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Improving Commissions and Fees Aid AJG, High Expenses Ail
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Arthur J. Gallagher (AJG - Free Report) is poised to grow on strong performing Brokerage and Risk Management segments, strategic buyouts to capitalize on growing market opportunities and effective capital deployment. Earnings of the world’s largest property/casualty third-party claims administrator and the world’s fourth-largest insurance broker based on revenues increased 20.7% over the last five years, better than the industry average of 13.2%.
This insurance broker has a stellar record of delivering earnings surprises in the last 24 quarters.
The insurer remains focused on generating both organic (particularly international) and inorganic growth and is thus tapping into growth opportunities worldwide. This, coupled with solid retention and improving renewal premiums across all major geographies and most product lines, bodes well for growth. The insurer expects 2024 organic revenues and adjusted EBITDAC margins of the Risk Management and Brokerage segments to be better than the 2023 levels.
In the Brokerage segment, AJG expects organic growth to be 7-9% in 2024. In the Risk Management segment, the company expects organic growth in the 9% range and margins around 20.5% in 2024.
AJG’s revenues are geographically diversified with strong domestic and international operations. International contributes about one-third of revenues. Given the number and size of its non-U.S. acquisitions, AJG expects international contribution to its total revenues to trend upward.
Its inorganic growth story is impressive. Since Jan. 1, 2002, the company has acquired 725 companies. A strong pipeline with about $550 million of revenues, associated with almost 60 term sheets, either agreed upon or being prepared, is well supported by AJG’s M&A capacity of $3.5 billion in 2024 and $4.5 billion in 2025 without using any equity.
Banking on its capital position, AJG distributes wealth to shareholders through dividend hikes and share repurchases. Its dividend has increased at a three-year CAGR of 7.7%.
However, Arthur J. Gallagher has been experiencing an increase in expenses due to higher compensation and operating expenses that have been eroding margins.
The debt level at Arthur J. Gallagher has been increasing over the years with a deterioration in the debt-to-capital ratio. The high debt level has been inducing an increase in interest expenses and adding to its woes.
BRO’s trailing 12-month return on equity was 19.3%, lagging the industry average of 32.4%. Return on equity, a profitability measure, reflects how effectively a company is utilizing its shareholders’ fund.
Also, return on invested capital in the trailing 12 months was 9.3%, comparing unfavorably with the industry average of 9.7%. It reflects AJG’s inefficiency in utilizing funds to generate income.
Heritage Insurance’s earnings surpassed estimates in three of the last four quarters and missed in one, the average surprise being 49.15%.
Rate adequacy, limiting new business in over-concentrated markets or products and selective profit-oriented underwriting criteria should drive growth at Heritage Insurance. The excess and supply (E&S) business is another growth driver for Heritage. This super-regional U.S. property and casualty insurance holding company stated that it will consider and evaluate growth opportunities in a greater number of states. Its solid reinsurance program protects its balance sheet, particularly given coastal exposure to hurricanes and other severe weather events.
Palomar’s earnings surpassed estimates in the last four quarters, the average surprise being 17.10%.
New business, strong premium retention rates for existing business and renewals of existing policies, better pricing and effective capital deployment should drive growth at Palomar. Palomar’s fee-generating PLMR-FRONT should fuel growth in the medium term. The addition of the fee-based revenue stream to the business is expected to strengthen its earnings base. PLMR’s risk transfer strategy lowers exposure to major events, which, in turn, reduces earnings volatility. Banking on operational strength, Palomar expects to generate adjusted net income between $110 million and $115 million in 2024.
CNO Financial’s earnings surpassed estimates in three of the last four quarters and missed in one, the average surprise being 21.21%.
Focus on the underserved middle-income market, its unique distribution model and broad product offerings poise CNO for growth. The insurance player continues to exhibit a growing agent force and improving underwriting margins. Significant investment in technology improves agent productivity and sales as well as enhances its efficiency. Improving insurance product margin, general account assets and new annualized premiums will continue to support its bottom-line growth.
