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Gallagher quarterly revenues up, but catastrophes could impact property prices

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Arthur J. Gallagher & Co. reported higher revenue in the third quarter amid strong organic growth in certain geographies, particularly Australia and New Zealand, but the recent natural catastrophes are likely to spur some modest hardening in property prices, company officials predicted. 

The Rolling Meadows, Illinois-based brokerage reported revenue of $1.58 billion in the second quarter of 2017, up 6.9% from $1.48 billion in the same period last year, according to the company’s second quarter earnings report released after the Thursday market close. 

Third quarter organic growth overall was 3.5% as “New Zealand and Australia really crushed it with over 8% organic growth,” J. Patrick Gallagher Jr., chairman, president and CEO, said during the company’s earnings conference call on Thursday. 

But the hurricanes, earthquakes and wildfires of the past 90 days mean that 2017 could be one of the costliest natural catastrophe seasons on record, with thousands of claims already filed from the hurricanes alone, he said.

“Unfortunately, there will likely be more claims filed over the coming weeks driven by the wildfires in California,” he said, noting the catastrophe modeling firms are estimating more than $100 billion of insured losses from the U.S. hurricanes and the Mexican earthquakes. 

“There’s likely to be some modest hardening in the property rates coming,” Mr. Gallagher said based on conversations he had with insurers at the recent Council of Insurance Agents and Brokers’ forum and information coming from the field. “Carriers are reacting rationally by focusing on those catastrophe-exposed lines and they’re not just looking for rate increases across the board. Having said that, we’re also seeing many casualty lines continuing to firm.”

“It’s pretty early in the game right now,” he continued. “These losses are still very fresh and one thing we know from the past is for an awful lot of the modelling firms, those models don’t necessarily hold up when it comes to these catastrophes, so we don’t know. I think probably the $100 billion is somewhere close to where reality will be. There’s plenty of capacity beyond that, but we are seeing people already talking to our folks, in particular around catastrophe-exposed properties, not across the board, but they’re saying ‘we’re going to need increases’ and it’s reasonable. We’ve had about 23 quarters by our estimate of decreasing property rates and that was fair because the clients weren’t putting a bunch of losses into the market. To see something on the order of 5% to 15% to 20% wouldn’t be unreasonable.” 

Lloyd’s of London providers are pushing hard for rate increases on the property side, but the casualty market in the United Kingdom is soft and flat domestically, Gallagher officials said in response to analyst questions. 

The potential for higher prices requires the brokerage to do some additional training for its employees interacting with buyers and teach them how to proactively explain to the buyers that these prices increases are “not unwarranted,” Mr. Gallagher said.

“One of the things we realize is that we’ve probably got 12 to 13 years of new hires that have never had to take a price increase to a client,” he said. “We’ve broadened terms and reduced prices. 

“If you surprise a client, they’re not happy and we don’t have people who have been trained in this so we’re working hard on it,” he added. 

The company’s brokerage segment reported revenue of $953 million in the third quarter of 2017, up 8.7% from the $877 million in the same period last year. 

Gallagher’s risk management segment, which includes third-party administrator business Gallagher Bassett Services Inc., reported revenue of $200 million in the third quarter of 2017, up 13.6% from the $176 million in the same period last year. 

The company closed six acquisitions in the third quarter of 2017, with total estimated annualized revenue acquired of $36.9 million, according to the report. This compares to 7 acquisitions with total estimated annualized revenue acquired of $27.4 million in the same period last year. Year-to-date, 27 acquisitions have been closed, just one off the pace of 28 in the first nine months of last year, although the total estimated annualized revenue acquired of $129.7 million is currently exceeding the $97.8 million of 2016. 

Total revenues for the first nine months of 2017 were $4.56 billion, up 8.3% from the $4.21 billion in the same period last year.