Arthur J. Gallagher & Co. (



Q3 2011 Earnings Conference Call

October 26, 2011 09:15 ET


J. Patrick Gallagher, Jr. – Chairman, President, Chief Executive Officer

Doug Howell – Chief Financial Officer


Vincent DeAugustino – Stifel Nicolaus

Ray Iardella – Macquarie Bank

Keith Walsh – Citigroup

Bob Glasspiegel – Langen McAlenney

Dan Farrell – Sterne Agee

Brian DiRubbio – Y/CAP Management

Sarah DeWitt – Barclays Capital

Scott Heleniak – RBC Capital Markets

Mark Hughes – SunTrust



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Good morning, and welcome to Arthur J. Gallagher & Company’s Third Quarter 2011 Earnings Conference Call. Participants have been placed on a listen-only mode. Your lines will be opened for questions following the presentation. (Operator Instructions) And as a reminder, today’s call is being recorded.

If you have any objections, you may disconnect at this time. Some of the comments made during this conference call including answers given in response to questions may constitute forward-looking statements within the meaning of the securities laws. These forward-looking statements are subject to certain risks and uncertainties described in the company’s reports filed with the Securities and Exchange Commission. Actual results may differ materially from those discussed today.

It is now my pleasure to introduce J. Patrick Gallagher, Jr., Chairman, President and CEO of Arthur J. Gallagher & Company. Mr. Gallagher, you may begin.

J. Patrick Gallagher, Jr.

Chairman, President, Chief Exec

utive Officer

Thank you, Rob and welcome everyone. Thank you for joining us this morning for our third quarter conference call. We appreciate you being on the line today. Today I’m joined by Doug Howell, our Chief Financial Officer as well as the operating heads of our operating divisions.

I’m very pleased with our third quarter results. You will typically read the press release I won’t do that as well, but those of you who would have seen the first paragraph I think our results from the quarter are outstanding. In our calls I typically try to focus my comments on the four strategic areas that we’re focused on and those are organic growth, mergers and acquisitions, productivity and maintaining our culture, but today most of my comments I think I’d rather spend on organic growth and mergers and acquisitions.

This is the third quarter we’ve been in positive organic territory, I am pleased with that. Our total company organic that’s combining the brokerage risk management segments commissions, fees and supplementals was up 5.2% and let me give you a little flavor on that. Brokerage grew at 2.6% and risk management grew at 12.9% even if you exclude the temporary surge that came about because of the risk management claims that rose from New Zealand earthquake, risk management grew organically 8% and the total company grew 4%. I think that’s excellent work by our team and it just shows that our sales and client service cultures are alive and well. Everyone in the company knows that good things happen when you take care of our clients and nothing happens until somebody rings the cash register.

I will give you a little further breakdown on the Brokerage segment, the 2.6% here is what we are seeing. Our U.S. retail PC operations grew slightly below that average. Our U.S. retail employee benefits operations grew slightly above that average and our U.S. and international wholesalers in MGA, MGUs who is slightly above that average with domestic being a little bit stronger than international. The drivers of those results were solid blocking and tackling. Number one new business levels held steady with 2010 and secondly our client retentions are actually running better than they did in 2010. These combined to overcome about a 2% to 3% negative impact from rates and exposures, which if you look back a year frankly is only a slight improvement over what we saw in the quarter in 2010.

Let me breakdown risk management organic excluding the New Zealand earthquake claims. Our domestic business grew about 5.5%, half of that relates to increased claim counts from net new business sales. A slight increase in claim counts from existing customers and the balance comes from getting rate increases. Internationally, we grew nearly 19%, most of all that relates to new business growth in Australia and the U.K. GB’s international operations are really a bright spot.

Let me look forward and comment a bit on rates. As per the rate environment, it is encouraging to see that the CIB Agent Survey Report showed about 1% average increase in rate across all lines for the quarter, on that at this time of year we spent a lot of time with our insurance carriers, and the mode this year is decidedly different than a year ago. We see them getting tighter rate cuts, they are looking for rate increases all of the CEOs are talking about that. It’s still going to take some time in my opinion to see that trickle down to the street level, but it sure would be nice to stop run and up and down escalator for the first time in eight years.

As per exposures, I’ve also spent a lot of time over the last few weeks with many of our clients across various parts of the country. I’m just not hearing from them that the recent economic turmoil has further damaged their businesses. They seem to have reached a level of employment and activity that can keep them going in this environment. So as we finish the year we are not planning for increased exposure units, but we are also not planning to see a decrease. As per new business there are lots of opportunities across the whole organization.

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