Arthur J. Gallagher & Co.
January 2005
Safe Harbor Statement Under the
Private Securities Litigation Reform Act of 1995
The presentation relating to this material may contain forward-looking statements. Forward-looking statements made by or on behalf of Gallagher are subject to risks and uncertainties, including but not limited to the following: Gallagher’s commission revenues are highly dependent on premiums charged by insurers, which are subject to fluctuation; lower interest rates reduce Gallagher’s income earned on invested funds; the alternative insurance market continues to grow which could unfavorably impact commission and favorably impact fee revenue, though not necessarily to the same extent; Gallagher’s revenues vary significantly from period to period as a result of the timing of policy inception dates and the net effect of new and lost business production; the insurance brokerage industry is subject to a great deal of uncertainty due to investigations into its business practices by various governmental authorities and related private litigation; the general level of economic activity can have a substantial impact on Gallagher’s renewal business; Gallagher’s operating results, returns on investments and financial position may be adversely impacted by exposure to various market risks such as interest rate, equity pricing, foreign exchange rates and the competitive environment or the outcome of litigation concerning Gallagher’s Syn/Coal production; Gallagher’s revenues and net earnings may be subject to reduction due to the elimination of contingent commission arrangements in 2005 and related developments in the insurance industry; and Gallagher’s effective income tax rate may be subject to increase as a result of changes in income tax laws or unfavorable interpretations of such laws or developments resulting in the loss or unavailability of Syn/Coal credits. Gallagher’s ability to grow has been enhanced through acquisitions, which may or may not be available on acceptable terms in the future and which, if consummated, may or may not be advantageous to Gallagher. Accordingly, actual results may differ materially from those set forth in the forward-looking statements.
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Non-GAAP Financial Measures
Regulation G Disclosure
This presentation includes certain non-GAAP financial measures as defined under rules promulgated by the U.S. Securities and Exchange Commission (the “SEC”). As required by SEC rules, we have provided reconciliations of those measures to the most directly comparable GAAP measures, which are available on our investor relations web-site at www.ajg.com.
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Arthur J. Gallagher & Co.
World’s fourth-largest insurance brokerage and risk management services firm Public since 1984 Market capitalization of $3.0 billion Shares outstanding of 92.1 million
Dividend yield of 3.5%* (indicated as of Jan ‘05)
52-week range – $25.42—$34.25 Traded NYSE as “AJG”
As of 12/31/04, unless otherwise indicated
* Yield given 1/19/05 Board of Directors’ declaration of a $.28 per share first quarter 2005 dividend.
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Arthur J. Gallagher & Co
Performance vs. S&P
350% 300% 250% 200% 150% 100% 50% 0%
Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04
Arthur J Gallagher & Co [AJG] S&P 500 (SPX)
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Arthur J. Gallagher & Co.
Summary: Why Invest?
$1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0
2000 Gross Revenues 2004 $300 $250 $200 $150 $100 $50 $0
21% CAGR
34% CAGR
19% CAGR
2000 Cash Flow from Ops 2004 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00
1985 Dividends 2005 $1.12*
2004 cash flow from operations of $277 M
5-year average ROE of 30% is highest in peer group Dividend yield of 3.5% indicated in 2005*
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Arthur J. Gallagher & Co.
A Real Growth Story
1984 IPO (Restated for stock splits) December 31, 2004
Stock Price
Market Cap
Tangible Net Worth
Annual Dividend/Share
$1.72
$57 M
$23 M$32.50
$.03$3.0 B
$387 M
$1.12* (indicated)
Including Dividend Reinvestment, Compound Annual Growth Rate of 19%
* On January 19, 2005, Gallagher’s Board of Directors declared a $.28 per share first quarter 2005 dividend.
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Arthur J. Gallagher & Co.
2004 Achievements
Record revenues of $1.5B and net earnings of $189
Total Brokerage and Risk Management revenues increased 11%
Total Brokerage and Risk Management pretax earnings increased 14%
Completed record 19 acquisitions
Record dividend increase of 39%
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Arthur J. Gallagher & Co.
2004 Achievements
Returned $141M in cash to stockholders
$56M of share repurchases or 1.8M shares
$85M of paid dividends
Increased GAAP Book Value to $761M
Maintained tangible net worth at nearly $400M
Navigated synfuel tax credit waters
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Arthur J. Gallagher & Co.
Long-term Goals
$2.0 - $2.3 billion in revenues within five years
15% year-over-year earnings growth
30%+ annual return on Average Stockholders’ Equity
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Arthur J. Gallagher & Co.
Culture Driven Success
Sales and marketing driven
Team-oriented and committed to growth
Open
“Small company” feel
Client-focused
Competitive
No “C” players
Niche advantaged
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Arthur J. Gallagher & Co.
