Good afternoon, and welcome to Arthur J. Gallagher & Co.'s Second Quarter 2021 Earnings Conference Call. Participants have been placed on a listen-only mode. Today's call is being recorded. 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 security laws. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the cautionary statement and risk factors contained in the company's 10-K, 10-Q and 8-K filings for more details on its forward-looking statements.

Thank you, Laura. Good afternoon, and thank you for joining us for our second quarter 2021 earnings call. On the call with me today is Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions. We had an excellent second quarter. The team delivered on all four of our long-term operating priorities to drive shareholder value. We grew organically. We grew through acquisitions, improved our productivity all while raising our quality and maintaining our unique Gallagher culture. For our combined Brokerage and Risk Management segments, we posted 17% growth in revenue, 8.6% organic growth, but it's over 10% when adjusted for timing, which Doug will spend some time on in a few minutes. Net earnings margin expansion of 107 basis points, adjusted EBITDAC margin expansion of 30 basis points. And we completed eight new mergers in the quarter, with more than $70 million of estimated annualized revenue. Most importantly, our Gallagher culture continues to thrive. Just a fantastic quarter on all measures. Now, before I discuss how each of our businesses performed in more detail, let me comment briefly about the termination of our agreement to purchase certain Willis Towers Watson brokerage operations. We were excited about the opportunity. We would have loved to complete the transaction. There are a lot of great people at Willis and they would have been a great addition to our team. But here's the key point. With or without this, we remained very well-positioned to support our clients, compete for new ones and ultimately drive value for all of our stakeholders. We're in the greatest business on earth. Our culture is stronger than ever, and I'm excited about our future. Okay. Back to our quarterly results. Starting with our Brokerage segment. Reported revenue growth was strong at 16%, of that 6.8% was organic revenue growth, a little better than our June IR Day expectation and closer to 9% adjusted for timing. Our net earnings margin moved higher by 53 basis points and our adjusted EBITDAC margin expanded by 23 basis points, highlighting our continued expense discipline. Another excellent quarter from the Brokerage team.

Thanks Pat and hello everyone. As Pat said, an excellent quarter and first half of the year. Today, I'll spend a little extra time on organic and then give you our current thinking on expenses and margins. Then, I'll walk you through some of the items on our CFO commentary document, and I'll finish up with some comments on cash, liquidity and capital management. Okay. Let's move to page four of the earnings release and the Brokerage segment organic table. Headline all in organic of 6.8%, excellent on its own, but as pat said, really running closer to 9%. There's two reasons for that. First, recall that we had some favorable timing in our first quarter related to contingent commissions that caused a little unfavorable timing here in the second quarter, call that 70 basis points. Second, also recall that we took our 606 revenue accounting adjustment in the first quarter of 2020, we then adjusted that in the second quarter of 2020. So that creates a more difficult compare this year second quarter, call that about 150 basis points. These two items combined for about 220 basis points of a headwind here in the second quarter. We don't expect similar headwinds in the second half. Okay. Let's go to page six to the Brokerage adjusted EBITDAC table. You'll see that we expanded our EBITDAC margin by 23 basis points here in the second quarter. Considering last year second quarter was in the depth of the pandemic and our Brokerage segment save $60 million in that quarter to post any expansion at all this quarter is terrific work by the team, shows we are indeed holding a lot of our savings. So, the natural question is, when you levelize for the $60 million of pandemic savings last year second quarter, and about $15 million of cost that came back this second quarter, what was the underlying margin expansion? Answer to that is about 125 basis points, which on 6.8% organic feels about right. That $15 million mostly relates to higher utilization of our self-insurance medical plans, a modest pickup in T&E expenses and incentive comp. So, we held $45 million of cost savings this quarter. And that's really terrific. Looking forward, we continue to think we can hold a lot of our pandemic period savings, perhaps more than half, but naturally some of those costs will come back. As of now we think about $20 million of costs returned in the third quarter and $30 million return in the fourth quarter, both of those numbers are relative to last year same quarters. So, again, the natural question might be, what organic do you need to post third and fourth quarter to overcome those expenses and still have margin expansion? Math would say about 7%, which is really the real story. Recall at the beginning of the year, after expanding margins 420 basis points in 2020, we were looking at just holding margins flat.

