Arthur J. Gallagher & Co.

Good afternoon, and welcome to Arthur J. Gallagher & Co.' 's fourth quarter 2023 earnings conference call. Participants have been placed on the 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. The company does not assume any obligation to update information or forward-looking statements provided on this call. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the Information Concerning Forward-Looking Statements and Risk Factors sections contained in the company's most recent 10-K, 10-Q, and 8-K filings for more details on such risks and uncertainties. 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, Jr., Chairman and CEO of Arthur J. Gallagher & Co. Mr. Gallagher, you may begin.

Thank you very much, and good afternoon, everyone. Thank you for joining us for our fourth quarter 23 earnings call. On the call with me today is Doug Howell, our CFO, as well as the heads of our operating divisions. We had a strong fourth quarter to wrap up another fantastic year. All measures were right in line with what we said during our December IR day. For our combined brokerage and risk management segments, we posted 20% growth in revenue. Headline 8.1% organic growth, but that's more like 9.4% controlling for the 606 accounting and large life case timing. We also had a terrific merger and acquisition quarter. We completed 14 mergers totaling $410 million of estimated annualized revenue. Gap earnings per share of 30 cents and net earnings margin of 2.8% were impacted by the counterintuitive earn out payable accounting that Doug will elaborate on in a few minutes. So better to look at it more on a comparable basis. Adjusted earnings per share We're $2.22, up 23% year over year, and we posted an EBITDAG margin of 30.1% of 69 basis points over fourth quarter 22. What a terrific quarter to close out an incredibly good year by the team. When I think about our growth for the full year, we are up 18% in revenue. That's an increase of $1.5 billion. That's amazing. Moving to results on a segment basis, starting with the brokerage segment. Reported revenue growth was 20%. Organic headline was 7.2%, but I see it more like 8.7% without the accounting and timing noise, and 11% if you include interest income. Adjusted EBITDA was $647 million, growing 21% year over year, and we posted adjusted EBITDAG margin expansion of 48 basis points. Let me give you some insights behind our brokerage segment organic, and just to level set, the following does not include interest income. Our global retail P&C brokerage operations posted organic of 8%. This includes about 8% organic in the U.S., 8% in the U.K., 5% in Canada, 10% in Australia and New Zealand. Our employee benefit brokerage and consulting business posted organic of 2% or 6%, controlling for the timing of those large life cases. Shifting to reinsurance wholesale and specialty businesses, overall organic of 14%. This includes Gallagher Re at 12%, U.S. Wholesale at 12%, and U.K. Specialty at 16%. So all of these are very similar to what we were seeing throughout the year. Next, let me provide some thoughts on the PC insurance pricing environment, starting with the primary insurance market. Global fourth quarter renewal premiums, which include both rate and exposure changes, were up 8.5%. That's in line with the 8% to 10% renewal premium change we have been reporting throughout 22 and 23. Renewal premium increases continue to be broad-based up across all of our major geographies and most product lines. For example, property is up 15%, even in a slow cat property quarter. General liability is up 6%. Workers' comp is up 2%. Umbrella and package are each up about 10%. Shifting to the reinsurance market. 1-1 renewals were orderly and reflected a more balanced supply-demand dynamic. Continued strong demand for property cat cover was met with sufficient reinsurance capacity from existing reinsurers and cat bonds. Importantly, reinsurers continued to exercise discipline on pricing and terms, not giving back the structural changes achieved last year. In casualty, while there was adequate supply, most casualty treaties experienced pricing pressure. Specialty lines renewed mostly flattish, however coverage limitations continued on war-related products. So in our view, insurance and reinsurance carriers continue to behave rationally, pushing for a rate where it's needed to generate an acceptable underwriting profit. Property is still needing rate, and more and more we're hearing about the need for rate and casualty lines. If prior-year development turns into a big concern, we think it could be a multi-year journey of rate increases. All that said, always remember, Our job as brokers is to help our clients find the best coverage while mitigating price increases. So not all these renewal premium increases ultimately show up in our organic. Moving to our customers' business activity, overall it continues to be strong. During the fourth quarter, our daily indications showed positive mid-year policy endorsements and audits ahead of last year's levels. So we are not seeing a slowdown. The same strength is also evident in the U.S. labor market with continued growth in non-farm payrolls and low unemployment rate, which is why I believe our HR consulting retirement and benefits business will have terrific opportunities in 24. As we sit here today, we are very well positioned. 2023 was a great new business year, and I believe we will continue to win new clients while retaining our existing customers. We have incredible niche expertise. Our client service is top notch and our data and analytics continues to distance ourselves from the competition. We can handle any account of any size anywhere around the globe. All this leads me to reaffirm that we will still see further 24 brokerage organic in the 7% to 9% range that would lead to another outstanding year. Shifting to mergers and acquisitions. We had an excellent fourth quarter, completing 13 new brokerage mergers, representing about $350 million of estimated annualized revenue. I'd like to thank all of our new partners for joining us and extend a very warm welcome to our growing family of Gallagher professionals. We are off to a strong start in 24. We've already closed core brokerage mergers here in January for about $30 million of annualized revenue. We also have around 40 term sheets signed or being prepared, representing around $350 million of annualized revenue. We know not all of these will ultimately close, but we believe we'll get our fair share, clearly a very strong pipeline. Moving on to risk management segment, Gallagher Bassett. Fourth quarter organic growth was terrific at 13.2%, full year at 15.8%. adjusted fourth quarter EBITDAG margins of 21% and full year at 20%. All this right in line with our December expectations. We also completed one merger in Australia with expected annualized revenue of about $60 million, adding new capabilities in the disability space. Looking forward, we continue to see 24-year organic in the 9% to 11% range and full year margins close to 20%. would be another outstanding year. And I'll conclude with some comments regarding our bedrock culture. It's a culture of client service, ethics, and teamwork encapsulated in the Gallagher way. It is an unrelenting culture of excellence that helped drive full year 23 results for our combined brokerage and risk management segments of 18% growth in revenue, of which 10% was organic. 51 mergers with nearly $900 million in estimated annualized revenue and 20% growth in adjusted EBITDA. Most importantly, we have a culture that our people believe in, embrace, and live every day. It's a huge competitive advantage and will continue to fuel our success and growth. Growth, that is the Gallagher way. Okay, I'll stop now and turn it over to Doug. Doug?

