The operator welcomes participants to the Arthur J. Gallagher & Co. Fourth Quarter 2023 Earnings Conference Call and reminds them that the call is being recorded. The company may make forward-looking statements, but does not assume any obligation to update them. The CEO, J. Patrick Gallagher, Jr., and CFO, Doug Howell, are present, along with division heads. The company had a strong fourth quarter, meeting expectations from their December IR Day. They saw 20% growth in revenue and 8.1% organic growth, or 9.4% controlling for accounting and timing factors.

The company had a successful quarter with 14 mergers completed and $410 million in estimated annualized revenue. Adjusted earnings per share were up 23% and EBITDAC margin increased by 69 basis points. The Brokerage segment saw a reported revenue growth of 20% and organic growth of 7.2%, with insights provided for each region. The P/C insurance pricing environment remains favorable.

The global fourth quarter renewal premiums increased by 8.5%, with increases seen across all major geographies and product lines. The reinsurance market was balanced, with strong demand for property cat cover being met with sufficient capacity. However, there was pricing pressure in casualty lines and coverage limitations on war-related products. Insurance and reinsurance carriers are behaving rationally and pushing for rate increases to generate an acceptable underwriting profit. Overall, customer business activity remains strong, with positive midyear policy endorsements and audits.

The labor market is expected to continue growing, providing opportunities for the HR consulting retirement and benefits business. The company had a successful year in 2023 and is well-positioned to continue winning new clients and retaining existing ones. The company also completed several mergers and acquisitions in the fourth quarter and has a strong pipeline for future deals. In the Risk Management segment, the company saw strong organic growth and expects to continue this trend in 2024.

The speaker concludes by highlighting the company's bedrock culture of client service, ethics, and teamwork, which has contributed to strong financial results. He then hands over to the CFO, who discusses the fourth quarter and full year organic and margins by segment, as well as the outlook for the coming year. He also provides some modeling helpers and explains the company's approach to investment income and earn-out payable accounting. The speaker concludes with comments on cash, M&A, and capital management.

The company has adjusted its expectations for the impact of 606 in its Brokerage segment for the upcoming year. The adjusted EBITDAC margin for the fourth quarter of 2022 was 31.6%, showing a 48 basis points expansion from the previous year. This was mainly due to the team's efforts and the closing of mergers. The Risk Management segment also had a strong quarter with 13.2% organic growth and 21% margins. The company expects similar growth and margins for the upcoming year.

The paragraph discusses the fourth quarter earnings release and provides an update on the corporate segment. It also mentions the addition of 2024 information and quarterly estimates in the CFO Commentary document. The company expects a small headwind to EPS in the first half within the Brokerage segment. They also mention the reestablishment of tax credits and provide a table breaking down the investment income line.

The company has renamed a line in their financial statements to clarify its contents, but there are no changes in the numbers. They have also included estimated revenues for mergers closed through yesterday and are expecting around $540 million of rollover revenues to be recognized in 2024. The company has increased their estimated earn-out payable for Willis Re and adjusts for changes in expectations of performance. The reinsurance business is performing well. The company has $400 million in available cash and estimates $3.5 billion of capacity to fund M&A in 2024 using free cash and incremental borrowings.

The speaker reflects on the success of '23, citing revenue and EBITDAC growth as key indicators. They express confidence in their team's ability to continue this success in '24. The listener then asks about the company's projected organic growth for '24 and the assumptions made in determining this range. The speaker clarifies that the range is based on current pricing and exposure units and that each business unit has different targets based on their individual circumstances.

The article discusses the benefits and pricing trends in the insurance industry. The benefits may be lower in some areas and higher in others, leading to an overall range of 7% to 9%. There is also concern about potential reserve holes in the casualty side due to inflation, which may lead to necessary price increases over the next few years.

During a recent conference call, Gallagher executives confirmed that they have reserved the maximum amount for the earn-out associated with the Willis Re deal. They estimate $50 million in accretion for the next year. When asked about organic growth, they noted that open brokerage has seen a significant increase of 13-15%, while the program business has only seen a 5% increase. They also discussed the property market, stating that they are still seeing a push for rate increases and a focus on valuations due to higher claim costs.

The speaker, J. Patrick Gallagher, is discussing the success of his company's acquisitions and the value they bring in terms of revenue, earnings, and expertise. He mentions that the recent bank-owned deals have been particularly beneficial in terms of acquiring talented individuals and expanding the company's reach. He also notes that these acquisitions have a positive impact on the company's organic growth.

The Gallagher effect is the boost in business that occurs after an acquisition by Gallagher. This is because the acquired companies are able to offer clients more expertise and tools, resulting in immediate excitement and increased sales. This effect is already evident in recent acquisitions, such as Cadence and Eastern, which are showing strong organic growth.

