Arthur J. Gallagher & Co.’s CEO says the Patient Protection and Affordable Care Act has created a demand for services from clients and an increase in acquisition targets, as small-benefit agencies find they can’t handle client demands and need to partner with someone who can.
CEO Patrick J. Gallagher says, “We are running hard” as the PPACA is keeping the firm busy with “new clients, prospects and mergers.” Many businesses, he says, “are just waking up to the reality that this act is going in place in 2014, and frankly, they’ve failed to prepare.”
Businesses need to prepare now for the changes PPACA will bring to their administration and health-insurance buying for employees, says Gallagher. At the same time, small-benefit agencies and brokers can’t handle the onslaught of regulatory changes and are looking for partners for the expertise they lack.
“Simply put, the smaller broker consultant cannot keep up,” says Gallagher, noting that the law has increased the firm’s acquisition pipeline and is providing new avenues of growth through this year into next.
Gallagher is no champion of PPACA and has been extremely critical of the law because of its complexity and failure to curb the inflationary aspects of healthcare. However, he has said he believes the law would be a boom to large brokers such as AJG because small brokers would not be able to handle it. He says the firm has prepared to take on the challenge with software to estimate individual business costs and it has contracted with Liazon, a private benefits exchange.
AJG says first-quarter net income was up 44 percent compared to the same period last year to $40.5 million. Revenues increased 23 percent to $674 million.
The brokerage segment produced first-quarter net income of $25 million, up 39 percent. The risk management segment, which includes its claims settlement and administrator Gallagher Basset, saw net income of $14 million, up 19 percent. Organic growth for the two segments combined is 6 percent.
Commissions have benefited from insurance rate increases of about 5 percent, says Gallagher. Workers’ Compensation has been higher, and rates need to continue to rise to put that line “in a profitable position.” He emphasized this is not a hard market but one of gradual, disciplined increases that are easier for client’s to handle.
“If the economy holds up, and rates continue to trend up, expect the rest of 2013 to be another outstanding year,” says Gallagher during an earnings conference call.