Arthur J. Gallagher & Co.

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. 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 can cause actual results to differ materially. Please refer to the information concerning forward-looking statements and risk factor 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 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. Good afternoon, and thank you for joining us for our first quarter 25 earnings call. On the call today is Doug Howell, our CFO and other members of our management team. We had a fantastic first quarter. For our combined brokerage and risk management segments, we posted 14% growth in revenue, 9% organic growth, reported net earnings margin of 23%, adjusted EBITDA margin of 41.1%, up 338 basis points year over year, adjusted EBITDA growth of 26%, our 20th consecutive quarter of double-digit growth. Gap earnings per share of $3.29 and adjusted earnings per share of $4.16, another excellent quarter by the team. Moving to results on a segment basis, starting with the brokerage segment. Reported revenue growth was 16%. Organic growth was 9.5%, which included about a point of favorable timing. Even without the timing impact, all in organic was right in line with our expectations. Adjusted EBITDAG margin expanded 359 basis points to 43.4%, with underlying margins up a full percentage point. Doug will unpack this in his comments. Let me provide you with some insights behind our brokerage segment organic. Within our retail PC operations, we delivered 5% organic overall. US organic was north of 5%, while our international operations, primarily in the UK, Canada, Australia and New Zealand, we're closer to 4%. Our global employee benefit brokerage and consulting business posted organic of more than 7%. Shifting to our reinsurance, wholesale and specialty businesses, in total organic of 13%. This includes 20% organic from Gallagher Re and 8% organic from our wholesale and specialty businesses. So we continue to report strong growth across retail PC, wholesale, reinsurance, and benefits. Next, let me provide some thoughts on the PC insurance pricing environment, starting with the primary insurance market. Overall, the global PC insurance market continues to behave rationally, with carriers looking to grow in lines and geographies where there's an acceptable return. and seeking rate increases where it's needed to generate an appropriate underwriting profit. Breaking down first quarter global renewal premium changes by product line, we saw the following. Property down 2%. D&O down 3%. Workers' comp up 5%. Personal lines up 8%, casualty lines up 8% overall, including general liability up 5%, commercial auto up 6%, and umbrella up 11%. Breaking down renewal premiums by client size, we continue to see a divergence between small to midsize accounts and large accounts. For small to midsize accounts, which we define as accounts generating less than $100,000 of revenue, renewal premiums were up 5%. For large accounts or clients generating more than $100,000 of revenue, renewal premiums were up 1%. All that said, pricing is ultimately driven by client loss experience. Good accounts are getting some premium relief in certain lines. However, accounts with poor experience are seeing greater increases. Having a trusted advisor like Gallagher can help businesses navigate a complex insurance and economic backdrop. By finding the best coverage for our clients while mitigating price increases, today's environment is the ideal market for us to show our expertise, product knowledge, and our data-driven capabilities. Let me move to the reinsurance market. First quarter dynamics, which is mostly influenced by January 1st renewals, reflected an environment that generally favored reinsurance buyers. Overall, reinsurers were able to meet increased client demand with sufficient capacity. While remaining disciplined on terms, the Gallagheri team shined with excellent retention and some fantastic new business wins. April renewals experienced similar trading conditions as earlier in the year and, as expected, saw a bit more downward pricing pressure. The January wildfire losses and continued casualty reserve increases remain a focus for the industry. But neither caused much upward movement in pricing, given the large proportion of Japanese buyers in April. With that said, U.S. severe convective storm season is here, which then leads us to U.S. wind season. Time will tell how the year plays out. Regardless, Gallagher Re should continue to excel in this environment. Moving to some comments on our customers business activity. During the first quarter, our daily revenue indications from audits, endorsements, and cancellations continue to be a net positive. While the upward revenue adjustments are not quite as high as last year, we continue to see solid client business activity and no signs of meaningful global economic slowdown. Our daily revenue indications through the end of April are not showing any significant changes in our customers' business activity from the prospect of tariffs. Our daily indications have historically given us some early insights into our clients' business activity, so we will continue to watch these very carefully. We are also closely watching the U.S. labor market, and there continues to be a strong demand for new workers. The number of open jobs in the US stood at more than 7 million, still at a level that is well above the number of unemployed people looking for work. We've also seen recent health insurance carry results show continued increases in the utilization and