Arthur J. Gallagher & Co. (AJG) on Q1 2023 Results - Earnings Call Transcript

Operator: Good afternoon, and welcome to Arthur J. Gallagher & Companies First Quarter 2023 Earnings Conference Call. Our participants have been placed on a listen-only mode. Your lines will be opened for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time. Some of the comments made during this conference call including answers given in response to questions may constitute forward looking statements within the meaning of the securities laws. The company does not assume any obligation to update information or forward looking statements provided on this call. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the information concerning forward looking statements and risk factors sections contained in the company's most recent 10-K, 10-Q and 8-K filings for more details on such risks and uncertainties. In addition, for reconciliations of the non-GAAP measures discussed on this call, as well as other information regarding these measures, please refer to the earnings release and other materials in the and relations section of the company's website. It is now my pleasure to introduce J. Patrick Gallagher, Chairman, President and CEO of Arthur J. Gallagher & Company. Mr. Gallagher, you may begin. 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? Douglas K. Howell: Thanks, Pat, and good afternoon everyone. As Pat said, an excellent start to the year. Today, I'll begin with some comments using both our earnings release and our CFO commentary document that we post on our website. I'll touch on organic margins and provide some modeling helpers for the remainder of 2023. Then I'll finish up with my typical comments in cash, M&A capacity and capital management. Okay. Let's flip to page 2 of the earnings release. All in brokerage organic of 9.1%. Call it right at the top end of the range we foreshadowed at our March 16th IR Day, a nice finish from our London specialty operations and a little upside from reinsurance benefits. One call out on that table. Contingence didn't grow organically this quarter for three reasons. First, there's a little geography between supplementals and contention call that about $2 million. Second, there was a bit of positive development in Q1 2022 from the prior year 2021 estimates. Call that $3 million and again, that's back in first quarter 2022, causing a little difficult compare. And third, we are not expecting one of our programs to pay as large of a contingent here in 2023 because of underlying loss ratio deterioration. Call that maybe towards a million. Regardless, base organic at 9.5% and all in at 9.1% that's a fantastic quarter by the team. Hoping to page 4 of the earnings release to the Brokerage segment adjusted EBITDAC table. We posted 40.4% for the quarter, before FX, that's up 56 basis points. And FX adjusted up 14 basis points over first quarter 2022. That's right in line with our March IR Day expectations when we discuss that first quarter 2022 expenses were lower than our expected run rate simply because we are still in the Omicron portion of the pandemic and that our tuck in acquisitions are just not as seasonally weighted. But they don't roll in at 40 points of margin here in the first quarter. If you levelize for those two items, our margins expanded approximately 110 basis points. Maybe looking at it like a bridge from first quarter 2022 will be helpful. Investment income gave us 90 basis points of margin expansion. The normalization of Omicron T&E expenses and inflation on all T&E costs us 80 basis points. The seasonal impact from rolling M&A uses about 40 basis points. Organic gave us 70 basis points of expansion and some additional wages and IT investments used about 25 basis points. Follow that bridge and the mass gets you close to that 14 basis points of FX adjusted expansion in the quarter. Looking forward, it's still early yet with a fantastic first quarter combined with pass up commentary makes us more bullish on hitting that full-year brokerage organic in the 7% to 9% range and posting adjusted margins up 60 basis points to 80 basis points. Two small heads up on that. First, getting to that 7% to 9% organic for the full-year might be a little lumpy over the next three quarters given the large life case we sold in Q2 2022. And then the 606 deferred revenue accounting in our fourth quarter. We discussed both of those with you last year, so there's no new news here. Just a reminder for your modeling. Second, the 60 to 80 basis points of margin expansion is before the roll in impact of Buck, which recall naturally runs lower margins. So when you include Buck, the math would show full year margin expansion in that 20 to 30 basis points range. So moving on to the Risk Management segment and the organic table at the bottom of page 4. As Pat said, an excellent quarter, 14.3% organic growth We did get a little tailwind this quarter because Omicron caused fewer claims arising in Q1 2022 and we also had some New Zealand [CAC] (ph) claims activity. But most of this excellent result comes from strong new business wins in the second half last year. As for margins, put to page 5 of the earnings release. Risk Management posted adjusted Q1 EBITDAC margins of 19.2%. That's up 177 basis points over last year. As we look forward, we're seeing the rest of the year organic in that 12% to 13% range and full-year margins now finishing a bit above 19%. That would be the best full-year adjusted margin in Gallagher asset six decade history. Another demonstration of the benefits of scale, intellectual capital, technology and operational excellence. Let's turn to page 6 of the earnings release. That's our Corporate segment and also, when you take a look at pages 3 and 4 of the CFO commentary document, most all of the items are right in line with our March IR Day forecast. Three callouts on the CFO commentary document. When you see Page 3, you'll see a slight tick up in our expected book effective tax rate. That's entirely due to the UK rate hike to 25% that went effective April 1st. But remember what you're seeing is a book effective tax rate. Our cash taxes paid rate is substantially lower. Call that around 10% of our adjusted combined brokerage and risk management EBITDAC. That's because of the tax shield from interest, the amortization of purchase intangibles and the incremental cash flows from our clean energy investments over the coming years. Page 5 of the CFO commentary shows those tax credits. We have over $700 million as of March 31st, and it shows that we're forecasting to use about a $180 million to $200 million in 2023 with a step up in 2024 in each later year. That's a really nice cash flow sweetener to help fund future M&A. Then if you flip back to page 4 of the CFO commentary document, you'll see that we had a slight beat on the Corporate segment this quarter compared to our midpoint, but some timing in that beat. So you'll see full-year still about the same as what we forecasted our March IR Day. Moving now to page 6 of the CFO commentary document, that table shows our rollover M&A revenues. It shows $61 million this quarter, which is pretty close to that $63 million we estimated during our March IR Day. And also looking forward, we've now included Buck in that table, but remember, you'll need to add your pick for other future M&A to these estimates. Let me move to some comments on cash, capital management and future M&A. At March 31, available cash on hand was around $1 billion, but note that about $600 million was used to buy Buck in early April. So call it $400 million. This means we estimate that we have about $2 billion more to fund M&A for the rest of this year and our early look is another $3 billion or more in 2024 usually to fund our M&A program, utilizing only free cash and incremental debt while maintaining our strong investment grade ratings. One final reminder, recall during our March IR Day, we mentioned that we would be reclassifying how we present fiduciary balances on our balance sheet and in our cash flow statement. These re-classes are purely GAAP geography, and we're doing so to better align our presentation with how many other brokers present their statements. You might notice some of that movement in the recast balance sheet on page 12 of their earnings release. To help you understand all of the movement there'll be a comprehensive table in our 10-Q that we will file later next week. Again, all of this is to make our presentation more consistent with most of the other public brokers and all of the changes just gap geography. So those are my comments. Another terrific quarter and looking forward, we see strong organic growth, a great pipeline of M&A and continued opportunities for productivity improvements, all fueled by an amazing culture. I believe we are very well positioned to deliver another fantastic year. Back to you, Pat. J. Patrick Gallagher, Jr.: Thanks, Doug. Operator, I think we're ready for some questions, please. Operator: Thank you. This call is now open for questions. [Operator Instructions]. Our first question is from Weston Bloomer with UBS. Please proceed with your question. Operator: Thank you. Our next question is from Elyse Greenspan with Wells Fargo. Please proceed with your question. Operator: Thank you. Our next question is from Greg Peters with Raymond James. Please proceed with your question. Operator: Thank you. Our next question is from Mike Zaremski with BMO Capital Markets. Please proceed with your question. Operator: [Operator Instructions]. Our next question is from David Montemaden with Evercore. Please proceed with your question. Operator: Thank you. Our next question is from Mark Hughes with Truist. Please proceed with your question. Operator: Thank you. Our next question is from Josh Shanker with Bank of America. Please proceed with your question. Operator: Thank you. Our next question is from Meyer Shields with KBW. Please proceed with your question. Operator: Thank you. Our next question is from Rob Cox with Goldman Sachs. Please proceed with your question. Operator: Thank you. Our next question is from Elyse Greenspan with Wells Fargo. Please proceed with your question. Operator: Thank you. Our next question is from David Montemaden with Evercore. Please proceed with your question. J. Patrick Gallagher, Jr.: Sure. We're pretty proud of the quality that comes out of that operation too. Well, thank you very much everyone. Appreciate that and thank you for joining us today. As you could tell, we're extremely pleased with our start to the year. We posted a great quarter. I'd like to thank all our colleagues for their outstanding efforts this quarter. We are people business and I believe we have the best people at Gallagher. We look forward to speaking with you again at our IR Day in June. Have a nice evening, and thanks for being with us. Operator: This concludes today's conference call. You may disconnect your lines at this time.
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Arthur J. Gallagher & Co. (NYSE: AJG) Insider Purchase and Stock Performance