Thanks Doug. Laura, I think we take some questions now.

Thank you. Our first question comes from the line of Elyse Greenspan with Wells Fargo. You may proceed with your question.

Hi. Thanks. Good evening.

Good evening.

My first question is on, Pat, your organic growth comments. I think you mentioned that you guys would get the full year to 8%. So, if my math is right, if you were sitting at 6.4% for the first half of the year, that would imply that you guys are expecting the back half to come close to 10%. Is there something wrong with that thinking, or are you thinking given the timing impact in the second quarter so we get close to double-digits in the second half a year within Brokerage?

Yeah. Elyse, I think you might be a little strong on that, based on the math. So, just take a look at it again. I think why are math produced more like, towards 9%.

Okay. So, 9%. Okay. Close. And then my second question, you guys announced a $1.5 billion share repurchase program, right, to effectively buyback the stock issued for the Willis deal. So I just wanted to get a sense of timing on the buybacks. Is that something you expect to complete this year? And then, is the expectation that you will buyback all those shares? Or is that also a little bit dependent upon some of the tuck-in deals if some of them come together pretty quickly?

No, I think as we sit right now, our intent is to repurchase the $1.5 billion. We think we can get that done in short order also and certainly by the end of the year. Now the point here is that we're -- we won't let access capital sip idle by any means.

Okay. That's helpful. And then, on the margin side if you were, give us some helpful information and you were giving an example, right, that if you guys get to pull your data of 7%, that you could show a 100 basis points of margin improvement. So, is that with the states coming back or is that kind of after adjusting for the impact of days or the expectation that we'll be about a 100 points of margin within Brokerage this year?

Yeah. I think, what I was doing is using the illustration of saying if we post 7% for the full year, you'd see about a 100 basis points of margin expansion, even with those costs coming back into our structure. And clearly if we better 7%, we should be able to better that too.

Okay. That's helpful. Thanks for the color.

Sure.

Thanks, Elyse

Our next question comes from the line of David Motemaden with Evercore ISI. You may proceed with your question.

Hi. Good evening. I had a question, just on the expense side. If I just look in Brokerage at the operating expenses, non-comp, non-D&A, just the OpEx line, if I take out the $15 million of incremental costs, it looks like expenses were roughly flat year-over-year. Doug, I think you spoke about this a little bit in your comments. But I guess I'm just wondering, is that sort of right that the underlying expenses in the business, or sort of flat year-over-year and would you expect that to continue for the rest of this year?

So, did you take the entire $15 million out of OpEx or did you spread some of that into comp and then also did you factor in M&A, but you're not far off of it, being pretty close to flat when you factor in M&A.

Yeah. I was just looking purely at OpEx. So, it was roughly flat, but that's something that you think can continue for the rest of the year, just given some of the changes you guys made over the course of last year.

Yeah. I think there was -- I guess I think the $20 million will come back in the third quarter of expensive, and I think $30 million will come back in the fourth quarter. That will be split some between OpEx and some between compensation. But by and large, our underlying costs, other than maybe in the IT areas, we're starting to see savings in real estate. We're starting to see savings in professional fees. We are seeing increases in travel and entertainment expenses because some of our clients are expecting us to be there and we're happy to be there for it. But you are seeing some good learnings from the pandemic. We have pretty well taken care of all of our incoming, outgoing mail. It's saving some costs there, so we can centralize that so we can deploy mail anywhere around the world with the touch of a button. So, there are some good projects that have been going on to -- that we're continuing to harvest out of the operating expense line.

Got it. Yeah. That continues to come in a bit better than I would've thought. I guess, any sort of update on the thinking in terms of the sustainable expense saves, that you -- that you're getting from COVID of the -- I think it was 150 to 175. Is that still a good sort of level to think about, or -- yeah, any sort of changes to that?

