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    AJG
    Earnings call· Mar 2025(Q1 FY25)

    Arthur J. Gallagher Q1 FY25 earnings call AJG

    May 1, 2025 Source

    Executive summary

    Arthur J. Gallagher & Co. Q1 FY25 — Strong Organic Growth and Margin Expansion

    Arthur J. Gallagher & Co. delivered a strong Q1 FY25, marked by robust 9% organic growth and significant adjusted EBITDAC margin expansion, driven by exceptional performance in its Brokerage segment, particularly reinsurance. While the Risk Management segment saw slower new business revenue, the company maintains a positive full-year outlook, supported by a strong M&A pipeline and ample capital capacity, despite ongoing regulatory review for a major acquisition. The market environment is characterized by rational P/C pricing and solid client activity.

    Highlights

    5

    • Combined Brokerage and Risk Management revenue grew 14%, with 9% organic growth.

    • Adjusted EBITDAC margin expanded 338 basis points to 41.1%, marking the 20th consecutive quarter of double-digit growth.

    • Brokerage segment organic growth was 9.5%, driven by 20% organic growth in Gallagher Re.

    • Acquired $400 million of annualized revenue year-to-date, including Woodruff Sawyer, with a pipeline of over $450 million.

    • Increased borrowing capacity from $1.7 billion to $2.5 billion, with over $2 billion of M&A capacity in FY25.

    Concerns

    4

    • Risk Management segment organic growth of 3.9% was below 5% expectation due to lower new business revenue, though expected to improve in H2 FY25.

    • Property insurance renewal premiums were down 2%, indicating a softening market in that line.

    • International operations (primarily UK, Canada, Australia, New Zealand) saw lower organic growth closer to 4% compared to US operations north of 5%.

    • Ongoing DOJ second request for AssuredPartners acquisition, delaying closure to H2 2025.

    Guidance & targets

    12
    CategoryTargetConfidence
    Full-year Brokerage segment organic growth
    6% to 8% range
    high materiality
    High
    Full-year Risk Management segment organic growth
    6% to 8% range
    medium materiality
    High
    Full-year Risk Management segment adjusted EBITDAC margin
    around 20.5%
    medium materiality
    High
    Full-year Brokerage segment underlying margin expansion
    about 60 to 100 basis points
    high materiality
    High
    Q2 Brokerage segment organic growth
    6% to 7%
    medium materiality
    Medium
    Q3 Brokerage segment organic growth
    about 5%
    medium materiality
    Medium
    Q4 Brokerage segment organic growth
    about 5%
    medium materiality
    Medium
    Q2 Brokerage segment headline margin expansion
    around 300 basis points
    medium materiality
    Medium
    Q3 Brokerage segment margin expansion
    250 to 280 basis points
    medium materiality
    Medium
    Tax credit cash flow
    more than $180 million
    medium materiality
    High
    Interest rate cuts assumption
    two 25 basis point rate cuts
    low materiality
    Medium
    AssuredPartners acquisition close
    second half of 2025
    high materiality
    Medium

    Segment performance

    2
    SegmentRevenueYoYQoQMargin
    Brokerage
    Headline organic growth included about 1 point of favorable timing, which will reverse in H2 FY25. Adjusted EBITDAC margin was up 359 basis points year-over-year, exceeding March IR Day expectations.
    Organic growth: 9.5%Underlying margin expansion: 1 percentage pointRetail P/C organic: 5% overallU.S. Retail P/C organic: north of 5%International Retail P/C organic: closer to 4%Global employee benefit brokerage and consulting organic: >7%Reinsurance, wholesale and specialty organic: 13% totalGallagher Re organic: 20%Wholesale and specialty organic: 8%Binding business organic: mid-teensOpen brokerage organic: 5% to 6%
    		16% growth——43.4% adjusted EBITDAC margin
    Risk Management (Gallagher Bassett)
    Organic growth was below the 5% expectation due to lower new business revenue, but is expected to improve in the second half of the year as new client contracts begin to generate revenue. Adjusted EBITDAC margin was in line with March expectations.
    Organic growth: 3.9%
    		6% growth——20.5% adjusted EBITDAC margin

    Operational metrics

    31
    Reported Net Earnings Margin
    23%
    Q1 FY25
    Adjusted EBITDAC Margin
    41.1%up 338 basis points year-over-year
    Q1 FY25
    Adjusted EBITDAC Growth
    26%
    Q1 FY25

    20th consecutive quarter of double-digit growth.

    GAAP EPS
    $3.29
    Q1 FY25
    Adjusted EPS
    $4.16
    Q1 FY25
    Brokerage Adjusted EBITDAC Margin (prior year reported)
    39.9%
    Q1 FY24

    As reported in Q1 FY24 earnings release.

