Arthur J. Gallagher & Co.
July 2004
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 perhaps not 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 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, 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 existing in income tax laws. 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 $2.8 billion
Shares outstanding of 91.9 million
Dividend yield of 3.3%
52-week range – $24.64—$34.25
Traded NYSE as “AJG”
As of 6/30/04, unless otherwise indicated
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Arthur J. Gallagher & Co
Performance vs. S&P
350% 300% 250% 200% 150% 100% 50% 0%
Arthur J Gallagher & Co [AJG]
S&P 500 (SPX)
June-99 June-00 June-01 June-02 June-03 June-04
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Arthur J. Gallagher & Co.
Summary: Why Invest?
$1,400 $1,200 $1,000 $800 $600 $400 $200 $0
1999 Gross Revenue 2003
19 % CAGR
$200 $150 $100 $50 $0
1999 Cash Flow from Ops 2003
33 % CAGR
$1.00 $0.80 $0.60 $0.40 $0.20 $0.00
1984 Dividends 2004
*$ 1.00
19 % CAG R
2003 cash flow from operations of $229 M
5-year average ROE of 31% is highest in peer group
Highest dividend yield in peer group – 3.3% indicated in 2004
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Arthur J. Gallagher & Co.
A Real Growth Story
1984 IPO (Restated for stock splits) June 30, 2004
Stock Price $ 1.72 $ 30.45
Market Cap $57 M $2.8 B
Tangible Net Worth $23 M $428 M
Annual Dividend/Share $ .03 $ 1.00
Including Dividend Reinvestment, Compound Annual Growth Rate of 18%
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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
Open
“Small company” feel
Client-focused Competitive
No “C” players
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Arthur J. Gallagher & Co.
2003 Employee Survey Results
78% participation
96% understand the need to grow and are committed to helping grow the Company
92% AgreeCustomer is top priority
92% “I am proud to work for this Company”
90% of men and women felt they were treated with respect by co-workers
80% felt the Company could run more efficiently
The Gallagher Culture is Alive and Strong
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Arthur J. Gallagher & Co.
Three Distinct Segments
2003
Revenue
Pretax Earnings
Brokerage 69% Brokerage 79%
Financial Services 6%
Risk Management 25%
Financial Services 1%
Risk Management 20%
Revenue excludes FIN 46 impact and investment write-offs
Pretax earnings exclude investment write-offs (no impact of FIN 46)
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Brokerage Segment
Gallagher’s largest business segment
Acts as intermediary – no underwriting risk
Niche driven
Alternative market leaders
(1) Business Insurance/JP Morgan
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Brokerage Segment
A Strategic Consolidator
Geographic diversity; enhance or expand capabilities
Over 125 acquisitions since 1986 in this segment
Almost $460 million of 2003 revenue from acquired entities
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
99 00 01 02 03
99 00 01 02 03
Revenue
Pretax Earnings
$383M $849M $72M $172M
180 160 140 120 100 80 60 40 20 0
20 % CAGR
20 % CAGR
2003 pretax margins of 19%
2003 growth in earnings per share of 24%
Note: Amounts as originally reported
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Brokerage Segment
Three Primary Operations
Retail Brokerage 62% (Jim Gault)
Employee Benefits 15% (Jim Durkin)
Specialty Marketing & International 23% (Dave McGurn)
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Retail Brokerage Offices
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Retail Brokerage
Niches
Agribusiness
Public Entity
Aviation
Real Estate
General Commercial
Construction
Habitational
Energy
Hospitality
Global Risk Management
Shopping Centers
Healthcare
Religious/Nonprofit
Higher Education
Restaurant
Management Liability
Scholastic K-12
Marine
Transportation
Mergers & Acquisitions
Worldwide Risk Services
Personal Insurance
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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
Reinsurance Brokerage
International P&C Brokerage
Programs/Program Administration
CoverageFirst.com
Wholesale Brokerage
Captives/Rent-a-Captives
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Employee Benefits Offices
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Employee Benefits
Capabilities
Employee Benefits Brokerage/Consulting
Executive Benefits/ Financial Planning
Healthcare Data Analysis/Benchmarking
Human Resource Services
Retirement Plan Services
Compliance Consulting
Employer Administrative Services
Merger & Acquisition Analysis
Business Continuation
Actuarial Services
Compensation Program Design/Analysis
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Employee Benefits
High Growth & Profit Potential
Niche marketing
Cross-selling opportunities with Brokerage Services
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” 91% (Rich McKenna)
Medical Claims Management 9% (Jim Durkin)
Fee revenues are primarily generated based on number of claims.