Yeah. Let's level set. We were saving, let's say -- let's call it $65 million a quarter during the pandemic. And we think that we can hold $30 million of that -- $35 million of that. So, again, back to -- I don't know where your 150 came from, unless it was 60 times, four or five -- four and a half, and then divided by two. But where'd you get the 150 from?

I was using more of a range, that you guys have given. But that makes sense.

Okay.

That makes sense. Thanks for that. I guess also -- maybe just on the growth side, I guess, could you just break down if we sort of look at the organic, the 9% in Brokerage on sort of a clean basis? Could you just talk about some of the different components of that? Whether that is, rate versus exposure versus new business and share gains and how you expect each of those to trend over the course of this year.

Okay. So, new business was stronger than where we were, same second quarter or for also say the year new business range stronger. Retention is about the same, getting lift from rate and exposure that when we combine that together, right now I think it's about 50/50. rate and 50% exposure.

Got it. Thank you.

Our next question comes from the line of Mark Hughes with Truist. You may proceed with your question.

Yeah. Thank you very much. Good afternoon.

Good afternoon, Mark.

I think some of your end markets have been a little slower getting ramped up, maybe compared to other more cyclical end markets. Could you expand on that just a little bit?

What do you mean end markets?

You're talking about your customers. If I heard you properly, tell me if I didn't, but your customers.

Our employee benefits business, you see a lot of headline recovery in employment stats that generally are citing retail, hospitality, transportation -- travel related industries. Our customer base is not concentrated in those industries. It's more diverse than that. And it's just the return to work and our customer base isn't quite at those headline returning to work numbers you see there. That what you're asking about, Mark? Nothing, it's just the mix of business down in the benefits business.

Right. Yeah. Gotcha. Yeah. No, that was my question. Then, Pat, on the pricing, I might not have heard all your commentary, but it seems like -- looking at some of your specific numbers compared to last time they were as good or better in Q1, it seems like there's some broader discussion of potential deceleration. Why do you think you may be seeing it a little more optimistically than others perhaps?

No. I just -- from where I sit, Mark, when I'm talking to people in the field and when I'm talking to our underwriting partners, there just doesn't seem to be any appetite for cutting. Now rate of increase is down, but I'm not seeing people say, oh gosh, we've got this thing right. Let's open the flood gates.

We're seeing a little bit. I think that there's a little bit of -- I think the larger account market or larger size market, we saw increases in premiums there that were a little higher than, let's say, the mid-market of a smaller market throughout the end of 2020 and here in the first half of 2021. So, we're just not seeing if a large account market is not growing rates quite as fast as they were in the past. We're not really seeing that as much in the mid-market. We are seeing it more consistent with first quarter and fourth quarter. You lose there, Mark?

No. No. Here -- I'm back. I'm sorry. I'm just curious if in a public forum, any thoughts you'd care to share around potential for adding some staff in light of the Willis Towers Watson, Aon breakup, you seeing anything out in the market? Any people moving that is noteworthy?

Well, no. We don't. But as you know, Mark, you follow us a long time. Our organic hiring is a big part of our strategy and there's no doubt that we're going to continue to hire production talent across all the lines of business that we've got. And our doors of all -- even in the depths of the soft market, as you followed us, the doors open for production talent.

Very good. Thank you.

Thanks Mark.

Our next question comes from the line of Meyer Shields with KBW. You may proceed with your question.

Thanks. I wanted a little bit on capital management, I guess it's $850 million of the raised debt that you're keeping, is it interpret, Doug, your comments about M&A potential as being able to utilize that $850 million?

Yeah. Absolutely. That's cash in the bank right now. We think that, that -- and we might have to borrow a little bit more towards the end of the year for part of next year, depending on how the M&A pipeline looks at, but the $650 million there's a special mandatory redemption feature in there. So, we'll pay that back. And then what happened with the $850 million that we raised along with that, that -- we'll get that to work here in the second half of the year.

Okay. I might be find you hard with this one. But if you're expecting an increase in potential sellers because of capital gains tax rates, is that likely to depress placing on these assets at all?

