Arthur J. Gallagher & Co.

Good afternoon and welcome to Arthur J. Gallagher & Co.'s third quarter 2026 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 meanings of the securities laws. The company does not assume any obligation to update 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 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.

Thank you. Good afternoon. Thank you for joining us for our third quarter 26 earnings call. On the call today is Doug Howell, our CFO, and other members of our management team. We had an outstanding third quarter. Our team delivered strong revenue growth and excellent profitability. For our combined brokerage and risk management segments, Our two-pronged revenue growth strategy, growing both organically and through acquisitions, delivered total revenue growth of 18% in the third quarter. Organic growth was also strong at 5%, reflecting excellent new business, strong retention, positive exposure growth, and the diversity of our business. And we continue to generate outstanding profits. Net earnings grew 25%, and adjusted EBITDA also grew 25%. That marks 26 consecutive quarters of double-digit adjusted EBITDA growth, along with another quarter of margin expansion. Doug will break that down for you in a few minutes. On a segment basis, brokerage revenues were up 19%, of which organic was 5%. We saw excellent growth across our retail, PC, wholesale, and reinsurance businesses. We're now more than a year into the Assured Partners combination. The business is living up to our high expectations. Client retention remains strong and the teams are working very well together. Our risk management segment, Gallagher Bassett, posted revenue growth of 14%, which includes organic of 10%, driven by excellent new business and strong client retention. Our consistent top and bottom line growth is driven by the four strategic pillars that have guided Gallagher for decades. Growing organically, growing through M&A, improving our productivity and quality, and maintaining our culture. I'll comment on each of these. First, organic growth. We have a diversified revenue model, but common across that are our client retention remains strong, their business is excellent, and our client's underlying business activity continues to be positive. It is well known that insurance rates are currently contributing less to growth than they have over the past several years. Caught about a point of organic growth today is tied to rates. This reinforces that rates are just one part of the equation. The bigger drivers of organic growth continue to be new business, strong retention, exposure growth, as well as the diversity of our model across PC, benefits, reinsurance, and claims. So this shows our business performs well through a wide range of economic, interest rate, and insurance pricing environments. And we believe our diversified model and breadth of capabilities position us well to continue growing as the market conditions evolve. We're also benefiting from favorable macro tailwinds. The need for insurance is growing around the world and risks are becoming more complex, thus requiring broader capabilities and more sophisticated solutions. Think about construction, infrastructure, energy, and data centers, as well as the growing need for clients to understand, mitigate, and ensure emerging risks from AI, just to name a few examples. These are the areas where clients need more advice and deeper expertise. That plays directly to Gallagher's advisory strengths and creates a tailwind for durable organic growth. Let me go back to rates for a few minutes. Overall, we continue to see a very segmented PC market. Property is competitive, casually varies considerably by line and account, and there's plenty of capacity looking for attractive risks. Carriers want to grow, but they still need the right risks at the right returns. For us, that creates opportunities to help clients navigate more choices and find the right solutions. Let me break this down by business. I'll start with our global retail PC business. Property remains competitive with renewal premiums declining 6% compared with down 10% in the second quarter. As we discussed in September, that sequential improvement largely reflects the mix and seasonality of renewals rather than a change in the underlying property market. However, Casualty remained firmer overall. Even with competition slightly increasing, conditions still varied considerably by line, account, and geography. In the third quarter, casualty renewal premiums, which includes general liability, commercial auto, and umbrella, were up 4% overall. Professional lines, including D&O and cyber, were up 2%. Workers' comp was up 1%, personal lines was up 3%, and package was also up 3%. Excluding property, renewal premium changes increased 3% in the third quarter, with higher increases in the U.S. versus international markets. And it's important to remember, premium changes in Gallagher's revenues do not move one for one. Renewal premium changes include exposures, changes in limits, coverage, and mix, not just rate. In other words, as property pricing eases, we're seeing clients opting in and using the savings to buy back coverage, increase limits, or improve structure after several years of opting out and making difficult trade-offs. They're also revisiting how much risk they retain, what they transfer, and how they structure their overall programs. And that makes the value of our advice, advocacy, and market access even more important. In the U.S., excess and surplus property remains very competitive, particularly cat-exposed property. E&S. Rates are clearly down, but for us, our teams continue to win new business, helping to offset rate decline. Within casualty, capacity is increasing, but loss costs remain an important consideration, so conditions vary by line and risk. In this case, we continue to see tailwinds, rate tailwinds, and strong growth in casualty. In our renewal book, we are not seeing any meaningful movement back to the admitted market. We're seeing new business still using the E&S market at levels broadly consistent with what we saw over the last couple of years. This shows that it's a different marketplace today. For us, the E&S market is here to stay. It provides important capacity and deep expertise with flexibility on terms and creative