Arthur J. Gallagher & Co. Q1 FY2026 Earnings Call

Good afternoon, and welcome to Arthur J. Gallagher and Company's first quarter, 2026 earnings conference call. Participants have been placed on a listen-only mode 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 meanings 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 risk and uncertainties that could cause actual results to differ materially. Please refer to the information concerning forward-looking statements and risk factor sections contained in the company's most recent 10K, 10Q, and 8K filings for more details on such risks and uncertainties. In addition, for reconciliation 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 & Company. Mr. Gallagher, you may begin.

Thank you very much. Good afternoon, and thank you for joining us for our first quarter 26 earnings call. On the call for me today is Doug Hall, our CF, 28% in the first quarter, driven by strong endurance and benefits. The revenue is up for strong client retention. And we continue to generate 10% and adjusted EBITDA growth of 18%. This quarter marks 24 consecutive quarters of double-digit adjusted EBITDA growth. And we had another quarter of solid underlying margin expansion in a few minutes. Mergers and acquisitions, improving our productivity and quality, and our culture so there's an acceptable blend by seeking rate increases where needed to generate an appropriate underwriting profit insurance renewal premium actually classes and our global pc retail businesses percent with rate pressure most and larger risks commercial auto and umbrella just increased four percent in the quarter driving much of the down sub markets behaving differently after several years of a very strong hard market remain healthy as well as umbrella E&S professional lines are largely stable, with renewal premiums up low single digits, and E&S continues to come from admitted markets and represent a structural multi-year growth. In the first quarter, we saw strong growth across lines and across geographies, with another excellent quarter of new business overcoming rate headwinds. At the 1-1 renewals, we saw rate decrease in especially lines. At the top end, the pricing was broadly. remain cautious around the United States in selected markets. Japan's specific renewals, continued interest from just marine war and political ultimate impact on the market is ideal for our region. In North America, can't expose property while competition in D&O, professional lines, financial institutions, and cyber is moderating. Remain the clear exception. Marine, aviation, and political conflict zones are seeing significant repricing and more selective deployment of capacity. WorkCover remains available across London, the U.S., and our international network are working closely together to navigate the employee benefits. We have a steady demand from executive benefits, life, and HR solutions. Our clients are still actively hiring and remain focused on talent attraction and talent retention. We have a demand for our actions to help our clients control their escalating benefits costs, driven by general procedures, innovative medical treatments, as well as demand design, demand, and retention. strong demand for new working for work our daily revenue indications have historically been a terrific indicator of economic activity our proprietary data from advocacy are now shifting to our second strategic pillar mergers and acquisitions during the first quarter we completed nine new tuck-in mergers representing around 60 million dollars of estimated annualized revenue looking at our pipeline we have over 40 term sheets signed are being prepared warm welcome in playbook developed from doing over 750 mergers over the last alignment has been exactly continuously improved that long-standing strategy it builds on decades of work standardizing processes centralizing our global data and improving execution playing ai i invite you to listen let me summarize a few key points from our march comment when it comes to selling insurance providing consulting services and managing claims our business is advisory led complex and relationship driven second speed to market win rates retention it is not new to Gallagher for more than two decades we've foundation of insurance benefits into our Deionizer model serve clients it does not change the fundamental nature of our attendance of the Gallagher way there are in an insurance price it can grow through any cycle is also allows us to scale as we grow organically and through mergers we don't change who we are our culture promotes welcoming new colleagues into a model that emphasizes collaboration, entrepreneurship, and talk about college reform in the future ahead of us. I'll stop now and turn it over to Doug.

...highlights, commentary document we post on our website. Overall, the punchlines you'll hear today in your review of our information, we are right in line, and in many cases bettered in our March IRC and EPS of interest income contingents combined. As we discussed, it really clouds. When I do, you'll quickly see that our productivity and quality strategic pillar with our March IR for our risk management segment added another two and a half. This, too, shows the power of our two-pronged growth strategy, leading to an adjusted EBITDA margin up 100% are considered in your mind with each post in each of our businesses. Another, I collect current FX rates and changes in fiduciary cash balance in September. Third, this is a helpful table to show you a full historical view of the amount of interest income we earned on the funds we were holding to buy AP. And it's a reminder, as a heads-up, when you build your model, second quarter had $144 million of interest earned, and then $76 million in the third quarter. The next two quarters were a March S for future M&A. All-Star prior year revenues for the divestiture numbers we provide, all netting like we saw last quarter. Appreciation and earn-out payable are included within our estimates on page 3. This points have underlined worth another call on. impact of investment income earned on the funds an easier compare just to call out 10 percent of even future investment grade next two years we might have close to 10 billion dollars to fund m a before using any stock our m a pipeline remains strong and is full of targets at attractive multiples which we are seeing an immediate shareholder i mentioned earlier in the continue to believe our equity has continued to invest in org thank you and with that we will be

