Arthur J. Gallagher & Co. 2Q 2026 Earnings Conference Call

Thanks. And then my second question is on assured partners. You guys will, you know, annualize the deal right in the third quarter. So I know it's only going to be in organic, right, for a small part of the year. But if you could give us a sense of just the underlying growth AP has been seeing, and then within the CFO sheet, when you're thinking about part of the third quarter and the fourth quarter organic, what are you assuming for growth for AP?

I think that we're sitting at this as we're clearly not going to have a stub for assured partners beginning with the – I can give you at least anecdotally the numbers that you see on paper. well you don't see the you know we'll be a year into it they have the sales tools on their desk

thank you thank you our next questions come from the line of greg peters with raymond james please proceed with your questions well hey good afternoon um so um i guess i'll pivot one uh one of the areas important areas is m a for you guys and boy the the whole sector has experienced a massive step change lower in the valuations. Just curious if you've seen any flow through in terms of expectations from sellers on exit pricing as a result of what's happened to the valuation of the strategics and any commentary on, I know there's a backlog of e-sponsored vehicles out there looking for some sunlight um just curious um what kind of rhetoric you're hearing in the marketplace on on that topic as well well i'll just do the anecdotal stuff and and uh doug can give you the facts talking about the reset greg and you've got a lot of consulting

brokers out there uh selling into the community saying that hey if you've got the if you got a great firm, those multiples haven't changed a bit. There's an awful lot of demand. Pent-up new P.E. money's coming in. Hang tight. They're coming down. And we're maintaining our discipline, and we're closing deals. Now, also, you see a slowdown in our deal count. It's not as great as it was. And part of that, I believe, is selling that the days of 15, 16, if you've got a platform, maybe 17 times even deck, are over. And so you sit there and go, well, okay, does that mean you're not going to be a seller at these prices. And I'm not going to give you a range on the downside because they do vary by what business they're in, the geography they're in, the size they are, whether they're a platform or not, and they are negotiated. And there is competition. As I said in my prepared remarks, they all have choices. We are not in the business of diluting our shareholders. And we stand by that and we're seeing reductions.

Three of the CFO commentary, We paid about 9.4 times in the first quarter, and it is at 11.3 times here in the second quarter. But notably, there were two acquisitions that we did that have, we believe, trading with ourselves synergies, and we don't put those in. When we do our tuck-in acquisitions, we don't assume synergies when we do the math. We talk about that forever. When we do a large deal like Shared Partners, sure, we can estimate synergies on that. We understand how being better together can create revenue and expense synergies. Typically, we don't do that when we report out our information on page three. When you really peel it back, there's about $2 million of additional revenues that are going to come out, and EBITDA that's going to come out of a couple deals we did in the second quarter. But by and large, we're paying around nine times for, let's say, U.S. retail and benefits. This wholesale was getting just a little bit more, and sometimes in the U.K. But, again, if you factor in the synergies that we're getting and you see that on page three, we're clearly down below 11 times, 10 times on the multiple. That creates still an immediate arbitrage and value for our shareholders because we're still getting that pricing arbitrage there.

Excellent detail. No. Related to that, I noted your comments about the $10 billion of capital to deploy over the next two years. You also mentioned the repurchase activity in the second quarter, building upon what you did in the first quarter. So you're prolific with the guidance you provide. And given the reset of the stock price, do you think that, you know, we should start modeling in some normalized run rate of share repurchase unless there's a recovery, and just assume that's now part of the capital deployment strategy going forward?

Oh, you know, Greg, I think here's the acquisition pipeline is pretty darn good right now. And I think you're going to see the tools and capabilities that their customers need. They just can't do it. They just can't do it. themselves and so they need to have great with their customers they're great they have great relationships but we get to bring them an infrastructure that makes they're probably sitting on the sidelines a little bit right now but i think they'll be back so i wouldn't model a ton of share repurchases got it thanks for the detail thank you our next questions come from the line of dean creche tielo with wolf research please proceed with your questions hey thanks for taking my question since your m a growth has sort of slowed in recent periods i was wondering right meaning you guys are onboarding less producers inorganically does that kind of change your hiring strategy or do you not think about the two in tandem thinking we're not i think there's a lot of folks that are going to be available in the future because i think the dream of where they are in pe owned firms is probably could present that opportunity market

happens next week it's in to look at our industry now we won't hire all those uh but we'll make offers to 50% of them. And that's continuing on from the prior year and the prior year. And these young people validate fast. I think that we're in a pretty good spot to maintain a sales culture that is pretty darn unique. And I do think Doug's right. It will also attract others that find they just don't have the tools where they are. And you can talk about jumping on the AI bandwagon, looking out to the future, but our clients are demanding this stuff today. And I think it does bode well.

