AJG - NYSE

Thanks, Pat, and good afternoon everyone. As Pat said, an excellent start to the year. Today, I'll begin with some comments using both our earnings release and our CFO commentary document that we post on our website. I'll touch on organic margins and provide some modeling helpers for the remainder of 2023. Then I'll finish up with my typical comments in cash, M&A capacity and capital management. Okay. Let's flip to page 2 of the earnings release. All in brokerage organic of 9.1%. Call it right at the top end of the range we foreshadowed at our March 16th IR Day, a nice finish from our London specialty operations and a little upside from reinsurance benefits. One call out on that table. Contingence didn't grow organically this quarter for three reasons. First, there's a little geography between supplementals and contention call that about $2 million. Second, there was a bit of positive development in Q1 2022 from the prior year 2021 estimates. Call that $3 million and again, that's back in first quarter 2022, causing a little difficult compare. And third, we are not expecting one of our programs to pay as large of a contingent here in 2023 because of underlying loss ratio deterioration. Call that maybe towards a million. Regardless, base organic at 9.5% and all in at 9.1% that's a fantastic quarter by the team. Hoping to page 4 of the earnings release to the Brokerage segment adjusted EBITDAC table. We posted 40.4% for the quarter, before FX, that's up 56 basis points. And FX adjusted up 14 basis points over first quarter 2022. That's right in line with our March IR Day expectations when we discuss that first quarter 2022 expenses were lower than our expected run rate simply because we are still in the Omicron portion of the pandemic and that our tuck in acquisitions are just not as seasonally weighted. But they don't roll in at 40 points of margin here in the first quarter. If you levelize for those two items, our margins expanded approximately 110 basis points. Maybe looking at it like a bridge from first quarter 2022 will be helpful. Investment income gave us 90 basis points of margin expansion. The normalization of Omicron T&E expenses and inflation on all T&E costs us 80 basis points. The seasonal impact from rolling M&A uses about 40 basis points. Organic gave us 70 basis points of expansion and some additional wages and IT investments used about 25 basis points. Follow that bridge and the mass gets you close to that 14 basis points of FX adjusted expansion in the quarter. Looking forward, it's still early yet with a fantastic first quarter combined with pass up commentary makes us more bullish on hitting that full-year brokerage organic in the 7% to 9% range and posting adjusted margins up 60 basis points to 80 basis points. Two small heads up on that. First, getting to that 7% to 9% organic for the full-year might be a little lumpy over the next three quarters given the large life case we sold in Q2 2022. And then the 606 deferred revenue accounting in our fourth quarter. We discussed both of those with you last year, so there's no new news here. Just a reminder for your modeling. Second, the 60 to 80 basis points of margin expansion is before the roll in impact of Buck, which recall naturally runs lower margins. So when you include Buck, the math would show full year margin expansion in that 20 to 30 basis points range. So moving on to the Risk Management segment and the organic table at the bottom of page 4. As Pat said, an excellent quarter, 14.3% organic growth We did get a little tailwind this quarter because Omicron caused fewer claims arising in Q1 2022 and we also had some New

Thank you. This call is now open for questions. [Operator Instructions]. Our first question is from Weston Bloomer with UBS. Please proceed with your question.

Okay. Great. And can you can you give a sense to of how quickly Buck is growing? I see in the acquired revenue table that's, call it $77 million per quarter. I'm assuming that's including a few other deals in there, but I'm curious if that's assuming any growth for Buck or how quickly that business is currently growing?

Yeah. This is [Indiscernible]. Buck has been pretty stable across the country last year, across the world last year. They have very strong growth in the U.K. and then their engagement last communications business. They just finished Q1 with their best sales quarter in the last five years. We're already beginning to have a lot of revenue synergy discussions, very organic early stages, built a pretty strong pipeline. We're already going on in on deals together. It's a little early to give predictions on what this looks like, but we do expect them to have mid-single digit growth this year.

Thank you. Our next question is from Elyse Greenspan with Wells Fargo. Please proceed with your question.

Hi. Thanks. Good evening. My first question, maybe I'm just confused. I thought you said Brokerage margin, can expand 50 basis points sorry, 60 basis points to 80 basis points for the year. But then in response to Weston's question, you were talking about 10 basis points to 30 basis points of expansion over the next few quarters.

