Arthur J. Gallagher & Co. ($AJG) Q1 2025 Earnings Call

Thank you. Good afternoon and thank you for joining us for our first quarter '25 earnings call. On the call with me today is Doug Howell, our CFO, and other members of our management team. We had a fantastic first quarter for our combined brokerage and risk management segments. We posted 14% growth in revenue, 9% organic growth, reported net earnings margin of 23%, adjusted EBITDAC margin of 41.1% up 338 basis points year-over-year, adjusted EBITDAC growth of 26%. Our 20th consecutive quarter of double-digit growth. GAAP earnings per share of $3.29 and adjusted earnings per share of $4.16. Another excellent quarter by the team.

Moving to results on a segment basis, starting with the brokerage segment, reported revenue growth was 16%. Organic growth was 9.5% which included about a point of favorable timing. Even without the timing impact, all-in organic was right in line with our expectations. Adjusted EBITDAC margin expanded 359 basis points to 43.4% with underlying margins up a full percentage point. Doug will unpack this in his comments. Let me provide you with some insights behind our brokerage segment organic. Within our retail PC operations, we delivered 5% organic overall. US organic was north of 5% while our international operations primarily in the UK, Canada, Australia, and New Zealand were closer to 4%. Our global employee benefit brokerage and consulting business posted organic of more than 7%.

Shifting to our reinsurance, wholesale and specialty businesses. In total, organic of 13%. This includes 20% organic from Gallagher Re and 8% organic from our wholesale and specialty businesses. So, we continue to report strong growth across retail, PC, wholesale, reinsurance, and benefits.

Next, let me provide some thoughts on the PC insurance pricing environment. Starting with the primary insurance market. Overall, the global PC insurance market continues to behave rationally with carriers looking to grow in lines and geographies where there's an acceptable return and seeking rate increases where it's needed to generate an appropriate underwriting profit.

Breaking down first quarter global renewal premium changes by product line, we saw the following. Property down 2%. D&O down 3%. Workers comp up 5%. Personal lines up 8%, casualty lines up 8% overall, including general liability up 5%, commercial auto up 6%, and umbrella up 11%.

Breaking down renewal premiums by client size, we continue to see a divergence between small to midsize accounts and large accounts. For small to midsize accounts, which we define as accounts generating less than $100,000 of revenue, renewal premiums were up 5%. For large accounts, or clients generating more than $100,000 of revenue, renewal premiums were up 1%.

All that said, pricing is ultimately driven by client loss experience. Good accounts are getting some premium relief in certain lines. However, accounts with poor experience are seeing greater increases. Having a trusted adviser like Gallagher can help businesses navigate a complex insurance and economic backdrop by finding the best coverage for our clients while mitigating price increases. Today's environment is the ideal market for us to show our expertise, product knowledge, and our data-driven capabilities.

Let me move to the reinsurance market. First quarter dynamics, which is mostly influenced by January 1 renewals, reflected an environment that generally favored reinsurance buyers. Overall, reinsurers were able to meet increased client demand with sufficient capacity while remaining disciplined on terms. The Gallagher Re team shined with excellent retention and some fantastic new business wins. April renewals experienced similar trading conditions as earlier in the year and as expected saw a bit more downward pricing pressure.

The January wildfire losses and continued casualty reserve increases remain a focus for the industry, but neither caused much upward movement in pricing given the large proportion of Japanese buyers in April. With that said, US severe convective storm season is here, which then leads us to US wind season. Time will tell how the year plays out. Regardless, Gallagher should continue to excel in this environment.

Moving to some comments on our customers' business activity. During the first quarter, our daily revenue indications from audits, endorsements, and cancellations continued to be a net positive. While the upward revenue adjustments are not quite as high as last year, we continue to see solid client business activity and no signs of meaningful global economic slowdown. Our daily revenue indications through the end of April are not showing any significant changes in our customers' business activity from the prospect of tariffs. Our daily indications have historically given us some early insights into our clients' business activity. So we will continue to watch these very carefully.