Thanks, Pat, and hello, everyone. Today I'll walk you through our earnings release, commenting on fourth quarter and full year organic and margins by segment. I'll also provide some comments on our full year 24 outlook. We'll then shift to the CFO commentary document that we post on our IR website, where I'll provide some comments on our typical modeling helpers and then give two short vignettes, one on investment income and another as a quick refresher on earn-out payable accounting. I'll then conclude my prepared remarks with a few comments on cash, M&A, and capital management. Okay, let's flip to page three of the earnings release. Headline fourth quarter brokerage organic of 7.2% is right in line with our December IR day expectation of 7 to 7.5%. But as Pat noted, we see that closer to 8.7% and organic of 11% if we were to also include interest income. That's a darn good quarter no matter what percentage you want to focus on. A couple other puts and takes to call out on that page. First, contingents did come in a little bit better than our December thinking due to more favorable carrier performance than we thought at that time. And second, base commission and fee organic of 6.5%. That's where you should levelize for the impact of 606 and those life cases. Controlling for those takes that over 8%. Looking ahead to 24%, Our brokerage segment organic outlook is unchanged from our late October and mid-December expectations. We still see full-year organic growth in that 7% to 9% range. All right, let's flip to page five of the earnings release, to the brokerage segment adjusted EBITDA table. Adjusted fourth quarter EBITDA margin was up 48 basis points. But remember, to get to that requires recomputing last year's fourth quarter using current FX rates. We've done that in this table, and it's 31.3% for fourth quarter 22. So posting a 31.6% margin this quarter gives you that 48 basis points of margin expansion. And that's right at the high end of our December IR day expectation. Then if you control for the roll in a buck and other mergers we close late in the quarter that have some seasonality, that would have been 150 basis points of expansion. That's simply terrific work by the teams. Looking ahead to next year, we anticipate seeing some full year margin expansion starting at 4% organic. And if organic was, say, double that, maybe around 60 basis points of expansion. And note, that includes about 40 basis points of pressure against it due to the roll in of M&A, mostly buck. On a quarterly basis, the headwind is about 80 to 90 basis points, in the first quarter 24. So please don't forget to reflect this nuance in your models. Okay, moving to the risk management segment and the organic and EBITDA tables on pages five and six. Another excellent quarter for Gallagher Bassett, 13.2% organic growth and margins at 21%. We continue to benefit from new business wins and excellent retention. Looking forward, even as we lap growth associated with some large new business wins from early 23, we see full year 24 organic in that nine to 11% range and margins around 20%. That's again, that's unchanged from our December views. So let's turn to page seven of the earnings lease and the corporate segment shortcut table. Total segment adjusted fourth quarter numbers came in a little better than the favorable end of our December IR day expectations. due to less borrowing our line of credit and slightly lower corporate expenses. So now let's shift to the CFO commentary document. To page three, that's where we provide many modeling helpers. Most of the fourth quarter actual numbers are very close to our December IR day estimates. We've also now added 2024 information, so take a look at that. In particular, as we're, you know, take a look at FX. We are expecting a small headwind to EPS in the first half within the brokerage segment. Now moving to page four of the CFO commentary document to the corporate segment outlook for full year 24. There's no change there to our full year estimate that we provided six weeks ago during our IR day, but we are now providing quarterly estimates. So please take some time to refine your models with this added information. When you get to page five, this page shows our tax credit carry forwards. You'll see what we discussed at our December IR day. We're able to reestablish a portion of our tax credits following a change in tax method election when we filed our 22 U.S. federal tax return here in the fourth quarter. Accordingly, as of December 31st, we have about $870 million of tax credits available. That's a nice future cash flow sweetener that helps us fund future M&A. So let's turn to a new table that we put in at the top of page six. We thought this would be helpful as we've been getting a lot of questions about our investment income line. The punch line is that this line includes items such as premium finance revenues, book gains, and equity investments in third party brokers in addition to interest income. So this table breaks it down for you by quarter. We hope you will find this helpful. We've also renamed that line in our financial statements to clarify that it contains other items. No numbers change. We've just broadened the descriptor. So just shifting down on that page on page six, you'll see total brokerage rollover revenue for fourth quarter was $180 million. That's consistent with our IR day expectation. Looking forward, we've included estimated revenues for mergers closed through yesterday for the brokerage segment in that table. and for the risk management segment in the text below that table. Based on brokerage and risk management mergers closed through yesterday, we're estimating around $540 million of rollover revenues to be recognized in 24. And also, don't forget, you'll need to make a pick for future M&A and also add interest expense as we fund a portion of those acquisitions via future borrowings. So while I'm on the topic of M&A, as we foreshadowed in December, we did increase our estimated earn-out payable for Willis-Reed during the quarter because we now have good line of sight of what we might pay out in the first quarter of 2025. Remember, the accounting for earn-out payables is a bit backwards. If expectations of performance are more favorable, it creates gap expense. And if expectations of performance are less favorable, it creates gap income. That's what Pat meant when he said counterintuitive accounting. That said, we do adjust out these estimate changes, but worth a highlight because it does create some gap earnings noise. The punchline in all this, and what's more important, our reinsurance business is performing extremely well. So moving to cash capital management and M&A funding. Available cash on hand at December 31st was about $400 million. And with another year of strong expected cash flow generation here in 24, we estimate about $3.5 billion of capacity to fund M&A in 24 using only free cash and incremental borrowings. So those are my comments. As I reflect on 23, two metrics for our combined brokerage and risk management segments really sum up how good our year was. Revenue growth of 18%, up $1.5 billion. and adjusted EBITDA growth of 20%, or nearly $550 million. So the team delivered another terrific year, and we all have tremendous momentum to do it again here in 24. Back to you, Pat.

