Good afternoon, and welcome to Arthur J. Gallagher & Companies First Quarter 2023 Earnings Conference Call. Our participants have been placed on a listen-only mode. Your lines will be opened for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time.

Some of the comments made during this conference call including answers given in response to questions may constitute forward looking statements within the meaning of the securities laws. The company does not assume any obligation to update information or forward looking statements provided on this call.

These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the information concerning forward looking statements and risk factors sections contained in the company's most recent 10-K, 10-Q and 8-K filings for more details on such risks and uncertainties.

In addition, for reconciliations of the non-GAAP measures discussed on this call, as well as other information regarding these measures, please refer to the earnings release and other materials in the and relations section of the company's website. It is now my pleasure to introduce J. Patrick Gallagher, Chairman, President and CEO of Arthur J.

Gallagher & Company. Mr. Gallagher, you may begin..

Thank you very much. Good afternoon, and thank you for joining us for our first quarter 2023 earnings call. On the call for today is Doug Howell, our CFO as well as the heads of our operating divisions. We had an excellent first quarter to start the year.

For our combined brokerage and risk management segments, we posted 12% growth in revenue, 9.7% organic growth. GAAP earnings per share of $2.52, adjusted earnings per share of $3.30 up 12% year-over-year. Reported net earnings margin of 21%, adjusted EBITDAC margin of 38% up 29 basis points.

We also completed 10 mergers totaling $69 million of estimated annualized revenue and we are recognized as the world's most ethical company for the thirteenth time, an outstanding quarter from the team. Let me give you some more detail on our first quarter performance starting with our Brokerage segment. Reported revenue growth was 12%.

Organic was 9.1%. Acquisition rollover revenues were $61 million. Adjusted EBITDAC growth was 15% and we posted adjusted EBITDAC margin of 40.4% right on our March IR Day expectations. A fantastic quarter for the brokerage team. Let me walk you around the world and provide some more detailed commentary on our brokerage organic.

Starting with our retail brokerage operations. Our U.S. PC business posted over 7% organic. Core new business was up year-over-year, even growing over the tough renewal compare in D&O lines, while retention was similar to last year's first quarter.

Our UK PC business also posted more than 7% organic due to strong new business production, stable retention and the continued impact of renewal premium increases. Our combined PC operations in Australia and New Zealand posted organic of 10%.

Net new versus loss business was consistent with prior year and renewal premium increases were ahead of first quarter 2022 levels. Rounding out the retail PC business, Canada was up 6% organically reflecting solid new business and consistent year-over-year retention.

Our global employee benefit brokerage and consulting business posted organic of nearly 7%. New business remains strong and client retention was excellent. We saw growth across many of our practice groups with particular strength in HR consulting and pharmacy benefits. Shifting to our wholesale and specialty businesses. Risk placement services, our U.S.

Wholesale operations posted organic of nearly 8%. This includes 16% growth in open brokerage and about 5% organic in our MGA programs and binding businesses. New business production and retention were both consistent with last year's first quarter.

UK specialty posted organic of 17% benefiting from a strong start within aviation and the addition of new teams focused on North American risks. And finally, reinsurance, Gallagher posted 12% organic reflecting new business wins, great retention and a hardening property reinsurance market. Outstanding results from the Gallagher Re team.

Pulling it all together Brokerage segment all in organic of 9.1% that's a bit above the top end of our first quarter expectation and a fantastic sales quarter by the team. Next, let me provide some thoughts on the PC insurance pricing environment, starting with the primary insurance market.

Overall, global first quarter renewal premiums that's both rate and exposure combined were up more than 9% consistent with the 8% to 10% renewal premium change we had been reporting throughout 2022. Renewal premium increases remain broad based across nearly all of our major geographies and product lines around the globe.

For example, workers' comp is up low single digits, general liabilities up mid to high single digits. Umbrella and package are up in the low double digits, so most lines are trending similar to previous quarters. Two exceptions.

