Good afternoon, and welcome to Arthur J. Gallagher & Companies Second Quarter 2023 Earnings Conference Call. Participants have been placed on a listen-only mode. Your lines will be opened for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time. 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 sections 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 is now my pleasure to introduce J. Patrick Gallagher, Jr, Chairman, President and CEO of Arthur J. Gallagher & Company. Mr. Gallagher, you may begin.

Thank you very much. Good afternoon, and thank you for joining us for our second quarter 2023 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, and recall, we don't include interest income in our organic. If we did, our headline number would be 13.4% and over 14% if you levelized for last year's large life products 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 EBITDAC margin of 30.4%, up 52 basis points. We 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 Day view. 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 9.7% or 12.3% if we include interest income and about 13% when levelizing for the large life product sale. Acquisition rollover revenues were $151 million. Adjusted EBITDAC growth was 23% and we posted adjusted EBITDAC margin expansion of about 50 basis points. Let me walk you around then Howell will 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 US PC business posted 13% organic. New business production was up year-over-year while retention was similar to last year's second quarter. Our UK 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 that 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 2022 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 have been about 5%, with core health and welfare up low single digits, and many of our consulting practice groups showed continued strength. Shifting to our reinsurance, wholesale, and specialty businesses, Gallagher Re posted 11% organic, another outstanding quarter by the team, building upon their excellent first quarter results. Replacement services, our U.S. wholesale operations posted organic of 10%. This includes 19% growth in open brokerage and about 6% organic in our MGA programs and binding businesses. And finally, UK specialty posted organic of 19%, benefiting from excellent new business production and fantastic retention in 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%. That's ahead of the 8% to 10% renewal premium change we were reporting throughout 2022 in the first quarter of 2023. Renewal premium increases were made 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' compensation is up about 3%. Umbrella and package are up about 11%. And most lines are trending similar or higher relative to previous quarters with two exceptions. First is public company D&O, where renewal premiums are lower versus last year, and second, cyber, which has flattened 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 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 fit their budgets. So, not all of these renewal premium increases show up in our organic. Shifting to the reinsurance market. 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 trees. Within the U.S., Florida property cat renewals were more orderly than in January due to an early start and well-defined reinsurer 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. As for casualty reinsurance renewals, 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 2023 and perhaps throughout 2024. 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 remain. 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 are on the rise. We anticipate these costs to accelerate into 2024 due to increased costs 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 are more confident with full-year brokerage organic in the 8% to 9% range. And with an excellent second quarter in the books, aiming 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 Buck 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 thank 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 and 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 of various client segments, including large corporate enterprises, public entities, insurance carriers, and captives. Growth in each of our client verticals is great affirmation in our ability to tailor our client offerings, utilize industry-leading technology, and ultimately deliver superior outcomes for clients across the globe. Second quarter adjusted EBITDAC margin of 19.4% was very strong and at the upper end of our June expectation. Looking forward, we see full year 2023 organic around 13% and adjusted EBITDAC margins pushing 20%. 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, traveling to New Zealand, Ireland, the UK, and 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 58th 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 welcoming new colleagues and merger partners into the Gallagher fold, I'm confident that each new addition will uphold the expertise, excellence, and ethical conduct that make Gallagher the name so trusted worldwide. And that is the Gallagher way. All right. I'll stop now and turn it over to Doug.