Thank you, Doug. And operator, I think we could go to questions now, please.

Thank you. The call is now open for questions. If you have a question, please pick up your handset and press star 1 on your telephone at this time. If you are on a speakerphone, please disable that function prior to pressing star one to ensure optimum sound quality. And you may remove yourself from the queue at any point by pressing star two. Again, that's star one for questions. Our first question is coming from Elise Greenspan with Wells Fargo. Please proceed with your question.

Hi, thanks. Good evening. My first question, within the 7% to 9% organic brokerage guide for 2024, can you guys give us a sense of what you're assuming for pricing and economic exposure throughout the course of the year?

Well, I think when we did that in our budget process, the range of 7% to 9%, it's pretty much so what we're seeing today throughout the

uh next year is is really the the assumptions is where are we today in pricing um where are we in exposure units what we've been running here this year we don't see a lot of change to that next year and then when you guys go through and come up with this seven to nine are you assuming um that all of your businesses will be in that range i mean um you know you've been seeing really strong growth within you know reinsurance wholesale and specialty Are those expected to continue to be above and maybe some of the others like benefits might be below? How do you see the different businesses shaking out in 24?

All right. So on that point, not every business is given a flat target number or do they view it based on what they're seeing in the marketplace rate, exposure, opportunities, hiring, you know, when they're hiring new producers. So every business does that differently. What would I say is being different? Who's on the upper end of the range and who's on maybe the lower end of the range? Benefits might be a little bit on the lower end of the range, and you might see reinsurance and specialty on the upper end of the range in that. But by and large, each business unit rolls it up, and that's how we get to that 7% to 9% range.

And then, Pat, you mentioned some interesting comments on the casualty side. We're starting to hear thoughts about you know, pricing pressure, you know, and just, you said, right, multi-year journey here. Can you just tell us like what you're seeing and then, you know, how you expect, you know, this cycle could transpire, assuming we do start to see, you know, more reserve holes emerge across the industry?

Well, I just think it makes some logical sense. At least when you take a look back, we saw this in the property side, you know, nobody touched values for five, six, seven years because inflation was zero. And so you've got a bunch of reserves on the casualty side set at those very same years that all of a sudden you come into a spike in inflation. And yes, it's been tamped down, but it's still there. And you look back at those reserves and then you take a look at these settlements that are, in fact, nuclear. And you start to say, well, all right, how well are those reserves going to hold up? Now, look, I can't speak for the industry as a whole. But my sense in the meetings that we're having and discussions we're having with a number of the various carriers is that they have some concerns there, that they are not necessarily comfortable with exactly where they are. And so our view on that is, okay, if you take a look at if there were inflation in those numbers and if it were something where you had to get them right, you'd have to see price increases in order to do it. I don't think that that's something with the kind of payout structure that you have in casualty that you need to get in one year. So I think you're going to see possibly affirming that does, in fact, take a few years to catch up with reality.

