Q2 2023 Arthur J Gallagher & Co Earnings Call
Good afternoon, and welcome to Arthur J Gallagher Company's second quarter 2023 earnings Conference call.
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It is now my pleasure to introduce J, Patrick Gallagher Junior Chairman, President and CEO of Arthur J Gallagher <unk> company Mr.
Mr. Gallagher you may begin.
Thank you very much good afternoon, everyone. Thank you for joining us for our second quarter 23 earnings call.
On the call with me today is Doug Howell, our CFO as well as the heads of our operating divisions.
We had a fantastic second quarter.
For our combined brokerage and risk management segments, we posted 20% revenue growth 10, 8% organic growth.
Paul We don't include interest income in our organic if we did our headline number would be 13, 4%.
We're 14% if you level is for last year's large life product sale.
GAAP earnings per share of $1 48, adjusted earnings per share of $2 28 up 21% year over year reported net earnings margin of 13, 6% adjusted EBITDAX margin of 34% up 52 basis points.
Also completed 15 mergers totaling $349 million of estimated annualized revenue.
We had a terrific month to finish the quarter that fueled the upside versus our June IR debut eye.
I could not be more pleased with our second quarter performance and how our teams all around the globe continue to deliver incredible value for our clients.
On a segment basis, let me give you some more detail on our second quarter performance, starting with our brokerage segment.
Reported revenue growth was 20% organic was nine 7% or 12, 3%. If we include interest income and about 13% when level rising for the large life product sale.
Acquisition rollover revenues were $151 million.
Adjusted EBITDA growth was 23% and we posted adjusted EBITDAX margin expansion expansion of about 50 basis points.
Let me walk you around the world and provide some more detailed commentary on our brokerage organic again. The following figures do not include interest income.
Starting with our retail brokerage operations.
Our U S PC business posted 13% organic new business production was up year over year, while retention was similar to last year's second quarter.
U K PC business posted 11% organic due to strong new business production.
Canada was up 6% organically, reflecting solid new business similar retention versus last year and continued but somewhat more modest renewal premium increases.
Rounding out the retail PC business, our combined operations in Australia, and New Zealand posted more than 10% organic core new business wins were excellent and renewal premium increases were ahead of second quarter 'twenty two levels.
Our global employee benefit brokerage and consulting business posted organic of about 2% that includes a three point headwind from last year's life product sale, excluding the tough compare organic would've been about 5% with core health and welfare up low single digits than many of our consulting practice groups showed continued strength.
Shifting to our reinsurance wholesale and specialty businesses.
<unk> posted 11% organic another outstanding quarter by the team building upon the excellent first quarter results.
Risk placement services, our U S wholesale operations posted organic of 10%. This includes 19% growth in open brokerage and about 6% organic that our MGA programs and binding businesses and finally, UK specialty posted organic of 19% benefiting from excellent new business production and Fad.
Mystic retention and a firm rate environment.
Next let me provide some thoughts on the PC insurance pricing environment, starting with the primary insurance market.
Global second quarter renewal premiums, which include both rate and exposure changes were up 12%.
It's ahead of the 8% to 10% renewal premium change we were reporting throughout 'twenty two in the first quarter 'twenty three.
<unk> premium increases remained broad based and are up across all of our major geographies. We're also seeing increases across most product lines property is up more than 20% general liability is up about 8% workers' comp is up about 3% umbrella and package up about 11% and most lines.
Trending similar or higher relative to previous quarters with two exceptions versus public company D&O, where renewal premiums are lower versus last year, and second cyber which is flat to down slightly year over year.
But to put this all in perspective. These two lines combined represent around 5% of our year to date brokerage revenues and thus don't have much of an impact so.
So I believe the market continues to be rational still pushing for rate, where it's needed to generate an acceptable underwriting profit remember, though our job as brokers is to help our clients find the best coverage, while mitigating price increases to ensure their risk management programs, but their budgets. So not all of these renewal premium increases show up in <unk>.
Our organic.
Shifting to the reinsurance market overall.
Overall, the June and July reinsurance renewals resulted in similar outcomes to what we saw during January renewals with most global reinsurance lines continuing to harden.
Property continues to experience the most hardening, especially cat exposed treaties.
Within the U S, Florida property cat renewals for more orderly the January due to an early start and well defined reinsure appetites, regardless price increases were in the 25% to 40% range, causing many seasons to increase their retentions.
While property capacity isn't abundant we ultimately were able to place risk for most all of our seasons.
Best for casualty reinsurance renewals for the second quarter showed more stable supply versus demand dynamics, resulting in price increases based on product or risk specific factors.
Looking forward carriers are likely to continue their cautious underwriting posture, given the frequency and severity of weather events replacement cost increases and social inflation, all of which can impact current and prior accident year profitability.
Add to that rising insurance costs, and it's easy to make the case for pricing increases on most lines to continue here in 'twenty, three and perhaps throughout 'twenty four.
Despite these and other inflationary cost pressures our customers business activity remains strong.
During the second quarter, our daily indications of client business showed positive endorsements and audits. These positive policy adjustments have continued thus far in July .
At the same time labor market imbalances Romain.
Recent data shows the U S unemployment rate declining continued growth in non farm payrolls and a very wide gap between the amount of job openings and the number of people unemployed and looking for work and medical cost trends around the rise. We anticipate these costs to accelerate into 24 due to increased cost of services.
More frequent high dollar claims and the impact of new therapies and specialty medications.
So I see demand for our HR consulting and other benefits offerings remaining strong.
So when I bring this all together as we sit here today, we're more confident with full year brokerage organic in the 8% to 9% range with an excellent second quarter in the books more towards the upper end of that range posting that would be another fantastic year.