Three Distinct Segments
2004
Gross Revenues
Brokerage 67%
Financial Services 7%
Risk Management 27%
Pretax Earnings
Brokerage 81%
Financial Services (8%)
Risk Management 26%
Gross revenues exclude FIN 46 impact and investment gains
Pretax earnings excludes investment gains (no FIN 46 impact on earnings)
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Brokerage Segment
Gallagher’s largest business segment
Acts as intermediary – no underwriting risk
Niche driven Alternative market leaders
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Brokerage Segment
Contingent Commissions
Effective 1/1/05, not entering into new volume/profit-based contingent agreements as retail broker
$39.5M total contingent commissions through 12/31/04; $33.8M are retail volume/profit-based
Received subpoenas and other requests for information from state attorneys general and state regulatory authorities
Gallagher cooperating fully
Initiated internal review with outside counsel which found no evidence of price fixing, bid rigging or improper tying arrangements
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Brokerage Segment
A Strategic Consolidator
Geographic diversity; enhance or expand capabilities
Approximately 138 acquisitions in this segment from 1986 through 2004
The rules: financial health, similar culture
Gallagher is merger partner of choice
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Brokerage Segment
Growth & Profits
1000 900 800 700 600 500 400 300 200 100
00 01 02 03 04 $458M $968M
20% CAGR
Gross Revenues
200 150 100 50 0
00 01 02 03 04 $92M $185M
20% CAGR
Pretax Earnings
2004 pretax margins of 19%
2004 growth in diluted net EPS of 11%
Note: Amounts as originally reported
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Brokerage Segment
Three Primary Operations
Retail Brokerage 60% (Jim Gault)
Employee Benefits 16% (Jim Durkin)
Specialty Marketing & International 24% (Dave McGurn)
As of 12/31/04
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Retail Brokerage Offices
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Retail Brokerage
Niches
Agribusiness Aviation Captives Construction Energy
Global Risk Management Healthcare Higher Education Management Liability Marine Mergers & Acquisitions Personal Insurance
Public Entity Real Estate
General Commercial Habitational Hospitality Shopping Centers
Religious/Nonprofit Restaurant Scholastic K-12 Transportation Worldwide Risk Services Wrap ups
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Retail Brokerage
High Growth & Profit Potential
Niches – number and size Acquisitions and hiring Alternative market
Captives Rent-a-captives Deductible plans Self-insurance
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Specialty Marketing & International
Offices, Joint Ventures & Alliances
Specialty Marketing & International
Capabilities
Wholesale Brokerage International P&C Brokerage Programs/Program Administration
Reinsurance Brokerage Captives/Rent-a-Captives CoverageFirst.com
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Employee Benefits Offices
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Employee Benefits
Capabilities
Employee Benefits Brokerage/Consulting Healthcare Data Analysis/Benchmarking Compliance Consulting Merger & Acquisition Analysis Actuarial Services
Executive Benefits/ Financial Planning Human Resource Services Retirement Plan Services
Employer Administrative Services Business Continuation Compensation Program Design/Analysis
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Employee Benefits
High Growth & Profit Potential
Niche marketing
Cross-selling opportunities with Retail Brokerage Merger and acquisition opportunities Assisting clients/prospects with four top priorities
Controlling health and welfare costs Providing better retirement tools/information Benefits communication and administration Compliance with federal and state regulations
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Risk Management Segment
Two Primary Operations
Property/Casualty Claims Management “Gallagher Bassett” 93% (Rich McKenna)
Medical Claims Management 7% (Jim Durkin)
Fee revenues are primarily generated based on number of claims.
As of 12/31/04
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Risk Management Segment
Growth & Profits
400 350
300 250 200 150 100 50 0
1999 2004
15% CAGR
Gross Revenues $373M
70 60 50 40 30 20 10 0
1999 2004
22% CAGR
Pretax Earnings $60M
2004 pretax margin of 16%
2004 growth in diluted net EPS of 46%
Note: Amounts as originally reported
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Gallagher Bassett Offices
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Risk Management Segment
Capabilities
Real-time Claims Reporting Recoveries (subrogation, salvage, etc.) Appraisal Services Litigation Management Information Management
Managed Care Services Loss Control Services Safety Programs Settlement Management Education and Training
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Risk Management Segment
High Growth & Profit Potential
Fortune 1000 companies
Outsourcing of insurance co. claims departments Captives Program business Expanding global capabilities Enhancements in systems/processes related to:
Electronic data storage Security Claims regulatory changes
Access to information via the Internet Employer communication/plan administration
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Financial Services Segment $888 Million of Cash & Investments*
Investments Allocated to Financial Services Segment
($175 M)
Cash Allocated to Brokerage Segment
($561 M)
Cash Allocated to Risk Management Segment
($152 M)
* As of December 31, 2004 – Cash & investments net of related investment borrowings
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Financial Services Segment
Net Assets Under Management and Financial Guarantees $400 $350 $300 $250 $200 $150 $362 $191
2002 2004 $70 $60 $50 $40 $30 $20 $10 $0
Net Asset Classes 12/31/04
Tax Adv. Asset Real Other Mgmt. Estate
Low Income Housing $16M Alternative Energy $60M Asset Alliance $48M Real Estate, incl HO $24M Bermuda Insurance $27M VC, Airplanes & Other $16M
$ In millions
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Financial Services Segment
Refocused Investing
Tax advantaged – maximize through 2007 Asset management – monetize Real estate – optimize cash flows Venture capital – substantially exited in 2003
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Arthur J. Gallagher & Co.