conducting a question and answer session if you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions. And our first question comes from the line of Charlie Lederer from BMO Capital Markets. Please proceed with your question.

hey good evening um appreciate uh past comments on the strength outside of property lines um just looking at slide four of the cfo commentary uh can you expand on what your expectations for the higher organic growth uh in america's retail in the second quarter i guess it's just a little surprising given the greater property mix uh in 2q thanks so the question you're asking about

Yeah, got it. Thank you. And then can you talk a little bit more about whether the M&A environment has changed over the last couple of months and how much that's factoring into your buyback decisions?

And can you share how much you've purchased, repurchased so far in the second quarter?

We're coming down. Much into that.

Thank you.

Thank you. And our next question comes from the line of Elise Greenspan from Wells Fargo. Please proceed with your question.

hi hi thanks um good evening my first question is on um the core commission and see um organic growth um the four percent in the quarter um in your minds does does that represent a floor i'm

sorry does that make at least i just didn't hear you say it again does it represent a floor yeah

like a florida where you see the growth from here the four percent yeah yes as we look out for them And then my second question, right, you know, you guys obviously provide a lot of guidance and disclosure by line, right? So it looks like organic growth, right, in brokerage, you know, you're looking, you know, four and a half in the Q1, 5% you're looking for in the second quarter, and you left the guide for five and a half for the full year. so that does imply a pickup in the back half um doug i think last we spoke you were just talking about incremental reinsurance demand as being somewhat of a of a driver there so i mean i know it's being a little nitpicky relative to you know half or maybe a point in the back half the year but is that still your expectation that that's what will drive improving organic growth in the second

half of the year relative to q1 and q2 yeah let me give you a couple just in general it's in that

And this guidance assumes consistent property declines for the rest of the year relative property price declines relative to what you saw in the Q1. Okay, thank you.

Thank you. And our next question comes from the line of Dean Christelio from Wolf Research. Please proceed with your question.

Hey, thanks. So just sticking on organic growth real quick, your full year estimate for the specialty in u.s wholesale growth is six percent which implies you know sort of a pickup of organic in the back half of the year so it's sort of curious you know what are your expectations under you know because of the you know the the pricing environment uh is obviously not great so

sort of your expectations um as to why you think it will pick up thanks in the in the may and june

got it and then my follow-up i noticed in the the cfo commentary that the the multiples that you list for token acquisitions the lower end of that range came down a bit so I was curious maybe if you could add a bit more color of what you're seeing in the market on multiples and and kind of

why you think that is yeah that's just what we're seeing right now I think the term sheets that we've got yeah we did put that on the why thank you and our next question comes from the line of

David Motamadden from Ebercore ISR. Please proceed with your question.

Hey, thanks. Just one question on the, I believe, Pat, you had talked about insurance rates still contributing to growth in the quarter, but just to a lesser extent. You guys in the past, you guys have broken out some of the different components of organic between, you know, net new and then, like, price and exposure growth. So just wonder if you could unpack that maybe within this quarter and how you're thinking about that within the outlook for the five and a half for the full year.

Listen, I think the way to look at it right now is opt-in, which will net new business wins, units growth.

Got it. Thanks. And sorry about that. And then just on the property pricing, maybe just thinking about the down 7 for this, or the down 7 RPC, if that were to get down to, let's say, down 10 or 11, how could you help sensitize the organic growth to that sort of RPC movement?

It may be a point.

And rates are approaching a pretty low level.

Yep, nope, got it.

Thank you. And our next question comes from the line of Meyer Shields with KBW.