Thank you, Pat. I will discuss organic growth and margins by segment, including our expectations for the rest of the year. I will also share insights using the CFO commentary document available on our website. Finally, I will wrap up my prepared remarks with thoughts on cash, M&A capacity, and capital management. Let's start by looking at page three of the earnings release. Our all-in brokerage organic growth stands at 9.7%. If we factor in interest income, it rises to 12.3%, and when we adjust for last year's significant life product sale, it exceeds 13%. This performance has outpaced our forecasts from our IR Day in June, thanks to a strong quarter-end across all divisions, particularly in U.S. retail and London specialty. Additionally, contingent revenues rose over 20% organically, and combined with supplementals, we see a 12% increase, aligning with our base commission and fee organic growth. Overall, it was an excellent organic growth quarter for our team. Looking ahead, we project brokerage organic growth around 9% for the third quarter and approximately 8% for the fourth quarter. It’s essential to remember that the fourth quarter will present a challenging comparison because in Q4 2022, we recorded a change in estimate regarding our 606 deferred revenue accounting. If we account for that, fourth-quarter organic growth for 2023 would be closer to 9%. We highlighted this issue last year and reiterated it during our June IR Day, so it’s a reminder as you revise your models. With all this, we remain optimistic about our organic growth prospects for the second half of the year. Consequently, we now anticipate that full-year brokerage organic growth will be at the higher end of the 8% to 9% range. These figures do not include interest income. Moving to page five of the earnings release to examine the brokerage segment's adjusted EBITDAC table, we reported an adjusted EBITDAC margin of 32.1% for the quarter, which is an increase of about 50 basis points from the second quarter of 2022's FX adjusted margin. This performance surpassed our June IR Day expectations of a mere 10 basis point increase, primarily due to the additional organic growth. Looking at the bridge from Q to 2022, organic growth contributed to 100 basis points of margin improvement, incremental interest income added 90 basis points, and M&A activity—mostly from Buck—used about 80 basis points. Moreover, we made some technology investments amounting to around $7 million and incurred continued inflation in T&E costs of about $5 million, which altogether accounted for about 60 basis points. Following that bridge, the calculations result in the 50 basis points of FX adjusted margin expansion for the quarter. Regarding margin expectations, we forecast approximately 40 to 50 basis points of expansion for the next two quarters. For the year, we are a bit more optimistic than our previous April and June assessments and now expect full-year margin expansion of 30 to 40 basis points, or 70 to 90 basis points when factoring in the impact of Buck. These percentages reflect increases from prior year FX-adjusted margins. During our June IR Day, we provided context on modeling margins. Allow me to share 2022 margins, recalculated to current FX levels. In Q3 2022, EBITDAC margins would have been approximately 31.7% compared to the reported 32.3%. For fourth-quarter 2022, the impact is less significant, around 31.3%. Now, turning to the risk management segment and the organic growth table on page five of the earnings release, we also had an excellent finish to the second quarter, achieving 18.1% organic growth. As Pat noted, we continue to benefit from new business wins gained in the second half of 2022. Looking ahead, we forecast organic growth of 14% for the third quarter and about 10% for the fourth quarter, which reflects the comparison to last year’s larger new business wins. In terms of margins, on page six where the adjusted EBITDAC margin table is located, risk management reported 19.4%, aligning with our June expectation of 19% to 19.5%. We anticipate margins will exceed 19.5% in each of the last two quarters of 2023. Therefore, we expect double-digit organic growth and margins approaching 20%, which would set a record year for Gallagher Bassett. Next, let’s move to page seven of the earnings release, which covers the corporate segment’s shortcut table. Overall, adjusted results for the second quarter hit the midpoint of the range provided during our June IR Day, even with an additional $5 million in FX-related re-measurement headwinds that slightly impacted our quarterly earnings. Now, let's refer to the CFO commentary document. On page three, you will see that most second quarter results align with our June commentary. Looking ahead, we’ve updated our outlook based on current FX rates and provided our usual modeling tools for the second half of the year. Moving to page four of the CFO commentary document regarding the corporate segment’s outlook for the second half, the main point is there is not much change other than slightly weaker corporate expense and interest in banking costs due to a higher balance on our credit line, reflecting our strong M&A activity. On page five of the CFO commentary, we present our tax credit carry forwards. As of June 30, we have approximately $700 million, which will be utilized over the next few years, enhancing our cash flow and aiding in future M&A funding. Transitioning to rollover M&A revenues on page six of the CFO commentary, we recorded $151 million for the quarter, with Buck contributing almost half of that. Keep in mind, the figures in this table only include estimates for M&A transactions closed through yesterday. Thus, you should account for future M&A and increase interest expenses if you anticipate borrowing for part of the purchase price. Additionally, at the bottom of page three of the earnings release, we noted a higher than usual use of stock for tax-free exchange mergers this quarter. This approach can be variable, but it remains attractive for sellers wishing to defer full tax consequences from selling their firms, and beneficial for us as it aligns our new partners with our long-term shareholders. Regarding future M&A, we are very well-positioned. By June 30, we had more than $400 million in available cash. Our cash flows tend to be strongest in the second half of the year, and we have room for additional borrowing while preserving our strong investment-grade ratings. We project our full-year 2023 M&A capacity to exceed $3 billion and another $3 billion or more in 2024 without relying on any equity. Overall, it has been another exceptional quarter for our team. As CFO, observing from halfway through the year, the outlook for full-year 2023 on all fronts continues to improve, with better organic growth, improved margins, and a stronger M&A pipeline. In summary, we are in an excellent position to deliver another record year of financial performance. Back to you, Pat.

