Itasca, Ill.-based insurance brokerage Arthur J. Gallagher said today it will eliminate 400 jobs through attrition and sell its reinsurance brokerage business in reaction to falling profits.
The company reported that in the 2007 fourth quarter its net income was off 5 percent, falling by $1.2 million to $23.4 million compared with $24.6 million for the same period in 2006.
Earnings per share remained flat at 25 cents a share. Revenues during the quarter rose 3 percent, or $11.3 million, to $410 million.
For the year, Gallagher reported net earnings were up 8 percent, or $10.3 million, to $139 million. Earnings per share rose 12 cents to $1.43 a share. Revenues were up 10 percent, or $153 million, to $1.62 billion.
In response to soft market pressures, reflected by zero percent organic growth in the insurance brokerage segment, Gallagher said it was taking action to help build its profit margins.
The company said it intends to eliminate 400 back-office positions and sell its reinsurance brokerage business. The job cuts will come from both attrition and outsourcing.
"We believe it is highly disruptive to implement across-the-board layoffs," said Douglas K. Howell, chief financial officer, during an analyst's conference call. "It is much more manageable to let natural attrition reduce our headcount."
To facilitate the job cuts the company plans to freeze wages in that area, shift work to existing service centers, and utilize technology that has been under development the last couple of years, said Mr. Howell.
He was not able to give a savings estimate for the move.
During the conference call, J. Patrick Gallagher Jr., chairman, president and chief executive officer, said the firm would "be very, very careful in hiring replacements" and that this move along with expense controls would help produce a strong 2008.
He said the market is the softest it has been since the late 1990s, and despite the fourth year of softening, the retail business performed well in the quarter.
Wholesale brokerage, however, was challenged by the loss of excess and surplus lines business moving out to retail, and large property accounts were down 10 percent or more. There is the added burden of new hires who have yet to begin producing, said Mr. Gallagher.
He said the sale of the reinsurance business was made after careful consideration and the realization that the firm would be unable to bring the unit up to scale to make it competitive without tremendous investment.
"It was a tough decision, but it will allow us to concentrate on our core business," said Mr. Gallagher.
On the mergers and acquisition front, Gallagher said that it made 21 deals in 2007–eight in the fourth quarter–bringing in $100 million in annualized revenue.
Mr. Gallagher said he believes the industry is coming into "an incredible merger environment" as what it estimates to be 25,000 agencies and brokerage firms, primarily owned and managed by principals who are nearing retirement, will be seeking to capitalize on their ownership position. Selling their agencies to the likes of Gallagher would give them opportunity to capitalize on their firm's value as well as access to markets that were unavailable to them previously.
The broker said it has sold its synthetic coal interest with the tax credits for the interest expiring at the end of 2007. The company sold it for $17.2 million in November.
Brian Small, a financial analyst with Bear Stearns, said Gallagher missed consensus earnings per share estimates by two cents at 39 cents a share, as well as Bear Stearns' estimate of 44 cents a share.
While applauding the move to sell the reinsurance business, he said the company is finally acting to reduce costs and increase margins with the trimming down of its workforce.
"We suspect AJG's off-shoring efforts to India over the past few years are beginning to pay off."
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