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Top insurance brokers, No. 4: Arthur J. Gallagher & Co.

J. Patrick Gallagher Jr.

2020 brokerage revenue: $6.07B

Percent increase (decrease): 6.2%

Arthur J. Gallagher & Co. continued to grow organically and through acquisitions last year, but it could potentially see significantly stronger growth ahead as the economy bounces back from the pandemic-related recession and it eyes what could be its largest deal ever.

The outcome of that proposed purchase — much of the reinsurance business of Willis Towers Watson PLC, chunks of Willis’ European operations and some of its U.S. business — is dependent on Aon PLC securing regulatory approval for its much bigger deal to buy most of the rest of Willis, which remains uncertain.

Gallagher reported $6.07 billion in brokerage revenue in 2020, a 6.2% increase over 2019, despite the economic downturn and restrictions imposed during the pandemic.

“I was concerned about our culture; we are a people culture,” said J. Patrick Gallagher Jr., chairman, president and CEO. “But we sold a ton of new business. People didn’t leave us.”

Gallagher retained its No. 4 position in Business Insurance’s ranking of the world’s largest brokerages. In the first quarter of 2021, Gallagher’s insurance brokerage business reported a 12.2% increase in revenue over the prior-year period, up 6% on an organic basis.

Gallagher saw faster organic growth than most of its peers during the pandemic, said J. Paul Newsome Jr., Chicago-based managing director of equity research at Piper Sandler & Co. 

The brokerage appeared to take a more positive approach to managing the crisis than some of its rivals and continued its sales strategy, he said. 

“They really had one of the better years among the large insurance brokers. Despite the pandemic they were able to maintain their relatively better organic growth rate,” said Mark Dwelle, director, insurance equity research, at RBC Capital Markets LLC in Richmond, Virginia.

Gallagher’s client profile worked to the brokerage’s advantage during the pandemic, he said. 

“A lot of times their clientele are businesses that are bigger than small but smaller than big and accordingly they did not run into some of the friction that a lot of small businesses suffered, and they weren’t over-exposed to large businesses that faced their own challenges as they worked their way through the pandemic,” Mr. Dwelle said.

The pace of Gallagher’s so-called tuck-in acquisitions of smaller brokers slowed last year, with 27 deals representing a combined $251.4 million in annualized revenue, compared with 46 deals and $452.3 million in 2019.

“We slowed down, and the sellers slowed down last year,” Mr. Gallagher said. However, valuations of brokerages are very high and possible changes to the U.S. capital gains tax rate will likely accelerate the pace of deals going forward, he said.

Whether a future deal will include Gallagher’s planned $3.57 billion purchase of the various Willis assets will depend on whether regulators allow the Aon-Willis merger to go through. The deal with Gallagher is contingent on the bigger deal being completed and last month the U.S. Department of Justice sued Aon and Willis to block the deal over competition concerns (see related profiles). 

Potentially, the divested Willis assets would vault Gallagher into the top tier of reinsurance brokers and advance its European strategy by five years, Mr. Gallagher said. 

If further divestitures of Willis assets are required, Gallagher would consider buying more of the brokerage’s business, Mr. Gallagher said shortly after the DOJ filed suit.

If the deal collapses, Gallagher could have a temporary drag on its earnings because it has already issued debt and equity to fund the purchase, but it could use the funds to buy back shares or make other purchases, analysts say.

Other consequences for Gallagher would likely be limited.

“Presumably, we’d go back to the status quo with everybody competing hard for business,” Mr. Dwelle said.

Meanwhile, amid the growth in cyber-related crime since the COVID-19 outbreak, Gallagher was hit by a ransomware attack last year and temporarily disconnected its systems. The brokerage’s operations were back up and running after a few days. Mr. Gallagher declined to comment on whether the brokerage paid a ransom.

“They obviously got through it and managed the process reasonably well, but there were certainly lessons learned and lessons that others in the industry should take before it’s their turn,” Mr. Dwelle said.