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Gallagher will not chase 'just outrageous' pricing in broker/agency M&A

Themanner in which private equity-backed companies continue to consolidate thebroker/agency business is not necessarily without precedent.

Executivesat Arthur J. Gallagher &Co. during the company's Sept. 23 likened theheightened influence of private equity-backed firms to the way in which banksentered insurance distribution in decades past.

"Thebanks got heavily into insurance broking in the 1970s and 1980s,"Chairman, President and CEO J. Patrick Gallagher Jr. said.

"Aswe were coming out doing acquisitions," he added in reference to astrategy that "really got going" at Arthur J. Gallagher in 1986,"I would literally say to people: 'Look, if in fact what you want is justsimply the highest price for your agency, then the local bank will pay it.They'll pay multiples I won't pay. … On the other hand, if you want to be partof a strategic growth plan, if you want to say I really like the insurancebrokerage business and I want to be part of a brokerage run by brokers, thenwe're a good alternative. And you can still make tons of money.'"

JamesGault, president of retail property/casualty, also referenced the past influxof banks into the brokerage space, saying private equity firms have been"driving up prices somewhat" in a "very similar" way tobanks in the 1990s.

"I'm pleased to say there are very few deals we havenot gotten that we didn't want to get," he said. "But we're not goingto chase the pricing that sometimes becomes just outrageous that some of ourcompetition has set the bar at."

Banks are not the consolidators they once were in thebroker/agency business. Buyers under S&P Global Market Intelligencecoverage as banks or thrifts accounted for 19 acquisitions of U.S.-basedbrokers, agencies or their books of business announced year-to-date throughSept. 23. During the same stretch in 2006, by contrast, deals of the sorttotaled 36. Seven banks announced the sale of U.S.-based agencies and/orinsurance books of business to date in 2016.

Three private equity-backed brokers have individuallyaccounted for more U.S. broker/agency acquisition announcements to date in 2016than the bank-owned brokers put together. S&P Global Market Intelligencehas credited Apax PartnersLP-backed AssuredPartners Inc. with 22 announced acquisitions ofU.S.-based brokers and agencies year-to-date and -backedAcrisure LLC andOntario Teachers' Pension PlanBoard-backed BroadStreet Partners Inc. with 21 announced U.S.broker/agency acquisitions apiece. Hellman & Friedman LLC's is not far behindwith 17 announced acquisitions meeting the same criteria to its credit.

S&P Global Market Intelligence credited Arthur J.Gallagher with 18 announced U.S. broker/agency acquisitions year-to-date, and22 total across geographies, well ahead of the four attributable to publiclytraded peer Brown & BrownInc.

"We're constantly throwing a wide net. We're constantlytalking to people," Gallagher said.

Both Gault and Joel Cavaness, president of U.S. wholesalebrokerage, said they intend to do more transactions through the balance of 2016and into 2017, after they have done 13 and three, respectively, to date thisyear in their respective businesses.

"We haven'tslowed down," Cavaness said, noting a preference in his division foracquisitions of managing general agencies rather than wholesale brokerages.

Acrossbusinesses, CFO Douglas Howell reiterated that he continues to see no real needfor Arthur J. Gallagher to use much, if any, stock in financing M&A.

"Onthe other hand, if there is a good opportunity to buy nice tuck-in brokers …[by using] a couple million shares of stock in a year, I'm not going to losetoo much sleep about it," he said.

Thecompany issued 1.4 million of its common shares in conjunction with acquisitionseffective during the first half of 2016, which it valued at $55 million in theaggregate in its most recent Form 10-Q. The $174.8 million aggregate recorded purchaseprice for those deals included $88.7 million in cash paid plus items such as$12.6 million in escrow deposited and $18.4 million in the recorded amount ofearnout payable. Arthur J. Gallagher said it completed 21 acquisitions duringthe first half of the year with $70.4 million in aggregate annualized revenues.

Howellestimated that the company's M&A pipeline is valued at upward of $1billion, with approximately 250 prospective deals, or, as he said, "nicelittle businesses that are out there that would do better by beingpart of us."