Gallagher Stocks Up; M&A Activity Steady

December 21, 2008

Stock Prices: Arthur J. Gallagher’s stock price remarkably continues to hold strong as many stocks are experiencing historical declines. Gallagher is up 6.5 percent for the year.

M&A Activity: Brokerage activity remains steady with several large transactions announced in the 4th quarter.

Mercury General Corp. (NYSE:MCY) announced that Mercury Casualty Co., its largest insurance subsidiary, entered into a definitive agreement with Aon Corp. (NYSE:AOC) for the purchase of Auto Insurance Specialists Inc. AIS is a major producer of auto insurance in California and the company’s largest independent broker producing more than $400 million of direct premiums written, which represented 14 percent of Mercury General’s direct premiums written in 2007. The purchase price is $120 million plus a potential earn out of up to $34.7 million, payable over the two-year period following the closing date.

ZC Sterling, a privately held U.S. insurance services company owned by private equity firm Stone Point Capital, announced an acquisition in October, and then announced in November that it is being acquired. ZCS specializes in property insurance to protect the lender in the event the original homeowners’ insurance policy is either cancelled or not renewed and also voluntary homeowners’ insurance through relationships with homebuilders, mortgage originators, and real estate brokerage firms. Centex Corp. (NYSE:CTX), a large U.S. homebuilder, and ZC Sterling Corp. announced that Centex has sold its property/casualty insurance agency, Westwood Insurance Agency, for $55 million to ZC Sterling. Westwood Insurance Agency is a California corporation that has provided insurance services to customers of homebuilders for more than 50 years. It will operate as a wholly owned subsidiary of ZC Sterling. Only one month after this acquisition announcement, ZC Sterling entered into an agreement to be purchased by QBE for $75 million. QBE, one of Australia’s largest insurance groups, has been very active in the United States M&A market over the past several years. The ZCS acquisition is expected to generate additional gross written premium for QBE of around $425 million in 2009 and $575 million in 2010.

Arthur J. Gallagher (NYSE:AJG), Brown & Brown (NYSE:BRO), and Wells Fargo (NYSE:WFC) continue to be the most consistent acquirers of brokerages in 2008.

Gallagher announced five acquisitions during October and November including the purchase of Roswell, Ga.-based Continental Special Risks Inc., a wholesale broker and managing general agent founded in 1984. They provide excess and surplus P/C coverage including professional and general liability, commercial package and property, and other specialty insurance products and services for its retail insurance agent clients throughout the Southeast. Gallagher also acquired brokerages in New York, North Carolina, Tennessee, and Australia.

Brown & Brown also announced five acquisitions of brokerages in Indiana, Michigan, Tennessee and Washington this period. The combined agencies will contribute about $20 million in revenue to Brown & Brown.

Wells Fargo Insurance Services acquired the EMAR Group, one of the nation’s largest independently owned commercial insurance agencies, headquartered in Livingston, N.J., with an office in Florida. Founded in 1971, EMAR is a local agency in the Tri-State Region serving middle market and upper middle market clients as well as risk management customers. Wells also added a brokerage in Michigan.

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