Arthur J. Gallagher & Co.

Good afternoon, and welcome to Arthur J. Gallagher and Company's second quarter 2025 earnings conference call. Participants have been placed on a listen-only mode. Your lines will be open for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time. Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws. 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 factors sections contained in the company's most recent 10-K, 10-Q, and AK 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. Good afternoon, and thank you for joining us for our second quarter 25 earnings call. On the call for you today is Doug Hall, our CFO, and other members of the management team. We had a great second quarter. For our combined brokerage and risk management segments, we posted 16% growth in revenue, 5.4% organic growth, reported net earnings margin of 17.3%, Adjusted EBITDA margin of 34.5%, up 307 basis points year-over-year. Adjusted EBITDA growth of 26%, our 21st consecutive quarter of double-digit growth. Gap earnings per share of $2.11, and adjusted earnings per share of $2.95. Another strong quarter by the team. Moving to results on a segment basis, starting with the brokerage segments. Reported revenue growth was 17%. Organic growth was 5.3%, in line with our expectations, despite headwinds from CAAT property renewal premium changes in June. Adjusted EBITDA margin expanded 334 basis points to 36.4%, with underlying margin up around 60 basis points. Doug will break down the margin expansion further in his comments. Let me provide you with some insights behind our brokerage segment organic. Within our retail operations, we delivered 4% organic overall, a reflection of the heavier weighting to property business this quarter. U.S. organic was 5%, with PC a bit below and benefits a bit above that level. Outside the U.S., our international operations, primarily in the U.K. and Canada, Australia, and New Zealand, were collectively around 3%, with the UK a bit above and Canada a bit below 3%. Shifting to our reinsurance, wholesale, and specialty businesses, in total organic of nearly 7%. This includes 5% organic from Gallagher Re and more than 7% organic from our wholesale and specialty businesses. So we continue to deliver organic growth across retail, wholesale, and reinsurance. Next, let me provide some thoughts on the PC insurance pricing environment. starting with the primary insurance market. Overall, the global PC insurance market remains rational, and we expect that to continue. Carriers today have insights into what products and geographies are generating appropriate returns and areas that need to be re-underwritten or repriced to improve profitability. Accordingly, we are seeing more carrier competition across property and continued caution within casualty lines. Breaking down second quarter global renewal premium changes, which includes both rate and exposure, we saw the following by product line. Property down 7%. That's a couple points below what we were seeing at the time of our early June IR day. Casualty lines up 8% overall, including general liability up 4%, commercial auto up 7%, and umbrella up 11%. Package up 5%, D&O down 3%, workers comp up about a point, and personal lines up 7%. Breaking down renewal premiums by client size, we continue to see significant differences. For clients generating less than $100,000 of revenue, renewal premiums were up 3%. For clients generating more than $100,000, renewal premiums were down 2%. As we discussed with you in June, second quarter renewal premium changes are more heavily influenced by property coverages than the other quarters. Excluding property, both small to midsize accounts and larger accounts are seeing global renewal premium increases in the 4% to 6% range. Now, good accounts will get some premium relief from that. However, accounts with poor loss experience are likely to see greater increases. Today's environment is actually ideal for us to show our expertise, product knowledge, and data-driven capabilities. Our talented team can help clients navigate market complexities while finding the best coverage, moving to the reinsurance market now. June and July renewals reflected broadly similar conditions as earlier in the year. Property covers continued to favor reinsurance buyers, particularly on cat-exposed risks, and increased limits being purchased are somewhat offsetting rate decreases. Casualty reinsurance dynamics reflected continued concerns over prior year loss development and rising loss trends from inflation and the litigation environment. Thus, pricing was flat to modestly higher. In a growing market with opportunities to differentiate clients' underwriting abilities and risk profiles, Gallaghery will continue to perform very well. Moving to some comments on our customers' business activity. Our second quarter in July revenue indications from audits, endorsements, and cancellations continue to be a nice positive. So we see solid client business activity in our data and no signs of a broad, meaningful global economic downturn, nor any changes from the prospect of tariffs. We will continue to watch these carefully for any early signs of changes in our clients' business