First, public D&O where renewal premiums are down a bit and second property, where renewal premium increases are accelerating. For example, fourth quarter property renewal premiums were up 15% and through the first three months of 2023, we have seen increases of 15%, 20%, and 17%, respectively.

So, our clients continue to feel cost pressures here due to rising replacement values, increasing frequency and severity of weather related events and hard reinsurance conditions. We're not seeing signs that these lost costs and profitability pressures are likely to abate in the near term.

So as we head to our largest primary insurance property quarter we are focused on helping our clients navigate and mitigate these premium increases. Moving to exposures. We are seeing continued strength in our customer's business activity.

First quarter mid-term policy endorsements audits and cancellations combined were better than first quarter 2022 levels greater than the eighth consecutive quarter of year-over-year increases. Shifting to reinsurance.

During the heavy Japan centric April renewals, reinsurance carriers continued to focus on increased pricing and tightening terms and conditions. This was across a broader range of territories and most all lines of business, so in even harder conditions compared to January 1.

The casualty trading market saw orderly renewals and a sufficient supply of capital to fulfill the demand from underwriting enterprises. The property market continued to experience its recent challenges due to more limited underwriting capital.

There were some green shoots in the ILS issuance, although pricing was typically less attractive to CDs than the traditional markets. Overall, there wasn't much new capacity entering the property market regardless, our teams navigated the hard market and customers again managed to secure satisfactory cover.

Those interested in more detailed commentary can find our April first view market report at our website.

Looking forward, there is good reason to expect a cautious underwriting stance from carriers for the foreseeable future as they contemplate recent weather events, replacement cost increases, social inflation and ongoing geopolitical tensions into their view of lost cost trend.

So we expect insurance and reinsurance pricing increases to continue throughout 2023 and while it's early likely into 2024. We also remain optimistic on our customer's business activity during 2023. We have yet to see any significant shifts to daily indications of client, business activity thus far in April.

We are also seeing encouraging employment levels for our benefits clients suggesting the economic backdrop for 2023 remains broadly favorable. Recent data shows the U. S. Unemployment rate declining. Continued growth in non-farm payrolls and a very wide gap between the amount of job openings and the number of people unemployed and looking for work.

So I see demand for our products and services around attracting, retaining, and motivating workforces remaining strong. As we sit here today, we continue to see full-year 2023 brokerage segment organic in that 7% to 9% range and that would be another fantastic year. Moving on to mergers and acquisitions.

We had an active first quarter completing 10 new tuck in brokerage mergers representing about $69 million of estimated annualized revenues. I'd like to thank all of our new partners for joining us and extend a very warm welcome to our growing Gallagher family of professionals.

Also in April, we officially welcomed the former Buck colleagues, combined with our existing employee benefits brokerage and HR consulting business we will enhance our offerings and be better positioned to deliver superior human capital solutions for all of our clients.

Moving to our pipeline, we have nearly 40 term sheets signed or being prepared representing more than $350 million of annualized revenue. Good firms always have a choice of who to partner with, and we'll be very excited if they choose to join Gallagher. Moving on to our Risk Management segment, Gallagher asset.

First quarter organic growth was 14.3% ahead of our expectations due to continued growth from recent new business wins and some revenue from first quarter New Zealand cyclone and flooding. We also saw core new arising claims increase in the low single digits during the quarter for existing clients across both workers' comp and liability.

First quarter adjusted EBITDAC margin was also strong at 19.2% ended up a bit ahead of our March expectations. Looking forward, we see full-year 2023 organic around 12% to 13% and adjusted EBITDAC margins holding up or above 19% and that would be another excellent year. And I'll conclude with some comments regarding our Bedrock culture.

I'm very pleased that just a few weeks ago, we were recognized as the World's Most Ethical Companies for the thirteenth time. We're honored to be one of only 135 companies globally to receive this award from the Ethisphere Institute. Our 45,000 plus colleagues embrace and celebrate the unique values that we have instilled in our company.

The 25 tenants articulated in the Gallagher way continue to drive our global team's success today and we believe that our unique culture is a key differentiator and a competitive advantage. It's a strong culture of client focus, excellence, and inclusion and it continues to drive us forward. That is the Gallagher way. Okay.

