Good afternoon, and welcome to Arthur J. Gallagher & Co.'s Fourth Quarter 2023 Earnings Conference Call. Participants have been placed on the listen-only mode. Your lines will be open 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 and CEO of Arthur J. Gallagher & 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, headline 8.1% organic growth, but that's more like 9.4% controlling for the 606 accounting and large life case timing. We also had a terrific merger and acquisition quarter. We completed 14 mergers totaling $410 million of estimated annualized revenue. GAAP earnings per share of $0.30 and net earnings margin of 2.8% 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 EBITDAC margin of 30.1%, up 69 basis points over fourth quarter '22. What a terrific quarter to close out an incredibly good year by the team. 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. Moving to results on a segment basis, starting with the Brokerage segment. Reported revenue growth was 20%. Organic headline was 7.2%, but I see it more like 8.7% without the accounting and timing noise, and 11% if you include interest income. Adjusted EBITDAC was $647 million, growing 21% year-over-year, and we posted adjusted EBITDAC margin expansion of 48 basis points. Let me give you some insights behind our Brokerage segment organic, and just to level set, the following does not include interest income. 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%, controlling for the timing of those large life cases. Shifting to reinsurance, wholesale, and specialty businesses, overall organic of 14%. This includes Gallagher Re at 12%, U.S. wholesale at 12% and U.K. specialty at 16%. So, all of these are very similar to what we were seeing throughout the year. Next, let me provide some thoughts on the P/C insurance pricing environment, starting with the primary insurance market. Global fourth quarter renewal premiums, which include both rate and exposure changes, were up 8.5%. That's in-line with the 8% to 10% renewal premium change we have been reporting throughout '22 and '23. Renewal premium increases continue 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 about 10%. Shifting to the reinsurance market. 1/1 renewals were orderly reflected a more balanced supply-demand dynamic. Continued strong demand for property cat cover was met with sufficient reinsurance capacity from existing reinsurers and cat bonds. Importantly, reinsurers continue to exercise discipline on pricing and terms, not giving back the structural changes achieved last year. In casualty, while there was adequate supply, most casualty treaties experienced pricing pressure. Specialty lines renewed mostly flat. However, coverage limitations continued on war-related products. So, in our view, insurance and reinsurance carriers continued to behave rationally, pushing for a rate where it's needed to generate an acceptable underwriting profit. Property 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 multi-year journey of rate increases. All that said, always remember, our job as brokers is to help our clients find the best coverage while mitigating price increases. So, not all these renewal premium increases ultimately show up in our organic. Moving to our customers' business activity. Overall, it continues to be strong. During the fourth quarter, our daily indication showed positive midyear 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 in non-farm payrolls and low unemployment rate, which is why I believe our HR consulting retirement and benefits business will have terrific opportunities in '24. 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. Our client service is top-notch, and our data and analytics continues to distance ourselves from the competition. We can handle any account of any size, anywhere around the globe. 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. Shifting to mergers and acquisitions. We had an excellent fourth quarter, completing 13 new brokerage mergers, representing about $350 million of estimated annualized revenue. I'd 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 we are off to a strong start to '24. We've already closed four 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. We know not all of these will ultimately close, but we believe we'll get our fair share, clearly, a very strong pipeline. Moving on to Risk Management segment, Gallagher Bassett. Fourth quarter organic growth was terrific at 13.2%, full year at 15.8%. Adjusted fourth quarter EBITDAC margins of 21% and full year at 20%, all this right in line with our December expectations. We 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 outstanding year. And I'll conclude with some comments regarding our bedrock culture. 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 '23 results for our combined Brokerage and Risk Management segments of 18% growth in revenue, of which 10% was organic. 51 mergers with nearly $900 million in estimated annualized revenue and 20% growth in adjusted EBITDAC. Most importantly, we have a culture that our people believe in, embrace, and live every day. It's a huge competitive advantage and will continue to fuel our success and growth. That is the Gallagher way. Okay. I'll stop now and turn it over to Doug.

