Q4 2023 Arthur J Gallagher & Co Earnings Call
Good afternoon, and welcome to Arthur J, Gallagher and co 's fourth quarter 2023 earnings Conference call.
Participants have been placed on the listen only mode.
Your lines will be opened for questions. Following the presentation.
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Some of the comments made during this conference call, including answers given in response to questions may constitute forward looking statements within the meaning of the securities laws.
The company does not assume any obligation to update information or forward looking statements provided on this call.
These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially.
Please refer to the information concerning forward looking statements and risk factors section contained in the company's most recent 10-K 10-Q and 8-K filings for more details on such risks and uncertainties.
In addition for reconciliations of the non-GAAP measures discussed on this call as well as other information regarding these measures. Please refer to the earnings release and other materials in the Investor Relations section of the company's website.
It's now my pleasure to introduce J, Patrick Gallagher Junior Chairman and CEO of Arthur J Gallagher <unk> co.
Mr. Gallagher you may begin.
Thank you very much and good afternoon, everyone. Thank you for joining us for our fourth 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 strong fourth quarter to wrap up another fantastic year. All measures were right in line with what we said during our December IR day for our combined brokerage and risk management segments, we posted 20% growth in revenue.
Douglas K. Howell: <unk> eight 1% organic growth, but thats more like nine 4% controlling for the 606 accounting and large life case timing.
Douglas K. Howell: We also had a terrific merger and acquisition quarter, we completed 14 mergers totaling $410 million of estimated annualized revenue.
Douglas K. Howell: Earnings per share of <unk> 30 in net earnings margin of two 8% were impacted by the counterintuitive earn out payable accounting that Doug will elaborate on in a few minutes.
So better to look at it more on a comparable basis adjusted earnings per share were $2.22 up 23% year over year, and we posted an EBITDA margin of 31% up 69 basis points over fourth quarter 2002.
Douglas K. Howell: Terrific quarter to close out an incredibly good year by the team.
Douglas K. Howell: When I think about our growth for the full year, we are up 18% in revenue that's an increase of 1.5 billion that's amazing.
Douglas K. Howell: Moving to results on a segment basis, starting with the brokerage segment reported revenue growth was 20% organic headline was seven 2%, but I see it more like eight 7% without the accounting and timing noise and 11%. If you include interest income.
Douglas K. Howell: Adjusted EBITDAX was $647 million growing 21% year over year, and we posted adjusted EBITDA margin expansion of 48 basis points.
Douglas K. Howell: Let me give you some insights behind our brokerage segment organic and just to level set. The following does not include the interest income.
Douglas K. Howell: Our global retail P&C brokerage operations posted organic of 8%. This includes about 8% organic in the U S. 8% in the U K, 5% in Canada, 10% in Australia, and New Zealand, our employee benefit brokerage and consulting business posted organic of 2% or 6%.
Douglas K. Howell: Controlling for the timing of those large life cases.
Douglas K. Howell: Shifting to reinsurance wholesale and specialty businesses overall organic of 14%. This includes Gallagher re at 12% U S wholesale at 12% and UK specialty at 16%.
Douglas K. Howell: So all of these are very similar to what we are seeing throughout the year.
Douglas K. Howell: Next let me provide some thoughts on the PC insurance pricing environment, starting with the primary insurance market.
Douglas K. Howell: Global fourth quarter renewal premiums, which include both rate and exposure changes were up eight 5%. That's in line with the 8% to 10% renewal premium change we have been reporting throughout 'twenty, two and 'twenty three.
Douglas K. Howell: Premium increases continued to be broad based up across all of our major geographies and most product lines. For example property is up 15% even in a slow cat property quarter General liability is up 6% workers' comp is up 2% umbrella and package are each up.
Douglas K. Howell: About 10%.
Douglas K. Howell: Shifting to the reinsurance market.
Douglas K. Howell: One one renewals were orderly and reflected a more balanced supply demand dynamic continuing.
Douglas K. Howell: Continued strong demand for property cat cover was met with sufficient reinsurance capacity from existing reinsurers in cat bonds.
Importantly, reinsurers continue to exercise discipline on pricing and terms not giving back the structural changes achieved last year.
Douglas K. Howell: In casualty, while there was adequate supply most casualty treaties experienced pricing pressure.
Douglas K. Howell: Specialty lines renewed mostly flattish however coverage limitations continued on war related products.
Douglas K. Howell: So in our view insurance and reinsurance carriers continued to behave rationally pushing for rate, where it is needed to generate an acceptable underwriting profit.
Douglas K. Howell: <unk> is still needing rate and more and more we're hearing about the need for rate in casualty lines. If prior year development turns into a big concern we think it could be a multiyear journey of rate increases.
Douglas K. Howell: All that said always remember.
Douglas K. Howell: Job as brokers is to help our clients find the best coverage, while mitigating price increases so not all of these renewal premium increases ultimately show up in our organic.
Douglas K. Howell: Moving to our customers' business activity overall it continues to be strong during the fourth quarter. Our daily indication showed positive mid year policy endorsements and audits ahead of last year's levels. So we are not seeing a slowdown. The same strength is also evident in the U S labor market with continued growth.
Douglas K. Howell: The non farm payrolls and low unemployment rate, which is why I believe our HR consulting retirement and benefits business will have terrific opportunities in 'twenty four.
Douglas K. Howell: As we sit here today, we are very well positioned 2023 was a great new business year and I believe we will continue to win new clients, while retaining our existing customers. We have incredible niche expertise or client service is top notch in our data and analytics continues to distance ourselves from the competition.
Douglas K. Howell: We can handle any account of any size anywhere around the globe.
Douglas K. Howell: All this leads me to reaffirm that we will still see further 24 brokerage organic in the 7% to 9% range that would lead to another outstanding year.
Douglas K. Howell: Shifting to mergers and acquisitions, we had an excellent fourth quarter, completing 13, new brokerage mergers representing about $350 million of estimated annualized revenue.
