Arthur J. Gallagher & Co.

Good afternoon, and welcome to Arthur J. Gallagher and Co.' 's first quarter 2024 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.

Good afternoon. Thank you for joining us for our first quarter 24 earnings call. On the call with me today is Doug Hull, our CFO, and other members of the management team and the heads of our operating divisions. We had a great first quarter to begin 2024. For our combined brokerage and risk management segments, we posted 20% growth in revenue, our 13th straight quarter of double-digit growth, 9.4% organic, merger and acquisition rollover revenues of approximately $250 million. We also completed 12 mergers, totaling nearly $70 million of estimated annualized revenue, reported net earnings margin of 21.5%, adjusted EBITDA margin of 37.8%, gap earnings per share of $3.10, and adjusted earnings per share of $3.83, up 17% year over year. So another terrific quarter by the team. Moving to results on a segment basis, starting with the brokerage segment. Reported revenue growth of 21%. Organic growth was 8.9% and about 10% if you include interest income. Adjusted EBITDA was up 18% year over year. And we posted adjusted EBITDA margin of 39.9%, a bit better than our March IR day expectations. Let me give some insights behind our brokerage segment organic, and just to level set, the following figures do not include interest income. Our global retail brokerage operations posted 7% organic. Within our PC operations, we delivered 7% in the United States, 6% in the UK, 2% in Canada, and 8% in Australia and New Zealand. And our global employee benefit brokerage and consulting business posted organic of about 8%, including some large life case sales that were completed in late March. Shifting to our reinsurance wholesale and specialty businesses, overall organic of 13%. This includes Gallagher Re at 13%, UK Specialty at 10%, and U.S. Wholesale at 13%. Fantastic growth, whether retail, wholesale, or reinsurance. Next, let me provide some thoughts on the PC insurance pricing environment. starting with the primary insurance market. Global first quarter renewal premiums, which include both rate and exposure changes, were up about 7%. Renewal premium increases continue to be broad-based up across all of our major geographies and most product lines. For example, property was up nearly 10%, umbrella up 9%, general liability up 7%, workers' comp up 2%, package of 8% and personal lines up 13%. So many lines are seeing sizable increases. There are two exceptions within professional lines. First, you know, where renewal premiums are down about 5% and second cyber where renewal premiums are flattish. These two lines appear close to reaching a pricing bottom but combined represent around 5% of our PC business globally. So overall, our clients continue to see insurance costs increase. But our job as brokers is to mitigate these increases and deliver comprehensive insurance programs that align with their risk appetite and fit their budget. Moving to the reinsurance market. First quarter dynamics were dominated by the January 1 renewal season where we saw stable pricing and increased demand for property CAD cover. Reinsurers continued to exercise discipline and met the increased client demand with sufficient capacity. Importantly, the team was able to secure many new business wins while retaining most of our existing clients. During April renewals, reinsurance carriers maintained their discipline, and with increased demand and stable pricing, we saw more coverage being purchased. Within property, more capacity was available at the top end of programs, and the quoting renewal process was disciplined and predictable. The casualty treaty market saw stable pricing overall. However, carriers able to differentiate themselves through good management of prior year reserves were able to secure better reinsurance placements. Specialty class renewals were a bit more complex with some changes in terms and conditions. However, many clients were able to secure modestly lower pricing. With that said, the tragedy in Baltimore may cause reinsurance carriers more pricing results throughout the rest of the year. Those interested in more detailed commentary on January or April renewals can find our first view market reports on our website. In our view, insurance and reinsurance carriers continue to behave rationally. Carriers know where they need rate by line, by industry, and by geography. We are seeing this differentiation in our data. Premiums are increasing the most where it's needed to generate an acceptable underwriting profit. A great example of this is primary casualty, where we are seeing renewal premiums moving higher. Global first quarter umbrella and general liability renewal premium increases are in the high single digits, including 9% increases in US retail. AMBEST recently maintained its negative outlook on the US general liability insurance market due to worsening social inflation, medical expenses, and litigation financing. We've been highlighting these dynamics for a while, along with hearing concerns around historical reserves, which leads us to believe further rate increases are to come in casually. At the other end of the spectrum, we have property. As insurance and reinsurance carriers believe they are getting closer to price and exposure adequacy, we are seeing property renewal premium increases moderating. With that said, first quarter insurance renewal premiums were still pushing double digits. As we look out for the remainder of the year, increased