Insurance broker Arthur J. Gallagher reported net income dropped 7 percent in the second quarter of this year as soft market pressures and the economic downturn continue to take a toll.
The Itasca, Ill.-based firm reported net income for the second quarter dropped $3 million to $41 million compared to the same period last year. The results translated into 45 cents a share from continuing operations, which missed consensus estimates of 47 cents a share, one investment analyst said.
Revenues increased slightly in the quarter, less than 1 percent, or $1 million, to $429 million.
For the six months, Gallagher reported net income declined 45 percent, or $29 million, to $35 million, or 62 cents a share. Revenues grew less than 1 percent, or $2 million, to $805 million.
"It is no secret to anyone who is doing any kind of business out there that it's tough," said J. Patrick Gallagher, chairman, president and chief executive officer of Arthur J. Gallagher. "You just can't pick up a newspaper without reading about a company that is in dire straits."
Despite this, he said the firm did well in the quarter, pointing to some segments of growth in the benefits and wholesale brokerage area which was helped by contingent commission bonuses.
However, organic growth in the quarter stood at negative 1 percent and was flat for the half.
Soft market pressures affected retail brokerage, but despite some surveys indicating some moderation in pricing, Mr. Gallagher said rates are "frothing" as the broker sees challenges with decreases in its client's businesses.
"Our clients are really being challenged," said Mr. Gallagher.
In his analyst's note, Meyer Shields with Stifel Nicolaus said, "We consider AJG's slight earnings miss and the brokerage segment's low organic growth rate to be symptoms of the rapidly softening [property-casualty] market, which is challenging all of the publicly traded brokers."
Mr. Shields added that "choppy brokerage revenue growth" was expected going forward, and the overall trend would be negative.
On the acquisition side, Gallagher said it has completed 20 deals so far this year, and more are expected.
The transactions are generally worth between $2 million and $10 million in revenue, said Douglas K. Howell, the firm's chief financial officer.
He said Gallagher plans to fund additional acquisitions, depending upon the size of the deal, with a combination of one-third cash, debt and stock. To augment the deal-making, the firm plans to file a shelf registration of $10 million of common stock for future acquisitions.
During a question and answer period, Mr. Gallagher said the firm is seeking to expand overseas where markets are growing faster. Among the places he noted were Asia, Australia, some emerging markets in Europe and Singapore.
Mr. Gallagher commented on the recent hearings in New York State concerning contingent commissions, which his firm does not take on commercial insurance business under an agreement with state attorneys general, after such fees were linked to price fixing arrangements.
Mr. Gallagher commended New York Insurance Superintendent Eric Dinallo and Attorney General Andrew Cuomo for holding hearings. He said the current system is "patently unfair."
"The issue, simply, should be transparency; complete, open discussion with clients about our remuneration," said Mr. Gallagher. "Once you are transparent, and the client decides how to pay you, then any form of compensation is appropriate. I hope New York levels the playing field. We should all have to play by the same rules."
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