Chief executive expects broker to benefit from rising rates and strong M&A pipeline in 2013

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Broking group Arthur J Gallagher made a net profit of $195m (£124m) in 2012, up 35% on the $144.1m it made in 2011.

The improvement came on the back of an 18% increase in total revenues to $2.5bn (2011: $2.1bn).

The broker also revealed that it had cut 400 middle- and back-office jobs globally – about 3% of its workforce – during the fourth quarter.

Gallagher said the job cuts reflected improved technology use and investment in productivity initiatives. It took a pre-tax charge of $12.3m related to the cuts, and expects them to result in $35m annual savings.

The broker added, however, that these savings would be mostly cancelled out by increased medical costs, a reduced discount rate on the company’s frozen pension plan, salary increases, increased performance-based compensation and increased long-term incentive compensation.

Acquisition pipeline

Gallagher chief executive Patrick Gallagher said the broker’s “strong finish” to 2012 put it in a good position for continued success in 2013.

He said: “As we look towards 2013, we see a rate environment that is still showing signs of firming in many lines, clients that are finding ways to grow their businesses even in these uncertain times, a strong M&A pipeline, and an operating environment where we can control our costs and improve our productivity. Gallagher’s sales and high-quality service culture is thriving and we are in an excellent position for success in 2013.”

Divisional performance

Profit and revenue growth were achieved both at Gallagher’s core broking division and its risk management unit.

Broking net profit was up 11.1% to $155.8m (2011: $140.2m) and total revenues increased 17.4% to $1.8bn (2011: $1.6bn).

Organic growth in base commissions and fees for 2012 was 4.4%, compared with 2.2% in 2011. Organic growth in supplemental commissions was 2.2% (2011: 12.8%), while contingent commissios shrank by 1.1% (2011: reduction of 6.3%).

The risk management segment’s net profit rose 28% to $42.5m (2011: $33.3m). Risk management total revenues increased 4% to $571.7m (2011: $548.8m).

Heath Lambert integration

Integration costs from Gallagher’s 2011 acquisition of UK broker Heath Lambert continues to depress the group’s earnings before interest, tax, depreciation, amortisation and change in estimated acquisition earn-out payables (EBITDAC).

The Heath Lambert integration costs lowered Gallagher’s 2012 EBITDAC by $19.3m, compared with a $16m reduction in 2011. The 2011 integration cost is lower mainly because Gallagher did not complete the purchase of Heath Lambert until May 2011, while the 2012 costs are for a full year.