Thanks, Doug. Operator, let's go ahead and open up for questions.

Thank you. The call is now open for questions. Our first question comes from Weston Bloomer with UBS. Please go ahead with your questions.

Hi. Good evening. My first question, really good strong organic growth within brokerage and around 200 basis points of above what you'd said, I guess about a month ago. I was curious if you could spend on maybe what lines of businesses or geographies, or maybe whether supplementals or contingents that drove that outperformance? Curious of what we can extrapolate for the back half of the year or what is about the nature?

Yes, I think extrapolating for the back half of the year, we feel that our look towards nine and then eight adjusted to nine for the second two quarters probably the best way to look at what we think for the rest of the year. The upside was due to U.S. and also U.K. specialty; they just had a terrific June. So, but we're seeing that across the globe; there is a noticeable uptick here in June of success on our sales. And our retention are good and there is some positive light movement in those numbers too.

Also, I would say clients are getting pretty darn weary of a hard market and they're looking for good advice. And we're finding great strong growth in property casualty. The basic blocking and tackling, workers' compensation areas that in the United States at least we stand an opportunity to stand really ahead and shoulders above our competition, especially with the little guys.

Great, thanks. And second question on M&A. I believe you said 55 term sheets for $700 million in revenue. If I kind of go back do my model. I believe that's $700 million the highest I've seen maybe away from Gallagher Re. So could you maybe just expand, is there any 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?

No I think that what we're seeing is, first of all, remember, we talked about this quite often. We don't have one individual out prospecting. And we've got dozens and dozens of people that have now done deals in our company. They are 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're 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 calls, talking to people, renewing relationships we've had for years. And people get into a point where they're possibly 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 that increase in interest rates in the borrowing cost. There's been some stress on that side of the industry. And so, we're seeing that folks are really more interested in being with a strategic now than trying to sell into a PE roll-up.

Got it. Thanks. Yes. It was double-digit. I think $1 million in revenue per term. So I got a little excited there.

Me too.

And then last one, just on fiduciary, you'd highlight around 90 bps benefiting the quarters. Is that roughly what you have baked into the back half of the year when we think about your guidance?

Yes, I think that this, I think the biggest job here in 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 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 on your 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 from a thing of the brokerage business from an organic growth perspective, how do you think 2024 shaping up?

Elyse, I think it's going to look a lot like 2023. I'm not seeing any hesitation of underwriters asking for rate. 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. Property through the roof is reasonable. What we're seeing in inflation in terms of lawsuit, social implications we're searching for. It's very, very troubling. And then you had inflation. We've been talking about inflation, and it's called now for over a year. And you look back in the reserves and inflation tips those into a very difficult spot. And you're 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 they're making money, where they're not making money, and they're telling us what they need. So I don't see people backing off on that. No one's walking in 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 a broker, honestly. So I think next year looks very, very strong.

And then Doug, I know, the bar was a little bit higher for the level of margin improvement this year, as 2024 looks like 2023 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?

Well, my response to that is that I think you would see some margin expansion at 6%. I'm not sure if you would achieve that at 4%. By the time you reach 9%, it should exceed 50 basis points of margin expansion. Additionally, there's one more quarter of roll and impact from Buck that would show an increase in the underlying business, though that business operates at lower margins. Depending on the specific question, I would expect that margin expansion in 2024 could be quite similar to our expectations for this year. If we have six points of organic growth, there might be 40 to 50 basis points of margin expansion, and with nine points of organic growth, you could see 75 to 80 basis points.

And then, when you're talking about price increases, are you making that comment on, like a nominal basis or are you expecting that when you think about property casualty pricing over the balance of this year in 2024, that will continue to exceed loss trend?

Well, I think that's the battle isn't Elyse. I mean, the carriers are very much wanting and telling us they need that. So, yes, I think that would be the objective 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. Do you have some initial thoughts on what we could see from reinsurance pricing at January 1, 2024?