frequency or severity of catastrophes could again move the market in 24. And while capacity was very challenging to come by during 22 and 23, we are now finding when clients are looking to add coverage or limits, carriers are more than willing to provide additional cover. Notably, we are not seeing a change in the underwriting standards from our carrier partners. While continued premium increases seem rational to our carrier partners, our clients have experienced multiple years of increased costs, having a trusted advisor like Gallagher to help businesses navigate a complex insurance market by finding the best coverage for our clients while mitigating price increases. That's what we do. Moving to our customers' business activity. Overall, it continues to be solid. During the first quarter, our daily indications showed positive mid-year policy endorsements and audits ahead of last year's levels across most geographies. So we are not seeing signs of a broad global economic slowdown. Within the U.S., the labor market remains tight. Non-farm payrolls continue to increase, and more people are reentering the workforce. Yet, there continues to be nearly 9 million job openings. Wage increases have persisted at the same time medical cost trends are rising. With these dynamics, employers are focused on total reward strategy to help them achieve their human capital goals while reining in costs. That's why I believe our benefits businesses will have terrific opportunities in 24. Overall, we continue to win new brokerage clients while retaining our existing customers. In fact, our new business production has been on an upward trend in recent quarters, and our retention is holding. We believe this is a direct reflection of our client value proposition, Core360 and Gallagher Better Works, our niche experts, service, and our data and analytics. Don't forget, we're competing with someone smaller than us 90% of the time. These local brokers just can't match the value we provide. So putting it all together, we continue to see full year 24 brokerage organic in the 7% to 9% range, and that would be another outstanding year. Moving on to our risk management segment, Gallagher Bassett. Revenue growth was 19%, including organic of 13.3%, and rollover revenues of $14 million. Adjusted EBITDA margins were 20.6%, up 140 basis points versus last year, and a bit better than our March IR Day expectations. Our results continue to reflect solid new business, outstanding retention, continued increases in new, arising claims across both workers' comp and liability, and resilient customer business activity. Looking forward, we continue to see 24 full-year organic in the 9% to 11% range, as our larger 23 new business wins have been fully onboarded. We now expect a full year margin of approximately 20.5%. That would also be another outstanding year. Shifting to mergers and acquisitions. We had an active first quarter, completing 12 new mergers representing about $70 million of estimated annualized revenue. I'd like to thank all of our new partners for joining us. I extend a very warm welcome to our growing Gallagher family of professionals looking ahead Our pipeline remains strong. We have around 50 term sheets signed or being prepared, representing around $350 million of annualized revenue. Good firms always have a choice and will be very excited if they choose to join Gallagher. Let me conclude with some comments regarding our bedrock culture. It's a culture that has remained constant through the decades of incredible growth. This is largely due to the 25 tenants of the Gallagher Way, which is entering its fifth decade next month. It is deeply rooted in the values of integrity, ethics, and trust, which have been guiding us since 1927. Our culture is not just a differentiator, it's a competitive advantage. It attracts the right talent to our organization and the best merger partners and enables us to build enduring relationships. What makes me particularly proud is that I witness our culture and action every day as our employees demonstrate their commitment to our clients, and 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. I'll comment on first quarter organic growth and margins by segment, including how we are seeing full-year organic growth and margins in each of the next three quarters. Then I'll provide some typical comments on the modeling helpers we provide in the CFO commentary document that we post on our website. And I'll conclude my prepared remarks with a few comments on cash, M&A, and capital management. Okay, let's flip to page two of the earnings release. Headline first quarter brokerage organic growth of 8.9%. That's a bit better than our March IR day expectation of 8 to 8.5%. And remember, we exclude interest income. Including such, we would have shown about 10% organic growth. Looking ahead, we continue to see strong new business production and favorable client retention. Combine that with further rate increases, a resilient economic backdrop, and sticky inflation, our 2024 brokerage organic outlook is unchanged. We are still seeing full-year organic growth in that 7% to 9% range. Moving to page four of the earnings release to the brokerage segment adjusted EBITDA table. First quarter adjusted EBITDA margin was 39.9%, a bit better than our March IR day expectations. The footnote on that page explains what we discussed in our January earnings call and again at our March IR day. There is 90 basis points of roll-in impact from M&A, principally Buck, that naturally runs lower margins. So