Arthur J. Gallagher & Co. (AJG)

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Arthur J. Gallagher & Co. (AJG)

Q2 FY08 Earnings Call

July 30, 2008, 09:00 AM ET

Executives

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Douglas K. Howell - Corporate VP and CFO

Analysts

Keith Walsh - Citigroup

Dan Farrell - Fox-Pitt Kelton

Meyer Shields - Stifel Nicolaus

Alison Jacobowitz - Merrill Lynch

David Louis - Raymond James

Presentation

Operator

Good morning, ladies and gentlemen. And welcome to the Arthur J. Gallagher & Company Second Quarter 2008 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. Your lines will open for questions following the presentation. 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 the conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws. Those forward-looking statements are subject to certain risks and uncertainties described in the company's report filed with the Securities and Exchange Commission. Actual results may differ materially from those discussed today.

It is now my pleasure to hand the floor over to your host J. Patrick Gallagher, Jr., Chairman, President and CEO of Arthur J. Gallagher. Sir, the floor is yours.

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Thank you very much Judith. Good morning everyone, and thank you for joining us on our second quarter conference call. We appreciate you being with us today. This morning I am joined by Doug Howell, our Chief Financial Officer, Walt Bay our General Counselor as well as the division heads that run our operating businesses.

I'll add some color to the quarter, then Doug will add some comments, and we'll get pretty quickly to questions-and-answers. I think it is no secret to anyone who is doing any kind of business out there today that is tough, you just can't pick up a newspaper without reading about a company or an industry that's in dire straits. When I see what's going on in the global credit markets, or the airline business, the automobile business or home building business, many of those by the way are clients of ours, its really, really difficult. So when I look at the environment, and I step back and I think about how we performed? I think we did well in the quarter.

Revenue grew 6 %, EBITDA grew 8%, net earnings grew 9%, and we had one point of margin improvement in the Brokerage segment. And that's pretty good, facing the difficulty we are in the marketplace.

Let me get into the individual segments. Our Brokerage segment was really a mix of varying results. Over the years, we built the Brokerage segment and we're lucky, I think to build a balance, we have in our PC retail business, we have our benefits retail business, our wholesaling and our MGAs and MGUs.

Our retail benefits operation, you will recall had a fantastic 2007, and our momentum is continuing to build nicely though the first half of 2008. We will have another very, very strong growth yield and benefits this year. Another bright spot in the segment was our wholesaling in MGA business.

Surprisingly, even in this soft market, our open market wholesale group was essentially flat in revenue and in pre-tax. The MGA and program business, we received underwriting profit sharing bonuses that lifted all of our wholesaling operations to actual growth over prior year.

Our retail PC operations had a tough quarter and a tough first half. Year-to-date, we're slightly ahead of last year in revenues but we're essentially flat in EBITDA. The market is just unbelievably competitive. The Counsel of insurance agents and brokers does a survey, that I know most of you are aware of every quarter. In the last survey, 77% of the respondents said that they felt the market was down 10% to 20%. 12% of the respondents said that they felt the market was down 20% to 30%. And I will give you too many illustrations and too many details on by line of coverage we'll have you. Let me just given you one illustration.

Even we're finding in ... even in catastrophe exposed areas, places that are exposed to wind and earthquake. Large accounts, I am talking multi-billion dollar schedules that need virtually the entire property market to complete, are down 20% this year. It's unbelievable slide. And to the rate deterioration, the fact that the economy is slowing, virtually every sector we worked in with the exception of oil and gas is slowing.

Construction and infrastructure projects continues but other than that, there is very little construction. Our clients are really, really being challenged in this business environment. So that said the business we've achieved in our Brokerage segment, I think served us well in the quarter in the first half, and frankly showing growth in this environment, seen with a lot of really hard work in the field, I am proud of what the people have accomplished out there.

Let me turn to the merger and acquisition front. We are off to our best start in our history. We've done 20 deals and remember last year we did 21 all in, for $58 million in revenues so far this year. And we're going to continue to aggressively build our company with new partners.

You can also see 20 deals averaging $3 million per deal in terms of revenue, this is closed to an organic hiring strategy as we can get so called acquisitions. These new partners are choosing Gallagher because they believe they and their colleagues will have great opportunities to prosper and grow with Gallagher. We welcome our new partners, and as I say every quarter, thank you, we are proud you chose to join us.

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