And then one last one. Have you guys reserved to the maximum on the earn out associated with the wellness redeal?

Effectively, yes. I mean, we still have to accrete that for one more year, so it might be, I think there's $50 million of accretion that will go through the financial statements this next year.

Thank you.

Thanks, Elise. Thanks for being with us.

Thank you. Our next question is coming from Mark Hughes with Truist Securities. Please proceed with your question.

Yeah, thanks. Good afternoon.

Hi, Mark.

Pat, did you give the organic for open brokerage versus the program business within wholesale?

Well, I think open brokerage has been where we've had the real nice run-up. I mean, it's probably double to triple what's going on in the program business. So if you look at open brokerage at running around 13% to 15%, you're probably looking at five on the programs. And then...

What's your take on the property market? Do you think a little bit of deceleration there? Well, one, do you think that's the case? And two, would it have any kind of material impact on your organic?

No, I think, well, I mean, any change in pricing is going to have an impact on organic, but I'm not. No, I don't see carriers at this point saying, oh, the good news is I can take the price backwards. So we are still seeing a push on property rate. And then you do, of course, have carriers incredibly focused on valuations. You know, that kind of went by the wayside for years. There was no inflation, fines, 0%, blah, blah, blah. Now claims are coming in. They didn't get their premium for it. The replacement costs are substantially higher than they may be predicted. And so I think you do have a little bit of time left. where there's going to be some valuation correction, and I do think there's a need for continued rate strengthening.

Thank you very much. Thanks, Mark. Thanks for being with us.

Thank you. Our next question comes from the line of Mike Zaremski with BMO Capital Markets. Please proceed with your question.

Hey, good evening. So, our first question on... On M&A, you guys have been extremely successful integrating and acquiring firms. But I'm just curious if the landscape has changed a bit in terms of kind of what's available. And I guess just for example, you've announced a few bank-owned brokers. I believe historically there's two of your competitors that did most of those. And they would one of them would talk openly about, you know, those those deals being tougher, meaning take a couple of years to turn them into the growth machines that those companies are. And, you know, Buck was a little different, too. So just curious if, you know, the you know, the the pool is changing a bit. And so we should kind of expect slightly different types of deals going forward versus the historical five, 10 years.

Well, I'll tell you. First of all, let's remember, I think that when we do acquisitions, we like to talk about the fact that we're getting two things. We're not just getting revenue and earnings, which of course we want we get, but we're getting terrific brains. And the bank-owned deals happen to be more sizable, and they've got a lot of terrific people. And in addition to the brainpower we're getting, we're getting expertise in the niches from the brainpower, but we're also getting more volume in areas that now we're spreading the brand. And it It adds to the virtuous circle of knowing about Gallagher, listening to the call, accepting the call. And I think what we're seeing is that our acquisition targets come aboard, and I guess this is the right way to phrase it, they kind of get on fire. It's our organic engine. There's no question about it. They come in. They've got a lot to say. Now, the bank deals are bigger, but if you take our day in and day out, roll in acquisitions, These are people that more often than not have not been able to really tackle the large accounts in their own geography. And the minute they sign on to us, they're out telling those clients, we're part of Gallagher. Here's what we've got. Let me tell you about the expertise we've got. Let me show you some of the things that we do in data and analytics. You've all heard us talk about drive. What do people like you buy? What kind of limits should you have? So we arm them with tools that they just, whether they're in a bank or not a bank, they've never had before. So the excitement level does not take a long time to resonate. The calls go out pretty immediately. Hey, did you hear that we're part of another firm? And these are not folks that are in any way on their back foot. They are on the front foot and moving literally at the day of closing. Yeah.

Let me add one thing on that. I think that the organic and cadence and Eastern was running very similar to what we're seeing in our similar geographies and similar areas. So I, I, I think your premise was that it would take a while to restart them. I think they're already starting. I think they're going after it. Buck is already showing terrific organic growth. We don't get it in our numbers for a year. Somebody goes out and sells something within the year, but we never get organic credit for that. We get the revenues for it, but we don't get the organic growth credit in our numbers. I wouldn't say that the premise was of the ones that we bought that they needed a restart.

No, in fact, Mike, I'll tell you what we're referring to in our process is the Gallagher effect. The Gallagher effect is what happens after you announce you're part of Gallagher. It's not a slow down, explain it. It takes their list, their pipeline of prospects, and energizes the team to go back and tell about, we really have something new to talk about here. And it's not just about, I know you, I've called on you many times, I've got a good relationship in the marketplace, can I talk to you about your pricing? It's a hard market, soft market, no, no. This is, let me bring some data analytics, let me show you what's going on in our niches. We have experts in your specific area that I think you're gonna wanna meet. It's pretty exciting, actually. When I get a chance to get involved, it turns me on.

