Arthur J. Gallagher & Co. insurance brokerage reported 2005fourth-quarter net income dropped $41.6 million, or 85 percent,driven down by the loss of contingent commissions, regulatoryexpenses and a soft market.

Net income for the period in 2005 fell from $49.1 billion, or 52cents a share in 2004, to $7.5 million, or 8 cents a share.Revenues grew 1 percent, from $373.4 million in 2004 to $376.1million.

For the year, Gallagher reported net income dropped $157.7million, going from $188.5 million, or $1.99 a share in 2004, to$30.8 million, or 32 cents a share. Revenues, however, increased 3percent, going from $1.44 billion to $1.48 billion in 2005.

The Itasca, Ill.-based firm has eliminated contingencycommissions and in early May of 2005 set up a $27 millionsettlement fund for clients.

Those moves came in the wake of numerous regulatoryinvestigations and a growing number of civil suits over the allegednondisclosure of volume-based contingent commissions to clients aswell as allegations of bid-rigging and steering of contracts tocarriers.

The results of the changes became clear today in the company'sfourth-quarter 2005 financial results.

“Sometimes it's the unforeseen things that can come out of theblue that really test your mettle,” said J. Patrick Gallagher Jr.,president and chief executive officer of Gallagher, during aconference call.

“Whenever I was asked what kept me up at night, I had a laundrylist of items, but never, ever, did I think we would face theregulatory and litigation risks that we faced in 2005.

“I'm glad to say that I think we are successfully dealing withall those issues and, hopefully, we should conclude most of them in2006,” he continued.

Looking ahead, Mr. Gallagher said the company future “is goingto hold additional challenges. None of us around this table canpredict what they'll be, but what I can say with certainty is thatthe Gallagher team, all of us, will have the fortitude to deal withthem and stay focused on building the best business in theinsurance industry and delivering results to our shareholders.”

Mr. Gallagher said the company has made “substantial managementchanges” in its London operation and cut costs after poorperformance there.

Gallagher took a $38.6 million pretax charge in the fourthquarter as its best estimate to cover the remaining costs toresolve legal actions connected with contingency fee issues.

The firm also took a $15 million charge related to its globalinsurance brokerage business in light of legal interpretations inthe United Kingdom over accounting for claims handling andadministrative services for reinsurance brokerage clients.

Despite problems the company has had, Mr. Gallagher said thereare some bright spots on the horizon, which include the placementof workers' compensation business in Australia, which is controlledby the government there, improved client retention in 2005, andperceived pick-up in acquisitions for 2006.

He also noted the firm has agreements with five of its nineinsurance carrier partners to increase upfront commissions by oneto one-and-a-half points on some lines of business.