Douglas K. Howell: Like to thank all of our new partners for joining us and extend a very warm welcome to our growing family of Gallagher professionals and.
Douglas K. Howell: And we are off to a strong start in 'twenty four.
Douglas K. Howell: <unk> already closed core brokerage mergers here in January for about $30 million of annualized revenue.
We also have around 40 term sheets signed or being prepared representing around $350 million of annualized revenue.
Douglas K. Howell: We know not all of these will ultimately close but we believe we'll get our fair share clearly a very strong pipeline.
Douglas K. Howell: Moving on to risk management segment Gallagher Bassett.
Douglas K. Howell: Fourth quarter organic growth was terrific at 13, 2% full year at 15, 8% adjusted fourth quarter EBIT margins of 21% and full year at 20% all of this right in line with our December expectations.
Douglas K. Howell: Also completed one merger in Australia with expected annualized revenue of about $60 million, adding new capabilities in the disability space looking forward. We continue to see 24 year organic in the 9% to 11% range and full year margins close to 20% and that would be another outstand.
The year.
Douglas K. Howell: And I'll conclude with some comments regarding our bedrock culture.
Douglas K. Howell: It's a culture of client service ethics, and teamwork encapsulated in the Gallagher way.
It is an unrelenting culture of excellence that helped drive full year 'twenty three results for our combined brokerage and risk management segments.
Douglas K. Howell: The 18% growth in revenue of which 10% was organic.
Douglas K. Howell: One mergers with nearly $900 million in estimated annualized revenue and.
And 20% growth in adjusted EBITDAX.
Douglas K. Howell: Most importantly, we have a culture that our people believe in embraced and live every day, it's a huge competitive advantage and will continue to fuel our success and growth.
Douglas K. Howell: Growth that is the Gallagher way.
Douglas K. Howell: I'll stop now and turn it over to Doug Doug.
Doug: Thanks, Pat and Hello, everyone. Today, I'll walk you through our earnings release, commenting on fourth quarter and full year organic and margins by segment I'll also provide some comments on our full year 'twenty for outlook.
Doug: I will then shift to the CFO commentary document that we posted on our IR website, where I'll provide some comments on our typical modeling helpers and then give to short vignettes one on investment income and another as a quick refresher on earn out payable accounting.
Doug: I'll then conclude my prepared remarks with a few comments on cash M&A and capital management.
Doug: Okay, let's flip to page three of the earnings release headline fourth quarter brokerage organic of seven 2% is right in line with our December IR day expectation of 7% to seven 5%.
Doug: <unk> noted, we see that closer to eight 7% and organic about 11%. If we were to also include interest income.
Doug: Thats a darn good quarter no matter what percentage do you want to focus on.
Doug: A couple of other puts and takes to call out on that page first contingence did come in a little bit better than our December thinking due to more favorable carrier performance than we thought at that time and second base Commission and fee organic of six 5%, that's where you should level is for the impact of 606 and those live cases controlling for those take.
Noah: At over 8%.
Noah: Looking ahead.
Noah: 24, our brokerage segment organic outlook is unchanged from our late October and mid December expectations, we still see full year organic growth in that 7% to 9% range.
Noah: Alright, let's flip to page five of the earnings release to the brokerage segment adjusted EBITDAX table adjusted fourth quarter EBIT margin was up 48 basis points, but remember to get to that requires a re computing last year's fourth quarter using current FX rates.
Noah: On that in this table and is 31, 3% for fourth quarter 'twenty two.
Noah: Posting a 31, 6% margin. This quarter gives you that 48 basis points of margin expansion and Thats right at the high end of our December IR day expectation.
Noah: And then if you control for the role and a Buck and other mergers we closed late in the quarter that have some seasonality that would have been 150 basis points of expansion that's simply terrific work by the team.
Noah: Looking ahead to next year, we anticipate seeing some full year margin expansion, starting at 4% organic and if organic was say double that maybe around 60 basis points of expansion and note.
Noah: That includes about 40 basis points of pressure against due to the roll in of M&A, mostly back.
Noah: On a quarterly basis, the headwind is about 80% to 90 basis points in the first quarter 'twenty four so please don't forget to reflect this nuance in your models.
Okay, moving to the risk management segment, and the organic and EBITDA tables on pages, five and six another excellent quarter for Gallagher Bassett 13, 2% organic growth and margins at 21%, we continue to benefit from new business wins and excellent retention looking forward, even as we lap growth associated.
Douglas K. Howell: With some large new business wins from early 'twenty, three we see full year 'twenty for organic in that 9% to 11% range and margins around 20%.
Douglas K. Howell: That's unchanged from our December views.
Douglas K. Howell: So, let's turn to page seven of the earnings release, and our corporate segment shortcut table total segment adjusted fourth quarter numbers came in a little better than the favorable end of our December IR day expectations due to less borrowing on our line of credit and slightly lower corporate expenses.
CFO: So now let's shift to the CFO commentary document to page three that's where we provide.
CFO: Many modeling helpers most of the fourth quarter actual numbers are very close to our December IR day estimates. We've also now added 2020 for information so take a look at that in particular as you.
CFO: Take a look at FX, we are expecting a small headwind to EPS in the first half within the brokerage segment.
CFO: Now moving to page four of the CFO commentary document to the corporate segment outlook for full year 'twenty. Four there is no change there to our full year estimate that we provided six weeks ago. During our IR day, but we are now providing quarterly estimates. So please take some time to refine your models, whereas added information.
CFO: When you get to page five this page shows our tax credit carryforwards Youll see what we discussed at our December IR day, we are able to reestablish a portion of our tax credits. Following the change in tax method election, when we filed our 22 U S. Federal tax return here in the fourth quarter.
CFO: Accordingly as of December 31, we have about $870 million of tax credits available.
CFO: A nice future cash flow sweetener that helps us fund future M&A.
CFO: So, let's turn to the new a new table that we put in on page six.
CFO: We thought this would be helpful. As we've been getting a lot of questions about our investment income line.
