Arthur J. Gallagher reported disappointing earnings results for the third quarter as the soft market took a serious hit to its earnings, producing zero organic growth and assurances from its chief executive that the firm can do better.
The Itasca, Ill.-based insurance brokerage firm reported third-quarter net income grew a modest 3 percent, or $2 million, to $52 million in the quarter. That translated into a net earnings per share increase of 3 cents, to 54 cents a share. Revenues in the quarter declined less than 1 percent, or $3 million, to $424 million.
For the nine months, the broker reported net income increased 11 percent, or $12 million, to $115 million. Earnings per share increase 12 cents over the same period last year to $1.18 a share. Revenues in nine months have grown 12 percent, or $134 million, to $1.2 billion.
The downturn in revenue growth and zero percent organic growth was blamed primarily on the softening insurance market, as rates decline and commissions fall in tandem.
"I'm very proud of the sales culture of this company," said J. Patrick Gallagher Jr., chairman, president and chief executive officer of the firm. "We are out every single day working hard for new business and doing everything we can to hold onto clients. So make no mistake about it, our people are working very, very hard. The market environment is presenting a real challenge to organic growth."
Nonetheless, he continued, "we believe we can do better, and we expect to do better than zero percent organic growth, quarter-in and quarter-out."
Mr. Gallagher observed that competition is very intense, as carriers show increasing willingness to slash premiums in order to retain favorable accounts. The soft market is also affecting the firm's wholesale division, which was flat, as more standard line insurers loosen terms and conditions and broaden their risk appetites to capture market share.
On the positive side, the firm's London business is growing, along with its services and benefits division.
Doug Howell, the firm's chief financial officer, said AJG is easing out of its synthetic fuel business. As fuel prices rise, it is no longer receiving the tax benefits it once received and will eventually turn over its interests to its energy industry partners.
During the quarter, AJG eliminated 100 positions, and will continue to look for ways to streamline and centralize operations, growing efficiencies aimed at improving margins.
Acquisition activity is expected to continue unabated, the executives said.
David Small, an investment analyst with Bear Stearns, said AJG missed the analyst's earnings estimates by 6 cents a share and consensus estimates by 9 cents.
Mr. Small said two major concerns on improving earnings are that the continued downward trend of the soft market will prevent meaningful organic growth, and the company's continued investment in growth is not focusing on cost.
Last week, AJG declared a regular quarterly dividend of 31 cents a share payable on Jan. 15 to shareholder of record as of Dec. 31.
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