  • Gallagher Patrick Murphy, COO of Arthur J. Gallagher & Co. (NYSE:AJG), purchased 1,115 shares, increasing his total ownership.
  • AJG completed a public offering of 30.36 million shares at $280 each, with a 30-day option for underwriters to buy an additional 4.55 million shares.
  • The stock price of AJG is currently $284.51, with a yearly high of $316.72 and a low of $221.15, showcasing its market volatility.

Arthur J. Gallagher & Co. (NYSE:AJG), a leading global insurance brokerage and risk management services firm, witnessed a significant insider purchase on December 23, 2024. Gallagher Patrick Murphy, the Chief Operating Officer, acquired 1,115 shares of AJG's common stock at $284.14 each. This transaction increased his total holdings to approximately 40,308 shares, as reported in the SEC transaction document.

Furthermore, AJG recently finalized a public offering of 30.36 million shares, priced at $280 per share. This offering was spearheaded by Morgan Stanley & Co. LLC and BofA Securities, Inc., with participation from several other financial institutions. Additionally, the company granted underwriters a 30-day option to purchase up to an extra 4.55 million shares at the same price.

The current stock price for AJG stands at $284.51, marking a slight increase of 0.50% or $1.41. The stock has fluctuated between $280.82 and $284.98 throughout the trading day. Over the past year, AJG's stock has experienced a high of $316.72 and a low of $221.15, indicating a significant level of volatility.

With a market capitalization of approximately $71.07 billion, AJG demonstrates its significant footprint in the insurance brokerage industry. Today's trading volume for AJG is 1,912,072 shares, reflecting active investor interest following the recent public offering and the insider purchase by Gallagher Patrick Murphy.

Arthur J. Gallagher’s Investor Day Review

RBC Capital provided a review of Arthur J. Gallagher & Co. (NYSE:AJG) quarterly Investor Day, which offered up some data points indicating that organic growth trends have remained favorable to start the year.

Both P&C pricing and the economy aren't showing signs of fading in any meaningful way and remain tailwinds. Gallagher's M&A appetite remains high as evidenced by recent deal activity. Likewise, the company sounded upbeat about 2023 organic growth prospects across both segments.

The analysts said they remain constructive on the company’s shares at current levels and revised their 2023 EPS estimate to $8.70 from $8.75 to reflect higher interest expense from a recent debt offering. Their 2024 EPS forecast of $9.70 is unchanged.