Good afternoon, and welcome to Arthur J. Gallagher & Co.’s First Quarter 2021 Earnings Conference Call. Participants have been placed on a listen-only mode. 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 security laws. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the cautionary statement and risk factors contained in the company’s 10-K, 10-Q and 8-K filings for more details on its forward-looking statements. 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 is now my pleasure to introduce J. Patrick Gallagher, Chairman, President and CEO of Arthur J. Gallagher & Co. Mr. Gallagher, you may begin.

Thank you, Laura. Good afternoon, and thank you for joining us for our first quarter 2021 earnings call. On the call with me today is Doug Howell, our CFO, as well as the heads of our operating divisions. What a fantastic quarter. We executed against our four long-term operating priorities to drive shareholder value: first, we grew organically; second, we grew through acquisitions; third, we improved our productivity while raising our quality; and fourth, we continue to reap the benefits of our unique Gallagher culture. I’m extremely proud of how our team continues to execute and deliver world-class expertise and service day-in and day-out. We’re off to a great start in 2021. So, let me give you some more detail on the quarter, starting with our Brokerage segment. Reported revenue growth of 12.2%, of that, 6% was organic revenue growth, better than our recent IR Day expectations, thanks to an excellent March. Our cost containment efforts saved about $60 million in the quarter, helping drive our net earnings margin higher by 94 basis points and expand our adjusted EBITDAC margin by 480 basis points and net earnings were up 17% and adjusted EBITDAC was up 24%, an excellent quarter from the Brokerage team. Let me walk you around the world and give you some insights about each of our Brokerage units, starting with our P/C operations. In the U.S., retail organic growth was strong at about 5%. New business was excellent and retention remains strong. In our U.S. wholesale operations, Risk Placement Services organic was about 6%. Open brokerage organic was 15% due to rate increases, higher levels of new business and improved retention. Our MGA program’s binding businesses were up about 4%. Retention in new business were similar to the first quarter of 2020. However, we did see a little bit more tailwind from rate and exposure during the quarter. Moving to the UK, over 7% organic for the quarter. In both our retail and specialty operations, new business was up over prior year while retention held pretty steady. Australia and New Zealand combined posted organic of 3%. New business and retention were both similar to prior year. Finally, our Canadian retail operations posted excellent organic of 13%, with fantastic new business and rate all contributing to our stellar performance again this quarter. Overall, our global P/C operations posted more than 7% organic, which is better than the 5% to 6% we discussed at our Investor Day, thanks to a really strong March. Moving to our employee benefit brokerage and consulting business, first quarter organic was up slightly, which is better than our March IR Day expectations. Revenue from our traditional health and welfare business held up well, while fees from consulting arrangements, special project work and our life business were up slightly. So when I bring P/C and Benefits together, total Brokerage segment organic was 6%, a really strong start to the year. Next, I’d like to make a few comments on the P/C market, starting with the rate environment. Global P/C rates remain firm overall, and the increases we saw during the first quarter of 2021 are consistent with the past couple of quarters. Rates in Canada led the way, up double digits, driven by property and professional liability. In the U.S., rates were up about 7%, including double-digit rate increases within our wholesale open brokerage operations. Our UK retail and London specialty operations combined, rates are up about 5%. Finally, Australia and New Zealand combined, rate increases are in the low single digits. At the same time, capacity is constrained in certain lines and carriers are pushing for tighter terms and conditions. There are also quite a few pockets in the U.S., Canada and London specialty market that I would describe as hard, such as cat-exposed properties, cyber, umbrella, and public company D&O, just to name a few. The global P/C environment remains difficult but is giving us some tailwinds. Looking forward, we don’t see conditions that would indicate this rate environment will change anytime soon, and we are seeing more and more economic activity across our client base. For example, customers are adding coverages and exposures to their existing policies. Through yesterday, April endorsements, premium audits and other midterm policy adjustments are a net positive overall. That, too, is an encouraging sign. On the benefits side, a recovering labor market in 2021 should favorably impact our core health and welfare business. We remain optimistic that we will start to see some incremental HR consulting and special project work. This is a terrific time for our team to shine, with firm global rates, increasing exposure units, and recovering employment. Our clients need our expertise and we are there with the very best insurance, consulting, and risk management advice. While there’s a lot of year left, I have greater conviction that our full year 2021 Brokerage segment organic will be equal to or perhaps even better than pre-pandemic 2019 organic. Moving on to mergers and acquisitions. We finished the first quarter with five completed brokerage mergers, representing about $90 million of estimated annualized revenues. I’d like to thank all our new partners for joining us, and I extend a very warm welcome to our growing Gallagher family of professionals. As I look at our tuck-in M&A pipeline, we have more than 40 term sheets signed or being prepared, representing about $250 million of annualized revenues. Our global platform is a great fit for savvy and successful entrepreneurs. We have the tools, data, products, niche expertise, and carrier relationships to effectively support these owners as they grow their businesses. Next, I’d like to move to our Risk Management segment, Gallagher Bassett. First quarter organic growth was 0.6%, which is in line with our March IR Day expectations of about flat. It was still a tough comparison to pre-pandemic first quarter 2020. However, there is no doubt we are starting to see more and more core workers’ compensation claim activity when compared to what we were seeing last year at this time. Traditional workers’ compensation claims are returning while we are seeing fewer and fewer COVID-related claims. Our cost containment efforts paid off again this quarter. We saved around $4 million and expanded our adjusted EBITDAC margin by 180 basis points to 18.4%, marking another great quarter of execution by the Gallagher Bassett team. Looking forward to the next three quarters, we expect new claims arising to be higher than what we saw last year, perhaps not back to pre-pandemic levels just yet, but certainly higher than last year. When combining that with some really nice new business wins, we should be back to seeing organic growth in the upper single digits for the next few quarters. That would bode well for keeping margins above 18% for the remainder of the year. Let me wrap up with some comments regarding our unique Gallagher culture. It’s a culture that emphasizes doing things the right way for the right reasons with the right people. It’s a culture of service, service to our clients, to one another, and to the communities where we work and live. Our culture continues to be recognized externally. Just last week, Forbes named Gallagher one of the best U.S. employers for diversity, and that’s on top of Gallagher being recognized by the Ethisphere Institute as one of the world’s most ethical companies for the 10th year in a row, making us the sole insurance broker recognized. These recognitions are a direct reflection of our more than 30,000 global colleagues working together as a team guided by the 25 tenets of the Gallagher Way. Culture is a key differentiator for our franchise. Every day, all our people get up and work diligently to maintain, promote, and live our culture, and I believe our culture has never been stronger. Doug, over to you.