CFO: The punch line is that this line includes items such as premium finance revenues book gains and equity investments in third party brokers. In addition to interest income. So this table breaks it down for you by quarter. We hope you will find this helpful.
CFO: We are also renamed that line in our financial statements to clarify that it contains other items no numbers change we've just broadened the descriptor.
CFO: So I was just shifting down on that page on page six you'll see total brokerage rollover revenue for fourth quarter was $180 million, that's consistent with our IR day expectation.
CFO: Looking forward. We've included estimated revenues for mergers closed through yesterday for the brokerage segment in that table and for the risk management segment and the tax below that table.
CFO: Based on brokerage and risk management mergers closed through yesterday, we're estimating around $540 million of rollover revenues to be recognized in 'twenty four.
CFO: And also don't forget youll need to make a path for future M&A and also add intra.
CFO: Interest expense as we fund a portion of those acquisitions.
CFO: Future borrowings.
CFO: So while I'm on the topic of M&A as we foreshadowed in December and we did increase our estimated earn out payable for Willis re during the quarter. Because we now have good line of sight of what we might pay out in the first quarter of 2025.
CFO: Remember the accounting for earn out payables is a bit backwards if expectations of performance are more favorable it creates GAAP expense and expectations of performance are less favorable and creates GAAP income that's what Pat Matt when he said counter intuitive accounting.
Pat Matt: That said, we do adjust out these estimate changes but were the highlight because it does create some GAAP earnings noise.
Pat Matt: Punch line in all of this and what's more important our reinsurance business is performing extremely well.
Pat Matt: So moving to cash capital management and M&A funding.
Pat Matt: Available cash on hand at December 31 was about $400 million and with another year of strong expected cash flow generation here in 'twenty four we estimate about $3 $5 billion of capacity to fund M&A and 24 are using only free cash and incremental borrowings.
Pat Matt: So those are my comments as I reflect on 23, two metrics for our combined brokerage and risk management segments really sum up how good our year was revenue growth of 18% up $1 5 billion and adjusted EBITDA growth of 20% or nearly $550 million. So the team do.
Pat Matt: Delivered another terrific year, and we all have tremendous momentum to do it again here in 'twenty four back to you Pat.
Pat: Thank you, Doug and operator, I think we can go to questions now please.
Pat: Thank you the call is now open for questions.
Pat: Have a question please pickup your handset and press star one on your telephone at this time.
Pat: On a speaker phone please disable that function prior to pressing star one to ensure optimum sound quality.
Pat: You may remove yourself from the queue at any point by pressing star Jim.
Pat: Again, Thats star one for questions.
Pat: Our first question is coming from Elyse Greenspan with Wells Fargo. Please proceed with your question.
Pat: Hi, Thanks, Good evening My first question within the 7% to 9% organic brokerage guide for 2024 can you guys give us a sense of what youre, assuming for pricing and economic exposure throughout the course of the year.
Elyse Greenspan: Well I think when we did that in our budget process the range of 7% to 9%.
Pat Matt: It's pretty much so what we're seeing today throughout next year is really that the assumptions is that where are we today in pricing.
Elyse Greenspan: Where are we in exposure units, while we've been running here. This year, we don't see a lot of change to that next year.
Elyse Greenspan: And then when you guys go through and come up with the seven to nine are you assuming.
Elyse Greenspan: That all of your businesses will be in that range.
Elyse Greenspan: You have been seeing really strong growth within reinsurance wholesale and specialty are those expected to continue to be above.
Elyse Greenspan: Maybe some of the others like benefits might be below how do you see the different business is shaking out in 'twenty four.
Elyse Greenspan: Alright, so on that point not every business is given a flat target number or do you have a view based on what they're seeing in the marketplace rate exposure opportunities.
Elyse Greenspan: Hiring or hiring new producers. So every business does that differently.
Elyse Greenspan: What I say is being different who is on the upper end of the range at upper end of the range and who's on maybe the lower end of the range.
Elyse Greenspan: Benefits might be a little bit on the lower end of the range and you might see reinsurance and specialty on the upper end of the range of that but by and large each business unit rolls it up and Thats, how we get to that 7% to 9% range.
Pat: And then Pat you mentioned.
Pat Matt: Some interesting comments on the casualty side, we're starting to hear your thoughts about.
Pat: Pricing pressure.
And just you said white multiyear journey here could you just tell us what youre seeing and then how are you.
Pat: You expect this cycle could transpire, assuming we do start to see more reserve holes emerge across the industry.
Pat: Well I just think it would make some logical sense loose when you take a look back.
Pat: We saw this in the property side, you don't nobody touch values for 567 years, because inflation was zero and so you've got a bunch of reserves on the casualty side said at those very same years that all of a sudden you come into a spike in inflation and yes, it's been tamped down, but it's still there and you look back at those reserves and then you take a look.
Pat: These settlements that are in fact nuclear.
Pat: When you start to say well alright, how well are those reserves can hold up now look I can't speak for the industry as a whole, but my sense in the meetings that we're having and discussions we're having with a number of the various carriers.
Elyse Greenspan: They have some concerns there.
Elyse Greenspan: They are not necessarily comfortable with exactly where they are and so our view on that is okay. If you take a look at.
Elyse Greenspan: If there were inflation in those numbers and if it were something where you had to get them right you'd have to see price increases in order to do it I don't think that thats something with the kind of payout structure that you have in casualty that you need to get in one year.
Elyse Greenspan: So I think youre going to see possibly affirming that does in fact take a few years to catch up with reality.
Elyse Greenspan: And then one last one have you guys reserved to the Max Bob on the earn out associated with the wellness we deal.
Effectively.
Pat Matt: We start to accrete that for one more year. So it might be I think it was $50 million of accretion that will go through the financial statements. This next year.
Pat Matt: Thank you.
Elyse Greenspan: Thanks, Elyse, thanks for being with us.
Thank you.
Elyse Greenspan: Next question is coming from Mark Hughes with curious Securities. Please proceed with your question.
Elyse Greenspan: Yes, thanks, good afternoon.
