Arthur J. Gallagher - Q2 2024

Transcript

Operator (participant)

Good afternoon, and welcome to Arthur J. Gallagher & Company's second quarter 2024 earnings conference call. Participants have been placed on 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 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 & Company. Mr. Gallagher, you may begin.

J. Patrick Gallagher Jr. (Chairman and CEO)

Thank you very much. Good afternoon, and thank you for joining us for our second quarter 2024 earnings call. On the call for you today is Doug Howell, our CFO, other members of the management team, and the heads of our operating business divisions. We had an excellent second quarter. For our combined Brokerage and Risk Management segments, we posted 14% growth in revenue, 7.7% organic growth, and 8.1% if you include interest income. We also completed 12 new mergers, totaling $72 million of estimated annualized revenue. Reported net earnings margin expansion of 35 basis points. Adjusted EBITDAC margin expansion of 102 basis points to 31.4%.

GAAP earnings per share of $1.70, up 15% year-over-year, and adjusted earnings per share of $2.68, up 19% year-over-year. Another great quarter by the team and right in line with the expectations we provided at our June IR Day. Moving to results on a segment basis, starting with the Brokerage segment. Reported revenue growth was 14%. Organic growth was 7.7% at the midpoint of guidance and above 8% if you include interest income. Adjusted EBITDAC margin expansion was 98 basis points at the upper end of our June IR Day expectations. Let me give you some insights behind our Brokerage segment organic. Just to level set, the following figures do not include interest income.

Within our P&C retail operations, we delivered 6% in the U.S. and Canada, 7% in the U.K., Australia, and New Zealand. Our global employee benefit brokerage and consulting business posted organic of about 3%. That would have been 5% without the timing impact from some lumpy life case sales. Shifting to our reinsurance, wholesale, and specialty businesses, overall organic of 12%. This includes Gallagher Re at 13%, U.K. Specialty at 10%, and U.S. Wholesale at 11%. Excellent growth, whether retail, wholesale, or reinsurance. Next, let me provide some thoughts on the P&C insurance pricing environment, starting with the primary insurance marketplace. Global second quarter renewal premiums, which include both rate and exposure changes, were up about 5%, so no change from what we discussed four weeks ago at our June investor meeting.

Renewal premium increases continue to be broad-based, up across all of our major geographies and most product lines. For example, property was up 2%-4%, general liability up 5%-7%, umbrella and commercial auto up 8%-10%, workers' comp up 1%-3%, D&O down about 5%, cyber was flat, and personal lines up over 10%. So many lines are still seeing strong increases. Moving to the reinsurance market and mid-year renewals. Property reinsurance renewals saw modest price declines concentrated at the top end of reinsurance towers due to the increased capacity from both traditional reinsurers and the ILS market. Offsetting this was underlying exposure growth, combined with increased demand, resulting in flat year-over-year premium for reinsurers overall. U.S. casualty renewals saw terms and conditions tighten and some modest price increases.

Reinsurers continue to heavily scrutinize submissions, given the industry's unfavorable prior year reserve development and reinsurers' view of the current loss cost trends. In our view, insurance and reinsurance carriers continue to behave rationally, raising rates the most where it is needed to generate an adequate underwriting profit by line, by industry, and by geography. We continue to see this differentiation in our data between property and casualty lines. Carriers believe property may be close to approaching price and exposure adequacy, and thus we are seeing property renewal premium increases moderating, but mostly within large accounts. Underlying that, accounts with premiums around 1 million or greater are seeing renewal premiums flattish year-over-year. Yet, on the other hand, in the small and mid-sized client space, where we are an industry leader, we are seeing increases of 7% for the second quarter.

Shifting to casualty classes, we are seeing the greatest renewal premium increases in signs of these increases advancing. In fact, global second quarter umbrella and commercial auto renewal premium increases are in the high single digits, and there is little differentiation by client size. We have been highlighting worsening social inflation, medical expenses, and growing historical reserve concerns for quite some time, and thus we continue to believe further rate increases are to come in casualty. While renewal premium increases are the rational carrier response in the current environment, our clients have experienced multiple years of increased costs. Having a trusted advisor like Gallagher can help businesses navigate a complex insurance market by finding the best coverage for our clients while mitigating price increases, and that's our job as brokers. Moving to comments on our customers' business activity.

During the second quarter, our daily indications continued to show positive midyear policy endorsements, audits, and cancellations, similar with last year's levels across most geographies. So activity remains solid, and we are not seeing signs of global economic slowdown. Within the U.S., the labor market imbalance remains intact, with more open jobs than unemployed people looking for work. And with continued wage growth and further medical cost inflation, employers remain focused on attracting and retaining talent while controlling costs. So I see solid demand for our services and advice in 2024 and in 2025. Across the Brokerage operations, I believe we continue to win market share due to our superior client value proposition, niche expertise, outstanding service, and our extensive data and analytics offerings.

Frankly, the smaller local brokers that we are competing against, about 90% of the time, just can't match the value we provide, and that is leading to more net brokerage wins for Gallagher. So when we pull all this together, we continue to see full year 2024 Brokerage organic in the 7%-9% range, and that would be another outstanding year. Moving on to our Risk Management segment, Gallagher Bassett. Revenue growth was 13%, including organic of 7.7%. Adjusted EBITDAC margins were 20.6%, up 120 basis points versus last year, and in line with our June IR Day expectations. We continue to benefit from new business wins, outstanding retention, increases in customer business activity, and higher new arising claims.

Looking forward, we see organic in the next two quarters around 7% and margins around 20.5%. That would bring full year 2024 organic to 9% and margins to approximately 20.5%, and that, too, would be an outstanding year. Let me shift to mergers and acquisitions. We completed 12 new mergers during the second quarter, representing about $72 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 Gallagher family of professionals. Looking ahead, our pipeline remains very strong. We have around 60 term sheets being signed or prepared, representing around $550 million of annualized revenue. Good firms always have a choice, and we will be very excited if they choose to join Gallagher.

