Arthur J. Gallagher & Co. ($AJG) Q2 2025 Earnings Call

Thank you. Good afternoon and thank you for joining us for our second quarter 25 earnings call. On the call for me today is Doug Hall, our CFO, and other members of the management team. We had a great second quarter for a combined brokerage and risk management segments. We posted 16% growth in revenue, 5.4% organic growth, reported net earnings margin of 17.3%, adjusted EBITDAC margin of 34.5%, up 307 basis points year-over-year, adjusted EBITDAC growth of 26%, our 21st consecutive quarter of double-digit growth, GAAP earnings per share of $2.11 and adjusted earnings per share of $2.95. Another strong quarter by the team. Moving to results on a segment basis, starting with the brokerage segment, reported revenue growth was 17%. Organic growth was 5.3% in line with our expectations despite headwinds from property renewal premium changes in June. Adjusted EBITDAC margin expanded 334 basis points to 36.4% with underlying margin up around 60 basis points. Doug will break down the margin expansion further in his comments. Let me provide you with some insights behind our brokerage segment organic. Within our retail operations, we delivered 4% organic overall, a reflection of the heavier weighting to property business this quarter. US organic was 5% with PC a bit below and benefits a bit above that level. Outside the US, our international operations primarily in the UK and Canada, Australia and New Zealand were collectively around 3% with UK a bit above and Canada a bit below 3%. Shifting to our reinsurance, wholesale and specialty businesses in total organic of nearly 7%. This includes 5% organic from Gallerie and more than 7% organic from our wholesale and specialty businesses. So we continue to deliver organic growth across retail, wholesale, and reinsurance.

Next, let me provide some thoughts on the PC insurance pricing environment. Starting with the primary insurance market. Overall, the global PC insurance market remains rational and we expect that to continue. Carriers today have insights into what products and geographies are generating appropriate returns and areas that need to be rewritten or repriced to improve profitability. Accordingly, we are seeing more carrier competition across property and continued caution within casualty lines. Breaking down second quarter global renewal premium changes, which includes both rate and exposure, we saw the following by product line. Property down 7%. That's a couple points below what we were seeing at the time of our early June IR. Casualty lines up 8% overall, including general liability up 4%, commercial auto up 7% and umbrella up 11%. Package up 5%, DNO down 3%, workers comp up about a point and personal lines up 7%. Breaking down renewal premiums by client size, we continue to see significant differences. For clients generating less than $100,000 of revenue, renewal premiums were up 3%. For clients generating more than $100,000, renewal premiums were down 2%. As we discussed with you in June, second quarter renewal premium changes are more heavily influenced by property coverages than the other quarters. Excluding property, both small to midsize accounts and larger accounts are seeing global renewal premium increases in the 4 to 6% range. Now, good accounts will get some premium relief from that. However, accounts with poor loss experience are likely to see greater increases. Today's environment is actually ideal for us to show our expertise, product knowledge, and data-driven capabilities. Our talented team can help clients navigate market complexities while finding the best coverage. Moving to the reinsurance market now. June and July renewals reflected broadly similar conditions as earlier in the year. Property covers continued to favor reinsurance buyers, particularly on cat exposed risks and increased limits being purchased are somewhat offsetting rate decreases. Casualty reinsurance dynamics reflected continued concerns over prior year loss development and rising loss trends from inflation and the litigation environment. Thus, pricing was flat to modestly higher. In a growing market with opportunities to differentiate clients' underwriting abilities and risk profiles, Gallerie will continue to perform very well.

Moving to some comments on our customers' business activity. Our second quarter and July revenue indications from audits, endorsements, and cancellations continue to be a nice positive. So we see solid client business activity in our data and no signs of a broad meaningful global economic downturn nor any changes from the prospect of tariffs. We will continue to watch these carefully for any early signs of changes in our clients' business activity. Within the US, we are seeing continued job growth, just not quite at the robust levels we saw during 2024. Additionally, trends from health insurance carriers continue to indicate ongoing increases in medical utilization and treatment costs. Our benefit professionals are well positioned to guide employers through these many challenges. So with a great first half in the books, we now see full year 25 brokerage segment organic in the 6.5 to 7.5% range. Doug will unpack our organic outlook by quarter in his comments. Regardless of market and economic conditions, I believe we are very well positioned today. Our niche expertise, extensive data and analytics offerings, and global resources put us in a great place competitively. Moving on to our risk management segment, Gallagher Bassett. Second quarter revenue growth was 9% including organic of 6.2%. We saw solid new business revenue in the second quarter. As the new business sold that we spoke about last quarter began to generate revenue combined with our fantastic client retention, we believe we will see full year 25 organic in that 6 to 8% range. Second quarter adjusted EBITDAC margin was 21%, a bit better than our June expectations and looking ahead we still see full year margin around 20.5% and that would be another great year for Gallagher Bassett.

