AJG - NYSE
Arthur J. Gallagher & Co.
AJG·NYSE
$210.30
+2.2%Financial ServicesInsurance - Brokers
Arthur J. Gallagher & Co., together with its subsidiaries, provides insurance brokerage, consulting, third-party claims settlement, and administration services in the United States, Australia, Bermuda, Canada, the Caribbean, New Zealand, India, and the United Kingdom. It operates through Brokerage and Risk Management segments. The Brokerage segment consists of retail and wholesale insurance brokerage operations; assists retail brokers and other non-affiliated brokers in the placement of specialized and hard-to-place insurance; acts as a brokerage wholesaler, managing general agent, and managing general underwriter for distributing specialized insurance coverage's to underwriting enterprises. This segment also performs activities, including marketing, underwriting, issuing policies, collecting premiums, appointing and supervising other agents, paying claims, and negotiating reinsurance; and offers brokerage and consulting services to businesses and organizations, including commercial, not-for-profit, and public entities, as well as individuals in the areas of insurance placement, risk of loss management, and management of employer sponsored benefit programs. The Risk Management segment provides contract claim settlement and administration services to enterprises and public entities; and claims management, loss control consulting, and insurance property appraisal services. The company offers its services through a network of correspondent insurance brokers and consultants. It serves commercial, industrial, public, religious, and not-for-profit entities. The company was incorporated in 1927 and is headquartered in Rolling Meadows, Illinois.
At a Glance
Live SnapshotMarket Cap$54.03B
EPS5.8300
P/E Ratio36.07
Earnings Date07/30/2026
Earnings Call Transcript
AJG • 2023 • Q2
Operator
Thank you. The call for now open for questions. [Operator Instructions] Now, our first question is coming from the line of Weston Bloomer with UBS. Please proceed with your questions.
Weston Bloomer
Hi. Good evening. My first question, really good strong organic growth within brokerage and around 200 basis points of above what you'd said, I guess about a month ago. I was curious if you could spend on maybe what lines of businesses or geographies, or maybe whether supplementals or contingent that drove that out performance? Curious of what we can extrapolate for the back half of the year or what is about the nature?
Douglas Howell
Yes, I think they see our capabilities. And I think some of the appeal of maybe selling to a PE firm, there's some concern about that giving that increase in interest rates in the borrowing cost. There's been some stress on that side of the industry. And so, we're seeing that folks are really more interested in being with a strategic now than trying to sell into a PE roll-up.
Weston Bloomer
Got it. Thanks. Yes. It was double-digit. I think $1 million in revenue per term. So I got a little excited there.
Douglas Howell
Me too.
Weston Bloomer
And then last one, just on fiduciary, you'd highlight around 90 bps benefiting the quarters. Is that roughly what you have baked into the back half of the year when we think about your guidance?
Douglas Howell
Yes, I think that this, I think the biggest job here in Q2, I think in the second half of the year you might see something like 70 basis points in the third quarter and it gives us maybe only 50 basis points of margin expansion in the fourth quarter just because rates have been popping up.
Operator
The next question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.
Elyse Greenspan
And then Doug, I know, the bar was a little bit higher for the level of margin improvement this year, as 2024 looks like 2023 from an organic revenue growth perspective. Would we see more margin improvement next year at the same level of organic that we saw this year?
Douglas Howell
Well, I guess my reaction to that is going back, I think that you'd see some margin expansion at 6%. I don't know if you'd get it necessarily at 4%. I don't -- I think by the time you got up to 9%, it'd be better than 50 basis points of margin expansion. And we do have one more quarter of roll and impact of Buck that would, the underlying business would be going up, but that business runs a lower margin. So, depending on which question you're asking me, I would think that margin expansion in 2024 could be very similar to what we thought it'd be in this year. Give us six points of organic and there might be 40, 50 basis points, give us nine points of organic, you might get 75, 80 out of it.
Operator
Our next question comes from the line of Mike
Mike Zaremski
Hey, good afternoon. Investment income, is this the new run rate was better than expected or should we expected to take another like I guess, well, of course, the company's growing too?
Douglas Howell
Listen, I think the impact on our numbers, I think that it's actually will be the change in margin from investment income was 90 basis points. This quarter, we think it would be about 70 basis points in the third and about 50 basis points of margin expansion in the fourth. So, to me, I would say that the actual dollar amounts that you're seeing in the second quarter are not just similar to the dollar amounts that you would see in third and fourth quarter.
