Arthur J. Gallagher & Co. (AJG)

AJG 
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Arthur J. Gallagher & Co. (AJG)

Q3 FY08 Earnings Call

October 29, 2008, 09:00 AM ET

Executives

J. Patrick Gallagher, Jr. - Chairman, President and CEO

Douglas K. Howell - Corporate VP and CFO

Analysts

Keith Walsh - Citigroup

Meyer Shields - Stifel Nicolaus & Company, Inc.

Daniel Farrell - Fox-Pitt, Kelton

Mark Dwelle - RBC Capital Markets

Presentation

Operator

Good morning, ladies and gentlemen. And welcome to the Arthur J. Gallagher & Company Third Quarter 2008 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. Your lines will be opened for questions following the presentation. 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 hand the floor over to your host J. Patrick Gallagher, Jr., Chairman, President and CEO of Arthur J. Gallagher & Company. Sir, the floor is yours.

J. Patrick Gallagher, Jr. - Chairman, President and Chief Executive Officer

Thank you very much. Good morning everyone and thank you for joining us this morning. We appreciate you being here. This morning I am joined by Doug Howell, our Chief Financial Officer; Walt Bay, our General Counsel as well as the heads of our operating divisions.

I think it's clear, we all know what's happening in the financial markets. I have to say that I am feeling very blesses to be in this business. I can tell you one thing is for sure and that is clients will continue to buy their insurance. So I won't spend any time on the financial markets, I'll just instead jump right into what's happening in our market and I'd like to start with our Brokerage segment.

We continue to fight the headwinds of rate reduction. You can see that in our results. Rates in the quarter according to the Council of Insurance Agents and Broker Survey, we're off again about 11% in the commercial market. But even with that continuing softening, our results EBITDA up 11%, EPS up 9% margins holding steady. And we think these are very good results given the environment. Holding our margins steady, growing revenues 8% in the phase of negative organic growth of 2%, I believe shows that our strategies are working.

We've closed 28 acquisitions this year for almost $100 million of revenue and we believe that we will continue in the fourth quarter. Our pipeline, frankly this has never been better. Also think about our position. Presently, there are only two publicly traded strategic buyers with an appetite for the deals the size that we are doing. We believe that there are 18,000 to 20,000 agencies in America. Most of them are run by Baby Boomers. Eventually, they have to capitalize their life's worth. I am exited by the teams that have joined us and I want to again thank each of them for joining our company.

In every instance they had a choice to be with Gallagher or someone else and chose us and we are proud of that. Now let me address some of the components of the Brokerage segment. The retail PC market is tough, but our management team has expanded well to this environment. We have a wise group on headcount and personal replacement, we are scrutinizing every expense and watching our costs, yet we continue to invest in production channel.

Our domestic wholesaling and MGA business are performing well overall. Our domestic open market wholesaling, this is where we place, hard to place accounts for various agents and brokers in the marketplace, this business is down as I would expect it to be. As you know, this business by its nature floats with market rates, on the hand our MGAs those are underwriting operations are performing incredibly well. Our international wholesaling business, primarily in London has continued to expand globally and we see good revenue and profit growth there, pardon me. We completed an acquisition of an MGA in London. End of the quarter, we took a minority position in the retail broker in Western Australia.

Our benefits business is a real highlight. This continues to be our strongest growth business in the group. We are seeing organic growth in this business and our acquisitions continue to add revenue and pre-tax monthly. We continue to believe the employer will play a key roll in the benefits business under either of the McCain or Obama benefit plans. Remember, we're also building product offerings that go way beyond just health and welfare. 2008 is going to be another great for our benefits team.

Let me turn now to the Risk Management segment. Although revenue grew 8%, claim counts from our existing businesses, existing clients went down again in the quarter. The soft market makes new business sales tough, but client retention has been excellent. When claim counts go down on existing renewals, we feel the pressure on our margin. Remember, margins were also impacted by foreign exchange, our fastest growing parts of the segment is international, so as we grow and currencies fall, we actually we build a bigger headwind for ourselves. It's a very labor intensive business that continues to be impacted by the soft market. The market continues to soften and as I've said before we have a Soft Market Play Book that we are following very closely.

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