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"To say it's extremely tough out there would be an unbelievable understatement. Rates are continuing to drop and the economy is taking a huge toll on our clients," J. Patrick Gallagher Jr., chairman, president and chief executive officer, said during an earnings conference call the morning of Oct. 28. "We believe the challenges we face are going to carry on to 2010, which is why we decided to reduce the headcount. Letting people go is never easy, but with organic revenue falling, it is necessary to downsize."
The cuts will be made through a combination of eliminating jobs and attrition over the next few months. Gallagher said it would post a one-time pretax charge of $10 million to $13 million for severance costs in the fourth quarter. The company estimates the move will save $25 million to $28 million annually.
The announcement came as Gallagher released its third-quarter earnings. While brokerage revenue grew 4% to $325.8 million and net earnings rose 10% to $41.6 million over the same period last year, organic revenue -- which excludes revenue from acquisitions and other items -- declined 5.5% to $279.2 million.
In the conference call, Gallagher said he estimated that two-thirds of the decline in brokerage revenue stemmed from the difficult economy's impact on clients, while about one-third was due to falling insurance rates.
He did not sound hopeful that the property/casualty market would harden any time soon.
Insurance companies' "balance sheets are recovered, and combined ratios are under 100, which will keep pressure on rates," Gallagher said. He noted one of the broker's key insurance partners posted a 6% drop in premiums written, but maintained a combined ratio of less than 100. "That does not reflect the need for higher rates," he said.
Still, he said Arthur J. Gallagher & Co. performed well in the quarter. "Given that this has got to be one of, if not the toughest market that I've seen in 35 years, I'm very pleased with the quarter," Gallagher said.
Earlier this week, Arthur J. Gallagher & Co. said it acquired wholesale broker Triad Insurance Agency Inc., in Honolulu, from the Bank of Hawaii (BestWire, Oct. 26, 2009). In July, Illinois allowed Gallagher to accept contingent commissions again on retail brokerage business effective Oct. 1, for the first time since the company swore off the fees in 2005 (BestWire, July 29, 2009.)
Arthur J. Gallagher & Co. (NYSE:AJG) is the fourth-largest global insurance broker by 2008 brokerage revenue, according to Best's Review's top global brokers' ranking.
The company's stock was trading at $22.86 a share on the morning of Oct. 28, down 4.83% from the previous close.
(By Meg Green, senior associate editor, BestWeek: Meg.Green@ambest.com)
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