Thanks, Pat, and hello, everyone. Today, I will discuss our earnings release, focusing on the fourth quarter and full year in terms of organic growth and margins by segment. I will also share insights on our full year 2024 outlook. After that, we'll look at the CFO Commentary document posted on our IR website, where I'll go over some typical modeling aids and present two brief discussions—one on investment income and another on earn-out payable accounting. I will wrap up my prepared remarks with comments on cash, M&A, and capital management. Let's move to Page 3 of the earnings release. The fourth quarter Brokerage organic growth of 7.2% aligns with our December expectations of 7% to 7.5%. However, as Pat mentioned, it is closer to 8.7%, and if we include interest income, organic growth rises to 11%. That's an impressive quarter, regardless of the metrics you focus on. There are a couple of points to highlight on this page. First, contingents performed slightly better than our expectations from December, due to improved carrier performance. Second, the base commission and fee organic growth stands at 6.5%, which should be normalized for the impact of 606 in those life cases. Adjusting for this takes it over 8%. Looking ahead to 2024, our outlook for the Brokerage segment remains unchanged from our late October and mid-December projections. We still expect full-year organic growth to fall within the 7% to 9% range. Now, let’s turn to Page 5 of the earnings release, where we see the Brokerage segment adjusted EBITDAC table. The adjusted fourth quarter EBITDAC margin increased by 48 basis points. Keep in mind, this requires recalculating last year's fourth quarter using current FX rates, which we did for this table, showing a margin of 31.3% for the fourth quarter of last year. Achieving a margin of 31.6% this quarter reflects that margin expansion, which is right at the high end of our December expectations. When accounting for the recently closed Buck deal and other mergers that have seasonal implications, the margin expansion would have been 150 basis points. That's an excellent achievement by the team. Looking forward to the next year, we expect some full-year margin expansion starting at 4% organic growth. If organic growth were to double, we might see about 60 basis points of expansion, acknowledging around 40 basis points of pressure primarily due to the Buck acquisition. On a quarterly basis, the headwind amounts to approximately 80 to 90 basis points in the first quarter of 2024, so please consider this in your models. Now, shifting to the Risk Management segment and the organic and EBITDAC tables on Pages 5 and 6, Gallagher Bassett had another strong quarter with 13.2% organic growth and margins at 21%. We continue to see benefits from new business and strong retention. Looking ahead, even as we compare with growth from significant new wins in early 2023, we anticipate full-year 2024 organic growth in the range of 9% to 11% and margins around 20%, which remains consistent with our December assessments. Let’s move to Page 7 of the earnings release, where the corporate segment shows total adjusted fourth-quarter numbers slightly exceeding our more favorable December expectations, primarily due to less borrowing on our credit line and lower corporate expenses. Now, let’s transition to the CFO Commentary document on Page 3, which offers numerous modeling aids. Most of the actual fourth quarter figures are close to our December IR Day estimates, and we've now added information for 2024, so please take a look. Specifically regarding FX, we expect a minor headwind to EPS in the first half of the Brokerage segment. On Page 4 of the CFO Commentary, the corporate segment outlook for full year 2024 remains unchanged from our estimates provided six weeks ago during our IR Day, but we are now offering quarterly estimates. Please refine your models with this added information. On Page 5, there's a recap of our tax credit carryforwards, consistent with discussions from our December IR Day. We've managed to reestablish some of our tax credits following the change in tax method when we filed our 2022 U.S. federal tax return in the fourth quarter. As of December 31, we have about $870 million in tax credits available, which is a beneficial future cash flow source to fund forthcoming M&A. Now, let’s look at the new table on Page 6, which addresses questions about our investment income. This line encompasses premium finance revenues, book gains, equity investments in third-party brokers, alongside interest income. This table provides a breakdown by quarter, which we hope you’ll find useful. We've also renamed the line in our financial statements for clarity; there are no changes in numbers, just an expanded description. On Page 6, total Brokerage rollover revenue for the fourth quarter was $180 million, consistent with our IR Day expectations. Looking ahead, we've included estimated revenues for mergers closed up to yesterday for both the Brokerage segment in that table and for the Risk Management segment in the text below. Based on the mergers closed through yesterday, we estimate about $540 million of rollover revenues to be recognized in 2024. Remember to include future M&A and account for interest expense, as some acquisitions will be funded through borrowings. On the topic of M&A, as we indicated in December, we have increased our estimated earn-out payable for Willis Re this quarter because we can now more accurately gauge potential payouts in the first quarter of 2025. The accounting for earn-out payables can seem counterintuitive; if performance expectations improve, it leads to GAAP expense, and if they worsen, it results in GAAP income. This is what Pat referred to when mentioning the complexities of accounting. Despite these adjustments creating some GAAP earnings noise, it's important to note that our reinsurance business is doing exceptionally well. Now, regarding cash, capital management, and M&A funding, our available cash as of December 31 was around $400 million. With another year of strong cash flow expected in 2024, we anticipate a capacity of about $3.5 billion for M&A funding this year, utilizing only free cash and additional borrowings. In conclusion, reflecting on 2023, two key metrics for our combined Brokerage and Risk Management segments illustrate our success: an 18% revenue growth, equivalent to an increase of $1.5 billion, and a 20% growth in adjusted EBITDAC, nearly $550 million. The team delivered another outstanding year, and we have great momentum to achieve even more in 2024. Back to you, Pat.