structures. All that is critical to delivering customized solutions to our customers. We're seeing a similar story in London especially. Competitive North American cat property has been more than offset by certain marine, Aviation and Political Violence Risks. These risks remain more challenging and they require careful structure and coordinated execution across markets. In reinsurance, the market has plenty of capacity. Property cap pricing remains competitive while casualty is more nuanced given lost cost trends. Reinsurance is another example where price is only one part of the story. New business, the amount of protection clients buy, and how they structure their programs all matter. Our expert capabilities across facultative, casualty, life, and capital advisory give Gallagher Reed multiple ways to grow. Moving to employee benefits. We've seen solid organic growth in our core health and welfare business so far this year. But in the third quarter, however, a few larger consulting projects were pushed out as clients focused on controlling rapidly rising medical and prescription costs. Employers still want competitive benefits to attract and retain people. but managing those rapidly rising costs is their immediate priority. That's where our people really help, working side by side with clients to manage costs and keep their benefits competitive. Let me turn to Gallagher Bassett. It was another terrific quarter with organic growth of 10% driven by excellent new business and strong client retention. Our investments in GB are paying off in both growth and margins. Clients are benefiting from our expanded capabilities and more robust technology. And each of these improves our advice and service and helps drive better claim outcomes. Those investments, together with the depth and experience of our people, continue to strengthen GB's competitive position. With a good pipeline of opportunities, we feel terrific about where the business is positioned. Now a quick comment on what we're seeing in the economy. Our daily revenue indications from our clients' underlying insurance activity Such as audits, endorsements, and cancellations have historically given us a good and practically real-time window into broader economic conditions. When I look at yesterday's report, those indicators continue to be nicely positive, pointing to solid business activity and steady underlying exposure growth. So to wrap up my thoughts on organic growth, property pricing is moderating, and that's well understood. But property is only one part of our very large and very diverse business. The tension remains strong, the business is excellent, and client activity continues to be positive. And as pricing changes, clients are buying more coverage, increasing limits, lowering deductibles, and turning to us for advice on how to structure their risk programs. Those are bigger drivers of organic growth, even as pricing continues to change. We also have a very diverse business. Our growth is not tied to one product, one geography, or one client segment. and we have many ways to grow across PC, benefits, reinsurance and claims. We are large, yet we still have very little market share. We operate in an industry where demand for advice, expertise and risk solutions continues to expand. When I look forward, I remain confident in our 2026 full-year organic growth outlook of approximately 6% for our combined brokerage and risk management segments. And looking to 2027, we see many of the same drivers. Strong New Business, Excellent Client Retention, Positive Exposure Growth, and our Diversified Business Mix. Those support another year of strong organic growth. Now shifting to our second strategic pillar, mergers and acquisitions. We continue to see good opportunities, and as always, we're staying disciplined on strategic fit, culture, valuation, and returns. During the third quarter, we completed five new tuck-in acquisitions, representing approximately $100 million of estimated annualized revenue. That brings us to 21 so far this year with approximately $225 million of estimated annualized revenue. Our pipeline remains active with over 30 term sheets signed or being prepared, representing around $300 million of annualized revenue. And these mergers continue to add terrific people and capabilities across our businesses and geographies. Assured Partners, Woodruff Sawyer, and dozens of others that have joined us are great examples of that strategy at work. We're connecting teams. Sharing capabilities in bringing Gallagher's tools, data, and expertise across the combined team. And in turn, these mergers accelerate our opportunities for future organic growth as we become better together. To all of our new merger partners, I'd like to extend a very warm welcome to the Gallagher family of performance. Turning to our third strategic pillar, continuously improving our productivity and quality. For more than two decades, we've been focused on improving productivity and quality through standardized workflows and a common data and digital strategy across the company and building out our centers of excellence. And today, our centers of excellence are 20,000 colleagues strong, and our goal has remained the same. Reduce repetitive work, improve quality, and give our people more time to serve and advise clients. AI and automation helps to accelerate that journey. and helps us capitalize on our scale. We'll continue to invest where it strengthens client service and growth while improving efficiency and margins over time. Let me wrap up with our fourth strategic pillar, our culture. We're a team first company. Our people help each other, share their expertise and work together to do the right thing for our clients. That's what makes Gallagher special. As we grow, that matters even more. We're bringing new colleagues into Gallagher, giving them more people, more expertise, and more capabilities to help their clients and win new business. The 25 tenets of the Gallagher Way guide how we work and how we treat one another. It's about serving our clients, supporting each other, and growing together. That's the Gallagher Way. So another outstanding quarter behind us. Our strategy is working, our team is executing, and the opportunities ahead of Gallagher have never been greater. I'll stop now and turn it over to Doug to walk through the financial details.

