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Gallagher sees more broker mergers coming

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The Carmel office of Arthur J. Gallagher & Co. just made its sixth acquisition in five years, and it expects looming changes to tax and health laws to produce even more chances to snap up benefits brokers this year.

The local Gallagher office acquired DeHart Benefit Solutions on Jan. 4. President Becky DeHart brought over about 50 clients, who she now serves under the Gallagher umbrella.

Meanwhile, Illinois-based Gallagher tapped Dane Hudson—the man who engineered the six deals in Indiana—to pursue acquisitions in 11 Midwestern states. Hudson still works out of the Carmel office, but Gallagher’s operations are now led locally by longtime benefits broker Jess Stump.

Stump, who joined Gallagher by selling his business in 2008, will continue to serve all his old clients, as well.

“It’s a great way to grow when organic growth is slow,” Hudson said of Gallagher’s acquisition strategy. “The interest is huge from a merger-partner prospect standpoint.”

A big factor driving interest this year, Hudson said, is the prospect that the capital gains tax cuts pushed by President Bush in 2003 are set to expire at year’s end. That means if a business owner is thinking about selling, doing so now could yield 5 percent to 10 percent more in proceeds than it would next year.

And there are plenty of trends in the industry that could push benefits brokers to sell. DeHart found that it took as much or more time to stay on top of the new regulations flowing out of the 2010 health reform law as it did finding and serving clients.

In addition, brokers are seeing their commissions squeezed because the Obama administration declared such costs an administrative expense as part of the health reform law’s requirement that health insurers spend no more than 20 percent of premiums on administration and profits. As a result of that ruling, many health insurers have reduced their commissions to brokers.

Stump thinks many small benefits brokerages are feeling the pinch. He thinks Gallagher can boost its annual revenue in Indiana from $5.5 million now to $8.5 million by year end, just through acquisitions.

“It’s almost impossible to try to run a business and keep up with all this stuff,” he said, noting that Gallagher will look not only at health insurance brokers, but also human resources consultants and retirement plan advisers.

As Gallagher’s Carmel office has grown, it hasn’t held on to all its employer clients. After Hudson sold his firm, Strategic Health Plans, to Gallagher in 2007, the firm lost its account with Subaru of Indiana Automotive. And even after adding DeHart’s clients, Gallagher has fewer clients now—270—than the 300 it had in 2009.

But Hudson and Stump are confident the resources of Gallagher—the fourth-largest benefits firm in the nation, according to Business Insurance magazine—will help it add $1 million in organic growth this year.

Those resources include local actuaries to help employers track their health care spending and push back if insurance companies come up with wildly different numbers. They also have teams of attorneys and custom software tools to help employers comply with the new regulations from the health reform law, and tools to help employers improve communication with employees, which is key for successful wellness programs.

“It’s going to be very hard for the small broker to compete,” Hudson said.

 

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