NU Online News Service, Oct. 28, 2:37 p.m. EDT
Arthur J. Gallagher management said despite a challenging economic environment, third-quarter net income increased 10 percent primarily on the strength of expense controls and it plans to trim 400 positions.
The Itasca, Ill.-based insurance broker said net income rose $4 million to $42 million, which translated into a 1 cent increase in earnings per share to 41 cents. Revenues rose 3 percent, or $11 million, to $440 million.
For the first nine months, net income rose 54 percent, or $39 million, to $112 million. Earnings per share rose from 78 cents last year to $1.12. Revenues rose 5 percent, or $61 million, to $1.3 billion.
The quarterly results missed analysts' consensus estimate by 1 cent, causing the stock to fall by $1 in early morning trading.
During a conference call with analysts today, J. Patrick Gallagher, chairman, president and chief executive officer, said, "Given that this has got to be one of the, if not the toughest markets I've seen in 35 years, I'm very pleased with our quarter–especially given the economic environment we are operating in."
He noted a decline in organic growth of 5.5 percent that, he said, was primarily attributable to lost business in the benefits area of life and health and wholesale segment where customers are moving to the standard markets.
He said the retail brokerage business showed an impressive increase of 3.9 percent organic growth. Risk management was about flat.
If benefits and wholesale segments were removed from the mix, organic growth would have stood at 2.7 percent, he added.
Mr. Gallagher said the insurance brokerage business remains difficult because of the economy and soft market, and there appears to be no reason to expect a significant change going into 2010.
The CEO noted that many insurers are reporting profitable balance sheets, reducing the pressure to increase rates, which does not bode well for any firming of prices in the future.
Because there appears to be no quick improvement on the horizon, AJG plans to eliminate 400 middle and back-office positions, or approximately 4 percent of its global work force, through a combination of lay-offs and attrition.
When asked about the resumption of insurers paying AJG contingent commissions, Mr. Gallagher said the local and regional companies are welcoming the change. He said clients have not objected to the arrangement either.
"This should not be viewed as a compensation issue but a transparency issue," said Mr. Gallaher, who added the firm discloses its compensation arrangements with all clients. "When you get away from the RIMS (Risk and Insurance Management Society) members, there is zero controversy about this issue."
RIMS has strenuously objected to the payment of contingent commissions, saying they should be banned because they present a conflict of interest. The issue became more pronounced when the New York Attorney General's Office got an agreement with Marsh, Aon and Willis to ban contingents in 2005 after an investigation found insurers engaged in price-fixing were making undisclosed payments so brokers would steer clients their way.
He added that RIMS members are showing signs of softening their position because it appears the three major brokers barred from taking the commissions may eventually be allowed to resume receiving them.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.