Arthur J. Gallagher & Co. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Financial Performance: Fourth quarter excellent with 12% revenue growth for combined brokerage and risk management, 16th consecutive quarter of double-digit revenue growth. Net earnings margin 13.5%, adjusted EBITDA growth 17%, adjusted EBITDAC margin 31.4%. GAAP EPS $1.56, adjusted EPS $2.51.
• P/C Insurance Pricing: Global P/C market growing, fourth quarter renewal premium increases consistent with past two quarters; January renewals ticking higher, especially casualty lines.
• Mergers and Acquisitions: Completed 20 new tuck-in mergers in Q4 (~$200M annualized revenue), full year $387M. Signed agreement to acquire AssuredPartners ($2.9B annual pro forma revenue), expected to close in first quarter. About 45 term sheets signed/being prepared ($650M annualized revenue).
• Culture: Proud of culture staying true as company expands, guided by Gallagher way, focusing on colleagues, clients, carriers, and merger partners.

Segment Performance

• Brokerage Segment: Reported revenue growth 12%, organic growth 7.1%. Base commission and fees at 7.8%, slightly offset by lower contingents. P/C retail organic 6%, U.K., Australia, NZ in high single digits, U.S. retail organic ~5%, Canada down a couple percent. Global employee benefit brokerage and consulting organic ~10%. Reinsurance wholesale and specialty organic 9%. Adjusted EBITDAC margin expanded 168 basis points to 33.1% (including interest income from AssuredPartners acquisition).
• Risk Management Segment (Gallagher Bassett): Revenue growth 9%, including organic 6%. Adjusted EBITDAC margin 20.6% in line with October expectations. Full year 2025 organic expected 6%-8%, margins around 20.5%.

Guidance

• Brokerage Segment: Full year 2025 organic growth expected 6%-8%.
• Risk Management Segment: Full year 2025 organic growth expected 6%-8%, margins around 20.5%.
• AssuredPartners Acquisition: Anticipated to close in first quarter, expects to build on commercial middle market focus, deepen niche practice groups, leverage data and analytics.

Risks

• Wildfires in California: Impact on clients and operations, but company tracking claims and helping clients, no significant loss of personnel.
• Casualty Reserve Increases: Potential impact on reinsurance market and results, but Gallagher Re had strong 1-1 renewals.
• Regulatory Approvals: For AssuredPartners acquisition, timing dependent on regulatory processes.

Question and Answer

Q: Cadence of organic growth next year, seasonality in reinsurance A: Doug Howell mentioned seasonality in reinsurance, with first quarter typically stronger, but brokerage organic growth expected 6-8% overall Q: Impact of California wildfires on operations A: Pat Gallagher mentioned tracking hundreds of claims, helping clients, and no significant loss of personnel Q: Lower contingents in brokerage segment A: Doug Howell explained it's not a trend, due to higher loss ratios in final estimates and some contracts in Canada, expected to bounce back Q: Risk management segment organic growth guidance change A: Doug Howell said it's lumpy, with potential for large contracts, but mid-single digit growth expected with opportunities in government programs Q: AssuredPartners acquisition pipeline and seasonality A: Pat Gallagher said AssuredPartners' pipeline is accretive with little overlap, and seasonality in their business exists but assumed as timing in guidance Q: Brokerage organic growth components A: Doug Howell explained base commission and fees, contingents, and supplementals, with base at 7.8% and expected to bounce back Q: International retail brokerage growth A: J. Patrick Gallagher Jr. said it varies by geography, with some regions growing well, like Latin America, but Canada had a slowdown Q: General liability adverse development impact on Gallagher Bassett A: J. Patrick Gallagher Jr. and Doug Howell said claim activity helps, and Gallagher Bassett's capabilities in nurse case management and managed care provide value, leading to more business Q: M&A multiples and competition A: J. Patrick Gallagher Jr. said tuck-in acquisitions are at fair prices, not treetop multiples, and AssuredPartners helps compete against smaller players Q: Renewal premium change impact on brokerage organic growth A: Doug Howell explained base commission and fees, contingents, and supplementals, with base at 7.8% and expected to bounce back Q: Reinsurance brokerage growth drivers A: J. Patrick Gallagher Jr. and Doug Howell said sales team, analytics, consulting on capital management, and integration with other segments drive growth Q: Health inflation impact on employee benefits organic growth A: J. Patrick Gallagher Jr. said health inflation provides opportunities as Gallagher is a leader in consulting, managing, and placing health and welfare Q: Competition in commercial middle market post-AssuredPartners acquisition A: J. Patrick Gallagher Jr. and Doug Howell said AssuredPartners helps compete against smaller players in new markets, increasing at-bats