I'll stop now and turn it over to Doug.

Doug?.

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 Zealand [CAC] (ph) claims activity. But most of this excellent result comes from strong new business wins in the second half last year.

As for margins, put to page 5 of the earnings release. Risk Management posted adjusted Q1 EBITDAC margins of 19.2%. That's up 177 basis points over last year. As we look forward, we're seeing the rest of the year organic in that 12% to 13% range and full-year margins now finishing a bit above 19%.

That would be the best full-year adjusted margin in Gallagher asset six decade history. Another demonstration of the benefits of scale, intellectual capital, technology and operational excellence. Let's turn to page 6 of the earnings release.

That's our Corporate segment and also, when you take a look at pages 3 and 4 of the CFO commentary document, most all of the items are right in line with our March IR Day forecast. Three callouts on the CFO commentary document. When you see Page 3, you'll see a slight tick up in our expected book effective tax rate.

That's entirely due to the UK rate hike to 25% that went effective April 1st. But remember what you're seeing is a book effective tax rate. Our cash taxes paid rate is substantially lower. Call that around 10% of our adjusted combined brokerage and risk management EBITDAC.

That's because of the tax shield from interest, the amortization of purchase intangibles and the incremental cash flows from our clean energy investments over the coming years. Page 5 of the CFO commentary shows those tax credits.

We have over $700 million as of March 31st, and it shows that we're forecasting to use about a $180 million to $200 million in 2023 with a step up in 2024 in each later year. That's a really nice cash flow sweetener to help fund future M&A.

Then if you flip back to page 4 of the CFO commentary document, you'll see that we had a slight beat on the Corporate segment this quarter compared to our midpoint, but some timing in that beat. So you'll see full-year still about the same as what we forecasted our March IR Day.

Moving now to page 6 of the CFO commentary document, that table shows our rollover M&A revenues. It shows $61 million this quarter, which is pretty close to that $63 million we estimated during our March IR Day.

And also looking forward, we've now included Buck in that table, but remember, you'll need to add your pick for other future M&A to these estimates. Let me move to some comments on cash, capital management and future M&A. At March 31, available cash on hand was around $1 billion, but note that about $600 million was used to buy Buck in early April.

So call it $400 million. This means we estimate that we have about $2 billion more to fund M&A for the rest of this year and our early look is another $3 billion or more in 2024 usually to fund our M&A program, utilizing only free cash and incremental debt while maintaining our strong investment grade ratings.

One final reminder, recall during our March IR Day, we mentioned that we would be reclassifying how we present fiduciary balances on our balance sheet and in our cash flow statement. These re-classes are purely GAAP geography, and we're doing so to better align our presentation with how many other brokers present their statements.

You might notice some of that movement in the recast balance sheet on page 12 of their earnings release. To help you understand all of the movement there'll be a comprehensive table in our 10-Q that we will file later next week.

Again, all of this is to make our presentation more consistent with most of the other public brokers and all of the changes just gap geography. So those are my comments.

Another terrific quarter and looking forward, we see strong organic growth, a great pipeline of M&A and continued opportunities for productivity improvements, all fueled by an amazing culture. I believe we are very well positioned to deliver another fantastic year. Back to you, Pat..

Thanks, Doug. Operator, I think we're ready for some questions, please..

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..

Hi. Good afternoon. My first question is on the margin expansion you're expecting for full-year 2023. How should we think about the cadence of that margin expansion as we move through the year? I think you'd previously guide to 1Q being lower relative to 2Q and 4Qs.

Is that still largely the case excluding Buck or can you just help us think about the moving pieces as we go through the year?.

Alright. So you're asking me about how do we fuel the margin extension quarter-to-quarter.

Is that the question?.

Yeah. More or less, because you highlighted some of the lumpy nature in organic. I'm just kind of curious on how that plays out on the margin as well..

