AJG Quarterly Shareholder Meeting

Highlights from the Arthur J. Gallagher Quarterly Shareholder Meeting

On June 17^th, Arthur J. Gallagher & Co. (AJG) held its regularly scheduled quarterly investor meeting. During these meetings, various department leaders present to and take questions from the investor community. The company also provides updated guidance on certain financial items related to its quarterly and annual earnings forecasts. Yesterday’s meeting focused on the current environment and specifically trends in each division in May and June.

We have noted the highlights below.

• AJG’s CEO commented the company continues to see an accelerating hardening market for P&C worldwide (workers compensation as the noted exception). Globally the company indicated P&C rates are up about 6-7% overall, with property and professional liability seeing the largest increases. AJG expects COVID-19 will only create more opportunity to continue or accelerate rate increases, though it will not see the full impact of these increases as the company works with customers to mitigate that impact with alternative coverage options.
• There has been much discussion within the industry regarding exposure decreases and the potential of declines in exposure to offset the rate increases. AJG noted the following trends as related to exposure:
  • There have not been “meaningful” business failures (resulting in policy cancellations) or mid-term audits or adjustments.
  • Increased unemployment has not led to “dropped lines” of coverage at its customers.
  • Client retention is either the same or better than it was pre-pandemic.
  • New business generation is only down 1-2% compared to pre-pandemic trends.
  • Some customers that shut down are starting to reopen.
• The company commented on U.S. Retail Division expectations for organic growth noting that it was about 5.5% in both 2019 and 1Q20. Currently, the expectation is for 2Q organic growth to be roughly half of that trend with the following impacts: 1.5% lower new business, 1% lower exposure (midterm policy adjustments related to temporary shutdowns), 0.5% improvement in retention and 1% lower in rates due to workers compensation price trends.

• The employee benefits division has not seen “massive” decreases in covered lives despite the historic spike in unemployment over the past ~10-12 weeks for several reasons, though the new business environment in Employee Benefits (EB) is challenging. AJG noted many of the unemployed persons counted by government data are furloughed, and thus likely still on employer payrolls, and those that were laid off and elect COBRA coverage, also remain on the plan. Also, the company’s mix is skewed towards industries that were not hardest hit in terms of employment reductions. The outlook for the EB division is for flat to down low single digits in organic growth in 2Q (5% organic growth reported in 1Q).
• AJG’s Managing General Agent (MGA) and program business (Risk Placement Services, or RPS) is seeing higher rate increases than the retail business, and exposure units are down more significantly. The division noted positive signs in June from three hard hit industries: amateur sports, trucking and New York construction projects, but overall organic growth is expected to be flat in 2Q20.
• The company’s Third Party Administrator (TPA) business, Gallagher Basset, is seeing the most COVID-19 impact of all the divisions as claims paid are down significantly and much of the revenue is generated on a fee-per-claim basis. Management indicated that as businesses nationally are reopening, claims figures are already starting to recover in May and June.
• Cash receipts which had slowed due to payment term extensions were stronger in May than April, and June is running at pre-pandemic levels.
• In terms of Mergers and Acquisition (M&A), AJG specifically said it is focused on “tuck-in” acquisitions and that due diligence standards are tightening. The current environment remains active though, and the company has 30 LOIs signed or issued, which would represent $200M of acquired revenue. AJG noted that M&A drivers such as aging ownership and lack of capitalized perpetuation candidates are not changing during this crisis, and they expect a return to more pre-pandemic levels of M&A in 2021. Multiples for the remainder of 2020 are expected to be in the 7.0-8.5x range for AJG on average, compared to 8.8x in 1Q.

The company noted in conclusion that its current organic growth picture of 2% across the brokerage segment is “a little better” than the previous expectations it had on its 1Q investor call on April 30^th and that its cost savings efforts will drive towards the upper end of its previously stated $50-$75M in reductions which it believes will be sustainable reductions through the balance of 2020 and into 1Q21. It also highlighted the belief that the recovery will be “U” shaped, which likely means a similar organic growth picture in 3Q (0-2%) and a stronger 4Q (2-4%).

If you have questions about Today’s ViewPoint, or would like to learn more about today’s marketplace, please email or call Courtney Ferrara, Vice President-Financial Advisory, at 440.392.6586

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This earnings summary has been prepared by Marsh, Berry & Co., Inc. and is not intended to provide investment recommendations on any company. It is not a research report, as such term is defined by applicable laws and regulations, and it does not contain sufficient information upon which to make an investment decision. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any securities, financial instruments or to participate in any particular trading strategy. These materials are based solely on information contained in publicly available documents and Marsh, Berry & Co., Inc. has not independently attempted to investigate or to verify such information.