Gallagher Wins Approval to Resume Receiving Contingent Commissions

Arthur J. Gallagher & Co. said it has received regulatory approval to again accept contingent commissions on retail brokerage business effective Oct. 1, for the first time since it disavowed the fees in 2005 because of investigation of broker compensation.

President, Chairman and Chief Executive Officer Arthur J. Gallagher said the broker estimates it may receive $10 million in contingent fees by 2011.

"We will continue to operate on a fully transparent basis," said Gallagher, who has been vocal over the years about ending "dual regulation" of the world's largest brokers.

Gallagher commented during a conference call with equity analysts discussing the broker's second-quarter earnings statement, in which Gallagher reported that net earnings rose to $43.8 million from $40.8 million in the same quarter last year.

In 2005, Gallagher entered into a settlement with Illinois regulators and the three largest global brokers -- Aon Corp., Marsh & McLennan Cos. and Willis Group Holdings Ltd. -- entered into similar settlements with New York state regulators.

The settlement stemmed from a 2004 investigation by New York officials of the alleged contract steering by brokers, focusing on contingent commissions, market service agreements and placement service agreements between insurers and brokers.

The brokers committed to terms including eliminating contingents, disclosing to clients the quotes sought and received and disclosing and receiving client approval for any compensation the broker would receive in connection with those quotes (BestWire, April 2, 2008).

Gallagher said he agreed to the settlement, but told Illinois Attorney General Lisa Madigan that he expected to see the restrictions implemented across the entire intermediary industry.

"I've probably been to the attorney general's office 25 times in the past few years, and the topic of conversation all 25 times is how to handle this dual regulation," he said during the conference call. "It's an unlevel playing field. ?Carriers are paying out billions a year in contingents to others, and we're excluded from that?"

"I'm very, very pleased," Gallagher continued, "that our insurance director and attorney general agreed that, once they saw that the industry standard on this was not going to change, that it was unfair to leave us in a position where we could not collect them."

Dan Glaser, chairman and chief executive of MMC's brokerage arm, Marsh, said his company "has consistently advocated for a level playing field."

"Marsh continues to believe that the settlement agreements should sunset and that a clear set of rules grounded in transparency should apply equally to all insurance producers," he said in a statement.

Aon and Willis declined to comment. Efforts to contact Madigan or Insurance Director Michael T. McRaith were not immediately successful.

Aon is the largest broker in the world based on 2008 brokerage revenue, according to the Best's Review ranking of global brokers; Marsh Inc. is the second-largest, Willis the third and Gallagher the fourth.

Shares of Arthur J. Gallagher & Co. (NYSE: AJG | Quote | Chart | News | PowerRating) were $23.25 in afternoon trading on July 29, up 2.8% from the previous close. Shares of Aon Corp. (NYSE: AOC) were $39.93, up 4.8%; shares of Willis Group Holdings (NYSE: WSH) were $26.88, up 2.8%, and shares of Marsh & McLennan Cos. (NYSE: MMC) were $20.61, up 5.2%.