Alright. Let me see if I can dig that out for you here. Should have it right here, and I apologize it's not quick on this. I think that -- stand by here.

In the second quarter, I think that we'd probably have -- maybe the second and third quarter more flat and then a little bit more upside, maybe towards 30 basis points in the fourth quarter, I think, is what I'm looking at here..

And is there any seasonality to Buck's margin as well?.

I'm sorry. Let me check that. I just looked at there are 9, I'm seeing probably 10 basis points of expansion in the second quarter, 20 in the third and maybe 20 in the fourth..

Great. And does that include seasonality to Buck as well? I think you had previously said it was roughly run rate..

That’s right. That includes Buck..

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..

Great. Thanks for taking my questions..

Thanks, Weston..

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?.

Okay. Got it. Yes. That helps. Thank you. And then in terms of the organic outlook, still kind of keeping the 79% range for the year.

Can you just give us a sense of what you're embedding in there for the economy as well as pricing when you think about or you're just expecting a general stable environment over the next few quarters compared to what we saw in the Q1..

I think, Elyse, this is Pat. I think that we're just sort of predicting that it's a stable environment over the next three quarters. We're not seeing a lot of rate reduction. We are seeing continued, and by the way, I'd point out being a little proud about this.

We've been the one saying we're not seeing recessionary pressure in the middle market by our clients around the United States in particular. Those businesses are continuing to grow and they are robust, even with the headwinds of higher interest rates and higher insurance costs.

And those insurance costs are not backing off, and we can tell you this data day-to-day, line-by-line, geography-by-geography, country-by-country.

So, I think that our commentary in our prepared remarks about it being a pretty firm market, looking like it's going to continue that way for all the reason we enumerated, we view it that same way over the next three quarters..

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 for the color..

Good. Thanks, Elyse..

Thanks, Elyse..

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

Well, good afternoon, everyone..

Hey, Greg..

So, I think before I get into the results, I wanted to step back and just talk about talent recruiting and employee producer retention, and maybe if you could give us an update on how that's progressing inside Arthur J. Gallagher.

And I guess in a parallel question, there was some recent announcements of promotions in the c-suite and, Pat, I don't think you, I think you have plenty of gas left in the tank, so maybe you could provide some context about some of those announcements as well..

Well, let me address a couple things first, Greg, so first, our recruiting efforts are ongoing. We are always recruiting producers, excited about the fact that our 500 interns will begin showing up in a few weeks here, in the United States, if I look around the globe, it's probably more like 600 interns.

As you well know, we recruit heavily from that group, and our consistency of retention there is very strong, and continues to be strong. So, we have a good pipeline and a good -- we do a good job of landing new producers, nothing to announce in the way of any more robust efforts in that regard than are normal.

And so I think I feel really good about that. In terms of retention of producers, very, very, very strong retention, and I think that we offer a great place to acquire trade, and we pay people well to do that. We're still one of the places that believes in remunerating people for their growth in books. So, I feel good about our production recruits.

I feel good about our new hires, and I feel very good about the retention level that we have with the people that are. As it relates to the article, which was not an announcement, I would just simply say that we don't make a lot of comments on news stories, Greg, and I think you know that. I'm the CEO, and I feel great. Thank you very much..

I expected that kind of comment from you, so but thank you for validating it. I guess, my follow on question will deal with M&A. And I know you comment on this almost every quarter, but the interest rate environment has posed a changing landscape for M&A.

We look at your multiples sits in the, Doug's CFO commentary tables, and it doesn't look like the multiples are changing much. Can you talk about how you view M&A at the current prices that are being in the marketplace? Do you think, you talk about the 40 term sheets or outstanding, it seems like you have 40 term sheets every quarter.

But can you talk about, how the interest rate environment might change your perspective on what you're willing to pay?.

Yes. I will. First of all, let me put some color on that. If I read the business insurance article correctly about a week ago, I think M&A in the first quarter is down about 29%.

That's after year-after-year-after-year, more PE entries, more deals being done it's, so I think we're seeing a slowdown in the number of transactions, which I do think reflects a slowdown in the number of new entrance. There are some -- there are some people who have been very active in the past that are less active now.