Moving on to mergers and acquisitions, we had a very active second quarter. In addition to the <unk> acquisition, which I will discuss in a moment, we completed 14, new tuck in brokerage mergers combined these 15 mergers represent about $349 million of estimated annualized revenues I'd like to think of.
All of our new partners for joining us and extend a very warm welcome to our growing Gallagher family of professionals.
Moving to the Buck merger, which was completed in early April our integration efforts have begun in the combined business is off to a great start while it's still early I'm extremely pleased with how the teams are working together and excited about our combined prospects.
Looking ahead, we have a very strong merger pipeline, including nearly 55 term sheets signed or being prepared representing more than $700 million of annualized revenue. We know that not all of these will ultimately close but we believe we will get our fair share.
Moving on to our risk management segment Gallagher Bassett.
Second quarter organic growth was 18, 1% ahead of our expectations due to rising claim counts and continued growth from recent new business wins. These wins have been broad based and across all our various client segments, including large corporate enterprises public entities insurance carriers and captives.
Growth in each of our client verticals is great affirmation and our ability to tailor our client offerings utilized industry, leading technology and ultimately deliver superior outcomes for clients across the globe.
Second quarter adjusted EBITDAX margin of 19, 4% was very strong and at the upper end of our June expectation.
Looking forward, we see full year 'twenty through organic around 13% and adjusted EBITDAX margins pushing 20% that.
That would be another outstanding year.
And I'll conclude with some comments regarding our bedrock culture.
This past quarter I was on the road for a month visiting employees around the globe travelling to New Zealand, Ireland. The U K in the Czech Republic, and I can say that our culture is thriving which makes me incredibly proud.
Some of those conversations included the more than 500 young people in our 58 class of the Gallagher summer internship.
This rigorous two month program is an essential investment in our future ensuring our unique culture remains strong for years to come.
As we continue a welcoming new colleagues and merger partners into the Gallagher fold I'm confident that each new addition will uphold the expertise excellence unethical conduct that make gallagher the names so trusted worldwide and that is the Gallagher way.
I'll stop now and turn it over to Doug Doug.
Thanks, Pat and Hello, everyone, what a terrific quarter on all measures today, I'll walk through organic and margins by segment, including how we see the remainder of the year playing out and then I'll provide some comments on our typical modeling helpers using the CFO commentary document that we posted on our website and I'll conclude my prepared remarks with a few comments on cash M&A.
Capacity and capital management.
Okay, let's flip to page three of the earnings release, Oh, and brokerage organic up nine 7% that'd be 12, 3%, if we including interest income and a little over 13% when further liberalizing for last year's large light products out.
A bit better than what we forecasted at our IR day in June due to a fantastic finish to the quarter across all of our divisions, especially U S retail in London specialty.
You'll also see that contingents were up more than 20% organically.
A better way to look at it.
In combination with supplemental because contracts can flip from time to time together up 12% as much more in line with our base Commission and fee organic growth. So no matter, which way you look at our fantastic organic growth quarter by the team.
Looking forward, we see headline brokerage organic around 9% for third quarter and about 8% for fourth quarter. It's important to recall that fourth quarter will have a tough compare because in Q4 'twenty two we booked a change in estimate related to our 606 deferred revenue accounting.
Controlling for that fourth quarter 23 organic would be towards 9%. We highlighted this matter last year and again at our June IR day. So there's nothing new here. It's just a reminder, as you update your models.
With all that said, we remain bullish on our organic prospects backs for the after the second half Accordingly, we now believe full year brokerage organic is looking like at the higher end of that 8% to 9% range again. These percentages do not include interest income.
Flipping to page five of the earnings release to the brokerage segment adjusted EBIT table, we posted adjusted EBITDAX margin of 32, 1% for the quarter, that's up about 50 basis points of our second quarter 'twenty two's FX adjusted margin.
Came in better than our June IR day expectation of expanding 10 basis points, mostly due to the incremental organic growth.
Looking at it like a bridge from Q2 'twenty two organic gave US a 100 basis points of expansion incremental interest income gave us 90 basis points of margin expansion the impact rolling.
M&A, which is mostly box uses about 80 basis points and then we also made some incremental technology investments called out around $7 million and some continued inflation on TNA called out about $5 million, which in total we used about 60 basis points, followed that brands in that math gets you close to that 50 basis point.
FX adjusted and expansion in the corner.
As for our margin outlook, we expect about 40 to 50 basis points of expansion for each over the next two quarters for the sorry for the year were a bit more optimistic than our April and June views and now see full year margin expansion of 30 to 40 basis points or that would be 70 to 90 basis points liberalizing for Roland.
Impact embark again, both both of those percentages are increases relative to prior year FX adjusted margins we.
We talked about that during our during June IR day, when we provided a vignette on how to model margins. Let me. Let me give you 22 margins re computed at current FX levels for your starting point.
In Q3, Q3, 'twenty two EBITDA margins would've been around 31, 7% versus 32, 3%, we reported and that was for fourth quarter 22, not nearly as much impact call. It around 31, 3%.
So now if you move to the the risk management segment and the organic table at the bottom of page five of the earnings release.
<unk> also had an excellent finish to the second quarter of 18, 1% organic growth as Pat mentioned, we continued to benefit from new business wins from the second half of 'twenty two.
Looking forward, we see organic in the third quarter around 14% in fourth quarter about 10%, which reflects the lapping of last year's larger new business wins.
As for margins when you flip to page six.
And the adjusted margin EBITDA table.
Risk management posted 19, 4% that was on the upper end of our 19% to 19, 5% June expectation looking forward, we see margins above 19, 5% in each of the last two quarters I'm twenty-three, so full year double digit organic and margins approaching 20% that would lead to a rep.
<unk> year for Gallagher Bassett.
