The Company's executive offices and certain subsidiary and branch facilities are located at Two Pierce Place, Itasca, Illinois where the Company leases approximately 200,000 square feet of space. The lease commitment on the above mentioned property expires February 28, 2006. The Company operates all of its branch and service offices in leased premises. Certain of these leases for office space have options permitting renewals for additional periods. In addition to minimum fixed rentals, a number of leases contain escalation clauses related to increases in the cost of living in future years. See Note 12 of Notes to Consolidated Financial Statements for information with respect to the Company's lease commitments at December 31, 1995.
NOTES: (a) The financial information for all periods prior to 1995 has been restated for acquisitions accounted for using the pooling-of-interests method. (b) Based on the weighted average number of common and common equivalent shares, if any, outstanding during the year. (c) Based on the number of employees at year end. (d) Based on the total dividends on a share of common stock outstanding during the entire year.
Fluctuations in premiums charged by insurance companies have a material effect on the insurance brokerage industry. Commission revenues are based on a percentage of the premiums paid by the insured and generally follow premium levels. Since the mid 1980s, lower premium rates and excess capacity have prevailed among property and casualty insurance carriers resulting in heavy competition for market share. This "soft market" (i.e. generally lower premium rates) has generally resulted in flat to reduced renewal commissions during the period.
Growth of the alternative insurance market has continued, albeit more slowly in recent years, notwithstanding the soft market conditions. The Company believes this move from the traditional approach of purchasing insurance will continue regardless of the property/casualty pricing environment and anticipates that sales in the risk management, benefits and self-insurance services areas will again be a major contributor to fee revenue growth in 1996.
Historically, inflation has contributed to increased property replacement costs and higher litigation awards causing some clients to seek higher levels of insurance coverage. These factors have the effect of generating higher premiums to customers and higher commissions to the Company. More recently, however, the United States has experienced low rates of inflation along with business downsizing, reduced sales and lower payrolls. These events have resulted in lower levels of exposure to insure. In general, premium rates have had a greater effect on the Company's revenues than inflation.
The Company's results of operations for all periods prior to December 31, 1995 have been restated to include the results of IMC Risk Management Group, Inc. and W. Lawrence Pfeiffer & Associates, Inc. on a combined basis as if they had operated as part of the Company. The Company continues to search for merger partners which complement existing business and provide entry into new market niches and new geographic areas. For the effect of such restatements in the aggregate on year-to-year comparisons, see Note 2 of the Notes to Consolidated Financial Statements.
increase, again generated primarily by Gallagher Bassett Services, Inc., resulted from strong new business production of $20.5 million and increases in existing business partially offset by lost business.
Investment income and other increased by $6.4 million or 66% in 1995. This increase is due primarily to a combination of significantly higher returns on funds invested with outside fund managers and a gain of $2.0 million recorded on the sale of a subsidiary in the fourth quarter of 1995. Investment income and other decreased by $6.8 million or 41% in 1994. This decrease is due primarily to a combination of significantly lower returns on funds invested with outside fund managers and lower levels of funds available for investment. This decrease is partially offset by a gain of $656,000 realized in closing out interest rate exchange agreements related to the retirement of the Company's debt agreement in the fourth quarter of 1994 and by a gain of $800,000 from the sale of two personal lines books of business also recorded in the fourth quarter of 1994.
Salaries and employee benefits increased by $21.9 million or 11% in 1995 due principally to a 9% increase in year-end employee head count and a corresponding increase in employee benefit expenses, salary increases for employees, and the annualized effect of prior year hires. Salaries and employee benefits increased by $21.9 million or 13% in 1994 due principally to salary increases, the annualized effect of prior year hires, a 4% increase in year-end employee head count and a corresponding increase in employee benefit expenses and changes in certain benefit plan actuarial assumptions. Also contributing to this increase is a $4.6 million non-recurring gain from a restructuring and settlement of a defined benefit plan at the Company's London subsidiary, Arthur J. Gallagher (UK) Limited, recorded in 1993. See Note 10 of the Notes to Consolidated Financial Statements. In 1995, 1994 and 1993, salaries and employee benefits have represented 53%, 54% and 52%, respectively, as a percentage of total revenues.