At present, we're not seeing a big decrease in those multiples. If you had 20 people bidding on a property 18 months ago, you still have 11 today.

And so, I do believe that, like anything, supply and demand, if that demand continues to decrease and interest rates are in some way impinging that capital, I think that you will see multiples come down, but they're not doing that right now..

Got it. Thanks for the answers..

Thanks, Greg..

Thank you. Our next question is from Mike Zaremski with BMO Capital Markets. Please proceed with your question..

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?.

Well, listen I can give you some percentage of our book, our property book we include package in there also is going to be somewhere around just doing the mental math here real quick, is around 27%, something like that of our first quarter, total revenues in the P&C units.

One of the things that our guys do is there and we all do out there is pretty good at mitigating some of that rate increase.

So, when you look at it, property rates are going up 17%, you might see commissions going up 10% or 11%, 12% something like that because you increase deductibles, you bring down limits, you come up some more creative programs in that.

So, that is a line of business where the direct correlation between the premium increase and then the commissions that we get there's a delta there..

I think that's a -- I'm piling in here. This is, Pat. That's a very, very good point. Every time in a firm market, we get that question. Rates are up on XYZ 12%. You're showing 6%. Why is that? Because our job is to not pass on the 12%, and we're good at that..

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..

Okay. Great. I appreciate that. And then maybe if I could just sneak one more in for Scott. Just on the Gallagher asset non comp liability claims. Just it sounded like core underlying claims were up low single digits during the quarter. That was both in workers' comp on liability lines.

I'm wondering on liability lines, is that up low single digits a significant change to how that core underlying claims level was running in the previous quarters?.

I mean there's a couple of things going on. One is we happen to be, if you look at kind of the new business we've been selling, it's been connected to more liability activity. So it's not necessarily that individual accounts are saying more. But the new business tends to be tilting a little bit in that direction..

Got it. Thank you..

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

Yeah. Thank you. Good afternoon..

Hey, Mark..

Hey, Mark..

Pat, you've been pretty enthusiastic about what you're seeing around exposures. In the construction space, if banks are really tightening up, would you have started to see that? Would there be some early project work that would flow through your system.

Do you have any kind of view on what you think will help or what will happen there given the banking crisis..

So, Mark, I'm not sure I'm understanding the question.

If I look in my data, is the question around what we're seeing in the construction risks that we ensure?.

Correct.

Any early signs of pressure because of the banking situation?.

In fact, if anything right now, construction continues to be pretty unrobust. First off, you've got, you do have a lot of infrastructure stuff that now is flowing through, and our infrastructure contractors are doing very well. And when you get down to the more -- to the smaller contractors, their backlog is strong..

Any observation about the carrier's willingness to pay claims with perhaps inflation in the system, are they tightening up there? And is that -- are you seeing that in your relationships with the carriers?.

No, I will say this. I'm proud of the industry market. One of the things that I think stays consistent is that our carriers and I'd say this on a broad based basis are paying the legitimate claims that they have filed with them. And I think they're paying them in a in a timely fashion, and I think they're paying them fairly.

Now you can get to certain jurisdictions. I don't mind mentioning it. Florida was assignment of benefits and litigation on behalf of the claims, and there's a battle going on there. But by and large, when you put a legitimate claim into the system, the insurance industry is a very efficient model of paying that claim.

We are not sitting there with a lot of complaints from our claimants..

Very good. Thank you..

Thanks Mark..

Thank you. Our next question is from Josh Shanker with Bank of America. Please proceed with your question..

Yeah. Thanks for fitting me in. I just want to ask one follow-up to Greg's question earlier. You gave a hypothetical path about and I did it. Let's say there were 18 bidders on the property. Maybe now there's only 11. I guess it was only hypothetical, but 11 still seems a lot to me.

I'm wondering in the market today are there still a lot of bidders who are flush with cash? Are they raising debt in this environment to make the acquisitions? What's their funding that keeps them around?.