Okay, I appreciate that, Collar. Switching gears, and you could tell me if I'm splitting hairs here, but on the December investor day, there was a number of reasons. You kind of lowered the very near-term 4Q organic growth estimates versus what you had previously been thinking. I think a couple of those sounded like they, you know, there were more of like a push into 24, like on the life insurance side and maybe entertainment business rebounding. But I didn't think you really brought up your, you didn't bring up your, your 24 guide. So I guess, should we, you know, seasonally, obviously we know there's seasonality in the quarters, but should we be thinking one cue or the first half of the year, you know, gets a little bit more of a bump than it does historically, or am I just reading too much into things?

I think you're missing the magnitude of this in the quarter. Let's call it $10 million of a cut, $15 million in total here that gets pushed out on a $10 billion business next year. Okay, it's 10 or 15 basis points in there. So that wouldn't be enough to change that 7% to 9% guide in there.

Okay. And just lastly, you're one of the leaders. You've been doing it successfully for a while in terms of moving folks. Sorry, you're in your center of excellence. You know, any changes in kind of the trajectory there in terms of what you guys talked about last year in terms of kind of the goal of, you know, kind of doubling maybe the percentage of employees there over the next five or so years?

I think what we said is that over the next five to seven years, we'll be twice as many people there as we have there now. I think what's really exciting about all the work that we've done for almost two decades there now has put us in a position of being so standardized in many of the processes that we do. We now have the opportunity to unleash AI on that because it's already done. We have made that investment And now what we can do is deploy AI against it. And those folks, if you're going to hire twice as many folks, they're going to end up with better jobs over there because they're going to be using AI. So our colleagues there are going to be well rewarded by deploying that technology into it. So we are really fired up about it.

Yeah, let me hit a couple other items. Why would we need to double our employee count there? Because we're going to double the business. And that's going to lead to plenty of opportunity there. Secondly, and I think this is a hugely important point, Standardizing a brokerage business from an agency system through the operating processes to things like issuing certificates of insurance is a bitch. It takes four, five years to bang it through. I've done it. It's a headache. We're there. We don't need to do it. We don't need to sell it. It's standard operating procedure. When you join us, you know that in your due diligence. You come aboard. You plan the effort to change into our agency system and you get rewarded for it by virtue of the data and analytics we can provide you to go out and sell. We don't need to sell our team on that. We don't need to prove it to them. We did that 15 years ago.

Thank you.

Thank you. Our next question is coming from David Motemaden with Evercore ISI. Please state your question.

Hey, good evening. I just had a question on just on it looks like there was a little bit of favorable timing during the quarter on incentive compensation expenses that helped the margin in brokerage. Was that a big help, and is that something that you guys have sort of baked into the first quarter of 24, just that timing coming through?

Well, first of all, we talked about that, I think, back in our April or June call, that we were probably a little further ahead at that point of the year in our incentive comp accruals. So that's been contemplated in our guidance of margin expansion since way back then. So I would say there's no new news of what we were expecting in December versus what we delivered this quarter. And what's the impact of it? It's not a point. So it's not a big number.

Got it. Understood. Thank you. And then I just wanted to come back to the 7% to 9% brokerage organic for 2024 and sort of level set in terms of what you guys are thinking on the exposure growth side, the range of outcomes that you guys are considering within that 7% to 9%.

all right so i think when you break down our organic we usually have more net new versus lost is probably three to four percent on that when you get some rate in there probably we're at that that two points and maybe there's two points of it that's two or three points that's exposure unit growth i don't it's we're going to have more lift next year from new versus lost probably uh So if you break down 9%, it might be a third, a third, a third. If you break down seven, it's probably half rate, half, excuse me, mostly new business and then exposure unit growth on the lower end.

Got it. Understood. Thank you.

Yeah. Okay. Thanks, David.

Thank you. Our next question is coming from Gregory Peters with Raymond James. Please state your question.

Good evening, everyone. I guess I'm going to go to the new table that you added to the CFO commentary, which we appreciate, which is the interest income, premium finance, revenues, and other income. Could you give us some perspective? Because ever since mid-December when the Fed changed their perspective on what's going to happen with rates, there's obviously some mechanics we're trying to calculate on what might happen with that line depending on what the Fed does with interest rates. So maybe there's some benchmarks you can provide for us that will help us sort of map out what we think might happen there.

