Illinois-based Arthur J. Gallagher & Co. has reported its financial results for the quarter ended March 31, 2005.
“Gallagher continues to do what it does best even in these challenging
times — solve our clients’ risk management problems,” said J. Patrick
Gallagher, Jr., president and CEO. “First quarter 2005 revenue growth reflects the strong efforts of our team in selling insurance products and completing acquisitions which fit in to the Gallagher culture. Risk Management in particular continues to show excellent results.”
Brokerage and risk management combined Q1 highlights:
— 12% growth in revenues, of which 4% is organic.
— 14% pretax margin before litigation and contingent matters, 2% below 2004 mostly due to investments in new hires of 0.7%, foreign exchange of 0.4% and pension and group medical inflation of 0.6%. Gallagher has made amendments to several employee benefit plans that will result in a one time gain of $10.0 to $12.0 million in second quarter 2005. In addition, Gallagher estimates quarterly savings as a result of these amendments of approximately $5.0 million in both third and fourth quarters 2005 and approximately $3.0 million quarterly
— Contingent commissions were $20.7 million in first quarter 2005 versus $20.0 million in first quarter 2004. The contingent commissions recognized in 2005 by Gallagher relate to contingent commission agreements in force during 2004. As previously announced, Gallagher ceased entering into new contingent commission agreements as a retail broker effective Jan. 1, 2005. Accordingly, it is expected that future contingent commissions will be substantially reduced.
— As previously announced, in first quarter 2005 Gallagher sold its two medical claim management operations. As a result, these operations have been accounted for as discontinued operations in the accompanying financial statements. Prior year amounts have been restated to reclassify the revenues and expenses of these entities to discontinued operations.
Brokerage segment Q1 highlights:
— Revenue growth of 11% reflecting strong acquisition activity.
— Organic growth rate of 1% in a soft market.
— Closed two acquisitions and the pipeline remains strong.
— First quarter 2005 compensation ratio was 3.2% higher than 2004. Most of this increase results from new hires in the retail operations of 0.6%, new hires and one-time charges related to staffing changes made in Gallagher’s London and reinsurance operations of 0.7% and pension and group medical inflation of 0.9%.
— First quarter operating expense ratio was up 0.6%. Cost savings were more than offset by foreign currency translation of 0.4% and one time legal expenses of 0.6%.
— Pretax margin before litigation and contingent matters of 12%, a
5% margin reduction from 2004. Pretax margin was impacted in 2005 by the compensation and operating expense factors discussed above, as well as 0.9% related to increased amortization expense.
— The insurance industry in general, and Gallagher individually, continue to be the subjects of a substantial number of regulatory and legal actions by many State Attorneys General and private litigants investigating contingent commissions and various other historical business practices. Over the last several months, three other major insurance brokers have reached settlement with one or more Attorneys General. Gallagher has recorded a pretax charge to its first quarter 2005 earnings of $35.0 million ($21.0 million after tax, or $0.23 per diluted share) representing its current best estimate of the amount to resolve the state insurance investigations, which is based on the costs of similar industry settlements thus far, plus an accrual for legal costs.
— The first quarter 2005 tax benefit of $7.9 million results from applying a 23% effective tax rate to the Brokerage Segment’s pretax earnings before the charge discussed above, plus applying a 40% marginal rate to the $35.0 million charge.
Risk management segment Q1 highlights:
— Diluted earnings per share growth of 27% over 2004; 39% growth in pretax earnings.
— Revenue growth of 13%, 12% growth in fees, all of which is organic.
— Increasing claim counts reflect excellent new business sales and the impact of recovering economic conditions from existing clients.
— Pretax margin of 19%, a 4% margin improvement over 2004 primarily reflecting expense savings initiatives put in place in 2004.
— Effective tax rate of 23% in 2005 versus 19% in 2004.
— Client retention remains strong.
— Clients’ use of Gallagher’s proprietary Risx-Facs(R) system now exceeds 18 million page views per month.
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