Gallagher CEO: Health Care Reform Will Lead to Broker Consolidation


NEW YORK, Feb 18, 2011 (A. M. Best via COMTEX) —

The health care reform law will result in consolidation among smaller brokers, said J. Patrick Gallagher Jr., chairman, president and chief executive officer of insurance broker and risk management services firm Arthur J. Gallagher & Co.

“I think it’s [the new health care law] just horrible for America, but it’s great for Gallagher,” the executive told the audience at the Bank of America Merrill Lynch Insurance Conference in New York, according to a replay of the conference on the company’s website.

“Clients cannot figure this thing out,” Gallagher said, adding his company has built tools to assist clients in determining their costs as the health-reform changes are implemented in the years ahead.

“What this is going to do, in my opinion, is essentially push all the smaller brokers that are in the benefits space out of the space,” Gallagher said, noting that will help his company’s acquisition opportunities.

Gallagher said his company’s “pipeline for acquisitions has never been better,” and estimated there are some 18,000 retail and wholesale brokerages and agencies in the United States.

Recently, the company acquired the Gleason Agency Inc. and its affiliate, Gleason Financial Ltd., both headquartered in Johnstown, Pa. (BestWire, Jan. 11, 2011). Gallagher has long employed a strategy of growing through acquisitions, completing 71 deals, with annualized revenue of $409 million, from 2008 through 2010, according to the company’s presentation at the conference.

Gallagher highlighted the company’s acquisition of GAB Robins (BestWire, Oct. 5, 2010), which he said is going well. Gallagher is intent on international expansion and focusing on building new niches, he noted.

As of Dec. 31, Gallagher had $100 million in available cash.

“We only do three things with our cash: We buy brokers, we pay dividends, and, if there’s excess cash after that, we repurchase shares,” Gallagher said. “And, at this point in time, the share repurchase is not probably where we’re going because we have such great acquisition opportunities.”

Brokers are facing a moment of truth due to the new medical loss ratio rules, Peter Gruenberg, chief placement officer with the human capital practice of Willis North America, recently said. By 2012, large group health plans will be required to issue refunds to policyholders if they spend less than 85% of premium income on medical care and activities to improve the quality of care; for small group and individual plans, the threshold is 80% (BestWire, Jan. 5, 2011).

Founded in 1927, Arthur J. Gallagher & Co. was the fifth-largest global insurance broker, based on 2009 revenue of $1.7 billion, according to Best’s Review magazine’s annual ranking.

During the afternoon of Feb. 18, Gallagher’s stock (NYSE: AJG | PowerRating) was trading at $31.62 a share, up 0.67% from the previous close.

(By Diana Rosenberg, senior associate editor, BestWeek)

Editor’s Note: Big is not always better. The big brokerage houses employ people. Some people are better equiped than other people. But a small independent can have the brain power and aggressive energy to run circles around the big boys. And they are more nimble.