J. Patrick Gallagher:

Thank you very much. Good afternoon. Thank you for joining us for our second quarter 2024 earnings call. On the call with me today is Doug Howell, 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 EBITDAC margin expansion of 102 basis points to 31.4%. GAAP 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 EBITDAC 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 PC retail operations, we delivered 6% in the U.S. 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 U.S. 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 tightened 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 loss 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 maybe 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 casualty. While renewal premium increases are rational carrier response in the current environment, our clients have experienced multiple years of increased costs. Having a trusted adviser 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 in balance 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 2024 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 2024 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 EBITDAC 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 rising claims. Looking forward, we see organic in the next two quarters around 7% and margins around 20.5% that would bring full-year 2024 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 the 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. Michael 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 with 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. Doug?

J. Patrick Gallagher:

Thanks, Doug. Operator, do you want to open it up for questions, please?

Elyse Greenspan:

Hi, thanks. Good evening. My first question is on the wholesale organic growth. You guys said it came in at 11% in the quarter. I believe the IR Day guide was 7% to 9%, and I think that reflected the slowdown you expected in open brokerage, I think, on the property side. So what changed relative to that guidance, and how the results came in, in the quarter?

Elyse Greenspan:

Okay. And then you – at your IR Day, you also had said when we think about next year, that it feels a lot like 2024. I think the assumption right is perhaps something still within the range of 7% to 9% organic in brokerage. I'm assuming that still remains the case, if you could confirm that. It's obviously been a few weeks. And then if that's the case next year, if this year's margin expansion was 80 basis points without the Buck and M&A noise, would that be the rule of thumb in terms of margin expansion for next year if you're in the 7% to 9% organic growth range?

Elyse Greenspan:

Okay. Thanks. And then my last one. You guys said – you said you have $3.5 billion to fund M&A this year. How much did you spend in the first half of the year? And given the pipeline that you guys see, does it feel like there might be some buyback this year? Or is it still kind of TBD?

Elyse Greenspan:

Thank you.

Operator:

Our next question is from Mike Zaremski with BMO Capital Markets. Please proceed with your question.

Douglas Howell:

All right. So a great thing and maybe we haven't talked about it directly for quite a few quarters, but you always have to think about the opt-in, opt-out of the buyers' behavior. When prices are going up, buyers opt out of coverages, which might mean they increase the deductible, lower a limit or just don't buy certain coverages. As prices start to moderate or slower amounts of increases, they tend to opt back in. They reduce their deductibles, they raised their limits and maybe they buy coverages and they said, we just couldn't afford before. So if you go all the way back into our investor materials, there is always a delta between rate and exposure and what our organic growth is. And so that's why in periods when you see property is up 12%, we're not growing our property lines by 12%. They're growing 7%, 8%, 9% that's actually our revenue. So you always have to remember the opt-in, opt-out impact. Then the other thing to do is you got the dynamic of large accounts versus mid-market and small accounts that can influence that. So we're giving you a feel of what's going on in the market, but the behavior of our actual customers can vary depending on – by rational buying behavior. Prices go down, I buy more. Prices go up, I buy less.

Michael Zaremski:

Got it. And obviously, it's great you guys disclosed it. And so I guess I just want to put a final point on it. So is it fair to say that you're doing a good job for your clients and on a year-over-year basis, it's putting out a little bit of, I guess, pressure on your organic year-over-year? And separately related rate [indiscernible] do clients have the same amount of flexibility as they do in other lines that would cause the RPC disconnect to continue?

Michael Zaremski:

Okay. That's helpful. And just lastly, pivoting to reinsurance. To the extent you have a view, one of the largest reinsurers today put out some data kind of showing that reinsurance demand. I mean you guys have done a great job not only taking market share, but kind of being able to keep your organic high because of that demand, increased like mid teens-ish this year. And if we kind of think about what's going on in personal lines, there's a lot of inflation. So just curious, would you expect kind of demand for reinsurance. I don't know if you think all the way into 2025 yet, but to remain at kind of pretty high levels relative to historical and relative to this year?

Michael Zaremski:

Got it. So coming as seaside too, maybe more demand. Okay. Thank you very much.

Operator:

Our next question is from the line of Gregory Peters with Raymond James. Please proceed with your question.

J. Patrick Gallagher:

Hey, Greg.

Douglas Howell:

Well, it'll take me a minute to dig it out, but I can tell you that June year-to-date, we've actually expanded the spread between new and lost by a full point. And I think that's probably the best way to look at it. The absolute numbers are kind of irrelevant. Our non-recurring is also coming back. Before some of the non-recurring revenues might have been putting just a slight drag on organic, but now they're actually being in line with just our recurring business. So you're seeing an expansion of our spread between new and lost. How do we see that going forward? Greg, it gets more and more complicated. I actually think our team will do a better job showing our wares and our capabilities in a more of a stable rate environment versus kind of some of the chaotic rate environment that we've been seeing over the last few years. We've developed – we spent so much money on resources in the last five years. Three of those were consumed with COVID. Two of those have been consumed with some chaotic market behavior. Put our guys on a field with kind of calm rate environment, a client that's not trying to just save their business and rebuilding it after COVID, I think you'd be amazed at the digital and data and analytics and expertise. And now bring our reinsurance folks into bear, stack them up with our wholesalers, I got to tell you, it is a compelling offer at the point of sale that I would think that would absolutely deliver better net new business, more new, less loss as our clients really see the capabilities that we have built over the last five years. Arguably, maybe we've spent $1 billion in capabilities over the last seven years, something like that. So that's going to come out at the point of sale and give us a little calm in the market, and I think you're going to see our new business continue to go up.

J. Patrick Gallagher:

Well, this is Pat, Greg. Let me take the operational side of that, and I'll throw the ball to Doug for the numbers and any kind of discussion there. But everywhere I look, I see opportunity and unbelievable benefits from using our centers of excellence. We started off checking policies 20 years ago with 12 people. We now have 12,000 people supporting over 400 services in 100 countries. It is unbelievable the level of professionalism that they help us attain. And that is a differentiator at the point of sale. It's a differentiator when we're recruiting. It's a differentiator in everything we do, and I don't see any sense of that slowing down or not being something that continues to expand. It's not just about replacing heads by any means. It's about having the people that should be doing things, doing them and freeing up those that should be doing other things, giving them the time to do that, which I do think feeds into retention and new business. So I think the – our centers of excellence are a unique product offering back to Doug's point about all the things we've invested in I think they are a very beneficial add to our sales list of things we provide at Gallagher. And as we grow through acquisitions alone, everyone of those people join us and we immediately start plugging them into this resource, which is another one of the reasons they join us. So to me, it's a very differentiating thing that we do. I think our team there is absolutely spectacular, and I'll let Doug address the numbers.

Gregory Peters:

Thanks for the color. Just a point of clarification. And I probably should know this number, Doug, but I don't remember. On the capital management side, you said, well, listen, if we can't do the deals, you get through your earn-out, you might consider share repurchase. When was the last time you guys were active in share repurchase?

Gregory Peters:

Okay. All right. No, no. Thanks for the answers.

J. Patrick Gallagher:

Thanks, Greg.

David Motemaden:

Hey. Thanks. Good evening. I just had a question. I was hoping to get a little bit more color on the July RPC acceleration that you mentioned, Doug, maybe just a little bit around the lines. Is it property moderation kind of pausing, or is a casualty acceleration? What's going on there?

David Motemaden:

Got it. Thanks. And there was a line in the press release on the adjusted comp ratio that caught my eye, just where you noted savings related to headcount controls. That's the first time I've seen that in, I can't remember how long. I'm just wondering, is that a – I guess, is that to do with – something to do with the offshore centers or is this more of a concerted effort to show some margin expansion as we think about this year and into next year?

David Motemaden:

Got it. Okay. That's helpful. And then maybe just sneaking one more in. Just on the contingent commission accruals that you guys had made the true-up to this quarter. I guess, we have seen a lot of noise this quarter on casualty reserves, particularly on the more recent years. I'm wondering how you feel about the potential for more of those reserve adjustments to come through and how that might impact the contingents?

David Motemaden:

Yes. Understood. Fair. Thank you.

Operator:

Our next question is from the line of Mark Hughes with Truist Securities. Please proceed with your question.

Douglas Howell:

Right. So first of all, let's make sure you asked about the history is that I think in 2022, we posted about 12% annual organic growth, 2023, it was – excuse me, 2021 was – it was 12%, 2022 was about 13% and last year is pushing 16%. This year, if we get 9%, we did talk about a couple of very large wins that we had that incepted in mid-2023. What we're seeing in our book of business right now is actually reassuring, not that we need reassurance. This is a great near double-digit grower and has been for a very long time is we're starting to see more and more opportunities in that $2 million to $10 million type customer a year. If you look at the amount of new business sales that are happening relative to, let's say, five years ago, it's nearly doubled now. We're double the size, too, but the carriers are beginning to understand that we offer a highly customizable solution. Self-insureds are seeing that our outcomes are better. So I think that there's a market awakening that we – when we pay nearly $12 billion or $13 billion primarily workers' comp and general liability claims that would be one of the top five, six, seven tiers in the U.S. as measured by total claims paid. So the expertise customizable services is becoming more and more known in the industry. So we're getting many more trips to the plate. Maybe a couple of fewer home runs, but I think we're going to see a lot of doubles and triples out there. So I wouldn't call it a lull because we're in now 9% this year, but we did have two years of some pretty big wins in there.

Douglas Howell:

Yes.

Douglas Howell:

Yes. Listen, I think that right now, open brokerage is maybe in that 11% to 13% range. And I think that binding and programs might be in the low-mid-single digits, something like that.

Mark Hughes:

Great. Appreciate it. Thank you.

Operator:

Thank you. Our next question is from the line of Rob Cox with Goldman Sachs. Please proceed with your question.

J. Patrick Gallagher:

Yes, I think some of that flows back – well, so for instance, a good example of that is a lot of our public entity clients, and as you know, we're very, very sizable in the public entity sector. They just work off a budget. And if the primary premiums are rising, they're taking bigger retentions, they're dropping limits, and they don't – they're not necessarily comfortable with that. So when the opportunity to buy those back up comes up, and they had an extra layer, they expand their coverage, oftentimes, we will call that new business. And at the same time, we're facing the renewal reductions on the stuff that stays with us. But it is a factor of what's available and what their budget restraints are.

Robert Cox:

Okay. Thanks for walking us through the nuances there. And then just on the revenue indications from the audit endorsements and cancellations, those are remaining positive. Just curious if the rate of change on those is either accelerating or is that decelerating at this point?

Robert Cox:

Got it. Thank you.

Operator:

The next question is from the line of Mike Ward with Citi. Please proceed with your question.

Douglas Howell:

All right. So yes, there's some good program development going on that combines those three together. Then also, you're having the introductions that happen across the units. I think our introductions to our reinsurance folks coming out of our carrier relations folks to the carriers is working very well. We're seeing some nice wins on that. Getting our program folks integrally involved with the reinsurers to create the capital, find the fronting market, it's going very well, at least from the CFO's chair.

Michael Ward:

Yes. No, that's helpful. Thank you. And then second question was just on the political election scenario type theme. Curious if you have any other kind of tax credit generation prospects in the pipeline, and any, I guess, political risk to those in the near term that we see?

Michael Ward:

Okay. So maybe if I'm thinking about it right, that – this dynamic should help bolster you in terms of, I don't know, having extra leverage in the M&A scenario if rates are cut. That should help sort of bolster your competitive edge, I would think. And do you have like a sort of update on the PE interest in the market?

J. Patrick Gallagher:

Let me take another side of that too, Mike. Second quarter, I believe it was Marsh Perry put out a reporter Optus partners. There were 62 buyers of properties in the second quarter alone. There's a lot of private equity interest in our space. That's not stupid money. I do believe that the multiples have risen, that we've been paying for these properties because of that interest over the years. Having said that, I think the quarter was 20% down in actual transactions. So you've got maybe smarter money, maybe smaller amounts of money, but the transaction count is coming down. I think sellers, as Doug said, are getting a little bit more discerning. And I do think when you take a look at what's happened with some of the roll-ups who are now at a point where it's time to go public, and I won't mention any names, you know who they are, well, let's see how that goes. It isn't an easy slog, and I think sellers are seeing that as well. And by the way, it's pretty easy to join somebody that's going to change, nothing in your shop until they want to go public. Better, I think, as Doug said, and joined me that everybody from the family to you all as investors, you have the same stack. Now one other comment on this. When we do an acquisition, we give the opportunity for everybody in that acquisition from that point on to participate in this equity. We've got an employee stock purchase plan. We have an LTIP program for management and senior producers. We've got all kinds of ways for people to participate in our success and our growth. You sell to the PE people, the owners do great, PE investors hopefully do great, and that’s it baby. Well, I like our model.

Operator:

Our next question is from the line of Grace Carter with Bank of America. Please proceed with your question.

Douglas Howell:

I think the degree of difference on a full-year on – listen, we're talking about a couple of million dollars on the difference between the 9% and 10%. So I wouldn't say that it's made $5 million. So there's nothing that's just – we think that we've got better insight for the rest of the year and so that range is coming maybe to the lower end of it than the upper end of it.

Douglas Howell:

Maybe the latter. I think it's been four weeks since we talked to you. We just finally got one more data point, and that's the close of June. So we'll talk to you again in September. And either way, listen, anywhere in that range. Look at that, that's 7% to 9% growth on top of 9% last year, 9% before. When you go back in 2019, we grew 6% all in. anywhere in that range is a terrific year. And if we can repeat it again next year, it's another terrific year.

Operator:

Thank you. Our last question will be from the line of Meyer Shields with KBW. Please proceed with your questions.

Douglas Howell:

No, it's very small.

Meyer Shields:

Okay. Perfect. That is good news. Second question, just looking for a brief overview of your appetite for additional acquisitions in personal lines, I guess, both within high net worth and beyond that?

J. Patrick Gallagher:

We're actually very excited about the stuff there. I think that's – it's, a Doug said, a real opportunity for us.

Meyer Shields:

I've got a ping pong table. That's about it.