activities. Within the US, we are seeing continued job growth, just not quite at the robust levels we saw during 2024. Additionally, trends from health insurance carriers continue to indicate ongoing increases in medical utilization and treatment costs. Our benefit professionals are well positioned to guide employers through these many challenges. So with a great first half of the books, We now see full year 25 brokerage segment organic in the 6.5% to 7.5% range. Doug will unpack our organic outlook by quarter in his comments. Regardless of market and economic conditions, I believe we are very well positioned. Today, our niche expertise, extensive data and analytics offerings, and global resources put us in a great place competitively. Moving on to our risk management segment, Gallagher Bassett. Second quarter revenue growth was 9%, including organic of 6.2%. We saw solid new business revenue in the second quarter as the new business sold that we spoke about last quarter began to generate revenue. Combined with our fantastic client retention, we believe we will see full year 25 organic in that 6% to 8% range. Second quarter adjusted EBITDAG margin was 21%. a bit better than our June expectations. And looking ahead, we still see full year margin around 20.5%. And that would be another great year for Gallagher Bassett. Shifting to comments about mergers and acquisitions, starting with assured partners. Since our early June IR day, we've made terrific progress and now believe we will be in a position to complete this transaction here in the third quarter. As for other M&A activity during the second quarter, we completed nine new mergers representing around $290 million of estimated annualized revenue. For those new partners joining us, I'd like to extend a very warm welcome to the Gallagher family of professionals. Looking at our pipeline, we have around 40 term sheets signed or being prepared, representing around $500 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 the second quarter, I had the pleasure of spending time with thousands of colleagues across the organization, including more than 500 college students from the 60th class of the Gallagher internship program. This rigorous two-month sales internship program is an essential investment in our future. And from my many interactions with this talented group, I am more than confident that our sales culture will remain strong for years to come, 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 and provide some comments on organic growth and margins by segment, including how we are seeing the rest of the year shape up. 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. All right, let's flip to page three of the earnings release. Brokerage segment organic growth of 5.3% was right in line with our June IR Day guidance. With our first quarter organic at 9.5%, year-to-date we are at 7.6%. Looking forward to the second half of 25, We see third and fourth quarter organic each around 5% plus, which would put full year organic in the 6.5% to 7.5% range. Let me give you four call-outs on that. First, recall from our first quarter earnings call and our June IR day, our 9.5% first quarter organic growth had some positive timing that is now flipping to a headwind in the second half. Second, as we discuss every quarter, organic can be dependent on those large and lumpy life cases. Given the current interest rate outlook uncertainty, clients may accelerate or even delay when to buy policies. Third is property rates further decreases or, on the other hand, a large cap here in wind season causing a quick shift higher would also influence our organic. And fourth are casualty rates. We are seeing some lines perhaps bottoming out and other lines continuing to steadily march higher. Looking at page 5 of the earnings release to the brokerage segment adjusted EBITDA table. Second quarter adjusted EBITDA margin was 36.4%, up 334 basis points year over year, and above our June IRD expectations. Let me walk you through our typical bridge from last year. First, if you pull out last year's 2024 second quarter earnings release, you'd see we reported back then adjusted EBITDA margin of 33.1%. Now adjust that using current FX rates, which for this quarter is next to nothing. So just assume adjusted EBITDA margin levelized for FX would remain at 33.1%. Then organic growth of 5.3% gave us about 60 basis points of expansion this quarter. The rolling impact of M&A used about 40 basis points. The impact of lower rates on fiduciary interest income used about 30 basis points. And then interest income on the cash we're holding for assured partners added about 340 basis points of margin this quarter. Follow that bridge and it will get you to second quarter 2025 margin of 36.4%. That's great discipline by the teams. As for the second half of the year, we don't see anything that causes to change how we view underlying margin expansion potential. We call it organic greater than 4%. We should see some underlying margin expansion. Then say at 6.5% organic, perhaps around 70 basis points of expansion. And at 7.5% organic, around 90 basis points of expansion. I would say the same thing looking out towards 26. We have a long