All right. Question one is without the math that results from Buck because they run naturally lower margins. That was the question that we answered for, Weston. The 60 basis points to 80 basis points is how we're looking at Gallagher before Buck. Does that help?

Thanks. That's helpful. And then you guys, I know right, the laws related to your clean energy investments right expired at the end of ‘21, and you guys have kind of I think, or kept some of the plants open. Is there still the potential that you guys could generate more tax credits there or have you kind of not expecting that at this point?

We're preserving all the machines that allow us to generate those tax credits if there's something that might come out of an energy bill or a tax reconciliation bill yet this year. Those plants could be put back into service.

Do you think there's a high probability that could happen?

Elyse, I don't know if there's a high probability of anything getting done in Washington. So I mean, that I would hope so, but I wouldn't put high probability on anything coming out of there. Yes, but if the plant sits there for another year, they sit there for another year.

Thanks, Elyse.

Thank you. Our next question is from Greg Peters with Raymond James. Please proceed with your question.

Thank you. Our next question is from Mike

Hi, good afternoon. First question, in the prepared remarks, you talked about property rates accelerating. Any stats or any way we can dimension what percentage of your revenues on the Brokerage side, touch that element of acceleration and it doesn't seem like from your organic guide that you're taking in that acceleration continuing or maybe I'm incorrect?

Got it. Okay. That's -- and that thanks for the answer, Doug, that excludes reinsurance?

Yes. That's right. But most of our reinsurance are on renewal, so you've already seen that math.

Got it. Okay. Follow-up investment income. Maybe I might have missed this, because I jumped on a minute late, but was there any help with if this is the right investment income run rate? I know that there might have been book sales in the number two. It looks like it was better than expected. I know there were some new -- there's some noise on the fiduciary balances too now. So, should you truly be thinking we need some help there?

All right. So, book sales would have been tiny. I think the total amount of book sales this quarter was about 200,000 bucks, something like that. So that wouldn't have influenced it in our numbers, at all. Our investment income on the face of the financial statements also includes our premium funding businesses. So, you will -- so that the amount of invest income that translates right into that number. Just take 90% of what you see as investment income and on the face and 90% of that is real, additional incremental investment income. When you look at what it means for the rest of the year, if you follow the interest rates through the big tick-up starting about last month last year, and so second half of the year, the increase in investment income is not as dramatic as it is here in the first quarter. So, if I were to look at full year impact of investment income on our organic lift, that would be about maybe 60 basis points for full year, 60 basis points of margin expansion from invest income for the full year. So, you can see here this quarter was up fueled about 90 basis points and for the full year it would be about 60 basis points to 70 basis points, something like that.

Okay. Great. And maybe just, well, last quick one. Given how much improvement Gallagher has shown in its margins over the last few years. Is there a way to dimension what percentage of the deals you guys look at have a better margin profile than Gallagher, or should we expect there to, there to be up maybe similar like a Buck headwind sometimes going forward as you guys continue to do deals.

No. I think if you look at our pipeline and you project it, we would think that if I were standing in January of next year looking back, what's to be the impact of rolling M&A excluding Buck. So, all it might use about 10 basis points to 20 basis points of margin expansion. So, it has a significantly smaller impact on the full year because we're so seasonally large in the first quarter.

Thank you.

[Operator Instructions]. Our next question is from David Montemaden with Evercore. Please proceed with your question.

Hi. Thanks. I just had a question just on the margin. So, I've understand, Doug, so we got, the 90 basis point tailwind from fiduciary income here in the first quarter, maybe that ticks down for the full year, like 60 basis points sounds like Buck is about a 50 point headwind to offset that. And then, I guess, we have organic that should contribute 60 basis points to 80 basis points I guess. Could you talk about some of the other headwinds that are going to offset some of the margin expansion going forward? Because, yes, I'm struggling to get to the 20 basis points to 30 basis points this year.

