Arthur J. Gallagher & Co. (AJG) Earnings

Management highlights

### Overall Quarterly Performance - The company delivered 24% total combined revenue growth across brokerage and risk management segments, with 6% overall organic growth, marking 25 consecutive quarters of double-digit adjusted EBITDA growth and continued underlying margin expansion, matching guidance from the June 2026 Investor Day. - The integration of Assured Partners (completed ~1 year prior) is progressing well, with strong client retention, collaborative team performance, and the business meeting all performance targets. ### Organic Growth & Market Dynamics - Client retention remains strong, new business activity is excellent, and client exposure units (revenues, payroll, headcount) continue to grow, supporting organic demand. Only ~1 percentage point of current organic growth is tied to insurance rate changes, with the majority driven by new business and retention. - The global PC market is segmented: property pricing is easing (especially for large catastrophe-exposed risks), while casualty remains firmer due to loss cost trends and underwriting discipline. Clients are using property pricing savings to buy back coverage, increase limits, or improve policy structure, increasing demand for advisory services. - Key end-market growth drivers include construction, infrastructure, energy, and data centers, which create increasingly complex risk needs that align with Gallagher's advisory and analytical strengths. - Reinsurance markets have ample capital, with strong new business growth offsetting rate headwinds; casualty reinsurance remains disciplined for U.S.-focused risks, while clients use lower property reinsurance pricing to improve coverage structure. - Employee benefits demand is steady, as employers prioritize talent retention and need support managing rising medical utilization, advanced treatment costs, and escalating prescription drug prices. ### Mergers & Acquisitions - Seven tuck-in acquisitions were completed in Q2 2026, representing ~$63 million in estimated annualized revenue. The active pipeline holds over 30 signed or pending term sheets representing ~$500 million in annualized revenue. - The company has ~$10 billion in total deployment capacity over the next two years, prioritizing disciplined M&A with opportunistic share repurchases when M&A activity is slower. - Acquisition multiples have declined amid broader sector valuation resets, but Gallagher maintains disciplined pricing and still achieves attractive valuation arbitrage for shareholders, with tuck-in acquisitions averaging ~9-10x EBITDA. ### Productivity, Technology & Culture - AI, digitization, and automation are the next step in the company's multi-decade effort to improve productivity and quality, building on prior investments in centralized data and standardized workflows. These tools enhance client service and productivity without replacing client-facing judgment, relationships, or advocacy. - The company's growth-focused culture drives consistent execution, as employees are willing to adopt new tools to improve client service, turning investments in technology and data into tangible operational and financial results.

Guidance

- Full year 2026 total company organic growth guidance is maintained at 6%, with brokerage organic growth guidance of 5.5% and risk management organic growth guidance of 9%. APAC and Gallagher Bassett full-year estimates were slightly raised due to strong Q2 performance, while reinsurance guidance was trimmed by less than 1 percentage point, with no material change to overall outlooks. - Full year 2026 underlying brokerage margin expansion is forecast at 40 to 60 basis points, maintaining prior guidance. - Expected annualized run-rate synergies from the Assured Partners acquisition remain $160 million by the end of 2026, rising to $325 million by early 2028, unchanged from prior guidance. - Risk management adjusted EBITDA margins are expected to remain above 22% for H2 2026 and full year 2026. - 2026 investment income forecasts assume no interest rate cuts in 2026 and reflect current foreign exchange rates.

Segment performance

1. Brokerage Segment: Total revenue grew 26% year-over-year, with 5% organic growth. Organic growth was broad-based across retail property/casualty (PC), wholesale, reinsurance, and employee benefits. The recently acquired Assured Partners is performing in line with full-year 2026 forecasts, with Q2 2026 EBITDA of $222 million matching guidance. The segment is on track to deliver 40-60 basis points of full-year 2026 underlying margin expansion. 2. Risk Management Segment (Gallagher Bassett): Total revenue grew 16% year-over-year, with 12% organic growth driven by strong new business and client retention. Adjusted EBITDA margin increased 140 basis points to 22.3%, and management expects full-year 2026 adjusted EBITDA margins to remain above 22%. 3. Corporate Segment: Adjusted results were slightly better than June 2026 Investor Day forecasts, primarily due to favorable non-cash unrealized foreign exchange movement. The segment holds $3.4 billion in future tax savings from tax credits and deductible intangible amortization, leading to an expected cash tax rate of ~10% of EBITDA.

Risks & headwinds

- Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from projections. Key risks referenced include ongoing changes in insurance pricing cycles, broader economic conditions, foreign exchange volatility, and integration risks for recent large acquisitions. Additional detailed risk disclosure is available in the company's recent SEC filings (10-K, 10-Q, 8-K). - M&A activity depends on seller price expectations, which have been slow to adjust to the broader sector valuation reset, leading to temporarily lower deal volume compared to historical averages. - While AI is expected to deliver significant long-term cost savings, some market participants raise uncertainty around whether long-term AI implementation costs could creep up and offset savings. - Social inflation and rising loss costs continue to pressure casualty and claims results, creating operational challenges for third-party claims administrators.

Analyst Q&A

• Q: If insurance pricing continues to moderate into 2027, can Arthur J. Gallagher maintain stable organic growth despite downward rate pressure?

  A: Management notes that this market cycle is different from past soft markets: it is only a reset for property pricing, not a broad-based decline across all lines. Gallagher's strong new business pipeline, solid retention, and investments in data and advisory capabilities position it to grow through the environment. Clients are buying more coverage as prices moderate, and rising risk complexity in growth sectors increases demand for Gallagher's services. The company is well-positioned to grow despite moderating property prices. ---

• Q: What is your outlook for AI implementation costs, given concerns that costs could creep higher over time?

  A: Management states that incremental AI costs will be de minimis relative to expected savings, because Gallagher already completed the heavy upfront investment to centralize and standardize data and workflows over the past decades. Most of the structural cost to implement new AI tools has already been incurred, so the marginal cost of expanding AI deployment is very low compared to firms starting the process from scratch. ---

• Q: How has the sector-wide valuation reset changed seller pricing expectations for M&A, and what is the outlook for future deployment?

  A: Sellers are gradually adjusting to lower valuation multiples after the period of very high pricing for platform deals. Gallagher maintains its pricing discipline and will not overpay for acquisitions, and is seeing reduced valuation expectations from sellers. While current deal volume is ~80% of historical averages, the pipeline remains strong, and the company has ~$10 billion in deployment capacity over two years. Management expects more sellers to come to market as they adjust to the new pricing environment, so investors should not model large sustained share repurchases, as most capital will go to M&A. ---

• Q: When will AI-driven cost savings be realized, and how will they impact margin expansion?

  A: Management reaffirms prior projections of 5% cost savings in production layers, 10-15% in support layers, and 20-30% in back-office layers, which could total up to 400 basis points of net margin expansion over 3-5 years. There are already dozens of tangible AI projects delivering immediate results, but the company will not launch a large formal transformation program; improvements will come incrementally as part of the firm's long-standing culture of continuous productivity improvement, and savings are incremental to the existing 40-60 basis points of annual underlying margin expansion.