Now, let's turn to page seven of the earnings release, and our corporate segment short test.
Short got table and total adjusted second quarter came in right at the midpoint of the range. We provided during our June IR day, even though we did experience a further $5 million of FX related.
We measure meant headwinds that cost us a couple of pennies in the quarter.
Moving now let's move to the CFO commentary document on page three Youll see most of the second quarter results were in line with our June commentary and looking ahead, you'll see that we've updated our outlook.
Our outlook to reflect current FX rates and provide our usual modeling helpers for the second half of the year.
Moving to page four of the CFO commentary document and in our corporate segment outlook for the second half.
A line here is not much change other than a modest weak corporate expense and interest and banking costs as we've assumed a slightly higher balance on our credit line, giving our robust M&A activity.
Then on page five of the CFO commentary that shows our tax credit carryforwards as of June 30, we have about $700 million will be used over the next few years and that Sweetens, our cash flow and helps us fund future M&A.
Shifting to rollover M&A revenues on page six of the CFO commentary document $151 million in the quarter with Buck contributing nearly half of that remember numbers. In this table only include estimates for M&A closed through yesterday, so youll need to make a path for future M&A and you should also increased interest expense of yours.
Assume we borrow.
A portion of the purchase price.
One other callout and Thats back at the bottom of page three of the earnings release, we did use a higher than normal amount of stock for tax free exchange mergers this quarter that can be a little lumpy, but we do like doing them. It's attractive to the sellers that are looking to defer the full tax consequence of selling their firm and it's also attractive to us fully.
<unk>, our new partners with our long term shareholders as.
As for future M&A, we remain very well positioned at June 30 available cash on hand is more than $400 million. Our cash flows are strongest in the second half of the year and we have room for incremental ball borrowing all the while maintaining our strong investment grade ratings.
We continue to see our full year 'twenty three M&A capacity upwards of 3 billion in another $3 billion or more in 24 without using any equity.
So another outstanding quarter by the team from my position as CFO sitting halfway through the year, our full year 'twenty three outlook on all measures continues to improve better organic better margins and a more robust M&A pipeline bottomline arent, great, but we're in a great spot to deliver another record year of financial performance, Okay back to.
You bet.
Thanks, Doug Operator, let's go ahead and open up for questions.
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Our first question is coming from the line of Western Bar with UBS. Please proceed with your questions.
Hi, Good evening My first question really good strong organic growth within brokerage and around 200 basis points above.
Above what.
You had said.
About a month ago I was curious if you could expand on maybe what lines of businesses or geographies or maybe it was a supplemental or contingent that drove that outperformance.
While we can extrapolate for the back half of the year.
Gotcha.
Yes, I think extrapolating for the back half of the year, we feel that that are look towards nine and then eight adjusted benign because two quarters is probably the best way to look at what we think for the rest of the year. The upside was due to the U S and also U K specialty they just had a terrific end of June so we're seeing it across the globe. There there is a.
A noticeable uptick here in June .
Success on our sales and our Retentions are good and there was some.
Positive rate movement in those numbers to also I would say.
<unk>.
Clients are getting pretty darn worry of a hard market and theyre looking for good advice and where we're finding great strong growth as in property casualty the basic blocking and tackling workers' comp areas that in the United States at least we stand at the opportunity to stand really head and shoulders above our competition, especially the little guys.
Great. Thanks, and second question on M&A I believe you said 55 term sheets for $700 million in revenue.
I'd go back to my model I believe that 700 is the highest.
<unk> seen maybe away from Gallagher re.
Could you maybe just expand.
Shift in your M&A strategy or any like larger deals in the pipeline or could you maybe just expand on what you're seeing in the market more broadly as well.
What we're seeing is first of all remember we talked about this quite often we don't have one individual out prospecting, we've got dozens and dozens of people that have now done deals in our company.
They are out constantly talking to our competitors.
The more deals we do the more friends they have in the industry that they're telling it's working well and they are pleased to be with us and I think it's just a matter of straight up blocking and tackling when it comes to the typical making cold calls talking to people renewing relationships, we've had for years and people get into a point where there.
We'll be ready to sell.
Yes, I think they see our capabilities and I think some of the appeal of maybe selling to a PE firm. There's some concern about that given the increase in interest rates in our borrowing costs there.
Theres been some stress in that side of that of the <unk>.
Industry and so we're seeing that folks are really more interested in being with a strategic now than trying to sell into a pea roll up.
Got it thanks.
Double digit I think dollar millions in revenue per ton, which I got I got a little excited there.
Me too.
And then last one just on fiduciary you'd highlight around 90 bps benefit in the quarter is that roughly what you had baked in into the back half of the year. When we think about your guidance.
I think that I think the biggest jump is hearing Q2, I think in the second half of the year you might see something like 70 basis points in the third quarter and it gives us maybe only 50 basis points of margin expansion in the fourth quarter, just because rates have been popping up.
Great. Thank you. Thanks.
Thanks Weston.
The next question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.
Hi, Thanks, good evening.
My first question Pat.
I know when asked Tom you are typically willing to provide a little bit of an outlook on how you're seeing things.
More than just the current year. So based on how you think about things right now how do you think.
No from the brokerage business from an organic growth perspective, how do you think 2024 shaping up.
Obviously I think it is going to look a lot like 23.
Not seeing any hesitation of underwriters asking for right.
I do think the cycles have shifted when you see cyber and D&O coming down they probably are coming down and that's reasonable properties through the roof as is reasonable what we're seeing in in.
Inflation in terms of lawsuit social inflation sort of searching for it's very it's very very troubling and then you add inflation, we've been talking about inflation in this call now for over a year.
And you look back into reserves and inflation.
