Itasca, Ill.-based insurance-broker Arthur J. Gallagher saysfourth-quarter net income dropped 17 percent as expenses increasedprimarily 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 16percent, or $95 million, to $673 million.

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

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

During a conference call with financial analysts, J. PatrickGallagher Jr., chairman, president and CEO, says the firm completed21 acquisitions in the fourth quarter for combined total revenuesof $76 million. That pushed total acquisition revenue to over $232million with a total of 60 acquisitions.

Among other positives Gallagher highlighted during hisconference call, organic growth was up for the 8^thquarter in a row in both the brokerage and risk-management segmentsof the business. Brokerage organic growth rose 5.2 percent whilerisk management rose 2.9 percent.

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

Gallagher was bullish about the prospects of increased premiumgrowth, which translates into increased commissions for thefirm.

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

“We are not experiencing a traditional hard market, but ratesare moving up consistently along all lines,” says Gallagher. “Thisis not a balance-sheet-driven correction. These are incomestatement driven corrections. Carriers realize they are getting noinvestment income and loss costs are continuing to rise.

“With costs inflating, a flat renewal is a step backward for thecarrier,” Gallagher continues. “Senior managers at the insurancecompanies we trade most with made it resolute that their team hasgot to get them increases. We have not seen the discipline abateduring the quarter.”

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