Despite the company’s buoyant top line in the fourth quarter of 2010, analysts foresee no improvement for the shares of Itasca, Ill.-based Arthur J. Gallagher and Co.

Fighting industry-wide headwinds, Gallagher, the fourth largest insurance broker in the world, reported 2010 earnings of $174.1 million, or $1.66 per diluted share, beating Wall Street’s estimate by 28 cents.

However, analysts think it is still too soon to say the tide has turned. Gallagher is expected to earn only $1.55 in 2011, according to a survey compiled by Zacks Investment Research Inc.

Insurance brokers have been buffeted by many factors over recent years. The dual pressure that hurt revenues for Gallagher and for all other insurance brokers last year was a combination of premium rate decreases and economic contraction that translated into less insurance being purchased.

The soft market lingered through fourth-quarter pricing as insurers continued to pursue market share, according to a quarterly survey by the Council of Insurance Agents & Brokers. Overall, commercial renewal pricing for small, medium and large business accounts on average declined 5.4 percent in the fourth quarter, compared with 5.2 percent in the previous quarter. Buyers have opportunities to get better pricing and terms when competition among carriers rules the day.

According to the council, that was the twenty-eighth quarter of consecutive decline in premium rates since the first quarter of 2004. The biggest plunge took place in the third quarter of 2007 with a 13.6 percent decrease.

“We are not anticipating much improvement until much later in 2011,” said Mark Dwelle, an analyst with RBC Capital Markets Corp. “The industry still has a lot of excessive capital. And it’s difficult to raise rates when there’s a lot of competition.”

“There are lots of speculations in terms of when we’ll actually start to see pricing power,” said Meyer Shields, an analyst with Stifel Nicolaus & Co. Inc. “I don’t think anyone disputes that we’re past the worst of it, but I think it’ll start drifting from the negative 5 percent range, where we are now, to zero or a little bit better by year-end 2011.”

Shields said the underwriting outlook will probably be bleak until 2012, when the market might permit a rise of about 10 percent by mid-year.

During these years of premium decline, brokers’ expenses have gone up.

“If there would be more accelerated consolidation among the insurance carriers,” Shields said, “it would translate into better pricing.”

As for Gallagher, Dwelle assigns a declining target price of $25, down from current trading around $30, and an underperform rating, based on the expectation that the growth environment for insurance brokers will remain tepid at best over the next few quarters, and that the organic growth recovery for risk management may be pushed out even further, as claims counts continue to decline and demand for risk management services is tempered.

Aside from weak pricing, the bad economy has also been playing its part.

Even though the U.S. unemployment rate fell by 0.4 percentage point to 9.0 percent in January, compared with the 4 to 5 percent range before the financial crisis, it’s still historically high.

Gallagher has a lot of exposure to unemployment in two of its three segments.

The brokerage segment, which accounted for 72 percent of the company’s revenue in 2010, is primarily comprised of retail and wholesale brokerage operations. Among Gallagher’s retail brokerage operations, employer-provided health and welfare insurance stands as a very important program.

“Every employee has workers’ compensation on them,” Shields said. “The fewer employees a business has, the less workers’ compensation it buys. Since premiums are based on payrolls, the unemployment rate has a great impact on Gallagher’s revenues.”

The risk management segment, which accounted for 25 percent of the company’s revenue in 2010, provides contract claim settlement service. Gallagher settles claims for companies that have not bought insurance, retaining the risks themselves.

However, soft pricing on the insurance carriers’ side has weaned some of these companies away from self-insuring. Furthermore, with the downsizing of payrolls, fewer claims will be filed, meaning a shrinkage in business for Gallagher.

According to Shields, workers’ compensation usually makes up 15 percent to 20 percent of a broker’s revenues.

Over the past decades, Gallagher has been growing mainly based on mergers and acquisitions. According to Evans’s rough count, since 1995 Gallagher has made 216 acquisitions.

Evans said it’s a common strategy for brokers to build and expand their business through acquisitions. At this time, Gallagher can still acquire small companies at below market value. However, as the company grows larger, it will “have to do a lot of acquisitions to move the needle.”

In 2010, Gallagher’s brokerage segment suffered a 1.7 percent decline in organic growth. The company could very likely have a flat year before things start to pick up in 2012.

“The pressures on organic growth are abating,” Shields said. “If the economy is recovering and the insurance rate is rising as well, the company would see more rapid organic growth.”

But in general, he expects Gallagher’s organic growth rate to be somewhere in the 0.5 percent to the 1.5 percent range over the course of 2011.

He assigns a fair value estimate of $24.60 a share with a sell rating, based on his concern that Gallagher’s expenses will probably rise faster than revenues going forward. He expects earnings of $1.33 per share in 2010 and $1.47 in 2011, compared with $1.38 in 2009.

Dean Evans, an analyst with Keefe, Bruyette & Woods Inc., assigns a target price of $28 per share, and a market- perform rating. He attributes recent buoyance of Gallagher’s stock to positive earnings reports from other insurers.

Travelers Insurance Group Holdings Inc., one of the largest insurance companies, reported its earnings on Jan. 27.

“On their [Travelers] conference call,” Evans said. “they were somewhat confident with regard to pricing and exposure units, in other words, the amount of insurance purchased. So, that’s the reason why Gallagher’s stock is going up these days.”

Evans is not so optimistic about seeing a turnaround in pricing.

“On the Property and Casualty market,” he said. “I expect a prolonged soft market. Pricing is now at best flat, despite what Travelers said. And I expect that to continue for the foreseeable future.”

Evans has a 0 percent organic growth on his Gallagher model for 2011, and 1.5 percent for 2012.

For the most part, it’s going to be pretty flat from an insurance brokerage’s standpoint, he said.

According to Evans, Gallagher’s performance is about the average among its competitors. Companies like Brown & Brown Inc., which is the closest peer, got hurt more by the weak economy, but are also rebounding a little more.

Gallagher reported total revenue of $1.86 billion in the year ended Dec. 31, 2010, up 7.8 percent from $1.73 billion last year. However, much of the growth in revenue was offset by the $1.66 billion in expenses, a 9.4 percent increase from $1.52 billion a year ago. The company’s rising compensation costs have become the driving force of expenses.

The company’s trailing price-earnings ratio is 22.90, compared to Standard & Poor's 500 Index’s price-earnings ratio of 18.35.

Gallagher raised its quarterly dividend 3.1 percent to 33 cents a share on Jan.27.

Tuesday’s closing price was $30.59.