Tips those into a very difficult spot and youre not going to get those healthy in one year. So I feel very strong about and I'll tell you. Our insurance companies are very our partners are very smart about their numbers, they know where theyre, making money, where theyre, not making money and they're telling us what they need so.
So I don't see people backing off on that no. One is walking in and saying the gates are wide open let's just get volume.
It's a reasonable market that you can get deals done at a reasonable price.
Our clients actually understand inflation, they're living with it across the board.
And inflation is good for our broker honestly, so I think next year looks very very strong.
And then.
Doug I know.
The buyer was a little bit higher for the level of margin improvement. This year is 24, it looks like 23 from an organic revenue growth perspective would we see more margin improvement next year at the same level of organic that we saw this year.
Yeah.
Well.
I guess my reaction to that is going back to I think that you'd see some margin expansion at 6% I don't know if you can get it necessarily at at a 4% or I don't I think by the time, you got up to 9% it would be better than 50 basis points of margin expansion and we do have one more quarter of role.
An impact of Buck that fluid.
But the underlying business would be growing up but that business runs at a lower margin. So depending on which question you're asking me I would think that margin expansion and 24 could be very similar to what we thought at the beginning of this year give us six points of organic and there might be 40 50 basis points give us.
<unk> nine points of organic he might get 75 to 80 out of it.
And then Pat when you were talking about price increases.
No are you, making that comment on a nominal basis or are you expecting that when we think about property casualty pricing.
Over the balance of this year and 24 that will continue to exceed loss trend.
Well I think thats the battle isn't at least I mean, if the carriers are very much wanting and telling us they need that so yes, I think that would be the objective is and we're finding that we can get it. So I do think that they're going to look at loss trends and they're going to try to definitely keep the rate structure moving ahead of that.
And one last one just some initial thoughts on what we could see from reinsurance pricing at January one 'twenty four.
No. It's too early for me to comment on that at least I think we just finished July and not as big a month, obviously as January but interesting that the pricing was still very firm the market. After after January one at a time at a chance to settle down and look at their books understood. If January was a nightmare. So as we said in our prepared remarks.
July was a little bit more orderly, but it's still difficult. So give me another quarter on that one.
Thank you thanks.
Thanks Luis.
Our next questions come from the line of Mike Zaremski with BMO capital markets. Please proceed with your question.
Hey, good afternoon investment income is this the new.
Run rate.
Better than expected or should we expect it to take.
Other.
You know my job I guess, just you know well yeah.
Of course, the company is growing too.
Listen I think the impact on our numbers I think that it's actually what the.
Change in margin from investment income.
It was 90.
90 basis points in this quarter, we think it'll be about 70 basis points in the third and about 50 basis points of margin expansion and they are in the core so to me I would say that the actual dollar amount that youre seeing in the second quarter are not dissimilar to the dollar amounts that you would.
See in third and fourth quarter.
Okay.
Okay.
And you guys are firing on all cylinders. So I'm just trying to poke some holes here, let's see let's see if I can do that.
I mean, just just.
Elisa.
Yeah.
U K inflation.
The stats look like.
It's high in theirs.
Wage pressures and some slowing GDP outlook.
Does your business look there.
They're currently.
Our margin has been growing as much there and.
Any.
How would you say retail business is on fire.
Really on fire.
And I give a lot of credit to the team on tours, Ron as you know we've spent money there in terms of branding.
And we did not do that for years, when we were putting together our.
Giles Oval Heath.
Those firms were trading under those names.
We brought those together we've started talking about ourselves as Gallagher and the in the in the field and our rugby partnerships there.
And the efforts that we spent on branding if paid incredible dividends.
People know, who we are now across the entire.
The U K.
And our people are taking advantage of that and I just visited.
And that was in our London offices for a good part of June I was in Dublin, and Belfast that I can just tell you. This there's a bounce in every retailer step.
They're kicking <expletive>, they're having fun and theyre, taking names and getting more business for next quarter.
Okay, and just because at least asked for I'm going to sneak in a quick one.
In terms of the pricing environment.
Taking a kind of a step up how much do you think is due to.
The reinsurance cost trying to be passed through and it sounds like you don't.
It sounds like it's not a big deal because you are saying that.
That next year could be similar to this year. So it wouldn't be a step down but I am curious if you think some of the math.
I mean on the reinsurance side, let's be clear I'm, saying that we're being told by our carrier Ceos that they have to cover their increasing cost base.
That starts with inflation in their past reserves and you know if you.
You plan to rebuild a house for $1 million two years ago, you're not going to spend $1 million.
So there they are looking at those reserves. Then secondly, there is still in a process of making sure that we get or the values right.
These values haven't been touched for a decade, they haven't needed to be touched. So now you got a value increase you've got exposure units growth.
Then you add to that the cost of reinsurance, which is clearly a cost.
They're not separating it out until you told our retail clients will this part is for reinsurance there say look guys.
On this line of cover we indeed, we need 25 points go get it.
And that'll hold as long as we have in fact do that to get the deal done now remember we are scouring the mountain.
Market for some of that will do it for 10.
Because that's our job.
But right now there's no break in that.
Okay. Thank you.
Thanks, Mike.
Our next questions come from the line of Greg Peters with Raymond James. Please proceed with your question.
Hey, good afternoon, Pat and Doug.
Oh, Hey.
Hey.
Yeah.
Have you for a moment talk about new business because you look at the organic results 10, 8%. If you look at renewal pricing, 12%. While you went through a bunch of lines pad where pricing was.
Clearly double digit.
And you also made this comment about your clients having a budget.
Just curious.
How much the growth organic is rate versus exposure existing clients versus new business in house.
Has that balance changed at all in the last year.
Let me, let Doug talk about the actual numbers because all of them.
More off the cuff with them and then I'll come back in on how I see the market shaping up good Doug So yes, Greg our net new business versus lost business is up this year by two percentage points.
