Friday, November 13, 2009

Insurance Company Stocks

Arthur J. Gallagher & Co. (AJG)

Current price: $22.90

52 week range: $14.82-26.02

Market cap $2.3 billion

Valuation |5 year average

P/E 18.1 |35.8

P/B 2.7 |3.5

P/S 1.3 |1.8

D yield 5.5%

Relative valuation target price: 44.33

Other analysts: 35


Arthur J. Gallagher & Co., one of the world's largest insurance brokerage and risk management services firms, provides a full range of retail and wholesale property/casualty (P/C) brokerage and alternative risk transfer services globally, as well as employee benefit brokerage, consulting and actuarial services. Gallagher also offers claims and information management, risk control consulting and appraisal services

to clients around the world.

Gallagher has operations in 15 countries and, through the Gallagher Optimus Network and its international operations, Gallagher offers client-service capabilities in more than 100 countries around the world. Some of the company's offices are fully staffed with sales, marketing, claims, loss control and other specialists; some function as servicing offices for the various divisions.

Marsh & McLennan Companies (MMC)

Current price: $24

52 week range: $17.18-25.58

Market cap $12.5 billion

Valuation |5 year average

P/E 40.2 |---

P/B 2.1 |2.7

P/S 1.2 |1.3

D yield 3.3%


Over time, Marsh & McLennan has developed one of the largest and best-respected risk-management services firms in the world. But in 2004, a regulatory crisis arrived, as investigations into insurance industry compensation and a civil suit from the New York attorney general included charges of bid rigging in MMC's insurance brokerage subsidiary. Head winds stiffened further in the last few years, as softening insurance market pricing (and brokerage commission revenue) coupled with the dramatic slowing in the overall economy. But we think MMC has been laying the basis for better revenue momentum and margin expansion. The firm has become leaner, cleaner, and more client-focused following the regulatory trials, and we think returns should improve in years to come.

(Comparison of the two)

Performance of Stock Price

On 3/03/2009 right around the time the stock market hit its’ lows MMC was down YTD (26.58%) while AJG was down (41.95%). This is a significant factor when evaluating these two stocks because I intend to use one of these stocks to better diversify my financial sector. Just looking at historical performance MMC’s stock price has outer performed AJG. But when we look at revenue growth AJG’s revenue growth was 171.54% from 1999 to 2008 much better than MMC’s 26.54% for the same period!

If we compare quarterly results to explain the difference in decline for the beginning months of 2009 we see that AJG has revenue growth for each quarter from 12/08 -9/09 where MMC’s sales declined every quarter. From these facts you would expect that AJG’s stock price would have outer performed MMC’s for 2009 but it has not. MMC’s stock price is down around 1% and AJG’s stock price is down around 12%!

Explanation of Decline

These discrepancies would suggest one of two things. 1. MMC’s stock price is overpriced and lagging behind AJG 2. AJG’s stock price is underpriced and its’ gains should be well above MMC’s due to the better performance, growth and valuation. Another explanation is the market cap of the two MMC is nearly 6 times that of AJG which would explain the volatility in AJG’s price for the beginning of the year. But this volatility should have worked positively for AJG and pushed the stock price up much faster than MMC. This hasn’t happened, yet.


In a cross sectional analysis, AJG beats MMC. In a time series analysis AJG has sustained better growth and this growth has yet to be factored into its’ stock price. Using relative valuation and other analysts estimates AJG is more undervalued then MMC.

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