Shifting to comments about mergers and acquisitions starting with AssuredPartners. Since our early June IR day, we've made terrific progress and now believe we will be in a position to complete this transaction here in the third quarter. As for other M&A activity during the second quarter, we completed nine new mergers representing around $290 million of estimated annualized revenue. For those new partners joining us, I'd like to extend a very warm welcome to the Gallagher family of professionals. Looking at our pipeline, we have around 40 term sheets signed or being prepared, representing around $500 million of annualized revenue. Good firms always have a choice and it would be terrific if they chose to partner with Gallagher. I'll conclude with some comments about our bedrock Gallagher culture. During the second quarter, I had the pleasure of spending time with thousands of colleagues across the organization, including more than 500 college students from the 60th class of the Gallagher internship program. This rigorous two-month sales internship program is an essential investment in our future. And from my many interactions with this talented group, I am more than confident that our sales culture will remain strong for years to come. And that is the Gallagher way. Okay, I'll stop now and turn it over to Doug. Doug.

Thanks, Doug. Darl, you want to open up for questions, please?

Well, Ely, we aren't going to give out dates that we did this or did that. We are done responding to their second request and we do continue to engage with them and respond to certain inquiries. And so the review is ongoing. So I'm not going to get into any more real details about timing, but our evaluation of where we stand given the give and take back and forth and given the relationship is we will be in a position to close the transaction during the third quarter. We're very, very excited about it.

And we are heavier in the second quarter on property than we are the next two.

Thanks, Ely.

That's a bad number. That's a bad number. Whoever gave you that number, it's not what we're seeing.

That's a bad number.

Bad number on large accounts. It's a bad number on middle accounts. It's a bad number on small accounts.

I tell you what, I have to agree. If I was an outsider, I'd be pretty impressed. Our machine, and we're in just a great position, is driven by literally hundreds of people in the field around the world talking to folks that they admire and working with people who have been hired by folks to sell their business. And we're on that short list of virtually anybody that wants to take a look at possibly selling their enterprise, large or small. Our tuck-in acquisition business or purchases are not all 50, 100 million. There's lots of twos, fives, tens. These are family businesses and they're not PE rollups and they're looking for a home for their people. And I couldn't be prouder of the fact that we're still at the high end of that checklist. They want to know, is Gallagher still the kind of company I'd like to join? And you're exactly right to pick up on the fact that nine closures at the very time that they know we're doing the biggest transaction in our history. So it is a testament to the...

Thanks Andrew.

Yeah, I think you're picking up on something, Charles. There seems to be a heavy focus on property. Property for us in the course of a year might be 35% of our business, casualty and we're seeing a steady march of casualty rates going forward. Recollection says that casualty is up about 8% and the mixing the weight of the business. So, I think overall you're seeing a market that's still mid-single digits going up in terms of rates. So you're right to sniff out the difference between those two and wonder but the combined number and that mid-single digits number is still spot for the second part of your question, we see that happening for the rest of the year. We are just in the beginning of wind season. So let's see what happens here over the next three months. That could change the market. We're at $80 billion of cat losses, the biggest first half of the year ever in the history of our business. It's only been five months ago that the tragic California fires were there. I think carriers still have to digest that and how that's impacting their reserves still. There's still development to come out of that. So, between the casualty rate still marching higher, property is, you're at the plate taking a swing at it. We'll see what happens for the rest of the year.