Paired to where it was their rate is then that's the total rate and exposure is up.
About a point and a half so you can see here that thats our net.
Our increased new is actually up more than the impact from rate is up.
Now, let me add some color to that.
Number one we're doing a much better job I think of it than ever of measuring kind of this new business stuff that you're talking about we know that our average production.
Is actually increasing in the income the commission income you're receiving on new business has moved up.
From let's call it 50 to $60000 into closer to 175 to 100000, that's per item as we start bringing it in so we're actually finding those clients that have for a long time, probably been pretty happy with either their local broker or their relationship with a larger broker, giving us a chance.
We're doing very very well.
We are a new business machine and when I take a look at the percentage of trailing revenue that we try to accomplish every year new business. Our goal has always been 15% of trailing where we're just about right there.
And that's it as our trailing revenue growth continues that pushes us in terms of our goals for more new business and we're right on track with that and when you start having 15 16, 13% of trailing and new business.
As long as you continue those retention levels 90, 495 et cetera.
Youre getting very very nice youre getting very nice upside.
Yes. That's that's good those are good numbers I think I've opened up a can of worms because.
Kind of wanted to start tracking the net new business wins, you guys are posting on a quarterly basis.
To give you that Gordon ask.
Yeah. Thank you.
In your comments Pat you also talked about in.
On the theme of poking holes right.
You talked about the employee benefits business kind of stood out that in the MGA business being low single digit mid single digit type of organic maybe.
Maybe.
I don't want to call that an underperforming but relative to the group I guess it kind of is so maybe you could spend a minute and talk about those two businesses because you called them out in her comments.
Well, let's talk about the benefits business for us it's adjusted for the large live case, 5% I think that's pretty in line with maybe what some of the other brokers have talked about in the employee benefit space. So I wouldn't say, it's necessarily out of whack compared to what's going on that business right. Now it doesn't have the loss cost increases that it's going to have I think theres going be medical inflation that coming up.
We're gonna fee on that a lot, but by and large medical cost inflation does have an impact when you go back to my early days here in 2003 through 2007, you were seeing medical loss inflation cost inflation in the double digits in that business was growing almost double digits also so that will have an impact because you can't keep them.
<unk> out of that space for too much longer.
So that would happen on the program business. There is some interest to understand in our case there are some programs that if theres a change in the state of their change in carrier appetite, sometimes that can cause a little bit of stress in that business, but still being in low single digit organic ranges are still pretty damn. Good in this environment, Yes, let me add to that.
Right now our clients are dealing with wage cost inflation.
People say look I've got I'm, having a hard time buying eggs.
And they are not looking to be expanding benefit offerings. In fact, they're doing everything they can to mitigate increased costs and benefits while at the same time being able to balance what they need to give their people and their regular income while at the same time, maintaining as you know how difficult. This is their employee base. So it is a really tough.
Time, and our consultants our people are doing a great job outside of health and welfare the effort in terms of our consulting business. The orders that are coming through are spectacular.
So it's really a balance of all of that and I agree with Doug I think that.
It's a matter of them trying to deal with inflation in there.
Cost of the cover inflation in their compensation costs for their people and doing everything and that's where we make our living is helping to mitigate that plan design change getting that down and then lastly, a lot of that as you know we do on a fee so when you're facing compensation costs inflation costs in the in the us.
Underlying purchase of health insurance, the last thing you're doing is giving GBS, 10% rate increase.
I think by I think getting five points is pretty damn good.
Yeah.
Fair enough.
I know you provided some data is it just the final question I know you provided some data around Bakken the integration.
That's a business that.
Has had sort of a.
Checkered past of success, maybe some challenges.
Maybe spend a second and this is my last question talking about the integration and why you think the outlook for that business is strong relative to its history.
Tell you what I am really excited about that business and it.
I'm a quarter in right.
And we had our board meeting yesterday and the team that's involved in integrating in the Onboarding reporting out to our board as we do on our large deals every quarter.
The synergies there first of all the management team could not be more excited to be finding a home they've been traded five times then that's part of what you're talking about Greg.
You wake up and your name is not changing with the owners are changing and then you're changing that again, you don't know who's on first Tucson second a big part of our effort of Onboarding here has been to tell those people look.
Found your last place now lets go take care of clients and Theres nothing consultants like to hear more than that.
So that has been a big message to them and I spend time with those folks in the UK I've spent time with him here, it's resonating our retention of people is outstanding.
The orders, we're getting in one quarter are mind boggling. So I'm really then you add to that we do think there's some great synergies there and thats that cost take outs, that's cross selling.
Seeing some of that already.
I think it's going to be just fine.
And I'm one quarter in.
Well. Thank you for your answers and the answers makes sense.
Thanks, Greg.
Our next question is from the line of David Mann Madden with Evercore ISI. Please proceed with your questions.
Hey, thanks.
I just wanted to follow up just on the group benefits organic.
And just on the deceleration.
Which you know still at 5% as good extra life sale comp, but that was down versus seven in the first quarter, but it does sound.
Like the acceleration is expected is that something is it second half expectation or is that something you think will start to.
To move up higher in 2024.
I wouldn't I wouldn't be modeling out David a huge acceleration there.
I spent a lot of time with Doug on the street, explaining why 3% organic was outstanding just a few years ago. Yes. There is all about looking at I'm not looking at a business here.
It is accepting hard rates.
Given the fact that theres big loss cost trends or reinsurance trends. These are people buying insurance and in many instances not buying insurance. That's a biggest part of what we do is help people self fund.
And that 5% growth is earned with a lot of discussion with the client.
It's more akin to what Gallagher Bassett is getting in terms of their renewal increases rather than what you look at it on the PC side. So I'm very happy at 5% I don't want to give you. This idea that you're going to see some acceleration of 12%.