You might have a little that end, but I think it will put -- truthfully, I think that it might put -- pricing might stay the same and it actually might pull forward a little bit less on an earn-out and more up front. So you put it here in this year, you might feel bad. Is it a full turn on the multiple, maybe to accelerate it, not have as much on that earn-out, but I wouldn't say it's going to cause a big decrease in pricing.

No, there's a lot of competition for deals out there.

Yeah. Fair enough. Okay. Thank you so much.

Our next question comes from the line of Alex Bolan with Raymond James. You may proceed with your question.

I am calling in on behalf of Greg Peters. Maybe kind of sticking with M&A, and the tuck-in conversation, when you're talking, I guess to potential is, as tuck-in up within the conversation as of now, or is that still a thought?

It's coming up every time.

Okay. And then, when looking at, I guess, M&A, I guess what is the size of acquisitions you're considering? Has that changed at all?

No. We're good at tuck-ins. By the way, looks also, Greg knows this very well. If in fact there's 39,000 agents and brokers in America, let's remember that business insurance that just brought out it's a July edition this month number 100 was $25 million in revenue. So the playing field is full of really, really good tuck-in players.

Okay. That makes sense. And then, when thinking about margin expansion and the effect T&E has, maybe you can touch on -- your thoughts around deployment of T&E and how that might be changed compared to 2019.

All right. Let me -- see if I can understand that again. I thought you had asked a question about India in there, or did I hear your word wrong?

No. I guess -- no, I didn't say anything on India. It was the effect of lower T&E on margin expansion and then, how you're considering deploying T&E in the future maybe compared to 2019.

All right. Great. Well, first of all, we have no hold on. If somebody wants to travel to see their clients where they're more than welcome to go do it, we have no restrictions on that. And people are self-governing on that. We will meet our clients wherever they would like us to meet them in order to conduct business with them. So, we are there and how they want to do it. How much is that? We probably have maybe $5 million a quarter of step-up from where we were in the past. So, maybe there's an extra $5 million in our first quarter, $5 million -- maybe we're at that $10 million this quarter, $15 million next, then $20 million next quarter relative to the depths of the pandemic. So, we're doing it. The good thing about this though, is that we are actually being able to bring our experts to the point of sale virtually much more now than we were before. So, remember the advantage that we have, and that is we have experts in every single aspect of insurance around the world. We can now drop that person into our customer's office, or even if they want to do it from home virtually. International folks, there's lots of -- there's conservative less international travel, but now we can bring our experts from London right into our terrific client or prospect in Des Moines, Iowa with the click of a button. So that's really the competitive advantage of that. But 90% of the time we compete with somebody smaller than us and they just don't have the expert. So, when we can drop our expert in and bring those capabilities to bear, it's going to leave some more wins in the future. In the past to travel somebody in for a half hour meeting, that might be a two or three-day affair. So think about even though expenses might return to a certain extent, it's the ability to get our experts at the point of sale, or the point of -- to the prospect virtually that really is the terrific outcome from the pandemic.

Okay. That makes sense. I appreciate the answers.

Thanks, Alex.

Our next question comes from the line of Ryan Tunis with Autonomous Research. You may proceed with your question.

Good evening, guys.

Good evening.

First question, thinking about the second half of the year, about 9% organic, I think you mentioned, it’s probably get 4% employee benefits. You spend a lot of visibility on how that's supposed to try -- I mean, how are you guys thinking about how that would fit into the 9% of the back half?

I think there's a sequential step-up continuing in employee benefits like we've seen, as people come back we're really starting to -- just even in the last few weeks, our HR consulting units are starting to get more calls. We're starting to get as covered lives increase -- the number of participants and medical plans and dental plans is stepping up. So, it's four went to six and then went to eight over the next couple of quarters and it wouldn't surprise me in our employee benefit.

Got it. And then, for Pat, can you just remind us why -- you guys do 40 deals a year, but very few of them seem to be a wholesale related. What do you mean by wholesale M&A? Why don't we see more of those?

