NU Online News Service, Aug. 1, 2:30 p.m.EDT

Modest property and casualty rate increases will benefit theindustry more than true a hard market because they are morepalatable to clients, says the chairman, president and chiefexecutive of insurance broker Arthur J. Gallagher & Co.

J. Patrick Gallagher also says a continuation of the currentconditions, rather than a hard market, will benefit insurancebrokers' organic growth over the long term.

During a conference call today to discuss the firm'ssecond-quarter results with financial analysts, Gallagher mentionedthe latest Council of Insurance Agents & Brokers P&Crate survey, which showed incremental increases in insurancepremium rates across the board, with some lines—workerscompensation, property, commercial auto, general liability andumbrella—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. Thisis my fourth cycle. We don't want to see 100 percent rate increasesand cutbacks in coverage. The industry is not reacting to balancesheet problems, but rather to income statement and loss ratioconcerns.”

He went on to say, “An environment of incremental rate growth isideal for us. If we have a 4 percent rate gain per quarter, peryear, for a number of years, that would produce an opportunity fororganic growth in each and every quarter.”

He also called the current environment “very sustainable” withrespect to selling the incremental rate increases to clients ratherthan asking them to accept steeper increases immediately.

He notes that brokers are taking the carriers' rate increases toclients and the rates are sticking. He says when brokerrepresentatives tell their clients they have to take rate increasesof anywhere from 4 to 9 percent, “they understand that.”

“Are they thrilled about it? No, they don't want to seeincreases, but at the same time, they do understand,” saysGallagher. “And the carriers, I think, are proving that this timearound they can get these increases incrementally.”

During a question-and-answer session, Gallagher elaborated onhis market observations, saying the current cycle “is completelydifferent in its feel and its look from any I have seen before, andin many respects that can be a positive thing.”

He added, “What we're seeing right now is disciplined managementrecognizing that, at present rates, with no investment income tospeak of, they have to improve the pricing of the product that theysell in the marketplace in order to have any kind of return toshareholders.”

He says discipline and quality of information are better than hehas seen in past market cycles.

Turning to Gallagher's second-quarter results, the broker saysnet income increased 72 percent from the same period last year, or$30 million, to $72 million. Revenues rose 19 percent, or $104million, to $650 million.

For the first six months of the year, net income rose 75percent, 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 decisionabout the healthcare reform act, Gallagher says the firm's benefitsbusiness is being helped by the healthcare reform act. He saysthere was an uptick in business since the decision.

“I think there were an awful lot of clients that just weren'tgoing to spend a lot of time on this if the whole law was going tobe found to be unconstitutional. We heard that repeatedly,” saysGallagher. “Now that they know that in fact this law is going to gointo place there is an awful lot of effort clients have to gothrough in order to get ready for it.”

Gallagher has been a vocal critic of the Patients Protection andAffordable Care Act, but also acknowledged that it would be greatfor the firm's employee-benefitsbusiness.