It's not happening.
That business also it can be heavily first quarter weighted so you get a little bit of that not only do you have to recognize the full year.
Kathy Sal on the health and welfare side, but the consulting in the first quarter tends to be a little heavier or you grow a little bit more than because if you think about it. Most people are one one type benefit customers. So they are putting the final touches on their on their business in January and.
On some of the programs. So we tend to make it a little bit more money in the first quarter can I answered underlying question I hear from you David and the others why do we do the bulk deal.
It looks like its growth isn't great doesn't have the margins that a PC broker does.
You realize where the pain is for our clients right now and what we are is paying mitigation people.
And it sure it's in property casualty, especially property and we're out there working everyday to help them get that down we're bring in self insurance plans captive plans group plans, what we can on the PC side and.
And every year you earn out our clients are dealing with how do we get people how do we keep them how do we pay them and how do we motivate them and at the same time take care of their benefits needs and to get a firm like Buck on our team.
Absolutely recognized as the best in the business.
I mean, it puts us over the top and that ability to respond to our clients' needs across all of what we do for them and I think 5% is outstanding I want to tell the team congratulations.
No. Thanks, I appreciate that that's helpful. Pat.
And.
I guess, just maybe just switching gears just just on the property casualty rate increases.
Yeah, you gave some numbers earlier I missed.
I missed some of them I was I was hoping you could talk a little bit about what youre seeing specifically on.
Casualty rates.
And it sounds like we're seeing an acceleration there if I just strip out D&O and workers comp.
But I'm wondering if it's if that is.
In fact, what you guys are seeing and how sustainable you guys think those what was it.
Acceleration is what I said in my prepared remarks, David is that general liabilities of about eight <unk>.
Workers comp, which as you know has been flat to down for a number of years is up about three.
And umbrella and package you are up about 11.
So now embedded in each of those lines or different reasons jet.
General liability is social inflation.
Probably aging population.
Workers comp is clearly it floats with medical costs.
Flows with employment.
And umbrella and package is probably also looking at social inflation and prop.
Property up 20% as clearly that's about exposure units and the need for rate.
Yes, David when I look at it you wanted to break it out in general liability umbrella all other casually call that 8% to 9% is what we're seeing here on the sheet commercial auto was eight and a half or more and that's a U S. A.
Business, what I'm, telling you about so I think in the second word call it 8% to 9% on casually.
Yeah.
Got it and those did tick up versus <unk> it sounds like.
Yes, a little bit, especially commercial auto was more around sex an hour and a half.
Got it and then could you just level set me if I think about full year the business to Gallagher rights and in brokerage how much of that is coming from property at this point.
[noise] properties, our largest line Doug you have that number but what was the what was the specific question sorry.
Much of our businesses property about 30% here in the.
For the full year 'twenty two.
That's about 30% of what we write.
Great. Thank you.
Thanks, David.
Our next question is from the line of Mark Hughes with Truth Securities. Please proceed with your question.
Yes, Thanks, Good afternoon, Hi, my remark.
Pat you talked about medical inflation do you think is going to accelerate.
Given that.
Broader measures of medical costs are pretty pretty calm. These days I wonder what gives you.
Confidence that that's going to happen.
If I'd say, it's confidence Mark I mean.
I'm not so sure it's good news for society or for our clients, but social inflation medical malpractice cost cover.
Any kind of losses in that regard in the cost of employees.
Hospitals right now.
We are working very hard to make sure that there are people stay with them their turnover rates with the pin debit and the like have increased.
Keeping their employees as a big deal and the cost of doing that.
Specialty drugs.
Specialty bills, helping me out here specialty drug costs and procedures are up significantly.
Understood. Thank you very much thanks Mark.
The next question is from the line of Katy, saying He's with autonomous research. Please proceed with your question.
Hi, Thanks, Good evening I want to follow up a little bit on that line of questioning on but.
Clearly an acquisition that definitely expand here.
Our ability to serve your clients with your portfolio.
Kind of thinking about what you guys have seen in the first quarter of integration. So far is there any opportunity to.
Tighten up a bit dry impacted buck has on brokerage margins over the back half of the year any opportunities you guys are seeing increased cross sales or maybe.
Expense synergies or where should we kind of expect that to materialize more in 2024.
I think it's more 24, good yeah, I would say 'twenty four 'twenty three we're still getting our feet under us, but also I'd like to have that as a friendly amendment to the statements. So that rolling natural impact of a business that just just it just run naturally slightly lower margins call. It in.
In the 20th somewhere versus in the thirties right. So the drag on us as what you see on the face of it but they actually have a nice improvement opportunities as we joined forces together to get better themselves and that's really what we're lucky if we can take this business sits in the in the.
Upper teens and move it into the mid twenties I think that's a good march for that business and I think Pat said about it.
They broke through five different owners. They have spent so much of their time in the last couple recent roles of becoming a freestanding independent organization and there's extra cost that goes into that by being a part of us and how it's being better together I think we will naturally see that that natural improvement in their underlying mark.
So, but they should be margin accretive after you get to.
They improved their margins they will improve our margins once we get through the first quarter up 24, then Katie to your point about cross selling.
To be clear, we do see cross selling opportunities PC to benefits benefits to PC for sure, but where we see we're very excited about is cross selling inside Gallagher benefit services their strength in the United States is in areas that were not as strong we've always been in defined benefit pension consulting for instance, but they come.
Terrific strengths, there and they're not probably as strong although they do quite well, but not probably as strong as we've been in health and welfare. So if you take a look at that now you're you're not trying to youre not trying to talk to a new party at a client you already dealing with the person who buys benefits let me bring in my partner.
Does the health and welfare and we're already seeing a lot of that so I think there is good cross selling I think that margin improvement will come and I'm excited about it.
Thank you so much and then one more question on that.
Outlook for risk management.
Yeah.
Additional data.
So sorry, just one more question on risk management.
Doug you your comments seem to imply a little bit of a sequential slowdown in organic on the back half of the year adjusting for them.
Lapping last years.
Exceptional outperformance I'm, just kind of curious is there anything you'd call out.
On that you know 14, and 10% organic growth guide that you might be a slight headwind to growth this year wraps up.
It's just the nature of this business when you look at it over the last 20 years is that you can get some pretty large clients that roll into your business and they don't come as steady as let's say a smaller clients smaller clients might do so if you sell the likes up large U S Corporation Act.
And you sell them in the fourth quarter of last year Youre going to get the benefit in the fourth quarter first second third and then you've got a lap yourself in the fourth so it's more of the timing of new business on larger accounts, that's causing that but if you stack it up 18% this quarter and if you think 14 and Tim when you get down to the end of the year you were talking to them.
I just wanted a 13% organic growth in that business and then we do have some nice larger clients on the drawing board right now that we're proposing on I don't know if they'll hit in the fourth quarter of all hit in the second or third quarter. It takes a year or two to sell these larger accounts. So it's just a little bit more naturally lumpy on a quarter by quarter basis, So I would.
I encourage you to look at it on an annual basis and if you think about what they did last year and then Youre looking at this year at 13, there is actually a sequential step up on an annual basis.
Great. Thanks for your insights.
Thanks Jay.
Our next question comes from the line of my ourselves with gave me W. Please proceed with your questions.
Okay.
We out there Marc.
Alright. Thank.
Thank you.
Yep, you're coming through now.
Okay, Yeah, well, you know I, probably do better than them yet.
Same question.
Two perspective.
Are you.
Clients dealing with affordability issues and I'm asking that in the context of what you said about pricing legitimately needing to go up and I'm wondering how much of that.
Client how much more of that client.
Sort of.
The revenues that you get from commissions as opposed to captive management or something like that.
Yes, and that's one of the things that gets us excited because that's the Genesis of our growth. That's what took us to a place where we could get public and 84, where the people that help folks deal with untenable situations and turn them basically into risk management approaches.
Call it larger tensions.
We do that in a number of ways, whether it's by line by state.
That's why putting someone into a cell captive whether its just finding them a pool to be part of that as a real defining aspect of gallagher's capabilities.
You know that okay.
Yes.
I'm just trying to.
I'm trying to digest the idea of how much more.
Insured and take I'm, just trying to get my head around that.
May be at odds with what underwriters actually need for rate.
And I think yeah go ahead.
You have to look at it definitely what percentage of our customers budget really is spent on insurance.
And let's say some of the averages are 345% of what their total.
They are spending on insurance so.
730% of their cost structure, so how much more can customers take in terms of us our job is to make that as small as possible, let's never forget that and that's what we do.
Day in and day out, but how much more they can can they take walther loss experiences bad they're going to have to take tomorrow will also I. Remember this is not anti underwriter underwriters are happy to have us help clients move away from lost to them.
If theres more self assumption and they pick up of an excess placement at the right rate they're happy.
It's not like they say Oh, my God, you ripped all as premium away from me.
They're they understand the partnership.
We're counseling on look take more rate make it easier for that care to participate in this is the right place on this coverage map.
And we'll be able to get to the limits you want but you got to take more skin in the game that's all.
And that I think is what we do better than anybody.
Okay. That's tremendously helpful same question on the on the reinsurance side, you've got property right.
Going up pretty dramatically Gallagher retelling.
Property.
Client.
But they should be buying more reinsurance in 2024 than they did in 2020 thing.
I'd tell you what I'm impressed with our reinsurance people and it's way more sophisticated than I am frankly, but they are the best in the world at capital management with their clients and this isn't a matter of us going in and talking to the local contractor that doesn't know what I'm going to do with a big time property increase or something like that these are sophisticated.
<unk> buyers they see it coming they know how to balance their portfolio and really the advice Gallagher re gives us not just by itself.
I mean, it's all about and again I mean this is this is one of the things Thats exciting to me in terms of my learnings with Gallagher re is that they are right at the crux of helping these clients manage their capital.
Okay and then one final question. If I can just have you talked about medical cost inflation is the medical cost inflation that you're anticipating on the call. It consulting side is that manifesting itself in all in workers' compensation claims the Gallagher Bassett and processing.
Sure Yeah, absolutely I mean.
Big part a big part of Workers' comp is medical only.
That's escalating.
Every month.
It's our job to help mitigate that just like we do on the employee benefit side.
Managed care is very very important.
I'm, just wondering the greater growth and expert.
Adjusting in our services in Gallagher Bassett as medical cost inflation hits that to clients will look to our Gallagher Bassett to help them reduce their total cost of risk and when medical inflation goes up that they will be clamoring for Gallagher Bassett services.
And that's part of making sure we give them we deliver the best outcomes.
No absolutely I'm, just wondering when the workers compensation jawbreaker I'm, assuming that didn't have been tremendously helpful. Thank you. Thanks man.
Thank you. Our final question is from the line of Michael Ward with Citi. Please proceed with your question.
Oh.
Hey, guys. Thank you.
I was just wondering on the M&A pipeline.
Youre talking about in the beginning.
It.
Is that would you say, that's skewed to PNC or could there be a employee benefits in there too.
Hello, there'll be both.
We keep a good strong pipeline on both no we're not going to have another buck.
That list I mean, Buck was one of the biggest players in that industry.
Clearly moves us up in the ranking substantially but there are plenty of smaller practitioners, we'd love to have on board our tuck in acquisition.
Process has been benefits forever.