Let me conclude with some comments regarding our bedrock culture. Last month, we reflected on the 40th anniversary of becoming a public company. My uncle, Bob Gallagher, chairman and CEO at the time, knew above all, we must maintain our unique culture of teamwork, integrity, and client service. Those values are captured in the 25 tenets of the Gallagher Way. Thanks to all of our global colleagues that live and breathe the Gallagher Way day in and day out. Our culture is stronger and more vibrant than ever, and it's our culture that continues to differentiate us as a firm and help to drive an average annual total shareholder return of more than 16% over the past 40 years. That is the Gallagher Way. Okay, I'll stop now and turn it over to Doug. Doug?

Doug Howell (CFO)

Thanks, Pat, and hello, everyone. Today, I'll start with our earnings release. I'll comment on second quarter organic growth and margins by segment. Punchline is we came in right in line with our June IR Day commentary. Also, I'll update you on how we are seeing organic growth and margins shape up for the second half of the year. I'll shift to the CFO commentary document that we post on our IR website, and I'll walk through the typical modeling helpers that we provide. I'll conclude my prepared remarks with a few comments on cash, M&A, and capital management. Okay, let's flip to page 3 of the earnings release. Headline: Brokerage segment second quarter organic growth of 7.7%. Again, that's right in line with our June IR Day, where we forecasted a range of 7.5%-8%.

Notably, we would have been above 8% if a few large life sales had not shifted from second quarter to later in the year. We signaled this possible timing at our June IR Day, so again, no new news here. Recall that we also foreshadowed in late, in late June, a small headwind from contingents that adversely impacted all inorganic by about 25 basis points. And finally, just a reminder that we don't include interest income in our organic. If we did, that would have pushed organic higher by about 40 basis points. We believe the investments that we have made in people, sales tools, niche experts, and data and analytics are leading to strong new business production and favorable client retention across the globe. Additionally, the insurance market backdrop remains supportive of growth. Pat said renewal premium change was 5% in the quarter.

However, July's renewal premium change thus far is above second quarter. And with an active hurricane season predicted and noise around U.S. casualty reserves growing louder in, again this quarter, it's not unreasonable to expect mid-single digit or greater renewal premium changes in the second half of 2024. So our organic investments, combined with the insurance market conditions, continues to support our 2024 full-year Brokerage segment organic outlook. We are still seeing it in that 7%-9% range. So now flip to page 5 of the earnings release to the Brokerage segment adjusted EBITDAC table. Second quarter adjusted EBITDAC margin was 33.1%, up 98 basis points over last year, and at the upper end of our June IR Day expectations. Let me walk you through a bridge from last year.

First, if you pull out last year, 2023, second quarter, you'd see we reported back then adjusted EBITDAC margin of 32.1%. Second, you need to adjust for current period FX rates, which had a very limited impact on margin this quarter. So 2023 adjusted FX margin was also 32.1%. Third, organic and interest gave us nearly 110 basis points of margin expansion this quarter, and then the impact of M&A and divestiture is used about 10 basis points of margin. That gets you to second quarter 2024 margins of 33.1%, and, and therefore, that, nearly 100 basis points of Brokerage margin expansion. That's really, really great work by the team.

As we look ahead to the second half of 2024, we are still expecting margin expansion in the 90-100 basis points range, so third and fourth quarter will look a lot like second quarter. Recall, first quarter 2024 still had the roll-in impact of the Buck acquisition, so the math for full year 2024 will show about 60 basis points of full-year expansion, but that would be about 80 basis points full year without Buck, which feels about right, assuming we post organic in the 7%-9% range. Let's move now to the Risk Management segment and the organic and EBITDAC tables on pages 5 and 6 of the earnings release. Another excellent quarter. We saw solid new business, fantastic retention, and growing claim count. We posted organic of 7.7% and margins at 20.6%.

Both were right in line with our Q2 June IR Day outlook. Looking forward, as Pat said, we see organic in each of the next two quarters around 7% and margins around 20.5%. If we were to post that, we would finish the year with organic of 9% and margins of approximately 20.5%. That also would be great work by the team. Turning to page 6 of the earnings release in the Corporate segment shortcut table, adjusted second quarter numbers came in just a better than the favorable end of our June IR Day expectations. All that was due to some favorable tax items within the Corporate expense line. All right, now let's move to the CFO commentary document. Starting on page 3, a few comments. First, foreign exchange.

The dollar has weakened over the past month, so please make sure you incorporate these updated revenue and EPS impacts from FX in your models for the Brokerage and Risk Management segments. Second, Brokerage segment or, amortization expense. Recall, while this impacts reported GAAP results, we adjust it out so it doesn't impact adjusted non-GAAP earnings. This line can also be a bit noisy from time to time. Late this quarter, we received updated third-party M&A valuation estimates on a third, excuse me, on a few recent acquisitions, and also made some balance sheet adjustments at the end of the quarter. You'll see that in footnote 2 at the bottom of the page. Looking forward, we expect amortization expense of about $155 million per quarter. Again, all of that is adjusted out, but it does cause some noise in the reported GAAP results.

Next, the Risk Management's amortization and depreciation line. Here, too, we received updated M&A valuation estimates for a recent acquisition, which is also described in footnote 5. The net impact to non-GAAP results is about $0.01 to EPS this quarter. Going forward, we're now expecting a lower level of depreciation and amortization as a result of that M&A valuation report. Turning to the Corporate segment on page 4, no change to our outlook for the third and fourth quarter. Flipping to page 5, to our tax credit forward, carry forwards, it shows about $800 million at June 30th. While this benefit won't show up in the P&L, it does benefit our cash flow by about $150 million-$180 million a year, which helps us fund future M&A. Turning now to page 6, the investment income table.