Operator
Our next question comes from the line of Greg Peters with Raymond James. Please proceed with your question.
Greg Peters
Yes. In your comments, Pat, you also talked about on the theme of poking holes, right? You talked about the employee benefits business kind of stood out. That MGA business being low single-digit, mid single-digit type of organic. Maybe I don't want to call that an underperforming, but relative to the group, I guess it kind of is. So maybe you could spend a minute and talk about those two businesses, because you called them out in your comments?
Operator
Our Next question is from the line of David Montemaden with Evercore ISI. Please proceed with your question.
Douglas Howell
Yes. David, when I look at it, you want to break it on general liability umbrella of other casualty call that 8% to 9% is what we're seeing here on the sheet commercial auto is 8.5% or more. And that's a U.S. business that I'm telling you about. So I think in the second word, call it 8% to 9% on casualty.
David Montemaden
Got it. And those did tick up versus 1Q, it sounds like?
Douglas Howell
Yes. Especially commercial auto its more around six and now its 10.5.
Douglas Howell
About 30% here for the full year 2022. That's about 30% of what we write.
Operator
Our next question is from the line of Mark Hughes with Truist Securities. Please proceed with your question.
Mark Hughes
Yes, thanks. Good afternoon.
Douglas Howell
Hi, Mark.
Mark Hughes
Pat, you talked about medical inflation. You think it's going to accelerate. Given that the broader measures of medical costs are pretty calm these days. I wonder what gives you confidence that that's going to happen?
Douglas Howell
I don't know if I'd say it's confidence, Mark. I mean, I'm not so sure it's good news for this society or for our clients. But social inflation, medical practice cost cover, and any kind of losses in that regard in the cost of employees. And you take your hospitals right now are working very hard to make sure that their people stay with them. Their turnover rates with the pandemic and the like have increased. Keeping their employees is a big deal. And the cost are doing that.
Operator
The next question is from the line of Katie Saki with Autonomous Research.. Please proceed with your question.
Katie Saki
Thank you so much. And then, one more question on the outlook for risk management. Oh, sorry, just one more question on risk management. Doug, your comments seem to imply a little bit of a sequential slow down in organic on the back half of the year, adjusting for lapping last year exceptional out performance. I'm just kind of curious, is there anything you'd call out on that 14% and 10% organic gross guide that might be a slight headwind to gross as a year wraps up?
Douglas Howell
The nature of this business, if you look at it over the last 20 years is that you can get some pretty large clients that roll into your business. And they don't come as steady as let's say, a smaller client might do. So if you sell the likes of large U.S. corporation acts and you sell them in the fourth quarter last year, you're going to get to benefit in fourth quarter, first second third and you got to lap yourself in the fourth. So it's more the timing of new business on larger accounts that's causing that. But if you stack it up, 18% this quarter and if you think 14% and 10%. When you get down to the end of the year, you're talking some nice one of the 13% organic growth in that business. And then we do have some nice larger clients on the drawing board right now that we're proposing on. I don't know if they'll hit in the fourth quarter or they'll hit in the second or third quarter, it takes a year or two to sell these larger accounts. So it's just a little bit more naturally lumpy on a quarter-by-quarter basis. So I would encourage you to look at it on an annual basis. And if you think about what they did last year and then you're looking at this year at 13%, there's actually a sequential step up on an annual basis.
Meyer Shields
Okay. Yes, I know that its excellent at this point. I'm trying to digest the idea of how much more insured and pay. I'm just trying to get my head around that, which maybe at all with what underwriters actually need for rate.
Meyer Shields
Okay.
Meyer Shields
No, absolutely. I'm just wondering why the workers come take some joy right. I'm just going to end. If this has been tremendously helpful.
Operator
Thanks Meyer.
Operator
Thank you. Our final question is from the line of Michael Ward of Citi. Please proceed with your question.
Douglas Howell
Yes, I think fundamentally, any smaller brokerage business that finds that they need more capabilities, whether it's P&C or benefits, it's the same decision by the owners of those businesses that they just think that they can use, join us together when we better as we serve as those clients and the capabilities they can get from us, they'll get it from whether it's wholesale, whether it's retail, whether it's benefit, even in Gallagher Bassett, they have especially acquisitions there. If it's -- as the owners, it's the same reason they're selling themselves is because they need capabilities, and they think Gallagher is the right place to get those capabilities.