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Risk Management Segment
Growth & Profits
350 300 250 200 150 100 50 0
1999 2003
1999 2003
Revenue
Pretax Earnings
45 40 35 30 25 20 15 10 5 0
$43M
$322M
23% CAGR
15% CAGR
2003 pretax margin of 13%
2003 growth in earnings per share of 51%
Note: Amounts as originally reported
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Gallagher Bassett Offices
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Risk Management Segment
Capabilities
Real-time Claims Reporting
Managed Care Services
Loss Control Services
Recoveries (subrogation, salvage, etc.)
Safety Programs
Settlement Management
Appraisal Services
Education and Training
Litigation Management
Information Management
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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
$927 Million of Cash & Investments*
Investments Allocated to Financial Services Segment
($190 M)
Cash Allocated to Brokerage Segment
($583 M)
Cash Allocated to Risk Management Segment
($154 M)
* As of June 30, 2004 – Cash & investments net of related investment borrowings
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Financial Services Segment
Assets at December 31, 2002 & June 30, 2004
Assets Under Management Asset Classes 6/30/04
$300 $250 $200 $150
$298 $190
$70 $60 $50 $40 $30 $20 $10 $0
Tax Adv.
Asset Mgmt.
Real Estate
Other
Low Income Housing $18M
Alternative Energy $67M
Asset Alliance $48M
Real Estate, incl HO $23M
Bermuda Insurance $20M VC, Airplanes & Other $14M
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Financial Services Segment
Refocused Investing
Tax advantaged – maximize through 2007
Asset management – monetize
Real estate – optimize cash flows
Venture capital – substantially exited in 2003
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Arthur J. Gallagher & Co.
Why Invest?
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Arthur J. Gallagher & Co.
Revenue Growth
Gross Revenues As Originally Reported ($ M)
$1,400 $1,200 $1,000 $800 $600 $400 $200
1999 2000 2001 2002 2003
$606 $741 $910 $1,101 $1,304
19% CAGR
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Arthur J. Gallagher & Co.
Profitable Growth
Pretax Earnings As Originally Reported ($ M)
$200 $180 $160 $140 $120 $100 $80 $60 $40
1999 2000 2001 2002 2003
$104 $125 $142 $186 $193
18% CAGR
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Arthur J. Gallagher & Co.
Rising Productivity
Revenue Per Employee As Reported
$180 $170 $160 $150 $140 $130 $120 $110 $100
1999 2000 2001 2002 2003
$127,000 $137,000 $140,000 $155,000 $181,000
8% CAGR
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Arthur J. Gallagher & Co.
Increasing Shareholder Value
Diluted EPS As Originally Reported – Post Split 1/18/01
$1.60 $1.40 $1.20 $1.00 $0.80 $0.60 $0.40
1999 2000 2001 2002 2003
$.88 $1.05 $1.39 $1.41 $1.57
15% CAGR
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Arthur J. Gallagher & Co.
Earnings Before Investment Gains (Losses), Depreciation,
Amortization and Stock Compensation Expense
(In millions)
$250 $200 $150 $100 $50 $0
1999 2000 2001 2002 2003
$74 $91 $129 $170 $203
27% CAGR
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Arthur J. Gallagher & Co.
Since 1990, $1.3 Billion Cash Flow from Ops
Dividends Paid
($376 M)
Reinvested in Operations
($502 M)
Shares Repurchased
($404 M)
Built a balance sheet with $4.65 in tangible net worth per share and no operating debt.
As of 6/30/04
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Arthur J. Gallagher & Co.
Summary: Why Invest?
$1,400 $1,200 $1,000 $800 $600 $400 $200 $0
1999 Gross Revenue 2003
$200 $150 $100 $50 $0
1999 Cash Flow from Ops 2003
$1.00 $0.80 $0.60 $0.40 $0.20 $0.00
1984 Dividends 2004
19% CAGR
33% CAGR
19% CAGR
2003 cash flow from operations of $229 M
5-year average ROE of 31% is highest in peer group
Highest dividend yield in peer group – 3.3% indicated in 2004
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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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