We call this modeling helper, breaks down the components of investment income, premium finance revenues, book gains, and equity investments in third-party brokers. As a reminder, none of these items are included in our organic growth computations that we present on pages 3 and 5 of our earnings release. The punchline here is not much has changed from what we provided at our June IR Day. We are still embedding two 25 basis point rate cuts in the second half of 2024, and we have updated our estimates on, in this table for current FX rates. When you shift down on that page to the rollover revenue table, second quarter 2024 column, the subtotal shows $128 million and $142 million before divestitures.

The $142 million was better than our IR Day outlook due to a few acquisitions performing very well during June. Looking forward, the pinkish columns to the right include estimated revenues for M&A closed through yesterday. So just a reminder, you'll need to make a pick for future M&A. Moving down on that page, you'll see Risk Management segment, segment rollover revenues have been updated for our early third quarter acquisition. For the next two quarters, we expect approximately $120 million and $15 million, respectively. Please make sure to reflect these additional revenues in your models. Moving now to cash, capital management, and M&A funding. Available cash on hand at June 30th was approaching $700 million.

When combined with our expected free cash flow in the second half of 2024, which is typically stronger than first half, we are well positioned for a pipeline of M&A opportunities. In total, we continue to estimate we could have $3.5 billion to fund M&A opportunities during 2024 and another $4 billion in 2025, all while maintaining a solid investment-grade debt rating. And remember, if we don't spend it all, it opens the door for share repurchases as well. Okay, another excellent quarter and fantastic first half of the year. Looking ahead, we see continued strong organic growth due to net new business wins, a large and growing M&A pipeline, and many opportunities for productivity improvements. Add that to a winning culture, and I, too, believe we are very well positioned to deliver another terrific year here in 2024.

Thanks to all the hard work by the team and back to you, Pat.

J. Patrick Gallagher Jr. (Chairman and CEO)

Thanks, Doug. Operator, do you want to open up for questions, please?

Operator (participant)

Sure. Thank you. We'll now be conducting a question-and-answer session. If you have a question, please pick up your handset and press star one on your telephone at this time. If you're on a speakerphone, please disable that function prior to pressing star one to ensure optimum sound quality. You may remove yourself from the queue at any point by pressing star two. Again, that's star one for questions. Our first question is coming from Elyse Greenspan with Wells Fargo. Please proceed with your question.

Elyse Greenspan (Managing Director)

Hi, thanks. Good evening. My first question is on the wholesale organic growth. You guys said it came in at 11% in the quarter. I believe the IR Day guide was 7%-9%, and I think, you know, that reflected the slowdown you expected in open brokerage, I think, on the property side. So what changed relative to that guidance and how the results came in in the quarter?

Doug Howell (CFO)

Well, then we had a terrific finish to the end of June. Submissions were up 31% during June. There is clearly a continued use of wholesalers. We're not seeing really any significant shift back to the primary market, and the submissions were up, and so our guidance is up.

Elyse Greenspan (Managing Director)

Okay. And then, you, at your IR Day, you also had said, you know, when we think about next year, you know, that it feels a lot like 2024. You know, I said, I think the assumption, right, is perhaps something still within the range of 7%-9% organic in brokerage. Assuming, I'm assuming that still remains the case, if you could confirm that. It's, you know, obviously been a few weeks. And then if that's the case next year, if this year's margin expansion was 80 basis points without the Buck and M&A noise, would that be the rule of thumb in terms of margin expansion for next year if you're in the 7%-9% organic growth range?

Doug Howell (CFO)

Well, yeah, let's reaffirm that we see next year, you know, it could be very similar to this year. Let's see what happens with hurricane season, casualty rates, interest rates, the election. So there's some unknowns that are happening, but we still think that next year feels a lot like where this year will come in. When it comes to margin expansion, let us work on that a little bit during our budget season. We'll start that before our September IR Day. We should have a good idea in October, but there's nothing systemic out there that would cause us to believe that in a 7%-9% organic environment, you could see margins up in that 75-100 basis point range.

Elyse Greenspan (Managing Director)

Okay, thanks. Then my last one, you guys said, you said you have $3.5 billion to fund M&A this year. How much did you spend in the first half of the year? And given the pipeline that you guys see, you know, does it feel like there might be some buyback this year, or is it still kind of TBD?

Doug Howell (CFO)

So I think we've spent around $700 million thus far this year. We have some commitments out there. Do I see us having some buybacks? You know, maybe. You know, we do have the large earnout payable that's due right up for the first of the year. Also, that's generally, we don't include that in that number. We kind of anticipate that, but that. You know, we'll see. I just got off the phone an hour ago with one of our M&A bird dogs here in the U.S., and he's really starting to feel upward pressure on opportunities for M&A. There are some that are sitting there thinking that we'll see what happens with the November election.

If it goes Republican, there's a lot of proposals to drop the capital gains rate, maybe down to 15%. So you might have people that try to push that into January. If the Democrats win, then there might be a push to get things sold before the end of the year. So we're sitting very similar to where we were before an election three and a half years ago and where we were, you know, seven and a half years ago. There is a lot of uncertainty on M&A flow that revolves around the presidential election. So I think we've got a great shot of using it all, and if not, we'll take a look at what happens on share repurchases.

Elyse Greenspan (Managing Director)

Thank you.

Doug Howell (CFO)

Thanks.

Operator (participant)

Our next question is from Mike Zaremski with BMO Capital Markets. Please proceed with your questions.

Mike Zaremski (Senior Equity Research Analyst and Managing Director)

Hey, thanks. Good afternoon. I hope this question makes sense, but on the P&C pricing environment, you always give good commentary on the renewal premium changes, and you kind of give it overall and, you know, by product line. And so the RPC rate has decelerated more recently to around 5%. How is that interchanging with your organic growth? Why is there a bigger delta now in your organic and RPC versus what we saw early this year and last year?