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Improving Commissions and Fees Aid AJG, High Expenses Ail
Arthur J. Gallagher (AJG - Free Report) is poised to grow on strong performing Brokerage and Risk Management segments, strategic buyouts to capitalize on growing market opportunities and effective capital deployment. Earnings of the world’s largest property/casualty third-party claims administrator and the world’s fourth-largest insurance broker based on revenues increased 20.7% over the last five years, better than the industry average of 13.2%.
This insurance broker has a stellar record of delivering earnings surprises in the last 24 quarters.
The insurer remains focused on generating both organic (particularly international) and inorganic growth and is thus tapping into growth opportunities worldwide. This, coupled with solid retention and improving renewal premiums across all major geographies and most product lines, bodes well for growth. The insurer expects 2024 organic revenues and adjusted EBITDAC margins of the Risk Management and Brokerage segments to be better than the 2023 levels.
In the Brokerage segment, AJG expects organic growth to be 7-9% in 2024. In the Risk Management segment, the company expects organic growth in the 9% range and margins around 20.5% in 2024.
AJG’s revenues are geographically diversified with strong domestic and international operations. International contributes about one-third of revenues. Given the number and size of its non-U.S. acquisitions, AJG expects international contribution to its total revenues to trend upward.
Its inorganic growth story is impressive. Since Jan. 1, 2002, the company has acquired 725 companies. A strong pipeline with about $550 million of revenues, associated with almost 60 term sheets, either agreed upon or being prepared, is well supported by AJG’s M&A capacity of $3.5 billion in 2024 and $4.5 billion in 2025 without using any equity.
Banking on its capital position, AJG distributes wealth to shareholders through dividend hikes and share repurchases. Its dividend has increased at a three-year CAGR of 7.7%.
However, Arthur J. Gallagher has been experiencing an increase in expenses due to higher compensation and operating expenses that have been eroding margins.
The debt level at Arthur J. Gallagher has been increasing over the years with a deterioration in the debt-to-capital ratio. The high debt level has been inducing an increase in interest expenses and adding to its woes.
BRO’s trailing 12-month return on equity was 19.3%, lagging the industry average of 32.4%. Return on equity, a profitability measure, reflects how effectively a company is utilizing its shareholders’ fund.
Also, return on invested capital in the trailing 12 months was 9.3%, comparing unfavorably with the industry average of 9.7%. It reflects AJG’s inefficiency in utilizing funds to generate income.
Some Key Industry Players
Other players in the insurance industry are Heritage Insurance (HRTG - Free Report) , Palomar Holdings (PLMR - Free Report) and CNO Financial Group (CNO - Free Report) .
Heritage Insurance’s earnings surpassed estimates in three of the last four quarters and missed in one, the average surprise being 49.15%.
Rate adequacy, limiting new business in over-concentrated markets or products and selective profit-oriented underwriting criteria should drive growth at Heritage Insurance. The excess and supply (E&S) business is another growth driver for Heritage. This super-regional U.S. property and casualty insurance holding company stated that it will consider and evaluate growth opportunities in a greater number of states. Its solid reinsurance program protects its balance sheet, particularly given coastal exposure to hurricanes and other severe weather events.
Palomar’s earnings surpassed estimates in the last four quarters, the average surprise being 17.10%.
New business, strong premium retention rates for existing business and renewals of existing policies, better pricing and effective capital deployment should drive growth at Palomar. Palomar’s fee-generating PLMR-FRONT should fuel growth in the medium term. The addition of the fee-based revenue stream to the business is expected to strengthen its earnings base. PLMR’s risk transfer strategy lowers exposure to major events, which, in turn, reduces earnings volatility. Banking on operational strength, Palomar expects to generate adjusted net income between $110 million and $115 million in 2024.
CNO Financial’s earnings surpassed estimates in three of the last four quarters and missed in one, the average surprise being 21.21%.
Focus on the underserved middle-income market, its unique distribution model and broad product offerings poise CNO for growth. The insurance player continues to exhibit a growing agent force and improving underwriting margins. Significant investment in technology improves agent productivity and sales as well as enhances its efficiency. Improving insurance product margin, general account assets and new annualized premiums will continue to support its bottom-line growth.