Mark Hughes: Hi, Mark.
Mark Hughes: And did you give the organic for open brokerage versus the program business within wholesale.
Well I think open brokerage has been where we've had a real nice run up I mean, it's probably double to triple what's going on in the program business. So if you look at open brokerage at running around 13% to 15% Youre, probably looking at five on the other programs.
Mark Hughes: And then.
Mark Hughes: What's your take on the property market do you think.
Mark Hughes: Little bit of deceleration there when do you think that the case.
Mark Hughes: And two would it have.
Mark Hughes: Any kind of material impact on your organic.
Mark Hughes: No I think well I mean any change in pricing is going to have an impact on organic but I am not no.
Mark Hughes: I don't see carriers at this point, saying Oh. The good news is I can take the price backwards. So we are still seeing a push on property right.
And then you do of course have tears incredibly focused on valuations.
Mark Hughes: Kind of went by the wayside for years, there was no inflation five zero percent blah Blah Blah now claims are coming in they didn't get their premium fourth replacement costs are substantially higher than they may be predicted and so I think you do have a little bit of time left where theres going to be some valuation correction and I do.
Mark Hughes: There is a need for continued rate strengthening.
Mark Hughes: Thank you very much.
Mark Hughes: Thanks, Mark Thanks for being with us.
Mark Hughes: Thank you. Our next question comes from the line of Mike <unk> with BMO capital markets. Please proceed with your question.
Mark Hughes: Hey.
Mark Hughes: Good evening, So first question on <unk>.
On M&A you guys have been extremely successful.
Mark Hughes: Integrating and acquiring firms.
Mark Hughes: Curious if if the landscape.
Mark Hughes: <unk> has changed a bit in terms of kind of what's available and I guess just for example, when I was.
Mark Hughes: Sure.
Mark Hughes: <unk> announced a few bank.
Mark Hughes: Brokers.
Elyse Greenspan: I believe historically, there's two of your competitors that did most of those.
Elyse Greenspan: One of them would talk openly about those those deals being tougher meeting.
Elyse Greenspan: A couple of years to turn them into the growth machine that those companies are back with a little different too. So just curious if the.
Elyse Greenspan: The pool is changing a bit and so we should kind of expect that tightly.
Elyse Greenspan: Different types of deals going forward versus the historical five to 10 years.
Elyse Greenspan: Well.
Elyse Greenspan: First of all let's let's remember I think that when we do acquisitions, we like to talk about the fact that we're getting two things. We're not we're not just getting revenue and earnings which of course, we want we get but we're getting terrific brands and the bank owned deals happen to be more sizeable and they've got a lot of terrific people and.
Elyse Greenspan: In addition to the Brainpower, we're getting we're getting we're getting expertise of the niches from the brain power, but we're also getting more volume in areas that now were spreading the brand and it adds.
Elyse Greenspan: As to that virtual the virtuous circle of knowing about Gallagher listening to the KOL call accepting accepting the call and I think what we're seeing is that.
Elyse Greenspan: Our acquisition targets come aboard.
Elyse Greenspan: This is the right way to phrase it.
Elyse Greenspan: We kind of get on fire.
Elyse Greenspan: It is our it's our organic engine. There is no question about it they come in they've got a lot to say now the bank deals are bigger, but if you take our data and doubt roll in acquisitions. These are people that more often than not have not been able to really tackle the large accounts and their own geography.
And the minute they sign on to US they are out to all those clients were part of Gallagher here is we've got let me tell you about the expertise. We've got let me show you some of the things that we do in data analytics, you've all heard us talk about drive.
Elyse Greenspan: What do people like you buy what kind of limits should you have so.
Elyse Greenspan: Arm them with tools that they just whether they are in a bank or non bank they've never had before so the excitement level does not take a long time to resonate.
Elyse Greenspan: Calls go out pretty immediately Hey did you hear that were part of another firm.
Elyse Greenspan: And these are not folks that are in any way on their back foot. They are on the front foot and moving literally at the day of closing, yes, Let me add one thing on that.
Elyse Greenspan: Think that the organic cadence in eastern was running very similar to what we're seeing in our similar geographies similar area. So.
Mark Hughes: I think your premise why does it take a while to restart them I think theyre already start I think theyre going after a buck is already showing terrific organic growth, we don't get it in our numbers for a year. So somebody goes out and sell something within the year, but we never get organic credit for that.
Mark Hughes: And we get the revenues for it but we don't get that organic growth credit in our numbers. So I wouldn't say that the premise was if the ones that we bought that they were they needed a restart no in fact, Mike I'll tell you what we're what we're referring to in.
Mark Hughes: In our processes the Gallagher effect.
Michael Zaremski: Gallagher effect is what happens after you announced you are part of Gallagher.
Michael Zaremski: Not a slowdown explain it.
Michael Zaremski: It takes their list their pipeline of prospects and energize the team to go back and tell about we.
Michael Zaremski: What we really have something new to talk about here.
Michael Zaremski: And it's not just about I know you called out new many times I've got a good relationship in the marketplace can I talked to you about your pricing.
Michael Zaremski: Hard market soft market no. No. This is let me bring some data and analytics. Let me show you what's going on in our niches. We are experts in your specific area that I think youre going to want to me, it's pretty exciting actually when I get a chance to get involved the turns me on.
Michael Zaremski: Okay.
Michael Zaremski: Appreciate that color.
Michael Zaremski: Whats your.
Years, and you could tell me if I am.
Michael Zaremski: Splitting hairs here, but.
Michael Zaremski: On the December.
Michael Zaremski: Investor Day.
Michael Zaremski: A number of reasons you've kind of.
Michael Zaremski: Lowered the very near term <unk> organic growth.
Michael Zaremski: Estimates universe.
Michael Zaremski: What you had previously been had been thinking I think a couple of those sounded like they.
Speaker Change: There were more of a push into 'twenty for like in the life insurance side, and maybe entertainment business.
Speaker Change: Rebounding.
