Gallagher: Marsh Business Isn't Coming Our Way

His comments came during an analyst's conference call held today to discuss the firm's fourth quarter and year end results for 2004.

He said the firm has received a lot of invitations from prospective clients, but it has not translated into a lot of new accounts.

"We have been invited to an awful lot of requests for proposals presentations, which at this point, has not generated any new, significant organic growth," said Mr. Gallagher.

"There's an awful lot of looking going on, some kicking the tires here and there," said Mr. Gallagher, but the company has not picked up the large accounts that are the mainstay of Marsh or Aon and Willis that have also come under scrutiny.

"Just last week we had seven people on an airplane, from various offices, coming together, a solid team, making a presentation across the entire spectrum of a client's account, and they told us they were very, very impressed," he said. "They were so impressed that we are not actually going to get any of their account."

He said the firm's main business continues to be the middle market. With the recruitment of new people, and the existing sales team, "organic growth opportunities should be very, very good."

For the fourth quarter, Gallagher reported revenues increased 6 percent, or $21.4 million, from $365.5 million to $386.9 million. Net income was off slightly in the quarter dropping slightly from $49.2 million, or 53 cents a share in 2003, to $49.1 million, or 52 cents a share.

For the year, net income rose 29 percent, or $42.3 million, going from $146.2 million, or $1.57 a share, to $188.5 million, or $1.99 a share. Revenues rose 17 percent, or $216.5 million, going from $1.26 billion to $1.48 billion.

Gallagher said part of its revenue stream in the fourth quarter included $8.2 million in insurers contingent commissions, which the company said it will no longer enter into new agreements for as of this year. However, carriers are under contract to pay the balance of the 2004 commissions into 2005.

Mr. Gallagher said carriers plan to live up to these agreements, some saying they would pay the commissions during the first quarter of this year, while others are holding the monies in escrow accounts. The firm pulled in more than $30 million in contingent commissions during 2004, executives said.

The commissions are not a revenue stream the company depends on, Mr. Gallagher noted. However, he said, carriers recognize this is income the broker should receive for its efforts and after "the dust settles and the regulations become clear," the carriers will find suitable avenues to compensate the brokers, which could include an increased percentage of commission.

Mr. Gallagher said that he sees a future trend where large accounts will look to break up their accounts among brokerage houses.

On legal issues, an internal investigation revealed no abusive practices related to contingency fees, though the broker still continues to cooperate with investigators and regulators in 15 states, and is the defendant in eight private lawsuits related to the issue, management said.

While not having a figure for the year, Mr. Gallagher indicated that regulatory and legal costs are taking a bite out of revenues. He said compliance with Sarbanes-Oxley has cost $6 million, and dealing with all the legal and regulatory issues in the fourth quarter came to approximately $2 million.

Gallagher also revealed that it is in the middle of a suit over its synthetic fuel business. The company said that Headwaters Corp., an alternative fuels company, based in South Jordan, Utah, is seeking $140 million in damages from the broker.

Douglas K. Howell, vice president and chief financial officer, said the suit involves allegations that Gallagher's synthetic fuel division used Headwaters' patented chemical techniques. He said Gallagher denies the allegations and was surprised by the amount Headwaters is seeking. Gallagher has filed a counter claim of $71 million.

This case is going to trial soon and a result is expected next month.

Earlier, the company declared a quarterly cash dividend of 28 per share of common stock payable on April 15 to shareholders of record as of March 31.