest rates do make a difference because the firm holds fiduciary funds, the CEO says he isn’t overly concerned with potential rate cuts, saying “we grew the company quite well for years on zero [and near zero] interest rates.” Likewise, the company’s acquisition strategy means that its pool of funds will continue to grow, yielding higher interest even in the face of lower rates. “I predict we’ll make up for volume we lose by virtue of lower interest rates,” Gallagher says. Those factors ultimately lend themselves to smooth and steady growth. He points to how well A.J. Gallagher has performed over time, even when disruptions like the 2008-09 financial crisis and Covid-19 pandemic occur. Its business will only increase as the world gets riskier, as evidenced by last week’s CrowdStrike outage that highlighted the need for nearly all businesses to carry tech policies—ones that may be beyond the capability of smaller shops who are then more likely to accept acquisition offers from Gallagher. One year ago, Barron’s recommended shares of A.J. Gallagher, citing its long history of market-beating performance and ongoing success in buying up smaller brokers. The shares have gained some 26% since, compared with around 20% for the S&P 500 over the same period. Gallagher says that’s likely to continue, given insurance is the “oxygen of commerce…nothing happens without insurance, you can’t build a building or ship a container without it.” The company’s ‘all-weather model’ makes it particularly attractive during uncertain times, like the recent market slump. Gallagher cites a Fortune 500 executive who recently remarked to him: “I’m beginning to realize that when things are bad they’re good for you.” And what about when times are good? Gallagher asked the exec. “I know, they’re good for you too,” he replied.

Slowly but surely insurance brokers are beginning to get noticed by Wall Street journalism. https://www.barrons.com/articles/arthur-j-gallagher-stock-price-earnings-b592a35e?mod=bol-social-tw

In the early 2000's we had reps from several large institutions come to my little town of Lexington NC to give an investing seminar. We had some pretty "famous" (LOL) investors attend including Jimmy Rogers (Mr. Commodity back then) and Fred Stanback (Warren't best man in his wedding). Banks like First Union (represented in this seminar) were earning 25% returns on equity for good reasons...actually liar reasoning...but still, that's what the financial statements suggested. Mr. Smartass, that's me, stood and questioned bank accounting and... (you guys know full well the "reception" that got me). But, the story since then and the massive crashes, at least to me, is that banking is just one hell-of-a-difficult business, one not getting better but getting worse. That does not mean that in the next few months bank stocks will not go up, it is a statement about the long term road of banking---- that the holes to fall in are so many that almost no one except Jamie can navigate. Imagine JPM without Jamie Dimon. I began my life as a banking and insurance analyst, I respected the road they travel, the grand difficulties of it all and the few and far between good managers that can survive it successfully. It is easy to see why banks aren't in the list. The Bank of Granite, shares of which I inherited 45 plus years ago, was led by John Forlines. A legendary manager, Forlines was honored and asked to stand up by none other that Warren at a late 1990's annual meeting. Forlines had well over 2% ROA and 15% ROE (huge equity to assets ratio from retained earnings). Forlines retired in the early 2000's and his successor, a 30 year top manager of the bank named Charles Snipes, bankrupted Bank of Granite within a very short period of time. Banking 101.

When you rid your mind of those using Berk (read Bloomstran) for self-promotion and those who refer to Buffett in uncle and grandpa terms the path and story of the business in its present form are not the extremes expressed by either side. But the capital outlays and their success/failure - or less polar wording would be preferred if I could think of it - are vividly obvious. With size Buffett almost inevitably goes into a slew of less-than-ideal things to get in down the road of existence. I'm 99% profit in my Berkshire, I'm not going to sell in my lifetime. But others can and probably should based on valuation and even more importantly where in the economic/stock/business performance cycle we are. These cycles by the way, at least to me, and screamingly obvious. That's one of the things barely addressed in online forum posts, that each of us has our own unique place as to lifespan, taxes, estate plan, etc.--- which highly affects our bias as to what to do and when. But these biases should be the starting point for all discussion.

All solid thinking it seem to me UK.

Agree that this is not a list for outstanding investing going forward. But it does suggest that these type businesses exist, that a good business is worth holding. My ownership of an initial tiny few NSC shares led to - relative to me - huge gains in owning all the railroads. And reading John Train's books led me to Buffett's quote as to insurance brokers being a toll booth on the world economy. These type businesses enabled me to avoid blowing in and blowing out of an endless array of stocks in an attempt to get a quick return. But many or most want bigger returns than this model suggests is possible via looking at those long term outcomes.

Decades owner and won't sell in my lifetime. I easily see the authors point of view and your logical one too UK. I have no guess as to returns, but I have some strong thoughts on the inevitable journey. Inevitable...at least in my mind.