Thanks, Pat, and good afternoon, everyone. I’ll echo Pat’s comments, an excellent quarter and a terrific start to the year. Today, I’ll spend most of my time on both our cost savings initiatives and our clean energy cash flows, then highlight a few items in our CFO commentary document, and I’ll close with some comments on M&A, cash, and liquidity. Before I get into cost, one quick comment on Page 3 in the Brokerage segment organic table. You’ll see that we had a great quarter for contingent commissions. There is a little bit of favorable timing in there, call it about 50 basis points on total organic. That will flip the other way next quarter but regardless, a really solid quarter. Okay, let’s go to Page 5, the Brokerage segment adjusted EBITDAC table. You’ll see that we grew adjusted EBITDAC by $122 million over last year’s first quarter, resulting in about 480 basis points of adjusted margin expansion. That would have been closer to 550 basis points, but as we discussed in our March IR Day, M&A roll-in isn’t as seasonally large, and we did strengthen bonuses a bit, given our considerably more optimistic outlook for 2021 compared to last year at this time standing at the gates of a global pandemic. Within that $122 million of EBITDAC growth is about $60 million that is directly related to our cost savings initiatives, which translates to about 370 basis points of margin expansion. By controlling these three items, we see underlying margin expansion of about 180 basis points on that 6% all-in organic growth. Once again, absolutely terrific execution by the team. Moving on to the Risk Management segment on Page 6. We grew adjusted EBITDAC by $4.3 million, resulting in about 180 basis points of adjusted margin expansion, leading us to post margins nicely over 18%. Most of that was due to our cost savings initiatives. When I combine our Brokerage and Risk Management segments, savings were around $64 million, pretty similar to the last three quarters, which consists of reduced travel, entertainment, and advertising of about $25 million; reduced consulting and professional fees of about $15 million; reduced outside labor and other workforce costs of about $15 million; and reduced office supplies, consumables, and occupancy costs of another $9 million. Remember, first quarter 2021 is the last quarter we have a favorable comparison to pre-pandemic spend levels. Now, it’s all about how much of the cost savings we can sustain going forward. As I look at it today, I still believe we will hold a lot of it. We see certain costs coming back, but that won’t happen overnight. Our best guess is maybe $15 million coming back in the second quarter of 2021, then stepping that up by about $5 million to $7 million in the third quarter and a similar step-up again in the fourth quarter. The amounts I’ve given are relative to 2020’s same quarters adjusted for the roll-in impact of M&A. As for how that translates into margins, that’s dependent on where we land on organic, but assuming organic growth of around 5% or above for the remainder of the year, the math indicates that would be enough to show some full-year margin expansion, and regardless of where we land, let’s keep this in perspective for the longer term. The pandemic has allowed us to accelerate many of the improvements we had on the drawing board and also served as an opportunity to design new and better ways to run our business. Both of these factors make us more productive today than we were 15 months ago, and our service quality has even improved. This will provide a lasting benefit for years to come. Now let’s move to the CFO commentary document we posted on our investor website. On Page 3, most items are very similar to what we provided at our March IR Day. On Page 4, both clean energy and the corporate line came in better than we mentioned in March. The corporate line is just a timing issue between the first and third quarters for certain tax items. However, the clean energy investments had a much better quarter, and we bumped up our full-year estimate. It’s now looking like $70 million to $80 million of full-year after-tax earnings, which is really good news. Next, let’s move to Page 5 of the CFO commentary. If you missed the clean energy discussion I provided during our March IR Day, it might be worth listening to the replay on our website, starting from the hour and 9-minute mark. Here are the punchlines: First, recall that 2021 is the last year of what we call the credit generation era; second, 2022 will be the first meaningful year in the cash harvesting era. This means 2021 is the last year we will report GAAP earnings, and 2022 will be the first year meaningful cash flows show up in our cash flow statement. You’ll see here on Page 5 that we think 2022 annual cash flows could increase by around $125 million to $150 million. Finally, this is not a one-year benefit to cash flow. We have more than $1 billion of tax credit carryforwards on our balance sheet that should favorably impact cash flows for the next six to seven years. Regarding M&A capacity, at March 31, available cash on hand was more than $400 million, and we had no outstanding borrowings on our revolving credit facility. With cash on hand, our untapped borrowing capacity, and another year of strong cash flows, it means upwards of $2.5 billion of M&A capacity here in 2021. With a nice M&A pipeline, we are in good shape to continue with our tuck-in strategy. Before I pass it back to Pat, I see a lot of positives. Organic growth has nice tailwinds from rate and exposure growth. Add to that a lot of pent-up consumer demand and perhaps a wave of governmental spending. Both could be additional growth catalysts. We have a robust M&A pipeline that should continue to grow, especially if an increase in capital gains tax gains momentum. We’ve learned a lot from the pandemic about how to operate better, faster, and cheaper, all the while improving service quality. The productivity gains we achieved over the last year appear to be sticky. This all bodes well for another year of strong cash flow generation, with a kicker starting in 2022 from our clean energy investment. We are very well positioned operationally and financially. I can feel the excitement out in the field about coming out of the pandemic stronger than ever before. It’s setting up to be another great year. Back to you, Pat.

