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Gallagher to funnel £650mn of Heath Lambert business through MGAs

Broker Arthur J Gallagher International is set to close its acquisition of Heath Lambert next month and will immediately look to introduce an underwriting engine to channel the UK retailer's powerful book of business.

The Insurance Insider - which revealed the milestone deal earlier today - understands that Gallagher International and Heath Lambert aim to complete the takeover by the end of March.

According to sources, Gallagher is also close to buying a London-based transactional managing general agency (MGA) that will become the funnel for much of Heath Lambert's business and that will enable the broker to take a greater share of the underwriting profit.

Heath Lambert places an estimated £650mn of premium business with underwriters and has a number of prestigious accounts, including RBS.

It earns around £92mn in brokerage and will be a transformational deal for Gallagher International, which is thought to earn around £120mn.

The company - a subsidiary of US retail giant AJ Gallagher - employs around 500 people in London, while Heath Lambert has around 350.

Gallagher International has grown rapidly in recent years through both organic growth and acquisition.

In 2010, the David Ross-led firm bought out financial institutions specialist FirstCity for $32mn, while in 2008 it took over Oxygen's MGA arm for a consideration of £10mn.

And the two brokers already have a history of carrying out M&A together after Gallagher bought Heath's global business solutions unit in 2008.

The company's most recently filed accounts show revenues of £93mn. However, the broker is heavily indebted, with £82.7mn of debt on its balance sheet, if an unpaid dividend deficit to preference shareholders of £15.5mn is included.

The debt will be repaid once the deal completes.

Heath has also disposed of most of its London market operations with its aviation, reinsurance and FSJ wholesale units all sold to Cooper Gay in 2008.

While Heath struggled, falling to a £3.3mn loss to ordinary shareholders in 2009, Gallagher has bucked the London market trend.

Figures for Gallagher International are not available, but the company's UK arm - which makes up a substantial portion of the segment - doubled its pre-tax profits for 2009 to £8.35mn.

The key to the broker's improved profitability was an efficiency programme that brought overheads in to £47mn - a 22 percent year-on-year reduction.

And the company registered this improved performance despite the distortion of one-time gains in 2008 from the sale of Gallagher Re to Aon.

Gallagher also has the firepower to make the deal after its parent raised $125mn through a bond issuance on 10 February, noting at the time that it "intends to use the net proceeds of the debt transaction to fund acquisitions".

Gallagher International said that it does not comment on market rumour. A spokesperson for Heath Lambert said that the company had no comment at this time.

Sources said that Heath Lambert CEO Adrian Colossi will remain with the firm once the deal is completed.

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