Arthur J. Gallagher & Co. and its subsidiaries, collectively referred to
herein as we, our, us or Gallagher, are engaged in providing insurance brokerage
and consulting services and third-party claims settlement and administration
services to both domestic and international entities. We believe that our major
strength is our ability to deliver comprehensively structured insurance, risk
management and consulting services to our clients. Our brokers, agents and administrators
act as intermediaries between insurers and their customers.
Since our founding in 1927, we have grown from a one-person agency to the world’s
fourth largest insurance broker based on revenues, according to Business Insurance
magazine’s July 20, 2015 edition, and the world’s largest property/casualty
third-party claims administrator, according to Business Insurance magazine’s
March 30, 2015 edition. We generate approximately 68% of our revenues from the
combined brokerage and risk management segments domestically, with the remaining
32% derived internationally, primarily in Australia, Bermuda, Canada, the Caribbean,
New Zealand and the United Kingdom (U.K.). Substantially all of the revenues
of the corporate segment are generated in the United States (U.S.).
Our business, particularly our brokerage business, is subject to seasonal fluctuations.
Commission and fee revenues, and the related brokerage and marketing expenses,
can vary from quarter to quarter as a result of the timing of policy inception
dates and the timing of receipt of information from insurance carriers. On the
other hand, salaries and employee benefits, rent, depreciation and amortization
expenses generally tend to be more uniform throughout the year. The timing of
acquisitions, recognition of books of business gains and losses and the variability
in the recognition of IRC Section 45 tax credits also impact the trends in our
quarterly operating results.
Our brokerage segment is primarily comprised of retail and wholesale insurance
brokerage operations. Our retail brokerage operations negotiate and place property/casualty,
employer-provided health and welfare insurance, and healthcare exchange and
retirement solutions principally for middle-market commercial, industrial, public
entity, religious and not-for-profit entities. Many of our retail brokerage
customers choose to place their insurance with insurance underwriters, while
others choose to use alternative vehicles such as self-insurance pools, risk
retention groups or captive insurance companies. Our wholesale brokerage operations
assist our brokers and other unaffiliated brokers and agents in the placement
of specialized, unique and hard-to-place insurance programs.
Our risk management segment provides contract claim settlement and administration
services for enterprises that choose to self-insure some or all of their property/casualty
coverages and for insurance companies that choose to outsource some or all of
their property/casualty claims departments. Approximately 69% of our risk management
segment’s revenues are from workers’ compensation related claims,
27% are from general and commercial auto liability related claims and 4% are
from property related claims. In addition, we generate revenues from integrated
disability management (employee absence management) programs, information services,
risk control consulting (loss control) services and appraisal services, either
individually or in combination with arising claims. Revenues for risk management
services are comprised of fees generally negotiated in advance on a per-claim
or per-service basis, depending upon the type and estimated volume of the services
to be performed.
We have ownership interests in several insurance and reinsurance companies
based in the U.S., Bermuda, Gibraltar, Guernsey, Isle of Man and Malta that
primarily operate segregated account “rent-a-captive” facilities.
These “rent-a-captive” facilities enable our clients to receive
the benefits of owning a captive insurance company without incurring certain
disadvantages of ownership. Captive insurance companies, or “rent-a-captive”
facilities, are created for clients to insure their risks and capture any underwriting
profit and investment income, which would then be available for use by the insureds,
generally to reduce future costs of their insurance programs. In general, these
companies are set up as protected cell companies that are comprised of separate
cell business units (which we refer to as Captive Cells) and the core regulated
company (which we refer to as the Core Company). The Core Company is owned and
operated by us and no insurance policies are assumed by the Core Company; all
insurance is assumed or written within individual Captive Cells. Most Captive
Cells reinsure individual lines of insurance coverage from external insurance
companies. In addition, some Captive Cells offer individual lines of insurance
coverage from one of our insurance company subsidiaries. The different types
of insurance coverage include special property, general liability, products
liability, medical professional liability, other liability and medical stop
loss. The policies are generally claims-made. Insurance policies are written
by an insurance company and the risk is assumed by each of the Captive Cells.
In general, we structure these operations to have no underwriting risk on a
net written basis. In situations where we have assumed underwriting risk on
a net written basis, we have managed that exposure by obtaining full collateral
for the underwriting risk we have assumed from our clients. We typically require
pledged assets including cash and/or investment accounts or letters of credit
to limit our risk.
We have a wholly owned insurance company subsidiary based in the U.S. that
cedes all of its insurance to reinsurers or captives under facultative and quota
share treaty reinsurance agreements. These reinsurance arrangements diversify
our business and minimize our exposure to losses or hazards of an unusual nature.
The ceding of insurance does not discharge the original insurer of its primary
liability to its policyholder. In the event that all or any of the reinsuring
companies are unable to meet their obligations, we would be liable for such
defaulted amounts. Therefore, we are subject to credit risk with respect to
the obligations of our reinsurers or captives. In order to minimize our exposure
to losses from reinsurer credit risk and insolvencies, we have managed that
exposure by obtaining full collateral for which we typically require pledged
assets, including cash and/or investment accounts or letters of credit, to fully
offset the risk.