Arthur J. Gallagher & Co. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good afternoon, and welcome to Arthur J. Gallagher & Co's First Quarter 2024 Earnings Conference Call. [Operator Instructions] 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.
Thank you. Good afternoon. Thank you for joining us for our first quarter '24 earnings call. On the call with me today is Doug Howell, our CFO; and other members of the management team and the heads of our operating divisions. We had a great first quarter to begin 2024.
Thanks, Pat, and hello, everyone. Today, I'll walk you through our earnings release. I'll comment on first quarter organic growth and margins by segment, including how we are seeing full year organic growth and margins in each of the next 3 quarters. Then I'll provide some typical comments on the modeling helpers we provide in the CFO commentary document that we posted on our website, and I'll conclude my prepared remarks with a few comments on cash, M&A and capital management.
Thank you, Doug. Operator, I think we're ready for some questions.
[Operator Instructions] Our first question comes from the line of Elyse Greenspan with Wells Fargo.
My first question is on the brokerage segment. So organic, as you guys said, right, a bit better than what you expected in March. So close to the top end of the full year guided range, right, that you guys are maintaining that outlook, could you just give us a sense, do you expect growth to slow over the balance of the year? Is there some level of conservatism?
Well, I'm going to let Doug do the numbers. But yes, I mean, I think you're reading me right, Elyse. I'm bullish on the environment. We are not seeing a downturn in terms of our clients. They're employing more people. We're seeing robust client activity at Gallagher Bassett. That's a very good bellwether of what's going on in the economy.
Yes. Listen, we don't see much difference in each quarter going forward. We think we'll be in that 7% to 9% range, Elyse. We do have a large first quarter and it is heavily weighted to reinsurance. So you would naturally expect us to -- if we're going to be in that range, that maybe the first quarter is a touch above the next 3 quarters, but I wouldn't say it's anything meaningful.
And then the second one is on margin, right? So a little bit, like you said, the Q1 was a little bit better than the March guide, but you previously had said, right, 100 basis points in the -- all three quarters. Now it's 90 to 100 and the full year guide seems unchanged. Is it just maybe Q1 was a little bit better so now you're taking some of that to invest internally? I know it's a little nitpicky because it's still 90 to 100, but just trying to kind of square the updated out-quarter margin view with what you told us in March.
Well, listen, I think that the CFO commentary document has kind of said 90 to 100, I think, consistently. If I said 100% of the last IR Day, I may have said towards 100 basis points. So I think our guidance feels, to us, about the same.
Okay. And then one last one. The FTC, right, is looking to potentially remove noncompetes from -- I guess my question is two-pronged from both the ability, I guess, to bring folks into Gallagher and also considering the potential to lose talent to other players, how do you think this could impact the company if it does actually go through?
Well, let me comment on that one. First of all, I think everybody saw that the U.S. Chamber has filed a lawsuit in Texas that's challenging this, and we're supportive of the Chamber's efforts. We think it's an overreach by the executive branch.
Our next question comes from the line of Mike Zaremski with BMO Capital Markets.
Just as a quick follow-up on the FTC question. One of the top 10 brokers is on record saying that their California margins are a bit lower than the rest of the rest of the regions due to a little bit higher turnover, which might be due to [ Cali ] not having non-solicited noncompetes. Just curious, have you ever sliced and diced your California margins? And are they a little bit lower than the rest of the company?
Sliced and diced every margin by every possible measure you can think of. And no, they're not a bit lower. We've been trading in California for 50 years. We love the state, we're big, big there, and our people love working there.
Okay. That's clear. Switching gears to M&A. You guys -- and I've asked this in the past, but I'll just keep asking, because these are big numbers. So Doug, you said $4 billion of capacity for next year. That's clear. But these are just big numbers, $3.5 billion this year, $4 billion next year. Does this imply, if you look at, like, the top 100 list of brokers, I know that's just U.S., there's lots of overseas stuff. But just -- should we be thinking that you guys do some chunkier size deals as time progresses to be able to kind of fully deploy cash and debt?
Mike, this is Pat. I think it's fair to say that when opportunity presents itself, we're not afraid. I mean, 10 years ago, we stepped up and bought Wesfarmers out of Australia for $1 billion. That was the biggest play we'd ever made, and had, in fact, some financing for it that's worked out incredibly well.
Yes. I think -- Mike, this is Doug. I think that we have a chassis now that we can bring on a lot of smaller acquisitions, nice family-owned businesses that realize that they can be better together with us. I think that our M&A integration process is pretty smooth, very refined, 700 deals over the last 20 years. So we've got that down.
Our next question comes from the line of David Motemaden with Evercore ISI.