As Doug said, we are always open to recruit new, and we're loading the- We're running about 80% of our historical average on acquisitions right now. We're running 80%. This isn't a huge step back in acquisition. We're talking about a 20% backwards, and that can change overnight when market conditions change.

Understood.

And then my follow-up, yeah, it seems like the organic growth in brokerage has been supported by strong organic and supplemental revenues so can you just kind of highlight what's driving that and then maybe talk about the sustainability of that in the future premium growth equals supplementals and contingents primarily supplementals and we are premium or contingent more on profitability and that can go up and down if there's if there's a reset in either premiums drastically or if there's a significant amount of loss but those losses tend over the last few years to be typically property so I think that that line is managed well and should continue to grow on the individual lines because there are changes in contracts

so in this case contingent contracts into supplementals here and that's the two numbers together and it's about nine percent growth one thing I will say maybe is that it sure shows you that the the the distribution is appreciated Thank you.

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next questions come from the line of David Motomadden with Evercore ISI. Please proceed with your questions.

Hey, thanks. Good evening. Doug, in the past, you had thrown some numbers out there just in terms of potential cost savings from AI. I'm wondering if you have any thoughts in terms of when you think that those will be realized and then maybe a philosophical question when you guys think about that. Is that something where you would announce more of a formal program, or is that something that we will just see coming through as incremental margin expansion on top of the, I think it was 40 to 50 basis points of sort of normal operating leverage?

All right. So it's incremental to the underlying margin expansion that we talked about, 20 to 30% of our back office layer. I don't see any difference in that today, and I think it'll take us three to five years to fully realize those levels. Now, that math would produce 600 basis points of margin expansion. I caution that maybe there's going to be offsets to a certain extent, so maybe we can harvest two-thirds of points there. And the way we look at it, we have 1,000 projects, you know, the flowers are blooming now. We've got dozens and dozens of real tangible projects that are showing immediate results. So I'm viewing that it's 20 years that we talk about launching a program. We didn't talk about the investments that we were making in the system. If you go way back when, I said that there was probably one point of margin that was being reinvested every year in betterment-type improvements. That's true today, and I think that you have to understand this is just cultural for us. We do this every day, and it's not something where we're going to announce a huge transformation exercise. You'll just see us naturally do that over time.

Okay, great. I appreciate that. And then maybe just as a follow-up, just on the reinsurance side, obviously still very good growth and the outlook was lowered a little bit, but still solid at the nine percent. Could you just unpack how much of that is specifically coming from share gain versus, you know, maybe buy up and just pure rate pressure? Just just sort of thinking through the sustainability of that as we move forward into into the next few years.

Yeah, most all of it is net new business. I think that's the way the three of us at the table that are very strong at this and I think they're realizing exactly.

Thank you. Our next question is coming from the line of Andrew Anderson with Jeffries. Please proceed with your question.

Hey, good afternoon. Just since announcing the AP transaction, the expected run rate synergy has increased a few times.

Could you maybe just talk about whether that's coming from existing synergy buckets, simply proving larger than expected, or entirely new sources of savings and revenue opportunities? um i think it's i think we're getting more revenue synergies than we maybe initially looked at and and and at an end point i think that we're just we're can we hit it at exactly the right time where are you have the ability for all the investment we put into them over time

to handle a substantial amount of additional revenue so better together uh this is not just gallagher tools being well received by a new sales force we've got a lot of terrific new professionals from AP. The Gallagher folks and on their own.

And then looking at the geographic table, the organic table and the geographic breakdown, it does seem like a lot of these regions, EMEA and APAC, are kind of decoupling from what I would think is an even softer price environment. So could you just talk a bit about how you are able to capture these market share gains or maybe the exposure growth underlying it?

