Arthur J. Gallagher & Co. (AJG)'s 2005 results demonstrates, once again, the value of common sense in business decisions. AJG is one of the "Big Four" in the insurance brokerage business; Marsh, Aon and Willis are the others. The insurance brokerage business is a "creamer," as premium increases drives higher commissions without additional capital requirements. With such a business paying a 4.3% dividend yield, what's not to like?
AJG is having significant challenges with its synthetic fuel investments. AJG committed to various energy and low-income housing investments in order to pay less taxes. The results have been far worse than simply poor investment returns. Last year, AJG settled a lawsuit in synthetic coal licensing technology for over $130 million, after a Utah jury returned a verdict against AJG for $175 million. To provide scale, $175 million is roughly what AJG was expected to earn for the year.
AJG commented in its 2005 annual report that the verdict was "totally unexpected." Of course. There is little understanding that an insurance brokerage firm would bring to a synthetic fuel investment legal issue. Common sense dictates that AJG focus its efforts on its wonderful insurance brokerage business and pay the resulting taxes.
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