Arthur J. Gallagher reported that third-quarter net income dropped 27 percent thanks to soft market pressures, but the insurance broker's chief executive said the firm performed well in spite of the challenge.
"We continue to fight the headwinds of rate reduction," said J. Patrick Gallagher, chairman, president and chief executive officer for the Itasca, Ill.-based insurance broker. "We think these are very good results given our environment."
Net income dropped $14 million to $38 million in the third quarter from the same period last year. Earnings per share were down 14 cents, to 40 cents a share. Revenues rose 4 percent, or $17.5 million, to $482 million.
For the first nine months of the year, net income dropped 37 percent, or $43 million, to $73 million from $115 million for the same period last year. Earnings per share for the period dropped from $1.18 a share last year to 78 cents this year. Revenues rose 2 percent, or $20 million, to $1.23 billion.
The firm continues to see growth in its London and benefits divisions, while client retentions are "excellent," said Mr. Gallagher.
Pressure on the brokerage segment was evident from the 2 percent loss in organic growth for the quarter compared to zero percent last year. Organic growth showed a loss of 1 percent for the first nine months compared to a 3 percent gain last year.
The risk management segment was one bright spot, reporting growth of 8 percent, compared to 4 percent for the same period last year. For the first nine months, organic growth remained unchanged at 8 percent.
"We have a soft market playbook that we are following very closely," said Mr. Gallagher. "Our fundamental strategy continues to be: number one, cost control–watching all expenses; mergers and acquisitions, number two; and number three, hiring production talent. When I look at our business, I really don't see any surprises. We have to focus and execute.
"I continue to be very, very bullish on our business," he concluded.
The firm's chief financial officer, Douglas K. Howell, said Gallagher has eliminated 140 people through attrition, and expects to continue to reduce headcount well into 2009. Attrition has slowed because of the downturn in the economy, and if it does not pick up, the firm will look into additional outplacements to reach its goals to reduce headcount in the future, he added.
Due to the state of the credit markets, the firm will look to utilize stock in acquisition transactions, according to Mr. Howell, who noted that terms and conditions are tightening in the deals as EBITDA (earnings before interest, taxes, depreciation and amortization) multiples decline.
He said the use of stock will give sellers the benefit of reaping the rewards later when multiples improve.
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