Arthur J. Gallagher & Co.

Good afternoon and welcome to Arthur J. Gallagher and Company's fourth 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 today's conference call, including answers given in response to questions, may constitute forward-looking statements within the meanings 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 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 reconciliation 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 fourth quarter 25 earnings call. On the call for you today is Doug Howell, our CFO, and other members of the management team. We had an excellent fourth quarter and a terrific year. Our two-pronged revenue growth strategy, that's organic and M&A, delivered revenue growth of more than 30% during the fourth quarter. That includes organic growth of 5%. Adjusted EBITDA growth was 30%, marking our 23rd consecutive quarter of double-digit growth. So a great quarter, highlighting our durable value creation strategy that drives consistent double-digit growth in revenue and profits. Moving to results on a segment basis, starting with the brokerage segment. Reported revenue growth was 38%. Organic growth was 5%, in line with our December commentaries. Adjusted EBITDAG margin was 32.2%, and ahead of our expectation with underlying margin expansion of 50 basis points. Let me provide you with some insights behind our brokerage segment organic. America's retail PC organic was up 5%. UK and EMEA up 7%. APAC up 3%. Specialty and wholesale up, U.S. wholesale up 7%. reinsurance of 8% and benefits of 1%. So we continue to deliver organic growth across retail PC benefits, wholesale and reinsurance. And Doug will further unpack organic in his comments. Next, let me provide some thoughts on the global PC insurance pricing environment. Fourth quarter insurance renewal premium change, which includes both rate and exposure, continued to increase in the low single digits. Once again, property decreases were more than offset by increases across most casualty classes. Let me break that down further. Property lines were down 5%. Casualty lines, which includes general liability, commercial auto, and umbrella, up 5%. Overall, with U.S. casualty lines, up 7%. Package up 3%. D&O down a point. Workers' comp up a point. Personal lines up 5%. So many lines are still seeing increases outside of property. In fact, excluding property renewal premium change, we'd be up about 3% during the quarter. With that said, premiums are ultimately determined by loss experience, and good accounts will get some premium relief, while accounts with poor loss experience will see greater increases. Moving to reinsurance, let me provide you with some thoughts on the 1-1 renewal season. With the strong underwriting results posted by carriers during 2025, which was helped by a quiet U.S. wind season, there was plenty of reinsurance capacity to support client demand. The property reinsurance market saw rate decreases in the teens with lower layers holding up better than the top end of reinsurance towers. We saw some continued demand for more cover and increased purchasing by clients. In fact, despite double-digit price declines for PropertyCat globally, property reinsurance premiums were down only mid to high single digits relative to last year. Within specialty lines, marine and energy experienced increased carrier competition. Pricing across casualty lines continued to be broadly stable because most reinsurers remained very cautious of U.S.-focused casualty risks. Looking ahead, we expect the buyer's market will persist through 2026. absent any outsized current year or prior year loss activity. While clients are comfortable with their purchased reinsurance programs at 1-1, we believe it is likely that some carriers will explore buying additional protection to further reduce earnings volatility or support growth throughout 2026. Moving to employee benefits, we continue to see strong demand for our services as clients manage rising health insurance costs. Medical costs are expected to be up high single digits again in 26, driven by increased utilization, provider consolidation, and newer high-cost treatments and therapies. So we are engaging with employers to help them implement innovative solutions, such as telemedicine programs, wellness initiatives, and tailored benefits packages to alleviate these cost pressures. Additionally, talent retention strategies remain top of mind for many of our clients given the resilient U.S. labor market So we're expecting another strong year of growth. Moving to some comments on our customers' business activity. Our proprietary data, which has been a valuable indicator of the economy, continues to show solid client business activity. Fourth quarter revenue indications from audits, endorsements, and cancellations remain nicely positive and were more favorable compared to both fourth quarter 2024 and third quarter 2025. And through the first three weeks of January, these favorable trends continue. We're watching our customers' business activity daily, and we're just not seeing signs of economic weakness. Regardless of market and economic conditions, I believe we are very well positioned to grow. Our global resources, data analytics, expertise, and unique product offerings put us in a spot to compete and to win. So as we sit here today, we continue to see brokerage segment full year 26 organic growth of around 5.5%. Moving into risk management segment, Gallagher Bassett. Fourth quarter revenue growth was 13%, including organic of 7%. We saw another quarter of strong new business growth and excellent client retention. Looking ahead, we are well positioned to drive new business production and believe full year 26 organic growth will come in around 7%. Fourth quarter adjusted EBITDA margin was 21.6%. a bit better than our December expectations. Looking ahead, we see full year 26 margins in the 21% to 22% range. Shifting to mergers and acquisitions, starting with some comments on assured partners. We are already seeing a lot of success with the AP team leveraging our products, data and analytics, insights, and tools. Our teams are hard at work integrating the 300-plus tuck-ins agency management system conversions, and training of our middle office will be in full swing during 2026. Additionally, a little more than a week ago, all of our U.S. retail operations were rebranded Gallagher. When it comes to our back office integration, we are ahead of plan, including going live on our general ledger, HR, payroll, treasury, and T&E systems. So, we remain firmly on track with our integration plans and our confident we will be able to deliver on our synergy targets. Moving to fourth quarter merger activity, we completed seven new mergers representing around $145 million of estimated annualized revenue. This brings our full year 25 annualized acquired revenue to more than $3.5 billion. That's fantastic. For all of our new partners joining us, I'd like to extend a very warm welcome. Looking ahead, There are thousands of brokerage firms across our footprint, and Gallagher is a great home for entrepreneurs looking to grow their business, add more value to their current clients, and further advance their employees' careers. Our M&A strategy is about being better together so that one plus one can equal three, four, or even five. Shifting to business. Today, our pipeline is showing more than 40 term sheets signed or being prepared, representing around $350 million of annualized revenue. Good firms always have a choice. It would be terrific if they chose to partner with Gallagher. With a strong close to the year, let me reflect on our full 25 financial performance for brokerage and risk management combined. 21% growth in revenue. 6% organic growth. 26% growth in adjusted EBITDA, and more than $3.5 billion in acquired annualized revenue. Another fantastic year driven by our talented colleagues and our bedrock culture. Frankly, our culture is unstoppable, and it drives our success year after year. That is the Gallagher way. I'll stop now and turn it over to Doug.