    Brokerage Adjusted EBITDAC Margin (prior year FX-adjusted)
    39.8%
    Q1 FY24

    Using current period FX rates for comparison.

    Brokerage Adjusted EBITDAC Margin Expansion from Organic Growth
    120 basis points
    Q1 FY25

    Driven by 9.5% organic growth.

    Brokerage Adjusted EBITDAC Margin Impact from M&A and Lower Interest Rates
    10 basis points
    Q1 FY25

    Used margin.

    Brokerage Adjusted EBITDAC Margin Impact from AssuredPartners Cash Interest Income
    260 basis points
    Q1 FY25

    From interest income on cash held for AssuredPartners acquisition.

    Corporate Segment After-Tax Expense Increase
    $1 million
    per quarter

    Due to favorable expense timing in Q1, some of which will reverse over the rest of the year.

    Tax Credit Carryovers
    $710 million
    as of March 31
    M&A Capacity
    $2 billion
    FY25

    Available M&A capacity.

    M&A Capacity
    $5 billion
    FY26

    Available M&A capacity before using any stock.

    Global P/C Insurance Renewal Premium Change (Property)
    -2%
    Q1 FY25
    Global P/C Insurance Renewal Premium Change (D&O)
    -3%
    Q1 FY25
    Global P/C Insurance Renewal Premium Change (Workers' Comp)
    5%
    Q1 FY25
    Global P/C Insurance Renewal Premium Change (Personal Lines)
    8%
    Q1 FY25
    Global P/C Insurance Renewal Premium Change (Casualty Lines overall)
    8%
    Q1 FY25

    Includes general liability, commercial auto, and umbrella.

    Global P/C Insurance Renewal Premium Change (General Liability)
    5%
    Q1 FY25
    Global P/C Insurance Renewal Premium Change (Commercial Auto)
    6%
    Q1 FY25
    Global P/C Insurance Renewal Premium Change (Umbrella)
    11%
    Q1 FY25
    Global P/C Insurance Renewal Premium Change (Small to Midsized Accounts)
    5%
    Q1 FY25
    Global P/C Insurance Renewal Premium Change (Large Accounts)
    1%
    Q1 FY25
    Global P/C Insurance Renewal Premium Change (Accounts $25k-$100k)
    3.5%-4%
    Q1 FY25
    Global P/C Insurance Renewal Premium Change (Accounts $10k-$25k)
    mid-4s
    Q1 FY25
    Global P/C Insurance Renewal Premium Change (Accounts <$10k)
    mid-5s
    Q1 FY25
    Rollover Revenue Subtotal
    $80 million
    Q1 FY25

    Consistent with March IR day expectations.

    Rollover Revenue before Divestitures
    $92 million
    Q1 FY25

    Consistent with March IR day expectations.

    Open Jobs in U.S.
    7 million
    Q1 FY25

    Still well above the number of unemployed people looking for work.

    AssuredPartners Employee Turnover
    better than oursby maybe 0.5 point to 1 point
    Q1 FY25

    Turnover is better than Gallagher's, even after bonuses have been paid.

    Industry KPIs

    6
    MetricValueDetails
    Capital returnsIncreased borrowing capacity from $1.7 billion to $2.5 billionUSD
    Catastrophe lossesJanuary wildfire losses
    Retention persistencyExcellent client retention
    Renewal rate change pricingProperty down 2%, D&O down 3%, workers' comp up 5%, personal lines up 8%, casualty lines up 8% overall (general liability up 5%, commercial auto up 6%, umbrella up 11%)%
    Broker specific when present9% organic growth%
    Prior year reserve developmentContinued casualty reserve increases

    Deals & partnerships

    3
    Woodruff SawyerAcquisition of an insurance brokerage firm

    Completed in early April 2025.

    AssuredPartnersMajor acquisition of an insurance brokerage firm$13.5 billion

    Working to respond to a second request from the DOJ. Management noted positive cultural fit and employee retention.

    Multiple11 new tuck-in mergers$100 millionannualized revenue

    11 new tuck-in mergers completed during the first quarter of 2025.

    Risks & headwinds

    5
    Softening Property MarketQ1 FY25, potential for future quarters

    Property renewal premiums down 2% in Q1 FY25.

    Mitigation: Leveraging expertise and data-driven capabilities to help clients navigate complex insurance and economic backdrop, finding best coverage and mitigating price increases.

    Catastrophe VolatilityOngoing, particularly Q2-Q4 FY25

    January wildfire losses and continued casualty reserve increases remain a focus; U.S. severe convective storm season and U.S. wind season approaching.