Speaker Change: Thank you really brought up your you didn't bring up your 24 guide so I guess should we seasonally obviously been other seasonality in the quarters, but should we be thinking <unk> or the first half gets a little bit more of a bump in it does historically or am I just.
Elyse Greenspan: Reading too much into thanks.
Elyse Greenspan: Youre missing the magnitude of the in the quarter, let's call. It 10 million Bucks of a cop 15 million Bucks and totally hear that gets pushed out on a on a $10 billion business next year, Okay. Its center 10, or 15 basis points and theirs, but so that wouldn't be enough to change that 7% to 9% guide there.
Elyse Greenspan: Okay, and just lastly.
Elyse Greenspan: One of the leaders <unk> been doing it for a while in terms of moving folks I'm sorry, yes.
Elyse Greenspan: And your center of excellence.
Elyse Greenspan: Any changes in kind of the trajectory there in terms of what you guys talked about <unk>.
Elyse Greenspan: Last year in terms of kind of the goal of doubling maybe that percentage of employees there over the next five or so years.
Elyse Greenspan: I think what we said is that over the next five years to seven years will be twice as many people. There is that we have there now I think what's really exciting about all the work that we've done for almost two decades. There now has put us in a position of being so standardizing many of the processes that we do we now have the opportunity to unleash AI.
Elyse Greenspan: On that because thats already done we have made that investment.
Elyse Greenspan: And now what we can do is deploy against it and those folks if youre going to hire twice as many folks.
Michael Zaremski: They're going to end up with better jobs over there because theyre going to be using AI. So our colleagues are going to be well rewarded by deploying that technology into it. So we are really fired up about it let me hit a couple of other items why would we need to double our employee count there because we're going to double the business and thats going to lead to plenty of opportunity there.
Michael Zaremski: Secondly, and I think this is a hugely important point.
Michael Zaremski: Standardizing brokerage business from an from an agency system through the operating processes to things like issuing certificates of insurance is a bitch.
Michael Zaremski: It takes four five years to bang it through I've done it. It's a headache. We are there we don't need to do it we don't need to sell it is standard operating procedure when you join us.
Michael Zaremski: Know that in your due diligence you've come aboard you plan your plan the effort to change into our agency system and you'll get rewarded for it but by virtue of the data and analytics. We can provide you to go out and so we don't need to sell our team on that we don't need to prove it to them, we did that 15 years ago.
Michael Zaremski: Thank you.
Nick: Thanks, Nick.
Nick: Our next question is coming from David Mcmahon with Evercore ISI.
Nick: Please state your question.
Nick: Okay.
Nick: Hey, good evening.
Nick: I just had a question on.
Nick: Just on.
Nick: It looks like there was a little bit of favorable timing.
Nick: During the quarter on incentive compensation expenses that helped the margin in brokerage.
Was that a big help and is that something that you guys have sort of baked into the first quarter 'twenty for just that that timing coming through.
Well first of all we talked about that I think back in <unk> and our April or June call that we were probably a little further ahead at that point in the year.
Nick: Comp accruals, so thats been contemplated in our guidance of margin expansion since way back then so I would say there is no new news of what we were expecting in December versus what we delivered this quarter, so and whats the impact of it.
Nick: It's not a point.
Nick: So.
Nick: It's not a big number.
Got it understood. Thank you and then I just wanted to come back to the 7% to 9% brokerage organic for 2024.
Nick: And sort of level set in terms of what you guys are thinking on the exposure growth side.
Nick: Yes, the range of outcomes that you guys are considering within that seven to nine.
Nick: Alright, So I think when you break down our organic we usually have more net new versus lost is probably 3% to 4% on that when you get some rate and there probably were at that that two points and maybe there is two points of it thats two to three points that's exposure unit growth.
Nick: It's we're going to have more lift next year for new versus lost probably.
Nick: Proportionately. So if you break break down 9% it might be a third a third a third if you break down seven it's probably half.
Elyse Greenspan: Right <unk> excuse me, mostly new business and then exposure unit growth.
Elyse Greenspan: Yes.
Elyse Greenspan: Got it understood. Thank you.
Elyse Greenspan: Okay. Thanks.
David Mcmahon: Thanks, David.
David Mcmahon: Thank you.
David Mcmahon: Our next question is coming from Gregory Peters with Raymond James Please state your question.
David Mcmahon: Good evening everyone.
David Mcmahon: Right I guess I guess some of this.
David Mcmahon: Go to the new table that you added to the CFO commentary.
David Mcmahon: Okay actually appreciation, which we appreciate which is the interest income premium finance revenues and other income.
David Mcmahon: And.
David Mcmahon: Could you could you give us some perspective because ever since mid December when the fed changed their perspective on what's going to happen with rates.
David Mcmahon: Theres, obviously, some mechanics, we're trying to calculate on what might happen with that line depending on what the fed does with interest rates. So maybe there is some benchmarks you can provide for us that will help us sort of map out what we think might happen there.
Elyse Greenspan: Alright, So you got the rate sensitivity and then you've got the amount.
Elyse Greenspan: Cash that we have on our balance sheet, that's not only ours, but our our clients. Okay. So first and foremost it's both the rate that we're earning and then thats. The on what we're earning that on second of all you've got the dynamic you mentioned the bad debt.
Elyse Greenspan: The U S portion of that interest income is only about 45% of the numbers. So it's actually more heavily weighted internationally and you would expect that with kind of large reinsurance balances in some of the large specialty businesses that we have in the U K. So you've got a separate youre thinking on that the other thing too is that you've got the growth as it is it.
Elyse Greenspan: This year it was not only because of rate that was going up but it was also because of the way the reinsurance receivables migrated from willis's books onto our books during the transition services agreement. So you've got that dynamic that I think what you are trying to plan for is how sensitive is that number.
Elyse Greenspan: Rate changes I would say that it's price sensitive $5 million per rate cut that the fed does in the U S per year.
Elyse Greenspan: So if there are four points that there's $20 million of expiring <unk>.