J. Patrick Gallagher:

I think that's our last comment. So just our last question, let me make just a few comments on the way out here. Thank you, again, very much all of you for joining us. I know it's a little late, and thanks to all of our Gallagher colleagues around the world for their hard work and their dedication. These quarters don't just happen. Thanks to your efforts, that means our people we're in a really enviable position our net new business is up. Our M&A pipeline is growing. I'm proud of the year-to-date financial performance. And as you can tell, I'm bullish on 2024 and beyond. So 40 years, 16% TSR, compound average annual growth rate, pretty good 40 years. I'm looking forward to the next 40. Thanks for being with us.

J. Gallagher:

Thank you. Good afternoon. Thank you for joining us for our first quarter '24 earnings call. On the call with me today is Doug Howell, our CFO; and other members of the management team and the heads of our operating divisions. We had a great first quarter to begin 2024.

Operator:

[Operator Instructions] Our first question comes from the line of Elyse Greenspan with Wells Fargo.

Douglas Howell:

Well, listen, I think that the CFO commentary document has kind of said 90 to 100, I think, consistently. If I said 100% of the last IR Day, I may have said towards 100 basis points. So I think our guidance feels, to us, about the same.

J. Gallagher:

Well, let me comment on that one. First of all, I think everybody saw that the U.S. Chamber has filed a lawsuit in Texas that's challenging this, and we're supportive of the Chamber's efforts. We think it's an overreach by the executive branch.

Operator:

Our next question comes from the line of Mike Zaremski with BMO Capital Markets.

J. Gallagher:

Sliced and diced every margin by every possible measure you can think of. And no, they're not a bit lower. We've been trading in California for 50 years. We love the state, we're big, big there, and our people love working there.

J. Gallagher:

Mike, this is Pat. I think it's fair to say that when opportunity presents itself, we're not afraid. I mean, 10 years ago, we stepped up and bought Wesfarmers out of Australia for $1 billion. That was the biggest play we'd ever made, and had, in fact, some financing for it that's worked out incredibly well.

Douglas Howell:

Yes. I think -- Mike, this is Doug. I think that we have a chassis now that we can bring on a lot of smaller acquisitions, nice family-owned businesses that realize that they can be better together with us. I think that our M&A integration process is pretty smooth, very refined, 700 deals over the last 20 years. So we've got that down.

David Motemaden:

But Pat, I wanted to just talk about your comments you made on the property insurance side and on clients looking to add incremental coverage or limits and just how I can think about that as a potential offset to some of the moderation in property insurance pricing that you were talking about as well. Just help me think about the -- both of those factors and sort of how to think about that moderation and the impact that could have on your organic growth in the future.

Douglas Howell:

Interestingly, David, we have -- we're seeing rate increases and the exposure unit increases in the middle and smaller market greater than we did in the larger account size whereas, say, you go back a year or so ago, it might have been just the opposite. So we're starting to see -- if you're talking about some rate moderation and the increase, it's starting to pick up a little bit in the middle and small market space.

J. Gallagher:

Also on the property side, back to that, David, you've got -- many years were 0 interest rates, not the last couple, but 0 interest rates left the schedules pretty much untouched. So you do have underwriters now being much more disciplined around the values, and that's pushing values up. So we've got the benefit of more values being insured in the property business.

David Motemaden:

No, thanks for that. And yes, I do -- I was referring also, and you guys answered it, just the primary market, the moderation there. It is interesting to hear more about sort of that opt-in which I have not thought about. So that is helpful to hear about that. And then if I could just add 1 more, just 1 more question.

Douglas Howell:

As probably more of the -- if you remember, in December, we had some push out of the fourth quarter. So I would say it might be more catch-up than it is pulling from the future. And we're talking about $5 million on a $3 billion revenue quarter. So it was -- it's not meaningful in any of our numbers. The difference. We love the business, but it's not -- it doesn't make a big difference in any of our numbers.

Douglas Howell:

That's right.

Mark Hughes:

Pat, did you give the breakout for open brokerage versus the MGA or binding business within the wholesale?

Douglas Howell:

You got about 16% open brokerage this quarter.

J. Gallagher:

Higher than that. So more like 10%, 11%.

J. Gallagher:

No, I think that's really interesting, Mark. In my career, that line has been, at times, pretty darn cyclical, and it is just as flat as a pancake. It's just going along. You might see 2 here, 3 there. And it's really just kind of flat.

Katie Sakys:

First, just kind of wanted to touch on the margin expansion guidance for the full year. If organic revenue growth were to come in higher than the current guide, whether that comes from the wind blowing and property rates reaccelerating or for something else, how much of that would you guys kind of envision letting fall to the bottom line? Like, should we expect to see greater margin expansion? Or are there other areas of investment opportunities that you guys would kind of like to see some progress made on.

Katie Sakys:

It's a helpful clarification. Just maybe as a quick follow-up. In terms of benefits from head count controls and client-related expense saves, are those things that you expect to persist as the year goes on? Or are those more specific to 1Q in particular?

Operator:

Our next question comes from the line of Yaron Kinar with Jefferies.

J. Gallagher:

I think -- let me go back to my prepared remarks. We've seen umbrella in the quarter, up 9%, which is kind of in line with what we're talking about in March. GL 7%, and that's where I think probably we've got to look at our carriers and say, are there going to be some reserve challenges going forward. So the 7% seems pretty -- it seems pretty stable. Maybe there'll be a push up a bit. And package, which is, of course, property and liability together at 8%; where comp, really not much, 2%. I think that feels like it's going to be there for the year. I think you could take our March discussions and kind of update them 6 weeks later for those numbers.

Operator:

Our next question comes from the line of Meyer Shields with KBW.

J. Gallagher:

I don't have the actual stats on that.

J. Gallagher:

No. I think that our partners are being very reasonable. We're not we're not having a lot of headbutting on that subject at all.

Robert Cox:

So I think in March, at the Investor Day, you guys were pretty optimistic on the potential for reacceleration in RPC in the remainder of 2024 due to higher exposure to property business and less workers' comp and the potential for casualty pricing increases. Is that still the case? Or is the property rate environment, with a little deceleration in the rate of increase, made you change your view a little bit?

Robert Cox:

Okay. Okay. Got it. And then maybe sort of a similar question in some ways. But if we strip out reinsurance, is the touch lower organic guide for the remainder of the year the same? Or do you think ex reinsurance, what would you say, for the trend of organic growth ex reinsurance?

Douglas Howell:

Well, it's a laundry list. I mean, first, you start with our people. I think that our training, our development, our internship program, I think bringing on more producers, we are seeing lots of interest in joining Gallagher by experienced producers out there. I think they see that the organization has a lot to offer for them.

J. Gallagher:

I'd like to emphasize what Doug -- I've got a lot of listeners on this call. I'd like to emphasize where Doug started this. Most of that spend is, in one way or another, directly related either to making our service offering to our clients better, and we happen to know, for instance, that our digital offerings from small accounts through the risk management accounts, connectivity, things like Gallagher Go or even a middle market client can see what their policies are, what's going on with their buildings, et cetera, et cetera, are being incredibly well received.

Operator:

Our next question comes from the line of Mike Ward with Citi.

J. Gallagher:

It's really where we had dreamed it would be. The team is incredibly solid. We're not having defections. We've got -- what's been fun about that is that there's a remarkable interest in having continued relationships and building relationships with the retail side of the house, which is what we predicted.

J. Gallagher:

Well, interestingly, like, the tone from our clients is there's a large amount of concern. And we're sitting with clients that, a, in some instances, don't know why they have turnover. And we're able to get in and do some data analytics around what's going on with them and where -- what's going on there. So a very deep concern about wanting to hold on to their top people.

Michael Zaremski:

Just a quick follow-up. You guys always give color on umbrella, lots of people do. Just curious, is there any way you can dimension what percentage of your business is umbrella?

J. Gallagher:

Do you have another question, Mike? We'll dig on that for a second.

J. Gallagher:

We're looking here.

J. Gallagher:

Well, I think that's it for questions. If I can just make a comment here. Thank you again for joining us this afternoon. And I would like to thank our 53,000 colleagues around the world for their efforts. Their hard work and dedication is evident when we report another fantastic quarter of growth and profitability.

Operator:

This does conclude today's conference call. You may disconnect your lines at this time.

J. Patrick Gallagher:

Thank you very much, and good afternoon, everyone. Thank you for joining us for our fourth quarter '23 earnings call. On the call with me today is Doug Howell, our CFO, as well as the heads of our operating divisions. We had a strong fourth quarter to wrap up another fantastic year. All measures were right in line with what we said during our December IR Day. For our combined Brokerage and Risk Management segments, we posted 20% growth in revenue, headline 8.1% organic growth, but that's more like 9.4% controlling for the 606 accounting and large life case timing. We also had a terrific merger and acquisition quarter. We completed 14 mergers totaling $410 million of estimated annualized revenue. GAAP earnings per share of $0.30 and net earnings margin of 2.8% were impacted by the counterintuitive earn-out payable accounting that Doug will elaborate on in a few minutes. So, better to look at it more on a comparable basis. Adjusted earnings per share were $2.22, up 23% year-over-year, and we posted an EBITDAC margin of 30.1%, up 69 basis points over fourth quarter '22. What a terrific quarter to close out an incredibly good year by the team. When I think about our growth for the full year, we are up 18% in revenue, that's an increase of $1.5 billion. That's amazing. Moving to results on a segment basis, starting with the Brokerage segment. Reported revenue growth was 20%. Organic headline was 7.2%, but I see it more like 8.7% without the accounting and timing noise, and 11% if you include interest income. Adjusted EBITDAC was $647 million, growing 21% year-over-year, and we posted adjusted EBITDAC margin expansion of 48 basis points. Let me give you some insights behind our Brokerage segment organic, and just to level set, the following does not include interest income. Our global retail P&C brokerage operations posted organic of 8%. This includes about 8% organic in the U.S., 8% in the U.K., 5% in Canada, 10% in Australia and New Zealand. Our employee benefit brokerage and consulting business posted organic of 2% or 6%, controlling for the timing of those large life cases. Shifting to reinsurance, wholesale and specialty businesses, overall organic of 14%. This includes Gallagher Re at 12%, U.S. wholesale at 12% and U.K. specialty at 16%. So, all of these are very similar to what we were seeing throughout the year. Next, let me provide some thoughts on the P/C insurance pricing environment, starting with the primary insurance market. Global fourth quarter renewal premiums, which include both rate and exposure changes, were up 8.5%. That's in-line with the 8% to 10% renewal premium change we have been reporting throughout '22 and '23. Renewal premium increases continue to be broad-based, up across all of our major geographies and most product lines. For example, property is up 15%, even in a slow cat property quarter. General liability is up 6%, workers' comp is up 2%, umbrella and package are each up about 10%. Shifting to the reinsurance market. 1/1 renewals were orderly reflected a more balanced supply-demand dynamic. Continued strong demand for property cat cover was met with sufficient reinsurance capacity from existing reinsurers and cat bonds. Importantly, reinsurers continue to exercise discipline on pricing and terms, not giving back the structural changes achieved last year. In casualty, while there was adequate supply, most casualty treaties experienced pricing pressure. Specialty lines renewed mostly flattish. However, coverage limitations continued on war-related products. So, in our view, insurance and reinsurance carriers continued to behave rationally, pushing for a rate where it's needed to generate an acceptable underwriting profit. Property is still needing rate. And more and more, we're hearing about the need for rate in casualty lines. If prior year development turns into a big concern, we think it could be a multiyear journey of rate increases. All that said, always remember, our job as brokers is to help our clients find the best coverage while mitigating price increases. So, not all these renewal premium increases ultimately show up in our organic. Moving to our customers' business activity. Overall, it continues to be strong. During the fourth quarter, our daily indication showed positive midyear policy endorsements and audits ahead of last year's levels. So, we are not seeing a slowdown. The same strength is also evident in the U.S. labor market with continued growth in non-farm payrolls and low unemployment rate, which is why I believe our HR consulting retirement and benefits business will have terrific opportunities in '24. As we sit here today, we are very well positioned. 2023 was a great new business year, and I believe we will continue to win new clients while retaining our existing customers. We have incredible niche expertise. Our client service is top notch, and our data and analytics continues to distance ourselves from the competition. We can handle any account of any size, anywhere around the globe. All this leads me to reaffirm that we will still see further '24 Brokerage organic in the 7% to 9% range that would lead to another outstanding year. Shifting to mergers and acquisitions. We had an excellent fourth quarter, completing 13 new brokerage mergers, representing about $350 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 family of Gallagher professionals. And we are off to a strong start to '24. We've already closed four brokerage mergers here in January for about $30 million of annualized revenue. We also have around 40 term sheets signed or being prepared, representing around $350 million of annualized revenue. We know not all of these will ultimately close, but we believe we'll get our fair share, clearly, a very strong pipeline. Moving on to Risk Management segment, Gallagher Bassett. Fourth quarter organic growth was terrific at 13.2%, full year at 15.8%. Adjusted fourth quarter EBITDAC margins of 21% and full year at 20%, all this right in-line with our December expectations. We also completed one merger in Australia with expected annualized revenue of about $60 million, adding new capabilities in the disability space. Looking forward, we continue to see '24 year organic in the 9% to 11% range and full year margins close to 20%, and that would be another outstanding year. And I'll conclude with some comments regarding our bedrock culture. It's a culture of client service, ethics and teamwork encapsulated in the Gallagher way. It is an unrelenting culture of excellence that helped drive full year '23 results for our combined Brokerage and Risk Management segments of 18% growth in revenue, of which 10% was organic. 51 mergers with nearly $900 million in estimated annualized revenue and 20% growth in adjusted EBITDAC. Most importantly, we have a culture that our people believe in, embrace and live every day. It's a huge competitive advantage and will continue to fuel our success and growth. That is the Gallagher way. Okay. I'll stop now and turn it over to Doug. Doug?

J. Patrick Gallagher:

Thank you, Doug. And operator, I think we can go to questions now, please.

Elyse Greenspan:

Hi, thanks. Good evening. My first question, within the 7% to 9% organic Brokerage guide for 2024, can you guys give us a sense of what you're assuming for pricing and economic exposure throughout the course of the year?

Elyse Greenspan:

And then when you guys go through and come up with the 7% to 9%, are you assuming that all of your businesses will be in that range? I mean, now you've been seeing really strong growth within reinsurance, wholesale and specialty. Are those expected to continue to be above and maybe some of the others like benefits might be below? How do you see the different businesses shaking out in '24?