I kind of look at base and supplementals together and that's pushing like 4.9 or 5%. So right in there what we're seeing going forward. The contingents, I think the carriers are doing well. We do well in the environments where carriers do well. So I think that it's nice to see that base and supplemental together still around 5%. Supplemental maybe topping that up a little bit. So I think you're reading through that right. But we're holding in there. Our fee accounts are doing well too. So it wouldn't surprise me that that's the same number the next two quarters also.

Thanks, Charlie.

No, I think Greg it is fair to say we had to suspend some actual work streams that were things like what producers would work with what other producers on accounts, what branches would be sharing what here or there. But we've had a lot of time and we have been allowed at the senior levels to continue to have dialogue to work on the plan here. And so we've followed the rules very closely. We've had a longer period of time to review this and we've been allowed to do more integration planning, just not getting into some of the details of some of these work streams. So, I'd say that we're really ready to hit the ground running. I think that if you'll recall when we announced this acquisition, we're very proud of the fact that we said in its first year it would be accretive. We still maintain that. I think we're going to see a bump in opportunities to sell stuff in geographies in places that we have not been represented. Remember only 94% of these acquisitions done by AP we didn't have a chance at. So these are fresh new bodies that are coming on our team. Seems like they're very excited. And we're looking forward to getting going.

All right, let me try to answer a little bit of that right off of my script. Jing, I think we're seeing property down 7, casualty overall up 8, but we did unpack that general liability up about 4, commercial auto continues to be up 7, and umbrella up 11. That tells you a lot about what's going on in the underlying business of underwriters. Package, which is packaged together with other property type covers, is up 5, but DNO, interestingly enough, is down 3. Workers comp is up about a point and overall personal lines are up 7. I think that's about as unpacked as we could get for you by line today. And I think that's pretty good data. What I'm seeing in the casualty market is a continuing caution as we talked about under our reinsurance report. Carriers from a reinsurance perspective are still concerned about prior years. And when they look at that and look forward, they're not willing to throw the numbers out to some additional credits that cause that problem from the past to get bigger. And I think if you add that to Doug's comments, we're one storm away from the market turning in property. So you're in a really interesting time in the market. These carriers are very good at knowing where they are, aren't making money, and they're very determined to try to keep their revenue coming in above loss costs. So, it's a good time for us to be talking to clients about all this because they're confused, to be honest with you.

Yeah, I would tell you this. First of all, every retail broker in the world has game plan number one in a market like this, and that's to reinstitute a direct play to take the wholesale commission away from the wholesaler. Now, that's a bold statement. There are wholesalers that have helped you write accounts. You're going to work together. So, you can't say every single account, but that is clearly a strategy that a retailer will use to not have to split commissions. And we're actually seeing in our submissions, our submission count is actually up. So, when it comes to opportunities, we're still having a lot of opportunities to pros. That's obviously in our wholesale and ENS market.

Thank you.

Thanks, David.

I'm not seeing it, Mark. I think comp is surprising to me. The last 10 years, it's been pretty flattish. So, I wouldn't read too much into that. We can unpack it every single quarter, but it's in a pretty tight range of not much movement.

We didn't provide that but it might be two points better. Maybe a point, point and a half better.

Thanks Mark.

Not much benefit from ILS. We've had a, relatively speaking, it's not a big quarter on reinsurance. And just ask your question about the reinsurance 5% again. Maybe I didn't hear you right.

Maybe a little bit, but we're seeing some carriers are realizing there's some opportunities here to increase their purchase of reinsurance. So that more than offset that.

Yeah, I think the faster grower of the two, MGA's, programs and open market is clearly the MGA business. I don't have a stat ready off the top of my head. Let me just look down the table here. Yeah, listen, I can tell you this is that the binding is up towards double digit and the issue you've got to look at in open brokerage is the submissions are up but because some of the renewal premiums are flat. It's primarily a property quarter. For me to say that it was flat, that might be a little unfair to it without context that we're still getting tons of positions going into the open brokerage spot.

Absolutely not.

Thanks, Katie. Okay, I think that's our last question. I've got just a quick thank you for everybody for joining us. I know it's late this afternoon. Appreciate it. We feel we had a great first half of 2025. Most importantly, I want to thank the 59,000 colleagues that we have for all their hard work. Thank you. And to all our clients around the globe, we're proud to be your trusted advisers. Thank you. And thank all of you for joining us. Have a great evening.