Arthur J. Gallagher & Co.

Good afternoon, and welcome to Arthur J. Gallagher & Company's third quarter 2021 earnings conference call. Participants have been placed on a listen-only mode. Your lines will be open for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time. Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the cautionary statements and risk factors contained in the company's 10-K, 10-Q, and 8-K filings for more details on its forward-looking statements. In addition, for reconciliations of the non-GAAP measures discussed on this call, as well as other information regarding these measures, please refer to the earnings release and other materials in the investor relations section of the company's website. It is now my pleasure to introduce J. Patrick Gallagher, Chairman, President, and CEO of Arthur J. Gallagher and Company. Mr. Gallagher, you may begin.

Thank you. Good afternoon, and thank you for joining us for our third quarter 2021 earnings call. On the call with you today is Doug Howell, our Chief Financial Officer, as well as heads of our operating divisions. We had a fantastic third quarter. For our combined brokerage and risk management segments, we posted 17% growth in revenue, 10% organic growth and nearly 11% organic if you control for last year's large life sale that we've discussed frequently. Net earnings growth of 22%, adjusted EBITDA growth of 13%. And we completed five new mergers in the quarter, bringing our year-to-date closed merger count to 19%. representing nearly $200 million of annualized revenue. And if you add in the pending Willis Reinsurance merger, that number would be pushing $1 billion. So the team continues to execute at a very high level, growing organically, growing through acquisitions, improving our productivity, raising our quality, and most importantly, constantly building upon our unique Gallagher culture. A terrific quarter on all measures. Let me provide a brief update on our agreement to purchase Willis-Ree. On the regulatory approval front, we received competition clearance in five of six jurisdictions required to close, including clearance by the U.S. Department of Justice, the final jurisdiction in the U.K. where the CMA is reviewing the transaction. That's the final jurisdiction. That review is ongoing, but we believe we're in good shape. Although there is still work to be done at this point, we believe we're on track for a fourth quarter closing. On the integration front, hundreds of Gallagher and Willis-Ree professionals are hard at work ensuring we will be well-positioned to service our clients when we close. Our 40-year acquisition history allows us to leverage our proven M&A integration path. Integration is in our DNA. We're looking forward to welcoming 2,200 new colleagues to Gallagher as a family of professionals this holiday season. It's really exciting to think about all the talent and expertise that will be joining us. It's going to be incredible for our combined organization and our clients. Okay, back to our quarterly results, starting with the brokerage segment. Reported revenue growth was excellent at 16%. Of that, 9% was organic revenue growth. At the upper end of our September IR day expectation and nearly 10% controlling for last year's large life product sale. Net earnings growth was 23% and we grew our adjusted EBITDA at 13%. Doug will provide some comments on third quarter margin and our fourth quarter outlook. But needless to say, another excellent quarter from the brokerage team. Let me walk you around the world and break down our organic by geography, starting with our PC operations. First, our domestic retail operations were very strong with more than 10% organic. Results were driven by good new business combined with higher exposures and continued rate increases. Risk placement services, our domestic wholesale operations, grew 16%. This includes more than 30% organic in open brokerage and 5% organic in our MGA programs in binding businesses. New business and retention were both up a point or so relative to 2020 levels. Outside the U.S., our U.K. operations posted more than 9% organic. Specialty was 12%, and retail was a solid 6%, both supported by excellent new business production. Australia and New Zealand combined grew more than 6%, also benefiting from good new business. And finally, Canada was up nearly 10% on the back of double-digit new business and stable retention. Moving to our employee benefit brokerage and consulting business. Third quarter organic was up about 5% in line with our September IR Day commentary. Controlling for last year's large life insurance product sale, organic would have been up high single digits and represents a really nice step up from the 4% organic we reported for the second quarter and the 2% organic for the first. So we are experiencing positive revenue momentum and really encouraging sign for the remainder of the year and 2022. So total brokerage segment organic solidly in that 9% to 10% range, simply an excellent quarter. Next, I'd like to make a few comments on the PC market. Global PC rates remain firm overall, and pricing is positive in nearly all product lines. Overall, third quarter renewal premium increases were about 8%, and similar to increases during the first half of this year. Moving around the world, U.S. retail