Elyse Greenspan: It might be 29 again thats just answering your question about the fed how the other central banks.
Elyse Greenspan: Bob.
Elyse Greenspan: What they do with their policy next year.
I just don't have that number right off the top of my hat, but when you asked about the fed think about it as is.
Bob: 5 million Bucks per cuts.
Bob: Excellent.
Bob: Just a follow up on that table for the for 'twenty, three and what quarter or did the services agreement with WCW shifts.
Bob: I assume that would have meant.
Bob: Launch in.
Bob: July one so that's so when we're looking at the third quarter and fourth quarter, that's more normalized under.
Bob: Going forward operating conditions correct.
Bob: Correct.
Bob: Thank you for that clarification.
Bob: I also think it's important for yeah, Okay, you've got to you've got the premium financing just to make sure you know.
Bob: Expenses associated with premium finance, that's down there so that.
Bob: It's a spread business, but you get grocers I forget the revenues up above and then we get.
Bob: The operating expenses and the interest cost envelope.
Bob: And operator.
Bob: Thats excellent detail I appreciate that and then I.
Bob: There is a bigger picture question I have before I get there I cant get hung up on the clean energy tax credit carry forward balance, which caught me by surprise going up and I know there's obviously.
Bob: Our revised approach towards your tax credits.
Bob: Without getting into detailed commentary on the changes and the nuances and the tax.
Elyse Greenspan: Is it your expectation going forward that you are still going to be pulling down $150 million or more of tax credits from clean energy going forward and then and then is that 867 just.
Elyse Greenspan: Related to the clean energy or is there other things in that.
Alright, so two things you can see on the bar on page five we havent reaffirm that we think that there'd be about $150 million worth of utilization of that balance in 'twenty four and maybe when you get to $25 <unk> is somewhere around $180 million of utilization a year. So you need to think about it coming in over the next four years.
Elyse Greenspan: There is a very small other balance of credits in there that I would say is a rounding error and it has to do.
Elyse Greenspan: With whom we constructed in our home office building, but.
Elyse Greenspan: All intensive purposes consider these credits to be.
Elyse Greenspan: From our clean energy work.
Elyse Greenspan: Great. Thank you so <unk>.
Elyse Greenspan: <unk> back to the bigger picture question is I'm going to focus on reinsurance because.
Elyse Greenspan: Last year was.
One of the most challenging reinsurance renewal periods.
Elyse Greenspan: Our lifetimes and.
Elyse Greenspan: And especially on the cat side I should say.
And.
Elyse Greenspan: Clearly based on your commentary and others. It seems like it's going to be more normal. This year. It seems like the lift you might get from the.
Elyse Greenspan: Pricing our rate component is going to be a lot less this year than it was last year. So.
Elyse Greenspan: I don't want to get too hung up on and I realize casualty has its own.
Cadence, but I was just curious about your your response to that observation and how you think it might talk with Gallagher.
Michael Zaremski: Well first of all.
Michael Zaremski: Let me just say that when I look back I can't tell you how proud I am of the team we came into a year youre new to the organization.
Michael Zaremski: Got some expertise for sure that get paid but.
Michael Zaremski: It was it was very difficult to year ago.
Michael Zaremski: We basically in a tough environment took care of our clients.
Michael Zaremski: I think thats really we learned a lot all of us from that and then we come around to this year, yes, the supply and demand balance was a little easier, but what you've got now is a group of our clients that number one the prices up.
Elyse Greenspan: And number two demand is up so you've got <unk>.
Elyse Greenspan: Pricing not coming down and people looking and saying, okay. It's not a sloppy as it was a year ago I'd like to I'd like to get more of that and we saw a bunch of that at one one remember about 45% of our business is booked one one so.
Year, when it comes to Cat property.
Elyse Greenspan: Is pretty much in the bag and it's been it's been a great year.
Elyse Greenspan: Easier to place in last year, but as I said demand up and pricing up so it still remains a very very good market for us and one in which there arent that many people Greg.
Elyse Greenspan: Do what we do for our clients.
Elyse Greenspan: Our larger competitors are very very good.
Elyse Greenspan: But it falls off pretty quick after us.
That's alright, alright, thanks for the answers.
Elyse Greenspan: Thank you, Greg Thanks for being with Us.
Elyse Greenspan: Great.
Elyse Greenspan: Thank you and our next question comes from the line of Andrew Clearman with TD Cowen. Please proceed with your question.
Elyse Greenspan: Hey, Thanks, a lot and good evening.
Andrew Clearman: I just wanted to clarify when you were saying 5 million per rate cut.
Andrew Clearman: Define what you meant by rate cut how much rate gets cut.
Andrew Clearman: 45 basis points.
Andrew Clearman: How many 20.
Andrew Clearman: 25, they do on 25, I was referring to a rate cut of 25 basis points 25, perfect. Thank you.
Andrew Clearman: And then with respect to Gallagher re could you talk a bit about.
Andrew Clearman: How the cross selling with risk management is playing in is that a big driver and also I understand youre going to be moving into facultative reinsurance, where maybe you've been doing that what kind of tailwind do those provide to 2024.
Andrew Clearman: So first of all.
Andrew Clearman: I have to say that the reinsurance team has been incredibly pleased within nicely surprised by the amount of interaction with our retail team around the world.
Michael Zaremski: And when we did the deal we told the team and ourselves that we thought there was a considerable benefit from having both sides of the equation under one roof and that is playing out over and over and over again as you know, we're very very strong and our niche a niche marketing and that's a global play.
Mark Hughes: The Cape the capability to have the reinsurance perspective in those meetings and then we're the largest player in the pooling sector for public clients in the United States.
Mark Hughes: We kind of thought we had that pretty well nailed you know not a lot to learn our reinsurance team has added a tremendous amount of value and helped us add cover for the pools and revenue for our retailers and revenue for our reinsurance people. So it's been it's been an incredible two year journey.
Mark Hughes: And we're just getting started in terms of the kit the opportunity to play together in the sandbox.
Mark Hughes: What was the other question Andrew.
