Arthur J. Gallagher & Co.

Good afternoon and welcome to Arthur J. Gallagher & Company's second quarter 2024 earnings conference call. Participants have been placed on 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 the information concerning forward-looking statements and risk factor sections contained in the company's most recent 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 & Company. Mr. Gallagher, you may begin.

Thank you very much. Good afternoon. Thank you for joining us for our second quarter 24 earnings call. On the call for you today is Doug Hall, our CFO, other members of the management team, and the heads of our operating business divisions. We had an excellent second quarter. For our combined brokerage and risk management segments, we posted 14% growth in revenue, 7.7% organic growth, and 8.1% if you include interest income. We also completed 12 new mergers, totaling $72 million of estimated annualized revenue. Reported net earnings margin expansion of 35 basis points. Adjusted EBITDAG margin expansion of 102 basis points to 31.4%. Gap earnings per share of $1.70, up 15% year-over-year. And adjusted earnings per share of $2.68, up 19% year-over-year. Another great quarter by the team and right in line with the expectations we provided at our June IR day. Moving to results on a segment basis, starting with the brokerage segment. Reported revenue growth was 14%. Organic growth was 7.7% at the midpoint of guidance and above 8% if you include interest income. Adjusted EBITDAG margin expansion was 98 basis points at the upper end of our June IR day expectations. Let me give you some insights behind our brokerage segment organic. And just to level set, the following figures do not include interest income. Within our PCE retail operations, we delivered 6% in the US and Canada, 7% in the UK, Australia, and New Zealand. Our global employee benefit brokerage and consulting business posted organic of about 3%. That would have been 5% without the timing impact from some lumpy life case sales. Shifting to our reinsurance, wholesale, and specialty businesses, Overall organic of 12%, this includes Gallagher Re at 13%, UK specialty at 10%, and US wholesale at 11%. Excellent growth whether retail, wholesale, or reinsurance. Next, let me provide some thoughts on the PC insurance pricing environment, starting with the primary insurance marketplace. Global second quarter renewal premiums, which include both rate and exposure changes, were up about 5%, so no change from what we discussed four weeks ago at our June investor meeting. Renewal premium increases continue to be broad-based up across all of our major geographies and most product lines. For example, property was up 2% to 4%, general liability up 5% to 7%, umbrella and commercial auto up 8% to 10%, Workers comp up 1% to 3%, D&O down about 5%, cyber was flat, and personal lines up over 10%. So many lines are still seeing strong increases. Moving to the reinsurance market and mid-year renewals. Property reinsurance renewals saw modest price declines concentrated at the top end of reinsurance towers due to the increased capacity from both traditional reinsurers and the ILS market. Offsetting this was underlying exposure growth combined with increased demand, resulting in flat year-over-year premium for reinsurers overall. U.S. casualty renewals saw terms and conditions tighten and some modest price increases. Reinsurers continue to heavily scrutinize submissions given the industry's unfavorable prior year reserve development and reinsurers' view of the current lost cost trends. In our view, insurance and reinsurance carriers continue to behave rationally, raising rates the most where it is needed to generate an adequate underwriting profit by line, by industry, and by geography. We continue to see this differentiation in our data between property and casualty lines. Carriers believe property may be close to approaching price and exposure adequacy, and thus we are seeing property renewal premium increases moderating, but mostly within large accounts. Underlying that, accounts with premiums around $1 million or greater are seeing renewal premiums flattish year over year. Yet on the other hand, in the small and mid-sized client space, where we are an industry leader, we are seeing increases of 7% for the second quarter. Shifting to casualty classes, we are seeing the greatest renewal premium increases and signs of these increases advancing. In fact, global second quarter umbrella and commercial auto renewal premium increases are in the high single digits, and there is little differentiation by client size. We have been highlighting worsening social inflation, medical expenses, and growing historical reserve concerns for quite some time, and thus we continue to believe further rate increases are to come in casually. While renewal premium increases are the rational carrier response in the current environment, Our clients have experienced multiple years of increased costs. Having a trusted advisor like Gallagher can help businesses navigate a complex insurance market by finding the best coverage for our clients while mitigating price increases, and that's our job as brokers. Moving to comments on our customers' business activity. During the second quarter, our daily indications continue to show positive mid-year policy endorsements, audits, and cancellations, similar with last year's levels across most