The company's list of prospects is energizing the team to talk about new developments. This includes data and analytics, experts in specific areas, and exciting opportunities. During the December Investor Day, the company lowered its very near-term 4Q organic growth estimates, but this is not expected to significantly impact the overall 7% to 9% growth guide for next year. The company is a leader in moving people to their center of excellence.

The company plans to double its employee count in the next five to seven years due to the growth of their business. They have already standardized their processes and are now able to utilize AI technology. This will lead to better job opportunities for employees in the future. The company also does not need to sell their team on the benefits of standardization as they have already done it and can provide data and analytics to aid in sales.

David Motemaden from Evercore ISI asks a question about the company's favorable timing on incentive compensation expenses and how it will impact their margin in Brokerage. Douglas Howell explains that this has been anticipated since the previous call and is not a significant factor. They then discuss the 7% to 9% Brokerage organic growth for 2024 and estimate that exposure unit growth will contribute 2-3 points to this, with more lift expected from new business next year.

Gregory Peters from Raymond James asks a question about the new table in the CFO Commentary regarding interest income, premium finance revenues, and other income. He wants to know how the line will be affected by the Fed's interest rate changes. Douglas Howell explains that the line is impacted by both the interest rate and the amount of cash on the balance sheet, with a heavier focus on international business. The growth of the line this year was also influenced by the transition of reinsurance receivables from Willis' books. Howell estimates that the line is sensitive to a $5 million change per rate cut by the Fed, with a potential $20 million impact for four cuts.

The speaker clarifies that the $5 million per cut mentioned earlier is only for the Fed, and he does not have the numbers for other central banks. He also confirms that the services agreement with WTW shifted on July 1, and the third and fourth quarter numbers are more normalized. The speaker also mentions expenses associated with premium finance and clarifies that the clean energy tax credit carryforward balance has increased. He reaffirms that $150 million will be utilized in 2024 and clarifies that the $867 million is only related to clean energy.

The speaker discusses the utilization of credits over the next four years, with a small balance remaining for the construction of a home office building. They then pivot to the topic of reinsurance and acknowledge the challenges faced during the previous year's renewal period. However, they express pride in how the team handled it and note that this year's renewal is expected to be more normal, with a balance between supply and demand. The speaker also mentions an increase in pricing and demand from clients.

The speaker discusses the success of the past year in the cat property market and the demand and pricing trends. They mention their ability to serve clients and the lack of competition in their niche market. The next question is about the impact of rate cuts and the potential benefits of cross-selling and expanding into facultative reinsurance. The speaker shares that there has been a positive interaction between their retail and reinsurance teams and they believe there is a considerable benefit from having both sides under one roof. They also mention their strength in niche marketing globally.

The company is the largest player in the pooling sector for public clients in the United States and has added value through its reinsurance team. They are now seeing an uptick in facultative opportunities and are growing in the claims management sector with both large and small clients.

The speaker discusses the success of their company in handling claims for both public sector clients and insurance companies. They mention that they have been focusing on outsourcing claims and have seen great results, but cannot mention specific carriers due to confidentiality. They also mention that smaller regional companies are turning to them for assistance with claims. The speaker believes that the amount of claims they handle is impressive and compares it to that of top insurance companies in the world.

The speaker discusses the success of their company in providing superior outcomes for outsourced claim work and potentially helping insurance companies increase their return on equity. They also mention that the contingent revenues were up 30% in the quarter and will likely remain in the 7-9% range. The speaker suggests that this number reflects the superiority of their book of business compared to the competition. A question is asked about the Brokerage organic numbers, which came in-line with expectations but may have been impacted by timing and accounting factors.

Douglas Howell, CEO of a company, discusses the impact of a $5 million decrease in sales on their $2 billion quarter. He explains that this small decrease does not have a significant effect on their overall sales performance, as their sales have fluctuated in the past. He also mentions a slowdown in the Canadian market, which has affected their organic growth.

J. Patrick Gallagher and Douglas Howell discuss their company's performance in Canada and the impact of recent acquisitions on their revenue projections. They mention a few missed opportunities in Canada but overall, the company has been performing well. The CFO commentary shows that the company has outperformed their revenue projections for 2Q '23 and increased their projections for 1Q '24, which is partly due to the recent acquisition of Buck. They also mention that there will be a decrease in revenue from Buck in the future as it is no longer part of their M&A roll over.

The speaker mentioned that benefits growth may be closer to 7% rather than 9% next year, due to the nature of their business. They also discussed the potential impact of medical inflation on this projection. The speaker clarified that this would not significantly affect their contingent commissions, unless there was a reserving crisis. The speaker also mentioned the increasing detail on Page 6, and asked if those components were all high-margin revenue.

The speaker thanks the audience for joining the conference call and expresses excitement about the company's performance in the fourth quarter and full year. They believe the company has immense opportunities for future growth due to its position in the market and look forward to an upcoming IR Day.

This summary was generated with AI and may contain some inaccuracies.