Arthur J. Gallagher & Co. (AJG)

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Arthur J. Gallagher & Co. (AJG)

Q3 2009 Earnings Call

October 28, 2009; 9:00 am ET


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

Doug Howell - Chief Financial Officer


Mark Hughes - SunTrust

Keith Walsh - Citi

Mike Grasher - Piper Jaffray

Meyer Shields - Stifel Nicolaus

Sarah DeWitt - Barclays Capital

Scott Heleniak - RBC Capital Markets

Brian Durupio - Field Capital

Paul Howard - Langen McAlenney

Dean Evans - KBW

Meyer Shields - Stifel Nicolaus



Good morning and welcome to the Arthur J. Gallagher & Company third quarter 2009 earnings conference call. Participants have been placed on a listen-only mode. (Operator Instructions)

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.

Thank you, Rob and good morning everyone. Thanks for joining us on our third quarter conference call. Today I’m joined by Doug Howell, our Chief Financial Officer as well as the leaders of our operating divisions. As is our customer I going to read from the press release instead I like here some highlights on the quarter and allow to flavor on the nine months.

Then Doug will make few comment and we’ll move quickly to questions-and-answers. Given that this has going to be one of the - if not the toughest markets that I have seen in 35 years, I’m very pleased with our quarter especially given the economic environment we are operating in. Even with organic revenue dropping in the brokerage segment and risk management segment we moved EBITDA had 11% for the quarter and 19% in the first nine months, and we’ve expanded our EBITDA margin by 2.5 points.

Let me pause for just a moment and give some additional flavor around the whole organic situation. The brokerage, we are showing 5.7% negative organic, but we know that 1% of that relates to life and retirement sales that were going strong last year until things crashed in September and about another 1% relates to our domestic whole selling operations that are being hit by customers who are returning to the standard market.

So I took those operating cells out of the results. Our retail operations are showing about 3.9% organic revenues. Then if I look at risk management, you can see in the release that we have a large performance bonus in the third quarter of 2008 and that bonus we are eligible for that every two years. So, levelizing just for that bonus puts the risk management segment about flat and if you gain brokerage and risk management the way we look at our company adjusted negative organic would be about 2.7%.

Let me go back and make some comments on the brokerage segment. To say that it is extremely tough out there would be an unbelievable under statement. I mean rates are continuing to drop and the economy is taking a huge toll on your clients. The decline in our brokerage revenue I think that two thirds of that can be attributed to the recessionary pressure on our clients exposure units and probably a third from rate decreases.

We believe that the challenges we face are going to carry on into 2010 and that is why we have decided to reduce headcount in the coming months. Letting people go is never easy, but with organic revenue falling, it’s absolutely necessary to down size. Instructed everyone involved while respecting the dignity feelings of those employees who are going to be affected.

The property casualty market as I said earlier remains soft. The latest quarterly results posted by a number of our trading partners show that balance sheets have recovered and combined ratios are still well under 100% and this is going to keep pressure on rates for the foreseeable future. Let me give you an example, I want mention any names, but a recent release by one of our key markets show that even with the decline in premiums written of 6% combined ratios were well under 90%.

So this does not reflect any need for firming rates. Let me move over to the benefits right now. Our benefits operations did quite well in the quarter and it performed well over the last nine months. That’s in spite of what I’ve already mentioned the decline in the last nine months of the area financial benefit sales, which is related to life insurance sales and retirement services.

Life sales have been timely by the credit crisis and our retirement practice was hurt by a drop in invested assets. If these two areas can get back on track as contributors in 2010, our benefits organic growth will pick up again.

Of course, all of us here Gallagher are focused on healthcare reform efforts in Washington DC. We’re involved; these efforts seem to change on a daily basis. We continue to support many of the reforms being discussed, but we do not believe a public option i.e. medicare for all is in the country’s best interest.

Our merger and acquisition activity continues to be a little slower this year than in previous years. I think, this reflects the sellers recognizing that values are declining. However, we did complete two new deals in the quarter and have a pipeline that is very, very strong. Again I’d like to welcome our new partners. I’m happy that they’ve joined Arthur J. Gallagher & Company.

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