    Mitigation: Gallagher Re positioned to excel regardless of market conditions; company helps clients with risk management. Property market is 'fragile' and can change quickly.

    Regulatory Delay for AssuredPartners AcquisitionExpected closure in H2 2025

    Second request from DOJ, delaying closure.

    Mitigation: Actively working to respond to the second request, expected to be submitted by mid-third quarter.

    Lower New Business Revenue in Risk ManagementQ1 FY25, expected to improve in H2 FY25

    Organic growth of 3.9% in Q1 FY25, below 5% expectation.

    Mitigation: Already sold new contracts are expected to start generating revenue in coming months.

    Impact of TariffsOngoing

    Discussed as a concern for clients, but daily revenue indications not showing significant changes.

    Mitigation: Company helps clients mitigate additional loss costs or value increases through captives, higher retentions, or language changes.

    What to watch in Q2 FY25

    5

    Risk Management Organic Growth

    H2 FY25
    Current3.9%
    TargetImprovement towards 6%-8% range

    Why it matters

    Improvement in new business revenue is crucial for the segment's full-year organic growth target.

    As these new client contracts incept and begin to generate revenue in the coming months⏳, we are confident we will see stronger revenue growth in the second half of the year. Looking ahead, we still see full year '25 organic in that 6% to 8% range.

    Q&A highlights

    6

    Breakdown the 20% reinsurance organic growth by pricing, retention, new demand, and whether it's new business or taken from peers.

    More than half of the organic growth came from new business, including 15 new client wins over $1 million each. Increased renewal premiums from carrier growth contributed about 5%, with the remainder from favorable timing. Management emphasized the successful integration of Gallagher Re with other segments.

    “Our new business spread was responsible for more than half the organic this quarter. In fact, we had about 15 new client wins with more than $1 million each.”

    asked by Elyse Greenspan · answered by J. Gallagher

    2 min read6 chapters

    Detailed Narrative

    01

    Brokerage Segment Performance Drivers

    The Brokerage segment achieved 9.5% organic growth, with Gallagher Re contributing a significant 20% organic growth, primarily from new business wins. Retail P/C operations saw 5% organic growth overall (U.S. north of 5%, international closer to 4%), and global employee benefits grew over 7%. The company attributes this success to its enhanced sales tools, data analytics, and expertise in navigating a complex insurance market, which enables producers to drive new business in a dynamic market.

    02

    P/C Insurance Pricing Environment

    The global P/C market remains rational. Property rates were down 2%, D&O down 3%, while workers' comp was up 5%, personal lines up 8%, and casualty lines up 8% (general liability up 5%, commercial auto up 6%, umbrella up 11%). A divergence exists between small to midsized accounts (up 5%) and large accounts (up 1%), with smaller accounts experiencing higher rate increases. Pricing is ultimately driven by client loss experience, with good accounts receiving relief and poor accounts seeing greater increases.

    03

    Reinsurance Market Dynamics

    January 1 renewals favored buyers with sufficient capacity and disciplined terms. April renewals showed similar conditions with some downward pricing pressure. Despite January wildfire losses and casualty reserve increases, pricing remained stable due to the large proportion of Japanese buyers in April. Management expects Gallagher Re to continue excelling in this environment, leveraging its integration with other company segments for cross-pollination and new business opportunities.

    04

    Economic Indicators and Client Activity

    Daily revenue indications from audits, endorsements, and cancellations remain net positive, suggesting solid client business activity and no meaningful global economic slowdown. The U.S. labor market shows strong demand with over 7 million open jobs, and health insurance carriers report increased utilization and costs. These trends drive employer demand for solutions to grow their workforce and control benefit costs, which Gallagher is positioned to provide.

    05

    M&A Strategy and Pipeline

    Arthur J. Gallagher & Co. completed 11 tuck-in mergers in Q1, adding $100 million in annualized revenue, and acquired Woodruff Sawyer in early April, bringing year-to-date acquired revenue to $400 million. The company has a robust pipeline with over 40 term sheets signed or prepared, representing over $450 million in annualized revenue. With increased borrowing capacity to $2.5 billion, the company maintains significant M&A capacity, including over $2 billion in FY25 and $5 billion in FY26 before using stock.

    06

    AssuredPartners Acquisition Update

    The AssuredPartners acquisition is still expected to close in the second half of 2025, pending response to a second request from the DOJ, which is expected to be submitted by mid-third quarter. Management noted that AssuredPartners' employee turnover is slightly better than Gallagher's, and the cultural fit and enthusiasm for integration are very high, with no significant breakage, reinforcing confidence in the deal's potential.

    AI-generated summary of the company’s earnings call. Not investment advice.