No. It's too early for me to comment on that, Elyse. I think, we just finished July, not as bigger month, obviously, as January, but interesting that the pricing was still very, very, very firm. The market after January had a time, better chance to settle down, look at their books to understand, January was a nightmare. So as we said in our prepared remarks, July was a little bit more orderly but still difficult. So, give me another quarter on that one.

Thank you.

Thanks, Elyse.

Our next question comes from the line of Mike Zaremski with BMO Capital Markets. Please just use your questions.

Hey, good afternoon. Investment income, is this the new run rate was better than expected or should we expect to take another like I guess, well, of course, the company's growing too?

Listen, I think the impact on our numbers, I think that it's actually will be the change in margin from investment income was 90 basis points. This quarter, we think it would be about 70 basis points in the third and about 50 basis points of margin expansion in the fourth. So, to me, I would say that the actual dollar amounts that you're seeing in the second quarter are not just similar to the dollar amounts that you would see in third and fourth quarter.

Okay. You are performing exceptionally well, but I'm looking for potential weaknesses. Let's be realistic. U.K. inflation appears to be high, along with wage pressures and a somewhat sluggish GDP outlook. How is your business performing there currently? Is the margin growing at the same rate, and do you have any comments on that?

Our U.K. retail business is thriving. I attribute this success to our team in two significant ways. First, we've invested in branding, something we neglected for years while consolidating companies like Giles, Oval, and Heath. After unifying these under the Gallagher name, we began to promote ourselves actively. Our partnerships in Rugby and the resources dedicated to branding have yielded remarkable results. People across the U.K. now recognize us, and our team is leveraging this awareness effectively. During my visits to our London offices throughout June and trips to Dublin and Belfast, I noticed an undeniable energy among retailers. They are performing exceptionally well, enjoying their work, and securing more business for the upcoming quarter.

Okay. Since Elyse asked, I want to sneak in a quick question. Regarding the pricing environment, how much do you think the reinsurance costs are being passed through? It seems like it isn't a major issue since you mentioned next year might be similar to this year, so there shouldn't be a decline. However, I'm interested to know if you believe there's some positive momentum from 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 and their past reserves and, if you plan to rebuild a house for a million dollars two years ago, you're not going to spend a million dollars. So they are looking at those reserves. Then secondly, they're still in a process of making sure that we get our 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 and telling our retail clients, well, this part is for reinsurance. They're saying, look guys, on this line of cover, we need 25 points. Go get it. And that'll hold as long as we have to, in fact, do that to get the deal done. Now, remember, we are scouring the market for some little do-for-ten, because that's our job. But right now, there's no break in that.

Thank you.

Thanks, Mike.

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

Hey, good afternoon, Pat and Doug. Hey, I wanted just to have you for a moment talk about new business. Because when you look at the organic result, 10.8%. You look at renewal pricing 12%. When you went through a bunch of lines, Pat, where pricing was clearly double digit. And so, and you also made this comment about your clients having a budget. Just curious how much of the growth organic is rate versus exposure, existing clients versus new business, and has that balance changed at all in the last year?

Let Doug talk about the actual numbers because I'm more off the cuff. And then I'll come back in on how I see the market shaping. Go ahead Doug.

So, Greg, our net new business has increased by two percentage points this year compared to last year, while our total rate in exposure has risen by about one and a half points. This indicates that our growth in new business exceeds the impact from the rate increase.

Now, let me add some color to that, Greg. Number one, we're doing a much better job, I think, 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 receiving on new business has moved up from, let's call it $50,000, $60,000 into closer to $175,000 to $100,000. 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 and 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 in new business. Our goal has always been 15% of trailing. We're just about right there. And as our trailing revenue growth continues, that pushes us in terms of our goals for more new business. And we are right on track with that. And when you start having 15%, 16%, 13% of trailing in new business, as long as you continue those retention levels, 94, 95, et cetera, you're getting very, very nice upside.

Yes, that's good. Those are good numbers. I think I've opened up a can of worms, because we're going to want to start tracking the net new business wins you guys are posting on a quarterly basis.

I'll give you that. Go and ask.

Yes. In your comments, Pat, you also talked about on the theme of poking holes, right? You talked about the employee benefits business kind of stood out. That MGA business being low single-digit, mid single-digit type of organic. 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 your comments?