We are also closely watching the US labor market and there continues to be a strong demand for new workers. The number of open jobs in the US stood at more than 7 million still at a level that is well above the number of unemployed people looking for work. We've also seen recent health insurance carrier results show continued increases in the utilization and cost of health care. With these two trends as the backdrop, we are seeing more and more employers looking for ways to grow their workforce and control their benefit costs. Our experts can provide creative solutions to solve these challenges.

Regardless of market and economic conditions, I believe we are well positioned to compete and to win. From our niche expertise, outstanding service, or extensive data and analytics offerings, we have the resources and know-how to service any account of any size of any complexity anywhere around the globe. So with a fantastic first quarter behind us, we continue to see full year '25 brokerage segment organic in the 6 to 8% range.

Moving on to our risk management segment, Gallagher Bassett. First quarter revenue growth was 6% including organic of about 4%. We continue to see excellent client retention and strong new business production. However, sold new business within the risk management segment typically takes longer to materialize into revenue. As these new client contracts incept and begin to generate revenue in the coming months, we are confident we will see stronger revenue growth in the second half of the year. Adjusted EBITDAC margin was 20.5% in line with our March expectations. Looking ahead, we still see full year '25 organic in that 6 to 8% range and margins around 20.5%.

Shifting to mergers and acquisitions. During the first quarter, we completed 11 new tuck-in mergers representing around $100 million of estimated annualized revenue. We also announced the acquisition of Woodruff Sawyer during the quarter and completed that in early April. That means through today we already are at $400 million of acquired revenue. For those new partners joining us, I'd like to extend a very warm welcome to the Gallagher family of professionals.

As for the pending AssuredPartners acquisition, not much to update relative to our March IR comments. We are working to respond to the second request and we still expect to close in the second half of 2025. Looking at our pipeline, we have more than 40 term sheets signed or being prepared, representing north of $450 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 our global sales award meeting in early March, our unique Gallagher culture was on full display. It was inspiring to watch the interactions among thousands of our colleagues across geographies, business units, and product lines. I came away even more convinced that our greatest asset is our people and our biggest differentiator is our culture and that is the Gallagher way. Okay, I'll stop now and turn it over to Doug. Doug.

Thanks, Doug. Operator, I think we're ready to go to questions and answers.

Well, thanks Elise and let me try to break down some of the 24% organic. First, the reinsurance folks are just on fire. They had a great quarter and a lot of it came with the January 1 renewals. So, let me break down three pieces. Our new business spread was responsible for more than half the organic this quarter. In fact, we had about 15 new client wins each more than a million each. These are big chunky deals. This is not similar to what we do on the retail side.

Increased renewal premiums from carrier growth was another 5% or so. Inflation, people buying more cover as you see some rates come down, people have some room for additional cover, etc. And the remainder was some favorable timing. We have now better insights into it and as I noted it'll reverse itself in the latter half of the year. But let me be clear, we said from the very beginning that we thought this was a group of folks that when working with our overall company, when we integrated them into working with retail and our wholesale and specialty people, that it would be a good match and that's what we're seeing. These guys and gals are just doing a tremendous job and the new business was outstanding. Congratulations to them.

Thanks, Elise.

Hey Greg. So Pat, in your comments, I think it was, yeah Pat, it was you that talked about the bifurcation of renewal pricing in the small to mid account which you define as less than $100,000 and then the mid to large account. Just wondering if you could provide some more color because the commentary we're hearing in the marketplace around that seems to suggest that the larger account business might be under a little bit more rate pressure specifically in the property areas.

Well, it's exactly what I said, Greg. I mean, I think we're seeing in the large account area and it's the typical economics. You got a bigger account, you got more swag, right? You can get a better deal, especially if you've got good results. And these larger accounts are better managed from a risk management standpoint and they're seeing the results of that. Our people are clearly helping with that. You get down into the smaller accounts all the way down to your personal lines, you don't have the negotiating power and at the same time they don't have the great results. So, it's a fluid market, but it makes sense to me that if you're bigger, you get a little bit better deal than if you're smaller.