premiums up about 8%, including nearly 10% increases in casualty and professional liability. Even workers' comp was up around 5%. In Canada, premiums up about 9% driven by double-digit increases in professional liability and casualty. Australia and New Zealand combined, up 3% to 4%. And U.K. retail was up about 7% with double-digit increases in professional liability, while commercial auto was closer to flat. Finally, within RPS, wholesale open brokerage premiums were up more than 10% and binding operations were up 5%. Additionally, improved economic activity, even despite the Delta variant and supply chain disruptions, are leading to positive policy endorsements and other favorable midterm policy adjustments as our customers add coverages and exposures to their existing policies. So premiums are still increasing almost everywhere. As we look ahead over the coming quarters, I see the PC market remaining difficult with rate increases persisting for quite a while. In the near term, we don't see any meaningful changes in carrier underwriting appetite, capacity, attachment points, or terms and conditions. Long term, markets do not appear to be seeing a slowdown in rising loss costs. Global third quarter natural catastrophe losses likely in excess of $40 billion. Increased cyber incidences. social inflation, replacement cost inflation, and supply chain disruptions. And all this is before factoring in further increases in claim frequency as global economies recover and become even more robust. All of these factors, combined with low investment returns, suggest that carriers will continue to push for rate. I just don't see a dramatic change for the foreseeable future. So it's still a very difficult and even hard in many spots global PC environment. But remember, our job as brokers is to help our clients find the best coverage while mitigating price increases through our creativity, expertise, and market relationships. As we think about the environment for our employee benefits, let's say improved business activity, lower unemployment, and increased demand for our consulting services is driving more revenue opportunities. And our customers and prospects continue to rapidly shift away from expense control strategies to plans and tactics that will help them grow their business. And with rebounding covered lives in one of the most challenging labor markets in memory, our consulting businesses are extremely well positioned to deliver creative solutions to our clients. So as I sit here today, I think fourth quarter brokerage segment organic will be similar to the third quarter, and that could take full year 2021 organic towards 8%. That would be a really nice improvement from the 3.2% organic we reported in 2020. To put that in perspective, 8% would be our best full year brokerage segment organic growth in nearly two decades. And we think 2022 organic will end up in a very similar range. Moving on to mergers and acquisitions. I mentioned earlier we completed five brokerage mergers during the quarter, representing about $16 million of estimated annualized revenues. I'd like to thank all our new partners for joining us, and I extend a very warm welcome to our growing Gallagher family of professionals. As I look at our tuck-in M&A pipeline, we have more than 50 term sheets signed or being prepared, representing around $400 million of annualized revenues. So even without the reinsurance merger, it's looking like we will finish 2021 strong, wrapping up another successful year for our merger strategy. Next, I would like to move to our risk management segment, Gallagher Bassett. Third quarter organic growth was 16.6%, even better than our September IR day expectation. Margins were strong, too. Adjusted EBITDA margin once again came in above 19%. Results continue to benefit from late 2020 and early 2021 new business wins, in addition to further improvement in new arising claims within general liability and core workers' compensation. Just an exceptional quarter from the team. Looking forward, while our fourth quarter comparison is somewhat more challenging, the recovering global economy, improving employment situation, and excellent new business production should result in fourth quarter organic over 10%. That puts us on track for double-digit full-year organic and an EBITDAG margin nicely above 19%. As I look back over the last nine months, I can't help but to be thoroughly impressed with our team and our accomplishments. Our commitment to our clients and to each other is evident in our successes, and that is due to our unique Gallagher culture. In these challenging times, our clients are continuing to count on us, and I'm proud of our team's unwavering client focus. Gallagher's unique culture is founded on the values in the Gallagher way. Those values have kept us on a steady course throughout the pandemic. And time and time again during these past months, our clients have shared their trust and appreciation for the value Gallagher brings to the table. It comes down to talented individuals tapping into the power of our expertise across the globe, working together during this ongoing pandemic to continue to deliver for our clients. That's the Gallagher way, and it's the backbone of who we are as an organization. Okay, I'll stop now and turn it over to Doug.