Well, let's talk about the benefits business first. It's adjusted for the large life case 5%. I think that's pretty in line with maybe what some of the other brokers have talked about in their employee benefit space. So I wouldn't say it's necessarily out of whack compared to what's going on. That business right now doesn't have the cost increases that it's going to have. I think there's going to be medical inflation in that coming up. We're going to see 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, and that business was growing almost double digits also. So that will have an impact because you can't keep the inflation out of that space for too much longer. So that would happen. On the program business, you just understand in our case, there's some programs that if there's a change in the state or there's a change in the carrier appetite, sometimes that can cause a little bit of stress in that business. But still, being in those single digit organic ranges are still pretty good in this environment.

Yes. Let me expand on that. Currently, our clients are facing wage cost inflation as they struggle with rising living costs, such as purchasing food. Consequently, they are not looking to enhance their benefit offerings. Instead, they are focused on managing increased costs while trying to balance the regular income for their employees and maintain their workforce, which is quite challenging. Our consultants are doing an excellent job during this tough period. Aside from health and welfare, the orders coming through our consulting business are exceptional. It's really about finding a balance. I also agree with Doug that clients are working to address inflation in health coverage and compensation costs for their employees while doing everything they can to mitigate these issues. This is where we excel, helping clients manage these changes. We also offer a lot of our services on a fee basis. Therefore, when confronted with rising compensation costs and the expenses associated with health insurance, clients are understandably reluctant to grant a significant rate increase to GBS. Securing a five-point increase in this context is quite reasonable.

Fair enough. Just I know you provided some data. It's just the final question. I know you provided some data around Buck and the integration. That's a business that has had sort of a checkered past of success and 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?

I am really excited about that business. I've been involved for a quarter now, and we had our board meeting yesterday where the team responsible for the integration and onboarding reported to our board as we do for our large deals every quarter. The synergies are significant. First, the management team is thrilled to finally have stability after being traded five times. This situation can be confusing, as ownership changes frequently, making it hard for employees to feel settled. A major part of our onboarding effort has been to reassure these individuals that they have found their last place, and now we can focus on taking care of clients, which is something consultants appreciate. I've spent time with the team in the UK and here, and the message is resonating well. Our employee retention is exceptional, and the volume of orders we're receiving in just one quarter is astounding. Additionally, we see promising synergies that aren't just about cost reductions but about cross-selling opportunities, which we are already starting to witness. I believe everything will be just fine as we move forward, and I'm only one quarter into this transition.

Well, thank you for your answers and the answers make sense.

Thanks, Greg.

Our Next question is from the line of David Montemaden with Evercore ISI. Please proceed with your question.

Hey, thanks. I just wanted to follow-up just on the group benefits organic and just on the deceleration, which is still a 5% is good extra life sale comp. But that was down for 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 move up higher in 2024?

I wouldn't be modeling out, David, a huge acceleration there. I mean, I spent a lot of time with Doug on the street explaining why 3% organic was outstanding just a few years ago. Yes, there's all, I'm now looking it. I'm now looking at a business here that is accepting hard rates. Given the fact that there's big loss cost trends or reinsurance trends, these are people buying insurance and in many instances, not buying insurance; that's the biggest part of what we do is help people self-fund. And that 5% growth is earned with a lot of discussion with a client. It's more akin to what Gallagher Bassett's getting in terms of their renewal increases rather than what you look at 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 to 12%. That's not happening.

That business tends to be quite focused on the first quarter. This means that when you sell an account in the health and welfare segment, you have to account for the entire year. Additionally, consulting revenue is typically higher in the first quarter because many clients finalize their benefit programs in January. As a result, we generally earn more in the first quarter.

Can I answer an underlying question I hear from you, David, and the others. Why do we do the Buck 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 pain mitigation people. And it's sure it's in property, casualty, its specialty property. And we're out there working every day to help them get that down. We're bringing self-insurance plans, captive plans, group plans, what we can on the PC side. And every year, year in and 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, when it 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. I want to switch topics to the property casualty rating increases. You provided some numbers earlier that I missed, and I would like you to elaborate on what you're observing specifically regarding casualty rates. It seems like there is an acceleration, particularly if I exclude D&O and workers' comp. I'm curious if this is indeed what you’re seeing and how sustainable you believe that acceleration is.

