Q4 2020 Arthur J Gallagher & Co Earnings Call

January 28, 2021

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 your response to questions may constitute forward looking statements within the meaning of the security laws. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially please refer to the cautionary.

And and risk factors contained and the company's 10 dashed K 10-Q, and 8-K filings for more details on its forward looking statements. In addition for reconciliations of the non G. A a P measures discussed on this call as well as other information regarding these measures. Please refer to the earnings release.

And other materials and the Investor Relations section of the company's website. It is now my pleasure to introduce Mr. J Gallagher.

Chairman, President and CEO of Arthur J, Gallagher and co. Mr. Gallagher you may begin.

Thank you good afternoon, everyone and thank you for joining us for our fourth quarter, 'twenty and 'twenty earnings call on.

On the call with me today is Doug Howell, our Chief financial Officer, as well as the heads of our operating divisions.

Before we get started I'd like to make a few comments regarding the tumultuous year that was 2020.

It was a year that tested everything from our physical health to our mental state of mind.

So how do we see one another and this impacted our colleagues our families our communities around the world.

And it brought personal hardship and loss stresses and challenges that none of us would have predicted a year ago I.

And I believe we've learned a lot about ourselves and our society over the past year and about 2020 is behind us many issues and difficulties remain.

But let's not forget 2020 also showed us that the world can work together towards a common goal to develop vaccines and in order to solve a global problem and for that on both thankful and I remain optimistic about our future.

Now on to the discussion of the quarter and year, we delivered an excellent fourth quarter and the midst of the pandemic. We grew organically we picked up momentum and grew through acquisitions, we improved our productivity and raised our quality, we continued to invest and our bedrock culture I'm extremely proud of how the team performed during.

The quarter and the full year.

And our brokerage segment fourth quarter reported revenue growth was a positive three 6% most of that or three 1% was organic revenue growth, we executed on our cost containment playbook and further utilized our centers of excellence saving about $60 million and the quarter, helping drive our net earnings.

And higher by 281 basis points and expanding our adjusted EBITDA margin by 579 basis points and.

Net earnings were up 33% and adjusted EBITDAX was up 30%.

Another fantastic quarter for the brokerage team.

Let me walk you around the world and give you some sound bites about each of our brokerage units starting with our PC operations.

And U S retail organic growth was strong at about four 5% new business and client retention was similar to last year's fourth quarter and midterm policy modifications, including full policy cancellations were slightly better than prior year levels.

And our U S wholesale operations risk placement services organic was about 5%.

Open brokerage organic was more than 20% due to strong renewals fueled by double digit rate increases our MGA programs binding businesses were up about 2% retention was better sequentially, but as expected new business wins are still lagging and given the economy.

Moving to the U K around four 5% organic for the quarter and both our retail and specialty operations, New and lost business was consistent with prior year.

And special mention to our aviation team, they performed well and their largest quarter of the year, helping clients navigate exposures that were down significantly call it 30% to 40% and rate increases that pushed premiums close to pre COVID-19 levels.

Australia, and New Zealand combined posted organic of about 1% the spread between new and lost business was similar to last year, but we're not getting as much lift from rate and exposure as we had in previous years and finally, our Canadian retail operations posted organic of 13% another terrific new business quarter combined with a.

A nice tick up and client retention and strong rate environment.

So overall, our global PC operations posted four 5% organic which is a bit better than the 4% we discussed at our December Investor day.

Moving to our employee benefits brokerage and consulting business fourth quarter organic was around minus 2%, which is at the favorable and of what we thought during our December IR day similar.

Similar to the previous couple of quarters fees from consulting arrangements and special project work were down.

However revenue from our traditional health and welfare business continues to hold up with slightly positive fourth quarter organic which is an encouraging sign.

So when I bring PC and benefits together total brokerage segment organic of three 1% a really strong quarter in this environment and even better when you consider the tough compare against the fourth quarter 2019 of over 6%.

Next I'd like to make a few comments on the PC market, starting with the rate environment.

Global PC rates continue to March higher during the fourth quarter and overall rate was up around 8% across our footprint rates and Canada led the way up more than 12%.

The us was up more than 8% with wholesale stronger than retail including rate increases of 15% within our wholesale open brokerage operations, followed by the U K, including London specialty at about 5% and Australia, and New Zealand combined and the low single digits.

By line of business property and professional liability are up 12%. Other casualty lines are up mid to high single digits and workers' comp was flat to modestly positive.

Not only our PC rates continuing to rise terms and conditions are tightening and capacity is becoming increasingly and constrained for some coverages.

Nearly every area and line of business is firm are firming and there are even a few lines that are very hard like umbrella cyber and public company D&O. So.

So needless to say it is a difficult PC environment.

This is where our teams excel, helping businesses many of which are still struggling navigate the market through creative program design shopping coverages and altering programs with increasing deductibles are reduced limits to help their risk management programs fit their budgets.

Looking forward I see a similar PC market conditions continuing in 2021.

And while economic growth is coming and the pace of the recovery remains uncertain.

So we remain laser focused on what we can control delivering the very best insurance and risk management advice now.

Now successfully doing this virtually more than ever before constantly improving our high quality customer service and engaging with new prospects and growing our new business pipeline.

Thus far and January full policy cancellations and other midterm policy adjustments are trending similar to January 2020.

While it's still early we are seeing year over year renewal premium increases at levels comparable to fourth quarter 2020 on the benefits side. The annual enrollment season is behind us and for many of our clients. We saw covered lives stabilized from last year's declines while retention and new business were similar to pre COVID-19 levels and addition.

All of our benefits consulting practices are seeing increased activity and engagement early on and the year.

So while Theres a lot of year left these early January indications give me further conviction that full year 2021 brokerage segment organic will be even better than the three 2% we delivered in 2020.

Moving on to mergers and acquisitions following and active December we finished the fourth quarter with 10 completed brokerage mergers representing about $100 million of estimated annualized revenues and we've announced a handful more so far in January and representing an additional $85 million of estimated annualized revenues. This <unk>.

<unk>, the bullington merger and the UK, which we think will close in early February after receiving regulatory approval. This week.

Like to thank all of our new partners for joining us and I extend a very warm welcome to our growing Gallagher family of professionals.

As I look at our M&A pipeline, we have 30 term sheets signed or being prepared representing around 300 million of annualized revenues.

We believe we are the platform of choice for successful entrepreneurs looking to take their business to the next level by leveraging our niche expertise our tools and data and addition to being a great place for their employees to advance their careers we.

We expect to have a very active 2021, particularly in the U S. Due to concerns related to possible tax changes.

So to wrap up the brokerage segment for the full year, we delivered five 4% growth and revenue three two all in organic growth adjusted EBITA margin expansion of 418 basis points fueled by cost savings of about $180 million and we completed 27 mergers representing.

Renting about $250 million of estimated annualized revenue a fantastic year for the brokerage team.

Next I would like to move to our risk management segment Gallagher Bassett.

Fourth quarter organic edged back into positive territory nicely, surpassing our december expectations of being down as much as 2%.

We had some positive lift due to increase and COVID-19 related workers compensation claims and saw strong retention and new business. So we ended 2020 with full year organic of minus two 7% and this environment to close a year and which core claim counts were down double digits for more than 10 months of the year.

And after posting a 10% organic decline and the second quarter alone.

Just terrific recovery story.

Going back to April and the beginning of the pandemic, we set our sights on delivering full year 2020, adjusted EBITDA similar to 2019.

Even with full year revenues forecasted to be down $38 million or more and Boyd team deliver the team proactively manage this workforce carefully rebalanced claim loads across adjustors and implemented expense controls ultimately driving 2020, adjusted EBITDA of nearly 150 million.

$4 million better than 2019.

Being able to grow full year EBITDAX. Despite organic revenues that were backwards is just fantastic work by the risk management team.

As we look forward January claim counts are trending very similar to the fourth quarter with many clients operating still at partial capacity.

And with new business sold in 2020 and <unk> over the next few quarters and still room for substantial job recovery. We believe full year 2021 organic will be closer to pre COVID-19 levels and the mid single digit range.

Let me wrap up with some comments regarding our unique and resilient Gallagher culture.

Culture guides, our organization, our people and both good times and even more so and demanding times and I believe culture as the source of our perseverance, our determination and our constant push for excellence I'm extremely proud of our collective successes during 2020, but more importantly, how we came together to work as a team.

And even while physically apart our culture has never been better and I believe we are ending 2021.

Even stronger okay.

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

Thanks, Pat and good afternoon, everyone, I'll Echo pat's comments, and great quarter and and excellent.

I would like to extend my appreciation to the team.

Today I'll begin with some comments on our cost savings and provide some a few observations from our CFO commentary document that we posted on our website.

And I'll do a vignette on our clean energy investments and finish with some thoughts on M&A cash and liquidity.

Alright, let's turn to the earnings release page six to the brokerage EBITDAX table.

You'll see that we grew adjusted EBITDA by about $85 million over last year's fourth quarter, resulting in about 580 basis points of adjusted margin expansion.

And that we realized about $60 million of cost savings relative to fourth COVID-19 adjusted for.

So underlying margin expansion was about 115 basis points on three 1%, all and organic which on its own is impressive.

When you move to page eight management segment, we grew EBIT <unk> debt more than $4 million on slightly positive organic resulting net about 190 basis points of adjusted margin expansion.

Within that we realized about $5 million of cost savings relative to Q4 dollars 19, which was moderated just a low by new client ramp up costs. So underlying margins were up just a debt that too is excellent and given the flattish organic this quarter.

Categories of fourth quarter savings for the combined brokerage and risk management segment were consistent with second and third quarter.

Reduced travel entertainment and advertising about $25 million reduced consulting and professional fees and $14 million.

Reduced outside labor and other workforce savings and $16 million office supplies consumables and occupancy costs about $10 million, so that totals around $65 million, which is consistent with what we said at our December IR day.

Now looking forward the pace of recovery is unclear we came into the year with another virus Serge now maybe some positive cases coming down some areas are imposing more lockdowns, yet others are loosening up.

There's been some success successes, but mostly delays and a vaccine rollout and now it's looking like more and more and more and that's a stimulus might be caught and grid logic, Fred Locke here and the U S. Regardless of whether you are looking at is how far half empty glass very few outlooks are expecting the business environment to be much different by the.

And in the first quarter so for us when it comes to first quarter 'twenty one.

Inorganic and the 3% to 4% range and we are seeing expense savings and similar to fourth quarter 'twenty call. It another $600 million excuse me $60 million.

That happens.

And we cut again and show margin expansion over about 500 basis points.

And then looking towards second third and fourth quarters of 'twenty, one and it gets a little more tricky.

When you when you do your models because of the slope of the recovery is still uncertain and.

And we're getting and we're already realizing substantial COVID-19 induced expense savings beginning.

Early in April of 'twenty.

But if the recovery steps up and those quarters, and we get back to organic of say high 4% or 5%. It does give us a path towards holding full year margins, especially if travel and entertainment remains limited.

And all of this needs to be taken into context, and 2017, 18, and 19, where you're expanding margins 50 to 75 basis points of year on organic and that 4%, 5% range than the COVID-19, yet we execute on our cost containment playbook and still managed to grow organic 3%.

That pops margins over 400 basis points on the face of this global pandemic. So now what I'm, saying is that we have a fighting chance to hold or even improved full year margins here in 'twenty, one on the prospect of getting closer to pre pandemic organic growth later in the year to me that's still about a bullish story as you go right.

Now if we move to the CFO commentary document that we posted on our website on page two.

The low fourth quarter column Youll.

And Youll see most of the items are consistent with what we provided during our December IR day, and that's and the Gray collar FX came in a penny better and severance and integration costs also up a penny better when you compare that to prior quarters.

Also on page, two and a radish call and we're now providing our quarterly look at 2021, a few comments.

Foreign exchange with the U S dollar weakening and if it stays that way and throughout the year.

2021 revenue could see $100 million tailwind and brokerage and $14 million and our risk management.

And be much EPS impact within risk management, but could translate into a net core ourselves for our brokerage segment and that would even be better on reported EBIT.

Second amortization expense and we're currently forecasting a little over $100 million a quarter and brokerage, which includes all announced mergers to date you can see the role and revenues associated with all announced mergers to date on page five and then also don't forget to adjust for amortization expense and the second and later quarters to reflect any future M&A.

B, including and in your model.

Third when you look at M&A multiples.

And on page two on the last line on the table like Pat said, we had and active December closing 10, and three of which were on the larger and of our typical tuck in size that push the multiple arbitrage or so this year, but still creating a nice arbitrage to our trading multiple and more importantly, it brings some really terrific merger partners to the team readiness.

Crow better together over the long haul.

When you move to page three of the CFO commentary and in the corporate table.

When you compare our December IR day estimates and a great column with our fourth quarter results and the Blue column, you posted favorable interest expense due to strong cash flows we had better clean energy earnings in line M&A expense and a slightly more favorable favorable corporate line also on page three we're now providing a first look at 'twenty one range.

As for the corporate segment, and Thats and the reddish column nothing surprising and there is no change on our outlook for clean energy still and that 60% to $75 million of annual after tax earnings we provided during our IR day.

So this brings me to write vignette on clean energy read on page four note five and the CFO commentary document that these investments are winding down at the end of 'twenty, one and lessors and extension.

That means in 2022, we will have zero GAAP earnings, but remember that will be more than replaced with substantial cash flow benefits and other words, 'twenty, one and prior years, where the or the credit generation years. When we report the GAAP benefit our P&L by 22 starts to cash harvest years.

We'll get considerably larger cash benefits and our operating cash flows.

Here's the shortcut way to think about how to compete those cash benefits first if you go to page 14 of the earnings release about the seventh wind down and our balance sheet, you'll read that we have a deferred tax asset of over $1 billion.

Mostly consisting of clean energy credit carryforwards, with one more year of credit generation that asset should grow by another $100 million.

So I'll call. It $1 1 billion of credit carryover is by the end of 'twenty one.

And then assume and 22, we will begin using more credits and we've been using thus far.

Third and how fast we will be using those credits will depend on how fast we grow our U S taxable income, but for this illustration and if you assume a seven year period, it might mean, we'd be harvesting and about $125 million to $150 million and 22 for that what that ramping up to say about 175% and.

And $200 million and 2028.

It's a little on the GAAP earnings go to zero and then the cash benefits become dramatically better, but that's just how it works. This is and has been a really important part of our story over the last decade. So I think it was worth some extra time today.

Alright, let me go on to some comments on cash and M&A.

At December 31 available cash on hand was nearly $700 million.

We have a significant untapped capacity on our on our revolving credit facility and we have another year ahead of US a really strong cash flows that might mean that we would have perhaps two point up to $2 5 billion of M&A capacity here in 'twenty one.

It's a terrific position as we come into a year that we see is perhaps the most active year ever and the brokerage M&A space.

Okay, that's wraps up 'twenty, and we're positioned really well for 'twenty, one organic looks better bolt on M&A looks better we have a decent chance of keeping a large chunk of our cost savings.

And here of harvesting cash flows from our clean energy initiatives and most important I can feel our team's excitement about coming out of the pandemic stronger than ever before my thanks to them for another fantastic year back to you Pat Thanks, Doug Operator, let's go to questions and answers that we can.

Thank you the call is now open for question and you have a question. Please pick up your heels that Empress Star one on your telephone at this time. If you are on speaker phone. Please disable that function prior to pressing star one to ensure optimal sound quality you may remove yourself from the queue at any point by pressing star two.

Again that is star one for question one moment, while we poll.

Our first question comes from the line of Elyse Greenspan with Wells Fargo. You May proceed with your question.

Hi, Thanks.

My first question.

And so I appreciate the color. Thank you.

And provide them and.

Moving on.

And we continue to think about again coming out of Covid and all.

Last quarter I believe you guys is that right and a one.

And that all debt.

<unk> and.

And maybe think about.

Level between half and $16 million at that time, just talking about brokerage and kind of middle two quarters of 'twenty 'twenty one day.

Thank you those figures I guess I would assume that they still seem about right given where we sit today.

Yes, I think that I think your recollection is right and as I did say is.

There was a silver lining coming out of something so terrible and that's we've learned a lot about ourselves.

Think that ultimately, we think theres, a $125 million to $150 million of annual cost savings that we might that we're pulling forward earlier and our continued March on margin improvement as it emerges for the quarters. This year it really is kind.

Kind of a base sensitive interplay between organic and then just really what happens with the economy will follow our customers' expectations. We are learning that they are much more receptive now to virtual interactions allow us to get our niche expertise at the point of sale easier than jumping on an airplane and <unk>.

Pending days traveling so we are learning a lot and but we will follow our customers' expectations, how that exactly plays out and the second and third and fourth quarters really depends on how fast organic moves from that three 3% to 4% range up into maybe the five or 6% range.

Okay. That's helpful.

And then on the M&A environment, and you guys mentioned, Mike and Paul a couple of larger deals and December right and that drove up the multiples on that.

300 million.

Revenue within those 30 term fees that you guys mentioned on.

Can you just give us a sense like kind of skew or are there any larger ones and there mark just kind of the typical smaller bolt on deals that you buy brokerage.

And of late as well, Yeah, I would say that just clarifying that we had some larger tuck in ones at the end of December.

Call it revenues and that $20 million $25 million range debt deal sheets that we're looking at right now $300 million of revenue and spread across 30, 35 term sheets are and the smaller range on a nice nice local.

Family owned entrepreneurial businesses and the range is lower than where we are right now full year. So I would see us back kind of more where we were in the second and third.

First second and third quarters.

Okay and then on.

Can you give us an update on top of the column, you'll be on Sharon's business, I guess, where that sits at the end of the year, how that's been trending from on.

Good day.

And margin perspective.

That's doing really well we couldn't be more pleased with the team I pack and talk about some of the cultural excitement that we have on that but financially they are growing and double digit still there margins are north of 30%, we see terrific opportunities for that business.

As you know Lisa this is Mike.

And second go around this one is a lot better.

And then one last question Doug.

Is there a chance that there isn't any kind of extender bill that would extend your ability I know you gave us a lot of helpful color, assuming that you can't generate any credit beyond and.

And this year is there a chance that there could be any extender bill or I guess.

Most likely not at this point.

Oh sure I always think there is a chance and I think that.

And that when when when Congress set about this about helping.

I will get better and burning.

Some some fossil fuels and they wanted they wanted to help and making it better so as long as we're going to be using Atlas to make it better. So I think they see that and I think they see the opportunity for this to continue to help innovate and so we hope that there is some there are some proposed legislative changes that would that possibly could make the extension happen. So we're home.

Over that and and we certainly are trying to get that message on on everybody's desk and that we can.

Okay, Thanks, Doug and taps and the color. Thanks, Louise Thanks Louise.

Our next question comes from the line of sales for pharma with Deutsche Bank. You May proceed with your question.

Yeah, Thanks, and good afternoon.

And thinking about the sales pipeline I'm trying to contemplate I guess and my mind.

And would have hunkered down early on and Covid and been less likely to change brokers or would you really contemplate and move like that and does it feel like people are just getting more comfortable with the world, We live and today and that's opening up or when we think about the path from 3% to 4% organic growth of 5% to 6% organic growth are we.

We're just waiting for the economy to improve and the shops to get and the arms. So everyone can get back out there and living well <unk> pad.

There's a lot of answers to your questions. So let me back up a little bit first of all did the client's hunkered down and you start with March of last year and the answer to that's yes, having said that they have a lot of needs and a lot of requests. So we were running webinars around COVID-19 returned to work all kinds of different as cyber what have you.

Blue My month, thousands of people signed up and who is not unusual for us to run a webinar with 5000 attendees and I never heard of such a thing so is a huge.

Thirst for information, which.

<unk> helped our people of course, no exactly some of the hot buttons that they should be talking to potential clients and to get out and I was amazed I really would have told you that I thought maybe do business would have hunkered down and I Didnt think I lost business would increase because of that in fact, it's.

It's amazing to me the kind of new business that we did generate so I think that it can.

US a lot of confidence to sell the kind of business, we sold last year and.

And you'd get some fall over from 19 into the first quarter and maybe a little and the second quarter, but everything from May on was really generated after the first and the year, So really a <unk>.

Credible new business year.

Secondly are we seeing the advent potentially.

People beginning to come back into the businesses I think yes.

I think we're seeing that there is going to and whether it's stimulus happens or not.

I think businesses have learned how to do this just to look at your local restaurants.

And I had a better year ago, they werent or March they might and then I can survive takeouts and not making them robust, but they are surviving and theyre ready I mean in the Chicago land area and now we can go to restaurants again, they have very limited occupancy, but they are ready they are welcoming and they want people back and people are excited about it so I think the.

And I get it they all look good on paper when have you, but they tick every customer off.

And they are suffering through this right now because they don't really have a choice.

But they are going to shop, and we are there for them to understand that both our data capabilities as well as our professional niche capabilities and our ability to work them through the process of taking more risk.

Becoming more becoming more self insured thats, our bread and butter were better debt than anybody. So I think that debt that is it's all of those combined that leaves me to believe that we see a very robust new business year ahead, and 'twenty, one and 'twenty two.

Okay, Thanks and.

And switching gears a bit I feel like the dividend is something that we don't really talk about but I was I was a bit surprised by the extent of the raise and the past week or so is there a long term growth rate that you target a payout ratio and maybe you could just refresh our understanding on how you think about the dividend.

I mean, we did we did pop it up a little bit more yesterday, we did raise I think it's an indication that our cash flows are very strong.

And we typically raise at a few cents and then maybe a little bit more and sit there for yourself and I think there was a vote of confidence by the board that said debt, let's let's take that dividend up just a little bit more of this week. So we did that.

And so we will look at that every year, but we agreed with that.

The observations and cash is strong so let's say, let's increase the dividend.

Okay. Thanks, Thanks al.

Our next question comes from the line of Mike Dee.

Credit Suisse. You May proceed with your question.

And then.

Evening.

I guess the first question.

On expenses I know, we've talked about this a lot, but it's just it's been phenomenal.

And so.

Trying to understand do you feel that.

A lot of these expense saves.

That will persist are kind of more.

Gallagher's.

And I'll give you a leg up on your competitors or do you feel like a lot of these things are things that just.

Yeah.

Your competitors are going to catch up to you eventually you're just a kind of a first mover I know that's maybe a complicated question, but just trying to get a sense of.

Weather.

And this kind of gives you a advantage that will persist versus peers or others.

There is just youre going to kind of follow you guys, but just you know it will take some time.

Alright, so let's break this into a couple of things let me, let me talk about who our competitors and 90% of the time, we're competing with somebody that's smaller and US right. So when you look at the where are we really getting leverage I think that we're getting leverage because of our scale, especially relative to that.

To that but that that level of competitor for smaller ones that we compete with day and a day out I think we that we have.

Opportunities to continue to use our lower cost labor locations and our centers of excellence I think our ability and in order.

To rationalize our real estate footprint I think that we can buy our goods and services cheaper I think our ability to automate many of the interactions with the clients and with our own employees.

All of those things I would say that Gallagher is positioned and we are a common agency management system and most of our countries.

And most of our businesses those are things that we believe that we will continue to bring scale advantages versus our smaller competitors, how do I feel about it comparing to let's say the other top 10 and brokers first of all you got to pick the ones that have the culture that want to work together and make it happen and then you've got to pick the ones that haven't already gone down this journey to see.

And whether or not they're there yet or not but we think that were and really terrific place to continue.

To leverage our technologies and our scale.

Compared to most of our competition.

So I don't know if theyre catching up if they're already there or.

Or they just don't have the culture to pull it off.

Okay.

And it is helpful. Doug.

Did you.

More straightforward question free cash flow for 2021 did you cite kind of an estimate for what we should expect.

I didn't but I said that we probably could do about up to $2 $5 billion and M&A.

For this year. So if you break that apart and got 700 million on hand and.

And if you look at our operating cash flows being somewhere in the debt.

And $1 billion $3 billion to $1 billion five range something like that I think and then you borrow a little bit more.

And so that's how you get to that.

$2 5 billion.

Okay.

And just lastly curious.

Hum.

Our broker that reported earnings earlier today.

And actually talked about stepping on the gas on hiring and.

And taking advantage of.

Some of the M&A, that's taking place and the industry. Just just curious are you are you seeing any increase.

Increased opportunities on the.

The hiring side.

Definitely seeing opportunities from two areas.

Doug mentioned that 90% of on time, we compete we compete with smaller brokers.

And the smaller brokers have the problem of just simply not having the capabilities that clients are starting to ask for and these can be simple questions like how do I know how do I know you just gave me the best deal.

When I was out selling 30 years ago on a daily basis that would be answered by saying and I went to three carriers is the best price that does not flow today. They want to know what you're doing with clients what carriers are doing and where the ranges on what their loss ratio looks like compared to others. They want detail they want data.

All are people can't do that so what you've got is folks that are losing accounts to the likes of ourselves and we're out telling them why wouldn't you come to a place that's happy to pay you for what you Hunt and kill and at the same time you have all this and the support and the capabilities and the world. We can write any account of any size no matter, where it's located.

And the world and that's very attractive and then of course.

And there's always opportunities larger competitors.

And we clearly believe we offer a cultural difference.

Thank you.

Our next question comes on the line of Greg Peters with Raymond James You May proceed with your question.

Good afternoon, just to follow up on Mike's question.

I don't know if I missed it in the prepared remarks, the free cash flow for 2020 was what.

For 'twenty and 'twenty.

Our free cash flow and our operating and free operating cash flow will be about one 4 billion and this year and.

And our cash flow statement and when we file our key and when we file or are on.

10-K, and a week and you'll see it's around $1 4 billion and.

And so you said the guidance for 'twenty, one as one three to one five was there some one time benefits that flow through and 'twenty that youre not going to realize and 21, otherwise I would normally expect the free cash flow to grow if you're growing your <unk>.

Topline and Bottomline and I expect free cash flow to gross and one of my mistake I do.

Don't think it will I don't think it will appreciably changed significantly and 'twenty versus 21 will grow at at <unk>.

Hold margins and there we're going to grow.

And not including acquisitions and that number so its cash flows off the acquisitions.

And that too.

So then.

Just to close the loop on your previous comments when you said.

And 22.

On that you'll drive.

Was it a $125 million.

Cash benefits from the pull down on the tax credit.

I want and use.

I can assume whatever free cash flow growth I have off of 'twenty, one and.

And on an operating basis, and then just add on and additional 125 is that a fair way to think about it yes, if you factor and mergers out and that's a fairway.

Okay.

The second question I had.

Listen I know you've commented on this before and you were sort of dancing around it in the.

Third remarks, and the Q&A, but.

You talked about and 8% rate increase across your entire footprint.

And you talked about.

Terms and conditions being changed changing.

I'm just curious about your customers and how they are dialing up our debt retentions.

Ah reducing limits to offset the price and I guess, what I'm really trying to gauge.

Is how does it look here at year end 'twenty versus how it was looking at year end 19.

Well I think it's continuing to get stronger Greg. This is Pat and I think look if were telling you that basically we're seeing rate increases of around eight and organic is about three and a half you see a 5% difference where to go what went to it went to a modification of what the purchased with the purchase was buying.

And that's our job and we sit down with these guys and St men and women and say look.

Here on your options you had $250 million of limits last year, we could show you the stats, but that would be a very unusual claim to break the 150 barrier.

Need that extra $100 million and we would help and worked through that Retentions are a very big part of it and a big part of it is and this is where our history comes from clients that enter self insurance for the first time.

I don't understand this what's the deal why don't you take 150000 dollar retention.

And Youll basically save X on the transaction.

And we have to pay if you do have the claims now let's really focus on loss control. So I don't need to get too detailed with you, but that's really it.

That's what we do for living.

Alright, well I guess, what I was I had assumed that the difference between the $8 three was a combination of retentions.

And reduce limits and reduced economic activity, but maybe I was over and that's fair that's fair.

I left out the economic activity that's fair.

Okay.

The final I guess, the final thing and I know you've been talking about M&A, but listen.

On the Dirty little not so big and the secret is to number two and number three are out there and the merger dance and.

And it.

It feels like that is an opportunity for dislocation.

For customers being unhappy for.

For Ya debate, new hires et cetera, and so I guess.

From the time that they announced this thing back in March of last year to now have you seen anything in the marketplace. That's disruptive that you see as an opportunity or.

Is the disruption if there is and you are going to come later on this process. So Greg let me, obviously I'm not going to talk about our competitors and I.

I've said to you many times change is good for us.

And when we move to <unk>.

Further consolidation of three players at the top end of the spectrum and our name happens to be one of them, there's lots and lots and lots of opportunities around along the lines of everything you're talking about.

Those clients that have never really talked to Gallagher and we're going to have a shot at I mean, if you go back and time and I went to the rooms conference and 100 years ago. Nobody came by our Booth. We've got 5000 people that show up to our rooms conference virtually.

There's interest and.

And so really.

It's we're in a very very good position.

Got it.

And probably gotten a little too cute on the question sorry about that but thanks for your answers sure. Thanks Rick.

Our next question comes from the line of Euro came on with Goldman Sachs. You May proceed with your question.

Hi, good evening.

And my first question.

Try and tie the organic growth two to.

And margins next year or so.

I would think there.

There are different ways to get to 4% to 5% organic growth and each of those potentially has a very different different impact on margins, namely.

If youre getting more of that organic growth through rate versus exposure unit growth. So maybe you can talk about that a little bit and then on the flip side.

I think in the past you used to talk about a meeting to get at least 3% organic in order to keep margins stable.

How should we think about let's say, a 3% organic growth for <unk>.

If you achieve that and 21, what does that mean for margins.

Alright, and the workload.

The difference and workload on a.

A customer that is adding exposure units, adding vehicles are changing miles isn't significant whether they're adding a couple of areas. So the workload associated with a rate increase that comes from exposure units.

And that much more if it comes from additional rate that means we want to go out and shop and more and will take a little bit more effort, but because of our efficiencies. We can do that at a pretty low cost model. So just the number of policies or the exposure units are a modest rate increase or decrease it doesn't change our workload that much.

So I wouldn't say that that would have a significant impact on margin, if you kind of and that too.

2% to 4% range and on an <unk>.

Rates and exposures.

When you're asking the next part of the question about when and where do we see the kind of the trial.

<unk> tried and true line, if you grow organically three percentage of our margin lift and it yes. I think there is is it and this year and 'twenty one since we are up 400.

Basis points and margin this year alone I think that'd be pretty tough to get at 3%.

Okay.

So beyond 'twenty, one, though if you do achieve 3% organic growth, even though the bar is so much higher today.

You can still achieve margin improvement, even with that and we've moved that to 3% to 4%.

Over the number of years as our margins are getting over 30%, there's just not as much there to harvest as our technology and get robot as our scale grows we'll be able to have margin improvement on those tuck in acquisitions that can come on to him.

On to our chassis can use our technologies, it's really more about selling more than it is necessarily about making more margin, but there would be upward tick do I see that and at 3% organic growth and 22 I don't know if we would have that much more margin expansion.

Okay, and do it for five years, and Roche or there could be zone.

Got it.

And then with this step up and Gallagher's margins.

With a good portion of debt being retained how do you think about the about acquisitions and potential targets I would think that the bar.

To clear there could be significantly higher.

And that's going on that but your margins are higher today.

If they're running good margins for the business that they're in and they show a prospect for growth will buy them, regardless of whether it's dilutive to our margin.

If they come and they are what they are and if we can improve their margins terrific authority at the upper end of the scale and terrific, but if they just happen to be in a space that requires a significant amount of service that maybe let's say that their margins are 22%, but they have a good growth will still buy them and we'll let you know we've done that and the past, where we've said of rolling and.

Active acquisitions had X y or Z impact on our margins.

Got it thank you.

Thanks Sharon.

Our next question comes from the line of David Madden with Evercore ISI. You May proceed with your question.

Thanks, Good evening.

Just a question on P&C.

P&C exposure units and the press release.

It sounded like we're continuing to see and increase in exposure versus April and May 2020, which not a not a big surprise, but I guess I'm wondering.

And how exposure units were trending and thus.

Thus far this year relative.

<unk>, obviously, a tough comp year over year, but are we continuing to see an improvement and exposure units and <unk> or is it sort of flattened out thus far in January they're flat in January.

Yeah, I think that day, we've kind of bounced off the bottom were not seeing significant daily step up.

We are seeing we look at our global positive endorsements that go through on our policies on every day and we can see and that's that's still showing a nice upward trend.

Similar to pre pandemic.

And when you werent seeing massive exposure unit growth.

A year ago and.

Fourth COVID-19, and early into 'twenty, you Werent seeing it there, but there is a steady increase there has been a bounce off the bottom and we would expect throughout 'twenty, one and 'twenty two as the economy recovers that those exposure and it would go back up also.

But not much difference today and let's say in December.

Got it okay that makes sense and then on just I guess I'm wondering you know after we've gotten through some of the renewals here in January.

I guess are you are you seeing any movement on that.

On the commission rates.

And I guess just conversations around contingents and supplemental is maybe an update on how those are looking.

And I think that.

Commission rates and the like are solid.

Not having pressure from.

From our carrier partners to try to diminish their payment to their distributors and as far as contingents and supplemental so we think we.

We think we'll have a solid year some growth this year.

Great. Thank you.

Thanks, David.

Our next question comes from the line of Mark Hughes with choice. You May proceed with your question.

Thank you good afternoon.

Why are the rebound in risk management and I Wonder if you could break that into pieces more claims and more employees new business on a debt.

Shakeout.

Well I think Doug and if you want a granular to the percent I can't do that but its you hit right on and Mark and maybe we got claims are recovering and we mentioned in our prepared remarks that Covid claims in particular have helped out.

Economic activity people are adding adding more folks and those are the factors that produce claims.

As we get people driving as we get people going back to work.

They will they will come back to more normal levels, and we don't hope to get more COVID-19 claims, but they are filling a hole in the bucket right now and then.

And they had a terrific new business here too and it's starting to and <unk>. You saw that we had some right and I've spent a couple million dollars a $1 million or so on some new client ramp up costs as we transition and we've got a solid outlook for this year being back in mid single digits, maybe this year. So.

And that team has done a terrific job on.

New business wins to didn't hit a ton this year, but it will next year.

How are you thinking about the open brokerage sounds like that was particularly strong and the fourth quarter has that continued into Q1.

Yes, it's continued.

And is very strong market and you understand wholesaling is a business that.

And as an awful lot of market leverage.

Up and down so we're in a very firm property market in particular and our team and this is what's exciting about this is you know this brokers do not want to go to wholesalers, it's not a friendly business and the sense that we're looking to give you a third of our commission. So they are providing an unbelievable service to the brokerage community.

Whom we trade about 15000, and the United States alone and those people need help and we're giving them help and thats why along with rate. So we're getting at both and item count and rate just by being ready to be very very helpful.

Thank you.

Thanks Mark.

Our next question comes from the line of Paul Newsome with managing Director you May proceed with your question.

Yeah.

Good afternoon.

And I wanted to yes.

Tom a little bit.

More about <unk>.

Comment.

About the lack of shopping by the customers and I think of a hard market is one with <unk>.

Increased.

Shopping.

And what your comments seem to square with every company I cover where the retention levels seem to be.

Really unchanged.

And the last couple of years why do you think we haven't seen it.

Greece and shot and why do you think the customers seem to be just kind of taken rate.

Moving on well.

Well pause again, Mike.

And my comment was predicated on two things to start within the pandemic.

I didn't think customers would be having people knocking on their door as much as they do right now.

And as much as they did in 2019 and I think that as they started to fair it their way through what's going to go on and this pandemic themselves. They were willing to very much hunkered down and say I've got a good insurance program. This is where it is.

I've gotta be considering my own survival tactics, and I surmise there'd be less shopping and of our existing business I was right a little bit and it certainly didn't stop shopping and it wasn't like everything came to a grounding halt.

But if you are a good broker and we've got really good competition and this market and.

On a hard market you early on and explain to your client that if you are unhappy with a hard market and you want to be really unhappy or shop, the hell out of it.

Because youre going to get slaughtered.

And in fact, and a hard market shopping does decrease.

Pardon me.

Unfortunately, as things ease up a bit people are unhappy and it tends to increase shopping so right now we're in a very firm and firming market and people understand that they need our expertise and it also does scare some of those little of competitors that we compete with 90% of the time and it being so bold as to say.

They can do better than we do pretty tough to prove it yes.

Theres a flight to quality.

I think that debt when you sit down and look on what you get from Gallagher.

And get more and how do you get more from US and you get you get price you get service you get access you get creativity.

And you get innovation.

Pretty hard to leave that.

If you don't have competition knocking on the door that can offer that so I think it's a different era from from and you and I were cutting our teeth Paul that debt.

Basically a small small brokers compete and with small brokers offer and kind of the same thing you get so much more from Gallagher today than you ever got before and and another thing piling in on that once you show someone how to get through these days and primarily by doing what we do so well, which is help people deal with assuming risk bringing gal.

Your basket and to help pay the claims mitigating those claims and showing them and in the long term they've really garnered a lot more control of their destiny.

And never lose those clients.

Client that moves from the traditional first dollar purchase into any form of self insurance pooling with other public entities moving into a group captive doing their own single parent captive taking a large retention on their workers' comp and a very heavy employee state.

And once you do that for them it shifts the game completely.

Makes sense.

Switching to a different topic.

Obviously with the with the.

With the change and the quick Catchwords Patel.

Potentially going away and we're probably looking at it and changing how we value income.

And.

Lastly on earnings more on something else like free cash flow I guess my question is free cash flow the right number as operating cash flow the right number.

And just curious is there.

And I noticed there and customer money easily get twined with.

And with yours, and the measurements and.

What's your theory on how we should measure of cash flow.

And if we had and probably wouldn't do it all right great I think that's a terrific question and and Alright first I still believe that EBITDA is a good proxy for how to value. A broker then you just have to back off the cash taxes paid.

And.

Interest expense of course, and and cash taxes paid and interest shield on that but if you basically start with EBITDA youre going to get pretty close to the way and thats been a traditionally so what does that mean for Gallagher is that we've said this for years, we're still pay taxes people, sometimes think that we're not paying our fair share and thats not the case and are we still pay taxes. It runs about Ive said this.

And you go back to win win and tax change that we are.

Net debt, where we think that we're going to pay on a five to 6% to 7% of EBITDA range, just as a proxy.

Probably at that same range, even if tax rates go up.

And to 28% from 21% it would be a book rate differential it wouldn't really be a cash difference.

If the bite and tax measures were put in place it might cost US 10 million Bucks, a year and taxes more Paul but it wouldn't be a huge number the value of tax credits become more valuable if tax rates co op, so really for Gallagher and to take our EBITDA back off our capex.

Back off or.

Interest expense and put it in <unk>.

Seven or 8% firm for cash taxes paid and you get pretty close to the cash flow amount.

And for Gallagher, and I had a miss something and there, but I think I got most of the pieces on that but I would start with EBITDA still.

And Jason.

Thanks, guys I appreciate it thanks, Paul and thanks Paul.

Sure.

Our next question comes from the line of Mayor Shields with K B W. You May proceed with your question.

Great Thanks, and good evening.

One small question one big one.

And are the claims that you're seeing recover in Gallagher Bassett and.

Sorry, Gallagher Bassett on any of those like late reported claims that occurred earlier or is it just now and you're seeing more claims because of COVID-19 or because of rising economic activity more claims rising out of better economic activity and the addition of Covid claims, which was a category that didn't exist a year ago.

Okay.

Perfect.

And then bigger picture that you talked about Gallagher has the ability to write any client cash.

And when those clients do you need to have more extensive set of consulting services comparable to the brokers that are bigger than you.

Yeah, and we do.

And when you haven't.

And when you hear me alright.

Sorry, but anyway.

No. When you said, we do is that we the Gallagher has those services and their need them and the same before we do we've got them and that Doug was going to go down the line or if you take a look at our verticals our niche capabilities.

We don't stay and second to anybody.

And I can go through the through the list of those we provided to you.

Every time, we get a chance, but you take a public sector client anywhere in the World you take of your college and University, We had some great College and University wins and the last month.

Names that if I threw them out which I won't today, you would go out Okay, and then and I'm talking on a global basis, where we probably are the largest provider of college and University risk management advice and Australia, So youre not going to be winning those types of accounts, we're very we've got much stronger and.

In terms of our benefits capabilities. When you take a look at what we do on the consulting work for health and welfare alone, but also all the other human resource needs.

I mean, we're clearly a top three consultant in that regard. So no I mean look we know that over 90% of our business falls and clearly defined niches, which we have expertise.

It's frankly better than our large competitors.

Okay excellent. Thanks, so much.

Thanks, Matt.

Yeah.

Our final question comes from the line of sales for Thanos with Deutsche Bank. You May proceed with your question.

Yeah. Thanks for taking the follow up I was just.

Hoping is there any way you can help frame for us what the ceiling on the brokerage organic growth and brokerage organic margin brokerage margin might be.

Oh, that's a tough question and I'd, rather not but I think.

The answer is it's just such an interplay between organic service expectation by our clients and then and underlying inflation too that we face every day and certain of that right now we're in a low wage inflation environment, we've kind of been on a low wage inflation environment since our since early 2007 2008.

And we're getting more efficient with scale and technology costs are coming down on the other hand.

There are costs that debt more.

Specific.

Technical expertise.

<unk>.

Getting smarter people on your payroll that can handle some of the really really technical aspects of what's going on systems, and theres cost inflation and systems right now.

So it's a it's a tough tough answer but youre seeing.

On the brokerage business somehow is running around 30 points plus or minus two points right now.

And that's the way, it's run and you look across <unk>.

And the other large publics and you look at the P. Ive owned firms, there's a number around 30% plus or minus a couple of points there.

Yeah fair enough I figured I'd give it and try thank you thanks, Dan and thanks Phil.

Ladies and gentlemen, that's all our questions yeah.

Yes, I would like to turn it back over to you Mr. Gallagher for closing remarks.

Thanks, and thank you again, everyone for joining us this afternoon.

And this and our prepared remarks, but we delivered an excellent quarter and full year and we all know how difficult the economic environment was so I would like to thank all of our Gallagher professionals around the globe for being flexible working hard and never losing focus on our job at hand, I am confident that we can deliver another great year of financial performance and 2021.

On and truly believe that as an enterprise. We are just getting started so thanks for being with US folks we appreciate it.

This does conclude today's conference you may disconnect your lines at this time.

Yeah.

[music].

Good afternoon, and welcome to Arthur J, Gallagher and close fourth quarter 'twenty 'twenty earnings Conference call.

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.

The comments made during this conference call, including answers given in your response to questions may constitute forward looking statements within the meaning of the security laws. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the cautionary statement.

And risk factors contained and the company that 10-K, 10-Q, and 8-K filings for more details on its forward looking statements. In addition for a reconciliation of the non G. A a P measures discussed on this call as well as other information regarding these measures. Please refer to the earnings release.

And other materials and the Investor Relations section of the company's website. It is now my pleasure to introduce Mr. J Gallagher Chairman President.

President and CEO of Arthur J, Gallagher and co. Mr. Gallagher you may begin.

Thank you good afternoon, everyone. Thank you for joining us for our fourth quarter 2020 earnings call on.

On the call with me today is Doug Howell, our Chief financial Officer, as well as the heads of our operating divisions.

Before we get started I'd like to make a few comments regarding the tumultuous year that was 2020.

It was a year that tested everything from our physical health to our mental state of mind.

So how we see one another and this impacted our colleagues our families our communities around the world.

And the broad personal hardship and loss stresses and challenges that none of us would have predicted a year ago.

And I believe we've learned a lot about ourselves and our society over the past year and about 2020 is behind us many issues and difficulties remain.

But let's not forget 2020 also showed us that the world can work together towards a common goal to develop vaccines and order to solve a global problem and for that on both thankful and I remain optimistic about our future.

Now onto the discussion of the quarter and year, we delivered an excellent fourth quarter and the midst of the pandemic. We grew organically we picked up momentum and grew through acquisitions, and we improved our productivity and raised our quality, we continued to invest and our bedrock culture on.

Extremely proud of how the team performed during the quarter and the full year.

And higher by 281 basis points and expanding our adjusted EBITDA margin by 579 basis points and.

Net earnings were up 33% and adjusted EBITDAX was up 30% another fantastic quarter for the brokerage team.

Let me walk you around the world and give you some soundbites about each of our brokerage units starting with our PC operations.

And U S retail organic growth was strong at about four 5%.

New business and client retention was similar to last year's fourth quarter and midterm policy modifications, including full policy cancellations were slightly better than prior year levels.

And our U S wholesale operations risk placement services organic was about 5%.

Moving to the U K around four 5% organic for the quarter and both our retail and specialty operations, New and lost business was consistent with prior year.

Australia, and New Zealand combined posted organic of about 1% the spread between new and lost business was similar to last year, but we are not getting as much lift from rate and exposure as we had in previous years and finally, our Canadian retail operations posted organic of 13% another terrific new business quarter combined with a.

A nice tick up and client retention and strong rate environment.

So overall, our global PC operations posted four 5% organic which is a bit better than the 4% we discussed at our December Investor day.

Moving to our employee benefits brokerage and consulting business fourth quarter organic was around minus 2%, which is at the favorable and of what we thought during our December IR day similar.

Similar to the previous couple of quarters fees from consulting arrangements and special project work were down however revenue from our traditional health and welfare business continues to hold up with slightly positive fourth quarter organic which is an encouraging sign.

Next I'd like to make a few comments on the PC market, starting with the rate environment.

Global PC rates continue to March higher during the fourth quarter and overall rate was up around 8% across our footprint rates and Canada led the way up more than 12%.

<unk> was up more than 8% with wholesale stronger than retail including rate increases of 15% within our wholesale opened brokerage operations, followed by the U K, including London specialty at about 5% and Australia, and New Zealand combined and the low single digits.

By line of business property and professional liability are up 12%. Other casualty lines are up mid to high single digits and workers comp was flat to modestly positive.

Not only our PC rates continuing to rise terms and conditions are tightening and capacity is becoming increasingly and constrained for some coverages.

Nearly every area and line of business is firm are firming and there are even a few lines that are very hard like umbrella cyber and public company D&O.

So needless to say it is a difficult PC environment. This is where our teams excel helping businesses many of which are still struggling navigate the market through creative program design shopping coverages and altering programs with increasing deductibles or reduced limits to help their risk management programs and their budgets.

Looking forward I see a similar PC market conditions continuing in 2021.

And while economic growth is coming the pace of the recovery remains uncertain.

So we remain laser focused on what we can control delivering the very best insurance and risk management advice now.

And now successfully doing this virtually more than ever before constantly improving our high quality customer service and engaging with new prospects and growing our new business pipeline.

Thus far and January full policy cancellations and other midterm policy adjustments are trending similar to January 2020, while.

All of our benefits consulting practices are seeing increased activity and engagements early on and the year.

So while Theres a lot of year left these early January indications give me further conviction that full year 2021 brokerage segment organic will be even better than three 2% we delivered in 2020.

Moving on to mergers and acquisitions following and active December we finished the fourth quarter with 10 completed brokerage mergers representing about $100 million of estimated annualized revenues and we've announced a handful more so far and January representing an additional $85 million of estimated annualized revenues. This <unk>.

<unk> the bulletin merger and the UK, which we think will close in early February after receiving regulatory approval. This week.

Like to thank all of our new partners for joining us and I extend a very warm welcome to our growing Gallagher family of professionals.

As I look at our M&A pipeline, we have 30 term sheets signed or being prepared representing around $300 million of annualized revenues.

We expect to have a very active 2021, particularly and the U S. Due to concerns related to possible tax changes.

So to wrap up the brokerage segment for the full year, we delivered five 4% growth and revenue $3. Two all in organic growth adjusted EBITA margin expansion of 418 basis points fueled by cost savings of about $180 million and we completed 27 mergers representing.

Renting about $250 million of estimated annualized revenue a fantastic year for the brokerage team.

Next I would like to move to our risk management segment Gallagher Bassett.

Fourth quarter organic edged back into positive territory nicely, surpassing our december expectations of being down as much as 2%.

We had some positive lift due to increasing COVID-19 related workers compensation claims and saw strong retention and new business. So we ended 2020 with full year organic of minus two 7% and this environment to close a year and which core claim counts were down double digits for more than 10 months of the year.

And after posting a 10% organic decline and the second quarter alone.

As a just terrific recovery story.

Going back to April and the beginning of the pandemic, we set our sights on delivering full year 2020, adjusted EBITDAX similar to 2019.

Even with full year revenues forecasted to be down $38 million or more and Boyd team deliver the team proactively manages workforce carefully rebalanced claim loads across adjustors and implemented expense controls ultimately driving 2020, adjusted EBITDA of nearly 150 million.

$4 million better than 2019.

Being able to grow full year EBITDAX. Despite organic revenues. They were backwards is just fantastic work by the risk management team.

And as we look forward January claim counts are trending very similar to the fourth quarter with many clients operating still at partial capacity with new business sold in 2020 and stepping over the next few quarters and still room for substantial job recovery. We believe full year 2021 organic will be closer to pre COVID-19 levels and the mood.

And single digit range.

Let me wrap up with some comments regarding our unique and resilient Gallagher culture.

And even while physically apart our culture has never been better and I believe we are entering 2021.

Even stronger okay.

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

Thanks, Pat and good afternoon, everyone, I'll Echo pat's comments, and great quarter and and excellent.

I would like to extend my appreciation to the team.

Today I'll begin with some comments on our cost savings and provide some a few observations from our CFO commentary document that we posted on our website and.

And I'll do a vignette on our clean energy investments and finish with some thoughts on M&A cash and liquidity.

Alright, let's turn to the earnings release page six to the brokerage EBIT <unk> table.

You'll see that we grew adjusted EBITDA by about $85 million over last year's fourth quarter, resulting in about 580 basis points of adjusted margin expansion.

And that we realized about $60 million of cost savings relative to fourth COVID-19 adjusted for.

So underlying margin expansion was about 115 basis points on three 1%, all and organic which on its own is impressive.

When you move to page eight management segment, we grew EBIT and a bit more than $4 million on slightly positive organic.

And then about 190 basis points of adjusted margin expansion within that and we realized about $5 million of cost savings relative to Q4, and 19, which was moderated just a low by new client ramp up costs. So underlying margins were up just a debt that too is excellent and given the flattish organic this quarter.

Categories of fourth quarter savings for the combined brokerage and risk management segment were consistent with second and third quarter.

Reduced travel entertainment and advertising about $25 million reduced consulting and professional fees and $14 million.

And reduced outside labor and other workforce savings and $16 million office supplies consumables and occupancy costs about $10 million, so that totals around $65 million, which is consistent with what we said at our December IR day.

Now looking forward the pace of recovery is unclear.

Came into the year with another virus surge and now maybe some positive cases coming down some areas are imposing more lockdowns, yet others are loosening up.

There's been some success successes, but mostly delays and a vaccine rollout and now it's looking like more and more and more and that's a stimulus might be caught and grid logic spread lock here and the U S. Regardless of whether youre looking at is half full or half empty glass very few outlooks are expecting the business environment to be much different by the.

And in the first quarter.

So for us when it comes to first quarter 'twenty one.

Inorganic and the 3% to 4% range, and we're seeing and expense savings and similar to fourth quarter 'twenty call. It another 600 million or excuse me $60 million, if that happens and we cut again and show margin expansion over about 500 basis points.

And looking towards second third and fourth quarters, and 21 and it gets a little more tricky.

When you when you do your models because of the slope of the recovery is still uncertain and and.

And we're getting and we're already realizing substantial COVID-19 induced expense savings beginning early in April of 'twenty.

But if the recovery steps up and those quarters, and we get back to organic and say high 4% or 5%. It does give us a path towards holding full year margins, especially of travel and entertainment remains limited.

And now all of this needs to be taken into context, and 2017, 18, and 19, where you're expanding margins 50 to 75 basis points of year on organic and that 4% to 5% range than the Covid ads, we execute on our cost containment playbook and still managed to grow organic 3% that pops margins over 400.

Basis points on the face of this global pandemic.

So now what I'm, saying is and we have a fighting chance to hold or even improved full year margins here in 'twenty, one on the prospect of getting closer to pre pandemic organic growth later in the year to me that's still about a boy story as you go right.

Now we move to the CFO commentary document that we posted on our website on page two.

And fourth quarter column you'll.

You'll see most of the items are consistent with what we provided during our December IR day, and that's and the gray columns.

FX came in a penny better and severance and integration costs also a penny better when you compare that to the prior quarters.

Also on page two and the reddish column, we're now providing our quarterly look at 2021, a few comments.

First foreign exchange with the U S dollar weakening and if it stays that way and throughout the year.

2021 revenue could see $100 million tailwind and brokerage and $14 million and risk management.

<unk> be much EPS impact within our risk management, but could translate into a net core ourself, our brokerage segment and that would even be better on reported EBIT.

Second amortization expense and we're currently forecasting a little over $100 million a quarter and brokerage, which includes all announced mergers today you can see the role and revenues associated with all announced mergers to date on page five and then also don't forget to adjust for amortization expense and a second and later quarters to reflect any future M&A.

B, including in your model.

Third when you look at M&A multiples.

And on page two on the last line on the table like Pat said, we had and active December closing 10, and three of which were on the larger and of our typical tuck in size that pushed them Baltimore <unk> Turner. So this year, but still creating a nice arbitrage to our trading multiple and more importantly, it brings some really terrific merger partners to the team readiness.

Grow better together over the long haul.

When you move to page three of the CFO commentary and in the corporate table.

When you compare our December IR day estimates and the Gray column with our fourth quarter results and the Blue column, you posted favorable interest expense due to strong cash flows we had better clean energy earnings in line and M&A expense and a slightly more favorable favorable corporate line also on page three we're now providing a first look at 'twenty one range.

As for the corporate segment, and that's and the reddish column nothing surprising and there is no change on our outlook for clean energy still and that 60% to $75 million of annual after tax earnings we provided during our IR day.

That means in 2022, we will have zero GAAP earnings, but remember that will be more than replaced with substantial cash flow benefits and other words 'twenty, one and prior years, where the for the credit generation years. When we report the GAAP benefit our P&L by 22 starts the cash harvest years.

We'll get considerably larger cash benefits and our operating cash flows.

Here's the shortcut way to think about how to compete those cash benefits first if you go to page 14 of the earnings release about the seventh line down on our balance sheet, you'll read that we have a deferred tax asset of over $1 billion, mostly consisting of clean energy credit carryforwards with one more year of credit generation that asset should grow.

And by another $100 million so call. It $1 1 billion of credit carryover is by the end of 'twenty one.

And then assume and 22, we will begin using more credits and we've been using thus far.

And third then how fast we'll be using those credits will depend on how fast we grow our U S taxable income, but for this illustration and if you assume a seven year period and it might mean, we'd be harvesting and about $125 million to $150 million and 22 for that without ramping up to say about 175 to two.

$200 million and 2028.

It's a little odd that GAAP earnings go to zero and then the cash benefits become dramatically better, but that's just how it works. This is and has been a really important part of our story over the last decade. So I think it was worth some extra time today.

Alright, let me go on to some comments on cash and M&A and.

On December 31st available cash on hand was nearly $700 million, we have a significant untapped capacity on our on our revolving credit facility and we have another year ahead of US a really strong cash flows that might mean that we would have perhaps two point up to $2 $5 billion of M&A capacity here in 'twenty one.

That's a terrific position as we come into a year that we see is perhaps the most active year ever and the brokerage M&A space.

Okay, that's wraps up 'twenty, and we're positioned really well for 'twenty, one organic looks better bolt on M&A looks better we have a decent chance of keeping a large chunk of our cost savings.

And you have here on harvesting cash flows from our clean energy initiatives and most important I can feel our team's excitement about coming out of and pandemic stronger than ever before my thanks to them for another fantastic year back to you Pat Thanks, Doug Operator, let's go to questions and answers are again.

Thank you the call is now open for question and if you have a question. Please pickup your handset and press star one on your telephone and at this time.

You are on speaker phone, please disable that function prior to pressing star one to ensure optimal sound quality you may remove yourself from the queue at any point by pressing star Chip again that is star one for question one moment, while we poll.

Our first question comes from the line of Elyse Greenspan with Wells Fargo. You May proceed with your question.

Hi, Thanks, Good evening Mike.

First question.

So I appreciate the color.

Right.

Moving on.

And we continue to think about.

And again coming out of Covid and all that.

Last quarter I believe you guys is that right on on a Wednesday.

And that all debt.

And <unk>.

And maybe think about novel between half and $16 million of guys on just talking about brokerage and kind of middle two quarters of 2021.

I guess I would assume that the sales team.

And about right, given where we think day, yes.

Yes, I think that I think your recollection is right and as I did say is.

There was a silver lining coming out of something so terrible and that's what we've learned a lot about ourselves.

Think that ultimately, we think theres, a $125 million to $150 million of annual cost savings and we might then we're pulling forward earlier and our continued March on margin improvement as it emerges for the quarters. This year. It really is kind of a base sensitive interplay between organic and then <unk>.

Really what happens with the economy will follow our customers' expectations. We are learning that they are much more receptive now to virtual interactions allow us to get our niche expertise at the point of sale easier than jumping on an airplane and <unk>.

Spending days traveling so we are learning a lot and and.

But we will follow our customers' expectations, how that exactly plays out and the second and third and fourth quarters really depends on how fast organic moves from that three 3% to 4% range up into maybe the five or 6% range.

Okay, that's helpful and.

And on the M&A environment, and so you guys mentioned Mike.

A couple of larger deals and December right and that drove up the multiples on that 300 million.

And.

On revenue within those 30 term sheets that you guys mentioned on.

Can you just give us a sense like kind of skew or are there any larger ones and there is it more just kind of the typical smaller bolt on deals that you buy brokerage.

And on of late as well, yes, I would say that just clarifying that we had some larger tuck in ones at the end of the December call on revenues and that $20 million $25 million range debt deal sheets that we're looking at right now $300 million of revenue and spread across 30 35 term sheets on the smaller range at nice.

And nice local.

Family owned entrepreneurial businesses and the range is lower than where we are right now full year. So I would see us back kind of more where we were in the second and third.

Our first second and third quarters.

Okay and then on can.

Can you give us an update on cash.

Yes.

<unk> business, I guess, where that sits at the end of the year, how that's been trending from on Volta.

Both the growth and margin perspective.

Yes, it's doing really well we couldn't be more pleased with the team I pack and talk about some of the cultural excitement that we have on that but financially they are growing and double digit still their margins are on north of 30%.

See terrific opportunities for that business.

As you know Elyse. This is my second go around this one is a lot better.

And then one last question Doug.

Is there a chance that there isn't any kind of extender bill that would extend your ability I know you gave us a lot of helpful color, assuming that you can't generate any credit beyond the end of this year is there a chance that there could be any extender bill or I guess.

Most likely not at this point.

Oh sure I always think there is a chance and I think that.

And that when when Congress set about this about helping.

Us get better and burning.

And some some fossil fuels they want and they wanted to help and making it better so as long as we're going to be using net let's make it better. So I think they see that and I think they see the opportunity for this to continue to help innovate and so we hope that there is some and there are some proposed legislative changes that would have that possibly could make the extension happen so were whole.

Full for that and and we certainly are trying to get that message on on everybody's desk and that we can.

Okay, Thanks, Doug and tasked with color. Thanks, Louise Thanks Louise.

Our next question comes from the line of sales for pharma with Deutsche Bank. You May proceed with your question.

Yeah, Thanks, and good afternoon.

And thinking about the sales pipeline I'm trying to contemplate I guess and my mind.

And sort of hunker down early on and Covid had been less likely to change brokers or would you really contemplate and move like that and does it feel like people are just getting more comfortable with the world. We live in today and that's opening up or when we think about the path from 3% to 4% organic growth of 5% to 6% organic growth are we.

We're just waiting for the economy to improve and the shops to get and the arms. So everyone can get back out there and living well <unk> pad.

Blue My month, thousands of people signed up and who is not unusual for us to run a webinar with 5000 attendees and I've never heard of such a thing so is a huge.

Thirst for information, which helped our people of course no exactly some of the hot buttons that they should be talking to potential clients and to get out and I was amazed I really would have told you that I thought maybe new business would have hunkered down and I Didnt think I lost business would increase because of that in fact, it's amazing to me that kind of.

New business that we did generate.

So I think debt.

US a lot of confidence to sell the kind of business, we sold last year and.

And you'd get some fall over from 19 into the first quarter and maybe a little and the second quarter, but everything from May on was really generated after the first of the year, So really a <unk>.

Credible new business year.

Secondly are we seeing the advent potentially of people beginning to come back into the businesses I think yes.

We're seeing that there is going on and whether it's stimulus happens or not.

I think businesses have learned how to do this just to look at your local restaurants.

And I had about a year ago, they werent or March they might and then I can survive takeouts, not making them robust, but they are surviving and theyre ready I mean in the Chicago land area. Now we can go to restaurants again, they have very limited occupancy, but they are ready, they're welcoming and they want people back and people are excited about it so I think the.

Pent up demand for people to be able to go do things and there's also going to be helpful. Then lastly, let's not forget something and I told you guys. This a thousand times I don't like hard markets and I get it. They all look good on paper and what have you, but they tick every customer off and.

And there are suffering through this right now because they don't really have a choice.

Becoming more becoming more self insured that's our bread and butter were better debt than anybody. So I think that debt that is it's all of those combined that leaves me to believe that we see a very robust new business year ahead, and 'twenty, one and 'twenty two.

Okay, Thanks and.

Switching gears a bit I I feel like the dividend is something that we don't really talk about but I was I was a bit surprised by the extent of the raise and the past week or so is there a long term growth rate that you target a payout ratio and maybe you could just refresh our understanding on how you think about the dividend.

And we did we did pop it up a little bit more yesterday, we did raise I think it's an indication that our cash flows are very strong.

We typically raise at a few cents and then maybe a little bit more and sit there for yourself and I think there was a vote of confidence by the board that said debt, let's let's take that dividend up just a little bit more of this week. So we did that.

And so we will look at that every year, but we were we agreed to it.

And the observations and cash is strong so listen let's increase the dividend.

Okay. Thanks, Thanks Ross.

Our next question comes from the line of Mike Zaremski.

Keith with Credit Suisse. You May proceed with your question.

And then early evening.

I guess the first question.

On the expenses I know, we've talked about this a lot, but it's just it's been phenomenal.

And so.

And trying to understand do you feel that you know a lot of these expense saves.

That will persist are kind of more you know gallagher's.

Vic and I will give you a leg up on your competitors or do you feel like a lot of these things are things that just.

Yeah.

Your competitors are going to catch up to heal eventually and you're just kind of a first mover I know that's maybe a complicated question, but just trying to get a sense of.

Weather.

Let's get this kind of gives you a advantage and it will persist versus tiers or or others.

There's just youre going to kind of follow you guys, but just you know it will take them time.

So, let's let's break this into a couple of things let me, let me talking about who our competitors 90% of the time, we're competing with somebody and a smaller and US right. So when you look at the.

Where are we really getting leverage I think that we're getting on leverage because of our scale, especially relative to that.

To that.

That level of competitor for smaller ones that we compete with day and a day out I think we that we have.

Our opportunities to continue to use our lower cost labor locations and our centers of excellence I think our ability in order to rationalize our real estate footprint I think that we can buy.

And services cheaper I think our ability to automate many of the interactions with the clients and with our own employees.

All of those things I would say that Gallagher is positioned and we have a common agency management system and most of our countries.

And most of our businesses those are things that we believe that we will continue to bring scale advantages versus our smaller competitors, how do I feel about it comparing to let's say the other top 10 brokerage first of all you got to pick the ones that have the culture that want to work together and make it happen and then you've got to pick the ones that haven't already gone down this journey to see.

And whether or not they're there yet or not but we think that were and really terrific place to continue.

To leverage our technologies and our scale.

Compared to most of our competition.

So I don't know if theyre catching up if they're already there or.

Or they just don't have the culture to pull it off.

Okay.

And it is helpful. Doug.

Did you.

And more straightforward question free cash flow for 2021 did you cite kind of an estimate for what we should expect.

I didn't but I said that we probably could do about up to $2 $5 billion and M&A.

For this year. So if you break that apart and got 700 million on hand, and if you look at our operating cash flows being somewhere in the debt.

1 billion, three 1 billion and five range something like that I think and then you borrow a little bit more.

And so that's how you get to that.

$2 5 billion.

Okay.

And just lastly curious.

On a broker that reported earnings earlier today.

You talked about stepping on the gas on hiring and.

And taking advantage of of of some of the M&A, that's taking place and the industry. Just just curious are you are you seeing any <unk>.

Increased opportunities on the.

The hiring side.

Definitely seeing opportunities from two areas.

Doug mentioned that 90% on time, we compete we compete with smaller brokers and.

And the smaller brokers have the problem of just simply not having the capabilities that clients are starting to ask for.

And these can be simple questions like how do I know how do I know you just gave me the best deal.

When I was out selling 30 years ago on a daily basis that would be answered by saying and I went to three carriers is the best price that does not flow today. They want to know what you're doing with clients what carriers are doing and where the ranges are what their loss ratio looks like compared to others. They want detail they want data.

And all our people can't do that so what you've got is folks that are losing accounts to the likes of ourselves and we're out telling them why wouldn't you come to a place that's happy to pay you for what you Hunt and kill and at the same time, you have all the support and the capabilities and the world. We can write any account of any size no matter, where it's located.

And the world and that's very attractive and then of course.

And there's always opportunities larger competitors.

And we clearly believe we offer a cultural difference.

Thank you.

Our next question comes on the line of Greg Peters with Raymond James You May proceed with your question.

Good afternoon, just to follow up on Mikes question on.

I don't know if I missed it and prepared remarks, the free cash flow for 2020 was what.

Okay.

For 'twenty and 'twenty.

Our free cash flow and our operating and our free operating cash flow will be about $1 4 billion and this year.

And the cash flow statement and when we file our kit and when we file our R. A.

10-K, and a week and you'll see it's around $1 4 billion and.

And so you said the guidance for 'twenty, one as one three to one five was there some one time benefits that flow through and 'twenty that youre not going to realize and 21, otherwise I would have normally expect the free cash flow to grow after garnier.

Topline and Bottomline and I expect free cash flow to grow and what am I missing.

Thank you and I don't think it will appreciably changed significantly and 'twenty versus 21 will grow at and if we <unk>.

Hold margins and there we're going to grow based on.

And not including acquisitions and that number so it's a cash flow is off the acquisitions will also on that too.

So then.

Just to close the loop on your previous comments when you said.

And 22.

And that you'll drive.

Was it a $125 million cash benefits from the pull down on the tax credit.

You know I want to add.

Yeah, I can assume whatever free cash flow growth I have off of 'twenty, one and on an operating basis and then just add on and additional 125 is that a fair way to think about it yes, if you factor and mergers out and that's a fairway.

Okay.

The second question and I had.

Listen I know you've commented on this before and you were sort of dancing around it and the the prepared remarks and the Q&A, but.

You talked about and 8% rate increase across your entire footprint.

And you talked about you know terms and.

Conditions being changed changing.

I'm just curious about your customers and how they are dialing up our debt retentions.

Reducing limits to offset the price and I guess, what I'm really trying to gauge.

And is how does that look here at year end 'twenty versus how it was looking at yearend and 19.

Well I think it's continuing to get stronger Greg. This is Pat and I think look if were telling you that basically we're seeing rate increases of around eight and organic is about three and a half you see a 5% difference where to go and went to it went to a modification of what the purchased with the purchase was buying.

And that's our job I mean, we sit down with these guys and say and men and women and say look.

Here your options you had $250 million of luminous last year, we could show you the stats, but that would be a very unusual claim to break the 150 barrier J D.

And do that extra $100 million and we would help and worked through that Retentions are a very big part of it and a big part of it is and this is where our you know our history comes from clients that enter self insurance for the first time.

I don't understand this what's the deal well why don't you take $150000 retention.

And Youll basically save X on the transaction.

And we have to pay if you do have the claims now let's really focus on loss control. So I don't need to get too detailed with you, but that's really it.

That's what we do for a living.

Right well I I guess, what I was I had assumed that the difference between the $8 three was a combination of retentions.

Reduced limits and reduced economic activity, but maybe I was over and that's fair that's fair.

And I left out the economic activity that's fair.

Okay.

The final I guess, the final thing and I know you've been talking about M&A, but listen.

You know.

The dirty little not so big of a secret is to number two and number three are out there and the merger dance and.

And it fees.

<unk> like that is an opportunity for dislocation.

And for our customers being unhappy for free debate.

Debate, new hires et cetera, and so I guess you know.

From the time that they announced this thing back in March of last year to now have you seen anything in the marketplace. That's disruptive that you see as an opportunity or is.

Is the disruption if there is any you're going to come later on in this process. So Greg let me, obviously I'm not going to talk about our competitors and but I've said it many times change is good for us.

And.

When we move to.

And there is clients that have never really talked to Gallagher and we're going to have a shot at I mean, if you go back and time and I went to the rooms conference and 100 years ago. Nobody came by our Booth. We've got 5000 people that show up to our rooms conference virtually.

I mean, theres interest and so really.

And it's.

We're in a very very good position.

Okay.

Got it.

I'd, probably gotten a little too cute on the question sorry about that but thanks for your answers sure. Thanks Rick.

Our next question comes from the line of Euro came on.

Goldman Sachs. You May proceed with your question.

Hi, good evening.

I guess my first question.

Try and tie the organic growth two to margins next year or so.

I would think there.

There are different ways to get to 4% to 5% organic growth and each of those potentially has a very different different impact on margins, namely if youre getting more of that organic growth through rate versus exposure unit growth. So maybe you can talk about that a little bit and then on the flip side.

I think in the past you used to talk about a meeting to get at least 3% organic and in order to keep margins stable.

How should we think about let's say, a 3% organic growth for <unk>.

If you achieve that and 21, what does that mean for margins.

Alright, and the workload.

The difference and workload on a customer that is adding exposure units, adding vehicles are changing miles isn't significant whether they're adding a couple of areas. So the workload associated with a rate increase that comes from exposure units.

Not that much more if it comes from additional rate that means we want to go out and shop and more and will take a little bit more effort, but because of our efficiencies. We can do that at a pretty low cost model. So just the number of policies or the exposure units are a modest rate increase or decrease doesn't change our workload that much.

So I wouldn't say that that would have a significant impact on margin. If you are kind of in that.

2% to 4% range and on.

On rates and exposures.

When you're when you're asking the next part of the question about when and where do we see the kind of day.

Tried and true line, if you grow organically, 3% as our margin lift and it yeah. I think there is is it and this year and 'twenty, one and since we are up 400.

Basis points and margin this year alone I think that'd be pretty tough to get at 3%.

Okay.

So beyond 'twenty, one, though if you do achieve 3% organic growth, even though the bar is so much higher today.

You can still achieve margin improvement, even with that and we've moved that to 3% to 4%.

Over the number of years as our margins are getting over 30%, there's just not as much there to harvest as our technologies get robot as our scale grows we'll be able to have margin improvement on those tuck in acquisitions that can come on to our.

On to our chassis can use our technologies, it's really more about selling more than it is necessarily about making more margin, but there would be upward tick there I see that and at 3% organic growth and 22 I don't know if we would have that much more margin expansion.

Okay.

For five years, and Roche or there could be zone.

Got it.

And then with this step up and Gallagher's margins.

And with a good portion of debt being retained how do you think about the about acquisitions and and potential targets and I would think that the bar.

To clear there could be significantly higher.

Just going on debt that your margins are higher today.

And if theyre running good margins for the business that they're in and they show a prospect for growth will buy them, regardless of whether it's dilutive to our margin.

If they come and they are what they are and if we can improve their margins terrific. If they are already at the upper end of the scale and terrific, but they just happen to be in a space that requires a significant amount of service that maybe on let's say that their margins are 22%, but they have a good growth will still buy them and we'll let you know we've done that and the past, where we've said of rolling and.

Pact of acquisitions had X y or Z impact on our margins.

Got it thank you.

Sure. Thanks Sharon.

Our next question comes from the line of David Most modern with Evercore ISI. You May proceed with your question.

Thanks, Good evening.

Just a question on P&C.

P&C exposure units and the press release.

It sounded like we're continuing to see and increase in exposure versus April and May 2020, which not a not a big surprise, but I guess I'm wondering.

And how exposure units were trending and thus.

Thus far this year relative.

So for Q, obviously, a tough comp year over year, but are we continuing to see an improvement and exposure units and <unk> or is it sort of flattened out thus far in January they're flat in January.

Yeah, I think that day, we've kind of bounced off the bottom were not seeing significant daily step up.

We are seeing we look at our global positive endorsements that go through on our policies on every day and we can see and that's that's still showing a nice upward trend.

Similar to pre pandemic.

And when you werent seeing massive exposure unit growth.

A year ago.

But not much different today than let's say in December.

Got it okay that makes sense and and then on just I guess I'm wondering you know after we've gotten through some of the renewals here in January.

I guess are you are you seeing any movement on the on the commission rates.

And I guess, just conversations around contingents and supplemental and maybe an update on on how those are looking.

Yeah, I think that.

Commission rates and the like are solid and we're not having pressure from.

From our carrier partners to try to diminish their payment to their distributors and as far as contingents and supplemental so we think.

We think we'll have a solid year some growth this year.

Great. Thank you.

Thanks, David.

Our next question comes from the line of Mark Hughes with choice. You May proceed with your question.

Thank you and good afternoon and American.

And.

Why are the rebound and risk management and I Wonder if you could break that into.

More claims more employees new business on its debt.

Shakeout.

Economic activity people are adding adding more folks and.

And.

As of the factories that produce claims.

So as we get people driving as we get people going back to work.

On that.

They will come back to more normal levels and.

And we don't hope to get more Covid claims, but they are filling a hole in the bucket right now.

And they had a terrific new business here too and it's starting to and <unk> you saw that we had some right and we spent a couple of million dollars, a $1 million and so on some new client ramp up costs as we transition and we've got a solid outlook for this year being back in mid single digits, maybe this year so that.

And that team has done a terrific job on.

New business wins to didn't hit a ton this year, but it will next year.

How are you thinking about the open brokerage sounds like that was particularly strong and the fourth quarter has that continued into Q1.

And so it's continued.

It's very strong mark and we need to understand wholesaling is a business that.

And awful lot of market leverage.

Up and down so we're in a very firm property market in particular and our team and this is what's exciting about this is you know this brokers do not want to go to wholesalers, it's not a friendly business and the sense that we're looking to give you a third of our commissions, so they're providing an unbelievable service to the brokerage community.

And we trade about 15000, and the United States alone and those people need help and we're giving them help and thats why along with rate. So we're getting at both and item count and rate just by being ready to be very very helpful.

Thank you.

Thanks Mark.

Our next question comes from the line of Paul Newsome with managing Director you May proceed with your question.

Yeah.

Good afternoon.

And I wanted to yes.

Tom a little bit.

More about you.

Comment.

About the lack of shopping and buying the customers I mean, I think of a hard market and this one with <unk>.

Increased.

Shopping.

And what your comments seem to square with every company I cover where the retention levels seem to be.

Really unchanged.

Through the last couple of years why do you think we haven't seen.

The increase in shop, and what why do you think the customers seem to be just kind of taken the rate.

Moving on.

Well Paul again.

Cabo is predicated on two things to start was and the pandemic.

I didn't think customers would be having people knocking on their door as much as they do right now and as much as they did in 2019 and I think that as they started to firm up their way through what's going to go on and this pandemic themselves. They were willing to very much hunkered down and say I've got a good insurance program. This is where it is I don't have I got it.

Considering my own survival tactics, and I surmise there'd be less shopping and of our existing business.

I was right a little bit and it certainly didn't stop shopping and it wasn't like everything came to a grounding halt.

But if you're a good broker and we've got really good competition on this market and.

On a hard market you early on and explain to your client that if you are unhappy with a hard market and you want to be really unhappy or shop, the hell out of it.

Because youre going to get slaughtered.

And in fact, and a hard market shopping does decrease.

Pardon me.

Unfortunately, as things ease up a bit and people are unhappy and it tends to increase shopping so right now we're in a very firm and firming market and people will understand that they need our expertise and it also does scare some of those little of competitors and we compete with 90% of the time and it being so bold as to say.

They can do better than we do pretty tough to prove it yes.

Theres a flight to quality.

I think that debt when you sit down and look on what you get from Gallagher.

And get more and how do you get more from us.

And you get price you get service you get access you get creativity.

And you get innovation.

Pretty hard to leave that.

If you don't have competition, knocking on the door and that can offer that so I think it's a different era from from when you and I were cutting our teeth Paul that debt at.

And basically a small small brokers competing with small brokers offer and kind of the same thing you get so much more from Gallagher today than you ever got before and another thing piling in on that once you show someone how to get through these days and primarily by doing what we do so well, which is help people deal assuming risk bringing GAAP.

Bass and to help pay the claims mitigating those claims and showing them and in the long term they've really garnered a lot more control of their destiny.

Nevertheless, as those clients are clients that moves from the traditional first dollar purchase and to any form of self insurance pooling with other public entities moving into a group captive doing their own single parent captive taking a large retention on their workers' comp and a very heavy employee state.

And once you do that for them it shifts the game completely.

And my expense.

Switching to a different topic.

Obviously with the.

Yes.

With the change and the tax rates.

Going away and we're probably looking at change and how we value and.

Company.

Lastly on earnings more on something else like free cash flow.

Yes my question yet.

And as free cash flow the right number as operating cash flow and the right number.

I'm just curious.

And I know that there the customer easily get intertwined with.

With yours and the measurements and.

And what's your theory on how we should.

And as your cash flow.

If we had and probably wouldn't do it yeah, all right great I think thats, a terrific question and and Alright first I still believe that EBITDA is a good proxy for how to value. A broker then you just have to back off the cash taxes paid.

And.

Interest expense of course, and and cash task is paid and interest yield on that but have you basically start with EBITDAX youre going to get pretty close to the way and thats been a traditionally so what does that mean for Gallagher is that we've said this for years, we're still pay taxes people, sometimes think that we're not paying our fair share and thats not the case and all we still pay taxes. It runs about Ive said this.

And you go back to win win and tax change that we are.

Net debt, where we think that we're going to pay and that 5% to 6% to 7% of EBITDA range, just as a proxy.

We're probably at that same range, even if tax rates go up.

28% from 21% it would be a book rate differential it wouldn't really be a cash difference.

If the bite and tax measures were put in place and it might cost US 10 million Bucks, a year and taxes more Paul but it wouldn't be a huge number the value of tax credits become more valuable if tax rates co op. So really for Gallagher to take our EBITDA back off our capex.

Back off or.

Interest expense and put it in <unk>.

Seven or 8% firm for cash taxes paid and you get pretty close to the cash flow amount for Gallagher and I have missed something and there, but I think I got most of the pieces on that but I would start with EBITDA still.

Fantastic. Thanks, guys I appreciate it thanks, Paul and thanks Paul.

Our next question comes from the line of Mayor Shields with K B W. You May proceed with your question.

Great Thanks, and good evening.

One small question one big one.

Are the claims that you're seeing recover in Gallagher Bassett and.

Sorry, Gallagher Bassett are any of those like just late reported claims that occurred earlier or is it just now and you're seeing more claims because of COVID-19 or because of rising economic activity more claims rising out of better economic activity and the addition of Covid claims, which was a category that didn't exist a year ago.

Okay.

Perfect.

And then bigger picture that you talked about Gallagher has ability to write any client cash.

When those clients do you need to have a more extensive set of consulting services comparable to the brokers that are bigger than you.

Yeah, and we do.

And when you have and our niche when you hear me alright.

Sorry about or what.

And when you said.

We do that debt.

Gallagher has those services and their need them and the same before we do we've got them and that Doug was going to go down the line or if you take a look at our verticals our niche capabilities.

We don't stay and second to anybody.

And I can go through the through the list of those we provided to you.

Every time, we get a chance, but you take a public sector client anywhere in the World you take care of your college and University, We had some great College and University wins and the last month names.

Names that if I threw them out which I won't today, you would go out with it Okay, and then and I'm talking on a global basis will be probably the largest provider of college and University risk management advice, and Australia, So youre not going to be winning those types of accounts and we're very we've got much stronger and.

Terms of our benefits capabilities when you take a look at what we do on the consulting work for health and welfare alone, but also all the other human resource needs.

We are clearly a top three consultant on that regard. So no I mean look we know that over 90% of our business falls and clearly defined niches, which we have expertise that we think is frankly better than our large competitors.

Okay. Thanks, so much.

Thanks, Matt.

Our final question comes from the line of sales with Arnold with Deutsche Bank. You May proceed with your question.

Yeah. Thanks for taking the follow up I was just hoping is there any way you can help frame for us what the ceiling on the brokerage organic growth brokerage organic margin brokerage margin might be.

Oh, that's a tough question I'd, rather not but I think.

And the answer is it's just such an interplay between organic service expectation by our clients and then and underlying inflation too that we face every day and certain of that right now we're in a low wage inflation environment, we've kind of been on a low wage inflation environment since our since early 2007 2008.

We're getting more efficient with scale and technology costs are coming down on the other hand.

There are costs.

And more specific.

Specific.

Technical expertise.

Cost more.

And getting smarter people on your payroll that can handle some of that really really technical aspects of what's going on systems, and theres cost inflation and systems right now.

So it's a it's a tough tough answer, but youre seeing and all.

The brokerage business somehow is running around 30 points plus or minus two points right now.

And that's the way, it's run and you look across <unk>.

And the other large publics and you look at the <unk> owned firms, there's a number around 30% plus or minus a couple of points there.

Yeah fair enough I figured I'd give it right. Thank you thanks, Dan and thanks Bill.

Ladies and gentlemen, that's all the questions yet.

Yes, I would like to turn it back over to you Mr. Gallagher for closing remarks. Thanks.

Thanks, and thank you again, everyone for joining us. This afternoon. We mentioned this in our prepared remarks, but we delivered an excellent quarter and full year and we all know how difficult the economic environment was so I would like to thank all of our Gallagher professionals around the globe for being flexible working hard and never losing focus on our job at hand.

I'm confident that we can deliver another great year of financial performance and 2021 and truly believe that as an enterprise. We are just getting started so thanks for being with US folks we appreciate it.

This does conclude today's conference you may disconnect your lines at this time.

Q4 2020 Arthur J Gallagher & Co Earnings Call

Request a DemoDemo

AJG

Arthur Gallagher

Earnings