Arthur J. Gallagher to Sell Reinsurance Unit, Ireland Brokerage; Layoff 400

January 30, 2008

Itasca, Illinois-based insurance brokerage Arthur J. Gallagher & Co. reported a drop in profit for the fourth quarter and announced it would sell its global reinsurance operation and its small Ireland-based wholesale brokerage.

In an expense-cutting move, it plans on reducing its workforce by cutting as many as 400 back office jobs.

Fourth-quarter net income was $23.4 million, or 25 cents a share, compared with $24.6 million, or 25 cents a share, last year.

Revenue rose to $410 million from $398.7 million in the fourth quarter one year ago.

For the year, the combined brokerage and risk management operations grew revenues 10.6 percent of which 5 percent was organic, pretax earnings were up 8.3 percent and earnings per share grew 13.9 percent, the company reported.

“In fourth quarter 2007, we undertook a strategic review of our operations and have made a determination to sell our global reinsurance operations,” said J. Patrick Gallagher, Jr., chairman, president and chief executive officer. “We are currently working on a potential sale of these operations and expect that the sale will be completed in early 2008.”

He also said the firm would sell its small wholesale brokerage operation in Ireland during 2008.

“While the sale of these operations will reduce our top line revenues, it will have a favorable impact on the brokerage segment’s earnings and pretax margins,” he said.

“We believe strict expense controls are necessary in a soft market and all of our operations are working hard to implement actions to control operating costs, to reduce headcount in our back office support functions and to reduce other workforce related costs,” Gallagher said.

Last year was a record one for acquisitions for Arthur J. Gallagher. In 2007, the firm closed 21 deals, eight of which were in the fourth quarter.

It appears the acquisitions will continue. “We expect our 2008 acquisition activity to be robust,” said Gallagher.

Within the brokerage segment for the fourth quarter, the retail brokerage operations posted revenue growth of 10.5 percent of which 1 percent was organic; 14.8 percent growth in pretax earnings; improved pretax margins by 0.8 percent and improved EBITDA margins by 1.6 percent.

“Unfortunately, this performance was entirely offset by weak results in our global wholesale brokerage operations,” said Gallagher, pointing to 2.5 percent revenue growth (-4% organic) and a slide in pretax and EBITDA margins. He said that results in the wholesale operations were adversely affected by lost business in UK operations, foreign exchange, burn-in costs for new production teams in the UK and wind-down costs related to a couple of wholesale offices in the U.S.

For the year, the retail brokerage operations posted revenue growth of 11.5 percent of which 3 percent was organic; 13.6 percent growth in pretax earnings; 16.7 percent growth in EBITDA; pretax margins improved 0.3% percent and EBITDA margins improved 1.0 percent.

The global wholesale brokerage operations posted 8.5 percent growth in revenues (0 percent organic) and pretax and EBITDA margins were down 4.7 percent and 4.6 percent, respectively.

The risk management segment delivered 10.5 percent revenue growth in the fourth quarter.

Over the next 6 to 9 months, Gallagher said it expects to reduce its existing back office workforce by approximately 400 positions through attrition, and to a lesser extent targeted outplacements.

In addition, Gallagher has adopted changes to other workforce related costs such as travel, entertainment, perquisites, compensation adjustments and other compensation elements that are expected to reduce its ongoing annualized costs.

Source: Arthur J. Gallagher & Co.

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