Elyse Greenspan:

And then, Pat, you mentioned some interesting comments on the casualty side. We're starting to hear your thoughts about pricing pressure and just you said right, multiyear journey here. Can you just tell us like what you're seeing and then how you expect this cycle could transpire assuming we do start to see more reserve holes emerge across the industry?

Elyse Greenspan:

And then one last one. Have you guys reserved to the maximum on the earn-out associated with the Willis Re deal?

Elyse Greenspan:

Thank you.

Operator:

Thank you. Our next question is coming from Mark Hughes with Truist Securities. Please proceed with your question.

J. Patrick Gallagher:

Hi, Mark.

J. Patrick Gallagher:

Well, I think open brokerage has been where we've had the real nice run-up. I mean it's probably double to triple what's going on in the program business. So, if you look at open brokerage that running around 13% to 15%, you're probably looking at 5% on the programs.

J. Patrick Gallagher:

I think -- well, I mean, any change in pricing is going to have an impact on organic. But I'm not -- no, I don't see carriers at this point saying, "Oh, the good news is I can take the price backwards." So, we are still seeing a push on property rate. And then you do, of course, have carriers incredibly focused on valuations. That kind of went by the wayside for years. There was no inflation, fine, 0% blah, blah, blah. Now claims are coming in, they didn't get their premium for it, the replacement costs are substantially higher than they may be predicted. And so, I think you do have a little bit of time left where there's going to be some valuation correction, and I do think there is a need for continued rate strengthening.

J. Patrick Gallagher:

Thanks, Mark. Thanks for being with us.

Michael Zaremski:

Hey, good evening. So first question on M&A. You guys have been extremely successful integrating and acquiring firms. But I'm just curious if the landscape has changed a bit in terms of kind of what's available. And, I guess, just for example, when I was -- you've announced a few bank-owned brokers. I believe, historically, there's two of your competitors that did most of those, and they would -- one of them would talk openly about those deals being tougher, meaning take a couple of years to turn them into the growth machines that those companies are and Buck was a little different, too. So just curious if the pool is changing a bit, and so we should kind of expect probably different types of deals going forward versus the historical five, 10 years.

Douglas Howell:

Yeah. Let me add one thing on that. I think that the organic in Cadence and Eastern was running very similar to what we're seeing in our similar geographies in similar areas. So I think your premise was that it take a while to restart them. I think they're already started. I think they're going after it. Buck is already showing terrific organic growth. We don't get it in our numbers for a year. So somebody goes out and sells something within the year, but we never get organic credit for that. And we get the revenues for it, but we don't get the organic growth credit in our numbers. So, I wouldn't say that the premise was, if the ones that we bought that they were -- they needed a restart.

Michael Zaremski:

Okay. No, I appreciate that color. Switching gears and you could tell me if I'm splitting hairs here. But on the December Investor Day, there was a number of reasons you kind of lowered the very near-term 4Q organic growth estimates versus what you previously have been thinking. And I think a couple of those sounded like they were more of like a push into '24 like on the life insurance side and maybe entertainment business rebounding. But I didn't think you really brought up your -- you didn't bring up your '24 guide. So I guess, should we seasonally -- obviously, we know there's seasonality in the quarters, but should we be thinking 1Q or the first half of the year gets a little bit more of a bump than it does historically? Or am I just reading too much into things?

Michael Zaremski:

Okay, And just lastly, you're one of the leaders. You've been doing it successfully for a while in terms of moving folks -- or sorry, in your center of excellence. Any changes in kind of the trajectory there in terms of what you guys talked about last year in terms of kind of the goal of kind of doubling, maybe the percentage of employees there over the next five or so years?

J. Patrick Gallagher:

Yeah. Let me hit a couple of other items. Why would we need to double our employee count there because we're going to double the business. And that's going to lead to plenty of opportunities there. Secondly, and I think this is a hugely important point. Standardizing a Brokerage business from an agency system through the operating processes to things like issuing certificates of insurance is a [indiscernible]. It takes four, five years to bang it through. I've done it. It's a headache. We're there. We don't need to do it. We don't need to sell it. It's standard operating procedure. When you join us, you know that in your due diligence, you come aboard, you plan the effort to change into our agency system and you get rewarded for it by virtue of the data and analytics we can provide you to go out and sell. We don't need to sell our team on that. We don't need to prove it to them. We did that 15 years ago.

Operator:

Thank you. Our next question is coming from David Motemaden with Evercore ISI. Please state your question.

J. Patrick Gallagher:

Hi, Dave.

Douglas Howell:

Well, first of all, we talked about that, I think, back in our April or June call that we were probably a little further ahead at that point of the year and our incentive comp accruals. So that's been contemplated in our guidance of margin expansion since way back then. So that -- I would say there's no new news of what we were expecting in December versus what we delivered this quarter. And what's the impact of it? It's not a point. I mean, so it's not a big number.

Douglas Howell:

All right. So I think when you break down our organic, we usually have more net new versus lost is probably 3% to 4% on that. When you get some rate in there, probably, we're at that 2 points and maybe there's 2 points of it, that's 2 or 3 points that's exposure unit growth. I don't -- we're going to have more lift next year from new versus lost probably proportionately. So, if you break down 9%, it might be a third, a third, a third. If you break down 7%, it's probably half rate -- excuse me, mostly new business and then exposure unit growth again.

J. Patrick Gallagher:

Thanks, David.

Gregory Peters:

Good evening, everyone. I guess I'm going to the new table that you added to the CFO Commentary, which we appreciate, which is the interest income, premium finance revenues and other income. And could you give us some perspective, because ever since mid-December, when the Fed changed their perspective on what's going to happen with rates, there's obviously some mechanics we're trying to calculate on what might happen with that line depending on what the Fed does with interest rates? So maybe there's some benchmarks you can provide for us that will help us sort of map out what we think might happen there.

Gregory Peters:

Excellent. Just a follow-up on that table for '23. And what quarter did the services agreement with WTW shift? Because I assume that would have meant the change...

Gregory Peters:

July 1. So when we're looking at the third quarter and fourth quarter, that's more normalized under going forward operating conditions, correct?

Gregory Peters:

Thank you for that clarification.

Gregory Peters:

That's excellent detail. I appreciate that. And then there's a bigger picture question I have before I get there. I can't -- I'm hung up on the clean energy tax credit carryforward balance, which caught me by surprise going up. And I know there's obviously a revised approach towards your tax credits here. But without getting into detailed commentary on the changes and the nuances and the tax, is it your expectation going forward that this -- that you're still going to be pulling down $150 million or more of tax credits from clean energy going forward? And then, is that $867 million just related to the clean energy? Or is there other things in that?

Gregory Peters:

Great. So, pivoting back to the bigger picture question is, I'm going to focus on reinsurance because last year was one of the most challenging reinsurance renewal periods in our lifetimes, and especially on the cat side, I should say. And clearly, based on your commentary and others, it seems like it's going to be more normal this year. It seems like the lift you might get from the pricing or rate component is going to be a lot less this year than it was last year. So I don't want to get too hung up on -- and I realize casualty has its own cadence, but I was just curious about your response to that observation and how you think it might work with Gallagher?

Gregory Peters:

That's right, all right, Thanks for the answers.

Operator:

Thank you. And our next question comes from the line of Andrew Kligerman with TD Cowen. Please proceed with your question.

Douglas Howell:

25 basis points.

Douglas Howell:

25. They do at 25. I was referring to a rate cut of 25 basis points.

J. Patrick Gallagher:

Well, I mean, first of all, I have to say that the reinsurance team has been incredibly pleased with and nicely surprised by the amount of interaction with our retail team around the world. And when we did the deal, we told the team and ourselves that we thought there was a considerable benefit from having both sides of the equation under one roof, and that is playing out over and over and over again. As you know, we're very, very strong in our niche or niche marketing, and that's a global play. And the capability to have the reinsurance perspective in those meetings, and then we're the largest player in the pooling sector for public clients in the United States. We kind of thought we had that pretty well nailed. Not a lot to learn. Our reinsurance team has added a tremendous amount of value and helped us add cover for the pools and revenue for our retailers and revenue for our reinsurance people. So, it's been an incredible two-year journey, and we're just getting started in terms of the opportunity to play together in the sandbox. What was the other question, Andrew?

J. Patrick Gallagher:

Facultative, but of course, now coming along with treaty clients and having our retailers -- here is an example of what you're talking about, where retailers are trying to get things done and oftentimes it's hard to place areas like property, et cetera. We are seeing our facultative opportunities grow. No, it's not brand new. But we are organizing ourselves better in the fac world. And I think we're getting -- we're in a better position today than six months ago to go out to our insurance carrier customers and our trading partners and say, "We want to participate in this. We want to help you." So, we are seeing an uptick in opportunities.

J. Patrick Gallagher:

Well, you're seeing two things. One, our historical play in the Risk Management accounts, where you've got large accounts, you name it, whatever the large hotel chains or what have you, that are procuring our business on their accounts. And there's -- we've got a great, great year in that regard, and that includes public sector clients as well. And then as you know, we have over the last decade or so really focused on outsourcing of claims from insurance companies. And I don't have liberty on this call to name some of those because some of those carriers are pretty well-known carriers and not one that I necessarily have the approval to be touting. But from inside the organization, you look at some of these carriers you go, it's fantastic. And then, of course, the regional small companies that would like to expand that don't want to add infrastructure, they think they've got an opportunity in a given stage or geography. They don't want to be putting a lot of boots on the ground. We're picking those up as well. So, the team at GB is, in my opinion, just outperformed expectations every single year.

J. Patrick Gallagher:

Well, let me put it this way, Andrew. I really believe this. I believe that it will not be unusual, and I believe that people will ask. "Did insurance companies pay their own claims? Why would they do that?" When I sit with some of our insurance company partners and explain to them that Gallagher Bassett pays substantially more claims in numeric numbers and substantially more dollars than they do in claims by line of cover, by geography, not just in the U.S., the first reaction is oftentimes shock. And again, I won't mention any names of carriers. They go no, no. Look, if you put a capital structure around GB and called it an insurance company, it'd be one of the five top insurance companies probably in the world. Think about that in terms of the amount of claim work that's coming through. And our focus, and this is, I think, really key, and what we're selling and we believe proving day in and day out is if you outsource your claim work to us, whether you are a large risk management account through self-insuring or whether you're a carrier, your outcomes will be superior. And if I look at an insurance company CEO and saying, "I think I'm worth or could help you find 2 points of ROE," it could be pretty dramatic.

Douglas Howell:

No, I said it -- I would say it would be in that same 7% to 9% range. I'm not going to see it outperforming that. And yes, we were pleasantly surprised by a few extra million bucks than we thought we were going to get there.

Andrew Kligerman:

Yes. Hey, thanks a lot. That was great insights.

Operator:

Thank you. And your next question comes from the line of Yaron Kinar with Jefferies. Please proceed with your question.

J. Patrick Gallagher:

Hi, Yaron.

Douglas Howell:

Maybe there's $5 million less than we had hoped on a few of them. But it's -- I mean, when you're looking at a $2 billion quarter, $5 million, it does move the percentage a little bit, but it doesn't -- it's not a meaningful that we are a sales organization, I look back last year, we had 11% one quarter, we had 7% in another quarter. We had 9%, 7%, 8%. So, it bounces around a little bit. So the fact that we brought it in within a 0.5 point or what we're looking at here, you do get some bounce around for a few million bucks here or there.

Douglas Howell:

That's right.

Douglas Howell:

Yeah, we announced My Plan Manager acquisition here a month or so or two months ago. So that's the $60 million worth of revenue in that disability business down in Australia.

Douglas Howell:

Sure. Thanks.

Operator:

Thank you. Our next question comes from the line of Michael Ward with Citi. Please proceed with your question.

Douglas Howell:

Well, listen, I think they had some -- they were posting 13 points, 14 points of organic growth. The market has shifted up there a little bit. So, I think they've been in the mid- to upper mid-single digits for the last four or five quarters. So, I don't see much of a shift going into 2024.

Douglas Howell:

Yeah. We actually had a couple of really great new business opportunity that just didn't fall our way. For some reason, they decided to stay with the incumbent. So I think that if you normalize for those a handful of items, I think they would have had -- add 3 or 4 more points to it.

Douglas Howell:

All right. Help me understand what you're looking at again. Tell me what you saw. I just didn't track to your question. Sorry about that.

Douglas Howell:

Listen, remember, every time we buy something, you're going to get maybe four quarters of this disclosure. So as Buck runs that off, we also have Cadence and Eastern that are coming on in fourth quarter '24, but that's -- you can see it there, the 2000 -- second quarter 2,000, it falls away to nothing, right? It goes -- which it would even if it were $5 million a quarter, it's $95 million. So, that is what you're seeing there. It's just the run in a Buck that's no longer M&A roll over.

Douglas Howell:

No, I just said they might be running more like 7% versus 9% in some things next year. So that's what I said. They would be more towards that lower end of that 7% to 9% range, just on the nature of their business.

Douglas Howell:

Pause on that a little bit. Get the medical inflation that many are starting to worry about, we might have a different answer for you on that one, that heats up.

J. Patrick Gallagher:

Thanks, Michael.

Meyer Shields:

Thanks. I think two really small ball questions. Doug, you talked about why contingents in the fourth quarter a little bit better than the December expectation. But it also sounds like you're not expecting reserve development to be a problem in 2024 if contingent organic matches core organic. Am I thinking about that right?

Meyer Shields:

Okay. Understood. And then just -- I may have missed this. But the increasing detail on Page 6 of the commentary where you break out the individual components, should we assume that those are all, I don't know, 90%-plus margin revenue?

Meyer Shields:

Okay. Perfect. Thanks for the clarification.

Operator:

Thank you. This does conclude today's conference call. You may disconnect your lines at this time.