Doug? Thanks, Pat, and hello, everyone. We had a fantastic quarter. Nearly every metric was at or better than the outlook we provided at our September investor day. Incredible total revenue growth, strong organic growth, excellent margin expansion, and terrific earnings growth. So let's go to page one of the earnings release. Our two-pronged revenue growth strategy continued to deliver. When you do the math, you'll see our combined brokerage and risk management segments posted adjusted revenue growth of 17%, adjusted EBITDA growth of 25%, and adjusted EPS growth of 26%. Then it gets even better when you levelize to remove the $76 million of interest income we earned in the third quarter 25 on the funds we are holding to buy Assured Partners. On that basis, adjusted revenues were up 20%, adjusted EBITDA grew 34%, Adjusted EPS grew 37% and adjusted EBITDA per share grew 35%. Like I said earlier, in a word, it's incredible. Flipping to page two, again, levelizing for the interest income earned on the funds held to buy AP. For our combined brokerage and risk management segments, nine-month adjusted revenues were up 27%. Adjusted EBITDA grew 32%. Adjusted EPS grew 34% and adjusted EBITDA per share grew 33%. So the strength we're seeing isn't just a one-quarter story. I'll call it a fantastic nine months, too. So let's move to page three. Brokerage organic growth was at 5% in the third quarter, right in line with our September IR Day forecast and a strong result in a competitive pricing environment. We posted solid organic growth in our base commissions and fees, plus another strong quarter of combined supplemental and contingent revenue growth. Moving to the brokerage margin table at the top of page five, our adjusted EBITDA margin was 35.3% in the third quarter. At the upper end of the range, we noted on our September IR day. Headline margin expansion of 200 basis points and the underlying expansion story is really terrific. I'll unpack that a little bit more when we get to page seven of the CFO commentary document. So let's move now to the bottom of page five. Risk management organic growth was 10% in the third quarter, again, right in line with our September IR date forecast. It's another excellent quarter, reflecting strong new business, excellent client retention, and continued momentum across Gallagher Bassett. When you flip over to page six, risk management third quarter adjusted EBITDA grew 17% with margin landing at 22.8%, up 90 basis points over last year. That reflects strong organic growth and continued operating efficiencies. Looking ahead, we see fourth quarter and full year 26 adjusted EBITDA margin again north of 22%. That would cap off another very strong year for Gallagher Bassett. We'll be now to the corporate segment on page seven. Not really much here. Adjusted corporate results were a bit better than our September investor day outlook, but that's primarily because the non-cash unrealized FX loss came in smaller than estimated. When you turn to page seven, about halfway down, you'll read that we repurchased about 400,000 shares for approximately $100 million in the third quarter. That brings repurchases to about $580 million through September 30. Okay, let's leave the earnings release and turn to the CFO commentary document. This document includes details that can meaningfully affect your models, so I'd encourage you to give it a careful look. Starting on page three, Most third quarter items came in very close to what we provided in September. As you model the fourth quarter, please consider the FX impact and non-cash expenses, as these have been updated to reflect the latest exchange rates. Turning to page four, a few business-level organic growth highlights, then the outlook. Third quarter brokerage organic was 5%, meeting our September midpoint estimates. and a few business-level call-outs. Reinsurance growth was 7%, reflecting another quarter of strong new business and retention, more than overcoming the competitive pricing environment. Our UK and EMEA businesses had a great quarter, which was somewhat benefited from war risk premiums. Benefits did come in a bit below our September forecast. Most of that reflects a contingent commission true-up and the timing of several consulting projects that Pat mentioned earlier, and admittedly little relates to some rounding in the percentages. Underlying core health and welfare growth remained solid and in line with our expectations. And then again, you'll see on this page another outstanding quarter for Gallagher Bassett's third quarter coming in at 10% organic growth. So moving right on this page, our outlook, we continue to see fourth quarter and full year 26 brokerage organic growth of around 5%. And it's worth a quick reminder of what we discussed in September at our IR day. Fourth quarter brokerage organic will include AP for the first time. The math behind that inclusion gives you roughly only 20 to 25 basis points of headwind. So that's another really good story here. And our early view of 27 is also encouraging. Our early planning indicates legacy brokerage organic growth could look a lot like 26. and it's also indicating that our early successes of being better together, the roll-in of AP is looking like maybe only impacting that by about 40 to 50 basis points for the full year 27. And as I provide