Along with P&C. So that's not a new thing and there is there's lots of activity in that regard.
Yeah, I think fundamentally any any smaller.
Brokerage business that find that they need more capabilities, whether its P&C or benefit since the same decision by the by the owners of those business or they just think that they can use join us together will be better as we service those clients and the capabilities. They can get from us they'll get it from from whether it's wholesale whether it's retail whether.
Other its benefit even in Gallagher Bassett as they have specialty acquisitions there if it's.
The owners, it's the same reason theyre selling.
Themselves because they need our capabilities and they think Gallagher is the right place to get those capabilities.
Great. That's helpful. Thank you and then.
Maybe.
In terms of internally.
In terms of your own wage sort of inflation monitoring just curious if.
If that has calmed down a little bit as inflation overall has slowed down.
Here's the thing we didnt see the great resignation that you read about in the papers, we've talked about that quite a bit we were very fair with our employees and the amount of raised pools that we've given those raised pools are larger.
In 'twenty, two and 'twenty three than they were in 18 and 19 on a per employee basis. So we've recognized that there are some costs that our employees have to bear and so we think that the raises we've given them a very fair and have acknowledged the inflation environment, we haven't really sat down to plan for next year yet to see.
Where we'd be and those raised pools, but obviously.
Obviously, it would be fair with our folks, but as you see some of the inflation numbers are cooling down.
What it cost to live.
But by and large I think that we've been very fair.
Throughout our history, we've given raises every single year that I've been at Gallagher and we recognize the importance of our employees to do that so we haven't seen a big stress on that.
Awesome. Thank you guys.
Thank you.
Thank you. Our next question is from the line of Scott <unk> with RBC capital markets. Please proceed with your question.
Yes, just.
A quick question on the risk management side wondering if you could give a little detail on the claims count differences and changes.
Both claims count and severity and kind of what youre seeing versus either recent quarters or year over year, and I guess I'm more interested I know you touched on a little bit just on the on some of the casualty lines and workers comp and liability and kind of what youre seeing there in terms of the counts and the average claim size that youre handling at Gallagher.
Alright, so three things on that first when you look at it we were seeing more COVID-19 claims last year and that's basically gone to very little at this point, yet we still grew through that kind of existing customers reconsider their claims are rising for our existing customers to be flattish, maybe up a little bit.
That was a trend that we're seeing also when you go back pre pandemic, because workplaces safer and safer. So really the success that youre seeing in the organic is really our new business and and excellent retention. So that kind of tells you flattish from existing customers growing through the loss of Covid claims.
Better considerably better new business, and then in and better retention on.
What are we seen for for severity within that severity is going up there's no question on average as a percentage.
I don't know, if it's 5% or 7% overall something like that.
Okay.
A couple of detail and then just another question on the M&A pipeline since it since it was.
And if I can compare to recent quarters.
Wondering if you could also just.
Talk about or comment on how much of that is how much of the trend Youre seeing is international versus domestic I'm not I'm not looking for a specific breakdown but.
Anything you can share there on are you continuing to look at it a lot more international deals than you had over the past few years.
Our international pipeline is pretty steady.
The majority of what we're looking at as U S domestic.
Okay.
And then finally any early read on July renewal premium I know, it's probably a little bit earlier, but how that's comparing to the 12% or is it just too early on that.
Our July numbers are better than our June numbers I looked at the overnights for last year and there is a noticeable difference now July is not over a lot of your a lot of your activity happens in the last week here, but right now our early reads month over month as there is another step up.
Okay interesting.
Great.
Thanks for all the answers.
Right.
Thank you the final questions follow up from Weston Bloomer with UBS.
Hey, Thanks for taking my follow up question.
Are you guys disclosing with free cash flow was in the <unk> or any updates on the level and maybe as a percentage of revenue that you're expecting for full year as you integrate buck or given the strong <unk>.
Well Q2 is notoriously smallest quarter, because that's when we pay out all of our incentive compensation, we pay that in April .
Q2 is our is our smallest the second half of the year is the largest as a percentage if you will.
All toil and that those numbers more than we do that's just not really how we look at it. The fact that as our cash flows closely tracked to our EBITDA growth as you know that that because of our tax credits or tax load as a percentage of our EBITDA is usually somewhere in that 8% range. Our capex is pretty consistent with prior years.
So you don't have a significant change in that so the only thing that really kind of impacts our cash flow is different than EBITDA would be a little bit to taxes, a little bit a little growth in capex and then.
And then obviously, if we're paying integration costs.
Some of those will go out in cash to on that but right now we.
Track closer to our cash flows track very close to what our EBITDA.
So the growth in EBITDA, it's pretty much sell what youre going to see growth in our cash flows.
Got it thanks, and then maybe ex integration costs is buck maybe cash flow neutral or maybe slightly cash flow.
Negative just given the lower margin there.
Oh, it's cash flow positive I mean listen we're.
We're not spending that much on integration.
The acquisition, so I would say over three years I think we're going to spend 125 million something like that.
It throws off cash flows in excess of that.
It's a great day.
Susan.
Great. Thank you.
Thanks for being with US. This evening everybody I really appreciate you joining us I think you can probably tell that myself.
Myself and the team are extremely pleased with our second quarter performance.
We are reflecting on full year 'twenty three financial outlook relative to our early thinking it has improved on every measure.
As we sit here today, we remain very bullish on the second half.
And most importantly to our more than 48000 colleagues around the globe. Thank you.
For all you do day in and day out I believe our continued financial success is a direct reflection of our people and our culture. Thank you very much we look forward to speaking with you again at our IR day in September thanks for being with Us.
This does conclude today's conference call you may now disconnect your lines at this time.
Remember, thanks for being with us.
This does conclude today's conference call you may now.