Gallagher Sees Profit In 1Q '06

Arthur J. Gallagher reported a first-quarter profit of $17 million, or 17 cents a share, compared with a loss of $74 million, or 85 cents a share, in the period last year.

The Itasca, Ill.-based insurance broker's revenues were down $19 million, from $347 million in 2005 to $328 million.

The decrease in revenue was due mainly to a $26 million drop in investment income and the loss of controversial contingent commission income, which amounted to $17 million in the first quarter of 2005.

Last year, Gallagher put aside $35 million in the first quarter in anticipation of a payment to settle charges by regulators and state attorneys general of accepting contingent commissions to improperly steer clients to insurers.

The company also put aside another $131 million to cover a settlement with Headwaters Incorporated in a patent infringement case over the use of proprietary technology by Syn Fuel, a company Gallagher has ownership investment in.

To settle the steering charges the company reached a $27 million settlement with Illinois State Attorney General Lisa Madigan and Michael McRaith, Illinois insurance director.

As part of the agreement, the broker stopped accepting all contingent commissions, except for those tied to recently acquired brokers for a three-year period.

The agreement also called for transparency and disclosure of commission fees to clients. J. Patrick Gallagher Jr., the firm's president and chief executive officer, said today that the disclosures are helping to drive retentions and the company has embraced them as an effective sales tactic.

"It will be interesting to see if [our competition's] business falls off," he said of the new disclosures. "Our people are using transparency as a sales wedge, and clients are demanding it."

Mr. Gallagher said companies have agreed to add commission on some lines of business where the firm would have received contingent commissions, but it has not received those commissions in all cases. He stressed that increased commissions are disclosed to clients and such agreements have been approved by Illinois.

James S. Gault, Gallagher chief operating officer, explained that all the mechanisms are not in place to receive the increased commissions on a consistent basis. The firm has to follow payments and go back to the underwriting desks to ensure it does get the payments in the future.

Mr. Gallagher said the property insurance market is in the beginning of a hard pricing cycle and, unless new capital comes in, there is some question about whether there will be enough capacity by the end of the year.

"The July 1 renewals will be very, very difficult," he said.

However, the rest of the market remains flat or down. In the catastrophe-prone regions, there may be some lift from the increase in property coverage rates, but overall, he said rates in the rest of the country are soft.

Gallagher also saw its tax rate go up to 41 percent as its synthetic fuel investment, which it has partial ownership in for tax purposes, reaches phase out with the continuing increase in oil prices.

Douglas K. Howell, chief financial officer, said the plants could be idled as the cost of oil increases and the tax benefits diminish, but some congressional action may allow the plants to continue operation. He would not speculate on what price oil would have to hit for the plants to be closed.