Doug Howell (CFO)

All right. So great thing, and maybe we haven't talked about it directly for quite a few quarters, but you always have to think about the opt-in, opt-out of the buyer's behavior. When prices are going up, buyers opt out of coverages, which might mean they increase the deductible, lower a limit, or just don't buy certain coverages. As prices start to moderate or slower amounts of increases, they tend to opt back in. They reduce their deductibles, they raise their limits, and maybe they buy coverages that they said we just couldn't afford before. So if you go all the way back into our investor materials, there is always a delta between rate and exposure and what our organic growth is.

So, you know, that's why in periods when you see property is up, you know, 12%, we're not growing our property lines by 12%. They're growing 7%, 8%, 9%, is actually our revenue. So you always have to remember the opt-in, opt-out impact. Then the other thing, too, is you got the dynamic of large accounts versus mid-market and small accounts that can influence that. So we're giving you a feel of what's going on in the market, but the behavior of our actual customers can vary depending on, you know, by rational, you know, buying behavior. Prices go down, I buy more; prices go up, I buy less.

Mike Zaremski (Senior Equity Research Analyst and Managing Director)

Okay, but.

J. Patrick Gallagher Jr. (Chairman and CEO)

As Doug said. Let me, let me hit on that as well, Mike.

Mike Zaremski (Senior Equity Research Analyst and Managing Director)

Okay.

J. Patrick Gallagher Jr. (Chairman and CEO)

You know, let's not forget what our job is. So Doug hit right on it. When rate and exposure looks like it's up 12%, and you say, "Well, how come you're not seeing that right in your renewal book?" Our job is to mitigate that. And we start right with that premise. Like, wait a minute, here's where we see the market coming. A good broker gets out in front of this with their clients months. Here's what we see in the market. Here's what's coming. What are we going to do about it? Let's take retentions up. Remember, you dropped cover before. Now it's time to add it. So there's a lot of moving parts between those two numbers.

Mike Zaremski (Senior Equity Research Analyst and Managing Director)

Got it. Now, and obviously, it's great you guys disclose it. And so I guess just wanted to put a final point on it. So is it, is it fair to say that, you know, you're doing a good job for your clients, and it, on a year-over-year basis, it's putting a little bit of, I guess, pressure on your organic year-over-year? And separately, but related,

J. Patrick Gallagher Jr. (Chairman and CEO)

Yeah.

Mike Zaremski (Senior Equity Research Analyst and Managing Director)

As you rate, you do start to, do clients have the same amount of flexibility as they do, in other lines that would cause the RPC disconnect to continue?

J. Patrick Gallagher Jr. (Chairman and CEO)

Yeah, definitely. Absolutely. Number one, yes, if you throw me the softball, are we doing a good job for our clients? The answer is going to be best in the business. And we think these numbers show that, and we think the growth numbers show it. Absolutely. And yes, you'll continue to see always some change between what's being reported as growth in units of exposure and premium rates based on what we do. And the tools in our toolbox are unbelievable. So do you want to look at a captive? Would you like to take your retention up? It's not just do you buy insurance or don't. Let's start with the things that maybe are the last things you should insure and the first things you'll self-insure. There's a lot of that work going on with our people every single day.

By the way, that appetite for risk is very individual. It's not prescriptive. You can't take a book. There's no AI that says, "Oh, an auto dealer has this much appetite for risk based on the number of cars in a lot." It's not how it works. So that's where our profession comes in, in dealing with those people, and then our advice is critical. It's not just, "Well, you know, I'm pretty bold here. I think a million-dollar retention makes a lot of sense." "Wait, wait, wait. We think it looks better this way." And that's what we get paid to do.

Mike Zaremski (Senior Equity Research Analyst and Managing Director)

Okay. That's, that's helpful. Just lastly, pivoting to reinsurance, to the extent you have a view. You know, one of the largest reinsurers today put out some data kind of showing that reinsurance demand. You guys have done a great job, you know, not only taking market share, but kind of being able to keep your organic high because of that demand increase like mid-teens-ish this year. And if we kind of think about what's going on in personal lines, you know, there's a lot of inflation. So just curious, would you expect kind of demand for reinsurance, I don't know if you think all the way into 25 yet, but to remain at kind of pretty high levels relative to historical and relative to this year?

J. Patrick Gallagher Jr. (Chairman and CEO)

It'll go up. Yes, I do, for a lot of reasons. I think that you're going to see the opportunity to buy more at prices that look more reasonable, and there have been cutbacks in the purchase of certain. The other thing is that these nuclear verdicts are real, and people are seeing that, and they're going: You know, it doesn't cost as much to buy on the high end, the top of the tower, as it does down where there's a lot more activity, and I just don't want to be sitting here when some goofball jury comes up with a billion-dollar award.

Mike Zaremski (Senior Equity Research Analyst and Managing Director)

Got it. So coming as we decide to, maybe more demand. Okay. Thank you very much.

J. Patrick Gallagher Jr. (Chairman and CEO)

Thanks, Mike.

Operator (participant)

Our next question is from the line of Gregory Peters with Raymond James. Please proceed with your question.

Gregory Peters (Managing Director)

Hey, good afternoon, everyone.

Doug Howell (CFO)

Hey, Greg.

Gregory Peters (Managing Director)

I guess, for my first question, you know, during your Investor Day, you spoke about net new business wins, and clearly, your results reflect that. I was wondering if you could give us some more color on how the quarter shaped up, and how we should think about, you know, your net new business in the second quarter versus, say, the net new business wins in the second quarter last year, or some additional metrics around that.