Mark Hughes: Okay.
Mark Hughes: Can you break that data but.
Mark Hughes: But of course now coming along with Treaty.
Mark Hughes: <unk>.
Mark Hughes: And having our retailers Here's an example of what you are talking about where our retailers are trying to get things done and oftentimes, it's hard to place areas like property et cetera, we are seeing our facultative opportunities grow.
Elyse Greenspan: No it's not brand new but we are organizing ourselves better in the Fac World and I think we're getting.
Mark Hughes: We're in a better position today than six months ago to go out to our insurance carrier customers and.
Mark Hughes: Our trading partners and say, we want to participate in this we want to help you.
Mark Hughes: So we are seeing an uptick in opportunities.
Mark Hughes: A lot of tailwind there.
Mark Hughes: Shifting over to risk management, and the organic change in fees I mean, it seems terrific and I'm just wondering on the claims management side, what kind of carriers are you growing with.
Mark Hughes: A large.
Mark Hughes: The large ones or the small ones like what are you seeing the most growth in.
Mark Hughes: Claims management.
Mark Hughes: Well you are seeing two things one our historical play and the risk management accounts, where you've got large accounts you name it whatever whatever the large hotel chains or what have you that are procuring our business on their accounts and there is we've got a great great year in that regard.
Elyse Greenspan: And that includes public sector clients as well and then as you know we have over the last decade, or so really focused on outsourcing of claims from insurance companies.
Elyse Greenspan: Right I don't feel at Liberty on this call to name some of those because some of those carriers are pretty.
Elyse Greenspan: Pretty well known carriers and that one that I necessarily.
Elyse Greenspan: Approval to be touting, but from inside the organization and look at some of these carriers you go it's fantastic and then of course, the regional small companies that we'd like to expand that don't Wanna add infrastructure.
Elyse Greenspan: <unk> got an opportunity that given stage or geography, they don't want to be putting a lot of boots on the ground, we're picking those up as well. So the team GB is in my opinion, just outperformed expectations every single year.
Elyse Greenspan: So it just seems like.
Elyse Greenspan: Carey.
Mark Hughes: Just a lot of runway there.
Andrew Clearman: Let me put it this way Andrew I really believe this.
Andrew Clearman: I believe that it will not be unusual and I believe that people will ask.
Andrew Clearman: Did insurance companies pay their own claims.
Andrew Clearman: They do that.
Elyse Greenspan: When I sit with some of our insurance company partners and explain to them. The Gallagher Bassett pays substantially more claims in numeric numbers and substantially more dollars than they do in claims by line of cover by geography, not just in the U S.
Elyse Greenspan: First reaction is oftentimes shock and again I won't mention any names are curious they go down.
Elyse Greenspan: If you look.
Elyse Greenspan: If you put a capital structure around GB and call that an insurance company. It would be one of the five top insurance companies probably in the world.
Elyse Greenspan: Think about that in terms of the amount of claim work that's coming through and our focus and this is I think really key.
Elyse Greenspan: And what we're selling and we believe proving day in day out is if you outsource your claim work to US whether you are a large risk management account for the self insuring or whether you're a carrier your outcomes will be superior.
Elyse Greenspan: And if I'm looking at an insurance company, CEO, and saying I think I'm worth or could help you find two points of ROE.
Elyse Greenspan: It could be pretty dramatic.
Elyse Greenspan: Maybe if I could just squeak one last one in on the contingent revenues they were up 30% in the quarter.
Elyse Greenspan: Just given it was such a great year for underwriting DTC that kind of being flattish as we go into 2004. When you. When you provided your 7% to 9% guidance, maybe that impact comes flattish and the scope of it all.
Elyse Greenspan: No I would say it would be in that same 7% to 9% range. So I'm not going to see it outperforming that and yes, we were pleasantly surprised by a few extra million Bucks and we thought we were going to get there by the way I look through that number and see what its telling you as a potential owner our book of business is superior to the competition.
Elyse Greenspan: That's interesting isn't it.
Elyse Greenspan: Yes.
Elyse Greenspan: Hey, Thanks, a lot that was great great insights.
Ed: Thanks, Ed.
Ed: Yeah.
Thank you and our next question comes from the line of Yaron Qunar with Jefferies. Please proceed with your question.
Ed: Thank you good afternoon or good evening.
Ed: Yes.
Yaron Kinar: First question I have and forgive me, it's a bit nitpicky here, but in brokerage organic.
Yaron Kinar: I know the organic came in line with December guide.
Yaron Kinar: But I think contingents were a bit better than you were expecting you were already accounting for the life case timing and 606 accounting. So it seems like there may have been something there that came in a little bit lighter than expectations or am I thinking about it correctly.
Yaron Kinar: There is $5 million less than we had.
Yaron Kinar: Got it on a few of them but.
Yaron Kinar: When you're looking at a $2 billion quarter 5 million Bucks. It does move the percentage a little bit but it doesn't it's not a it's not a meaningful that we are a sales organization I look back last year, we had 11% one quarter at 7% another corner, we had 9% seven.
Yaron Kinar: Eight so it bounces around a little bit so the fact that we brought it in within a half a point or.
Yaron Kinar: Yes.
What we're looking at here.
Mark Hughes: Get some bounce around for a few million bucks here or there.
Mark Hughes: Okay.
Mark Hughes: And then a couple of quick ones on the CFO commentary, so I am seeing a bit of a slowdown in brokerage earn out payables. In 2024 is that just the winter three true up in 'twenty three.
Mark Hughes: That's right okay.
Mark Hughes: Okay.
Mark Hughes: And then.
Mark Hughes: I'm also seeing a meaningful increase in the amortization of intangibles and risk management.
Mark Hughes: Are you expecting a knee or Germany, there or did you already.
Mark Hughes: Conducted we announced my plant manager acquisition here.
Mark Hughes: A month or so or two months ago. So that's the $60 million worth of revenue.
Mark Hughes: And that disability business down in Australia.
Mark Hughes: Okay got it.