All right, so you've got the rate sensitivity and then you've got the amount of cash that we have on our balance sheet that's not only ours but our clients, okay? So first and foremost, it's both the rate that we're earning and then it's on what we're earning that on. Second of all, you've got the dynamic. You mentioned the Fed. The U.S. portion of that interest income is only about 45% of the number, so it's actually more heavily weighted to international, and you would expect that with kind of large reinsurance balances in some of the large specialty businesses that we have in the U.K. So you've got to separate your thinking on that. The other thing, too, is that you've got the growth as it grew this year. It was not only because of rate that was going up, but it was also because of the way the reinsurance receivables migrated from Willis' books onto our books during the transition services agreement. So you've got that dynamic in it. I think what you're trying to plumb for is how sensitive is that number to rate changes? I would say that it's probably sensitive $5 million per rate cut that the Fed does in the US per year. So if there's four points in it, there's $20 million of expo, four cuts, it might be 29. Again, that's just answering your question about the Fed. How the other central banks, what they do with their policy next year, I don't know. I just don't have that number right off the top of my head. But when you asked about the Fed, think about it as $5 million per cut.

Excellent. Just a follow-up on that table for 23. In what quarter did the services agreement with WTW shift? Because I assume that would have meant the change. July 1. So when we're looking at the third quarter and fourth quarter, that's more... normalized under going forward operating conditions, correct?

That's correct.

Thank you for that clarification.

Yeah, I also think it's important for, yeah, okay, you've got the premium finance, or just to make sure you know that there's expenses associated with premium finance that's down there. So that's a spread business, but it grosses up. We get the revenues up above, and then we have the operating expenses and the interest costs down below.

an operation that's excellent detail i appreciate that and then i i i don't i there's a bigger picture question i have before i get there i can't i get i'm hung up on the clean energy tax credit carry for balance which caught me by surprise going up and i know there's obviously a a revised approach towards your tax credits there but without getting into detailed commentary on changes and the nuances in the tax. Is it your expectation going forward that you're still going to be pulling down $150 million or more of tax credits from clean energy going forward? And then is that $867 just related to the clean energy or is there other things in that?

All right, so two things. You can see on page five, we have reaffirmed that we think that there would be about $150 million worth of utilization of that balance in 24, and maybe when you get to 25, 6, 7, it's somewhere around $180 million of utilization a year. So you need to think about it coming in over the next four years. There is a very small other balance of credits in there that I would say is a rounding error, and it has to do with whom we constructed our home office building. But for all intents and purposes, consider these credits to be from our clean energy work.

Great. Thank you. So pivoting back to the bigger picture question is I'm going to focus on reinsurance because, you know, last year was one of the most challenging reinsurance renewal periods, you know, in our lifetimes. And especially on the CAT side, I should say. And clearly, based on your commentary and others, it seems like it's going to be more normal this year. It seems like the lift you might get from the pricing or rate component is going to be a lot less this year than it was last year. So I don't want to get too hung up on, and I realize casualty has its own cadence, but I was just curious about your thoughts your response to that observation and how you think it might work with Gallagher?

Well, first of all, let me just say that when I look back, I can't tell you how proud I am of the team. We came into a year, you're new to the organization. You know, we've got some expertise for sure that got paid, but it was, it was very difficult a year ago. And we basically in a, in a tough environment took care of our clients. And I think that's, Really, we learned a lot, all of us, from that. And then we come around to this year, and yeah, the supply and demand balance was a little easier, but what you've got now is a group of our clients that, number one, the price is up, and number two, demand is up. So you've got pricing not coming down, and people looking and saying, now, okay, it's not as sloppy as it was a year ago. I'd like to get more of that. And we saw a bunch of that at 1.1. Remember, about 45% of our business is booked 1-1. So the year when it comes to cat property is pretty much in the bag. And it's been a great year. Easier to place than last year, but as I said, demand up and pricing up. So it still remains a very good market for us. And one in which there aren't that many people, Greg, that can do what we do for our clients. Our larger competitors are very, very good. but it falls off pretty quick after us.

That's right. All right. Thanks for the answers.

Thank you, Greg. Thanks for being with us.

Thank you. And our next question comes from the line of Andrew Klingerman with TD Cowan. Please proceed with your question.

Hey, thanks a lot, and good evening. I just want to clarify, Doug, when you were saying $5 million per rate cut, just Define what you meant by rate cut, how much rate gets cut?

Twenty-five basis points.

How many?

Twenty-five. They do a 25. I was referring to a rate cut of 25 basis points.

For 25 bips. Perfect. Thank you. And then with respect to Gallagher-Rhee, could you talk a bit about how the cross-selling with risk management is playing in? Is that a big driver? And also, I understand you're going to be moving into facultative reinsurance, or maybe you've been doing that. What kind of tailwinds do those provide to 2024?

Well, I mean, first of all, I have to say that the reinsurance team has been incredibly pleased with and nicely surprised by the amount of interaction with our retail team around the world. And when we did the deal, we told everybody the team and ourselves, we thought there was a considerable benefit from having both sides of the equation under one roof. And that is playing out over and over and over again. As you know, we're very, very strong in our niche or niche marketing, and that's a global play. And the capability to have the reinsurance perspective in those meetings. And then we're the largest player in the pooling sector for public clients in the United States. We kind of thought we had that pretty well nailed, you know, not a lot to learn. Our reinsurance team has added a tremendous amount of value and helped us add cover for the pools and revenue for our retailers and revenue for our reinsurance people. So it's been an incredible two-year journey, and we're just getting started in terms of the opportunity to play together in the sandbox. What was the other question, Andrew?

Faculty.

but of course now coming along with treaty clients and having our retailers here's an example of what you're talking about where retailers are trying to get things done and oftentimes it hard to place areas like property etc we are seeing our facultative opportunities grow no it's not brand new but we are organizing ourselves better in the fact world and I think we're getting We're in a better position today than six months ago to go out to our insurance carrier customers and our trading partners and say, we want to participate in this. We want to help you. So we are seeing an uptick in opportunities.

A lot of tailwinds there. Shifting over to risk management and the organic change in fees, I mean, it seems terrific. And I'm just wondering on the claims management side, what kind of carriers are you growing with? Are they the large, the large ones? Are they the small ones? Like where are you seeing the most growth in, in claims management?

Well, you're seeing two things. One, our historical play in the risk management accounts where you've got large accounts, you name it, whether whatever, whatever the large hotel chains are, what have you that are procuring our business on their accounts. And we've had a great, great year in that regard. And that includes public sector clients as well. And then, as you know, we have, over the last decade or so, really focused on outsourcing of claims from insurance companies. And I don't feel at liberty on this call to name some of those, because some of those carriers are pretty pretty well-known carriers and not one that I necessarily have the approval to be touting. But from inside the organization, you look at some of these carriers, you go, it's fantastic. And then, of course, the regional small companies that would like to expand that don't want to add infrastructure, they think they've got an opportunity in a given stage or geography, they don't want to be putting a lot of boots on the ground, we're picking those up as well. So the team at GB is, in my opinion, just outperformed expectations every single year.

It just seems like in the carriers, I mean, there's just a lot of runway there.

Well, let me put it this way, Andrew. I really believe this. I believe that it will not be unusual, and I believe that people will ask, did insurance companies pay their own claims? Why would they do that? When I sit with some of our insurance company partners and explain to them that Gallagher Bassett pays substantially more claims in numeric numbers and substantially more dollars than they do in claims by line of cover, by geography, not just in the U.S., the first reaction is oftentimes shock. And again, I won't mention any names of carriers. They go, no, no, no. If you put a capital structure around GB and called it an insurance company, it'd be one of the five top insurance companies probably in the world. Think about that in terms of the amount of claim work that's coming through. And our focus, and this is I think really key, and what we're selling and we believe proving day in and day out is if you outsource your claim work to us, whether you are a large risk management account that is self-insuring or whether you're a carrier, your outcomes will be superior. And if I'm looking at an insurance company CEO and saying I think I'm worth or could help you find two points of ROE, it could be pretty dramatic.

Sounds like it. Maybe if I could just squeak one last one in on the contingent revenues. They were up 30% in the quarter. Just given it was such a great year for underwriting, do you see that kind of being flattish as we go into 24 when you provided your 7% to 9% guidance? maybe that impact becomes flattish in the scope of it all?

No, I said it. I would say it would be in that same 7% to 9% range. I'm not going to see it outperforming that. And yeah, we were pleasantly surprised by a few extra million bucks than we thought we were going to get there.

By the way, look through that number and see what it's telling you as a potential owner. Our book of business is superior to the competition. That's interesting, isn't it?

Yeah. Okay, thanks a lot. That was great, great insights.

Thanks, Ed.

Thank you. And our next question comes from the line of Yaron Kunar with Jefferies. Please proceed with your question.

Thank you. Good afternoon or good evening. First question I have, and forgive me, it's a bit nitpicky here, but in brokerage organic, I know the organic came in line with December guide, but I think contingents were a bit better than you were expecting. You were already accounting for the life case timing and the 606 accounting. So it seems like there may have been something there that came in a little bit later than expectations, or am I thinking about it incorrectly?

You know, maybe there's $5 million less than we had hoped on a few of them, but it's, I mean, when you're looking at a $2 billion quarter, you know, $5 million. It does move the percentage a little bit, but it's not a meaningful event. We are a sales organization. I look back last year. We had 11% one quarter. We had 7% another quarter. We had, you know, 9%, 7%, you know, 8%. So it bounces around a little bit. So, you know, the fact that we brought it in, you know, within a half a point of what we're looking at here, you do get some bounce around for a few million bucks here and there.

Okay. And then a couple of quick ones on the CFO commentary. So, I am seeing a bit of a slowdown in brokerage earn out payables in 2024. Is that just the Willis 3 true up in 2023?

That's right.

Okay. And then I'm also seeing a meaningful increase in the amortization of intangibles in risk management. Are you expecting any large M&A there or did you already?

Yeah, we announced my plan manager acquisition here a month or so or two months ago, so that's the $60 million worth of revenue in that disability business down in Australia.

Okay, got it. Thanks so much.

Sure. Thanks, Sharon.

Thank you. Our next question comes from the line of Michael Ward with Citi. Please proceed with your question.

Hi, guys. Thank you. Maybe just curious on Canada. I think one of your peers mentioned some headwinds there. And I think if we're interpreting the commentary, it sounds like maybe you saw a slowdown too. Just wondering if you could talk about that dynamic, if you think that should persist in 24.

Well, listen, I think they had some, they were posting 13 points, 14 points of organic growth. The market has shifted up there a little bit. So I think they've been in the, the mid to upper mid single digits for the last four or five quarters. So I don't see much of a shift going into 2024.

Let me pile on that one, if you would, Michael. First of all, Doug, get right on it. They've been killing it in Canada. High upper digit organic year in and year out, and now they're about five. That makes perfect sense to me, given where they've been. And I think the five is a great number.

Yeah, we actually had a couple really great new business opportunities that just didn't fall our way for some reason that they decided to stay with the incumbent. So I think that if you normalize for those handful of items, I think they would have had, you know, add three or four more points to it.

Okay, thank you. And then... In the CFO commentary, it looked like you guys outperformed your revenue pick for 2Q23 acquisition activity and increased the pick for first quarter for your 2Q23 acquisition activity. Just wondering, is that momentum from Buck or what's driving that?

All right. Help me understand what you're looking at again. Tell me what you saw. I just didn't track to your question. Sorry about that.

It was just... The revenue pick from 2Q23, and you increased the 1Q24 pick. Just sort of wondering if that was Buck from 90 to 95.

Listen, remember, every time we buy something, you're going to get maybe four quarters of this disclosure. So as Buck runs that off, we also have cadence and Eastern that are coming on in fourth quarter 24, but that's, that's, you can see it there. The 2000 second quarter, 2000, it falls away to nothing, right? It goes, which it would, even if it were 5 million, a quarter is 95. So that is what you're seeing there. It's just the run run in a buck. That's no longer, uh, uh, M and a rollover.

Okay. Awesome. And then maybe just following up on the, on the, on the question from earlier, Did I hear you sort of mention for benefits growth was kind of going to be at the – or you think it's going to be towards the bottom end of the kind of spectrum across product lines this year?

I just said they might be running more like 7% versus 9% in some things next year. So that's what I said. They would be more towards that lower end of that 7% to 9% range, just on the nature of their business.

Okay. Thanks, guys.

pause on that a little bit, get medical inflation that many are starting to worry about, we might have a different answer for you on that one.

Right.

That heats up.

Thank you. Thanks, Michael.

Thank you. And our last question is coming from Meyer Shields with KBW. Please proceed with your question.

Thanks. I think two really small ball questions. Doug, you talked about why contingents in the fourth quarter are a little bit better than the December expectation, but it also sounds like you're not expecting reserve development to be a problem in 2024 if contingent organic matches core organic. Am I thinking about that right?

No, I didn't say that. I think that on the casualty lines, I think that would impact our base commission. I don't see it really eroding our supplemental or our are contingents um uh if if we do have a reserving um again i don't like you to use word crisis but if there's something like that that happens maybe something that but i don't see that eroding the contingent commission substantially next year as they take rational and orderly rate increases okay understood and then just uh i may have missed this uh but the

Increasing detail on page six of the commentary where we break out the individual components. Should we assume that those are all, I don't know, 90% plus margin revenue?

No, my point was on the premium funding, the margin on that would be very similar to our brokerage business. So that's not, you know, equity interest is not that big of a number. We just don't have that many non-100% owned entities on it. And then interest income is, Yeah, there's margin on that. But remember, interest income is there because there's inflation out there. And we do have inflation in some of our categories, like travel and entertainment, for instance, substantial inflation in that. So if interest rates come down, then I would expect inflation on travel to come down also. So there are some offsets on it. But the premium funding business is there. you know, 30 points of margin, something like that.

Okay, perfect. Thanks for the clarification.

Thanks, Meyer. And let me just say thank you again for joining us this afternoon. And to our 52,000 plus colleagues across the globe, thank you for another fantastic year. Our achievements are due to all of your hard work and dedication. As thrilled as I am with our fourth quarter and full year 23 performance, I get even more excited when I think about our future. We operate in an essential industry for the economy within a fragmented market, having leaded data and analytics and niche expertise and limited global market share. So I believe our opportunities for future growth are immense. And while I always say we're just getting started, it's pretty cool to be Gallagher. Look forward to seeing you at our mid-March IR day. Thanks for being with us today.

Thank you. This does conclude today's conference call. You may disconnect your lines at this time.