Well, a, I don't understand it, and I'm not smart enough too. So let's start with that. And b, yes, they're raising funds like crazy. One of our competitors that I won't name actually eliminated their integration team and their acquisition team.

Announced publicly that they were no longer going to be actively pursuing acquisitions, they've got additional funding and they're back in the game. Go figure out who would sell to that. Not me. So then you go to other players that have been more consistent long term. And, yes, they're they received significant funding in the last 60 days.

So they are flush. That capital's got to work. They didn't get it to put it interest. So there's competition out there..

And in terms of the price they are paying, I mean, I've always felt that there's not really a big patching going on. People want to come in partners with Gallagher and it's a choice acquirer compared to some others.

Is there evidence that certain sellers are willing to not consider certain bidders who might be less of an attractive acquirer?.

Well, I think so. So, I mean, I think that's a big part of our sales, that we are always talking about the fact that the differentiator here is twofold. One, we believe we have a great franchise that offers them the opportunity to expand their business.

And if they love the business or they tend to stay in it, this is the best platform in our mind to trade from. So that starts it. And then, of course, you've got the cultural aspect. And we're competitive. We're not we're not trying to sell the fact that that should give them a deep discount.

But there are, you know, there are people that sell for various reasons, and we don't win them all..

Thank you for the answers. Appreciate it..

Sure, Josh..

Thank you. Our next question is from Meyer Shields with KBW. Please proceed with your question..

Thanks. Two sort of big picture questions if I can. First, Pat, you talked about within wholesale and specialty. Open brokerage is growing a lot faster than MGA and binding business.

Is there something you could talk us through why there's that gap in growth rate?.

Sure. I'll toss that to Joel. Go ahead, Joel..

Sure. So, on the wholesale side, obviously, you work with larger accounts and larger accounts that end up in the wholesale space typically are larger accounts with larger exposures and a little tougher to play. So that would be really the first.

And then really the second thing is the inflow of tougher accounts today that are coming out of the admitted market and coming into the several lines market or E&S depending on what your terminology is, is more robust. They're coming in very quickly because of especially the difficulty in the property market.

So you would see a higher organic in that line versus our MGA binding business, which is more consistent, growing nicely, but it's more consistent in the nature of smaller accounts. So it doesn't move the needle as much..

Look at it this way. Another way to put in Meyers, one is troubled business, frankly. When we're doing open market broker, brokers are coming to us because they need our help on tough to place accounts that are going up in price.

Our MGAs and programs are consistently writing smaller accounts that are not distressed, that are looking for specialty coverage or specialty expertise..

Okay. No. That's very helpful. Thank you. That's definitely what I needed. Second question, I'm just wondering how should we think about reinsurance growth over the next year or so.

Is there sort of a special maybe temporary boost because it's now under sort of doubters purview, and you can explain the benefits of that to the insurance company that you deal with worldwide and then once that happens, you're on a stable basis? Or is that a more enduring first of upside?.

No, I think that's an enduring thing. When this team was part of our competitor, Willis, they had a very good block of business underneath them. A very good firm they were part of. And I would say in fact similar economic. So we're not we're not changing that. But I think we do offer a different environment. We offer a different way of trading.

We're bringing our retailers together with the reinsurance people at a much higher level or I shouldn't say higher level at a much greater frequency with much greater interaction than they were used to, which I do believe will fuel their growth.

And I think it will accelerate beyond what they would have achieved, but that's what it could have should and we'll never know..

Okay. Perfect. Thanks so much..

Thanks, Meyer..

Thank you. Our next question is from Rob Cox with Goldman Sachs. Please proceed with your question..

Hey, thanks. I just had one question on pricing. I think you all had commented previously that Australia, New Zealand are potentially seeing a reacceleration in rate and the UK is also seeming quite strong. So I'm just curious if you're seeing or expect to see more of a divergence in the pricing trajectory between, the U.S.

and the international business..

