The Signal Interview
Pat Gallagher sits in a brown leather chair in his headquarters in Rolling Meadows, Illinois, and recalls his early memories of the man who named the insurance brokerage he has now led for 30 years.
“As a little boy, I could tell the passion he had for this business. He used to put me in a chair like the one I’m sitting in and say, ‘How does it feel,’” J Patrick Gallagher Jr says of Arthur J Gallagher, his late grandfather, who launched the family business in 1927 by opening an insurance agency in nearby Chicago.
There was never much doubt that Pat would join the business. He started on an internship in 1972, when three of the four interns were cousins, and remembers his father’s and uncle’s instructions as he rose through the company: “Don’t screw it up.”
Arthur J Gallagher (now more commonly known as just Gallagher) is still a family affair, with Pat’s brother, sister, daughter, three sons, and two nephews all listed as employees in its latest proxy filing. But the company went public more than four decades ago, the family holds only about 1% of the shares, and it has 56,000 other people on its payroll. So why does a Gallagher still run it?
“Did you look at our [stock] chart? It answers the question,” the third-generation CEO answers. Since its 1984 listing, the company has outperformed the US market tenfold, attaining an $87 billion valuation that puts it between Marsh McLennan and Aon in the rankings of the world’s largest brokerages. Both rivals are larger in revenue terms, but Gallagher’s stock has easily outpaced theirs in the past five years.
The pitch behind Gallagher’s acquisition machine
That growth has been fueled in large part by acquisitions — “well over 500″ of them on Pat Gallagher’s watch, of which he estimates fewer than 5% didn’t work out.
“You’ll hear from the B-school guys that roll-ups don’t work,” he says, referring to the term for successive tuck-in acquisitions of businesses in a single sector. “But we’re not a roll-up business; we’re building a company together in a partnership.”
There are 30,000 brokerage and insurance businesses in America, competing for mid-sized accounts in the millions of dollars. The partnership pitch Gallagher offers when he approaches one of them with a deal in mind is that his firm can bring potent data analytics and a global reach.
Plugged into Gallagher’s systems, a broker can show a local trucking firm with $10 million in cover that most other clients with the same profile are buying twice as much, and convince the client to do the same, he says. “We can sit at the table and say, ‘We know your business as well as you do.’”
As more companies trade globally, Gallagher can also offer a network in more than 130 countries. “The local broker is going to say he can handle the account in Peru and Mexico and Argentina. The truth is, he can’t — but we can handle any account, any line of business anywhere in the world.”
His company’s global reach can unlock those opportunities for local operators, Gallagher says, telling the story of one broker whose business it acquired in Iowa: “We gave him cash and stock. His book of business is up five to 10 times. His kids went to college on the cash. He’s the happiest guy on the planet.”
Gallagher is paying the kind of money that would allow such entrepreneurs to walk away wealthy, he adds, but they tend to stay. Most are family enterprises, he notes, and in a family business, “there’s no halfway house — you’ve got to work your ass off.”
For 41 years, Gallagher says, the company’s acquisitions have been “building a moat around a castle — and that moat is what separates us from the middle market.” But if scale begets scale, he has reason to argue that its marketplace remains competitive as the insurance industry bucks the wider slowdown in mergers and acquisitions.
US regulators asked in March for more information on Gallagher’s proposed $13.5 billion acquisition of AssuredPartners, an 11,000-person business with 400 offices across the US, the UK, and Ireland. Even if federal officials give their blessing, its intervention has pushed back the date by which Gallagher had hoped to close the largest deal of its kind in industry history.
Even at its size, Gallagher has little pricing power, he insists. Global insurance premiums have passed $7 trillion, he notes: “Last year we pressed about $125 billion of premiums, so we have no market share.”
‘The most important business in the world’
Gallagher’s father, John, used to say that nobody chose a life in insurance — they were either born into it, or fell into it. But Pat paints his industry as a heroic one, that’s nothing less than the oxygen of commerce.
“It’s the most important business in the world,” he says repeatedly, likening insurers to first responders or doctors in their willingness to show up for people (and businesses) in their hour of need.
“I think our industry’s misunderstood. People say ‘Who are these greedy bastards?’ They say that we’re an unwanted tax, that this is a scam. I’ll tell you what, visit all the towns hit by tornadoes and ask them. We put people’s lives back together. It’s us. It’s not the federal government; it’s us.”
The idea that Gallagher should “run to problems, not away from them,” is one of 25 “shared values” written down by his uncle Robert, a former chairman, when the company was going public. The Gallagher Way describes the company culture as both “competitive and aggressive” and “warm [and] close.” Leaders need followers, it says, and they have to earn those followers’ loyalty rather than demand it because “fear is a turn-off.”
Pat Gallagher recites his uncle’s dictums as he argues that “culture is the single biggest factor of success or failure in any human enterprise, including your family.” What matters most, he says, is simply whether people can work together, “whatever folderol you have in terms of being CEO.”
After three decades in charge, Gallagher has become one of the longest-serving chief executives in America, and will move another rung up the list as Warren Buffett steps back, 60 years after he took control of Berkshire Hathaway.
At 73, Gallagher betrays little interest in handing over from the third generation to the fourth. “Yesterday, I spent an hour and a half with 100 of our young people — how fun is that? Tomorrow I’ll spend time with a client. This is what I love to do. As long as I’m capable, the board is stuck with me.”