Illinois Okays Contingent Commissions For AJG

NU Online News Service, july 29, 11:17 a.m. EDT

Insurance broker Arthur J. Gallagher has reached a nationwide agreement with the Illinois attorney general and Illinois Insurance Department permitting it to once again accept contingent commissions.

AJG was one of four brokers that agreed to drop the contingent fees in 2004 after a New York state investigation turned up evidence that the lucrative commissions served as a reward for rigging bids and steering commercial insurance clients to certain insurers.

Marsh, Aon and Willis agreed to end taking the commissions at that time, and that has not changed to date.

AJG, based in Itasca, Ill., revealed the agreement yesterday in its second-quarter earnings announcement where it reported net income for the quarter increased 7 percent over the same period last year.

The company said the agreement allows the company to once again accept contingents beginning Oct. 1 and applies nationwide. Contingents are expected to add an estimated $10 million to the firm's earnings in 2011 on an annual basis.

During a conference call with analysts this morning, J. Patrick Gallagher Jr., chairman, president and chief executive officer, said since the agreement was reached in 2004, he has been to the office of Attorney General Lisa Madigan 25 times to discuss the issue.

He said when AJG agreed to eliminate contingent commissions it was with the understanding that there would be an open discussion on the issue if the rest of the industry did not eliminate them.

"I probably, of the public CEOs, have been the most vocal when it comes to this dual regulation that we have lived in for so much time," said Mr. Gallagher. "We vehemently disagreed that contingent commissions were in any way illegal or immoral. We've said all along that we were willing to give them up if the rest of the industry was going to follow.

"That really was the sentiment I had with the AG's office four years ago, and I'm very pleased that our attorney general and director of insurance–once they recognized that in fact the industry standard for contingent commissions was not going to change–they agreed that it would be unfair to leave us in a situation where we could not collect them."

He said the major component of the agreement is that AJG will operate on a fully transparent basis, disclosing all its compensation to its customers–something, he added, that has not been universally accepted by the insurance brokerage community.

The estimated $10 million in contingent commissions will apply to relationships with small regional carriers who were unable to pay supplemental commissions to the firm, said Mr. Gallagher. It also means that an additional $12 million in contingents the company was collecting from acquired agencies will not be lost in the coming years.

On the earnings front, AJG reported second-quarter net income rose $3 million to $43.8 million over the same period last year. Earnings per share remained flat at 44 cents. Revenues rose 6 percent, or $25 million, to $454 million.

For the first half of the year, net income has doubled, rising 102 percent, or $35 million, to $70 million. Earnings per share rose from 37 cents last year to $71 cents.

Mr. Gallagher said that despite the tough economic times, the firm was able to report net income growth thanks in large measure to cost-cutting measure throughout the firm.

"I'm very pleased with the results in the quarter," he said. "We overcame some pretty strong headwinds."