list that will continue to benefit our productivity and quality, including a more stable labor environment, increased returns from our technology spends on client facing sales and service tools, our proven early AI successes, further centralization of back office services, all on top of an industrial strength core operating system that can handle significantly more revenue with marginal costs. So in a sound bite, in any organic environment, we still see significant opportunities to get better, faster, and more productive, and thereby provide higher quality offerings to our clients at lower costs. Sticking on page five, risk management segment organic at 6.2%. As Pat said, that's a bit better than our expectations due to strong new business revenues from contracts that have been accepted in Q2. And for the year, we continue to see organic in that 6% to 8% range. Adjusted EBITDA margin of 21% was better than our June IR day expectations. And looking forward, we still see full year margins closer to 20.5%. Turning now to page seven of the earnings release in the corporate segment shortcut table. Compared to our June IR day expectations, the adjusted interest in banking line and the clean energy line, both were very close to our expectations. The adjusted acquisition cost line related to our typical tuck-in acquisitions came in a penny better, and the adjusted corporate line was four cents below. That's solely due to a larger non-cash, unrealized FX remeasurement loss because the dollar weakened in June. That has already mostly reversed here in July, so it just shows the noise that this can create in our corporate segment results. So let's move now from the earnings release to the CFO commentary document that we post on our website. As a general statement, please read the headers and the footers on each page carefully on how numbers in this document include or exclude the impact of assured partners. Flipping to page three and our typical modeling helpers, most of the second quarter of 25 actual numbers were close to what we provided back in June. One call out here, a small flip from amortization to depreciation that cost us about a penny of adjusted EPS. That's simply because we updated opening balance sheet numbers related to our recent acquisition. Finally, on this page, please look at the FX disclosures for the brokerage and risk management segments as you refine your models. Turning now to page four and the corporate segment outlook for the second half of 25, there's not much change here from what we provided eight weeks ago. So you can flip to page five to our tax credit carryovers. As of June 30, about $685 million which we get over the next few years. And recall that those that that benefit flows through our cash flow statement, not through the P&L. Also, no change to the value of these credits from the recent US OB3 tax bill. So that's good news. And while I'm at it, there isn't anything concerning to us in the other provisions of the new bill either. So that's good news too. Turning to page six, the investment income table. We've updated our forecast to reflect current FX rates and changes in fiduciary cash balances. These numbers assume two future 25 basis point rate cuts, one in September and one in December. You'll also see that the interest income associated with Assured Partners Financing runs through the third quarter in this table. If we closed before that, obviously that number would come down. Shifting down the page is the rollover revenue table. Only a small change from our June CFO commentary. That was due to a refinement in the seasonality of revenues from our second quarter 25 acquisitions, which are more heavily weighted towards first quarter versus second, third, and fourth. And then looking forward, you'll see in the pinkish columns to the right, they included estimated revenues for brokerage M&A closed through yesterday. So there's our standard reminder you'll need to make a pick for future M&A. And also, you'll need to make a pick for when AP might close. The purple section on that page should help with that. All right, moving to cash, capital management, and M&A funding. Available cash on hand at June 30 was about $14 billion and no outstanding borrowings on our line of credit. With our strong second half cash flows, we are in great position to fund another $2 billion of M&A here in 25. And it's looking like we would have about $5 billion in 26 before using any stock, all while maintaining a solid investment-grade debt rating. Think about that for a minute. Another $7 billion over the next 17 months. That should allow us to add another $600 to $700 million of EBITDA at a really nice arbitrage. And I'm bullish about this because for 20 years, we've invested in building a chassis that can support billions and billions more of revenue, provide world-class service, and enable thousands and thousands of talented producers to win at the point of sale. So our M&A strategy has a fantastic outlook. So a great quarter and first half in the books, and we have an exciting future with AP, organic growth, margin expansion, M&A opportunities, all driven by a talented team with a bedrock culture. Those are my comments. Back to you, Beth.