Thanks, Doug. Laura, I think we can go to some questions and answers.

Our first question comes from Elyse Greenspan with Wells Fargo. Please go ahead with your question.

Hi, thanks. Good evening.

Hi, Elyse.

Hi. My first question is on organic growth. You reported 6% in the quarter. In your comments, you mentioned that you could potentially get back to where we were in 2019, which was also 6%. However, with what’s going on today, such as the strong P&C pricing and the improving economy, what could cause the next three quarters of this year to not be stronger? Do you foresee any deceleration, or is there a level of conservatism in that outlook where you believe things will remain stable for the rest of the year?

I think it depends on the recovery pattern. There is still a lot of unemployment, and we’re running somewhere in that 5.5% to 6% range right now. We expect that to hold for the rest of the year. While it looks like it could be a pretty good year, there’s nothing inherently different in that thought process other than it feels a lot like 2019.

Our clients are doing much better, Elyse. They are coming back to 2019 levels, not surging beyond it.

Okay, and related to the margins, you mentioned 400 basis points of margin expansion at your IR event, and you achieved 80 basis points above that, despite experiencing headwinds. What was better, relative to your IR Day expectations, within the margins? Did the improvement stem from the contingent commissions or was the core margin expansion better than you had anticipated?

The contingent commission came in better than expected, which primarily fueled that improvement.

Okay, and on the M&A side, you highlighted an active pipeline for tuck-ins. With the significant merger between Aon and Willis underway, could you provide some insight into how you’re thinking about the potential availability of properties that may result from their divestment process and whether these could be attractive to Gallagher?