The Company's overall tax rate of 34% in 1995 is less than the statutory federal rate. For 1995, the net effects of state and foreign taxes are substantially offset by the tax benefits of certain investments. The Company's overall tax rate of 35% in 1994 approximates the statutory federal rate. For 1994, the net effects of state and foreign taxes were again substantially offset by the tax benefits generated by certain investments. The Company's overall tax rate of 39% in 1993 is greater than the statutory federal rate of 35%, due primarily to the net effects of state and foreign taxes which are partially offset by the tax benefits generated by certain investments, and to pre-acquisition income of pooled entities which was taxed to the previous owners. See Note 13 of the Notes to Consolidated Financial Statements.
The Company also entered into two term loan agreements (the "Term Loan Agreements") that have outstanding balances of $1.9 million and $1.5 million at December 31, 1995. Loans under the Term Loan Agreements are repayable in equal annual installments no later than January 11, 1998, and June 15, 1998, respectively, and bear interest rates over the terms of the loans of 6.64% and 6.30%, respectively.
The Company also has line of credit facilities of $17.5 million and $10.0 million which expire on April 30, 1996 and February 28, 1997, respectively. No borrowings currently exist under these facilities.
The Company paid $14.7 million in cash dividends on its common stock in 1995. The Company's dividend policy is determined by the Board of Directors and payments are fixed after considering the Company's available cash from earnings and its known or anticipated cash needs. In each quarter of 1995, the Company's Board of Directors declared a dividend of $.25 per share which is $.03 or 14% greater than each quarterly dividend in 1994. In January, 1996, the Company announced a first quarter dividend of $.29 per share, a 16% increase over the quarterly dividend in 1995.
Due to changes in the United States federal income tax laws, effective in 1994, the Company began providing for U. S. income taxes on the undistributed earnings of its foreign subsidiaries. Prior to 1994, the Company did not provide for U. S. income taxes on the undistributed earnings of certain foreign subsidiaries ($19.2 million) which are considered permanently invested outside the United States. See Note 13 of the Notes to Consolidated Financial Statements. Although not available for domestic needs, the undistributed earnings generated by certain foreign subsidiaries referred to above may be used to finance foreign operations and acquisitions.
The accompanying consolidated financial statements include the accounts of the Company and all subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior year financial statements in order to conform to the current year presentation.
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Intangible assets consist primarily of the excess of cost over the value of net tangible assets of acquired businesses and are amortized principally over forty years using the straight-line method. Accumulated amortization at December 31, 1995 was $7,225,000 ($7,221,000 at December 31, 1994).
The following is a summary of available for sale marketable securities:
The net unrealized (losses) gains on investment strategies included in income amounted to ($171,000) in 1995, $83,000 in 1994 and $1,908,000 in 1993.
The Company also has line of credit facilities of $17,500,000 which expires on April 30, 1996 and $10,000,000 which expires on February 28, 1997. No borrowings existed under these facilities at December 31, 1995.
During 1986, the Company adopted an incentive stock option plan for its officers and key employees resident in the United Kingdom. The United Kingdom Plan is essentially the same plan as the Company's 1983 U.S. incentive plan, with certain modifications to comply with United Kingdom law and to provide potentially favorable tax treatment for grantees resident in the United Kingdom.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following assumptions were used in determining the actuarial present value of the plan's projected benefit obligation:
At the time of the foreign plan conversion, there was a surplus of plan assets in excess of benefit obligations. Previously vested benefits of the plan participants were settled by the purchase of annuity policies with a life insurance company. As a result of the defined benefit plan settlement, the Company recognized a $4,572,000 gain in 1993, which was recorded as an offset to salaries and employee benefits expense.
The discount rate used to measure the accumulated postretirement benefit obligation was 7.5% and 8.0% at December 31, 1995 and 1994, respectively. The transition obligation is being amortized over 20 years. Prior to 1993, postretirement benefits were recorded on a pay-as-you-go basis.
Total rent expense, including rent relating to cancelable leases and leases with initial terms of less than one year, amounted to $26,510,000 in 1995, $25,130,000 in 1994 and $24,450,000 in 1993.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A reconciliation of the provision for income taxes with the U.S. federal income tax rate is as follows: