NU Online News Service, Aug. 1, 2:30 p.m. EDT
Modest property and casualty rate increases will benefit the industry more than true a hard market because they are more palatable to clients, says the chairman, president and chief executive of insurance broker Arthur J. Gallagher & Co.
J. Patrick Gallagher also says a continuation of the current conditions, rather than a hard market, will benefit insurance brokers’ organic growth over the long term.
During a conference call today to discuss the firm’s second-quarter results with financial analysts, Gallagher mentioned the latest Council of Insurance Agents & Brokers P&C rate survey, which showed incremental increases in insurance premium rates across the board, with some lines—workers compensation, property, commercial auto, general liability and umbrella—up by more than 5 percent.
“This is not a classic hard market,” says Gallagher. “Frankly, that’s a very good thing for us, our clients and our markets. This is my fourth cycle. We don’t want to see 100 percent rate increases and cutbacks in coverage. The industry is not reacting to balance sheet problems, but rather to income statement and loss ratio concerns.”
He went on to say, “An environment of incremental rate growth is ideal for us. If we have a 4 percent rate gain per quarter, per year, for a number of years, that would produce an opportunity for organic growth in each and every quarter.”
He also called the current environment “very sustainable” with respect to selling the incremental rate increases to clients rather than asking them to accept steeper increases immediately.
He notes that brokers are taking the carriers’ rate increases to clients and the rates are sticking. He says when broker representatives tell their clients they have to take rate increases of anywhere from 4 to 9 percent, “they understand that.”
“Are they thrilled about it? No, they don’t want to see increases, but at the same time, they do understand,” says Gallagher. “And the carriers, I think, are proving that this time around they can get these increases incrementally.”
During a question-and-answer session, Gallagher elaborated on his market observations, saying the current cycle “is completely different in its feel and its look from any I have seen before, and in many respects that can be a positive thing.”
He added, “What we’re seeing right now is disciplined management recognizing that, at present rates, with no investment income to speak of, they have to improve the pricing of the product that they sell in the marketplace in order to have any kind of return to shareholders.”
He says discipline and quality of information are better than he has seen in past market cycles.
Turning to Gallagher’s second-quarter results, the broker says net income increased 72 percent from the same period last year, or $30 million, to $72 million. Revenues rose 19 percent, or $104 million, to $650 million.
For the first six months of the year, net income rose 75 percent, or $43 million, to $100 million. Revenues rose 20 percent, or $203 million, to $1.20 billion.
Touching on client reaction to the Supreme Court’s decision about the healthcare reform act, Gallagher says the firm’s benefits business is being helped by the healthcare reform act. He says there was an uptick in business since the decision.
“I think there were an awful lot of clients that just weren’t going to spend a lot of time on this if the whole law was going to be found to be unconstitutional. We heard that repeatedly,” says Gallagher. “Now that they know that in fact this law is going to go into place there is an awful lot of effort clients have to go through in order to get ready for it.”
Gallagher has been a vocal critic of the Patients Protection and Affordable Care Act, but also acknowledged that it would be great for the firm’s employee-benefits business.