geographies, so activity remains solid and we are not seeing signs of global economic slowdown. Within the U.S., the labor market imbalance remains intact with more open jobs than unemployed people looking for work. And with continued wage growth and further medical cost inflation, employers remain focused on attracting and retaining talent while controlling costs. So I see solid demand for our services and advice in 24 and in 2025. Across the brokerage operations, I believe we continue to win market share due to our superior client value proposition, niche expertise, outstanding service, and our extensive data and analytics offerings. Frankly, the smaller local brokers that we are competing against about 90% of the time just can't match the value we provide. and that is leading to more net brokerage wins for Gallagher. So when we pull all this 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 13%, including organic of 7.7%. Adjusted EBITDA margins were 20.6%, up 120 basis points versus last year, and in line with our June IR Day expectations. We continue to benefit from new business wins, outstanding retention, increases in customer business activity, and higher new arising claims. Looking forward, we see organic in the next two quarters around 7%, and margins around 20.5%. That would bring full year 24 organic to 9%, and margins to approximately 20.5%, And that, too, would be an outstanding year. Let me shift to mergers and acquisitions. We completed 12 new mergers during this second quarter, representing about $72 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 Gallagher family of professionals. Looking ahead, our pipeline remains very strong. We have around 60 term sheets being signed and prepared, representing around $550 million of annualized revenue. Good firms always have a choice, and we will be very excited if they choose to join Gallagher. Let me conclude with some comments regarding our bedrock culture. Last month, we reflected on the 40th anniversary of becoming a public company. My uncle Bob Gallagher, chairman and CEO at the time, knew above all we must maintain our unique culture of teamwork, integrity, and client service. Those values are captured in the 25 tenets of the Gallagher Way. Thanks to all of our global colleagues that live and breathe the Gallagher Way day in and day out, our culture is stronger and more vibrant than ever, and it's our culture that continues to differentiate us as a firm and help to drive an average annual total shareholder return of more than 16%. over the past 40 years. That is the Gallagher way. Okay I'll stop now and turn it over to Doug.

Thanks Pat and hello everyone. Today I'll start with our earnings release. I'll comment on second quarter organic growth and margins by segment. Punchline is we came in right in line with our June IR day commentary. Also update you on how we are seeing organic growth and margins shape up for the second half of the year. Then I'll shift to the CFO commentary document that we post on our IR website, and I'll walk through the typical modeling helpers that we provide. And I'll 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 brokerage segment second quarter organic growth of 7.7%. Again, that's right in line with our June IR day where we forecasted a range of 7.5% to 8%. Notably, we would have been above 8% if a few large live sales had not shifted from second quarter to later in the year. We signaled this possible timing to our June IR day, so again, no new news here. Recall that we also foreshadowed in late June a small headwind from contingents that adversely impacted all inorganic by about 25 basis points. And finally, just a reminder, that we don't include an interest income in our organic. If we did, that would have pushed organic higher by about 40 basis points. We believe the investments that we have made in people, sales tools, niche experts, and data and analytics are leading to strong new business production and favorable client retention across the globe. Additionally, the insurance market backdrop remains supportive of growth. Pat said renewal premium changes 5% in a quarter. However, July's renewal premium change thus far is above second quarter. And with an active hurricane season predicted and noise around U.S. casualty reserves growing louder again this quarter, it's not unreasonable to expect mid-single digit or greater renewal premium changes in the second half of 24. So our organic investments, combined with the insurance market conditions, continues to support our 2024 full-year brokerage segment organic outlook. We are still seeing it in that 7% to 9% range. So now flip to page five of the earnings release to the brokerage segment adjusted EBITDA table. Second quarter adjusted EBITDA margin was 33.1%, up 98 basis points over last year and at the upper end of our June IR day expectations. Let me walk you through a bridge from last year. First, if you pull out last year, 2023 second quarter, you'd see we reported back then adjusted EBITDA margin of 32.1%. Second, you need to adjust for current period FX rates, which had a very limited impact on margin this quarter. So 2023 adjusted FX margin was also 32.1%. Third, organic and interest gave us nearly 110 basis points of margin expansion this quarter. And then the impact of M&A and divestiture is used about 10 basis points of margin. That gets you to second quarter 2024 margins of 33.1%, and therefore that nearly 