There’s a lot to unpack in that question. In terms of capacity, we have up to $2.5 billion worth of M&A capacity this year and a full pipeline of attractive tuck-in acquisitions. As for what could emerge from the Aon and Willis situation, we read the same things you do and typically don’t comment on acquisitions mentioned in the news, but I want to emphasize that we have $2.5 billion available and believe in our tuck-in merger strategy.

Okay, that’s helpful. Thanks for the insight.

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

Good afternoon.

Hey, Greg.

I want to revisit the M&A discussion. Can you elaborate on the timeline regarding the process when you executed the JLT global aerospace deal in 2019? Was it a three-month process or a one-month process? Ultimately, I’m curious about potential timeline concerns with Aon and Willis Towers Watson and whether there’s a risk of sacrificing due diligence to meet any regulatory timelines.

Greg, I’ll respond to that. We executed the Arrow deal in London in a fairly short timeframe and I’m pleased with how that acquisition turned out. We didn’t seem to sacrifice anything.

Understood. Can you provide some insight into how you’ve managed to maintain the continuity of your culture during large acquisitions, particularly with regards to the major acquisitions you’ve made in New Zealand and Australia?

In those situations, we had very strong stand-alone businesses that we could engage with the leadership of. As you recall, we flew to Australia to meet with their leadership and provided them with a choice to either go public on their own or join us. Steve Lockwood made a solid decision to join Gallagher, and things have been going great.

To add on that, during that deal, the previous owner was an industrial conglomerate that didn’t prioritize brokerage. The combination of our sales leadership coming together and Steve’s focus on sales contributed greatly to revitalizing the Australian operation, which had been struggling before the acquisition.

Indeed. Our Canadian operation faced similar challenges before our intervention.

Interesting, I appreciate your sharing that perspective. I’d like to pivot back to the operations. The employee benefits business, while not necessarily struggling, hasn’t rebounded to pre-pandemic levels. Are there any ASC 606 issues pertaining to the first quarter results, or is there a prediction that we could see some benefits if the economy recovers?

In terms of ASC 606, there’s nothing noteworthy in the numbers. However, if employment levels surge significantly compared to our current estimates, we might see some positive developments in those estimates for the rest of this year. Keep in mind that most of the employee benefits business is a January 1 renewal where we have to project covered lives. We didn’t experience a significant drop in covered lives last year, so I wouldn’t expect a substantial recovery to occur this year. Essentially, we’re looking at flat levels for renewals based on our current expectations.

We see potential for growth in our fee business. That sector faced significant challenges at the end of the first quarter last year but demands for consultancy are rising now. There is a pressing need for expertise in this area.

The talent workforce is returning, and our strength lies in helping employers navigate through these challenges.

Hi, good evening.

Hi, David.

I wanted to follow up on the benefits business and get more detail on your expectations for organic growth throughout the remainder of the year. Specifically, regarding covered lives, can you discuss how your present estimates align with returning to 2019 organic levels in 2021?

Our assumptions in the 606 estimates currently do not factor in any substantial recovery in covered lives. This differs from what our brokers are planning as we close out this period in January. Thus, we don’t foresee a significant uptick in expectations. It's important to note that this business didn’t experience a massive decline last year due to the stability of our employer base.

We anticipate opportunities for growth in project-based fees. These functions require specialist skills to execute effectively, and we anticipate heightened demand.

While we didn’t provide any comments on how that’s trending for the second quarter so far, I can say that there hasn’t been a significant difference noted as of April 29 compared to March 29. However, we are beginning to see some green shoots, with our consultants receiving more inquiries. This suggests a more active summer and fall may be on the horizon.

Let’s hope for the best.

Thanks, that was helpful. Shifting to a broader M&A question, can you clarify your views regarding larger acquisitions versus team lift-outs, and how you balance both pathways towards growth given their differing impacts on financial performance?

To be clear, I would prefer to work with entrepreneurs who have built companies out of respect for their clients and teams, and who are willing to sell ongoing enterprises to us. Individual recruitment and team transitions are part of our strategy, but we prioritize working with established entities with solid operations.

Understood, that makes sense. That covers my questions for now. Thank you.

Thanks, David.

Our next question comes from the line of Mark Hughes with Truist. You may proceed with your question.

Hi, Mark.

Thank you. Good afternoon.

Hi, Mark.

