Arthur J. Gallagher & Co. (AJG)

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Arthur J. Gallagher & Co. (AJG)

Q4 2012 Earnings Call

January 30, 2013, 09:15 am ET


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

Doug Howell - CFO


Mike Nannizzi - Goldman Sachs

Arash Soleimani - Stifel Nicolaus

Gregory Locraft - Morgan Stanley

Sarah DeWitt - Barclays

Mark Hughes - SunTrust

Adam Klauber - William Blair

Brian Durubio - Yield Capital

Bob Glasspiegel - Janney Montgomery Scott

Ray Iardella - Macquarie

Joshua Shanker - Deutsche Bank

Brett Huff - Stevens



Good morning and welcome to Arthur J. Gallagher & Company’s Fourth Quarter 2012 Earnings Conference Call. Participants have been placed on a listen-only mode. Your lines will be opened for questions following the presentation. 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 that will be discussed on this call and which are also described in the company’s reports filed with the SEC. 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.

Thank you, Christine. Good morning everyone and welcome to our fourth quarter and year-end earnings conference call. Today, I am joined by the division head’s that run our businesses as well as Doug Howell, Chief Financial Officer.

Before I get into my prepared remarks, I want to thank the sell-side that are listening in today; I think many of you probably seen the December ’12 and January ’13 issue of Institutional Investors and in that magazine the sell-side voted Doug Howell The Best CFO in the insurance business and I think that's well deserved.

Today, we are going to talk about the quarter and the year-end. Another record quarter and a record year and I will tell you it feels really, really great. Our team hit on all cylinders throughout all 2012. Our growth came from all operations across all geographies. I couldn’t be proud of the team and our results. We are growing the company for our shareholders, year in and year out, quarter after quarter. We are getting stronger in our capabilities to deliver services to our clients and to attract new business.

In the fourth quarter, we did 21 acquisitions bringing in $76 million of projected revenue. Our legal teams, our HR teams, all the support groups’ seamless efforts to put these people on the books, incredible, incredible work. The fourth quarter was also a testament to our sales culture and the strategy we’re focused on for years.

Everyday, we focus on four things, I’ve mentioned on this call many times. The first is organic growth. Everyone in this company knows that nothing happens until somebody rings the cash register. The second thing we are after is mergers and acquisitions and attracting the best entrepreneurial talent in the marketplace to our growing family. Third is productivity and quality. We are always looking to do a better job for our clients and to improve our margins along the way. And fourth, we work hard everyday at maintaining our unique team oriented Gallagher culture.

Thinking about these four things everyday has served us well and those are the four things we are going to stay focused on as we go into 2013 and beyond. When you look at our Brokerage segment and Risk Management segments together, adjusted revenue was up 14% in the quarter, 15% for all 2012; adjusted EBITDAC was up 17% for the quarter and 20% for the full year and margins expanded in the quarter and for the full year.

All-in-all an excellent quarter, another record year for Gallagher; our production force is winning; we’ve turned on and really providing great results. The fourth quarter is our eight quarter in a row that we have posted positive organic growth. So many of the things that succeeded for us in 2012, we believe will carry over into 2013 and continue to prove successful for us again.

In 2012, we completed 60 acquisitions bringing in annualized projected new revenues of $232 million. We project that $130 million of that will hit our books in 2013. This is again across all divisions, across all geographies and our pipelines still remains strong. These firms added greatly to the niche expertise we talk often about and to our geographic footprint. They brought us a couple of hundred new producers, who now are armed with our capabilities and who we expect will produce significant new business in 2013. Think about it.

We give the production force greater opportunities to grow their book of business and to make more money. Our Risk Management segment, Gallagher Bassett for 2012 had revenue growth of 7%, adjusted EBITDAC was up 11%, organic growth and base domestic and international fees for the quarter was 2.9%, but importantly, the way we handle our clients is recognized. Gallagher Bassett was recognized by business insurance readers as the top TPA for both small and medium sized companies and this is the fifth consecutive year we've been recognized by the readers of business insurance.

Again, the sales culture is strong. New business was excellent throughout 2012, and was especially strong in the fourth quarter. In addition, we continue to have strong business retention. Our account retention across both segments is nicely in the mid-90s. Our sales teams are doing a fantastic job of explaining the value proposition that Gallagher has to offer through the entire insurance spectrum.

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