Doug? Thanks, Pat, and hello, everyone. Today, I'll first walk you through our earnings release and provide some brief comments on organic growth and margins by operating segment and also on our corporate segment results. Next, I'll move to the CFO commentary document we post on our IR website. I'll walk you through our typical modeling helpers and our outlook for 26. Additionally, this is where I'll spend a little more time on organic and margins. Then I'll conclude my prepared remarks with my usual comments on cash, M&A, and capital management. Okay, let's go to the earnings release, to page three. Brokerage segment fourth quarter organic growth was 5%. That's right in line with the information we provided you at our December IR day. Since then, We've received really positive feedback from the investment community for levelizing for the quarterly noise caused by the timing of large live sales and deferred revenue accounting assumptions. That's a fantastic reflection of our sales culture to post 5% in this quarter and 6% for the year. Flipping to page five of the earnings release to the brokerage segment adjusted EBITDA table at the top half of the page. We told you in December that our fourth quarter 25 headline margin would not be comparable to fourth quarter 24 because, as the footnote to that table explains, we are no longer earning investment income on funds we were holding to buy assured partners, and there would also be a roll-in impact of M&A. The footnote tells you that was about 130 basis points. So the quick math shows levelizing for that gets you to 50 basis points of underlying expansions. right at the midpoint of our 40 to 60 basis points of expansion we estimated during our December IR day. That's really terrific work by the team. So I'll give you some more information on brokerage margins when I get to page eight of the CFO commentary document, because this headline noise will happen in the first and second quarter of 26 again. Sticking on page five. Fourth quarter risk management segment organic growth was 7%, right in line with our December expectations. That reflects strong new business revenues and excellent client retention. Looking to full year 26, we continue to see organic around 7%. And then when you flip to page six, the risk management adjusted EBITDA margin of 21.6% was a bit better than our December expectation. And as we looked forward, we see full year 26 margins in the 21 to 22% range. So turning to page seven of the earnings release and the corporate segment shortcut table. For the adjusted interest and banking, clean energy and acquisition lines, all were very close to the midpoint of our December expectations. The adjusted corporate line was a couple pennies less than our midpoint estimate, partly due to a non-cash unrealized FX remeasurement loss and a small tax item. Also, while we adjusted out, we substantially completed the wind-down and annuitization of our long-ago frozen pension plan. It creates a non-cash gap expense here in the fourth quarter and will again in Q126, but those reverse through OCI, so it nets to zero. But more importantly, we hit the market just right and didn't have to inject any cash into the plan. All right, let's leave the earnings release and go to the CFO commentary documents. Starting on page three, these are typical modeling helpers. Most of the fourth quarter 25 actual numbers were close to what we provided back in December, so there's nothing new here. Looking at 26, as you build your models, please use these helpers. In particular, the estimated impact from FX and the forecasted depreciation and earn out payable expense. Turning to page four of the CFO Commentary document. This page breaks down organic performance by business, and it's like what we provided for the first time at our December IR Day. This view helps you see four things. First, it removes the quarterly comparability impact caused by the large life sales. And second, it removes the comparability impact caused by deferred revenue estimates. These two items were causing a lot of quarterly noise. But as we said in December, and you can see here, they are really a no-never-mind on a full-year basis. Third thing this view does is it shows you the quarterly seasonality of our business, and fourth, it gives you organic growth and another level down in the table. Two call-outs on this page. First, in total, our fourth quarter and full-year actuals in blue were in line with our IR date thinking, as shown in the gray column. Second, when you move to the pinkish column, We've wrapped up our full year 26 organic budgeting, and our outlook is unchanged. We continue to see 26 brokerage segment organic growth of around 5.5%. That would be another fantastic year. So when you turn to page 5 in the corporate segment, just two small items. Our full year 26 estimate is unchanged from six weeks ago, and we're now providing a first look at our quarterly estimates. That said, we do have a little more work to do on the corporate segment quarterly budget, but full year is done. So maybe a tweak here or there between quarters, and we'll update you during our March IR day. Turning to page six, the investment income table. Three comments here. First, our 26 forecasts reflect current FX rates and changes in fiduciary cash balances. Second, our forward estimates continue to assume two future 25 basis point rate cuts over the course of the year, one in April and another in September. Third, the second line of this table shows you the amount of interest income we earned on funds that we are holding to buy AP. Clearly, that has gone away, and you can see it won't repeat here in 26. More on the impact of this on our