Thank you, Doug. And operator, I think we can go to questions now, please.

Thank you. Our first question is from Elyse Greenspan with Wells Fargo. Please go ahead with your question.

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 you're assuming for pricing and economic exposure throughout the course of the year?

Well, I think when we did that in our budget process, the range of 7% to 9%, it's pretty much so what we're seeing today throughout next year is really the assumptions. Where are we today in pricing, where are we in exposure units, what we've been running here this year, we don't see a lot of change to that next year.

And then when you guys go through and come up with the 7% to 9%, are you assuming that all of your businesses will be in that range? I mean, now you've been seeing really strong growth within reinsurance, wholesale, and specialty. Are those expected to continue to be above and maybe some of the others like benefits might be below? How do you see the different businesses shaking out in '24?

All right. So on that point, not every business has given a flat target number, they view it based on what they're seeing in the marketplace rate, exposure, opportunities, hiring, hiring new producers. So, every business does that differently. What would I say is being different? Who's on the upper end of the range? And who's on maybe the lower end of the range? 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 in that. But by and large, each business unit rolls it up and that's how we get to that 7% to 9% range.

And then, Pat, you mentioned some interesting comments on the casualty side. We're starting to hear your thoughts about pricing pressure and just you said right, multiyear journey here. Can you just tell us like what you're seeing and then how you expect this cycle could transpire assuming we do start to see more reserve holes emerge across the industry?

Well, I just think it makes some logical sense, at least. When you take a look back, we saw this in the property side. Nobody touched values for five, six, seven years because inflation was zero. And so you've got a bunch of reserves on the casualty side, set 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 at these settlements that are, in fact, nuclear. And you start to say, well, all right, how well are those reserves going to 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 is that they have some concerns there that they are not necessarily comfortable with exactly where they are. And so, our view on that is, okay, if you take a look at 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, that's something with the kind of payout structure that you have in casualty that you need to get in one year. So, I think you're going to see possibly affirming that does, in fact, take a few years to catch up with reality.

And then one last one. Have you guys reserved to the maximum on the earn-out associated with the Willis Re deal?

Yes, we will need to account for that for another year. There is approximately $50 million of accretion that will be reflected in the financial statements this upcoming year.

Thank you.

Thanks, Elyse. Thanks for being with us.

Thank you. Our next question is coming from Mark Hughes with Truist Securities. Please proceed with your question.

Yeah, thanks, good afternoon.

Hi, Mark.

Pat, 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 the 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 that running around 13% to 15%, you're probably looking at 5% on the programs.

And then, what's your take on the property market? Do you think little bit of deceleration there? Well, one, do you think that's the case? And two, would it have any kind of material impact on your organic?

I believe any change in pricing will affect organic growth. However, I don't see carriers currently indicating they can reduce prices. We are still experiencing upward pressure on property rates. Additionally, carriers are very focused on valuations, which were overlooked for a long time when there was no inflation. Now, with claims coming in and not receiving appropriate premiums, replacement costs are significantly higher than expected. Therefore, I think we still have some time left for valuation corrections, and there is a necessity for ongoing rate increases.

Thank you very much.

Thanks, Mark. Thanks for being with us.

Thank you. Our next question comes from the line of Mike Zaremski with BMO Capital Markets. Please proceed with your question.