Michael Ward
Great. That's helpful. Thank you. And then maybe in terms of internally, in terms of your own wage sort of inflation monitoring, just curious if that has calmed down a little bit as inflation overall has slowed down?
Douglas Howell
Yes. Here's the thing. We didn't see the great resignation that you read about in the papers. We talked about that quite a bit. We were very fair with our employees on the amount of raise pools that we've given those raised pools are larger in 2022 and 2023 than they were in 2018 and 2019 on a per employee basis. So we've recognized that there are some costs that our employees have to bear, and so we think that the raises we've given them have been very fair and have acknowledged the inflation and the environment. We haven't really sat down to plan for next year yet to see where we'd be in those raised pools, but obviously we'd be fair with our folks. But as you see, some of the inflation numbers are cooling down and what it costs to live. But by and large, I think that we've been very fair. Throughout our history, we have given raises every single year that I've been at Gallagher, and we recognize the importance of our employees to do that. So, we haven't seen a big stress on that.
Operator
Thank you. Our next question is from the line of Scott Heleniak with RBC Capital Markets. Please proceed with your question.
Scott Heleniak
Yes. Just a quick question on the risk management side. Wondering if you could give a little detail on the claims count differences and changes, you've both claims count and severity and kind of what you're seeing versus either recent quarters or year-over-year, and I guess I'm more interested at. I know you touch on a little bit just on some of the casualty lines and workers comp and liability and kind of what you're seeing there in terms of the counts and the average claims size that you're handling at Gallagher Bassett?
Douglas Howell
All right. So three things on that. First, when you look at it, we were seeing more COVID claims last year and that's basically gone to very little at this point that we still grew through that. Kind of existing customers, we consider that the claims are rising for existing customers to be flat-ish, maybe out a little bit. Now that was a trend that we were seeing also when you go back pre-pandemic, because as workplaces get safer and safer, so we're really the success that you're seeing in the organic is really our new business and excellent retention. So that kind of tells you, flat-ish from existing customers growing through the loss of COVID claims and conservatively better new business and better retention. What are we seeing for severity within that severity is going up. There's no question on average. As a percentage, I don't know if it's 5% or 7%, but overall something like that.
Scott Heleniak
Okay. And then finally, any earlier read on to my renewal premium. I know it's probably a little bit early, but how that's comparing? Is it 12% or is it just too early on that?
Douglas Howell
Our July numbers are better than our June numbers. I looked at the overnight for last year and there is a noticeable difference. Now July's not over. A lot of your activity happens in the last week here, but right now our early reads month-over-month as well as another step up.
Operator
Thank you. The final question is follow-up from Weston Bloomer with UBS.
Weston Bloomer
Hey, thanks for taking my follow-up question. Are you guys closing with free cash flow was in the 2Q or any updates on the level maybe as a percent of revenue they're expecting for full year as you integrate Buck or given the strong 2Q?
Douglas Howell
Well 2Q is our notoriously smallest corners because that's when we pay out all of our incentive compensation. We pay that in April. So the 2Q is as our smallest. The second half of the year is the largest. As a percentage you all toil in that those numbers more than we do that's just not really how we look at it. The fact is our cash flows closely tracked to our EBITDA growth. As you know that that because of our tax credit. Our tax load is a percentage of our EBITDAC is usually somewhere in the 8% range. Our CapEx is pretty consistent with prior year, so you don't have a significant change in that. So the only thing that really kind of impacts our cash flows different than EBITDAC would be a little bit taxes, a little bit the little growth in CapEx and then obviously, we're paying integration costs some of those we'll throw out in cash too on that. But right now we track close -- our cash flows tracked very close to what our EBITDAC is. So the growth in the EBITDAC is pretty much so what you're going to see growth in our cash flows.
Weston Bloomer
Got it. Thanks. And then maybe ex integration cost is Buck, maybe cash flow neutral or maybe slightly cash flow negative just given the lower margin there?
Douglas Howell
Oh, it's cash flow positive. I mean, we're not spending that much that on integration on this acquisition. So I would say over three years I think we're going to spend $125 million something like that. And it throws off cash flows and that's what's about.
Transcript from July 28, 2023
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