Arthur J. Gallagher reported second-quarter net income rose 20 percent over last year, which the insurance brokerage's chief executive credited to the writing of new business and a high retention rate.
J. Patrick Gallagher, the Itasca, Ill.-based firm's CEO, chairman and president, also said 25 carriers have agreed to pay supplemental commissions to his company.
Describing the market environment, he said the vicious price-cutting underway now is akin to the worst conditions of the last decade.
Speaking today during an analysts' conference, Mr. Gallagher credited the efforts of the firm's producers with achieving revenue growth.
"I'm happy with the results in a really difficult trading environment, and it is a credit to our brokerage team," he said, adding that it was Gallagher's best second quarter ever. "They did a very good job."
The firm's strength is in niche business areas, Mr. Gallagher explained, with retention rates at 90 percent.
The firm reported net income increased by $7 million compared with the same period last year, to $44 million, or 44 cents a share, in line with analysts' estimates. Revenues rose 19 percent, or $70 million, to $441 million.
For the six-month period net income is up 10 percent, or $18 million, to $64 million, or 64 cents a share. Revenues rose $131 million, or 19 percent, to $829 million.
Brokerage revenues rose 14 percent, or $38 million, to $308 million. Gallagher said that 5 percent of the growth was organic.
The company said it has completed 11 acquisitions so far this year amounting to $50 million in revenue.
In an analyst's note, David Small with Bear Stearns said that except for the financial segment (Gallagher's interest in a synthetic fuel plant which it appears to be ending as fuel prices rise and the tax benefit diminishes), the firm "handily beat our and street estimates." However, the soft market is still a concern for future earnings, he added.
Mr. Gallagher called the current soft market "unbelievably competitive," characterizing the pricing environment as a "bloodbath out there" with premium pricing off 20 percent except for coastal property and California earthquake. "We're right back in the middle 1990s," he said.
In response to a question about supplemental commissions, Mr. Gallagher revealed the firm has reached agreements with between 20 and 25 carriers who will pay supplemental commissions on top of the base rate because the brokerage is no longer accepting contingent commissions.
The firm ceased taking volume-based contingents in 2005 as part of a settlement with Illinois Attorney General Lisa Madigan that ended an investigation into contingent fee abuses.
Gallagher was accused of steering insurance contracts to certain carriers and not revealing the steering arrangements to customers. With firms it is newly acquiring, the brokerage is allowed to continue collecting their contingent commissions until such contract arrangements expire.
Mr. Gallagher said the supplemental commissions "are not contingent on anything; they are not contingent on growth or on profitability. They are completely, 100 percent disclosed to our clients, and we feel, in that regard, we are right in taking them."
He said no other carriers outside of the 25 would be paying supplemental commissions. He also said the amount of supplemental commissions the brokerage will receive, compared to total commission, is "not significant."
He further explained that commissions paid have to be negotiated with the underwriter, and it is up to the producer to make sure the firm is receiving the agreed upon commission. Mr. Gallagher added that commissions can be cut by the producer if necessary for the benefit of the client.
With the soft market affecting commissions, some carriers are beginning to pay higher commissions, Mr. Gallagher said in response to a question.
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