cost of healthcare. With these two trends as the backdrop, we are seeing more and more employers looking for ways to grow their workforce and control their benefit costs. Our experts can provide creative solutions to solve these challenges. Regardless of market and economic conditions, I believe we are well positioned to compete and to win. From our niche expertise, outstanding service, or extensive data and analytics offerings, we have the resources and know-how to service any account of any size, of any complexity, anywhere around the globe. So with a fantastic first quarter behind us, we continue to see full year 25 brokerage segment organic in the 6% to 8% range. Moving on to our risk management segment, Gallagher Bassett. First quarter revenue growth was 6%, including organic of about 4%. We continue to see excellent client retention and strong new business production. However, sold new business within the risk management segment typically takes longer to materialize into revenue. As these new client contracts incept and begin to generate revenue in the coming months, we are confident we will see stronger revenue growth in the second half of the year. Adjusted EBITDAG margin is 20.5% in line with our March expectations. Looking ahead, we still see full year 25 organic in that 6% to 8% range and margins around 20.5%. Shifting to mergers and acquisitions. During the first quarter, We completed 11 new tuck in mergers representing around $100 million of estimated annualized revenue. We also announced the acquisition of Woodruff Sawyer during the quarter and completed that in early April. That means through today, we already are at $400 million of acquired revenue. For those new partners joining us, I'd like to extend a very warm welcome to the Gallagher family of professionals. As for the pending assured partners acquisition, not much to update relative to our March IR day comments. We are working to respond to the second request and we still expect to close in the second half of 2025. Looking at our pipeline, we have more than 40 term sheets signed or being prepared, representing north of $450 million of annualized revenue. Good firms always have a choice and it would be terrific if they chose to partner with Gallagher. I'll conclude with some comments about our bedrock Gallagher culture. During our Global Sales Award meeting in early March, our unique Gallagher culture was on full display. It was inspiring to watch the interactions among thousands of our colleagues across geographies, business units, and product lines. I came away even more convinced that our greatest asset is our people and our biggest differentiator is our culture, 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, starting with some comments on first quarter organic growth and margins by segment, including how we are seeing these shape up for the full year 25. Next, I'll move to the CFO commentary document that we post on our IR website and walk you through our typical modeling helpers, and then I'll conclude my prepared remarks with my usual comments on cash, M&A, and capital management. Okay, let's flip to page two of the earnings release. Headline brokerage segment organic growth of 9.5% was a great quarter and it helps bolster our view that full year organic will be in that 6% to 8% range. And that range is in line with what we've been saying all year. As Pat mentioned, first quarter did have some favorable timing of about a point. So looking forward, we see some favorable timing again in the second quarter, but not to the same magnitude. And then all of the first half timing will reverse itself in the third and fourth quarters with no impact on full year 25. So as we look through to the rest of the year, second quarter might be more like 6% to 7%. Then we will see the timing flip in the third and fourth quarters, might mean third and fourth quarter organic of about 5% each. causes a little noise across the quarters, but with a 9.5% first quarter, the math gets us back to a full year 25 organic in that 6% to 8% range. That would be a terrific year. So flipping now to page four of the earnings release, to the brokerage segment adjusted EBITDA table. First quarter adjusted EBITDA margin was 43.4%, up 359 basis points year over year, and above our March IR day expectation. So let me walk you through a bridge from last year as we typically do. First, if you pull out last year's 2024 first quarter earnings release, you'd see we reported back then adjusted EBITDA margin of 39.9%. But now using current period FX rates, that would have been 39.8%. Then organic growth of 9.5% gave us about 120 basis points of expansion this quarter. The roll-in impact of M&A and lower interest rates each used about 10 basis points of margin this quarter. Finally, as the footnote at the bottom of that table notes, the impact of interest income from the cash that we're holding for the Assured Partners acquisition adds about 260 basis points of margin this quarter. Follow that bridge, and it will get you to first quarter 2025 margin of 43.4%. That is really, really great work by the team. As for second quarter headline margin expansion, it's still looking like we will be pushing around 300 basis points, again driven by strong underlying margin expansion of approximately 60 to 80 basis points, assuming organic in that 6% to 7% range, and also interest income related to cash we're holding for AP, less a small offset by the rolling of M&A and lower interest rates. Looking out towards the third quarter, we would still expect underlying margin expansion, and then we'll