Good evening. My first question is about mergers and acquisitions. Your team has been very successful in integrating and acquiring firms. However, I'm wondering if the available options have changed recently. For instance, you've announced several bank-owned brokers, but it seems that historically, two of your competitors were the primary players in that market. One of them has mentioned that those deals can be challenging, often requiring a couple of years to become the successful enterprises they should be. It seems like the situation might be a bit different now. I'm curious if the pool of opportunities is evolving, which could mean we might see different types of deals in the future compared to what we've seen over the past five to ten years.

I want to emphasize that when we make acquisitions, we benefit in two key ways. We gain revenue and earnings, which are important, but we also acquire exceptional talent. The bank-owned deals tend to be larger, and they come with a wealth of skilled individuals. Along with this expertise, we also see increased volume in areas that help to elevate our brand. This contributes to a positive cycle of awareness about Gallagher, as new teams engage in our operations and calls. Our acquisition targets often come in and quickly become enthusiastic participants; they fuel our organic growth. Even our smaller, regular acquisitions often include teams that haven't previously engaged with larger clients in their regions. Once they join us, they immediately start reaching out to clients, introducing Gallagher’s capabilities and expertise in areas like data and analytics. We equip them with tools to understand customer needs, such as appropriate purchasing decisions and coverage limits. The enthusiasm is quick to spread, with new teams reaching out right away to announce their integration into our firm, and they are very proactive from day one.

Let me add one thing on that. I think that the organic growth in Cadence and Eastern is running very similarly to what we're experiencing in our comparable regions. Your assumption was that it would take some time to restart them, but I believe they’re already up and running. Buck is already demonstrating significant organic growth. However, we won't reflect that in our numbers for a year. If someone sells something within that year, we receive the revenue but not the credit for organic growth in our metrics. So, I wouldn't agree with the notion that the companies we acquired needed a restart.

No, in fact, Mike, what we're talking about in our process is the Gallagher effect. The Gallagher effect refers to what happens after you announce you're part of Gallagher. It's not a slowdown; rather, it energizes the team to go back and discuss the new opportunities available. It's not just about knowing someone and having a relationship in the marketplace. It's about bringing data and analytics to the conversation, showing what's happening in our niches, and introducing experts in specific areas that could be valuable. It's quite exciting, and when I get involved, it really motivates me.

I appreciate the information. Changing topics, could you clarify something for me? During the December Investor Day, you discussed several reasons for lowering the near-term 4Q organic growth estimates compared to your previous outlook. It seemed that some of these reasons suggested a shift toward 2024, particularly regarding life insurance and the potential recovery in the entertainment business. However, I noticed you didn't mention your guidance for 2024. Should we anticipate that the first quarter or the first half of the year might see a larger increase than usual due to seasonality, or am I overinterpreting this?

I think you're missing the magnitude of this. In the quarter, let's call it, $10 million, we get $15 million in total here that gets pushed out on a $10 billion business next year. Okay, it's 10 or 15 basis points in there, but so that wouldn't be enough to change that 7% to 9% guide in there.

Okay, you're one of the leaders and have been successful for a while in your area of expertise. Are there any changes in the direction you discussed last year regarding the goal of possibly doubling the percentage of employees in that area over the next five years?

I think what we said is that over the next five or seven years, we'll need twice as many people there as 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 standardized in many of the processes that we do. We now have the opportunity to unleash AI on that because that's already done. We have made that investment. And now what we can do is deploy AI against it. And, look, those folks, if you're going to hire twice as many folks, they're going to end up with better jobs over there because they're going to be using AI. So, our colleagues there are going to be well-rewarded by deploying that technology into it. So, we are really fired up about it.

Yeah. 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 that's going to lead to plenty of opportunities there. Secondly, and I think this is a hugely important point. Standardizing a Brokerage business from an agency system through the operating processes to things like issuing certificates of insurance is a challenge. It takes four, five years to bang it through. I've done it. It's a headache. We're there. We don't need to do it. We don't need to sell it. It's standard operating procedure. When you join us, you know that in your due diligence, you come aboard, you plan the effort to change into our agency system and you get rewarded for it by virtue of the data and analytics we can provide you to go out and sell. 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.

Hey, good evening.

Hi, Dave.

