Gallagher: New business “surprisingly good” given Covid-19

Arthur J Gallagher’s Pat Gallagher has struck a positive tone over the impact of Covid-19, saying the broker is confident it can “cost save our way through a lull in organic growth” and that some signs of improvement are emerging.

On an investor call today, the broker’s chairman, president and CEO gave an overview of trends he had seen in the past 75 days resulting from Covid-19.

He said AJG is not seeing a meaningful number of outright business failures leading to policy cancellations. The amount of negative endorsements, downward premium audits and other midterm policy adjustments “are also not meaningful”, he said.

In addition, the impact of unemployment has not caused a significant drop in covered lives in AJG’s customer base, while retentions are still at pre-pandemic levels, and in some cases, better. He also said that the pandemic had pushed down new business one or two points but it is “still surprisingly good”.

“In the end, we feel highly confident we can cost save our way through a lull in organic growth,” he said.

“I see a strong case for underwriters to push for even more rate. Some are calling it a hard market, but I might call it more and more a difficult market as nearly all risk can still find a home”

Pat Gallagher

The CEO also noted that on a first quarter call at the end of April the broker identified quarterly cost savings of $50mn to $75mn that it could remove from the organization almost immediately.

“These proactive actions included: eliminating discretionary spending; reducing travel, entertainment and advertising expenses; limiting the use of temporary help and consultants; increasing utilization of our centres of excellence; and implementing a support layer hiring and wage freeze,” said Gallagher. “The team has been hard at work and with April and May in the books, I feel confident we will be able to deliver closer to the upper end of that range here in the second quarter.”

Pricing creating a “more difficult market”

Gallagher noted that property casualty pricing around the globe is going up, “and going up faster as each month goes by”. He said exceptions include US workers compensation, as well as pricing in Australia and New Zealand.

“When I look at our P/C global book, pricing is up about 6 percent to 7 percent. Property remains the strongest line of business, up 10 percent. Next is professional liability, up nearly 7 percent. And other casualty lines are up low mid-single digits,” said Gallagher.

“Looking over the next year or two, I see rates continuing to increase within the already firm market. Entering 2020, loss costs were already outpacing rate, and many carriers are now quantifying Covid-19 as the largest catastrophe loss in history. I see a strong case for underwriters to push for even more rate. Some are calling it a hard market, but I might call it more and more a difficult market as nearly all risk can still find a home.”

Turning to M&A, Gallagher said Covid-19 may slow acquisitions down in the near term because due diligence is tough.

“But we’ve seen some downturns in the past from tax law changes, et cetera, and we then catch up,” he said. “Remember, the dynamics are still there. So many family-owned brokerages are owned by baby boomers. Now add the pandemic and difficult market conditions, smart owners are seeing that being part of Gallagher might be a safe port in a storm.”

He said AJG’s M&A pipeline includes 30 term sheets signed or being prepared, representing approximately $200mn of revenues. He added that over the past few weeks the level of developing mergers has increased significantly to approximately $1bn of revenue.

Michael Pesch, CEO of US brokerage services, provided more detail on US pricing. He said overall first quarter price increases were close to about 6 percent to 7 percent, with strengthening in property and umbrella.

“Thus far, here in the second quarter we are seeing very similar rate changes,” said Pesch. “For example, property is up about 10 percent, professional liability up 9 percent, commercial auto up 5 percent, casualty up 4 percent and workers compensation is down about 3 percent.

Pesch said organic growth in 2019 was about 5.5 percent, with about the same figure in the first quarter of this year.

“Based on what we are seeing thus far, I think the second quarter might be about half that. Here is why. New business is running about 1.5 points lower. Retentions, however, are running about 0.5 point better. Midterm policy adjustments are running about 1 point lower than before Covid. And finally, workers compensation is costing us about 1 full point.”

He added: “I’m really pleased that we are not seeing a significant amount of cancellations, which means our clients are weathering the storm. In fact, most of the midterm adjustments seem to be companies pressing pause on some of their business activity rather than cancelling coverages entirely.”

Wholesale market rates up 9%

Joel Cavaness, president of US wholesale brokerage, said overall rates in his area were up about 9 percent in April and May.

“This includes double-digit increases in property and marine and mid single-digit increases in professional liability and casualty,” Cavaness said. “So we’re seeing rate as pretty broad based outside of workers compensation. Certainly, capacity has tightened, specifically from umbrella or excess layers. Fewer carriers have appetites for these risks, and the carriers that are still willing to quote are reducing the limits that they provide.”

Cavaness said Gallagher has segmented the wholesale business into high, moderate and low Covid-impact industries. For high-impact industries, open brokerage premiums for the second quarter are up year-over-year, suggesting pricing is exceeding exposure changes.

“But on the program and binding side, rate increases seem to be falling a bit short of exposure changes, not a lot, just not covering the decrease in exposure units,” he said. “In the low-impact industries, we’re seeing a significant increase in open brokerage premiums as rate is exceeding the exposure change by a wide margin, while program and binding businesses are flattish. In other words, rate is offsetting the exposure declines.”

Cavaness said retention rates in May were very similar to pre-Covid-19 levels. New business is up in open brokerage, but programs are down, he said.

“And for our clients not up for renewal, we aren’t seeing a meaningful change in midterm policy adjustments nor cancellations either,” he said. “This is encouraging as it seems that revenue headwinds are mostly related to a pause in activity rather than companies going out of business.”

For example, he said demand was already bouncing back for Gallagher’s amateur sports program, in the trucking space and in New York construction.