Gallagher Net Income Thrown For Loss

Itasca, Ill.-based insurance broker Arthur J. Gallagher & Co. reported a first quarter net income loss of $6 million, which the firm attributed to the continued decline in coverage rates.

For the same period last year, Gallagher report net income of $20 million. This year net earnings per share fell to a loss of 7-cents a share from 20-cents a share from the comparative period. Revenues were virtually flat rising $800,000 to $375.8 million.

David Small, an analyst with Bear Stearns, said in a note that 18 cents a share earnings from continuing operations were one-cent off estimates of 19-cents. On the positive side, the broker posted one percent organic growth, with operating income coming in at $1.1 million better than expected.

Mr. Small said the driver of the earnings mix was lower than expected profitability in the risk management segment. On the brokerage side, profitability was flat compared to a year ago.

During an analyst's conference call today, J. Patrick Gallagher Jr., Gallagher's chairman, president and chief executive officer, called the current market “very, very competitive” with rates declining as much as 40 percent. He said if the cycle continues as it is it will be very difficult to grow organically.

“This is one tough trading environment … but I expect this to even get tougher,” said Mr. Gallagher, adding that rates are going to continue to fall. “We are in the fourth year of a soft market and who knows how long these rate cuts can continue.”

He said with a recession looming there will be additional challenges ahead as sales slide and clients purchase less insurance in response to reduced exposure units affecting benefits and risk management business.

Risk management, which showed an 8 percent increase in revenue of $9 million to $116 million, was affected by an increase in expenses of $12 million to $102 million. Mr. Gallagher noted that staffing levels have exceeded the expected claims volume, but he insisted that will change as the year progresses and claims volume grows to expected levels.

He said the company's one bright spot is in its acquisition environment with plenty of opportunities in the pipe line.

Douglas K. Howell, chief financial officer and corporate vice president, said the company is concentrating its efforts on acquisitions and less on buying back stock.

The company is controlling expenses and working on its overall head count reduction. It has eliminated 70 positions through attrition and the aim is to reduce staffing in back office functions by 400 through this year, he said.

The brokerage announced it would pay a quarterly cash dividend of 32-cents a share on July 15 to shareholders of record as of June 30.