Patrick Gallagher:

Good afternoon. Thank you for joining us for our third quarter '23 earnings call. On the call with me today is Doug Howell, our CFO, as well as the heads of our operating divisions. We had an excellent third quarter. For our combined brokerage and risk management segments, we posted 22% growth in revenue, 10.5% organic growth; GAAP earnings per share of $1.72, adjusted earnings per share of $2.35, up 22% year-over-year, reported net earnings margin of 15.5%, adjusted EBITDAC margin of 30.8%, up 78 basis points. We also completed 12 mergers totaling $57 million of estimated annualized revenue. Another great quarter by the team on all measures. Before I dive into more detail about the quarter and our outlook, I want to make a comment regarding the leadership appointments that were also announced this afternoon. Tom Gallagher will assume the role of President, and Patrick Gallagher will become COO, both effective January 1, 2024. These appointments are being made to better position us for the next phase of our growth. And before you ask, I have no plans to retire. I will continue to be CEO and Chairman focused on Gallagher's strategy and global expansion. In their future roles, Tom and Patrick will help me lead organic and merger and acquisition growth initiatives, drive operational improvement and further promote our bedrock culture across the entire organization. This is the best business on the planet. I love my job and believe we are just getting started. Moving to results on a segment basis. Let me give you some more detail on our quarter's performance. Starting with the Brokerage segment. Reported revenue growth was 22%. Organic was 9.3%. Acquisition rollover revenues were $153 million. Adjusted EBITDAC growth was 23%, and we posted adjusted EBITDAC margin expansion of about 55 basis points. Let me walk you around the world and provide some more detailed commentary on our brokerage organic. And just to level set versus some of our peers, the following figures do not include interest income. Starting with our retail brokerage operations. In our U.S. P/C business underlying organic growth was about 8%. New business production and retention was better than last year, while less nonrecurring construction and capital markets business was a bit of a headwind. Our U.K. P/C business posted 7% organic with new business production and retention similar to last year. Our Canadian P/C operation was up 10% organically, reflecting solid new business and retention and more modest renewal premium increases. Rounding out the retail P/C business, our combined operations in Australia and New Zealand posted 13% organic. Core new business wins remain excellent, and renewal premium increases were ahead of third quarter '22 levels. Our global employee benefit brokerage and consulting business posted organic of 6% with solid health and welfare results and continued strength across many of our retirement and HR consulting practice groups. Shifting to our reinsurance, wholesale and specialty businesses. Gallagher Re posted 20% organic, thanks to a strong 7/1 renewal season, another outstanding quarter by the team following an excellent first half. Risk Placement Services, our U.S. wholesale operations posted organic of 7%, including a couple points headwind from lower contingents. Open brokerage organic was 13% and organic was about 5% in our MGA programs and binding businesses. And finally, U.K. Specialty posted organic of 18%, benefiting from outstanding new business production, strong retention and continued firm market conditions. Next, let me provide some thoughts on the P/C insurance pricing environment, starting with the primary insurance market. Global third quarter renewal premiums, which include both rate and exposure changes were up 10%. That's at the top end of the 8% to 10% renewal premium change we had been reporting throughout '22 and early '23 and very similar to second quarter renewal premiums adjusting for business mix. Renewal premium increases remained broad-based, up across all of our major geographies and most product lines. For example, property is up more than 20%. General liability is up about 6%. Workers' comp is up about 2%. Umbrella and package are each up about 10%. Overall, the primary market continues to behave rationally in our view, with carriers pushing for rate where it's needed to generate an acceptable underwriting profit. Remember, though, our job as brokers is to help our clients find the best coverage while mitigating price increases. So not all of these premium increases ultimately show up in our organic. Shifting to the reinsurance market. Following the orderly July 1 renewal season, all eyes are turning to January renewals. Assuming no major cat events before year-end, we believe the property reinsurance market will see adequate capacity, continued firm pricing, rising insured values and increased demand overall. When it comes to casualty, reinsurers appear to be taking a cautious view of risk. With that said, we believe adequate capacity will be available to support increased demand at firmer pricing. Here in the U.S., our retail and reinsurance teams met with more than 25 of our key U.S. insurance carrier partners at the annual CIAB conference earlier this month. It remains a tough environment for carriers, dealing with frequency and severity of weather events, including secondary perils, pockets of unfavorable prior year development in casualty lines, higher replacement costs, social inflation and rising reinsurance costs. So we believe carriers are likely to seek out further renewal premium increases and to maintain their cautious underwriting posture. Moving to our customers' business activity. Overall, it continues to be more resilient than headlines would suggest and we continue to characterize it as strong. During the third quarter, our daily indications showed year-over-year increases in positive midyear policy endorsements and audits. Additionally, the U.S. labor market remains strong. With continued growth in U.S. nonfarm payrolls and a wide gap between the amount of job openings and the number of people unemployed and looking for work. We also just passed the 6-month mark of the Buck acquisition, and the team is off to a fantastic start with integration on track and financial performance in line with our expectations, and I am most pleased with how the teams have come together to better serve our clients. So I believe our HR Consulting, Retirement and Benefits business is well positioned headed into the 2024 enrollment period. So bringing it all together, as we sit here today, we see full year brokerage organic in the upper 8s and pushing towards 9%, posting that would be another fantastic year. Let me move on to mergers and acquisitions. We had an active third quarter, completing 12 new tuck-in brokerage mergers representing about $57 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. We also recently signed definitive agreements to acquire the insurance brokerage operations of Eastern Bank and Cadence Bank, with total pro forma annualized revenue towards $275 million. Building on our success from the 2022 M&T Bank transaction, we are extremely excited about these mergers and believe these 2 regional banks have built brokerage businesses that operate and feel a lot like us. And if that isn't exciting enough, we also have a very strong merger pipeline. Excluding these 2 pending mergers, we have around 45 term sheets signed or being prepared, representing more than $450 million of annualized revenue, and we know all of these won't ultimately close, but we believe we'll get our fair share. Moving on to our Risk Management segment, Gallagher Bassett. Third quarter organic growth was 17.9% ahead of September expectations due to continued growth in claim counts and new business from 22 new business wins. We still expect to grow over these wins by double digits during the fourth quarter due to our superior client offerings, some smaller new business wins in '23 and continued growth in claim activity. Third quarter adjusted EBITDAC margin of 20.4% was strong and in line with our September expectation. Looking forward, we see full year '23 organic above 15% and adjusted EBITDAC margins pushing 20%, and that would be another fantastic year. And I'll conclude with some comments regarding our bedrock culture. A few weeks ago, I had the pleasure to visit our associates in our India Gallagher Center of Excellence. It was awesome to see our team in action again. The energy, the excitement and relentless pursuit of improvement is thriving among our 10,000 colleagues. It's a huge competitive advantage for us because we can take a process, streamline and standardize it and then move it to our centers of excellence. Once there, the process is refined even further, and then we make the service available to all our geographies. At the same time, we are refining, automating, deploying robotics and using AI. We are a machine that is driving out rework, improving turnaround times and raising our quality. And remember, we don't outsource these important roles. Rather, these full-time Gallagher employees represent the very best service and support professionals who are passionate about our customers and have a culture of constant improvement, which is the Gallagher way. Okay. I'll stop now and turn it over to Doug. It was a great quarter. Doug, over to you.

Patrick Gallagher:

Okay. I think we're ready for some questions and answers. Operator, will you open it up?

Robert Cox:

Thanks for the outlook on the organic growth for 2024. Just curious, you had previously mentioned that you didn't think there would be that much of a difference in sort of the different areas within the business growing at different rates. Curious if you have any updated thoughts on how different businesses may perform in 2024 versus 2023.

Robert Cox:

Okay. Got it. And then just on the 2024 margin expansion of 50 bps. If you could achieve 7%, just curious on if that includes impacts from investment income or maybe a potential slight uplift from some of these higher-margin acquisitions you've done recently?

Operator:

Our next question is coming from Elyse Greenspan with Wells Fargo.

Patrick Gallagher:

That's a good question, Elyse. I think as Doug said earlier, we're just in the throes now of budgeting, and I'd have to say that the reinsurance team has outperformed our expectations. They came aboard and have just continued to do an unbelievable job. And that 20% does include new business and great retention. So when I look forward, I'm not going to comment on rate. I'm not there yet. I got to get their professional view as we get into the budget. But I think that the business momentum will be good. I think retention will continue to be very, very strong. So would I tell you that I think we're going to see 20% organic next year? I don't know. That would be awfully hard. But I'm really -- this is a good business for us. The market there, similar to what we're seeing on retail, we are not seeing softening. As we said in our prepared remarks, there's capacity, but you're going to pay for it. And I don't think that's going to change between 1/1 and 7/1 next year. So I think that what you've got is kind of an interesting market. And again, this is -- if nothing happens in the cat world. So I'm not trying to waffle you. I don't have a really good clear answer for you at this point.

Elyse Greenspan:

And then a good problem to have, the results there have been really strong. I know there's an earn-out associated with that transaction. Is that something that you would account for in '25? Or is that something that's already been accounted for?

Elyse Greenspan:

Okay. And then the M&A pipeline sounds still pretty robust. Doug, you mentioned that some deals were pushed into October and November. Are those the Eastern and the Cadence transactions? Or are there other transactions that were pushed from a timing perspective that could be forthcoming?

Operator:

Our next question comes from the line of Paul Newsome with Piper Sandler.

Patrick Gallagher:

Well, I'll give you some and then Doug can make some comments as well. I do think, and we've said this before, that some of the competition relative to some of the private equity stuff is a little bit less robust. There is still plenty of competition. And if you put a nice piece of property out for bid, you're going to get a lot of bids. So there's good competition for these good properties. I can't get into the strategy of the banks as to by their deciding now is the time to exit, and we've seen that across a broad base. And I think it's probably because multiples are at very, very solid high levels. And whether thinks that those multiples may, at some point in time, begin to diminish, I'm not sure. But we've had incredible success with our friends at M&T. We're very excited about Eastern and Cadence. And frankly, if there's other banks that are looking in that direction, we're a very good place to look. In terms of other M&A opportunities, you've got 30,000 agents and brokers across America. A good number of them are still owned and run by baby boomers. They're good businesses. This has been a very robust time for them. The last 5 years have been outstanding for them. A lot of change going on in our market, an awful lot of data and analytics that they can't compete with. Now you have the advent of AI, which is coming on stronger and faster than I think any of us thought. And I think people look at it and say, maybe it's time to check who's out there. Maybe now it's not a bad time for me to look. And when you take a look at our pipeline, we gave you some numbers today. I mean, it's just incredibly robust.

Patrick Gallagher:

No, we're not. I mean, the stuff that's in the E&S market has gone there for a reason, and that is growing every single month in terms of 15%, 20%. Our submissions at RPS are up substantially this year. We measure that every day, frankly. And our submissions into RPS, our wholesaling operation, are at an all-time high. Property, in particular, is a big driving line for sure, and there just is a lack of capacity, and it is getting -- it continues to be -- whoever can tell the best story might just get a quote. So no, I'm not seeing -- and we are not seeing terms and conditions soften while things still stay in the excess market. And we're not seeing business flow back to the primaries.

Charles Peters:

Pat, I feel like you have been saying you feel like you're just getting started for over 20 years now. So I guess no change there. Can we go back to your comments on the bank acquisitions. And I think you said some of the banks Cadence and Eastern are getting solid high multiples for those businesses. I think those were your words. And I look at the CFO commentary, and it looks like the -- you're -- inside that you're looking for -- your multiples are paying are 10 to 11x EBITDAC. Is that inclusive of Cadence and Eastern because it feels like those numbers were -- multiples for those businesses were a little bit higher.

Charles Peters:

Okay. That makes sense. And then on those -- the larger transactions, it doesn't seem like -- maybe I'm -- I don't know the answer. So is there a lot of synergies to be harvested from as you integrate the businesses? Or are the stand-alone teams sort of like what you got with the WTW reinsurance operations.

Patrick Gallagher:

The real kicker there, Greg, is that look at these bigger deals run by banks, and this is why we say it very much feels like we're buying somebody similar to us. These are firms that were rolled up by the bank, typically good community people. I've heard 3 separate outreaches from Cadence people in the last 2 days that I've known in 1 instance that they came in to kick the tires with us in 1998. And I remember the guy wrote to me and he goes, "Hey, I came with Shorty and I remember Shorty and I came with Jim, I remember Jim and I can't tell you how excited we are." Now what we're bringing to them that Cadence could never do is that whole discussion of moving upstream. We can show you statistically that our closing rate on bigger deals, and I'm not talking risk management, huge accounts. I'm just saying the bigger deals that are generating over $125,000 to $150,000 of commission are significantly greater today than they were 5 or 10 years ago. This is what we're giving them the opportunity to go after. They're typical agents in these banks that look just like everybody else, and now they're going to go out. And frankly, they're going to have our tools and they're terrifically excited about it. So that's, I think, the whole synergy thing. This is not take out headcount. This is turn them on, show them what we do, give them the tools and watch them eat the market all around them.

Patrick Gallagher:

Well, here's the thing. First of all, Greg, we'll look at every single opportunity we can. And our first question every single time is what's the culture. What was it that went into this group. In most of these, there are situations where we didn't succeed in buying something they bought. Let's talk about that around this table, not with them in the room. XYZ didn't sell to us. Why is that? Okay, fine. What's left there? And yes, I would say that there are some of those that we would be interested in. But we'd have to get through this whole cultural piece. When you chose not to join Gallagher, I'll tell you the one main reason why you chose not to join Gallagher is because you didn't want change. And our competition has done a very good job of saying, "Hey, why join Gallagher when I'll give you the money? I'm going to give you the cash, keep some in. Our returns have been terrific. You'll get a second bite on the apple and you don't need to change anything. You don't need to change your name, you don't need to change your agency system," and while they've been doing that, we've been building power-to-power, data, analytics, capabilities and vertical strength. They've got none of that. And now it's coming to roost with higher interest rates and tougher earnouts, and you got to make do -- you got to come due on your promises. So yes, we'd look at them. But we're going to have to fall in love.

Michael Zaremski:

Maybe I missed this, but on the Cadence deal, is it -- am I right looking at the revenue and EBITDA disclosure that Cadence has a 36% to 37% margin, which is pretty great. And then also on the deal there was -- you called out tax benefits. I don't recall you guys calling out tax benefits in the past.

Michael Zaremski:

Interesting. And I guess this one probably for -- this one question is for Pat, and congrats to Thomas and Patrick on our new appointments. Just curious on Pat. Will these new appointments cause any of your existing managers other than yourself to share responsibilities they didn't previously share?

Michael Zaremski:

And so were these promotions well-telegraphed? Or is this kind of like -- were these promotions like about well-telegraphed, like within the firm, like over time or were these kind of...

Operator:

Our next question comes from the line of Mark Hughes with Truist Securities.

