Arthur J. Gallagher & Co. Q3 FY2024 earnings call

• Third quarter was a great financial quarter for Arthur J. Gallagher & Company. Brokerage and Risk Management segments showed strong growth. In the PC insurance pricing environment, global third quarter renewal premiums had various changes by product line. Client business activity remained solid with daily revenue indications in positive territory. During the third quarter, four new mergers were completed at fair prices representing $47 million of estimated annualized revenue, and there were over 100 mergers in the pipeline representing approximately $1.5 billion of annualized revenue. The company's culture, which runs towards problems, supports teamwork, and upholds high moral and ethical standards, was emphasized as a key differentiator.

Brokerage segment

• Reported revenue growth was 13%, organic growth was 6% (excluding interest income). Adjusted EBITDA margin expanded 137 basis points to 33.6%. Within PC retail operations, U.S. had 5% organic growth and outside U.S. had 7% organic growth; internationally, Australia and New Zealand led with over 10% organic growth, U.K. was up 6%, and Canada was flattish. Global employee benefit brokerage and consulting business posted organic of about 4%, and reinsurance wholesale and specialty businesses had 8% organic growth.

Risk Management segment (Gallagher Bassett)

• Revenue growth was 12%, including organic of 6%. Adjusted EBITDAC margin was 20.8%, 35 basis points higher than last year. Fourth quarter organic was around 7% and full year organic was pushing 9%, with margins for fourth quarter and full year expected to be in the 20.5% range.

• Brokerage segment full year 2024 organic was around 7.5%, and Risk Management segment fourth quarter organic was around 7% with full year organic pushing 9%. Brokerage segment full year 2025 organic growth might be in the 6% to 8% range. For the first nine months of 2024, combined Brokerage and Risk Management segments delivered revenues up 16%, organic growth of 8%, net earnings up 20%, adjusted EBITDA up 18%, and adjusted EPS up 17%.

• Potential impact of recent storms and floods on business. Unrealized non-cash foreign exchange re-measurement expense in the Corporate segment. Uncertainty in the M&A market due to factors like the presidential election.

Q: Hey. Thanks for the questions. First one is on the bridge from, in the Brokerage segment from 3Q organic to 4Q organic to kind of at the 2-point uplift sequentially. Is -- are you saying most of that is life insurance and if not, it sounded like RPC was still kind of more muted, but are you saying RPC is kind of, is lifting off into, is trending higher into 4Q? Just trying to understand some of the pieces there?

A: All right. So I think when you, renewal premium changes is what you’re referring to as RPC, I’m assuming. We’re not seeing underlying that our rates, that what we’re seeing for rates are not different all that much in the third quarter at all compared to what we saw in the first two quarters. And I think you’re seeing that in a lot of the carrier releases right now too. So rates for the fourth quarter, we’re assuming about the same as what we’re seeing here, yeah, in the third quarter, which is the same as in the first and the second. As for the increase next quarter, yes, we are getting about a point of additional organic growth from the life insurance sales. But when you bake all this in, we think that we’re running around 7.5% in our business right now. That’s the underlying growth. When you take out the puts and takes quarter-to-quarter, yeah, we’re nicely in that 7% to 8% range.

Q: Switching gears a bit to, I guess, the margins or just if I look at the fiduciary investment income, looks like it was much better than expected. But I think you’re guiding down. What caused the spike and why is it expected to go back down?

A: Well, I think, you have to look at our premium funding business there. So when you take a look at the table on Page 6 of the earnings release, I don’t think we’ve changed our estimates all that much for the, excuse me, of the CFO commentary. I don’t think we’ve changed our comments all that much for the fourth quarter. You also realize there can be some times where we have, obviously, fluctuations in our fiduciary cash balances, too, that can impact that number.

Q: Hey. Good afternoon, everyone. Just building on your...

A: Hi, Greg.

Q: Yeah. Building on your last answer on acquisitions, one of the things that struck out or stuck out to me, I should say, is when I was going through the supplement was the weighted average multiple for tuck-in pricing of acquisitions came down a lot in the third quarter. Is there any -- maybe you can just help me understand what happened, why the multiple came down, because I don’t feel like multiples are coming down in the marketplace. And Pat, in your prepared remarks, you seem to emphasize your price discipline a little bit more than usually referenced in talking about tuck-in acquisitions?

A: Yeah. When we prepared the remarks, Greg, we did discuss whether in the past we’d been undisciplined. What I said... No, I think it’s just a good reminder. We have a lot of people listening to these calls, our own people included, and a lot of acquisitions, we try to maintain a good discipline around the pricing and we seem to strike a fair balance between that and the great people that join us.

Q: Yeah. Good afternoon. Doug, did you give early margin thoughts for 2025 for Brokerage and Risk Management?

A: I have not. I will in December as we go through the budget. But I will say this, we post 6% to 8% organic growth next year. It’s there, Mark. There’s an opportunity for us to continue to get better. Our scale advantages are coming through our technologies, using the offshore centers of excellence. It still gives us an opportunity in an environment that we’re seeing with current wage inflation, with current inflation and in other categories of our spend, that we continue to have opportunities to get better and better. And when you’re punching out 6% to 8% organic growth, the underlying margins will absolutely have opportunity for expansion.

Q: Hi. I was hoping we could talk about the contingents a little bit more. Just given the ongoing conversation around the casualty market, I was wondering how you all are thinking about any potential risk of maybe some of the pressures from the casualty line that we saw in contingents last quarter resurfacing over the next few months?

A: If it did, we’re talking a few million bucks. I mean, I wouldn’t call that as being a systemic issue that we’re going to have to face. Just like with the storms, it’s a few million. There are some corridors, that -- we do have caps in our contingents. And so sometimes, if there is -- if the carriers have, let’s say, maybe loss -- more losses than they had hoped, it may still let us get to our full contingent level because there’s caps on that. So, right now, we’re not seeing a lot of pressure from that, not only in our past book, but as we look forward in the book. If carriers continue to strengthen their casualty rates the way they have been and what we’re hearing from them, what we’re reading about what they’re saying, it should maintain our contingent level also.