We're very active there. Ryan, I think it's just opportunistic. We've built RPS over the last 20 plus years in large part with acquisitions, and we've done some nice acquisitions over the last 12 months at RPS. One of the areas we built out, of course, we're the country's largest MGA. We also have a program business that's really strong, but open market brokers, we built the typical Gallagher way. We've recruited our own and built our own young people out of hardship. And we've done some very nice acquisitions there. So, no, there's no hole back there. And actually there's no real shortage of opportunities, a lot of competition, one of which at a very successful IPO this month.

Gotcha. Okay. Cool. Thanks, guys.

Thanks, Ryan.

Our last question comes from the line of Phil Stefano with Deutsche Bank. You may proceed with your question.

Yeah. Thanks. Good evening. Congrats on the quarter. I guess, I'm not sure how to put this in. I hope it's not offensive, but I know that the complaint I'm going to get tonight and then tomorrow is, the organic growth seems to be lagging peers. I understand the timing issue and with the contingent and the 606, but even at 9%, it feels like people are going to -- I suspect people are going to -- how do you want me to respond to this, as I'm looking conversations over the next day?

Well, I think it's -- I'll let Doug give you the tactical side, Phil, because he's good at that, but let's put it this way. If you're dropping in the room, here's what I'd say. I'm really proud of our team. We had a great quarter and so did our competitors. God bless them. And if you take a look at our results over the past number of years versus anyone else you want to put up into that, our team gets up every morning and aggressively sells a lot of assurance. And so, I take no second stance to the fact that this quarter was anything, but outstanding. And one quarter comparables, doesn't get my dander up, Doug to give you more technical answer. But I think our people did a great job of selling insurance and holding on to our clients. And I'm really happy with the quarter. On a comparable basis, there's others that look stronger. I'm okay with that.

Yeah. I think, Phil, one of the things you might want to do is take last year second quarter and this year second quarter for all of us, add them up and I think you might find that delta isn't all that much different. And like Pat said, so over two years, we're up about 10% organically in aggregate in our Brokerage segment. And again, I think that if you do the math on those that have reported are worth wherever your other insights are coming from. The second quarter and the second quarter -- last year this quarter might add up to about the same number. I think that running towards 9% is the best quarter since we've posted since fourth quarter of 2003. And like Pat said, this level of organic growth isn't an aberration just to one of us or two of us or whatever. The entire industry is showing excellent organic growth. Industry is growing at a much higher clip than GDP. And I guess what I would say is our outlook for the second half of the year is pretty bullish. So, that's how I would answer it, but mathematically take the two quarters together and we won't be all that far apart when you have like for like business.

I guess, part of this comes back to -- if I think about the two year back that you're suggesting, it comes back to the idea that your clients were more persistent. And so, we don't get the ebb and the flow that we've seen in the recovery last year. I guess, is that a fair way to tie that commentary into the numbers?

The other way I might put it, Phil, is we're doing a better job than our competition to mitigating the impact of rates for our clients.

Yeah. Yeah. Yeah. Okay. Got it. When I think about the -- you said that the door is always open for talent that wants to come. As part of the agreement for the Willis potential businesses that were going to be acquired, was there any non-compete or no shop for talent provisions within that, that would keep you on the sideline from certain talent that might be wondering, looking around.

Yeah. We have some limitations. We've agreed, of course, that we intend to honor those and they're not extensive. But generally speaking, we're not limited in our ability to hire general production talent. But of course, in that discussion, that transaction, there are some limitations which we intend on.

Yeah. Okay. Perfect. Thanks. Congrats. And look, I think the margin expansion story over the past few years has been probably second to none. So, I hope -- hopefully that's the takeaway that you get from me and my comments tonight. Appreciate it.

All right. Thanks Phil.

Thanks, Laura. Let me just -- to make a few comments here. We delivered, obviously excellent second quarter. I'm extremely proud of our team. I believe that we are in the best business in the world, and we're delivering significant value for our clients around the globe day-in and day-out. Thank you all for being with us this evening, and we'll talk to you next quarter. Thanks very much. Thank you, Laura.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation for the rest of your evening.