Today's Viewpoint: A MarshBerry Publication

AJG Announces 1Q20 Earnings

Highlights from the AJG earnings release and analyst call

Arthur J Gallagher (AJG) reported a strong first quarter last night, with top-line organic growth within its brokerage segment of 3.1%, which includes an estimated 3.2% drag related to the impact of COVID-19, or a $41.1M reduction in revenue in the quarter. Noteworthy takeaways from AJG management include:

  • Management noted that AJG did not experience a meaningful change to new business, lost business, or renewed business in the first quarter, or second quarter to date (through April 30). In fact, through April, new business and retention was strong. Cash receipts did begin to slow in April as carriers and regulators have extended terms to insureds.
  • Premium pricing continued to increase, with property & casualty (“P&C”) pricing up 5% in the quarter. Management believes that, as the impact of COVID-19 continues to evolve, growth in pricing should help partially offset the expected decline in exposure units.
  • AJG has implemented a significant expense reduction plan, which management estimates will save $50M-$75M in expenses per quarter for the remainder of 2020. Reductions will come from reduced travel & entertainment, advertising, consulting and professional fees. Within its press release, AJG announced that it plans to furlough portions of its workforce, impacting less than 4% of its global workforce.
  • Due to the COVID-19 pandemic, AJG expects that it will pay out approximately $87.3M less in earn outs in 2020 versus its original expectations.
  • AJG completed eight acquisitions in the first quarter, which are estimated to add $25M-$30M in annualized revenue. AJG management provided insight into the current merger & acquisition (“M&A”) market, stating that competition in the space has slowed, which may result in a recalibration of valuations, with the expectation that sellers will be willing to take less guaranteed money upfront, and more on an earn out. Additionally, AJG has said that while its M&A pipeline has over $200M in revenue with over 30 letters of intent (both agreed upon and prepared), there has been a slight lull in activity due to difficulties related to completing due diligence during the COVID-19 pandemic.
  • AJG previously expected to complete $1.5B in acquisitions in 2020, and while they made it clear that the capacity remains, the delay in completing due diligence will likely mean that total capital deployed will fall short of the original goal. Management expects to make up for the shortfall in 2021.

Bottom line, the AJG management team sounded more optimistic on the call than many of its competitors. Management is preparing for flat to negative organic revenue growth for the next several quarters but expects top-line growth to rebound in 2021 similar to levels seen in 2019. AJG will lean heavily on its expense reduction plan, outlined above, to help mitigate the overall impact of the virus and related economic fallout.

One final key takeaway was the client stratification analysis that AJG management described, categorizing clients by high, medium and low risk industries, in order to better understand the impact. This is an activity that we have heard some of our clients have already begun thinking about and implementing. We highly encourage those of you who have not yet considered a stratification analysis, to take a hard look at your client base and concentrations within it to try to better understand how they, and ultimately you, may be impacted in the coming quarters. Although no one, including executives at the large publicly traded brokers, know what the COVID-19 end-game will look like, having an offensive approach and an understanding of your client base can help you gain deep insight as you navigate and think forward through 2020 and beyond.

As we keep our eye firmly focused on the industry and actions within it, we are eager to know what you are experiencing. Take a quick 3-minute MarshBerry Pulse survey to help us gauge the industry’s response and outlook as the country moves towards “open for business” from the anticipated loosening of stay-at-home orders.

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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.

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