Doug Howell (CFO)

Well, it'll take me a minute to dig it out, but I can tell you that June, year to date, we've actually expanded the spread between new and lost by a full point. I think that's probably the best way to look at it. The absolute numbers are kind of irrelevant. Our non-recurring is also coming back before some of the non-recurring revenues might have been putting just a slight drag on organic, but now they're actually being, you know, in line with just our base, our recurring business. So you're seeing an expansion of our spread between new and lost. How do we see that going forward? You know, Greg, it gets more and more complicated.

I actually think our team will do a better job showing our wares and our capabilities in more of a stable rate environment versus kind of some of the chaotic rate environment that we've been seeing over the last few years. We spent so much money on resources in the last 5 years. Three of those, three were consumed with COVID, two of those have been consumed with some chaotic market behavior. Put our guys on a field with kind of calm rate environment, a client that's not trying to just save their business and rebuilding it after COVID, I think you'd be amazed at the digital and data and analytics and expertise, and now bring our reinsurance folks to bear, stack them up with our wholesalers.

I got to tell you, it is a compelling offer at the point of sale that I would think that would absolutely deliver better net new business, you know, more new, less loss, as our clients really see the capabilities that we have built over the last 5 years. Arguably, maybe we've spent $1 billion in capabilities over the last 7 years, something like that. So that's going to come out at the point of sale, and give us a little calm in the market, and I think you're going to see our new business continue to go up.

Gregory Peters (Managing Director)

Excellent color. Thank you. You know, one of the things you've also talked expansively about in the past is the offshore centers of excellence. And, you know, this kind of dovetails with the opportunities for margin expansion. Is it your sense for, for Arthur J. Gallagher, that you sort of maximize those opportunities, or do you see further potential to, for more opportunities in offshoring to help drive some margin improvement?

J. Patrick Gallagher Jr. (Chairman and CEO)

Well, let me, this is Pat, Greg. Let, let me take the operational side of that, and I'll throw the ball to Doug for the numbers and, and kind of discussion there. But everywhere I look, I see opportunity and unbelievable benefits from using our centers of excellence. You know, we started off checking policies 20 years ago with 12 people. We now have 12,000 people supporting over 400 services in 100 countries. It is unbelievable the level of professionalism that they help us attain, and that is a differentiator at the point of sale. It's a differentiator when we're recruiting. It's a differentiator in everything we do, and I don't see any sense of that slowing down or not being something that continues to expand. It's not just about replacing heads by any means.

It's about having the people that should be doing things, doing them, and freeing up those that should be doing other things, giving them the time to do that, which I do think feeds into retention and new business. So I think our centers of excellence are a unique product offering. Back to Doug's point about all the things we've invested in, I think they're a very beneficial add to our sales list of things we provide at Gallagher, and as we grow through acquisitions alone, every one of those people join us, and we immediately start plugging them into this resource, which is another one of the reasons they join us. So to me, it's a very differentiating thing that we do. I think our team there is absolutely spectacular, and I'll let Doug address the numbers.

Doug Howell (CFO)

Yeah, I think if you talk about the growth path of our offshore centers of excellence, I think, remember, they work only for us. They're an integral part of our team. There isn't a they or we, they're us. If you look at some of our outlook, if we're going to be $20 billion of revenue, there'll be, well, there'll be almost 30,000 folks there. So the growth path of our India and other area service centers will grow faster than the headcount in our other areas. But more importantly on this, is we've been on this nearly 20-year journey now to standardize, make our operations, you know, consistent. It really is going to allow us to to deploy AI into that environment.

AI is terrific when you have consistency of information and repeatable behaviors and processes, and we have that, and we've spent, you know, nearly 20 years doing this. We have a jump, I believe, compared to most, by almost a decade. And I think that some of the tests that we're using with AI now will make our folks there better, will make the different type of job for our folks in the centers better. It'll make our sales folks better, our service folks better. And I can speak, you know, I've got 57% of my entire global finance, worldwide finance team operating out of there, and I can see it going to 80%. So it is going to be a service and sales differentiator for us because of the hard work we've put in for the last 15 years.

Gregory Peters (Managing Director)

Thanks for the color. Just a point of clarification. I probably should know this number, Doug, but I don't remember. On the capital management side, you said, "Well, listen, if we can't do the deals, you get through earn-out, you might consider share repurchase." When's the last time you guys were active in share repurchase?

Doug Howell (CFO)

So let's see. It probably was, maybe in 2000 and, when was Brexit? 2000 and. Was that 7 or 8 years ago? Whatever, whatever Brexit was.

Gregory Peters (Managing Director)

Okay. All right. You, no, no, thanks for the answers.

Doug Howell (CFO)

Thanks, Greg.

Operator (participant)

Our next questions are from the line of David Motemaden with Evercore. Please proceed with your questions.

David Motemaden (Managing Director and Senior Equity Research Analyst)

Hey, thanks. Good evening. I just had a question. I was hoping to get a little bit more color on the July RPC acceleration that you mentioned, Doug. Maybe just a little bit around the lines. Is it property moderation kind of pausing, or is it casualty acceleration? What is, you know, what's going on there?

Doug Howell (CFO)

Well, actually, a little bit of both. We actually saw property, and actually, property is a pretty heavy quarter for us here in the second quarter. If you think it's about 1/3 of our business, I think here in the second quarter, it might comprise 50% of our mix. So, property, in July, we did see a slight tick up. I'm talking 1 point or so. I'm not talking about it's 5 or 8 points. It's 1 point to 2. Casualty rates are showing some I wouldn't say acceleration. We use the word advancement in terms of where they are, because but they're steady. We'll see what happens with pricing here in the second half of the year coming out of the carriers.

So I would expect that to advance more. So not a jump up, but certainly, you know, again, our dailies, they come out overnight. I looked at it, you know, last night, and we're seeing a tick up on both property and casualty.