all this information, please know we're assuming broadly similar conditions, our market conditions in 27 as we saw in 26. And then one other sound bite here. Improving AAP Assured Partners base organic growth was not and is still not included in our synergy assumptions. So progress towards Gallagher growth levels over the coming year to two years would represent additional upside. Moving down a few lines of the risk management segment, you'll see our outlook remains strong. A 9% organic year would be another impressive result for Gallagher Bass and reflects the momentum from our continued investments in the business. As for 27, our early look at the pipeline suggests the momentum should continue. So 27 also could look a lot like this year for Gallagher Bassett. Moving to the investment income table at the top of page five, our fourth quarter investment income estimates reflect current exchange rates, estimated fiduciary cash balances, and the September rate increase. And staying on this page, but shifting down to the rollover revenue table. Third quarter rollover revenues came in pretty close to our estimates provided in September. For the fourth quarter, acquisitions closed through yesterday could add about $65 million to brokerage revenue and about $5 million to risk management revenues. You also need to make a pick for future M&A. However, realize we're already well into the quarter, so practically speaking, that fourth quarter number shouldn't meaningfully increase all that much. This seems to be another place for the closer look in your models. And finally, as a reminder, fifth line up from the bottom, please remember to adjust the prior year revenue base for this divestiture and other line before applying your fourth quarter organic growth assumption. Let's turn over to talk about assured partners on page six. We discussed in our last few investor days that integration is progressing very well. So there's no need to repeat today, other than to add that all back office systems are integrated and up and running. And by year end, close to half of AP's revenues will be up and running on their designated agency management system. That's great work by the team. So just a few call outs from this page. AP did deliver $285 million of adjusted EBITDA in the quarter. That's right in line with our September estimate. We remain on track for $160 million of annualized run rate synergies by year in 26. And that goes up to $325 million by early 2028. And just one modeling helper here. When I get to page seven in a second, we give you our estimated fourth quarter margin expansion from AP synergies. So don't, again, add synergies from this page. If you do that, you'll double count. So let's go now to page seven. This really shows the power of our model when it comes to our margins. First, underlying brokerage margins expanded 60 basis points in the quarter. That's at the top end of our September range. That's our vigilant work on process standardization, greater use of our centers of excellence, deploying technology, and other productivity initiatives, all continuing to show up in our underlying results practically every quarter for the last five or more years. Second, AP added another 310 points of margin lift in the quarter. First line shows 220 basis points related to AP pre-synergies. Understand that 180 basis points of that relates to having full quarter of AP this year versus only a partial quarter of last year third quarter. Then the next line shows another 90 basis points came from synergies. That's the integration work now showing up in our results. And there's more ahead. As we look out to 27, we see strong margin momentum and multiple levers to drive further improvement. Additional AP synergies, greater use of our lower cost centers of excellence, and continued technology and productivity initiatives. So we're not just a revenue growth story, we're also a profitability growth story too. Let's move to page 8 to our corporate segment. Our fourth quarter outlook is very close to what we presented in September, and you'll see again in the right lower box, it's just a reminder that we have $3.4 billion of future tax savings from tax credits and tax deductible and tangible amortization. That shows up in our cash flow statement rather than in the P&L. So for modeling, set your cash taxes paid at about 10% of EBITDA, and that should get you close. And remember, those tax benefits give us more cash to put to work. Combined with cash on hand, expected free cash flow, and future investment-grade borrowings, we estimate more than $12 billion of acquisition capacity to deploy over the next two years. That's substantial capacity to continue executing our M&A strategy. Our pipeline remains strong, and we stay disciplined on fit and price. We continue to favor M&A, but we'll continue to repurchase shares opportunistically. Another great quarter across the businesses. We're on track for a terrific full year. We're growing organically, executing on a strong M&A pipeline. We're expanding margins, realizing the benefits of AP, and deploying our capital to create long-term shareholder value. We have good momentum heading into 27, and we're very excited about what's ahead. So those are my comments. Back to you, Pat. Thanks, Doug. Sherry, I think we're ready for some questions and answers.