Well thank you for the question Greg, but I'll tell you it's actually gotten stronger. I mean we did our board meeting this week and that was of course one of the key questions. Their turnover is actually better than ours. Not by a lot, by maybe half a point to a point. So they're staying very consistent with what they've had in the past and that's after bonuses have been paid. So we're not seeing an uptick. I said when we did the deal I didn't expect any breakage. We've seen a producer here or there depart but you know that's common business across all of our platforms. In terms of the people, we've had to be careful given the request for another bit of information but there are certain work streams that have been allowed to continue. And I'll tell you what, just every single day, our people are more affirmed in the fact that they're dealing with folks that they really like. They understand the business, they love the business, and they can't wait to get the two organizations together. There's no waffling. There's no mama crying. It's people that just want to go out and sell a lot of insurance. And we're very, very excited, more excited than we were in January.

Yeah, it is. We have numbers. Yeah, I mean they account for 606 differently, but let's just say it is. You can throw a hat over them.

Thanks, Greg.

Well, it's a fair question, Mike, but here are a couple things. We're a different company than we were then. And number one, we've got many more large accounts. Our large account penetration continues to grow every month. And a lot of that business is on fees. Then also when you take a look at the business and how we're selling it, I think that we're better sellers today. We've got tools that are just unbelievable in terms of helping our producers get out and drive new business. Whether it be we call Gallagher Win, which is Salesforce, and then you've got the data analytics and Gallagher Drive, which I think most of you have seen these tools. We presented them to you and they're maturing now. They're in the hands of solid producers that have got anytime the market's in flux. That's great news for our producers up and down. And frankly, right now is a great time and it's a great message for our client base and our prospect base. Work with Gallagher. We think we've got an opportunity to really do a great job on your pricing as well as your coverage and your terms. So, we're a different company, better opportunities, more fee business, larger platform, stronger players.

I'll give you one minute color, Mike. We're not talking a lot about this. That's intentional. It's a lot of data from both parties.

Sure, Mike.

Hey, Mark.

Not really. I mean, we did actually plumb for that among Gallagher. Gallagher Bassett's biggest line of cover of course is comp. We were asking ourselves, is there any systemic change there? We don't see it. You know, most of comp is fee schedule stuff. So I think it's underlying comp costs are up with medical. But I also do think it's a better economy than I think people are writing about. Our daily check-in on the economy is that our middle market accounts in particular are pretty robust.

Well, again, Mark, let me go back in my history, which is a long one now. The property markets, I would define it as fragile, right? When you're minting money, it's a great place to be. And of course, you're going to give customers back some of the money you've made, but boy, the bill comes hard when it comes, and it's not gradual. And so, you know, if it just seems that we're all concerned, in fact, you might recall a year ago or so, we surveyed over a thousand of our customers, middle market customers. Their number one concern was weather related, climate change. And I think we all see it. We never had tornadoes in the fall. These convective storms have got everybody scratching their head. The prediction for the hurricane season is more storms than normal. And now that last year there was that prediction as well and it wasn't as severe. But I'll tell you who ever saw California wildfires coming. You combine those with some storms both in California and around the world. Well, the thing about properties that can change on a dime. Now, we certainly hope that doesn't happen because our customers have been shocked. You know how I feel about hard markets. I'd much rather have a market that's pretty stable, lets us show our tools, help us contain the cost for our clients. It's hard to explain to people why rates are jumping. You can do it in property because you can show them the losses, but I think you're right to ask the question. It's all well and good now. I think customers deserve a bit of a decrease. Carriers are on a little bit of an edge, if you will. You know they know they've got to give some money back. The market's competitive, but if the wind blows, the story could change very quickly.

No, Mark, that's the new normal.

We waited a hundred years. Some people have a bad decade. We had a bad century. We're back for good.

You know, David, back to Mark's comments before about a long time to look back. In my past experience, when markets became a little squishy, you'd see them fall quite dramatically across all lines. That is not what we're seeing today. Umbrella cover up this past quarter 11%. Continuing push up of casualty a little bit down on property. As we said at our opening remarks, this is a pretty logical market. So I don't think you're going to see any major change. And if we do, we'll give it to you at our IR day updates.

