Arthur J. Gallagher & Co. (AJG)

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Arthur J. Gallagher & Company (AJG)

Q4 2011 Earnings Conference Call

February 01, 2012, 09:15 a.m. ET

Executives

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

Doug Howell - Corporate VP and CFO

Scott Hudson - Corporate VP, President, and CEO, Gallagher Bassett Services, Inc.

Analysts

Yaron Kinar - Deutsche Bank

Adam Klauber - William Blair

Arash Soleimani - Stifel Nicolaus

Bob Glasspiegel - Langen McAlenney

Brian DiRubbio - Y/CAP Management

Dan Farrell - Sterne Agee

Ray Iardella - Macquarie

Mark Hughes - SunTrust Robinson Humphrey

Scott Heleniak - RBC Capital Markets

Presentation

Operator

Good morning and welcome to Arthur J. Gallagher and Company Fourth Quarter 2011 Earnings Conference Call. Participants have been placed on a listen-only mode. (Operator Instructions) As a reminder today’s call is being recorded. If you have any objection 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 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 thank you everyone for joining us this morning in our fourth quarter conference call. I appreciate you been here. We are sitting here in beautiful 45 degree weather in Chicago, a year ago we were settled under 22 inches of snow.

2011 was a great year, and we finished we think was a very, very strong fourth quarter. At the beginning of 2011 things still look to be really tough out there, but during the year we continue to build significant momentum which culminated in a very strong finish to the year. I’m proud of our team’s performance in the quarter and last year, and I want to sight some key highlights for the group this morning.

All divisions, all of our operating divisions across the entire globe contributed to our profit growth this year. Brokerage revenue on an adjusted basis was up 22%, we were back with positive organic growth at 5.2% which is really, really good work, I’m pleased with those results. Remember 2010, our organic revenues were down 2%, so a 7% turnaround is great work by the team.

Adjusted EBITDAC up 27%, if you look at that organic growth there is a very simple calculation. We essentially had flat rates for the fourth quarter, we had a flat economy, zero really declined from the economy and the organic was made up of new business less our loss business.

Our Risk Management segment adjusted revenues up 13%; our organic growth was very strong at 12.6% which Doug will make some comments on in a moment. Very good work by the team, adjusted EBITDAC in the Risk Management segment up 22%.

During the year our merger and acquisition activity, we had a record year, we purchased $277 million of additional revenue. During the year we did our largest acquisition ever which was Heath in the UK which is integrating very well. We finished in the Risk Management segment integrating the GAB acquisition all those clients are now up and operating on our claim system and our client retention is very strong.

2011 adjusted EBITDAC with our Brokerage and Risk Management segments combined, we broke through $400 million market $428 million. 2011 supplemental commissions and contingents came at over $94 million which is outstanding work by our field management team. Business was strong throughout the year, but especially strong in the fourth quarter. We finished the year with 12,000 colleagues and over $2 billion of revenue.

During the second half of 2011 we finished 15 more clean coal plant that will contribute significantly to after-tax income in 2012 and beyond. Total return to shareholders in 2011 was 20% and if you go back to 11/08, what we view as the start of the great recession, total shareholder return is 70% including our dividend and our Board of Directors increased our quarterly dividend to 3% at the last meeting. All and all just a great year, I’m very proud of our team. I think everyone contributed from all over the globe.

Let me highlight three particular points, so I’d like to add some color to it, and those will be the property casualty rate environment, our economy and mergers and acquisitions. And I will start with the PC rates. The Council of Insurance Agents & Brokers survey came out last week. It shows small accounts up 3.1%, medium accounts cost going up about 3.5% and larger accounts about 1.8% which averages out to 2.8% and that’s pretty much exactly what we are seeing. There are some exceptions, catastrophe exposed properties especially the big wind exposed accounts are virtually in a hard market. In some instances we have seen a 100% rate increases.

Property in general across the Board is increasing more than the 3%, work comp as a line of coverage needs significant rate adjustments especially in California, Illinois and New York. Management liability, directors, officers, etcetera in particular in the middle market is showing some firming. I think it's fair to say in general, carriers are resisting decreases. Now having said that I’m declaring a hard market here, a great account with a good loss record one that hasn’t shopped every year is likely to receive a very competitive proposal.

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