also have the impact of investment income on the funds we're holding for AP. So in total, we're thinking expansion could be 250 to 280 basis points. This, of course, would change if we get AP closed before September 30th. As for fourth quarter, we would hope we'd have AP closed, so we would have underlying margin expansion still, but lose the extra investment income, yet have AP's fourth quarter results in our books. The punchline here is there's nothing we're seeing that causes us to change how we view underlying margin expansion potential. We believe at organic, greater than 4%, we should see some underlying margin expansion. At 6% organic, maybe 60 basis points of expansion. And at 8% organic, perhaps around 100 basis points of expansion. So again, there's no new news here. We still believe we are positioned to expand underlying full year margins by about 60 to 100 basis points. Sticking on page four, risk management segment organic was 3.9%. That's a bit below our 5% expectation due to lower new business revenue. As Pat mentioned, we expect this to improve in the second half of the year. as we have already sold new contracts, but these have yet to start generating revenue. So we see organic moving back towards 6% to 8% throughout the year. Adjusted EBITDA margin of 20.5% was in line with our March IRD expectations. And looking forward, we still see full year margins again around 20.5%. Turning now to page six of the earnings release and the corporate segment shortcut table. For the adjusted interest in banking, clean energy, and acquisition lines, All were very close to our March IR day expectations. The corporate line was better than our March expectations due to some expense timing, a few favorable tax items, including the tax benefit from stock-based compensation, somewhat offset by an unrealized FX remeasurement loss. So now let's move from the earnings release to the CFO commentary document that we post on our website. First, as an overall statement, please read the headers and footnotes carefully on how These numbers in this document include or exclude the impact of assured partners. That said, let's flip to page three and our modeling helpers across the board. First quarter, 25 actual numbers were fairly close to what we provided back in March. One thing to call out in our 25 outlook are changes from FX for both the brokerage and risk management segments. With the dollar weakening since mid-March, we have provided updated estimates for revenue and EPS impacts for the remainder of the year. Just take a look at this disclosure as you refine your models. Turning now to page four and the corporate segment outlook for 25. Within the corporate line of the corporate segment, like I mentioned earlier, we had some favorable expense timing in the first quarter, so you'll see some of that comes back over the rest of the year. We've increased after-tax expense by about $1 million per quarter for the remainder of 25. However, the rest of our outlook for the corporate segment is unchanged from six weeks ago. Flipping to page five to our tax credit carryovers, this is a reminder page that March 31st we have about $710 million of tax credit. We continue to expect additional cash flow of more than $180 million this year and even more in 26 and later years. And don't forget, this benefit will show up in our cash flow statement rather than our P&L. So it's still a nice sweetener to fund a future M&A. Turning now to page six, the investment income table. We've updated our forecast to reflect current FX rates and changes in fiduciary cash balances. And you'll see here that we're still assuming two 25 basis point rate cuts during 25. You'll also see that we provided a separate line to show our estimates of interest income associated with the funds that we're holding to pay for Assured Partners. Shifting down on that page to the rollover revenue table, first quarter 25 column subtotal is around $80 million and $92 million before divestitures. These numbers are consistent with our March IR day expectations. Looking forward, the pinkish columns to the right include estimated revenues for brokerage M&A closed through yesterday. And just a reminder, you'll need to make a pick for future M&A. Then below that table, we have a separate section for assured partners. We show you what we expect for monthly pro forma revenues in purple. And then finally, continuing down on the page, you'll see the risk management segment rollover revenues too. So moving to cash, capital management, and M&A funding. We had no outstanding borrowings on our line of credit at March 31st, and you might have seen that in early April, we amended our credit agreement. We extended the maturity date to April of 2030 and also increased our borrowing capacity from $1.7 billion to $2.5 billion. Our current cash position, potential borrowing capacity, and strong expected free cash flow position us well for our pipeline of M&A opportunities. So even after the $13.5 billion for Assured, paying for Woodruff and paying for the Willis re-earn out. And after the other 11 deals we've already done through Q1, we still have over $2 billion of M&A capacity here in 25 and another $5 billion of capacity in 26 before using any stock. So our M&A strategy has a tremendous runaway. So another excellent quarter in the books. As we look ahead, we see strong organic growth, a terrific M&A pipeline, We continue to see opportunities to improve our productivity and quality. And as Pat said, we have a waiting culture. So it looks like we're well on track for another great year. Back to you, Pat.