But Pat, I wanted to just talk about your comments you made on the property insurance side and on clients looking to add incremental coverage or limits and just how I can think about that as a potential offset to some of the moderation in property insurance pricing that you were talking about as well. Just help me think about the -- both of those factors and sort of how to think about that moderation and the impact that could have on your organic growth in the future.
Well, first of all, I think that when you look at that, those were in the section of the prepared remarks that had to do with reinsurance. There's been a lot of demand the last number of years for cat covers and what have you that frankly were hard to meet. And that's why we talk about the fact that it was more orderly this 1/1. We were able to complete what people wanted more or less.
Interestingly, David, we have -- we're seeing rate increases and the exposure unit increases in the middle and smaller market greater than we did in the larger account size whereas, say, you go back a year or so ago, it might have been just the opposite. So we're starting to see -- if you're talking about some rate moderation and the increase, it's starting to pick up a little bit in the middle and small market space.
Also on the property side, back to that, David, you've got -- many years were 0 interest rates, not the last couple, but 0 interest rates left the schedules pretty much untouched. So you do have underwriters now being much more disciplined around the values, and that's pushing values up. So we've got the benefit of more values being insured in the property business.
No, thanks for that. And yes, I do -- I was referring also, and you guys answered it, just the primary market, the moderation there. It is interesting to hear more about sort of that opt-in which I have not thought about. So that is helpful to hear about that. And then if I could just add 1 more, just 1 more question.
As probably more of the -- if you remember, in December, we had some push out of the fourth quarter. So I would say it might be more catch-up than it is pulling from the future. And we're talking about $5 million on a $3 billion revenue quarter. So it was -- it's not meaningful in any of our numbers. The difference. We love the business, but it's not -- it doesn't make a big difference in any of our numbers.
Got it. So that was in your sort of outlook range that you gave in March. So the upside this quarter was not just solely from the life sale?
That's right.
Our next question comes from the line of Mark Hughes with Truist Securities.
Pat, did you give the breakout for open brokerage versus the MGA or binding business within the wholesale?
I did not.
You got about 16% open brokerage this quarter.
And then with the binding, I think it's been running mid-single digits. Is that…
Higher than that. So more like 10%, 11%.
Okay. And then anything on the workers' comp side? Or just waiting for signs of life there in terms of frequencies, severity, pricing? Is it more of the same? Or do we have some reason to think it could be in selecting?
No, I think that's really interesting, Mark. In my career, that line has been, at times, pretty darn cyclical, and it is just as flat as a pancake. It's just going along. You might see 2 here, 3 there. And it's really just kind of flat.
Our next question comes from the line of Katie Sakys with Autonomous Research.
First, just kind of wanted to touch on the margin expansion guidance for the full year. If organic revenue growth were to come in higher than the current guide, whether that comes from the wind blowing and property rates reaccelerating or for something else, how much of that would you guys kind of envision letting fall to the bottom line? Like, should we expect to see greater margin expansion? Or are there other areas of investment opportunities that you guys would kind of like to see some progress made on.
Well, listen, I don't think that our investment opportunities would be rolled out fast enough in order to spend more going into if we had to pop up in organic growth and starting in August, if something -- the wind blows or something like that. So I don't think we would have the ability even to ramp up on some of the -- some big investment opportunities to offset that additional organic growth.
It's a helpful clarification. Just maybe as a quick follow-up. In terms of benefits from head count controls and client-related expense saves, are those things that you expect to persist as the year goes on? Or are those more specific to 1Q in particular?
Listen, I think the team does a really nice job of looking at our head count controls. We have work model that show how many people we need to have, how many do we have. Do we need to hire in July, August and September, we can kind of forecast that.
Our next question comes from the line of Yaron Kinar with Jefferies.
I just want to touch on a couple of market questions, if I could. I think in the prepared remarks, you were talking about general liability and retail being up, like, 9%. If I go back to the investor meeting from, like, a month or so ago, I think you were talking about maybe seeing liability lines moving up to the 9%, 10% range over the course of 1 year or 2. So are you -- are we talking apples-to-apples here? Or are you surprised by the magnitude of improvement that you're seeing in liability lines right now?
I think -- let me go back to my prepared remarks. We've seen umbrella in the quarter, up 9%, which is kind of in line with what we're talking about in March. GL 7%, and that's where I think probably we've got to look at our carriers and say, are there going to be some reserve challenges going forward. So the 7% seems pretty -- it seems pretty stable. Maybe there'll be a push up a bit. And package, which is, of course, property and liability together at 8%; where comp, really not much, 2%. I think that feels like it's going to be there for the year. I think you could take our March discussions and kind of update them 6 weeks later for those numbers.
There's a tone of concerns that seems to be louder today in our interactions with carriers and clients around casualty rate adequacy. So I would say that what we were chatting about in January and February seems to be louder today -- that confirms to be a little bit louder today. And so I think that -- and we're just -- I don't know if I have enough data yet to say absolutely that there was a tone shift in March in our data compared to what we were seeing in January and February.