David Motemaden (Managing Director and Senior Equity Research Analyst)

Got it. Thanks. And there was a line in the press release on the adjusted comp ratio that caught my eye, just where you noted savings related to headcount controls. That's the first time I've seen that in, you know, I can't remember how long. I'm just wondering, is that, I guess, is that to do with something to do with the offshore centers, or is this more of a concerted effort, you know, to show some margin expansion, you know, as we think about, you know, this year and into next year?

Doug Howell (CFO)

You know, I think that the answer is this: First of all, if you look at what we did during COVID, we actually took out quite a few folks, and we've been hiring back since then as our business has grown into that. We haven't stopped hiring by any means, so it's not an indication of anything. I think the teams just are seeing that of their workload models that we're probably okay staffed in the environment that we are right now. So I would read that into it, but nothing, nothing systemic, but just maybe a, a, you know, that we've hired back into the capacity that we need in 2023.

David Motemaden (Managing Director and Senior Equity Research Analyst)

Got it. Okay, that's helpful. And then, maybe just sneaking one more in. Just on the contingent commission accruals that you guys had made the true up to this quarter. I guess, you know, we have seen a lot of noise this quarter on casualty reserves, particularly on the more recent years. I'm wondering, you know, how you feel about the potential for more of those reserve adjustments to come through and how that might impact the contingents?

Doug Howell (CFO)

All right. First of all, on the supplementals, we've done pretty well year to date. Contingents, we did have some development that happened. We're probably not accruing as, I don't want to use the word bullish, but I will for the second, as we were, as maybe we could. Casualty, we're cautious on it. You know, some of our programs and some of our binding operations, you got to be a little careful on performance-related compensation there. But I don't see a systemic shift in how we believe that our total compensation is going to happen. Maybe some bumps, a little bit per quarter, but we're talking a couple of $3 million on a $130 million number year to date, so it's pretty small.

David Motemaden (Managing Director and Senior Equity Research Analyst)

Yep. Understood. Fair. Thank you.

J. Patrick Gallagher Jr. (Chairman and CEO)

Thanks, David.

Operator (participant)

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

Mark Hughes (Equity Analyst)

Yeah, thank you. Good afternoon.

Doug Howell (CFO)

Hey, Mark.

Mark Hughes (Equity Analyst)

On the Risk Management business, like maybe we've gotten used to the elevated growth for quite an extended period of time, the 7% the next couple of quarters. Could you maybe just talk about the growth environment there relative to what it might have been in prior years, and what's your expectation? Is this a little bit of a lull, or is this a good number?

Doug Howell (CFO)

All right. So first of all, let's make sure you ask about the history is that I think in 2022, we posted about 12% annual organic growth. 2023, it was, excuse me, 2021 was 22%, it was 12%. 2022 was about 13%, and last year was pushing 16%. This year, if we get 9%, we did talk about a couple of very large wins that we had that incepted in mid 2023. What we're seeing in our book of business right now is actually reassuring, not that we need reassurance. This is a great near double-digit grower and has been for a very long time, we're starting to see more and more opportunities in that $2 million-$10 million dollar type customer a year.

If you look at the amount of new business sales that are happening relative to, let's say, 5 years ago, it's nearly doubled. Now, you know, we're double the size, too, but there are carriers beginning to understand that we offer a highly customizable solution. Self-insureds are seeing that our outcomes are better. So I think that there's a market awakening that we, you know, when we pay, you know, nearly $12 billion or $13 billion, primarily workers' comp and general liability claims, that would be one of the, you know, top 5, 6, 7 carriers in the U.S., but as measured by total claims paid. So the expertise, customizable services is becoming more and more known in the industry, so we're getting many more, you know, trips to the plate.

Maybe a couple fewer home runs, but I think we're gonna see a lot of doubles and triples out there. So I wouldn't call it a lull because we're gonna do 9% this year, but we did have two years of some pretty big wins in there.

J. Patrick Gallagher Jr. (Chairman and CEO)

But we wrote all the big ones. That's not true. But the elephant hunting is a lot more difficult, more lumpy than the stuff we're seeing now.

Doug Howell (CFO)

Yeah.

Mark Hughes (Equity Analyst)

Yeah, understood. And then any way to break out the within the wholesale, the open brokerage versus the MGA and binding?

Doug Howell (CFO)

Yeah, listen, I think that right now, open brokerage is, you know, maybe in that 11%-13% range, and I think that binding and programs might be in the low to mid-single digits, something like that.

J. Patrick Gallagher Jr. (Chairman and CEO)

You know, Mark, what I'm most,which I'm most impressed with and pleased with, is the fact that you're seeing that open brokerage number keep moving in not, in, in nice double digits. My experience with these types of markets, especially with property, is that's the first line you kind of see submissions slow down, you know, people sort of stay where they are. Our submission count is up substantially for the quarter, for the month, for the year. We are not seeing business flow back to the primaries. So the, I think, change that we've seen, that we're excess and surplus is becoming much more the norm, and where people want to, you know, check out, check out what a wholesaler can do, and then we earn that business, we're not losing it.

Submission counts are up, retention rates are up, new business is up, and that's, that's pretty exciting.

Mark Hughes (Equity Analyst)

Great. Appreciate it. Thank you.

J. Patrick Gallagher Jr. (Chairman and CEO)

Thanks, Mark.

Operator (participant)

Thank you. Our next question is from the line of Rob Cox with Goldman Sachs. Please proceed with your question.

Rob Cox (VP of Equity Research)

Hey, thanks. Yeah, just a question going back on the, the opt-in, opt-out dynamics. Just, just curious, does that flow through net new business, and that's what's kind of driving the 1 point higher, you said June year to date, of net new business, or is that, is that something else entirely?

