Gallagher Reports 3Q

Arthur J. Gallagher AJG reported modestly weaker third-quarter results than we had anticipated, but the overall picture is one of continued improvement from 2008, and we will keep our fair value estimate. Total revenue rose 3% from a year ago, and revenue growth slowed from the second quarter after discounting normal seasonal trends. Lower investment income arising from low interest rates played a material role in the revenue weakness, but we would have liked to have seen better results on the commissions and fees lines. Internal (excluding acquisitions and other items) commission and fee revenue declined 5.5%, as insurance rates and overall demand for insurance remained pretty weak. But we were encouraged by the earnings acceleration in Gallagher's risk-management segment, driven as it is by client payroll head counts. Pretax income from continuing operations rose significantly from a weak year-earlier result but was basically flat on a sequential basis.