Please receive your question. Hi, this is Jin Yong for Mayor. Thanks for taking my question. My first question is on the EAS. You call out the data center and AI-related infrastructure as the fastest growing part of the E&S market. Could you kind of like help us size kind of like what percentage of the submission today is kind of related to that and going forward? Yeah.

As a percentage, you know, it's a very – it's not anecdotal. It comes in five –

The E&S market is world markets to – The overall market, this is not –

Okay. Very helpful. My second question is on the Middle East conflict. I think you flagged the significant reprising and more selective capacity deployment in marine war, political violence, terror, etc. For Gallagher specifically, is this a net organic tailwind given your london specialty and reinsurance um positioning yes it is um and we've got to be very sensitive

about that first of all just because war rates are you got a very big caution light on making sure that crews are safe and shippers are not necessarily going to take the risk but the market is available it takes a lot of skill and a lot of diligence to put these together but in the end And when they bind, yes, they're a net positive.

And just one quick follow-up, does the capacity constrain career, like, placement difficulties that number your ability to capture that, or?

No, not at the present time.

Okay. Thank you so much.

Thank you.

Thank you. And our next question comes from the line of ERNNR from Lizuho. Please proceed with your question.

Thank you, Alan. Good afternoon or good evening. One question for me, the Assured Partners estimates, I see revenue is down a little bit again and margins up a tad more than that. Is that the same real estate moves that we had talked about in the March 17th investor meeting,

or is there something else driving those? First of all, we're going to get deeper insight. We're The reason why this isn't...

Got it. And those bounces between the line items, that will no longer be the case once the business rolls over into organic? No, that's right.

I mean, once we have a better insight into whether these numbers are coming to us gross or net, remember, they're all on individual agency systems, number going through the operating expense. And again...

Thank you.

Thank you. And our next question comes from the line of Mark Hughes with Truist Securities. Please proceed with your question.

Yeah, thanks. Good afternoon. Hey, Mark. Hello. A number of your competitors or a couple of your competitors have talked about challenges with new business, and it sounds like you're seeing things go pretty well. Is there any reason why, say, at this point in the cycle, with property down and maybe a little more pressure on casualty, perhaps, why would new business be more difficult? And again, just from a kind of a broad, cyclical perspective, or anything else that might be contributing to that?

So, Mark, we look at that closely, and a couple of things you might remember from discussions in the past. we have found over the last few years that if we digitize a relationship with a client it will actually increase our retention by a full point so that means it takes it from something like ninety four five ninety five five I would contend that that's pretty close to renewing a hundred percent of eligible not measured not for sure but darn close now those same tools are increasing our hit ratio so I can tell you that if we take our Gallagher Drive product out in prospect started selling 50 years ago my hit ratio was about 32 percent before we got our tools going over the last decade our hit ratio was about 32 percent so it was all about getting at bats with our tools now we know this statistically we're approaching 45 hit ratios when in fact we use the tools and we have a number of them it's not just gallagher drive this week at rims We'll be announcing Blueprint, which is all about improving the riskability of our clients, making their profile better. Our reinsurance people have got a workbench product that uses AI to show clients all kinds of spending hundreds of millions of dollars. And with somebody substantial, we can now get to get increasing.

Yeah, excellent. Is there any kind of structural or cyclical reason why, you know, putting your advantages to the side, it might be harder to sign up new business in this kind of environment? Since prices are going down, it's harder to tempt people away or easier, perhaps, because you can offer lower pricing?

No, I think it's – frankly, it's interesting. I've said before, the brokerage business is a tough business. you've got to go out and convince somebody to leave somebody they're happy with and that's difficult and and it's a very strong rule as they like them and they trust so we have to go and make a very strong most of the time their family by making a move together so it's not you think we've got confidence in the in the step of our producers that if they can get it if they can get a shot at something they've got a pretty darn good chance of writing it very good thank you I think that's our last question so let me just make a few comments here to wrap you for joining us this afternoon as you can tell i remain extremely confident where gallagher is headed our strategy is consistent our execution is strong and our culture continues to differentiate us to more than the 72 thousand colleagues around the world thank you we've got a great quarter your talent and dedication of what makes this company great that is the gallagher way thank all of you for being on and have a great evening thank you and

And with that, ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time, and have a wonderful rest of your day.