J. Patrick Gallagher Jr. (Chairman and CEO)

Yeah, I think some of that flows back. Well, so for instance, a good example is of that is a lot of our public entity clients, and as you know, we're very, very sizable in the public entity sector. They just work off a budget, and if the primary premiums are rising, they're taking bigger retentions, they're dropping limits, and they're not necessarily comfortable with that. So when the opportunity to buy those back up comes up and they add an extra layer, they expand their coverage, oftentimes, we will call that new business, and at the same time, we're facing the renewal reductions on the stuff that stays with us. But it is, it is a factor of what's available and what their budget restraints are.

Doug Howell (CFO)

Yeah, I think it's a little tough for us. If an existing client writes a new cover that goes through our wholesale business, that would be new business. If it's a change in premium level or like, a slightly lower deductible or slightly higher retention, that would go as renewal change. It's a little tough sometimes to split that apart, but so part of it goes through new business, probably if I were going to guess, maybe 20%, 25% goes through new business, and 75% would go through the renewal premium change.

Rob Cox (VP of Equity Research)

Okay, thanks. Thanks for walking us through the, the nuances there. And then just on the, the revenue indications from, from the audits, endorsements, and cancellations, those are remaining positive. Just curious if, if the rate of change on those is, is either accelerating or is that decelerating at this point?

Doug Howell (CFO)

All right. Great question. So on the surface, we're about the same as they were last year, second quarter. But what happened last year, second quarter, we actually had quite a bit of endorsements that came out of the, the mini banking crisis. We were seeing a lot of banks increasing their D&Os in April of 2023. March, April of 2023. We didn't have that repeat this year. Probably a good thing, we're not having that crisis. But interestingly, flat year-over-year, carve that out, that's still up pretty nice.

J. Patrick Gallagher Jr. (Chairman and CEO)

Yeah.

Rob Cox (VP of Equity Research)

Got it. Thank you.

J. Patrick Gallagher Jr. (Chairman and CEO)

Thanks, Rob.

Operator (participant)

The next question is from the line of Mike Ward with Citi. Please proceed with your question.

Mike Ward (Financial Analyst)

Thanks, guys. I was wondering if you could update us on the progress with your integrated approach? Where you're going to market with multiple business, businesses at a time? I think you talked about leveraging programs, reinsurance, and Gallagher Bassett together.

Doug Howell (CFO)

All right. So yeah, there's some good program development going on that combines those three together. Then also you're having the introductions that happen across the units. I think our introductions to our reinsurance folks coming out of our carrier relations folks to the carriers is working very well. We're seeing some nice wins on that. Getting our program folks and integrally involved with the reinsurers to create the capital, find the fronting markets, it's going very well, at least from the CFO's chair.

J. Patrick Gallagher Jr. (Chairman and CEO)

Yeah, Mike, I think when we talked about that, we weren't talking about taking just individual accounts and saying the way we want to do this is all together now on the XYZ manufacturing company. What we're talking about is what Doug was hitting on. We're now meeting with insurance companies quite regularly, and we're saying, "Let's talk about the broad base of our relationship." And at that table are our reinsurance people, our benefits people, our service people on the claims side, as well as the property, casualty, production, and marketing folks. That is working extremely well for us, and that's really what Doug is talking about. Now, at the same time, in RPS, looking across a broad base of programs, we are looking at those saying, "Okay, we've got about 250 programs in the company.

Where are we not, A, doing the reinsurance, B, doing the claims, and what should we be doing to make sure that our retailers are using those programs as well?" So it's kind of a mixed bag, and it's not like we just take XYZ account to the market and say, "Now it's all or nothing," or to the client and say, "It's all or nothing." I hope that color gives you a little bit of, you know, reference to what we were talking about the last time around as well.

Mike Ward (Financial Analyst)

Yeah, no, that's helpful. Thank you. And then second question was just on the political election scenario type theme. Curious if you have any other kind of tax credit generation prospects in the pipeline and any, I guess, political risk to those in the near term that we see?

Doug Howell (CFO)

Well, most of our tax credits are already in the bank, so I think we feel pretty comfortable about that. What are we working on? I think that with 45Q, that really was passed under the previous. You know, all above the line Inflation Reduction Act, it's made the tax credit market much more common, much more defined, broader. But we're pretty well suited for tax credits for the next 4 to 5 years. I'm not. We don't think we need to plunge in to new tax credit projects right now, 'cause we just generate the credits, and they sit on the shelf for 4 or 5 years.

The team's working on it, and there are some exciting things that are happening out there across all forms of clean energy that are exciting, but I don't see us doing something big in the next year and a half. Let's burn through these credits first, and then we'll see about what we can do. By that time, there'll be a robust market out there for tax credits. You can get insurance on it now that much more to insure the credits, so that's a good change in the law. Right now, I think the law is pretty well suited for us to do something in a few years and probably not have to do it with a lot of capital investment into it either.

Mike Ward (Financial Analyst)

Okay. So maybe if I'm thinking about it right, that this dynamic should help bolster you in terms of, I don't know, having a, you know, extra leverage in the M&A, you know, scenario. If rates are cut, that should help sort of bolster your competitive edge, I would think. And do you have, like, a sort of update on the PE interest in the market?

Doug Howell (CFO)

Well, listen, not to belabor the PE update. You know, like I said, I just got off the phone with our bird dog, and I got to tell you, my soapbox is that I had during the IR Day about the new what I call less than transparent equity structures that PEs are now doing in order to buy nice family-owned brokers. I think there's starting to be more and more of, you know. The curtain's been pulled back on that, and, you know, I think that sellers are really looking at, they don't have the same equity. At Gallagher, you got one equity: owners, employees, you know, people that sell into the business, and you know, on this call, own the same equity across the board. That's not how it works now with the PE structures.

It all looks okay. Do the models on it. Looks okay, what happens if everything goes up in a linear line. Get a little bit of a downdraft on that, and the people that give their, you know, their family's lifetime of work to the PE firms get very little. And I'm telling you, that is something that needs to be made aware out there, and I think that, you know, when I talked to one of our bird dogs today, he said it's becoming more and more apparent to sellers they're getting the last spot at the trough.

