Arthur J. Gallagher & Co. (AJG)

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Arthur J. Gallagher & Co. (AJG)

Q4 2008 Earnings Call Transcript

February 4, 2009, 9:00 am ET

Executives

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

Douglas K. Howell – Corporate Vice President and Chief Financial Officer

Analysts

Keith Walsh – Citigroup

Michael F. Grasher – Piper Jaffray

Alison Jacobowitz – Bank of America - Merrill Lynch

Bill Bergman – Morningstar

Meyer Shields - Stifel Nicolaus & Company, Inc.

Dan Farrell – Fox-Pitt Kelton

Kenneth J. Ruskin – Temujin Asset Management

Presentation

Operator

Good morning, ladies and gentlemen. And welcome to the Arthur J. Gallagher & Company fourth 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. (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 the host J. Patrick Gallagher, Jr., Chairman, President and CEO of Arthur J. Gallagher & Company. Thank you, Mr. Gallagher. You may begin.

Patrick Gallagher, Jr.

Thank you, Diego. Good morning everyone and thank you very much for being with us this morning. This morning I’m joined by Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions.

As I said in my remarks and our press release, we did not escape the negative impact of the rapidly deteriorating economy and a continued soft market in the fourth quarter. However, as you saw there are a lot of moving parts in the quarter, so I encourage you to use the tables on page three and four, as you evaluate our results. We’ll answer questions on the table and any other part of the press release you have when we get to questions and answers.

Although I think that we are very lucky to be in a business that people need and will continue to buy, we saw some changes in buying behavior in the quarter. Buyers are buying less coverage and reducing limits. They are also increasing deductibles and self-insured retentions. Rates continue to soften and exposure units are down. Remember all insurance is predicated on sales, payrolls, values and in benefits its full time equivalent employees.

In my 35-year career, I believe these are the toughest headwinds I can ever, ever remember. Our construction niche has been hit hard by the fall off in construction activity. Our transportation and our hospitality niches have seen significant slowdowns. In fact, I think it’s fair to say when you look across all our stated niche markets, even the public sector are feeling the negative effects of the global financial slowdown.

During 2008, we worked hard to proactively address expenses and headcount reductions. The items that we listed on page two of our release our actions we’ve already taken. We’ll see the benefits of these actions in 2009, even with these efforts though our fourth quarter was of prior year and below our expectations.

In the brokerage segment, I’ve already mentioned the impact of the economy but also remember that rates are declining. We started the year with double-digit rate decreases across all lines of coverage in an all geographic locations, and there has been a lot of talk about market hardening, which we did see a little bit of in large marine and energy placements, in particular in London at the end of the year.

But clearly though, fourth quarter rates continue to fall. The CIAB survey showed a drop of about 7% in the commercial middle market in the fourth quarter. So, ’08 was the sixth year our industry has had to run up a down escalator to get results.

Underwriting results are beginning to show some mixed results. Our balance sheet asset values are coming down. So, at some point we’re going to see some tightening, but our middle market Property & Casualty world there is no evidence of any major change now.

The Brokerage business I think is going to be unbelievably tough in 2009. I'm afraid the economy will experience record drops in GDP, which will continue to impact clients severely. This will result in bankruptcies, layoffs, and budgets that just won't be able to pay the same premium dollars. So we are really battened down the hatches.

Even in tough times though there are some bright spots and I do want to mention four of those this morning. First in our brokerage segment, our Benefits business had an outstanding year. Accretive acquisitions and organic growth propelled our Benefits team to really a record year. Secondly, in our Retail, Property & Casualty business, we did have a number of our branches that actually ruled through this tough environment. There are always people who find a way to get it done and on this call, I want to thank them for their efforts. They inspire the rest of our team to understand that growth is possible regardless of the environment.

Thirdly, another bright spot in ’08 was acquisitions. We did 37 deals, a $165.6 million in revenue purchased this is a record result. Our M&A teams worked tirelessly all year long. All of our operations, Property & Casualty, Retail, Benefits and Wholesale contributed to those results.

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