Arthur J. Gallagher & Co. (AJG)

AJG 
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Arthur J. Gallagher & Co. (AJG)

Q3 2012 Earnings Conference Call

October 31, 2012 9:00 am ET

Executives

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

Douglas K. Howell – Chief Financial Officer

James W. Durkin – Corporate Vice President

Analysts

Greg Locraft – Morgan Stanley

Brett Huff – Stevens Incorporated

Meyer Shields – Stifel Nicolaus

Mark Hughes – SunTrust Robinson Humphrey

Josh Shanker – Deutsche Bank

Chris Lakim – William Blair

Eric Fraser – Goldman Sachs

Ray Iardella – Macquarie

Scott Heleniak – RBC Capital Markets

Presentation

Operator

Good morning and welcome to Arthur J. Gallagher & Company’s third quarter 2012 earnings conference call. Participants have been placed on a listen-only mode. Your lines will be opened for questions following the presentation.

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 that will be discussed on this call and which are also 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 and Company. Mr. Gallagher, you may begin.

Patrick Gallagher, Jr.

Rob, thank you very much, and good morning everyone, welcome to our third quarter call. This morning, I’m joined by Doug Howell, Chief Financial Officer as well as the heads of our operating division.

For those of you that are out east, we hope your families are safe that’s cleared your weather a heck of a monster storm. For the safety of our people we did close many of our offices as well, we’re working very hard to get back to our offices to handle the thousands of claims that we know we filed after the safety of our people servicing our clients is our number one priority. So hope all of you are well today.

As our customer make some remarks about the quarter and Doug will add additional color and we’ll get pretty quickly to questions-and-answers. Again this quarter I’m very pleased with our results, across all of our operating businesses globally we’re producing growth for our shareholders and getting stronger in our capabilities to serve our clients. I believe these capabilities are evident in the numbers that we posted with you last night.

Adjusted brokerage revenue is up 14% in the quarter, 17% year-to-date with organic growth of 4% is another excellent quarter. Adjusted EBITDAC in the brokerage up 20%, 22% year-to-date with margins up by 141 basis points is also excellent, year-to-date we’ve closed 43 acquisitions bringing in over a $170 million of additional revenue to our company. We’ve acquired businesses across all of our operating divisions five internationally and our pipeline continues to be very, very strong.

Our risk management segment had revenue growth on adjusted basis of 5%, EBITDAC was up adjusted 6%, organic growth in our base, domestic and international fees was 5%, when you put the two segments together our brokerage and risk management together, adjusted revenues grew 12% and adjusted EBITDAC grew 18%. I could not be proud of our team, our sales culture is strong. We continued to sell new accounts and to keep those accounts we have. Account retention remains nicely in the mid 90s which we view as continuing to be very strong and everyday everywhere in the world our sales teams are explaining why Gallagher is the right risk management partner to help client’s deal with this risky world.

Let me touch on a number of the individual operations and I’ll start with the brokerage segment. In our property casualty retail area we continue to see rate increases across most of the lines of coverage in across all geographic locations. Any rate environment that is flat or a little better is extremely helpful to our growth.

From 2003 through 2011, we saw consistent and persistent rate decreases. We return from the CIAB that’s the Council of Insurance Agents and Brokerage meeting at the end of last month, I can tell you that after many meetings with the management teams of our largest trading partners it was very apparent, they know where they’re making or losing money, they understand their loss costs are inflating and they are committed to continuing the rate increases.

Let me touch just briefly on the economy, we believe that we are still seeing our clients businesses improving. Now this is a slow no higher recovery that we’re feeling and it does feel fragile that positive audits continue to come through our system and it appears that our clients businesses are improving. Our international brokerage is having a very strong year and a very solid quarter, as I said last quarter, our Heath acquisition has brought many new opportunities to grow our business. Internationally we’ve closed five acquisitions this year, having a solid retail platform in the UK is working and we’re recruiting new sales talent that we couldn’t have attracted before this transaction. Our global growth is a growing and exciting part of our story.

Our wholesale and NGA business had another strong quarter, submissions are up as are the number and the percent of those submissions that are actually becoming orders. Clearly business is moving back into the access and surplus market.

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