Douglas Howell:

We haven't. And can you give until December? I know you're trying to figure out your '24 models. You might want to take what we did this year and just take it by line by line and make a site pick on it to see what you think it -- what would happen there. I know it's really difficult to do, Mark, because of FX remeasurement gains. I know we put some acquisition costs through there that can be lumpy. And there's a lot of tax, restructure numbers that run through there as we implement tax planning strategy. I know it's really difficult. But if you could you just give me until December and I can get that to you.

Douglas Howell:

We get this every year.

Patrick Gallagher:

It's interesting you should ask because we were talking about that with the board this week. And yes, we're seeing a lot of pressure on medical costs. Full insured renewals at our largest carriers are showing 7% to 9% increases right now as we speak. When you start to take retentions and you start to get in the stop-loss market, we're seeing averages there closer to 17% to 18%. That's on premium now. That's not on the underlying costs. But that's because more of the claims are tagging those carriers. So they're not only trying to move away in terms of the low end of the cost, but also they're having to pay that. So if you take a look at all of it, all in, Mark, I'd say that our numbers that we're seeing are about 8% to 9% and that's embedded both in work comp as well as health insurance across the United States.

David Motemaden:

I was wondering if you could just help me think through just how much of the organic growth over the last several years and even this quarter is driven by just the macro environment versus what you guys have been doing behind the scenes to accelerate share gains? Because it feels like there's been a lot going on to help you guys gain share and that the share gains are accelerating. So I'm just wondering as kind of a big picture question. as you guys head into next year and you think about that 7% to 9% organic, I guess, how much of that do you think is coming from market share gains as you guys continue to execute versus like rate and exposure improvements?

Douglas Howell:

In terms of?

Douglas Howell:

92% of our new business.

Douglas Howell:

Into one of our verticals.

Douglas Howell:

92%.

Douglas Howell:

[indiscernible] that 7% organic growth next year, I'd say that half comes from net new business wins or taking share. I would say, 1/4 is coming from exposure units and another quarter is coming from rate. If you got 9%, you probably got 1/3, 1/3, 1/3 in there.

Patrick Gallagher:

I'll help you think through it and probably the people from Cadence Bank and say, he's maybe talking off the top of the head, blah, blah, blah. But I don't think the bank did much to help them produce insurance, like probably hurt their production, which is why when you look at some of these deals, the Board goes well, where is the growth. Cadence and Eastern good growth, but the fact is -- those people have gone out and scrape for that business around the bank relationship, which was, of course, when they bought those firms, supposed to be the golden nugget in terms of being able to produce business that just isn't true. In fact, I think we're going to unleash an opportunity to really grow the top line.

Meyer Shields:

Two big picture questions. One, there's been some press about larger insurance brokers getting back into wholesale. Would that matter at all to Gallagher?

Meyer Shields:

That's very helpful. Second question, and this relates to what you've been talking about, Pat, with the additional resources that being part of Gallagher brings. How rapidly can acquisitions take advantage of that? And is that something we should factor in when we're modeling acquired revenues?

Douglas Howell:

Yes. One thing, I think we actually understate true organic because we don't consider any new business, net new business wins by those mergers in the first year. That doesn't get counted as organic. Was it $20 million, $30 million more of net new maybe across the business every year? I don't know. It might be worth 20 basis points on our organic growth over the course of the year. So I think it naturally understates it. But I think the point is, like I said on this one just a minute ago. We had a merger partner that just crushed it here at the end of September, and that doesn't go into organic, but it sure impacts our acquisition revenues. Now we try to give you that when we do these projections. So look at that on Page 6 of our CFO commentary. But the point is the great mergers are the ones that come in, hit the ground running, use our resources and capabilities. And next thing you know over the next 2, 3, 4 years, they're just hitting it out of the park.

Operator:

Our last question is coming from Yaron Kinar with Jefferies.

Patrick Gallagher:

No, there's no seasonality.

Yaron Kinar:

Got it. And do either of those deals fall any vertical space that you were looking to boost stop? Or is it more of a geographic play? What's the rationale there?

Michael Pesch:

Yes, this is Mike Pesch. So I would say both of them are -- in their geographies are strong where we are maybe strong in other industries. So in Cadence, in their perspective, we do a lot of public entity in the mid-south region, and that's not one of their strengths. But they do a lot in construction and manufacturing. So it complements us really, really well. It's one of the reasons we like them so much. Eastern is the same way. If you look in New England, New England is heavily weighted towards life sciences, technology and D&O, and they balance that book considerably with a lot of other industry verticals, including construction. So it is very much a complementary business to each of those areas.

Douglas Howell:

I think when you look at it, if you look at the adjustment -- if you look at it on an adjusted basis, there were some tax and litigation items when we adjusted that out. On an adjusted basis, it's kind of noisy. Comp might be up $3 million or $4 million. I think we're a little further ahead on our corporate bonus accruals than we have been in the past. And when you look at operating expense, it looks down considerably on an adjusted basis, but that's the FX remeasurement gains that you're seeing. So if you're looking at it on a pretax basis on an unadjusted basis, that's what you'll see in there. But there's nothing fundamentally underlying our expense structure in the corporate segment.

Operator:

Thank you. This does conclude today's conference call. You may now disconnect your lines at this time.

J. Patrick Gallagher, Jr.:

Thank you very much. Good afternoon, and thank you for joining us for our second quarter 2023 earnings call. On the call with me today is Doug Howell, our CFO, as well as the heads of our operating divisions. We had a fantastic second quarter. For our combined brokerage and risk management segments, we posted 20% revenue growth, 10.8% organic growth, and recall, we don't include interest income in our organic. If we did, our headline number would be 13.4% and over 14% if you levelized for last year's large life products sale. GAAP earnings per share of $1.48, adjusted earnings per share of $2.28, up 21% year-over-year, reported net earnings margin of 13.6%, adjusted EBITDAC margin of 30.4%, up 52 basis points. We also completed 15 mergers totaling $349 million of estimated annualized revenue. We had a terrific month to finish the quarter that fueled the upside versus our June IR Day view. I could not be more pleased with our second quarter performance and how our teams all around the globe continue to deliver incredible value for our clients. On a segment basis, let me give you some more detail on our second quarter performance starting with our brokerage segment. Reported revenue growth was 20%. Organic was 9.7% or 12.3% if we include interest income and about 13% when levelizing for the large life product sale. Acquisition rollover revenues were $151 million. Adjusted EBITDAC growth was 23% and we posted adjusted EBITDAC margin expansive expansion of about 50 basis points. Let me walk you around then Howell will provide some more detail commentary on our brokerage organic. Again, the following figures do not include interest income. Starting with our retail brokerage operations. Our US PC business posted 13% organic. New business production was up year over year while retention was similar to last year's second quarter. Our UK PC business posted 11% organic due to strong new business production. Canada was up 6% organically, reflecting solid new business, similar retention versus last year and continued that somewhat more modest renewal premium increases. Rounding out the retail PC business, our combined operations in Australia, New Zealand posted more than 10% organic. Core new business wins were excellent and renewal premium increases were ahead of second quarter 2022 levels. Our global employee benefit brokerage and consulting business posted organic of about 2%. That includes a three-point headwind from last year's life product sale. Excluding the tough compare, organic would have been about 5%, with core health and welfare up low single digits, and many of our consulting practice groups showed continued strength. Shifting to our reinsurance, wholesale, and specialty businesses, Gallagher Re posted 11% organic, another outstanding quarter by the team, building upon their excellent first quarter results. Replacement services, our U.S. wholesale operations posted organic of 10%. This includes 19% growth in open brokerage and about 6% organic in our MGA programs and binding businesses. And finally, UK specialty posted organic of 19%, benefiting from excellent new business production and fantastic retention and a firm rate environment. Next, let me provide some thoughts on the PC insurance pricing environment, starting with the primary insurance market. Global second quarter renewal premiums, which include both rate and exposure changes, were up 12%. That's ahead of the 8% to 10% renewal premium change we were reporting throughout 2022 in the first quarter of 2023. Renewal premium increases were made broad-based and are up across all of our major geographies. We're also seeing increases across most product lines. Property is up more than 20%. General liability is up about 8%. Workers comp is up about 3%. Umbrella and package are up about 11%. And most lines are trending similar or higher relative to previous quarters with two exceptions. First is public company D&O, where renewal premiums are lower versus last year, and second, cyber, which has flattened down slightly year-over-year. But to put this all in perspective, these two lines combined represent around 5% of our year-to-date brokerage revenues and thus don't have much of an impact. So I believe the market continues to be rational, still pushing for rate where it's needed to generate an acceptable underwriting profit. Remember though, our job as brokers is to help our clients find the best coverage while mitigating price increases to ensure their risk management programs fit their budgets. So not all of these renewal premium increases show up in our organic. Shifting to the reinsurance market. Overall, the June and July reinsurance renewals resulted in similar outcomes to what we saw during January renewals with most global reinsurance lines continuing to harden. Property continues to experience the most hardening, especially cat exposed trees. Within the U.S., Florida property cat renewals were more orderly than January due to an early start and well-defined reinsurer appetites, regardless, price increases were in the 25% to 40% range, causing many seasons to increase their retentions. While property capacity isn't abundant, we ultimately were able to place risk for most all of our seasons. As for casualty reinsurance renewals, the second quarter showed more stable supply versus demand dynamics, resulting in price increases based on product or risk-specific factors. Looking forward, carriers are likely to continue their cautious underwriting posture given the frequency and severity of weather events, replacement cost increases and social inflation, all of which can impact current and prior accident year profitability. Add to that rising insurance costs, and it's easy to make the case for pricing increases on most lines to continue here in 2023 and perhaps throughout 2024. Despite these and other inflationary cost pressures, our customers' business activity remains strong. During the second quarter, our daily indications of client business showed positive endorsements and audits. These positive policy adjustments have continued thus far in July. At the same time, labor market imbalances remain. Recent data shows the U.S. unemployment rate declining, continued growth in non-farm payrolls and a very wide gap between the amount of job openings and the number of people unemployed and looking for work. And medical cost trends are on the rise. We anticipate these costs to accelerate into 2024 due to increased costs of services, more frequent high-dollar claims, and the impact of new therapies and specialty medications. So I see demand for our HR consulting and other benefits offerings remaining strong. So, when I bring this all together, as we sit here today, we are more confident with full-year brokerage organic in the 8% to 9% range. And with an excellent second quarter in the books, more towards the upper end of that range, posting that would be another fantastic year. Moving on to mergers and acquisitions. We had a very active second quarter. In addition to the Buck acquisition, which I will discuss in a moment, we completed 14 new tuck-in brokerage mergers. Combined, these 15 mergers represent about $349 million of estimated annualized revenues. 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. Moving to the Buck merger, which was completed in early April. Our integration efforts have begun and the combined business is off to a great start. While it's still early, I'm extremely pleased with how the teams are working together and excited about our combined prospects. Looking ahead, we have a very strong merger pipeline, including nearly 55 term sheets signed or being prepared, representing more than $700 million of annualized revenue. We know that not all of these will ultimately close, but we believe we will get our fair share. Moving on to our risk management segment, Gallagher Bassett. Second quarter organic growth was 18.1% ahead of our expectations due to rising claim counts and continued growth from recent new business wins. These wins have been broad-based and across all of various client segments, including large corporate enterprises, public entities, insurance carriers, and captives. Growth in each of our client verticals is great affirmation in our ability to tailor our client offerings, utilize industry-leading technology, and ultimately deliver superior outcomes for clients across the globe. Second quarter adjusted EBITDAC margin of 19.4% was very strong and at the upper end of our June expectation. Looking forward, we see full year 2023 organic around 13% and adjusted EBITDAC margins pushing 20%. That would be another outstanding year. And I'll conclude with some comments regarding our Bedrock culture. This past quarter, I was on the road for a month, visiting employees around the globe, traveling to New Zealand, Ireland, the UK, and the Czech Republic. And I can say that our culture is thriving, which makes me incredibly proud. Some of those conversations included the more than 500 young people in our 58th class of the Gallagher Summer Internship. This rigorous two-month program is an essential investment in our future, ensuring our unique culture remains strong for years to come. As we continue welcoming new colleagues and merger partners into the Gallagher fold, I'm confident that each new addition will uphold the expertise, excellence, and ethical conduct that make Gallagher the name so trusted worldwide. And that is the Gallagher way. All right. I'll stop now and turn it over to Doug. Doug?

J. Patrick Gallagher, Jr.:

Thanks, Doug. Operator, let's go ahead and open up for questions.

Weston Bloomer:

Hi. Good evening. My first question, really good strong organic growth within brokerage and around 200 basis points of above what you'd said, I guess about a month ago. I was curious if you could spend on maybe what lines of businesses or geographies, or maybe whether supplementals or contingent that drove that out performance? Curious of what we can extrapolate for the back half of the year or what is about the nature?

J. Patrick Gallagher, Jr.:

Also, I would say, clients are getting pretty darn weary of a hard market and they're looking for good advice. And we're fine and great strong growth is in property casualty. The basic blocking and tackling, workers' comp areas that in the United States at least we stand and opportunity to stand really ahead and shoulders above our competition, especially with the little guys.

J. Patrick Gallagher, Jr.:

No I think that what we're seeing is, first of all, remember, we talked about this quite often. We don't have one individual out prospecting. And we've got dozens and dozens of people that have now done deals in our company. They are constantly talking to our competitors. The more deals we do, the more friends they have in the industry that they're telling it's working well, and they're pleased to be with us. And I think it's just a matter of straight-up blocking and tackling when it comes to the typical making calls, talking to people, renewing relationships we've had for years. And people get into a point where they're possibly ready to sell.

Weston Bloomer:

Got it. Thanks. Yes. It was double-digit. I think $1 million in revenue per term. So I got a little excited there.

Weston Bloomer:

And then last one, just on fiduciary, you'd highlight around 90 bps benefiting the quarters. Is that roughly what you have baked into the back half of the year when we think about your guidance?

Weston Bloomer:

Great. Thank you.

Operator:

The next question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.

J. Patrick Gallagher, Jr.:

Elyse, I think it's going to look a lot like 2023. I'm not seeing any hesitation of underwriters asking for rate. I do think the cycles have shifted. When you see cyber and D&O coming down, they probably are coming down and that's reasonable. Property through the roof is reasonable. What we're seeing in inflation in terms of lawsuit, social implications we're searching for. It's very, very troubling. And then you had inflation. We've been talking about inflation, and it's called now for over a year. And you look back in the reserves and inflation tips those into a very difficult spot. And you're not going to get those healthy in one year. So I feel very strong about. And I'll tell you, our insurance companies are very, our partners are very smart about their numbers. They know where they're making money, where they're not making money, and they're telling us what they need. So I don't see people backing off on that. No one's walking in saying, the gates are wide open, let's just get volume. It's a reasonable market that you can get deals done at a reasonable price. Our clients actually understand inflation. They're living with it across the board, and inflation is good for a broker, honestly. So I think next year looks very, very strong.

