Arthur J. Gallagher & Co. (



Q2 2011 Earnings Call

July 27, 2011, 09:15 am ET


J. Patrick Gallagher Jr. - President & CEO

Doug Howell - Corporate VP & CFO


Adam Klauber - William Blair

Tate Anderson - Citigroup

Sarah Dewitt - Barclays Capital

Mark Hughes - SunTrust

Meyer Shields - Stifel Nicolaus

Alex Pitchard - Trimaran Fund Management

Dan Farrell - Sterne, Agee & Leach

Bob Glasspiegel - Langen McAlenney

Scott Heleniak - RBC Capital Market

Richard Mortell - Piper Jaffray

Ken Billingsley - BGB Securities



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Good morning and welcome to the Arthur J Gallagher & Company’s second quarter 2011 earnings conference call. Participants have been placed on a listen-only mode. Your lines will be open for questions following the presentation. (Operator instructions) 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.



Patrick Gallagher Jr


Thank you, Rob. Good morning everybody and welcome to our second quarter conference call. We appreciate you being with us this morning. This morning, I am joined by Doug Howell, our Chief Financial Officer as well as the heads of our operating divisions.

As is our custom, I am going to offer my views on the quarter, Doug will make some comments and we will get pretty quickly to questions and answers. As said in the press release, I am extremely pleased with our second quarter. The results I think were terrific and seem where I think really came through in the quarter.

Brokerage adjusted revenues, up 16%, EBITDAC in the brokerage side up 13%. 2.1% organic growth, then if I added our supplemental commissions, the organic number would have been 3.1% in the Brokerage segment. Risk management adjusted revenue, up 20%. EBITDAC up 19% with 5.9%, almost 6% organic growth and if you combine our two operating segments, we produced about 3.7% organic growth in the quarter.

Everywhere I look around, our enterprise, our numbers are improving. Most of our businesses across the globe contributed to the quarter. I am really proud of the work our team did this quarter and I think that these results show that the strategies we have to grow our company are working. I want to remind the listeners that all of our strategies essentially fall in the four main categories.

First thing, we are out after every day’s organic growth. Secondly, mergers and acquisitions. Thirdly, we are focused on operational excellence and productivity improvement and fourthly, we want to maintain what we believe is a very unique, corporate culture.

So let me touch on each of these categories briefly. Let me talk about the drivers of organic growth this quarter. Driving these results was about a 1 point to 2 point increase in new business over 201o and about a 1 to 2 point improvement in our loss business numbers over 2010. An incredibly competitive market out there and to improve new business and loss business in the face of that competition is really an achievement.

Also I would comment our niche focus I think continues to pay results that clients would want to do business with those who truly understand their business. We have made good progress in the quarter, implementing our sales management software and I hope that this will help us maintain our new business momentum. Rates actually showed some flattening, the PC side in the quarter. Catastrophe exposed property, there is Florida wind, California earthquake, some of the property in the middle of the country where there were bad tornado losses this quarter are all showing signs of increases.

Worker’s compensation in many of the states are also showing increases. Now mainstreet and middle market accounts still are receiving some reductions especially when there is competition, but in many instances we are finding markets are not willing to cut their prices at renewal. As I said if there is competition on good account, we are still going to see reductions and there continues to be a difference in the underwriter’s view between new business and renewals. But the whole market is no longer one of automatic cuts for the clients. Our organic growth I think shows great work by our team. We work in an incredibly competitive environment as I said and I am proud of what we have done.

Mergers and acquisitions are second category of strategic growth, for 25 years we’ve sought to attract the best firms in our industry, to our company through the acquisition process. The second quarter was a great merger and acquisition quarter. We closed 9 deals bringing a $180 million of annualized revenue to the company. Our Heath Lambert acquisition in the UK brought us 1200 new associates and a $158 million of annualized new revenue.

This acquisition fits our international growth strategy extremely well, you will recall Gallagher had a modest retail presence in the UK market which is the third largest retail market in the world. The Heath team is a great fit from a business standpoint. But just as importantly, the culture of the firm fit extremely well. We are excited to have our new teammates aboard and already we are seeing that in many numbers of ways our two organizations will be stronger together that we were apart.

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