What I've mentioned earlier is that the general liabilities are around eight. Workers' comp, which has been stable or declining for several years, has increased by about three. Additionally, umbrella and package rates have risen by approximately eleven. Each of these categories has various contributing factors. General liability is influenced by social inflation and likely the aging population. Workers' comp is closely tied to medical costs and employment levels. The rise in umbrella and package rates is also likely impacted by social inflation, while property rates have increased by twenty percent, driven by exposure units and the necessity for rate adjustments.

Yes. David, when I look at it, you want to break it on general liability umbrella of other casualty call that 8% to 9% is what we're seeing here on the sheet commercial auto is 8.5% or more. And that's a U.S. business that I'm telling you about. So I think in the second word, call it 8% to 9% on casualty.

Got it. And those did tick up versus 1Q, it sounds like?

Yes.

A little bit.

Yes. Especially commercial auto its more around six and now its 10.5.

Got it. And then, could you just level set me, if I think about full year, the business that Gallagher rates in brokerage. How much of that is coming from property at this point?

Properties is our largest line. Doug, will give that number.

About 30% here for the full year 2022. That's about 30% of what we write.

Great, thank you.

Thanks, David.

Our next question is from the line of Mark Hughes with Truist Securities. Please proceed with your question.

Yes, thanks. Good afternoon.

Hi, Mark.

Pat, you talked about medical inflation. You think it's going to accelerate. Given that the broader measures of medical costs are pretty calm these days. I wonder what gives you confidence that that's going to happen?

I don't know if I'd say it's confidence, Mark. I mean, I'm not so sure it's good news for this society or for our clients. But social inflation, medical practice cost cover, and any kind of losses in that regard in the cost of employees. And you take your hospitals right now are working very hard to make sure that their people stay with them. Their turnover rates with the pandemic and the like have increased. Keeping their employees is a big deal. And the costs are doing that.

Specialty drug.

No, on specialty builds 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 Katie Saki with Autonomous Research.. Please proceed with your question.

Hi, Thanks. Good evening. I want to follow-up a little bit on the line of questioning on the Buck. And clearly an acquisition that definitely expands here. Ability to serve your clients from this 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 the drive or the impact that Buck has on brokerage margins over the back half of the year? Any opportunity you guys are seeing to increase cross-sells or maybe find some expense synergies. Or should we kind of expect that to materialize more in 2024?

I think it's more 2024, Doug?

Yes. I would say 2024 and 2023, we're still getting our feet under it. But also I'd like to have a friendly amendment to the statement. So that roll in natural impact of a business, it just runs naturally slightly lower margins. Call it in the 20s somewhere versus in the 30s, right? So the drag on us is what you see on the face of it. But they actually have a nice improvement opportunities as we join forces together to get better themselves. And that's really what we're looking at. If we can take this business that's in the upper teens and move it into the mid 20s. I think that's a good march for that business. And I think cut that at best. They've wrote to five different owners. They have spent so much of their time and in the last couple of recent roles of becoming a free-standing independent organization. And there's extra conflict goes into that. By being a part of us and us being better together, I think we'll naturally see that natural improvement in their underlying margins. So they should be margin creative after you get to, as they improve their margins, they will improve our margins once we get through the first quarter of 2024.

Katie, regarding your point about cross-selling, we definitely see opportunities between PC and benefits, as well as benefits to PC. What excites us is the potential for cross-selling within Gallagher benefit services. Their strengths in the U.S. lie in areas where we're not as strong. While we have a solid background in defined benefit pension consulting, they excel in that area. Conversely, we've been stronger in health and welfare. This means we're not reaching out to a completely new client but working with someone who already purchases benefits. We can easily introduce my partner who specializes in health and welfare, and we're already witnessing this collaboration. I believe there is significant potential for cross-selling, and I'm enthusiastic about the margin improvements that will come from it.

Thank you so much. And then, one more question on the outlook for risk management.

Thank you. Our final question is from the line of Michael Ward of Citi. Please proceed with your question.

Thank you for your time. I was curious about the M&A pipeline you've mentioned. Would you say it's primarily focused on Property and Casualty, or could there also be opportunities in employee benefits?

