Arthur J. Gallagher & Co. reported net income for the second quarter increased 12 percent but on a half-year comparison fell 126 percent, hurt by declining prices and millions in defense costs related to contingency fee investigations.
For the second quarter, the Itasca, Ill.-based insurance broker reported net income was up $5.7 million, going from $46.1 million in 2004, or 49 cents a share, to $51.8 million, or 54 cents a share, in 2005. Revenues increased less than 1 percent, or $2.4 million, from $368.7 million to $371.1 million.
In the first six months, Gallagher reported net income dropped 126 percent, or $107.2 million, from $85 million, or 90 cents a share in 2004, to a loss of $22.2 million, or 24 cents a share. Revenues were up less than 3 percent, or $17.9 million, going from $700.1 million to $717.9 million.
Gallagher management said the six-month net income loss reflected an expense of $105.2 million for legal matters related to allegations the broker took undisclosed fees or kickbacks to rig bids on commercial insurance contracts.
Douglas K. Howell, vice president and chief financial officer, said during an analysts' conference call today that the broker is spending $1 million a day on attorneys as it continues to answer investigator's questions from 18 states. The company is also defending itself against 13 lawsuits resulting from the regulatory scrutiny.
In May, the firm reached a $27 million settlement with Illinois regulators to settle the allegations of improper activity. J. Patrick Gallagher Jr., president and chief executive officer, said he still hopes initial settlement will eventually lead to a disposition of the case with other regulators.
Mr. Gallagher said the firm, which discontinued accepting contingent commissions, is seeing soft market rate reductions of around 10-to-20 percent, except in some difficult lines, which is affecting earnings. To replace the loss of contingent commissions, the firm is talking to carriers about increasing commissions, and some carriers have done so, he said.
"It is clear that 2005 is a very tough year for Arthur J. Gallagher & Co.," Mr. Gallagher said. "But as I look back on 31 years of being a part of this company, I find many, many examples of when we have had to deal with tough issues, and in every instance, we have always come out better and stronger."
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