Mark Hughes: Thanks, So much sure thanks sure.
Mark Hughes: Thank you. Our next question comes from the line of Michael Ward with Citi. Please proceed with your question.
Hi, guys. Thank you.
Mark Hughes: Maybe just curious on Canada.
Mark Hughes: I think one of your peers mentioned mentioned some headwinds there and I think if we're interpreting the commentary it sounds like maybe you saw a slowdown to just wondering if you could talk about that dynamic and if you think that should persist in 'twenty four.
Michael Zaremski: Well listen I think they add some they were posting 13 points 14 points of organic growth. The market has shifted up there a little bit. So I think they've been in the mid to upper mid single digits for the last four or five quarters. So I don't see much of a shift.
Michael Zaremski: Going into 2024.
Michael: Let me pile on that one if you would Michael first of all Doug you're right they've been killing it in Canada high upper digit organic year on year out and now they are about five that makes perfect sense to me given where.
They have been.
Michael Zaremski: And I think the five is a great number.
Yes, we actually have had.
Michael Zaremski: A couple of really great new business opportunity that just didn't fall our way for.
Michael Zaremski: For some reason.
Michael Zaremski: <unk> to stay with the incumbent so I think that if you normalize for those.
Michael Zaremski: Handful of items I think they would have had.
Michael Zaremski: At three or four more points too.
Michael Zaremski: Okay. Thank you.
Michael Zaremski: And then in the in the CFO commentary.
Michael Zaremski: It looks like you guys outperformed your revenue pick for <unk> 'twenty three acquisition activity and increase the pick for first quarter for your <unk> acquisition activity.
Michael Zaremski: Just wondering if that is that momentum from buck or what's driving that alright.
Michael Zaremski: Alright, So help me understand what you are looking at again tell me as you saw I just didn't track to your question sorry about that it was it was just the revenue pick from <unk> 23.
Michael Zaremski: Yeah.
Michael Zaremski: And doing well and you increase the <unk> 24 pack.
Michael Zaremski: Just sort of wondering if that was buck.
Michael Zaremski: 995.
Michael Zaremski: Remember every time, we buy something youre going to get maybe four quarters at this disclosure. So as Buck runs that off we also have cadence in eastern that are coming on in fourth quarter 'twenty four but thats right you can see it there the 2002nd quarter 2000, and it falls away to nothing right.
Mark Hughes: Even if it were $5 million a quarter is <unk> 95, so that is what youre seeing there is just a run Nf Buck that's no longer.
Mark Hughes: M&A rollover.
Mark Hughes: Okay Awesome and then maybe just following up on the question from earlier.
Mark Hughes: Did I hear you sort of mentioned for benefits growth was kind of going to be at that or you think it's going to be towards the bottom end of the kind of spectrum across product lines. This year.
Elyse Greenspan: They might be running more like 7% versus 9% in some things next year. So that's what I said, there would be more towards that lower end of that 7% to 9% range just on the nature of the guidance.
Elyse Greenspan: Okay.
Elyse Greenspan: Alright, thanks, guys.
Speaker Change: Pause on that a little bit get medical inflation that many are starting to worry about it we might have a different answer for you on that one.
Speaker Change: Right.
Speaker Change: Thank you.
Thanks, Michael.
Speaker Change: Thank you and our last question is coming from Meyer Shields with <unk>.
Speaker Change: Please proceed with your question.
Speaker Change: Thanks, I think two really small ball question.
Speaker Change: Doug you talked about why contingence in the fourth quarter, a little bit better that would be December expectation, but it also sounds like you're.
Speaker Change: No I was thinking.
Speaker Change: The development to be a problem in 2020 for contingent.
Speaker Change: Contingent organic Matthew.
Speaker Change: Core organic am I thinking about that right.
Speaker Change: No I didn't say I think that they are on the casualty lines I think that would impact our base Commission I don't see it really eroding our our supplemental ore are our contingents.
Speaker Change: If we do have a reserving.
Speaker Change: Again, I don't like you to use where crisis, but if there is something like that that happens maybe something that but I don't see that erodes. The contingent commission substantially next year as they take rational and orderly rate increases.
Elyse Greenspan: Okay understood and then just.
Elyse Greenspan: May have missed it but the increase in detail on page six of the commentary where you break out the individual components should we assume that those are all.
Elyse Greenspan: I don't know, 90% plus margin.
Michael Zaremski: Yes, Mike.
Michael Zaremski: <unk> was on the premium funding there is the margin on that would be very similar to our brokerage business.
Michael Zaremski: So that's that.
Pat Matt: Equity interest is not that big of a number we just don't have that many non 100% owned entities on it and then interest income.
Pat Matt: Yes, there is margin on that but remember of interest income is dry.
There because there is inflation out there and we do have inflation in.
Pat Matt: Some of our categories like travel and entertainment for instance are substantial.
Pat Matt: Inflation in App, so that if interest rates come down and I would expect inflation on travel to come down also so there are some offsets on it but the premium funding businesses is is 30.
Pat Matt: <unk> 30 points of margin something like that.
Pat Matt: Okay perfect. Thanks for the clarification.
Thanks Mark.
Mark: Let me just say thank you again for joining us this afternoon.
And to our 52000 plus colleagues across the globe. Thank you for another fantastic year.
Mark: Achievements are due to all of your hard work and dedication.
Mark: <unk> I am with our fourth quarter and full year 'twenty three performance I get even more excited when I think about our future.
Mark: We operate in an essential industry for the economy within a fragmented market, having leading data and analytics a niche expertise unlimited global market share.
Mark: So I believe our opportunities for future growth are immense.
Mark Hughes: I always say, we're just getting started it's pretty cool to be Gallagher look forward to seeing that our mid March IR day, thanks for being with us today.
Mark Hughes: Yes.
Mark Hughes: Thank you. This does conclude today's conference call you may disconnect your lines at this time.
Mark Hughes: Hmm.
Mark Hughes:
Mark Hughes: This concludes today's conference call you may disconnect your lines.