J. Patrick Gallagher Jr. (Chairman and CEO)

Yeah, let me take another side of that too, Mike. Second quarter, I believe it was MarshBerry put out a report, OPTIS Partners. There were 62 buyers of properties in the second quarter alone. There's a lot of private equity interest in our space. That's not stupid money. I do believe that the multiples have risen, that we've been paying for these properties because of that interest over the years. Having said that, I think the quarter was 20% down in actual transactions. So you've got maybe smarter money, maybe smaller amounts of money, but the transaction count is coming down.

I think sellers, as Doug said, are getting a little bit more discerning, and I do think when you take a look at what's happened with some of the roll-ups, who are now at a point where it's time to go public, and I won't mention any names, you know who they are. Well, let's see how that goes. It ain't an easy slog, and I think sellers are seeing that as well. And by the way, it's pretty easy to join somebody that's gonna change nothing in your shop until they want to go public. Better, I think, as Doug said, and join a company that everybody from the families to you all as investors, you have the same stock. Now, one other comment on this. When we do an acquisition, we give the opportunity for everybody in that acquisition from that point on, to participate in this equity.

We've got an employee stock purchase plan. We have an LTIP program for management and senior producers. We've got all kinds of product ways for people to participate in our success and our growth. You sell to the PE people, the owners do great. PE investors hopefully do great, and that's it, baby. Well, I like our model.

Mike Ward (Financial Analyst)

Awesome. Thank you, guys.

Operator (participant)

Our next question is from the line of Grace Carter with Bank of America. Please proceed with your question.

Grace Carter (VP of Equity Research)

Hi, everyone. I wanted to start on the Risk Management guidance. I think you all mentioned maybe around 9% for the year. I think that the prior guide was maybe 9%-11%. Could you go over maybe anything that's changed since we last spoke in June? Thanks.

Doug Howell (CFO)

I think that the degree of difference on a full year on. You know, listen, we're talking about a couple million dollars on the difference between a nine and a ten. So I wouldn't say that it's a, you know, maybe it's $5 million. So there's nothing. It's just, you know, we think that we've got better insight for the rest of the year, and so that range is coming, maybe to the lower end of it than the upper end of it.

Grace Carter (VP of Equity Research)

Thank you. And also on the Brokerage organic growth guide, I think that you all had mentioned you were considering narrowing it maybe to 7.5%-8.5% at the Investor Day. Just, is keeping it at a wider range of 7%-9%, does that just reflect uncertainty in the environment, or has anything changed since then, or am I just reading too much into it entirely?

Doug Howell (CFO)

Maybe the latter. I think, you know, it's been 4 weeks since we talked to you. We just finally got one more data point, and that's the close of June. So, you know, we'll talk to you again in September, and, you know, either way, listen, anywhere in that range, you know, look at that. That's 7%-9% growth on top of 9% last year, 9% before. You go back in 2019, we grew 6% all in. You know, anywhere in that range is a terrific year.

Grace Carter (VP of Equity Research)

Yeah. Thank you.

Doug Howell (CFO)

If we can repeat it again next year, it's another terrific year.

Grace Carter (VP of Equity Research)

Cool. Thank you.

Operator (participant)

Thank you. Our last question will be from the line of Meyer Shields with KBW. Please proceed with your question.

Meyer Shields (Managing Director)

Thanks. Just two quick ones, I think. First, I was hoping, hopefully we won't need to know this, but give us a sense as to the contingent commissions exposure to hurricane season.

Doug Howell (CFO)

No, it's very small.

J. Patrick Gallagher Jr. (Chairman and CEO)

Very small. Most of that hurricane exposed business, especially in, is in the excess and surplus. Meyer, we're the largest excess and surplus broker, I think, in the state. A lot of that is, all that's in the E&S markets, and none of those are subject to contingents.

Meyer Shields (Managing Director)

Okay, perfect. That is good news. Second question, I was just looking for a brief overview of your appetite for additional acquisitions in personal lines, I guess, both within high net worth and beyond that.

Doug Howell (CFO)

Well, you're talking about personal lines, just being a pure auto writer. You know, that's probably not what we're going to do. We're not, we're not great at it. We're, we're an advisor, so if somebody's gonna use us to use our advice to help them buy their insurance, that's the business that we'd like to be in. High net worth, we do a terrific job of it. I'm telling you, our folks are, are some of the very best in the business, and that's an important spot right now. There's planes, there's boats, there's houses on sandbars, there's houses on views that have landslide risk. High net worth needs an advisor, probably as much as any complex, any, you know, mid-market commercial client.

Just going out and trying to buy an auto agent, you know, a writer that does auto is probably not what we're looking to do. If it's gonna be one of those things that takes advice, we'll be there in that space.

J. Patrick Gallagher Jr. (Chairman and CEO)

Yeah, we're actually very excited about the stuff there. I think that's, as Mike said, a real opportunity for us.

Doug Howell (CFO)

We'll take your call. Just go ahead, we'll help you out with it.

Meyer Shields (Managing Director)

I've got a ping-pong table. Let's start it.

Doug Howell (CFO)

Well, there's a slip and fall on that one, Connor.

J. Patrick Gallagher Jr. (Chairman and CEO)

I think that's our last comment. So just our last question, let me make just a few comments on the way out here. Thank you again, very much, all of you, for joining us. I know it's a little late, and thanks to all of our Gallagher colleagues around the world for their hard work and their dedication. These quarters don't just happen. Thanks to your efforts, that means our people, we're in a really enviable position. Our net new business is up. Our M&A pipeline is growing. I'm proud of the year-to-date financial performance, and as you can tell, I'm bullish on 2024 and beyond. So 40 years, 16% TSR compound average annual growth rate. Pretty good 40 years. I'm looking forward to the next 40. Thanks for being with us.

Operator (participant)

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