Arthur J. Gallagher Reports Q2 Results; Slight Drop in Organic Revenue

July 29, 2009

Arthur J. Gallagher & Co. reported a slight drop in organic revenue of just 0.3 percent for the second quarter 2009 for its combined insurance brokerage and risk management units.

For the quarter ending June 30, 2009, AJG reported $340.1 million in brokerage revenue compared to $312.2 million for the same period a year ago. For AJG’s risk management unit, the company reported $113.3 million in revenue for Q2 2009, compared to $115.2 million for the same period in 2008.

“I am pleased with our second quarter results given we are still operating in an extremely difficult environment. Insurance rates were still soft in the second quarter, the economy continues to adversely impact our clients’ buying activities and investment yields are at all time lows,” said J. Patrick Gallagher Jr., chairman, president and CEO. “Despite these headwinds, we continue to see the benefits of our tuck-in acquisition strategy and cost savings initiatives in our expanding EBITDA margins. Even with a 0.3 percent decline in organic revenue in second quarter 2009 in our combined Brokerage and Risk Management Segments, we expanded the combined EBITDA margin 0.9 percent compared to the same period in 2008.

For the first half of 2009, AJG reported $ 629.6 million in brokerage revenue compared to $ 570.2 million for the first half of 2008. For AJG’s risk management unit, the company reported $225.5 million in revenue for the first half of 2009, compared to $231.4 million for the first half of 2008.

“For the first six months of 2009, our brokerage and risk management operations combined to grow revenues 7 percent, grow EPS 15 percent, grow EBITDA 24 percent and expand EBITDA margins by 2.9 percent from the same period in 2008,” added Gallagher.

Brokerage Segment Q2 Highlights

  • On July 23 and July 27, 2009, respectively, Gallagher amended its settlement agreements with the Illinois Attorney General and the Illinois Department of Insurance. The amendments, which will be effective as of October 1, 2009, will permit Gallagher to accept retail contingent commissions across all lines of its brokerage business. As a result, Gallagher anticipates generating additional retail contingent commission revenues of approximately $10.0 million on an annualized basis by 2011.
  • Revenue growth of 9 percent. Organic revenue declined 1.2 percent compared to 2008. Included in organic revenue was an increase in supplemental commissions in 2009 over 2008, of $2.5 million.
  • Second quarter compensation expense ratio was 2.4 percent higher than 2008 as the result of increased headcount from the Liberty-Wausau transaction of 0.5 percnet, increased pension expense of 0.6 percent, increased medical benefits of 0.6 percent, increased incentive compensation of 0.6 percent and severance costs of 0.2 percent.
  • Second quarter operating expense ratio was 2.9 percent lower than 2008. The ratio was primarily impacted by lower travel and meeting expenses of 1.4 percent, decreased professional fees of 0.6 percent and foreign currency translation of 0.5 percent.
  • The change in estimated acquisition earnout payables expense relates to the adoption of Statement of Financial Accounting Standards No. 141 (SFAS 141(R)), which was effective January 1, 2009 for acquisitions completed in 2009.
  • EBITDA margin of 26.3%, which was up 0.6% as compared to 2008.
  • Second quarter effective tax rate was 40.3% in 2009 and 40.2% in 2008.
  • Gallagher shifted and diversified nearly all of its world-wide cash balances into accounts that were insured/guaranteed by various governments or governmental agencies. Most of these accounts are non-interest bearing. While Gallagher believes that these accounts are secure, there can be no assurances that governmental guarantee programs would be sufficient to repay balances in the event of a system-wide failure of the global banking system.

Risk Management Segment Q2 Highlights

  • Revenue declined 2 percent. Organic growth was 2.2 percent after excluding the impact of foreign currency translation of $3.5 million. Domestic revenues declined 1 percent, reflecting reduced claim counts. International revenues grew 1 percent and after excluding the impact of foreign currency translation, revenue increased 25 percent reflecting new business and renewal increases. International revenues in the quarter also included a $2.3 million performance bonus compared to zero for the same period in 2008.
  • Second quarter compensation expense ratio was 0.6 percent higher than 2008 as a result of increased pension expense of 0.6 percent and increased medical benefits of 0.5 percent, partially offset by reduced temporary help.
  • Second quarter operating expense ratio was 1.5 percent lower than 2008 reflecting savings in travel and meeting expense of 1.5 percent, savings in office expenses of 0.9 percent and lower rent expense of 0.4 percent, partially offset by higher business insurance costs of 1.5 percent.
  • EBITDA margin of 14.5 percent, which was up 0.9 percent compared to 2008.
  • Second quarter effective tax rate was 41.0% in 2009 and 39.3% in 2008.

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