Itasca, Ill.-based insurance-broker Arthur J. Gallagher says fourth-quarter net income dropped 17 percent as expenses increased primarily in compensation and operations.

AJG reports fourth-quarter net income of $34 million, a drop of $7 million from the same period last year. Revenues rose 16 percent, or $95 million, to $673 million.

The firm took a pre-tax charge of $12.3 million related to a reduction of its global workforce by 3 percent, or 400 middle-office and back-office positions, during the quarter. The move is expected to save approximately $35 million in the future.

The savings will be offset by increased medical costs, reduced discount rate on the firm's frozen pension plan, salary increases, increased performance-based compensation and increased long-term incentive compensation.

During a conference call with financial analysts, J. Patrick Gallagher Jr., chairman, president and CEO, says the firm completed 21 acquisitions in the fourth quarter for combined total revenues of $76 million. That pushed total acquisition revenue to over $232 million with a total of 60 acquisitions.

Among other positives Gallagher highlighted during his conference call, organic growth was up for the 8^th quarter in a row in both the brokerage and risk-management segments of the business. Brokerage organic growth rose 5.2 percent while risk management rose 2.9 percent.

Retentions also remained strong during the quarter in both segments in the mid-90-percent range, he says.

Gallagher was bullish about the prospects of increased premium growth, which translates into increased commissions for the firm.

He says property and casualty rate increases will continue in a manner similar to 2012 remaining in the mid-single digits. Catastrophe property and workers' compensation are experiencing the greatest increases, especially workers' comp. He says that line is “in distress” and running in excess of 10 percent in some cases.

“We are not experiencing a traditional hard market, but rates are moving up consistently along all lines,” says Gallagher. “This is not a balance-sheet-driven correction. These are income statement driven corrections. Carriers realize they are getting no investment income and loss costs are continuing to rise.

“With costs inflating, a flat renewal is a step backward for the carrier,” Gallagher continues. “Senior managers at the insurance companies we trade most with made it resolute that their team has got to get them increases. We have not seen the discipline abate during the quarter.”

For the year, AJG says net income rose 35 percent, or $51 million, to $195 million. Revenues rose 18 percent, or $386 million, to $2.5 billion.

Special Reports /

AJG Q4 Net Income Down; Rate Increases Point to Strong Future

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