I don't like to think about it that way. And I'll tell you why. Convective storms are, you know, they seem to be localized in the Midwest. You know, you got fire risk in lots of states I never thought of before, like New Jersey. But I don't think that's necessarily something you'd say is more akin to hurting those accounts. Although, you have to say there are a heck of a lot more small accounts than there are large accounts. You know, there's a thousand Fortune 1000 accounts. There's a thousand small accounts in Schaumburg. So, I guess in one sense, I'd argue no. I don't think those storms fall necessarily harder on one book of business than another, except by virtue of the fact that the numbers are just greater. I think it's buying power. That's what I'd say, David. It's just real simple. You know, if I've got an account that's going to pay me 100 grand or an account that's going to pay me 100 million, who gets the better deal? 100 million.

Listen, I think that when you get down to a point one way or another on the organic, I would say they're almost the same number. You know, there could be a mix difference in there. You know, when something moves a point, I'll be honest, we don't dig into it as deeply as something moves five points. So, the point is consider it mixed, but still, the point is on this is it's still going up, you know, and if you look across everything that we've said is we still have a market that is arguably flat in a couple spots and going up in a lot of spots, right? So, I think that the fact is there still is a need for rate. The carriers see that. You've seen that in the releases that they've had in it. So, you know, I think that you blend all that together, we're selling more than we're losing. We feel pretty good about a 6 to 8% year. You know, that'd be a terrific five or six year run on that.

Thanks, David.

Thanks, Katie.

Listen, our binding business had a terrific quarter. I think they're in the mid teens. The brokerage business was probably, you know, five to six percent something like that. So, you know, I think between the two, brokerage and binding, our affinity business had a terrific quarter. Capes were a little slow this quarter. But by and large, you know, the binding business did a really great job and the open brokerage is still continuing to show really nice, you know, mid single-digit growth.

Thanks, Andrew.

No, that's a big factor and that's, you know, 15 deals. Again, we're not getting granular as to who, what, where, and when. But that's exactly what we talked about. It's coming out the way we dreamed it. These people are working together. We've introduced them to some other players that they didn't know. They've introduced us to plenty of players we didn't know. The cross-pollinization both in what we're doing in retail and things like pools and what they're doing with carriers that we didn't know about has been very good for our retail team. And of course, we've got deep relations with carriers across the board that all of us at this table have traded with for years. And you know, it's just really been a very positive development in our repertoire. Listen, in our culture, the fact that people run together to help each other, we're really seeing that. We're seeing a lot of joint meetings between our retail folks, our wholesale folks, our reinsurers. I just spent a week in London and all the opportunities that we have with MGAs and capital formation using the reinsurance opportunities. I think we're just scratching the surface of what Gallagher will bring to us.

Oh, it's probably less because we're on fees. I mean that's there's no question about that, you know. And the nice thing about a fee account in a softening market is that you don't get asked to take a pay cut for doing a better job.

Thanks, Myer.

I think that you've read all the stuff, Cave, that there is out there. I mean, everybody's got questions and it's very client specific. What business are you in? Where does your product mix come from? What's your supply chain? Is it something that you can change one way or another? How do your clients feel about it? The good news for us is that anytime there's consternation, anytime there's change, anytime there's concern, we're there to help them through it. So if in fact tariffs create some additional loss costs or some additional value increases, there's ways to mitigate that. Whether we move towards a captive, higher retentions, change the language, etc., etc., but there's concern as to what it means to them as individuals, and I'd say that's much more pronounced in the middle and small account market.

And remember nowhere in the world has our casualty book. Nobody's got our tort system. So we are seeing pressure on casualty rates and carriers are seeing pressure on their past casualty years.

Well first of all you know we now trade extensively throughout the world as we said in our prepared comments. There's not an account anywhere in the world we can't do of any size. But if you take a look at premium, written premium, that's the ball we're following.

Thanks, Cave. Well, thank you everyone for joining us this afternoon. We had a great first quarter and a great kickoff to 2025. It's important that we thank the 57,000 colleagues around the globe for doing the work that creates these results. Their creativity, dedication, and unwavering client focus is what really makes these results. Thank you all and have a great evening.