Well, listen, let's make sure we put 50 billion. So the fact is, there's an infinite amount of market space for us to go. And I think our folks are just showing that the tools and capabilities are letting us outshine the competitors. But there is so much market opportunity out there. We're not bumping up against any problems. So market share is pretty hard to measure. But $250 billion out of $7 trillion, you can do the math.

It's an astounding number, and it grows every year. And the harder we run, We don't make any progress in really denting the share, but we know we're taking share.

Thank you.

Thank you. Our next question has come from the line of Yaron Kinnar with Mizuho Securities. Please proceed with your questions.

Thanks. Good evening. I had a question with regards to the M&A being maybe at 80% of normal capacity. How much of a boost is that to margin in brokerage?

Well, listen, in terms of deal count, we've done 80% of our average over the last 10 years, something like that. In terms of lift in our margin, actually, the roll-in of M&A, if you go back to page 7 of the CFO commentary, if you roll in it because of the seasonality of what we've – so we haven't really – roll-in of tuck-in M&A, we're saying it's not going to – when you aggregate, when you're just rolling in 10 a quarter or something like that, margin lift.

Okay. And then conversely, I think the divestiture activity has been a little bit larger than normal the last few quarters. What kind of impact has that had on margins?

Well, listen, I think some of those businesses, they fit better elsewhere than they do inside of Gallagher. I think that we said, listen, we're just businesses that would be other. We sold off eight years ago, something a lot of it's just.

Right. Okay. Thank you.

Thank you. Our next question has come from the line of Mark Hughes with Truist. Please proceed with your questions.

Yeah, thank you. Good afternoon. On the benefits business in USP&C, that's been lagging a little bit here lately. Is this the right kind of go-forward organic growth rate, or should that be a little bit faster?

Let me see if I understand the question. Are you talking about just your question about your teasing out there? You know, we actually have cases so that those can be lumpy, but they do fuel our organically a little bit. But we've, you know, 3% to 4%, I think, in today's environment. You know, we're not seeing tons of employment. You know, there could be some upside to that number going forward as people understand that they really need our expertise to help them with talent attraction, retention. And then also right now, you know, the employees are staring in the face, massive amounts of medical cost inflation. So I think that you could see an upset over the next something like that. I think that employers are going to need our services now. I'm not going to say it's runaway inflation, but it's pretty cool.

And every fire market is.

Okay. And then on the risk management margin, Doug, I think you described 22% plus. Seems like that just continues to move higher and higher. You've talked about AI, some new capabilities. Is there an upper bound? I think there used to be, maybe talking about 20%. Is it just one of these, it's going to keep going 50 bps is the way to think about it?

Yeah, listen, I actually think that they're having some good success with AI. I think their customers are understanding the value they're bringing. They're doing a great genius, getting their folks back. It's a good scale point. So you could see, is it 50 basis points a year? Yeah, if they continue to grow 12% a year like they've done from time to time, that's not unreasonable at all. So this is a great business. It comes a little bit more lumpy as they attract some larger customers.

You can't underestimate the scale. I'm looking out at the insurance company marketplace as a place that I think over the next decade just throws in the towel. They just can't keep up. And we've got one example that I can't mention any names, but just our AI fraud saved one, and this is auditable numbers, we've saved one client $100 million.

Just out of curiosity, what was the fraud?

Bad people.

Thank you.

Thank you. Our next questions come from the line of Meyer Shields with KBW. Please proceed with your questions.

Thanks. This is sort of a follow-up, I guess, to the last question. But we've been hearing for years about social inflation, and I was hoping you could talk about how Gallagher Bassett's ability to combat that has changed or improved over the last few years.

Well, I think they just do a damn good job of getting after the claims and making sure that they get in front of the claimant and their employer, and they say that, listen, going down the litigation path isn't going to prove good for anybody. Return to work, you know, three points of contact by nurses. Our nurse case managers have a really, really breaking down this barrier between the adversary claim and just that philosophical difference reduces the total cost of the claim. They are a resolution manager to manage this case versus a claim adjuster that just wants Take a look at one of the problems with the TPA, any claims organization.

Hundreds, thousands, hundreds of thousands of claims poured in the door. And sorting through that to figure out which one of these have I got to put my absolute top people on is damn near impossible. And it's that one that blows up. It's coming in. The more we can say, whoa, whoa, whoa, flag this, and it could be a million different things that all of a sudden sort this out, pull it off the conveyor belt, and manage it. We're getting better and better at saying to people, if you want to have an improvement in your outcomes, that's how to measure Gallagher Bassett, and we're getting better at proving that.