I think they're pretty close to the same. Yes we're seeing some of those, but we're seeing, take D&O out of it right now. We are starting to see some uptick in workers' comp now. So, I mean, I don't see a lot of difference between what's going on in the U.S. and what's going on Canada, New Zealand, Australia, and the UK. So it's pretty close..

Got it. Thank you..

Sure..

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 then, you know, I know I had asked earlier kind of just a question just in terms of just it seems like you're assuming a stable economy. Right? We see some forecasts out there for decelerating GDP or perhaps GDP to go negative.

What are you guys assuming for GDP over the balance of the year?.

Well, here's the thing. Translating it directly into GDP is a different exercise But one thing, you got to separate real versus nominal first and foremost. So I can only get a look at what's the growth in the insured values and insured, what's being assured there. Remember, we're not seeing that in our data right now.

I'm looking down through our industry list right now, and we talked about construction earlier, heavy construction other than building construction contractors up 12.4%, construction special trade 8%, building construction up 8%. So you look through our industry list here, we're not seeing it. We're not seeing it in our dailies overnight.

The cancellations are lower than before. Negative endorsements are lower than before. Audits are audits. They have a lag factor in there, so I wouldn't look at those two terribly carefully. But we're just not seeing this in our customer’s business at this point.

And believe me, our customers, if they believe they're seeing a down turn one of the things they want to do is modify their insurance program because that's cash flow to them. So, we will know in two years how accurate our dailies are. But right now, they are pretty right over the last two years..

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?.

Both..

But I think the pricing will far offset any modest contraction and exposure in it. I don't know what's going to contract in the next six months or what volumes are going to contract. We're just not seeing at least..

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..

Thanks, Elyse..

Thanks, Elyse..

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

Hi. Thanks for taking my follow-up. So I've noticed the last few quarters just in the adjusted compensation ratio commentary in brokerage. Just the impacts from savings related to back office headcount controls. Could you maybe just touch on that? I'm assuming some of this has to do with leveraging centres of excellence.

But I don't think you had mentioned that as a tailwind when we think about the margin roll forward. So, I guess maybe just help me think through that, maybe not only for this year, but, like, broader picture. How big of an opportunity that is leveraging the centres of excellence..

Well, maybe we back up and take a look. Do you remember some of our discussion about the sensitivity of our business to inflation? We said about 40% of it is neutral because it just moves more in tandem with premium -- with our commission rates because we pay people on incentive compensation basis there.

Then we've got about 40% of our whole cost structure that is moderately impacted by inflation. And then we have 20% of it that might run a little bit more close to what headline is inflation knocking off some tops of certain things that maybe transportation, gas, etcetera on that.

So when you add all that up, when you look at what could be facing an -- somebody like us that's pushing $6 billion worth of cost. If something if you say that, let's say, let's call it 30% of your – 25% of your cost structure is subject to – 75% of the headline inflation number. Just think about that.

Let's say there's $4 billion, I'm just doing this off the top of my head that might have 6% or 7% inflation factor in it. That's a big number. Right? And I'm saying that the only thing that's really affecting us is $5 million to $8 million bucks a quarter on it.

What that's saying is as we get more productive, not just from our offshore centres of excellence, but because of technology and other process improvements that are both domestic and offshore centres of excellence. That is absolutely controlling against inflation out there.

So there is substantial uplift that's happening every day because of our productivity work, our quality work and our offshore centres of excellence. And I just kind of did that off the top of my head, but you get the point.

You'd see a heck of a lot more cost or expense dropping into the bottom line if we didn't have our offshore centres of excellence..

Got it. Nope. That makes sense. Thank you for that..

Sure. We're pretty proud of the quality that comes out of that operation too. Well, thank you very much everyone. Appreciate that and thank you for joining us today. As you could tell, we're extremely pleased with our start to the year. We posted a great quarter. I'd like to thank all our colleagues for their outstanding efforts this quarter.

We are people business and I believe we have the best people at Gallagher. We look forward to speaking with you again at our IR Day in June. Have a nice evening, and thanks for being with us..

This concludes today's conference call. You may disconnect your lines at this time..