All right. So, maybe let me back-up and just say, and think about it this way. We built a bridge this quarter from last year first quarter, right? So, if we were look -- if we were standing in January of ‘24, looking at a year that we're kind of seeing in that organic in the 7% to 9% range, here are some of the components we've talked about already and I'll toss in a couple more. So, where we said that maybe investment income would give us 60 basis points, 70 basis points, 80 basis points of margin expansion for full year, but not the 90 basis points. We got to think about as the normalization of the Omicron T&E expenses and then maybe some inflation on other T&E throughout the year, but we were back to doing full business in the second half of last year. That may cost margin expansion, let's say a 30 basis points to 40 basis point. I told you about the rolling impact of regular tuck-in acquisitions excluding Buck that would maybe use 10 basis points to 20 basis points of margin expansion. That gives you organic maybe in that 70 basis points to a 100 basis points just pure organic without those things, 70 basis points to a 100 basis points of margin expansion. And then we are making some additional -- we provided some additional raises that we talked about last quarter. We are making some additional IT investments all those maybe $5 million to $8 million a quarter that would use maybe 20 basis points to 50 basis points of margin expansion. Again, these are ranges, follow that bridge for the full year and that gets you back to the 60 basis points to 80 basis points of FX adjusted margin expansion for the year. So, then you'd layer in Buck, and that would get you down to that margin expansion that you mentioned there. So, I hope that bridge, and I don't have a crystal ball, it's not January of next year, but you -- if that was type of range you get some from investment income, you get a lot from organic, some goes back because of T&E and the rolling impact has a little impact, and we're making some investments. So, if we ended up the year and ignored Buck being up 60 basis points to 80 basis points, knowing me in January next year, I'd probably point out that we would have expanded margins 600 basis points in five years, and knowing my personality, I probably would say that I still would feel confident that we would have more and more productivity opportunities as we look forward. So, a lot can change in nine months, but wouldn't that be a great year for us to post. So, that's those are kind of my thoughts on that, and I hope that helps all the listeners on this to understand that where the pieces are coming from and hopefully that will help you build your models.

Yes. That helps a lot. Thanks for that. I appreciate that, Doug. Maybe just a follow-up, Doug, I think you said you sounded, or you did say you were bullish on hitting that full-year organic in the 7 to 9 range after being a little bit above that this quarter. It sounds like renewal premiums are chugging along. The economy is also chugging along. Is it really just the tougher comps that is holding you back from increasing that outlook? Or is there anything else that I that we should think about that that's on your guys' mind as you were thinking about the organic growth outlook over the rest of the year?

I think the accounting on the deferred revenue from 606 in the fourth quarter plus maybe a life cases. Now maybe we sell some more life cases that come in pretty lumpy. Those probably cost us 50 basis points. The combination of the two and full-year organic something like that. But one thing I will say is that when we look at our dailies, you know, these are the overnights where we get a scrape of all the renewals that are going on, I got to tell you, April looks a lot more -- looks stronger in terms of premium increases than we were seeing before even on a mix adjusted basis. There is a tone that we're seeing in our data, not from anecdotal polling, that there is some further strengthening in all lines and all geographies, maybe other than one or two smaller ones. So, who knows? Maybe we'll be close to the 9%, but we're still comfortable in that that 7% to 9% range.

Got it. Thank you.

Thank you. Our next question is from Mark Hughes with Truist. Please proceed with your question.

Hey, Mark.

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Hey, thanks. I just had one question on pricing. I think you all had commented previously that Australia, New

Thank you. Our next question is from Elyse Greenspan with Wells Fargo. Please proceed with your question.

Hi. Thanks. Just a follow-up on the margin side and thanks for all the color on the moving pieces. But within that 20 to 30 basis points, are you assuming that the fiduciary investment income is in line with the Q1 level over the remaining three quarters?

Yeah. That's pretty close. Yeah. That's right.

And so even, I guess, if we still like, if you were thinking about what's going to have the greater impact, do we think about it being the economy and GDP or PNC pricing when we think about the next few quarters?

But remember, Elyse, we are the beneficiary of inflation. There are very few industries out there that really get a benefit from inflation, and we do. So as building values go up and for and right now for the first time in the decade, carriers are very, very interested in what you're insure to make sure you're ensuring the value. This inflation is hitting building costs very hard.

Thanks for all the color.

Thank you. Our next question is from David Montemaden with Evercore. Please proceed with your question.