Arthur J. Gallagher & Company saw 2005 fourth-quarter net income drop 85 percent, driven down $41.6 million by the loss of contingent commissions, regulatory expenses and a soft market.
Fourth-quarter net income fell from $49.1 billion in 2004 to $7.5 million last year. Revenues only grew 1 percent to $376.1 million.
For the full year, Gallagher reported net income down 83 percent, from $188.5 million in 2004 to $30.8 million last year. Revenues were up 3 percent to $1.48 billion.
The Itasca, Ill.-based brokerage eliminated contingency commissions and in early May 2005 set up a $27 million settlement fund for clients. Those moves came in the wake of numerous regulatory investigations and a growing number of civil suits over the alleged nondisclosure of volume-based contingency fees as well as allegations of bid-rigging and steering of contracts to carriers.
"Sometimes it's the unforeseen things that can come out of the blue that really test your mettle," said J. Patrick Gallagher Jr., president and chief executive officer of Gallagher, during a conference call. "Whenever I was asked what kept me up at night, I had a laundry list of items, but never, ever, did I think we would face the regulatory and litigation risks that we faced in 2005."
He added that "I'm glad to say that I think we are successfully dealing with all those issues and, hopefully, we should conclude most of them in 2006."
Mr. Gallagher said the company has made "substantial management changes" in its London operation and cut costs after poor performance there.
Gallagher took a $38.6 million pretax charge in the fourth quarter as its best estimate to cover the remaining costs to resolve legal actions connected with contingency fee issues.
The firm also took a $15 million charge related to its global insurance brokerage business in light of legal interpretations in the United Kingdom over accounting for claims handling and administrative services for reinsurance brokerage clients.
Despite problems the company has faced, Mr. Gallagher said there are some bright spots on the horizon, which include the placement of workers' compensation business in Australia (which is controlled by the government there), improved client retention in 2005, and a perceived pick-up in acquisitions for 2006.
He also noted the firm has agreements with five of its nine insurance carrier partners to increase upfront commissions by one-to-1.5 points on some lines of business.
Looking ahead, Mr. Gallagher said the company's future "is going to hold additional challenges. None of us around this table can predict what they'll be, but what I can say with certainty is that the Gallagher team, all of us, will have the fortitude to deal with them and stay focused on building the best business in the insurance industry and delivering results to our shareholders."
"Whenever I was asked what kept me up at night, I had a laundry list of items, but never, ever, did I think we would face the regulatory and litigation risks that we faced in 2005."
J. Patrick Gallagher Jr., President & CEO
Arthur J. Gallagher & Co.
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