Doug? Thanks, Pat, and hello, everyone. As Pat said, a fantastic third quarter. Today I'll touch on a few items in the earnings release, predominantly organic and margins. Then I'll walk you through our CFO commentary document and finish up with my typical comments on cash, liquidity, and capital management. Okay, let's move to page four of the earnings release and the brokerage segment organic table. Headline, all-in organic is 9%. Outstanding on its own, but as Pat said, really running closer to 10% due to last year's life sale. Either way, a nice step up from the 6% we posted in the first quarter and the 6.8% in the second. As we sit now, I'm seeing a fourth quarter organic again pushing that double-digit level. Turning now to page six, to the brokerage segment adjusted EBITDA margin table. Okay, underlying margin after controlling for the live sale was around 160 basis points. Let me take you through the math to get you to that. First, headlining margins were down 48 basis points, right about where we forecasted at our September IR day. So controlling for the large live sale would bring us back to flat. Second, in September, we forecasted about 25 million of expenses returning into our structure as we emerged from the pandemic and a small amount of performance comp time. Recall expenses returning mostly relate to higher utilization of our self-insured medical plans, resumption of advertising costs, more use of consultants, merit increases, and a small pickup in T&E expenses. We came in right on that forecast. So controlling for these expenses also brings you to that underlying margin expansion of about 160 basis points. That feels about right on organic in that 9% to 10% range. Looking forward, we think about $30 million of our pre-pandemic period expense savings return in the fourth quarter. And if you assume, say, 9% organic, math would say we should show 90 to 100 basis points of expansion here in the fourth quarter. So in the end, the headline story is that we have a really decent chance at growing our full year 21 margins by nearly 150 basis points. And that's even growing over the life sale and the return of costs as we come out of the pandemic. Add that to expanding margins over 400 basis points last year, means we'd be growing margins more than 550 basis points over two years. That really demonstrates the embedded improvements in how we do business. No matter how you look at it, it's simply outstanding work by the team. Moving to the risk management segment EBITDA table on page seven, adjusted EBITDA margin of 19.5% in the corner is an excellent result. Year-to-date, our margins are at 19.2%, which underscores our ability to maintain a large portion of our pandemic period savings. Looking forward, we think we can hold margins above 19% in the fourth quarter and for the full year. That would result in about 100 basis points of margin expansion relative to 2020, another fantastic margin story. Now let's shift to our CFO commentary document we post on our IR website, starting on page 4. You'll see most of the third quarter items are close to our September IR day estimates. One small exception is brokerage segment amortization expense, about $3 million below our September IR day estimate. It's simply because we finalized our valuation work on a recent 21 acquisition, which causes a small catch-up estimate change. We adjusted that out on page one of the earnings release, so it doesn't benefit adjusted EPS. flipping to page five in the corporate segment table, comparing actual third quarter results in the blue section to our September IR estimates in gray. Interest in banking line on a reported and adjusted basis were both in line. The non-GAAP adjustment here is that $12 million charge related to the early extinguishment of debt that we issued in May related to the terminated Aon Willis remedy package. Acquisition cost line, mostly related to the WSRE transaction, came in a bit higher than our IR day estimate on a reported basis, but in line on an adjusted non-GAAP basis. We will see some additional transaction-related costs here in the fourth quarter. Should have a sense of what those costs might be at our December IR day. Again, we plan on presenting these costs as a non-GAAP adjustment as well. On the corporate cost line, in line on an adjusted basis after controlling for $5 billion of a one-time permanent tax item. That's a non-cash, and it's simply a small valuation allowance related to a couple international M&A transactions. And finally, clean energy. What a terrific quarter. Came in much better than our estimate thanks to a warm September, less wind in certain areas of the country, and higher natural gas prices. We are increasing our full-year net earnings range to $87 to $95 million on the back of the third quarter upside. Okay, as for cash and capital management and M&A, as you heard Pat say, we have a strong pipeline of tuck-in merger opportunities, and that's on top of the Willis reacquisition that we hope to close here in the fourth quarter. In September 30, cash on hand was about $2.7 billion, and we have no outstanding borrowers on our credit facilities. We plan to use that cash, cash flow generated during the fourth quarter, and our line of credit to fund the acquisition of Willis-Reed. Before I turn it back over to Pat, our year-to-date performance deserves a mention. Our brokerage and risk management segments combined have produced 15% growth in revenue, nearly 8% organic growth. We completed 19 new mergers this year with nearly $200 million of estimated annualized revenue, Net earnings margin expanded 81 basis points. Adjusted EBITDA margin expanded 153 basis points. And our clean energy investments are on track to being up 30% this year, setting us up nicely for substantial additional cash flows for the coming five to seven years. A terrific quarter in nine months on all measures positions us for another great year. Okay, those are my comments. Back to you, Pat.