I have a question regarding the favorable timing during the quarter for incentive compensation expenses that contributed to the margin in Brokerage. Was that a significant factor? Additionally, is this something you have factored into the first quarter of '24?

We previously mentioned that we were likely a bit ahead in our incentive compensation accruals during our April or June call. This has been factored into our guidance for margin expansion since then. Therefore, there is no new development regarding our expectations in December compared to what we achieved this quarter. The impact of this isn't significant; it's not a major number.

Got it. Understood. And then I just wanted to come back to the 7% to 9% Brokerage organic for 2024 and sort of level set in terms of what you guys are thinking on the exposure growth side, the range of outcomes that you guys are considering within that 7% to 9%.

All right. When we analyze our organic growth, we typically see more net new accounts compared to losses, which is likely around 3% to 4%. With the addition of some rate, we might be looking at around 2 points, with another 2 to 3 points coming from exposure unit growth. I believe we'll see more improvement next year from new accounts relative to losses, likely in a proportional manner. If we consider 9%, it could break down into three equal parts. For 7%, it’s probably mostly new business along with a significant contribution from exposure unit growth.

Good evening, everyone. I guess I'm going to the new table that you added to the CFO Commentary, which we appreciate, which is the interest income, premium finance revenues and other income. And 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, there's 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's some benchmarks you can provide for us that will help us sort of map out what we think might happen there.

You have the rate sensitivity and the cash on our balance sheet, which includes both ours and our clients'. First, it's about the rate we are earning and what that rate applies to. Secondly, regarding the Fed, only about 45% of our U.S. interest income comes from that. It’s more weighted towards international sources, mainly due to the large reinsurance balances in some of our significant specialty businesses in the U.K. So it's important to distinguish that. Additionally, the growth we saw this year was not solely because of the rising rates; it also came from the transition of reinsurance receivables from Willis’ books to ours under the transition services agreement. What you’re inquiring about is how sensitive that income is to rate changes. I would estimate it's price-sensitive to about $5 million for each rate cut by the Fed in the U.S. annually. So, if there are four cuts, that could translate to about $20 million. Regarding the actions of other central banks and their policies next year, I don’t have that information readily available. But for the Fed, consider it as $5 million per cut.

Excellent. Just a follow-up on that table for '23. And what quarter did the services agreement with WTW shift? Because I assume that would have meant the change...

July 1.

July 1. So when we're looking at the third quarter and fourth quarter, that's more normalized under going forward operating conditions, correct?

That's correct.

Thank you, all. Good afternoon or good evening.

Hi, Yaron.

First question I have, and forgive me it's a bit nitpicky here, but in Brokerage organic, I know the organic came in-line with December guide. But I think contingents were a bit better than you were expecting. You were already accounting for the life case timing and the 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 incorrectly?

There may be about $5 million less than we anticipated for a few of them. However, when considering a $2 billion quarter, that $5 million does adjust the percentage slightly, but it isn't significant. Looking back at last year, we had percentages of 11%, 7%, 9%, 7%, and 8% in various quarters, so there is some fluctuation. The fact that we managed to stay within a 0.5 point margin shows that a few million dollars here or there can lead to some variability.

Thanks. I think two really small ball questions. Doug, you talked about why contingents in the fourth quarter a little bit better than the December expectation. But it also sounds like you're not expecting reserve development to be a problem in 2024 if contingent organic matches core organic. Am I thinking about that right?

No, I didn't say that. I think that on the casualty lines, I think that would impact our base commission. I don't see it really eroding our supplemental or our contingents. If we do have a reserving, again, I don't like you to use word crisis, but if there's something like that that happens maybe something that, but I don't see that eroding the contingent commission substantially next year as they take rational and orderly rate increases.

Thank you all again for joining us this afternoon. To our 52,000-plus colleagues across the globe, thank you for another fantastic year. Our achievements are due to all of your hard work and dedication. As thrilled as I am with our fourth quarter and full year '23 performance, I get even more excited when I think about our future. We operate in an essential industry for the economy within a fragmented market, having leader data and analytics and niche expertise and limited global market share. So I believe our opportunities for future growth are immense. And while I always say, we're just getting started. It's pretty cool to be Gallagher. We look forward to seeing you at our mid-March IR Day. Thanks for being with us today.

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