Douglas Howell:

Well, I guess my reaction to that is going back, I think that you'd see some margin expansion at 6%. I don't know if you'd get it necessarily at 4%. I don't -- I think by the time you got up to 9%, it'd be better than 50 basis points of margin expansion. And we do have one more quarter of roll and impact of Buck that would, the underlying business would be going up, but that business runs a lower margin. So, depending on which question you're asking me, I would think that margin expansion in 2024 could be very similar to what we thought it'd be in this year. Give us six points of organic and there might be 40, 50 basis points, give us nine points of organic, you might get 75, 80 out of it.

J. Patrick Gallagher, Jr.:

Well, I think that's the battle isn't Elyse. I mean, the carriers are very much wanting and telling us they need that. So, yes, I think that would be the objective and we're finding that we can get it. So, I do think that they're going to look at loss trends and they're going to try to definitely keep the rate structure moving ahead of that.

J. Patrick Gallagher, Jr.:

No. It's too early for me to comment on that, Elyse. I think, we just finished July, not as bigger month, obviously, as January, but interesting that the pricing was still very, very, very firm. The market after January 1 had a time, better chance to settle down, look at their books to understand, January was a nightmare. So as we said in our prepared remarks, July was a little bit more orderly, but still difficult. So, give me another quarter on that one.

J. Patrick Gallagher, Jr.:

Thanks, Elyse.

Mike Zaremski:

Hey, good afternoon. Investment income, is this the new run rate was better than expected or should we expected to take another like I guess, well, of course, the company's growing too?

Mike Zaremski:

Okay. And you guys are firing on all cylinders, I'm just trying to poke some holes here. Let's see if I can. So, I mean, just that will be realistic. U.K. inflation, the stats look like, it's high and there's wage pressures and some, at least slow in GDP outlook. How does your business look there -- has look there currently? Margin has been growing as much there, and any comments on that?

Mike Zaremski:

Okay. And just because Elyse asked for, I mean, I'm just going to sneak in a quick one. In terms of the pricing environment, taking a kind of a step up, how much do you think is due to the reinsurance cost trying to be passed through? And it sounds like you don't -- it sounds like it's not a big deal, because you're saying that next year could be similar to this year, so there wouldn't be a step down. But I'm curious if you think some of the momentum something on the reinsurance side?

Mike Zaremski:

Thank you.

Operator:

Our next question comes from the line of Greg Peters with Raymond James. Please proceed with your question.

J. Patrick Gallagher, Jr.:

Let Doug talk about the actual numbers, because I'm more off the cuff. And then I'll come back in on how I see the market shaping. Go ahead Doug.

J. Patrick Gallagher, Jr.:

Now, let me add some color to that, Greg. Number one, we're doing a much better job, I think, than ever of measuring kind of this new business stuff that you're talking about. We know that our average production is actually increasing in the income. The commission income receiving on new business has moved up from, let's call it $50,000, $60,000 into closer to $175,000 to $100,000. That's per item as we start bringing it in. So we're actually finding those clients that have for a long time probably been pretty happy with either their local broker or their relationship with a larger broker giving us a chance and we're doing very, very well. We are a new business machine. And when I take a look at the percentage of trailing revenue that we try to accomplish every year in new business. Our goal has always been 15% of trailing. We're just about right there. And as our trailing revenue growth continues, that pushes us in terms of our goals for more new business. And we are right on track with that. And when you start having 15%, 16%, 13% of trailing in new business, as long as you continue those retention levels, 94, 95, et cetera, you're getting very, very nice. You're getting very nice upside.

J. Patrick Gallagher, Jr.:

I'll give you that. Go and ask.

Douglas Howell:

Well, let's talk about the benefits business first. It's adjusted for the large life case 5%. I think that's pretty in line with maybe what some of the other brokers have talked about in their employee benefit space. So I wouldn't say it's necessarily out of whack compared to what's going on. That business right now doesn't have the lost cost increases that it's going to have. I think there's going to be medical inflation in that coming up. We're going to see on that a lot, but by and large, medical cost inflation does have an impact. When you go back to my early days here in 2003 through 2007, you were seeing medical loss inflation, cost inflation in the double digits, and that business was growing almost double digits also. So that will have an impact because you can't keep the inflation out of that space for too much longer. So that would happen. On the program business, you just understand in our case, there's some programs that if there's a change in the state or there's a change in the carrier appetite, sometimes that can cause a little bit of stress in that business. But still, being in those single digit organic ranges are still pretty damn good in this environment.

Greg Peters:

Fair enough. Just I know you provided some data. It's just the final question. I know you provided some data around Buck and the integration. That's a business that has had sort of a checkered past of success and maybe some challenges. Maybe spend a second. And this is my last question. Talking about the integration and why you think the outlook for that business is strong relative to its history?

Greg Peters:

Well, thank you for your answers and the answers make sense.

Operator:

Our Next question is from the line of David Montemaden with Evercore ISI. Please proceed with your question.

J. Patrick Gallagher, Jr.:

I wouldn't be modeling out, David, a huge acceleration there. I mean, I spent a lot of time with Doug on the street explaining why 3% organic was outstanding just a few years ago. Yes, there's all, I'm now looking it. I'm now looking at a business here that is accepting hard rates. Given the fact that there's big loss cost trends or reinsurance trends, these are people buying insurance and in many instances, not buying insurance, that's the biggest part of what we do is help people self fund. And that 5% growth is earned with a lot of discussion with a client. It's more akin to what Gallagher Bassett's getting in terms of their renewal increases rather than what you look at on the PC side. So I'm very happy at 5%. I don't want to give you this idea that you're going to see some acceleration to 12%. That's not happening.

J. Patrick Gallagher, Jr.:

Can I answer an underlying question I hear from you, David, and the others. Why do we do the buck deal? It looks like its growth isn't great, doesn't have the margins that a PC broker does. You realize where the pain is for our clients right now and what we are is pain mitigation people. And it's sure it's in property, casualty, its specialty property. And we're out there working every day to help them get that down. We're bringing self-insurance plans, captive plans, group plans, what we can on the PC side. And every year, year and out, our clients are dealing with how do we get people? How do we keep them? How do we pay them? And how do we motivate them and at the same time take care of their benefits needs. And to get a firm like Buck on our team, when it absolutely recognized as the best in the business. I mean, it puts us over the top and that ability to respond to our clients needs across all of what we do for them. And I think 5% is outstanding. I want to tell the team, congratulations.

J. Patrick Gallagher, Jr.:

What I've said in my prepared remarks, David, is the general liabilities of about eight. Workers comp, which has been flat to down for a number of years is up about three. And umbrella and package you're up about 11. So now, embedded in each of those lines have different reasons. General liability is social inflation, probably aging population. Workers comp is clearly, it floats with medical costs and it floats with employment. An umbrella and package is probably also looking at social inflation and property up 20% is clearly -- that's about exposure units and the need for rate.

David Montemaden:

Got it. And those did tick up versus 1Q, it sounds like?

J. Patrick Gallagher, Jr.:

A little bit.

David Montemaden:

Got it. And then, could you just level set me, if I think about full year, the business that Gallagher rates in brokerage. How much of that is coming from property at this point?

Douglas Howell:

What was the specific question?

Douglas Howell:

About 30% here for the full year 2022. That's about 30% of what we write.

J. Patrick Gallagher, Jr.:

Thanks, David.

Mark Hughes:

Yes, thanks. Good afternoon.

Mark Hughes:

Pat, you talked about medical inflation. You think it's going to accelerate. Given that the broader measures of medical costs are pretty calm these days. I wonder what gives you confidence that that's going to happen?

Mark Hughes:

Specialty drug.

Mark Hughes:

Understood. Thank you very much.

Operator:

The next question is from the line of Katie Saki with Autonomous Research.. Please proceed with your question.

J. Patrick Gallagher, Jr.:

I think it's more 2024, Doug?

J. Patrick Gallagher, Jr.:

And then, Katie to your point about cross selling, maybe cleared. We do see cross selling opportunities, PC to benefits, benefits PC for sure. But what we see -- we're very excited about is cross selling inside Gallagher benefit services. Their strength in the United States is in areas that we're not as strong. We've always been in defined benefit pension consulting for instance, but they come with terrific strengths there. And they're not probably as strong, although they do quite well, but not probably as strong as we've been in health and welfare. So if you take a look at that, now you're not trying to talk to a new party, add a client. You're already dealing with the person who buys benefits. Let me bring in my partner who does health and welfare, and we're already seeing a lot of that. So I think there is good cross selling. I think that margin improvement will come, and I'm excited about it.

Douglas Howell:

The nature of this business, if you look at it over the last 20 years is that you can get some pretty large clients that roll into your business. And they don't come as steady as let's say, a smaller client might do. So if you sell the likes of large U.S. corporation acts and you sell them in the fourth quarter last year, you're going to get to benefit in fourth quarter, first second third and you got to lap yourself in the fourth. So it's more the timing of new business on larger accounts that's causing that. But if you stack it up, 18% this quarter and if you think 14% and 10%. When you get down to the end of the year, you're talking some nice one of the 13% organic growth in that business. And then we do have some nice larger clients on the drawing board right now that we're proposing on. I don't know if they'll hit in the fourth quarter or they'll hit in the second or third quarter, it takes a year or two to sell these larger accounts. So it's just a little bit more naturally lumpy on a quarter-by-quarter basis. So I would encourage you to look at it on an annual basis. And if you think about what they did last year and then you're looking at this year at 13%, there's actually a sequential step up on an annual basis.

J. Patrick Gallagher, Jr.:

Thanks Katie.

J. Patrick Gallagher, Jr.:

You out there, Meyer.

J. Patrick Gallagher, Jr.:

Oh, there you go. Yes, you're coming through now.

J. Patrick Gallagher, Jr.:

Yes. And that's one of the things that gets us excited, because that's the genesis of our growth. That's what took us to a place where we could get public in 84. We are the people that help folks deal with untenable situations and turn them basically into risk management approaches. It's called larger tensions. We do that in a number of ways, whether it's by-line by state, whether it's by putting someone into a self-captive, whether it's just finding them a pool to be part of, that is a real defining aspect of Gallagher's capabilities. Do you know that?

Douglas Howell:

I think we have to look at it this way. What percentage of customers budget really is spend on insurance? And let's say some of the averages are 3%, 4%, 5% of what their total budget they're spending on insurance. So this isn't 30% of their cost structure So how much more can customers take in terms of this? Our job is to make that a small as possible. Let's never forget that. That's what we do day in and day out. But how much more can they take? Well, if their loss experience is bad, they're going to have to take some more.

Meyer Shields:

Okay, that's tremendously helpful. The same question on the re-insurance side. We've got property rates going up pretty dramatically. Is Gallagher telling its property clients that they should be buying more reinsurance in 2024 than they did in 2023?

Meyer Shields:

Okay. And then one of the final question if I can. Just could you talk about medical cost inflation. Is the medical cost inflation that you're anticipating on the college consulting side. Is that manifesting itself at all in worker's competition claimed to Gallagher Bassett processing?

Meyer Shields:

Okay.

J. Patrick Gallagher, Jr.:

And that's part of making sure we deliver the best outcomes.

Operator:

Thanks Meyer.

Michael Ward:

Hey, guys. Thank you. I was just wondering on the M&A pipeline that you're talking about from the beginning. Is that -- would you say that's skewed to P&C, or could there be employee benefits in there too?

Douglas Howell:

Yes, I think fundamentally, any smaller brokerage business that finds that they need more capabilities, whether it's P&C or benefits, it's the same decision by the owners of those businesses that they just think that they can use, join us together when we better as we serve as those clients and the capabilities they can get from us, they'll get it from whether it's wholesale, whether it's retail, whether it's benefit, even in Gallagher Bassett, they have especially acquisitions there. If it's -- as the owners, it's the same reason they're selling themselves is because they need capabilities, and they think Gallagher is the right place to get those capabilities.

Douglas Howell:

Yes. Here's the thing. We didn't see the great resignation that you read about in the papers. We talked about that quite a bit. We were very fair with our employees on the amount of raise pools that we've given those raised pools are larger in 2022 and 2023 than they were in 2018 and 2019 on a per employee basis. So we've recognized that there are some costs that our employees have to bear, and so we think that the raises we've given them have been very fair and have acknowledged the inflation and the environment. We haven't really sat down to plan for next year yet to see where we'd be in those raised pools, but obviously we'd be fair with our folks. But as you see, some of the inflation numbers are cooling down and what it costs to live. But by and large, I think that we've been very fair. Throughout our history, we have given raises every single year that I've been at Gallagher, and we recognize the importance of our employees to do that. So, we haven't seen a big stress on that.

J. Patrick Gallagher, Jr.:

Thank you.

Scott Heleniak:

Yes. Just a quick question on the risk management side. Wondering if you could give a little detail on the claims count differences and changes, you've both claims count and severity and kind of what you're seeing versus either recent quarters or year-over-year, and I guess I'm more interested at. I know you touch on a little bit just on some of the casualty lines and workers comp and liability and kind of what you're seeing there in terms of the counts and the average claims size that you're handling at Gallagher Bassett?

Scott Heleniak:

Okay. That's a helpful detail. And then just another question on the M&A pipeline since it was so significant compared to recent quarters. Just wanting if you can also just talk about or comment on how much of that is, how much of the trend you're seeing is international versus domestic. I'm not looking for a specific breakdown, but anything you can share there on, or you continue to look at a lot more international deals than you had over the past few years?

Scott Heleniak:

Okay. And then finally, any earlier read on to my renewal premium. I know it's probably a little bit early, but how that's comparing? Is it 12% or is it just too early on that?

Scott Heleniak:

Okay. Interesting. Great. Thanks for all the answers.

Operator:

Thank you. The final question is follow-up from Weston Bloomer with UBS.

