Arthur J. Gallagher & Co.

 
Asset Management, Companies and Industries February 21, 2024

Arthur J. Gallagher & Co.

We recently purchased a position in Arthur J. Gallagher & Co (tkr:AJG), one of the largest insurance brokers in the world. This 97-year-old, U.S.-based company provides insurance brokerage and risk management services to its clients in more than 150 countries.

According to market analysts, the global insurance market is expected to grow at a compound annual growth rate of 16% between 2023 and 2030. The industry’s growth expectation is based on forecasted increases in replacement costs, extreme weather, and litigation, among other factors. Furthermore, insurance remains a required expense for most businesses regardless of macroeconomic conditions. Despite its size, Arthur Gallagher has grown its revenue at a compound annual growth rate of 12% over the last decade through both acquisitions and organic growth. Unlike traditional insurance companies, insurance brokers do not underwrite policies. Instead, their revenue is generated from commissions and fees charged for matching insurers and clients. Commissions are based on a percentage of the premiums; this means that insurance brokers benefit from rising premiums. Because brokers do not underwrite policies, they are not subject to claims or catastrophic losses.

Arthur Gallagher is attractive because in 2023, 87% of its revenue was generated from its brokerage business segment. The company also continues to invest in software portals and other technology that enables its clients to access its services, providing a superior experience while lowering operating costs. The company’s Risk Management business, which represents 14% of its revenue, is mostly made up of clients that are not affiliated with its brokerage operations. This diversity in its client base provides a broader source of revenue.

Arthur Gallagher brokers a broad range of insurance services, from automotive and healthcare to energy and transportation, from management liability and property to cybersecurity and fine arts. When these services are combined with its global footprint and strong client relationships, the company can serve multinational clients that small brokers cannot.  Therefore, as a company that has increased its dividends since 1984 and grown its revenue and free-cash-flow over the last decade, we feel it is positioned to take advantage of the growing insurance market.

 

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Capital Management, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.

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