Okay, that's very helpful. I really appreciate it. And then second question, Doug, I'm looking at the updated organic growth by line of business. This is a tremendous table. And I'm trying to understand the seasonality and specialty in U.S. wholesale where you can get first half of the year.

You broke up on us right when you asked the question.

I'm sorry, am I coming through now? Okay, I'm trying to understand the seasonality and the specialty U.S. wholesale line because you've got the first half of the year at 4%. and you're still anticipating 6% for the full year, I didn't think that it was that much seasonality in quarterly production.

Well, that line is seasonality. Benefits tends to have its business, and then you get into some of our – Okay, so it's a third quarter-ish more than a fourth quarter. Well, in a fourth quarter, all of a sudden you start getting into complex placements that are going to – you have a pretty good – Okay, perfect.

Thank you so much.

Thank you. Our next questions come from the line of Andrew Klagerman with TD Cowan. Please proceed with your questions.

Thank you. Maybe just staying with that wholesale question with the guidance at 6%, could you talk a little bit about, and I think in your prepared remarks, you talked about the stability, even where property pricing is under pressure, you're still seeing stable flows. So the part A of it is, are you seeing the flow of business kind of very stable from E&S to admitted? It's just not moving that much. It's just a pricing situation. And then with that 6% guidance, do you see that number kind of – we'll stay with the first part, and I'll come back to the six.

Market of last niche.

Got it. And then just tying that to assured partners, because I think if assured partners wholesaling was going elsewhere, if it comes into A.J. Gallagher, that's considered organic growth. And if so, is that having a material impact on that six points of guidance? Any numbers you could put around that?

I'll let Doug talk about the numbers, but Andrew, I'll tell you that the consolidation of that wholesale work, which was, you're correct, spread between dozens, if not hundreds of wholesalers, is going extremely well. AP was already about trying to figure out how to consolidate wholesale relationships. As you know, we own RPS, and RPS has become – it's been a very good working relationship that's grown between the two. Now, we were trading with them before, but we're seeing some very nice synergies there.

Yeah, New Miracle, it's not moving the needle for overall, Gallagher, but it is meaningful. Remember, our retail producers understand it needs to go to the place that's best for the customer. And I think that's not a one-year sale. It takes time. So it's not meaningfully moving it right now. But I think if we look back in three years, you know, there's probably $100 million of opportunity that's going to come.

And if I could just sneak one last one on the risk management, I mean, just such awesome numbers, 10% and 12% organic in the last two quarters. Could you size the universe out there or the market that's available to you to continue this kind of awesome growth?

Yeah, let's figure this one out, Andrew. $7 trillion of premium in the global market. Trillion is non-life, non-health. So let's call it PC. I don't know what the personal alliance number would be. About 65% of that turns into a claim every day. I think we've got plenty of market. Every year, not every day. Every year, about 60% of that trillion.

It's a huge market with great opportunity, and it's a market in California.

No problem. I'm licensed in both. Not going to work.

Sounds like you'll make a dent.

Yeah, I think so.

Thank you. Our final questions will come from the line of Mike Zaremsky with BMO Capital Markets. Please proceed with your questions.

Just a quick numbers follow-up for Doug. On the 10% cash tax rate, as we think about modeling cash flow in outer years, should we be just glide-pathing that up to the gap tax rate over time, or is it more of like a cliff after the, you know, in outer years?

To refresh itself, you know, it's the equivalent of an interest shield, and your credits are becoming, we're darn good at those. These are not loopholes. These are, you know, government, many years left that we're looking at that might keep that number up. We might be able to continue to generate 100 or 200. We'll see what happens a lot, but I think that we'll be in a position to be able to take a look at. Thank you.

Again, all of you for joining us this afternoon. We delivered another excellent quarter and continue to execute against the same strategy that has guided Gallagher for decades. We have strong organic growth, a powerful active M&A strategy, successful integration across our recent acquisition. You are more than 73,000 colleagues around the world. Thank you. Your talent, dedication, and commitment to clients are what makes this company great, and that is the Gallagher way. thank all of you for being with us and have a nice evening thank you this does conclude today's conference call you may disconnect your lines at this time enjoy the rest of your day