Douglas Howell:

Well 2Q is our notoriously smallest corners because that's when we pay out all of our incentive compensation. We pay that in April. So the 2Q is as our smallest. The second half of the year is the largest. As a percentage you all toil in that those numbers more than we do that's just not really how we look at it. The fact is our cash flows closely tracked to our EBITDA growth. As you know that that because of our tax credit. Our tax load is a percentage of our EBITDAC is usually somewhere in the 8% range. Our CapEx is pretty consistent with prior year, so you don't have a significant change in that. So the only thing that really kind of impacts our cash flows different than EBITDAC would be a little bit taxes, a little bit the little growth in CapEx and then obviously, we're paying integration costs some of those we'll throw out in cash too on that. But right now we track close -- our cash flows tracked very close to what our EBITDAC is. So the growth in the EBITDAC is pretty much so what you're going to see growth in our cash flows.

Douglas Howell:

Oh, it's cash flow positive. I mean, we're not spending that much that on integration on this acquisition. So I would say over three years I think we're going to spend $125 million something like that. And it throws off cash flows and that's what's about.

J. Patrick Gallagher, Jr.:

Thanks for being with us this evening everybody. I really appreciate you joining us. I think you can probably tell that myself and the team are extremely pleased with our second quarter performance. We're reflecting on fully year 2023 financial outlook relative to our early thinking, it has improved on every measure. As we sit here today we remain very bullish on the second half. And most importantly to our more than 48,000 colleagues around the globe, thank you for all you do day in and a day out, I believe our continued financial success is a direct reflection of our people and our culture. Thank you very much. We look forward to speaking with you again at our IR Day in September. Thanks for being with us.

J. Patrick Gallagher, Jr.:

Thank you very much. Good afternoon, and thank you for joining us for our first quarter 2023 earnings call. On the call for today is Doug Howell, our CFO as well as the heads of our operating divisions. We had an excellent first quarter to start the year. For our combined brokerage and risk management segments, we posted 12% growth in revenue, 9.7% organic growth. GAAP earnings per share of $2.52, adjusted earnings per share of $3.30 up 12% year-over-year. Reported net earnings margin of 21%, adjusted EBITDAC margin of 38% up 29 basis points. We also completed 10 mergers totaling $69 million of estimated annualized revenue and we are recognized as the world's most ethical company for the thirteenth time, an outstanding quarter from the team. Let me give you some more detail on our first quarter performance starting with our Brokerage segment. Reported revenue growth was 12%. Organic was 9.1%. Acquisition rollover revenues were $61 million. Adjusted EBITDAC growth was 15% and we posted adjusted EBITDAC margin of 40.4% right on our March IR Day expectations. A fantastic quarter for the brokerage team. Let me walk you around the world and provide some more detailed commentary on our brokerage organic. Starting with our retail brokerage operations. Our U.S. PC business posted over 7% organic. Core new business was up year-over-year, even growing over the tough renewal compare in D&O lines, while retention was similar to last year's first quarter. Our UK PC business also posted more than 7% organic due to strong new business production, stable retention and the continued impact of renewal premium increases. Our combined PC operations in Australia and New Zealand posted organic of 10%. Net new versus loss business was consistent with prior year and renewal premium increases were ahead of first quarter 2022 levels. Rounding out the retail PC business, Canada was up 6% organically reflecting solid new business and consistent year-over-year retention. Our global employee benefit brokerage and consulting business posted organic of nearly 7%. New business remains strong and client retention was excellent. We saw growth across many of our practice groups with particular strength in HR consulting and pharmacy benefits. Shifting to our wholesale and specialty businesses. Risk placement services, our U.S. Wholesale operations posted organic of nearly 8%. This includes 16% growth in open brokerage and about 5% organic in our MGA programs and binding businesses. New business production and retention were both consistent with last year's first quarter. UK specialty posted organic of 17% benefiting from a strong start within aviation and the addition of new teams focused on North American risks. And finally, reinsurance, Gallagher posted 12% organic reflecting new business wins, great retention and a hardening property reinsurance market. Outstanding results from the Gallagher Re team. Pulling it all together Brokerage segment all in organic of 9.1% that's a bit above the top end of our first quarter expectation and a fantastic sales quarter by the team. Next, let me provide some thoughts on the PC insurance pricing environment, starting with the primary insurance market. Overall, global first quarter renewal premiums that's both rate and exposure combined were up more than 9% consistent with the 8% to 10% renewal premium change we had been reporting throughout 2022. Renewal premium increases remain broad based across nearly all of our major geographies and product lines around the globe. For example, workers' comp is up low single digits, general liabilities up mid to high single digits. Umbrella and package are up in the low double digits, so most lines are trending similar to previous quarters. Two exceptions. First, public D&O where renewal premiums are down a bit and second property, where renewal premium increases are accelerating. For example, fourth quarter property renewal premiums were up 15% and through the first three months of 2023, we have seen increases of 15%, 20%, and 17%, respectively. So, our clients continue to feel cost pressures here due to rising replacement values, increasing frequency and severity of weather related events and hard reinsurance conditions. We're not seeing signs that these lost costs and profitability pressures are likely to abate in the near term. So as we head to our largest primary insurance property quarter we are focused on helping our clients navigate and mitigate these premium increases. Moving to exposures. We are seeing continued strength in our customer's business activity. First quarter mid-term policy endorsements audits and cancellations combined were better than first quarter 2022 levels greater than the eighth consecutive quarter of year-over-year increases. Shifting to reinsurance. During the heavy Japan centric April renewals, reinsurance carriers continued to focus on increased pricing and tightening terms and conditions. This was across a broader range of territories and most all lines of business, so in even harder conditions compared to January 1. The casualty trading market saw orderly renewals and a sufficient supply of capital to fulfill the demand from underwriting enterprises. The property market continued to experience its recent challenges due to more limited underwriting capital. There were some green shoots in the ILS issuance, although pricing was typically less attractive to CDs than the traditional markets. Overall, there wasn't much new capacity entering the property market regardless, our teams navigated the hard market and customers again managed to secure satisfactory cover. Those interested in more detailed commentary can find our April first view market report at our website. Looking forward, there is good reason to expect a cautious underwriting stance from carriers for the foreseeable future as they contemplate recent weather events, replacement cost increases, social inflation and ongoing geopolitical tensions into their view of lost cost trend. So we expect insurance and reinsurance pricing increases to continue throughout 2023 and while it's early likely into 2024. We also remain optimistic on our customer's business activity during 2023. We have yet to see any significant shifts to daily indications of client, business activity thus far in April. We are also seeing encouraging employment levels for our benefits clients suggesting the economic backdrop for 2023 remains broadly favorable. Recent data shows the U. S. Unemployment rate declining. Continued growth in non-farm payrolls and a very wide gap between the amount of job openings and the number of people unemployed and looking for work. So I see demand for our products and services around attracting, retaining, and motivating workforces remaining strong. As we sit here today, we continue to see full-year 2023 brokerage segment organic in that 7% to 9% range and that would be another fantastic year. Moving on to mergers and acquisitions. We had an active first quarter completing 10 new tuck in brokerage mergers representing about $69 million of estimated annualized revenues. 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. Also in April, we officially welcomed the former Buck colleagues, combined with our existing employee benefits brokerage and HR consulting business we will enhance our offerings and be better positioned to deliver superior human capital solutions for all of our clients. Moving to our pipeline, we have nearly 40 term sheets signed or being prepared representing more than $350 million of annualized revenue. Good firms always have a choice of who to partner with, and we'll be very excited if they choose to join Gallagher. Moving on to our Risk Management segment, Gallagher asset. First quarter organic growth was 14.3% ahead of our expectations due to continued growth from recent new business wins and some revenue from first quarter New Zealand cyclone and flooding. We also saw core new arising claims increase in the low single digits during the quarter for existing clients across both workers' comp and liability. First quarter adjusted EBITDAC margin was also strong at 19.2% ended up a bit ahead of our March expectations. Looking forward, we see full-year 2023 organic around 12% to 13% and adjusted EBITDAC margins holding up or above 19% and that would be another excellent year. And I'll conclude with some comments regarding our Bedrock culture. I'm very pleased that just a few weeks ago, we were recognized as the World's Most Ethical Companies for the thirteenth time. We're honored to be one of only 135 companies globally to receive this award from the Ethisphere Institute. Our 45,000 plus colleagues embrace and celebrate the unique values that we have instilled in our company. The 25 tenants articulated in the Gallagher way continue to drive our global team's success today and we believe that our unique culture is a key differentiator and a competitive advantage. It's a strong culture of client focus, excellence, and inclusion and it continues to drive us forward. That is the Gallagher way. Okay. I'll stop now and turn it over to Doug. Doug?

J. Patrick Gallagher, Jr.:

Thanks, Doug. Operator, I think we're ready for some questions, please.

Weston Bloomer:

Hi. Good afternoon. My first question is on the margin expansion you're expecting for full-year 2023. How should we think about the cadence of that margin expansion as we move through the year? I think you'd previously guide to 1Q being lower relative to 2Q and 4Qs. Is that still largely the case excluding Buck or can you just help us think about the moving pieces as we go through the year?

Weston Bloomer:

Yeah. More or less, because you highlighted some of the lumpy nature in organic. I'm just kind of curious on how that plays out on the margin as well.

Weston Bloomer:

And is there any seasonality to Buck's margin as well?

Weston Bloomer:

Great. And does that include seasonality to Buck as well? I think you had previously said it was roughly run rate.

Weston Bloomer:

Okay. Great. And can you can you give a sense to of how quickly Buck is growing? I see in the acquired revenue table that's, call it $77 million per quarter. I'm assuming that's including a few other deals in there, but I'm curious if that's assuming any growth for Buck or how quickly that business is currently growing?

Weston Bloomer:

Great. Thanks for taking my questions.

Operator:

Thank you. Our next question is from Elyse Greenspan with Wells Fargo. Please proceed with your question.

Douglas K. Howell:

All right. Question one is without the math that results from Buck because they run naturally lower margins. That was the question that we answered for, Weston. The 60 basis points to 80 basis points is how we're looking at Gallagher before Buck. Does that help?

J. Patrick Gallagher, Jr.:

I think, Elyse, this is Pat. I think that we're just sort of predicting that it's a stable environment over the next three quarters. We're not seeing a lot of rate reduction. We are seeing continued, and by the way, I'd point out being a little proud about this. We've been the one saying we're not seeing recessionary pressure in the middle market by our clients around the United States in particular. Those businesses are continuing to grow and they are robust, even with the headwinds of higher interest rates and higher insurance costs. And those insurance costs are not backing off, and we can tell you this data day-to-day, line-by-line, geography-by-geography, country-by-country. So, I think that our commentary in our prepared remarks about it being a pretty firm market, looking like it's going to continue that way for all the reason we enumerated, we view it that same way over the next three quarters.

Douglas K. Howell:

We're preserving all the machines that allow us to generate those tax credits if there's something that might come out of an energy bill or a tax reconciliation bill yet this year. Those plants could be put back into service.

Douglas K. Howell:

Elyse, I don't know if there's a high probability of anything getting done in Washington. So I mean, that I would hope so, but I wouldn't put high probability on anything coming out of there. Yes, but if the plant sits there for another year, they sit there for another year.

J. Patrick Gallagher, Jr.:

Good. Thanks, Elyse.

Operator:

Thank you. Our next question is from Greg Peters with Raymond James. Please proceed with your question.

J. Patrick Gallagher, Jr.:

Hey, Greg.

J. Patrick Gallagher, Jr.:

Well, let me address a couple things first, Greg, so first, our recruiting efforts are ongoing. We are always recruiting producers, excited about the fact that our 500 interns will begin showing up in a few weeks here, in the United States, if I look around the globe, it's probably more like 600 interns. As you well know, we recruit heavily from that group, and our consistency of retention there is very strong, and continues to be strong. So, we have a good pipeline and a good -- we do a good job of landing new producers, nothing to announce in the way of any more robust efforts in that regard than are normal. And so I think I feel really good about that. In terms of retention of producers, very, very, very strong retention, and I think that we offer a great place to acquire trade, and we pay people well to do that. We're still one of the places that believes in remunerating people for their growth in books. So, I feel good about our production recruits. I feel good about our new hires, and I feel very good about the retention level that we have with the people that are. As it relates to the article, which was not an announcement, I would just simply say that we don't make a lot of comments on news stories, Greg, and I think you know that. I'm the CEO, and I feel great. Thank you very much.

J. Patrick Gallagher, Jr.:

Yes. I will. First of all, let me put some color on that. If I read the business insurance article correctly about a week ago, I think M&A in the first quarter is down about 29%. That's after year-after-year-after-year, more PE entries, more deals being done it's, so I think we're seeing a slowdown in the number of transactions, which I do think reflects a slowdown in the number of new entrance. There are some -- there are some people who have been very active in the past that are less active now. At present, we're not seeing a big decrease in those multiples. If you had 20 people bidding on a property 18 months ago, you still have 11 today. And so, I do believe that, like anything, supply and demand, if that demand continues to decrease and interest rates are in some way impinging that capital, I think that you will see multiples come down, but they're not doing that right now.

J. Patrick Gallagher, Jr.:

Thanks, Greg.

Mike Zaremski:

Hi, good afternoon. First question, in the prepared remarks, you talked about property rates accelerating. Any stats or any way we can dimension what percentage of your revenues on the Brokerage side, touch that element of acceleration and it doesn't seem like from your organic guide that you're taking in that acceleration continuing or maybe I'm incorrect?

J. Patrick Gallagher, Jr.:

I think that's a -- I'm piling in here. This is, Pat. That's a very, very good point. Every time in a firm market, we get that question. Rates are up on XYZ 12%. You're showing 6%. Why is that? Because our job is to not pass on the 12%, and we're good at that.

Douglas K. Howell:

Yes. That's right. But most of our reinsurance are on renewal, so you've already seen that math.

Douglas K. Howell:

All right. So, book sales would have been tiny. I think the total amount of book sales this quarter was about 200,000 bucks, something like that. So that wouldn't have influenced it in our numbers, at all. Our investment income on the face of the financial statements also includes our premium funding businesses. So, you will -- so that the amount of invest income that translates right into that number. Just take 90% of what you see as investment income and on the face and 90% of that is real, additional incremental investment income. When you look at what it means for the rest of the year, if you follow the interest rates through the big tick-up starting about last month last year, and so second half of the year, the increase in investment income is not as dramatic as it is here in the first quarter. So, if I were to look at full year impact of investment income on our organic lift, that would be about maybe 60 basis points for full year, 60 basis points of margin expansion from invest income for the full year. So, you can see here this quarter was up fueled about 90 basis points and for the full year it would be about 60 basis points to 70 basis points, something like that.