I think, and my older age thinking (I continually increase the omissions and mistakes in my thinking - and particularly my writing - as I age) may be in error here, that there is some degree of mental advantage infused to your (an investors) brain via holding ownership of businesses for a long time. What I mean by this is that you do get some insight as to the probability that this or that business is one of sustainable good outcome. Although I've never really owned tech stocks (I have owned Google for about 20 years) as a whole my long term (40 years plus) returns both in tax and tax free accounts have been pretty steady and over 14%. That 14% has mostly been enabled by owning a few good businesses that were never sold. But at the same time there's a lack of really poor performers in these portfolios and I think that comes from the knowledge (and/or luck) from owning the better stocks in the portfolio and getting some insight to what makes business have some sorts of long term sustaining traits. I watched an investor who had outrageously grand results for the 2015 to 2021 period, a guy who had bought into the SAAS theme...and he'd basically gone online to promote/interact with his followers, I think with good intentions. I've made a few posts on his site, quickly he blocked me (I wasn't rude) and within a short period of time literally his entire model was imploding all over the place- even given his earlier wild success (and continued to implode as he went into rapid buy/sell mode on multiple entities not related to his original SAAS mandate). So in the end he still had good returns since his beginning of 2015 (that he sited in every post he ever made) but literally hundreds if not thousands who took on his method got the downside of his obvious low probability investing style. Often these late-comers were losing 3/4's of their savings in their retirement accounts and trying desperately to think rationally about what to do was obviously traumatizing to this bunch. I have had a few write to me outside the site who lost over 80% of their investments based on this investor they become enchanted with. The way I invest, or at least my perspective of it, is basically "and idiots guide of how to almost guarantee you don't do poorly." This list in the link that Spek has posted, I do own quite a few of these stocks - my starting point wasn't 1925 but about 1975...and still these businesses did very well and continue to do so. I have bought a few more of these along the way. All of them have poor periods of return, growth and success isn't linear. Instead of bailing out in the poor periods I've chosen just to observe. But in the end, even without the 80-some percent of my portfolio that is either Berkshire or insurance brokers I'd easily be able to retire for decades comfortably with the "other" stocks I inherited in 1975. That inheritance of those stocks I mention, leaving out the 80-plus percent of the Berk/brokers (I bought all my broker stocks later in 1994), was about $30,000 so it wasn't some huge figure. But today it is a huge figure, or at least to little ole me it is huge. And yes there are long periods of either low or no success, no returns whatsoever. Rambling.

Superb example, the banyan tree. I'm often looking at my investment accounts and seeing a few "stocks" with business names I've never heard of. Didn't know they were being spun off and have no clue until I do some investigation. The goal for us is of course as mentioned many times, to create a sustainable model for those who follow if they choose to use it. So far our method model is spoken about by them - as the next generations choice too.

Today since I'm in the chatty mode online I'll re-tell the AJ Gallagher story of my Lexington Investment Club. This is not my personal story of owning AJG (since 1994), this is my suggestion to the club, something worthwhile to think about today given the valuation of AJG is quite "firm" so to speak LOL. The year was about 2015 or so (too lazy to look) and AJG for whatever reason had fallen to $35 per share and was yielding 3.8 percent or so. The "PE" based on earnings had fallen to about 15 or so and the free cash earnings had it substantially less. Our club, a club with value investing obsessions, decided to go for it and buy the stock. But, as was always the case, in a club of 25 and a portfolio of over $1 mil the $20k that was suggested to me was a disappointment. The stock did very well of course, but then as it first approached the high $70's I began to hear the chant. The club experts (not me) stated: "AJG stock price is borrowing from the future as the price line in the 22-23x eps range is escalating well above the 15 times earnings line where we bought it." And then of course the dreaded: "We need to sell AJG and buy Bristol Myers, a cheap value stock that's trading substantially below the 15 times earnings line." We sold AJG at $82 somewhere about 2018-19 and bought Bristol Myers BMY at $63 or so. Most of use have funds in the club via taxable $ so we also paid tax on our gains with AJG. Six or so years later AJG has gone from $82 to $270 or so and BMY is about where we bought it. AJG is expensive...and so is Brown and Brown which I know some of you bought. My advice to you who bought Brown and Brown? Figure out how to live a long life. And keep the damn stock.

73 Reds, as I've stated here many times, time and price have informed me which businesses were the best, not my personal trading expertise. I have many stocks in the 100-and-way-up-from-there "bagger" status and yes some crumbs that I have written about here too...you know the go to zero types LOL. I inherited about $47,000 of stocks in 1975 by the way. Even then not a lot of money. For decades around here basically everybody either owned or traded Coke and Pepsi for instance. Counting the spin off of YUM which gave me a bunch of stocks, the outcome of holding Coke and Pepsi since 1975? Well, I remember the local business titans discussing holding Coke and Pepsi...and I also remember the guys who in the upcycles decided to buy and sell Coke and Pepsi - a repeated pattern. Luckily I was drafted into an investment club that began in 1954 where for decades I was the youngest member. These men bought and held and they were the cream of the crop locally in financial matters. Yea, in the long run the men/women and their heirs who held instead of traded? Well, these families have one HELL of a lot of money. This is one hard issue to discuss for me and I'm not good at it. I find that so few people understand the longevity of holding stocks...and that the web is a place where the time frame focus for owning stocks is hyper short.

Sorta easier in some respects to just own some decent businesses via stocks and live long for satisfactory results. Some, like parts of your health given this longevity, blow up. But kind of like my enlarged prostate that's getting me a delightful cystocopy in a month, overall the result is - compared to others - just a relative short pain in the groin on your way to financial success.

I mention 1st cousins, relevant because all of us lost our fathers (they were brothers) by 20 (some long before 20), thus our close connections and some of us (4) are in the builders supply and millwork business together (where we have a relatively large investment portfolio also). I hold all the stocks I inherited in 1975 that haven't collapsed or been merged or bought and basically except my tax free account (which I have shared info about and described here on several occasions) I hold all the stocks I've ever bought. Angela and I own over 150 stocks in taxable accounts and retirement accounts.

I first began interacting in the mid 90's online with Berk investors stating I had $500K of both Berkshire and AJ Gallagher. Not interrupting this, now together rounding out to $30 mil or so. In the mid 90's I was by far the least financially successful in a close family of 7 first cousin men and pretty much obsessed with wanting to be a part of their world, one of business ownership and community (volunteer and financial contributions) involvement. I'm there now and just loving it. I grew up in a world view of many successful men who preached never selling a good business. It was a culture I loved slowly becoming a part of.

Hub is a fabulous business that for a short while we could own directly.