on the surface, it is showing 30 basis points lower, but underlying margins actually expanded 60 basis points. Again, that improvement is a little better than what we forecasted in March. Let me walk you through a bridge from last year. First, if you were to pull out last year's 2023 first quarter, you would see we reported back then adjusted EBITDA margin of 40.4%. Second, when we update that margin using current period FX rates, it gets you to an FX-adjusted margin of about 40.2%. And we've done that here, so you can see that in the 2023 column in this table. Third, deduct the 90 basis point roll in impact. Again, that's all due to the roll in math. And just to be clear, these are not businesses with margins that are going backwards. So that gets you to 39.3%. Compare that to the 39.9% we showed today, and that gives you the underlying 60 basis points of margin expansion. That is really great work by the team. As we look ahead to the following three quarters of 24, it is looking like we could expand margins in the 90 to 100 basis point range in each of the next three quarters. Let me give you some flavor on that. First, as Pat said, Buck passed its one-year anniversary, so that roll-in noise is behind us. Second, as discussed at our March IR day, the carryover impact of raises given in 2023 is comparatively lesser over the next three quarters. And third, the reality is we are typically posting margins higher than most of our M&A targets. While that slightly impacts what we report as margin expansion, we will do these mergers all day, any day. These are great businesses with terrific talent, and when we combine, we are better together. So to repeat, expansion in that 90 to 100 basis points range at each of the next three quarters would get you to about 60 basis points of full year margin expansion. That assumes we would post organic in that 7% to 9% range. And it still is allowing us to continue to make substantial investments in data, analytics, sales tools, digital service, and arming our sales and service folks with the best resources in the business. Okay, let's move to the risk management segment and organic and EBITDA tables on pages 4 and 5. Another fantastic quarter benefiting from new business wins and excellent client retention, 13.3% organic growth and margins at 20.6%. Looking forward, we are now lapping growth associated with our large new business wins from 23, and so we see quarterly organic for the rest of 24 in the 8% to 9% range. As for margins, the team has done a great job posting margins above 20% this quarter, and we believe we can hold that for the remainder of the year. That also is a bit better than our March IR Day outlook. Turning to page six of the earnings release in the corporate segment shortcut table, Adjusted first quarter numbers came in better than the favorable end of our March IR day expectations due to lower acquisition costs and some favorable tax items, primarily associated with stock-based compensation, and that's shown in the corporate line. So now let's move to the CFO commentary document that we post on our website. Not much changes at all on pages three or four, other than a few tweaks to a few numbers such as FX, non-cash items, etc., Just do a double check with your models using these numbers. Page five updates our tax credit carry forwards. It shows about $820 million available at March 31st, and that we are benefiting our cash flows about $150 to $180 million a year. Doesn't flow through our P&L, but still a nice annual cash flow benefit to help us fund future M&A. Turning to page six, the top table. Recall we introduced this modeling helper in January. It breaks down the components of investment income, premium finance revenues, book gains, and equity investments in third-party brokers. Not much has changed from what we provided in March, but that we are still embedding two 25 basis point rate cuts in the second half of 24, and we've also updated for current FX rates. The lower table on page six is rollover revenues. Blue column subtotal of about $228 million is very close to the $224 million we provided at our March IR Day. And remember, the pinkish columns only include estimated revenues for M&A that we've closed through yesterday. So just a reminder, you'll need to make a pick for future M&A. Also, a little housekeeping. When you read note three on that page, you'll see we had an estimate change related to some historical acquisitions. That causes a gross up of revenues and expenses. It nets to close to nothing, but it does flow through the P&L. We've adjusted these out so there's no impact to organic adjusted net earnings or adjusted EBITDA or adjusted EPS. Moving to cash capital management and M&A funding, available cash on hand at March 31st was around $1 billion, which includes a portion of the proceeds from our February debt offerings. So with a billion in the bank and expected strong future cash flows, we are still estimating we have total capacity in 24 of about $3.5 billion to fund M&A without issuing stock, nor having to borrow much, if any more. As for 2025, looks like we could fund over $4 billion of M&A with free cash and debt. All this while maintaining a solid investment grade rating. Okay, another terrific quarter and start to the year. Looking ahead, we see continued strong organic growth, a growing pipeline of M&A, further opportunities for productivity improvements, and a culture that makes us hard to beat. I believe we are very well positioned to deliver another fantastic year here in 24. Back to you, Pat.