Douglas K. Howell:

No. I think if you look at our pipeline and you project it, we would think that if I were standing in January of next year looking back, what's to be the impact of rolling M&A excluding Buck. So, all it might use about 10 basis points to 20 basis points of margin expansion. So, it has a significantly smaller impact on the full year because we're so seasonally large in the first quarter.

Operator:

[Operator Instructions]. Our next question is from David Montemaden with Evercore. Please proceed with your question.

Douglas K. Howell:

All right. So, maybe let me back-up and just say, and think about it this way. We built a bridge this quarter from last year first quarter, right? So, if we were look -- if we were standing in January of ‘24, looking at a year that we're kind of seeing in that organic in the 7% to 9% range, here are some of the components we've talked about already and I'll toss in a couple more. So, where we said that maybe investment income would give us 60 basis points, 70 basis points, 80 basis points of margin expansion for full year, but not the 90 basis points. We got to think about as the normalization of the Omicron T&E expenses and then maybe some inflation on other T&E throughout the year, but we were back to doing full business in the second half of last year. That may cost margin expansion, let's say a 30 basis points to 40 basis point. I told you about the rolling impact of regular tuck-in acquisitions excluding Buck that would maybe use 10 basis points to 20 basis points of margin expansion. That gives you organic maybe in that 70 basis points to a 100 basis points just pure organic without those things, 70 basis points to a 100 basis points of margin expansion. And then we are making some additional -- we provided some additional raises that we talked about last quarter. We are making some additional IT investments all those maybe $5 million to $8 million a quarter that would use maybe 20 basis points to 50 basis points of margin expansion. Again, these are ranges, follow that bridge for the full year and that gets you back to the 60 basis points to 80 basis points of FX adjusted margin expansion for the year. So, then you'd layer in Buck, and that would get you down to that margin expansion that you mentioned there. So, I hope that bridge, and I don't have a crystal ball, it's not January of next year, but you -- if that was type of range you get some from investment income, you get a lot from organic, some goes back because of T&E and the rolling impact has a little impact, and we're making some investments. So, if we ended up the year and ignored Buck being up 60 basis points to 80 basis points, knowing me in January next year, I'd probably point out that we would have expanded margins 600 basis points in five years, and knowing my personality, I probably would say that I still would feel confident that we would have more and more productivity opportunities as we look forward. So, a lot can change in nine months, but wouldn't that be a great year for us to post. So, that's those are kind of my thoughts on that, and I hope that helps all the listeners on this to understand that where the pieces are coming from and hopefully that will help you build your models.

Douglas K. Howell:

I think the accounting on the deferred revenue from 606 in the fourth quarter plus maybe a life cases. Now maybe we sell some more life cases that come in pretty lumpy. Those probably cost us 50 basis points. The combination of the two and full-year organic something like that. But one thing I will say is that when we look at our dailies, you know, these are the overnights where we get a scrape of all the renewals that are going on, I got to tell you, April looks a lot more -- looks stronger in terms of premium increases than we were seeing before even on a mix adjusted basis. There is a tone that we're seeing in our data, not from anecdotal polling, that there is some further strengthening in all lines and all geographies, maybe other than one or two smaller ones. So, who knows? Maybe we'll be close to the 9%, but we're still comfortable in that that 7% to 9% range.

J. Patrick Gallagher, Jr.:

I mean there's a couple of things going on. One is we happen to be, if you look at kind of the new business we've been selling, it's been connected to more liability activity. So it's not necessarily that individual accounts are saying more. But the new business tends to be tilting a little bit in that direction.

Operator:

Thank you. Our next question is from Mark Hughes with Truist. Please proceed with your question.

J. Patrick Gallagher, Jr.:

Hey, Mark.

Mark Hughes:

Pat, you've been pretty enthusiastic about what you're seeing around exposures. In the construction space, if banks are really tightening up, would you have started to see that? Would there be some early project work that would flow through your system. Do you have any kind of view on what you think will help or what will happen there given the banking crisis.

Mark Hughes:

Correct. Any early signs of pressure because of the banking situation?

Mark Hughes:

Any observation about the carrier's willingness to pay claims with perhaps inflation in the system, are they tightening up there? And is that -- are you seeing that in your relationships with the carriers?

Mark Hughes:

Very good. Thank you.

Operator:

Thank you. Our next question is from Josh Shanker with Bank of America. Please proceed with your question.

J. Patrick Gallagher, Jr.:

Well, a, I don't understand it, and I'm not smart enough too. So let's start with that. And b, yes, they're raising funds like crazy. One of our competitors that I won't name actually eliminated their integration team and their acquisition team. Announced publicly that they were no longer going to be actively pursuing acquisitions, they've got additional funding and they're back in the game. Go figure out who would sell to that. Not me. So then you go to other players that have been more consistent long term. And, yes, they're they received significant funding in the last 60 days. So they are flush. That capital's got to work. They didn't get it to put it interest. So there's competition out there.

J. Patrick Gallagher, Jr.:

Well, I think so. So, I mean, I think that's a big part of our sales, that we are always talking about the fact that the differentiator here is twofold. One, we believe we have a great franchise that offers them the opportunity to expand their business. And if they love the business or they tend to stay in it, this is the best platform in our mind to trade from. So that starts it. And then, of course, you've got the cultural aspect. And we're competitive. We're not we're not trying to sell the fact that that should give them a deep discount. But there are, you know, there are people that sell for various reasons, and we don't win them all.

J. Patrick Gallagher, Jr.:

Sure, Josh.

Meyer Shields:

Thanks. Two sort of big picture questions if I can. First, Pat, you talked about within wholesale and specialty. Open brokerage is growing a lot faster than MGA and binding business. Is there something you could talk us through why there's that gap in growth rate?

Joel D. Cavaness:

Sure. So, on the wholesale side, obviously, you work with larger accounts and larger accounts that end up in the wholesale space typically are larger accounts with larger exposures and a little tougher to play. So that would be really the first. And then really the second thing is the inflow of tougher accounts today that are coming out of the admitted market and coming into the several lines market or E&S depending on what your terminology is, is more robust. They're coming in very quickly because of especially the difficulty in the property market. So you would see a higher organic in that line versus our MGA binding business, which is more consistent, growing nicely, but it's more consistent in the nature of smaller accounts. So it doesn't move the needle as much.

Meyer Shields:

Okay. No. That's very helpful. Thank you. That's definitely what I needed. Second question, I'm just wondering how should we think about reinsurance growth over the next year or so. Is there sort of a special maybe temporary boost because it's now under sort of doubters purview, and you can explain the benefits of that to the insurance company that you deal with worldwide and then once that happens, you're on a stable basis? Or is that a more enduring first of upside?

Meyer Shields:

Okay. Perfect. Thanks so much.

Operator:

Thank you. Our next question is from Rob Cox with Goldman Sachs. Please proceed with your question.

J. Patrick Gallagher, Jr.:

I think they're pretty close to the same. Yes we're seeing some of those, but we're seeing, take D&O out of it right now. We are starting to see some uptick in workers' comp now. So, I mean, I don't see a lot of difference between what's going on in the U.S. and what's going on Canada, New Zealand, Australia, and the UK. So it's pretty close.

J. Patrick Gallagher, Jr.:

Sure.

Elyse Greenspan:

Hi. Thanks. Just a follow-up on the margin side and thanks for all the color on the moving pieces. But within that 20 to 30 basis points, are you assuming that the fiduciary investment income is in line with the Q1 level over the remaining three quarters?

Elyse Greenspan:

And then, you know, I know I had asked earlier kind of just a question just in terms of just it seems like you're assuming a stable economy. Right? We see some forecasts out there for decelerating GDP or perhaps GDP to go negative. What are you guys assuming for GDP over the balance of the year?

Elyse Greenspan:

And so even, I guess, if we still like, if you were thinking about what's going to have the greater impact, do we think about it being the economy and GDP or PNC pricing when we think about the next few quarters?

J. Patrick Gallagher, Jr.:

But I think the pricing will far offset any modest contraction and exposure in it. I don't know what's going to contract in the next six months or what volumes are going to contract. We're just not seeing at least.

Elyse Greenspan:

Thanks for all the color.

J. Patrick Gallagher, Jr.:

Thanks, Elyse.

David Montemaden:

Hi. Thanks for taking my follow-up. So I've noticed the last few quarters just in the adjusted compensation ratio commentary in brokerage. Just the impacts from savings related to back office headcount controls. Could you maybe just touch on that? I'm assuming some of this has to do with leveraging centres of excellence. But I don't think you had mentioned that as a tailwind when we think about the margin roll forward. So, I guess maybe just help me think through that, maybe not only for this year, but, like, broader picture. How big of an opportunity that is leveraging the centres of excellence.

David Montemaden:

Got it. Nope. That makes sense. Thank you for that.

Operator:

This concludes today's conference call. You may disconnect your lines at this time.

Patrick Gallagher:

Thank you. Good afternoon, and thank you for joining us for our fourth quarter '22 earnings call. On the call with me today is Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions. We had a terrific finish to cap off an excellent year. During the quarter, for our combined Brokerage and Risk Management segments, we posted 16% growth in revenue, 11.7% organic growth. GAAP earnings per share of $0.83, adjusted earnings per share of $1.86, up 24% year-over-year, reported net earnings margin of 9%, adjusted EBITDAC margin of 29.6%, up 120 basis points. We also completed 17 mergers totaling more than $140 million of estimated annualized revenues in addition to announcing our agreement to acquire Buck, another fantastic quarter by the team and our best fourth quarter in decades. Let me give you some more detail on our fourth quarter performance, starting with our Brokerage segment. Reported revenue growth was 16%. Organic was 11%. Doug will explain it does include a point from our Annual 606 review, Brokerage organic and double digits is outstanding. Acquisition rollover revenues were $107 million, and our adjusted EBITDAC margin was 31.3%, up 120 basis points and in line with our December IR Day expectations, another excellent quarter for the brokerage team. Focusing on the Brokerage segment organic, let me walk you around the world and provide some more detailed commentary starting with our P/C operations. Our U.S. retail business posted 8% organic, our new business was a bit better than last year offset somewhat by less nonrecurring business, client retention and the combined impact of rate and exposure were both similar to last year's fourth quarter. Risk Placement Services, our U.S. wholesale operations, posted organic above 9%. This includes more than 12% organic and open brokerage and about 7% organic in our MGA programs and binding businesses. New business was strong and retention was consistent with last year's fourth quarter. Shifting to outside the U.S. Our U.K. businesses, both retail and specialty combined posted organic of 17% benefiting from excellent new business production, strong retention and the continued impact of renewal premium increases. Australia and New Zealand combined, organic was 12%. Net new versus loss business was consistent with last year and renewal premium increases were above fourth quarter '21 levels. Canada was up nearly 9% organically, reflecting solid new business and retention. Moving to our employee benefit brokerage and consulting business. Organic was 3%, consistent with our December IR Day expectations. New business was similar to last year's fourth quarter and retention remained excellent. And finally, to reinsurance. Our legacy reinsurance operations crushed it with some hard earned new business wins and quarterly organic well into double digits. And recall that December was the first month our newly acquired reinsurance operations were included in organic. And while off a very small revenue base, they too had a spectacular organic growth for the month. So combined, Gallagher Re team continues to deliver outstanding results. So again, Brokerage segment, all in organic double digits. And with our outstanding fourth quarter finish, full year organic came in at 9.7%. That's our best full year Brokerage segment organic performance in decades and even more impressive when you consider we grew on top of the 8% organic we posted in '21. Next, let me give you some thoughts on the current P/C market environment starting in the primary insurance market. Overall, global fourth quarter renewal premiums, that's both rate and exposure combined, were up more than 9% that's consistent with the 8% to 10% renewal premium change we have been reporting throughout '22. Fourth quarter renewal premium changes by line of business were broadly consistent with the first 3 quarters of '22 with 1 exception, which is D&O. D&O continues to be the one area where rates are flat to down slightly, but in some cases, our customers are using the weaker pricing to purchase more limit. Exposures also continue to be consistent with the first 3 quarters of '22, indicating continued strength in our customers' business activity. In fact, fourth quarter midterm policy endorsements, audits and cancellations were better than fourth quarter '21 levels. Looking ahead, these trends appear to be holding. Thus far in January, midterm policy endorsements and audit adjustments are trending higher than last year's level and global renewal premium increases are consistent with the fourth quarter. But remember, our job is to help clients mitigate premium increases and provide an appropriate level of risk transfer that fits their budgets. Shifting to reinsurance and the important January 1 renewals. As we discussed in our 1st View Market report published earlier this month, it was a very late and complex reinsurance renewal season. Not surprising, U.S. peak zone property cat reinsurance saw some of the largest price increases. But it's worth noting 4 additional trends within property cat

Patrick Gallagher:

Thank you, Doug. Operator, I think we're ready for questions.

Weston Bloomer:

So my first question is on the reinsurance market and the growth you saw there. It's obviously really strong end of the quarter. And I think you've talked about high single-digit growth there for 2023. So did the end of the year kind of change how you think about that level of growth? Or how should we be thinking that going into next year?

Weston Bloomer:

Great. And then my second question within brokerage as well. I noticed the compensation ratio as a percentage of revenue dropped pretty materially. And I think you'd called out some back-office saves, lower benefit costs, offset by some hiring. Is there a way you can call out how much each of those had an impact? Or where I'm trying to go with the question is how much additional leverage do you have to kind of bring that lower in 2023?

Weston Bloomer:

Got it. Is there any change to the compensation structure that you make in this market, too? I know there's some changes just, I guess, higher organic accounts, things like that.

Operator:

Our next questions come from the line of with Autonomous Research.

Douglas Howell:

So are you asking for the quarter? Are you asking for the full year? Sorry, just so I've got the baseline.

Douglas Howell:

For the full year, right? So when I look at rate and exposure, as I did, our new business, we had a terrific new business here. So I'll say that our net new business spread was about 4 points and the rest of that is probably rate and exposure, remember between that. So maybe, again, you think about it, 1/3, 1/3, 1/3 net new business over loss business is 1/3, rate was 1/3 and exposure unit growth was 1/3.