headline margins when I get to page eight. Staying on page six, but shifting down to the the page to the rollover revenue table. The fourth quarter 25 column subtotal of $145 million for brokerage came in pretty close to our December estimate. Looking forward, the pinkish columns to the right include estimated 26 revenues for brokerage M&A closed through yesterday. And you'll see that clearly excludes Assured Partners. We provide a separate page on page seven for Assured Partners. And finally, you'll see the same info for our risk management segment below that. And then to this, you must make your picks for what you think might be unknown M&A that hasn't closed yet throughout 2026. Moving to page seven, this is the same page that we have provided several times before. It shows you how we view AP. Now it includes third and fourth quarter 25 results and our full year 26 outlook. A few comments here. AP's fourth quarter revenues were in line with our expectations. for the fourth quarter while expenses came in a little better than expected. Some of that is a little timing between now and throughout 26. Next, the second item, there could be some small refinements in the 26 numbers because we're still a week or so away from having AP budgets locked down. That said, we don't expect anything significant. And of course, we'll update you in the March IR day. Third, be careful when rolling an AP into your 26 models. You can use first and second quarter columns as is, but for third and fourth quarter, it is the delta between the pink numbers and the blue numbers. Fourth, I also ask you to closely read the footnote. You're going to read three things in there. This table reflects the midpoint of our estimates and does not include any revenue or expense synergies. The non-cash figures shown on this page, which reflect depreciation and earn-out payable, are included within our estimates on page three, so don't double count there. And finally, you'll read that we still see annualized run rate synergies of $160 million by the end of 26, and then up to $260 to $280 million by early 28. I'm also more and more comfortable there could be upside to these numbers, but give us a little more time before we update our estimates. So this is a page of really, really good news. Moving on to page A. This is a new page to help you better understand items that impact the comparability of our brokerage segment adjusted EBITDA margins. In the past, I've done a bridge in my verbal comments to get you past the noise from the impact of FX changes in interest income, income from cash we're holding on assured partners and then when M&A that naturally runs lower margins rolls into our numbers. We think these tables paint a better picture than all the words we're using before. Hopefully this will be more helpful when you build your 26 models. Since this is the first time we've provided this page, let me make a few comments. First, the upper blue table, the punchline is we improved fourth quarter by about 50 basis points. That's all due to the incredibly hard work by the team to control our costs. The lower table gets you started on modeling 26. Blue section first level sets 25 by removing the investment income on funds we were holding to buy assured partners and also resets for estimated FX at current rates. FX will likely change, but at least it gets you something as of today. The pink section of this table has ranges and margin impact commentary for what we see today. The punchline is nothing has changed since our December IR day, and we still see underlying margins expanding 40 to 60 basis points in 26. and we will also begin to benefit from synergies by being better together with AP. You'll also see that we've added a line called unknown M&A with no estimate provided. This is more of a placeholder for you to just think about other factors that could impact margin comparability. All right, let's go to page 9 of our tax credit carry forward page. At December 31st, we had $713 million of tax credit carry forwards. And you'll see the footnote there that says that we have another billion dollars of future tax benefits related to our purchase of AP. The punchline from this page is the same. It creates a nice cash flow sweetener to fund future M&A. As for some modeling thoughts, when you're modeling cash flows, just assume our cash taxes paid will be about 10% of EBITDA for the foreseeable future, and that should get you close. All right, let's move to cash, capital management, and M&A funding. When I look at available cash on hand, expected free cash flows, and future investment-grade borrowings, over the next two years, we might have close to $10 billion to fund M&A before using any stock at attractive multiples. And this was an important point. While we talk about organic a lot, it's worth a reminder that our M&A strategy creates immediate shareholder value through a nice price arbitrage. And it also creates long-term shareholder value through additional sales talent, niche expertise, and further scale. So those are my comments. An excellent 25 for our combined brokerage and risk management segments. Organic growth of 6%, more than $3.5 billion of estimated acquired revenues, adjusted EBITDA growth of 26%, and adjusted EBITDA margin of 35%. Up 70 basis points this year on an underlying comparable basis. And it might be worth a reminder that since COVID hit us, every year our margins have marched higher. We're up over 400 basis points since then. And we still see many more opportunities to improve. Those are fantastic results. So we're on to 26. We have an unstoppable momentum driven by an amazing culture. I see 26 being another terrific year. Okay, back to you, Pat.