Arthur J. Gallagher said its fourth-quarter net income increased 200 percent--proving the firm has adapted to life without contingent commissions.

J. Patrick Gallagher Jr., the firm's chairman, president and chief executive officer, said the numbers mean the company is ahead of those who will eventually deal with a new compensation model in the future.

"We embraced transparency the past year, and our clients like it," said Mr. Gallagher during an analyst's conference call held today.

He added that the brokerage has moved to a new business model and said, "Our results reflect our loss of contingent revenue, except when we do an acquisition. We have settled a federal class action suit, and most of our competitors have yet to face these issues."

The class action filed in U.S. District Court in Newark, N.J., which was settled for $37 million, alleged the company improperly accepted hidden contingent fees from insurers to steer customers.

In response to a question about contingent commissions, Mr. Gallagher said the recent decision by Chubb and St. Paul Travelers to abandon contingent commission payments and adopt a different commission payment system was "very good news."

He predicted that more insurers would move in that direction. He said through Gallagher's own negotiations with carriers over increased commission payments to offset the loss of contingents, it is evident the insurers realize they need to support their distribution system and not plow the benefits of lost contingent payments back into the carrier.

"I'm not sure what model they will develop," he said, "but I see major changes in the next few years or so."

For the fourth quarter of last year, the Itasca, Ill.-based insurance broker reported net income increased more than $17 million, from $7.5 million, or 8 cents a share in 2005, to nearly $25 million, or 25 cents a share. Revenues were up 10 percent, or $39 million, from $376 million to $415 million.

For the year, net income increased by $98 million, from $31 million, or 32 cents a share in 2005, to $129 million, or $1.31 a share. Revenues were up $50 million, or 3 percent, from $1.48 billion to $1.53 billion.

"I am very happy with the brokerage results in 2006. We came through a tough year; we did a great job," said Mr. Gallagher. "Our culture, though, which I feel is our real differentiator, is very, very strong."

He said part of that cultural differentiator is the acceptance of transparency concerning charges and the discontinuance of contingent commissions. The change in selling strategy has been accepted and embraced by both the sales representatives and customers, he continued, becoming a sales advantage and helping to increase retentions.

The changes resulted in 6 percent organic growth for the firm, a fourth-quarter increase in commissions of $20 million to $223 million and an increase for the year of $65 million to $850 million.

Mr. Gallagher credited the entire company for the firm's performance.

On the issue of its $37 million settlement amount, Mr. Gallagher said the cost of not settling was felt to be prohibitive.

He said attorneys' fees to defend the case would have ranged from $20-to-$50 million a year and required "tens of thousands of man hours in the defense."

"The litigation could have taken three to four years, and who knows whether we would have won," he said.

"It is not certain if this class will be certified. It is not certain if the class will win, but we wanted the certainty of this settlement," Mr. Gallagher pointed out, adding that the settlement is still subject to court approval.

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Abandonment Of Contingent Commissions To Gain Traction

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