Oh, there'll be both. Yes, we keep a good strong pipeline on both. Now, we're not going to have another Buck on that list. I mean, Buck is 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's lots of activity in that regard.

Yes, I believe that any smaller brokerage business that recognizes a need for additional capabilities, whether in property and casualty or benefits, faces a similar decision. The owners of these businesses often conclude that collaborating with us will enhance their ability to serve clients. They can receive various capabilities from us, whether it involves wholesale, retail, or benefits, including those found in Gallagher Bassett, where there have been significant acquisitions. Ultimately, the owners sell their businesses because they require these capabilities and believe Gallagher is the best fit for obtaining them.

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 that has calmed down a little bit as inflation overall has slowed down?

Yes. Here's the thing. We didn't see the great resignation that you read about in the papers. We talked about that quite a bit. We were very fair with our employees on the amount of raise pools that we've given those raised pools are larger in 2022 and 2023 than they were in 2018 and 2019 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 have been very fair and have acknowledged the inflation and the environment. We haven't really sat down to plan for next year yet to see where we'd be in those raised pools, but obviously we'd be fair with our folks. But as you see, some of the inflation numbers are cooling down and what it costs to live. But by and large, I think that we've been very fair. Throughout our history, we have 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 final question is from the line of Scott Heleniak 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, you've both claims count and severity and kind of what you're seeing versus either recent quarters or year-over-year, and I guess I'm more interested at. I know you touch on a little bit just on some of the casualty lines and workers comp and liability and kind of what you're seeing there in terms of the counts and the average claims size that you're handling at Gallagher Bassett?

All right. So three things on that. First, when you look at it, we were seeing more COVID claims last year and that's basically gone to very little at this point that we still grew through that. Kind of existing customers, we consider that the claims are rising for existing customers to be flat-ish, maybe out a little bit. Now that was a trend that we were seeing also when you go back pre-pandemic, because as workplaces get safer and safer, so we're really the success that you're seeing in the organic is really our new business and excellent retention. So that kind of tells you, flat-ish from existing customers growing through the loss of COVID claims and conservatively better new business and better retention. What are we seeing 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%, but overall something like that.

Okay. That's a helpful detail. And then just another question on the M&A pipeline since it was so significant compared to recent quarters. Just wanting if you can also just talk about or comment on how much of that is, how much of the trend you're seeing is international versus domestic. I'm not looking for a specific breakdown, but anything you can share there on, or you continue to look at a lot more international deals than you had over the past few years?

Now international pipeline is pretty steady. The majority of what we're looking at as U.S. domestic.

Okay. And then finally, any earlier read on to my renewal premium. I know it's probably a little bit early, but how that's comparing? Is it 12% or is it just too early on that?

Our July numbers are better than our June numbers. I looked at the overnight for last year and there is a noticeable difference. Now July's not over. A lot of your activity happens in the last week here, but right now our early reads month-over-month as well as another step up.

You bet.

The final question is follow-up from Weston Bloomer with UBS.

Hey, thanks for taking my follow-up question. Are you guys closing with free cash flow was in the 2Q or any updates on the level maybe as a percent of revenue they're expecting for full year as you integrate Buck or given the strong 2Q?

The second quarter is typically our smallest due to the payment of incentive compensation in April. Consequently, the first half of the year is weaker, while the second half tends to be stronger. We recognize that you may analyze these figures more closely than we do, but our cash flows generally mirror our EBITDA growth, largely due to our tax credit. Our tax liability, as a proportion of our EBITDAC, typically hovers around 8%. Capital expenditures remain consistent with the previous year, so there's no major variation there. The main factors affecting our cash flows compared to EBITDAC are slight tax changes and minor increases in capital expenditures, along with the integration costs, some of which also affect our cash outflow. Overall, our cash flows closely align with our EBITDAC, meaning that the growth in EBITDAC is closely reflected in the growth of our cash flows.

Got it. Thanks. And then maybe ex integration cost 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, we're not spending that much that on integration on this acquisition. So I would say over three years I think we're going to spend $125 million something like that. And it throws off cash flows and that's what it's about.

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 and the team are extremely pleased with our second quarter performance. We're reflecting on fully year 2023 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 48,000 colleagues around the globe, thank you for all you do day in and a 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 line at this time.