100 basis points of brokerage margin expansion. That's really, really great work by the team. As we look ahead to the second half of 2024, we are still expecting margin expansion in the 90 to 100 basis points range. So third and fourth quarter will look a lot like second quarter. Recall, first quarter 24 still had the roll-in impact of the buck acquisition, so the math for full year 24 will show about 60 basis points of full year expansion, but that would be about 80 basis points full year without buck, which feels about right, assuming we post organic in the 7% to 9% range. Let's move now to the risk management segment and the organic and EBITDA tables on pages 5 and 6 of the earnings releases. Another excellent quarter. We saw solid new business, fantastic retention, and growing claim counts. We posted organic of 7.7% and margins at 20.6%. Both were right in line with our June IR Day outlook. Looking forward, as Pat said, we see organic in each of the next two quarters around 7% and margins around 20.5%. If we were to post that, we would finish the year with organic of 9% and margins of approximately 20.5%. That also would be great work by the team. Turning to page six of the earnings release in the corporate segment shortcut table, adjusted second quarter numbers came in just a better than the favorable end of our June IR day expectations. All that was due to some favorable tax items within the corporate expense line. All right, now let's move to the CFO commentary document. Starting on page three, a few comments. First, foreign exchange. The dollar has weakened over the past month, so please make sure you incorporate these updated revenue and EPS impacts from FX in your models for the brokerage and risk management segments. Second, brokerage segment or amortization expense. Recall, while this impacts reported GAAP results, we adjust it out so it doesn't impact adjusted non-GAAP earnings. This line can also be a bit noisy from time to time. Late this quarter, we received updated third party M&A valuation estimates on a few recent acquisitions and also made some balance sheet adjustments at the end of the quarter. You'll see that in footnote two at the bottom of the page. Looking forward, we expect amortization expense of about $155 million per quarter. Again, all of that is adjusted out, but it does cause some noise in the reported gap results. Next, the risk management amortization and depreciation line. Here, too, we received updated M&A valuation estimates for a recent acquisition, which is also described in footnote 5. The net impact in non-GAAP results is about a penny to EPS this quarter. Going forward, we're now expecting a lower level of depreciation and amortization as a result of that M&A valuation report. Turning to the corporate segment on page four, no change to our outlook for the third and fourth quarter. Flipping to page five to our tax credit carry forwards, it shows about $800 million at June 30th. While this benefit won't show up in the P&L, it does benefit our cash flow by about $150 to $180 million a year, which helps us fund future M&A. Turning now to page six, the investment income table. We call this modeling helper breaks down the components of investment income, premium finance revenues, book gains, and equity investments in third party brokers. And as a reminder, none of these items are included in our organic growth computations that we present on pages three and five of our earnings release. The punchline here is not much has changed from what we provided at our June IR day. We are still embedding two 25 basis point rate cuts in the second half of 24, and we have updated our estimates in this table for current FX rates. When you shift down on that page to the rollover revenue table, second quarter 24 column, the subtotal shows 128 million and 142 million before divestitures. The 142 million was better than our IR day outlook due to a few acquisitions performing very well during June. Looking forward, the pinkish columns to the right include estimated revenues for M&A closed through yesterday. So just a reminder, you'll need to make a pick for future M&A. Moving down on that page, you'll see risk management segment rollover revenues have been updated for our early third quarter acquisition. For the next two quarters, we expect approximately $20 million and $15 million respectively. Please make sure to reflect these additional revenues in your models. Moving now to cash, capital management, and M&A funding. Available cash on hand at June 30 was approaching $700 million. When combined with our expected free cash flow in the second half of 24, which is typically stronger than first half, we are well positioned for a pipeline of M&A opportunities. In total, we continue to estimate we could have $3.5 billion to fund M&A opportunities during 24, and another $4 billion in 25, all while maintaining a solid investment grade debt rating. And remember, if we don't spend it all, it opens the door for share repurchases as well. Okay, another excellent quarter and fantastic first half of the year. Looking ahead, we see continued strong organic growth due to net new business wins, a large and growing M&A pipeline. and many opportunities for productivity improvements. Add that to a winning culture, and I, too, believe we are very well positioned to deliver another terrific year here in 24. Thanks to all the hard work by the team, and back to you, Pat.