Gallagher Drops Incentive Fees, Gets Subpoena

The broker said that Connecticut has requested information concerning possible violations of the state's antitrust laws in connection with the solicitation of bids for insurance.

Connecticut Attorney General Richard Blumenthal said he was conducting his own investigation based on complaints from risk managers in the state back in May, a few months after New York Attorney General Eliot Spitzer started his own investigation.

During an analyst's conference call, J. Patrick Gallagher Jr., president and chief executive officer, said the firm has not received a subpoena from Attorney General Eliot Spitzer in his probe of contingency fees.

He emphasized that Gallagher is different from the global brokers?Marsh, Aon and Willis?in that its business is the middle market and negotiations are done through decentralized field offices. Because of this, Gallagher does not exert the kind of leverage on accounts that enabled executives at Marsh to allegedly manipulate the placement of accounts in return for contingent fee commissions, he said.

Mr. Gallagher said that the firm has had an auditing process in place for over a decade to ensure that each office is abiding by the company's policies of honesty and integrity. The firm has hired an outside counsel to make an internal review to ensure that the company's policies have been followed. He said he expects the review to be completed in 30-to-45 days.

"Obviously, it has been a tumultuous two weeks," said Mr. Gallagher. "Our industry has a shadow cast over it that none of us, in our careers, ever expected. At Gallagher, we have always tried to put our clients first."

"I ask you to look at our mission statement and the Gallagher way as well as my e-mail on our Web site. We don't think any of these need to be re-written. We think where we have come from over the years and where we stand speaks for itself in the documents we've used over the years. We have reiterated this to all of our people, and we are confident that our people understand our values."

When asked during the conference what the fallout will be for the industry and if Gallagher would benefit from Marsh's misfortunes, Mr. Gallagher said, "It is too early in the game to see how this all shakes out," adding that he did not want to comment on his competitors.

For the quarter, Gallagher reported that revenues grew 8 percent, or $28 million, going from $345 million to $373 million. Net income increased 11 percent, or $5.5 million, from $49 million, or 52 cents a share, to $54 million, or 57 cents a share.

For the nine months ending Sept. 30 of this year, Gallagher said it collected $31.7 million in contingency fees, which accounts for less than 3 percent of its revenues. It said $5.1 million of those fees were in non-retail business, managing general agency and program administration contracts, which Mr. Gallagher said he believes his firm would be able to retain. He did not say how the firm would make up the loss in revenues.

For the nine months, Gallagher reported revenues of $1.09 billion, compared to $898 million for the same period last year, an increase of 22 percent, or $195 million. Net income rose 44 percent, or $42 million, going from $97 million, or $1.04 a share, to $139 million, or $1.48 a share.

Also having a potential impact on earnings is the firm's Synthetic fuel production, which resulted in a 20 percent tax rate for the firm this year. Doug Howell, chief financial officer, explained that should a barrel of oil remain above $52 a barrel, the firm could see some phase out of its tax benefit.

Should the figure rise above $65, the benefit could be wiped out altogether, which would result in a corporate tax rate of 38 percent. In 2005, he said the price would have to rise about $100 a barrel before the tax benefit would be wiped out.