Arthur J. Gallagher & Co. (AJG)

AJG 
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Arthur J. Gallagher & Co. (AJG)

Q4 2009 Earnings Call Transcript

February 3, 2010 9:00 am ET

Executives

Patrick Gallagher Jr – Chairman, President and Chief Executive Officer

Doug Howell – Corporate Vice President & Chief Financial Officer

Analysts

Bob Glasspiegel – Langen McAlenney

Michael Grasher – Piper Jaffray

Keith Walsh – Citi

Jack Sherck – Suntrust Robinson Humphrey

Meyer Shields – Stifel Nicolaus & Company

Doug Mewhirter – RBC Capital Markets

Alex Pitchard [ph] – Trimaran Fund Management

Alison Jacobowitz – Bank of America Merrill Lynch

Brian Durupio – Field Capital

Sarah DeWitt – Barclays Capital

Presentation

Operator

Good morning and welcome to the Arthur J Gallagher & Company’s fourth quarter and year-end 2009 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 such as any guidance regarding future results. 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 here today.

It is now my pleasure to introduce to you Mr 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 everyone and welcome to our fourth quarter and year-end conference call. Thank you for being with us this morning, we appreciate it. I am joined this morning by Doug Howell, our Chief Financial Officer as well as the heads of our operating businesses.

I will add some color to the quarter, give you kind of my perspective, Doug will add some thoughts and we will move to questions and answers. But first, I want to publicly welcome Scott Hudson to our team. I think all of you know that Scott became the President of Gallagher Bassett this month and we are glad he is aboard. We are looking forward to working together for a number of years ahead.

Given the economic environment in 2009, I have to tell you I feel we had an excellent year. We grew EBITDA over $60 million or 17%. In fact, if we had a better economy I would be happy with 17% EBITDA growth. Coming into 2009, we knew we had incredibly strong headwinds. Premiums were dropping, our clients’ businesses were being stressed but we did the things we needed to do to thrive in the toughest environment I think I have seen in my career.

So what did we do? If you look at page 2 of our press release, you will see we reduced our workforce, which was tough, but we did it, and at the same time we maintained our unique culture. We substantially cut operating cost by realizing the benefits of a lot of hard previous expense control work. We completed our largest acquisition ever. We brought in 250 new people all at the same time and we integrated them into our team. We successfully negotiated with our Attorney General in Illinois to get our contingents back and we continued to hire production talent and to sell a lot of insurance.

We never forget that we are a sales and marketing company and I am proud of the fact that we never took our eye off that ball. We all know at Gallagher that nothing happens until somebody sells something. Once again, our team found a way to grow. For the quarter, Brokerage, Risk Management revenues were up 4% and EBITDA was up 14%. For the full year, Brokerage and Risk Management revenues were up 5% and EBITDA was up 17%.

I am also very proud that at the start of 2009, we told our investors that we would cut our expenses and successfully bring on our 2008 acquisitions and that those two things would contribute approximately $50 million to $60 million of EBITDA growth in the Brokerage and Risk Management segments and we achieved those objectives. Let me touch on some of the specific businesses.

Our property casualty brokerage business continues to face strong headwinds. Premiums continued to decrease and the economy will continue to hurt us in 2010. You have to remember we are lagging indicator of economic activity, when our clients start to get healthy, it is going to take at least a full year of growth to really benefit us. As for our hard market, I know many of you have seen the results that have been announced just this quarter by some of our trading partners. I think we are still a long way off from a hard market. Underwriters are continuing to post very good results so there is very little pain on the underwriting side; we think premiums will continue to slide.

So our focus for 2010 will be to maintain expense control and drive the topline. Our efforts to drive growth will include focused effort on cross-selling. Our PC and benefits team are very focused on this in 2010. We are also targeting opportunities to utilize our wholesale talent when we need to be in the excess and surplus market. We are putting salesforce.com into our retail brokerage shops, which we hope will help our producers sell more clients. And we are working very closely with our carrier partners to be certain that our remuneration is commensurate with our efforts to grow both of our businesses.

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