That makes sense. I appreciate the color. And then -- and I apologize if you've already addressed this, and I missed it. But we saw the stamping office data come out in March around E&S flows and in the [ REITS ]. And it seems like it was a little bit of a surprise and disappointment.
That is noise. Our E&S business is on fire. We are seeing submissions come in. We're renewing our business. I don't have any caution on that.
Our next question comes from the line of Meyer Shields with KBW.
I was hoping to start on the reinsurance side. I think you talked about 13% organic growth. And is there any way of breaking that down between maybe the increasing limits that are being purchased versus market share wins versus pricing?
I don't have the actual stats on that.
Well, listen. I will tell you this that we had a terrific new business quarter. Our teams are working together. I think we're starting to see some nice wins of working with our retailers on that. When you go down -- we were hearing a lot of great stories about teams settled in. When we look back and see it and try to measure our success on doing that merger. Our teams are working together. We're selling more new business.
Okay. That's helpful. And second question, and clearly, I guess, the premise is we're not seeing any successful pressure on the part of carriers to reduce commission percentages. I was hoping you'd update us on efforts that are being made, even if they're not successful.
No. I think that our partners are being very reasonable. We're not we're not having a lot of headbutting on that subject at all.
Our next question comes from the line of Rob Cox with Goldman Sachs.
So I think in March, at the Investor Day, you guys were pretty optimistic on the potential for reacceleration in RPC in the remainder of 2024 due to higher exposure to property business and less workers' comp and the potential for casualty pricing increases. Is that still the case? Or is the property rate environment, with a little deceleration in the rate of increase, made you change your view a little bit?
No, I think our view is unchanged. We're very bullish.
Okay. Okay. Got it. And then maybe sort of a similar question in some ways. But if we strip out reinsurance, is the touch lower organic guide for the remainder of the year the same? Or do you think ex reinsurance, what would you say, for the trend of organic growth ex reinsurance?
Well, yes, I think just because reinsurance is a little more skewed seasonally to the first quarter, it did help us, let's say, get from 8% to 8.9% this quarter, right? We do have some pretty good April 1 renewals coming in, so we'll see that in the second quarter. So I think we'll get the benefit of reinsurance a little bit in the second quarter, even though it's not as big percentage-wise as the total amount of our revenues.
Got it. And if I could sneak 1 more in. In the Brokerage segment, could you remind us how much you're reinvesting in the business annually and what you're spending it on?
Well, it's a laundry list. I mean, first, you start with our people. I think that our training, our development, our internship program, I think bringing on more producers, we are seeing lots of interest in joining Gallagher by experienced producers out there. I think they see that the organization has a lot to offer for them.
I'd like to emphasize what Doug -- I've got a lot of listeners on this call. I'd like to emphasize where Doug started this. Most of that spend is, in one way or another, directly related either to making our service offering to our clients better, and we happen to know, for instance, that our digital offerings from small accounts through the risk management accounts, connectivity, things like Gallagher Go or even a middle market client can see what their policies are, what's going on with their buildings, et cetera, et cetera, are being incredibly well received.
Our next question comes from the line of Mike Ward with Citi.
Kind of a similar question, but specifically on reinsurance. Just curious where you guys are in terms of the innings of getting that business where you want it to be.
It's really where we had dreamed it would be. The team is incredibly solid. We're not having defections. We've got -- what's been fun about that is that there's a remarkable interest in having continued relationships and building relationships with the retail side of the house, which is what we predicted.
And then maybe just one last one on group benefits. Kind of curious if you can sort of discuss how the renewals have gone and how top line is trending from your perspective. And I guess the -- what's the tone like among the customer base in terms of health of the economy and then hiring and labor?
Well, interestingly, like, the tone from our clients is there's a large amount of concern. And we're sitting with clients that, a, in some instances, don't know why they have turnover. And we're able to get in and do some data analytics around what's going on with them and where -- what's going on there. So a very deep concern about wanting to hold on to their top people.
And our last question is coming from Mike Zaremski with BMO Capital Markets.
Just a quick follow-up. You guys always give color on umbrella, lots of people do. Just curious, is there any way you can dimension what percentage of your business is umbrella?
I can dig it out. Did you have a second piece of that?
Do you have another question, Mike? We'll dig on that for a second.
No, I -- that was my only question.
We're looking here.
So let's see, in '23, I would say, it makes up 6% of our business.
Well, I think that's it for questions. If I can just make a comment here. Thank you again for joining us this afternoon. And I would like to thank our 53,000 colleagues around the world for their efforts. Their hard work and dedication is evident when we report another fantastic quarter of growth and profitability.
This does conclude today's conference call. You may disconnect your lines at this time.