Why Invest?
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Arthur J. Gallagher & Co.
Revenue Growth
21% CAGR
Gross Revenues As Originally Reported ($M) $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $741 $910 $1,101 $1,304 $1,522
2000 2001 2002 2003
2004
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Arthur J. Gallagher & Co.
Profitable Growth
19% CAGR
Pretax Earnings As Originally Reported ($M) $260 $240 $220 $200 $180 $160 $140 $120 $100 $125 $142 $186 $193 $236
2000 2001 2002 2003 2004
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Arthur J. Gallagher & Co.
Rising Productivity
11% CAGR
Revenue Per Employee As Reported $200 $190 $180 $170 $160 $150 $140 $130 $120 $137,000 $140,000 $155,000 $181,000 $185,000
2000 2001 2002 2003 2004
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Arthur J. Gallagher & Co.
Increasing Shareholder Value
Diluted Net EPS As Originally Reported – Post Split 1/18/01 $2.20 $2.00
18% CAGR
$1.80 $1.60
$1.40 $1.20
$1.00 $0.80 $1.05 $1.39 $1.41 $1.57 $1.99
2000 2001 2002 2003 2004
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Arthur J. Gallagher & Co.
Earnings Before Investment Gains (Losses), Depreciation, Amortization and Stock Compensation Expense
26% CAGR
(In millions) $300 $250 $200 $150 $100 $50 $91 $129 $170 $203 $237
2000 2001 2002 2003 2004
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Arthur J. Gallagher & Co.
Since 1990, $1.4 Billion Cash Flow from Ops
Dividends Paid
($422 M)
Reinvested in
Operations
($546 M)
Shares Repurchased
($442 M)
Built a balance sheet with $4.20 in tangible net worth per share and no operating debt.
As of 12/31/04
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Arthur J. Gallagher & Co.
Summary: Why Invest?
$1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0
21% CAGR
2000 Gross Revenues 2004 $300 $250 $200 $150 $100 $50 $0
34% CAGR
19% CAGR
2000 Cash Flow from Ops 2004 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00
1985 Dividends 2005 $1.12*
2004 cash flow from operations of $277 M
5-year average ROE of 30% is highest in peer group Dividend yield of 3.5% indicated in 2005*
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Culture Driven Success
The Gallagher Way
Shared values at Gallagher are the rock foundation of the Company and our Culture. What is a Shared Value? These are the concepts that the vast majority of movers and shakers in the Company passionately adhere to. What are some of Gallagher’s Shared Values?
1. We are a Sales and Marketing Company dedicated to providing excellence in Risk Management Services to our clients.
2. We support one another. We believe in one another. We acknowledge and respect the ability of one another.
3. We push for professional excellence.
4. We can all improve and learn from one another.
5. There are no second class citizens -everyone is important and everybody’s job is important.
6. We’re an open society.
7. Empathy for the other person is not a weakness.
8. Suspicion breeds more suspicion. To trust and be trusted is vital.
9. Leaders need followers. How leaders treat followers has a direct impact on the effectiveness of the leader.
10. Interpersonal business relationships should be built. 11. We all need one another. We are all cogs in a wheel. 12. No department or person is an island.
13. Professional courtesy is expected.
14. Never ask someone to do something you wouldn’t do yourself.
15. I consider myself support for our Sales & Marketing. We can’t make things happen without each other.
We are a team.
16. Loyalty and respect are earned -not dictated.
17. Fear is a turn-off.
18. People skills are very important at Gallagher. 20. We run to problems -not away from them.
21. We adhere to the highest standards or moral and ethical behavior.
22. People work harder and are more effective when they’re turned on -not turned off. 23. We are a warm, close Company. This is a strength -not a weakness.
24. We must continue building a professional Company -together -as a team.
25. Shared values can be altered with circumstances -but carefully and with tact and consideration for one another’s needs.
When accepted Shared Values are changed or challenged, the emotional impact and negative feelings can damage the Company.
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