I'm interested in your Risk Management business, particularly regarding claims counts. While you mentioned that year-over-year, claim counts will increase, I understand that Q4 and Q1—and possibly Q2 as well—are holding relatively steady. Is that correct?

Yes, that’s accurate. We’ve seen a crossover—COVID claims are declining, and regular workers' compensation claims are on the rise. You might see some of this in the second quarter, but not a significant amount. We're at a point where COVID claims have nearly run their course, while common workers’ compensation claims should surpass those going forward.

Regarding pricing, some discussions indicate moderation. However, you seem consistent in asserting that trends are steady with similar rates of increase. In fact, I believe you noted higher rates for the second quarter. Are you experiencing any moderation?

No, we’re not seeing that. We are observing a consistent demand for appropriate pricing. We’ve been in a hardening market for several years now, so, while I anticipate that moderation will come in time, the discipline observed in the market is ongoing, and underwriters continue to pursue price increases.

When we look at year-over-year increases in dollar amounts, we're still seeing that growth. The percentage of increase based on a larger base might not appear as significant, but we are witnessing rate increases across various sectors. Even workers' compensation is experiencing upward rates at this point.

Doug, regarding the potential for extending clean energy legislation, are there any green shoots in that area?

There are several infrastructure proposals being discussed that could provide opportunities, indicating some good potential for the environment. There is always hope, especially if our clean energy initiatives gain traction in the infrastructure package or tax reconciliation proposals.

Thank you.

Sure.

Thanks, Mark.

Our next question comes from the line of Yaron Kinar with Goldman Sachs. You may proceed with your question.

Hi, good afternoon, everyone. I have a question regarding the contingent commissions. I believe that I calculated around 120 basis points or so of margin expansion stemming from contingents. Does that align with your assessment?

What did you assume the margin on that to be?

Approximately 70%.

Yes, that might be a bit high. Many of the contingent commissions are allocated to leadership variable compensation. So while some of that might resonate with you, it’s probably more accurate to consider maybe an increase of 100 basis points—not 120.

Understood, so you suggest like 60 basis points from organic margin expansion along with 100 from contingent commissions and the remainder from cost savings?

That’s fairly accurate. The bulk of the margin is derived from regular performance, and contingent contributions should not be excluded.

Thanks, and did I hear correctly that you'll be reporting cash EPS in 2022?

No. What I meant is that in the clean energy segment, we anticipate seeing additional cash flows between $120 million and $150 million from that area as it moves from a non-cash asset to cash. We’ll ensure to highlight this going forward.

Got it. Thank you very much, and congrats on the quarter.

Thanks.

Thanks.

Our last question comes from the line of Meyer Shields with KBW. You may proceed with your question.

Thanks. I have a fundamental question regarding rate increases holding steady and assuming economic recovery. Wouldn't that typically lead to organic growth surpassing 5% year-over-year?

That’s the hope.

It's important to note that our role is to help our clients structure programs that mitigate rate increases. We can certainly manage exposure growth by either adjusting deductibles or limits, but our clients need to add coverage as well—a net positive symptom of a thriving economy.

Understood, thank you. That clarifies that well.

Thanks Meyer.

Our last question comes from the line of Phil Stefano with Deutsche Bank. You may proceed with your question.

Thanks, and good evening. Just a few quick points. Most have already been asked and addressed, but to clarify as we project the appropriate margin base for the first quarter 2022, should we consider the printed 39.2%? Or should we adjust for the benefits stemming from contingent or supplemental contributions?

You are right to consider that for Q1 2022. While 39.2% was recorded, you should factor in contingent commissions as well as our long-term savings while spreading that across our expected earnings, which are projected to be between $1.8 billion and $1.9 billion by that time.

Understood. So it's fair to normalize these kinds of fluctuations as we project future margins?

Exactly, yes.

That makes sense, thank you, and just regarding the Risk Management segment. You mentioned expected growth in the upper single digits over the next few quarters. Should we view that as year-over-year growth or more so a sequential comparison?

You could interpret it both ways, but keep in mind last year’s second quarter was a trough. Thus, there may be some recovery compared to that quarter, although viewing it based on the last two quarters is also valid.

Understood, thanks for the clarification.

Thank you, Phil. And thank you all for being with us today. We really appreciate your time. We delivered an excellent first quarter, and I want to thank our Gallagher professionals for their hard work, our clients for their trust, and our carrier partners for their support. I’m confident that we can deliver another great year of financial performance in 2021, and I genuinely believe we’re just getting started. Thanks for joining us.

This does conclude today’s conference call. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your evening.