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Today's Viewpoint: A MarshBerry Publication

Highlights from the AJG earnings release and analyst call.

Arthur J. Gallagher & Co. (AJG) reported that fiscal year 2021 is off to a “fantastic” start. First quarter revenue totaled $2.17 billion. This is up from $1.87 billion in the previous period and above the consensus estimate of $2.0 billion. Looking ahead, AJG expects organic growth in the upper single digits for the next few quarters thanks to strong new business and retention, tailwinds from the property & casualty (P&C) environment and increased economic activity across its client base.

Highlights from the quarter include:

  • Within its Brokerage segment, the company reported 6% organic growth, and 12.2% total revenue growth for the quarter. It’s noted that a favorable timing nuance related to contingent income contributed to 50 basis points of the organic and total revenue growth.
  • In the U.S., retail organic growth was 5%. In U.S. wholesale operations, Risk Placement Services grew 6% organically and open brokerage organic growth was 15% due to rate increases, higher levels of new business, and improved retention. Managing General Agent (MGA) program binding businesses were up approximately 4%. Globally, P&C operations posted more than 7% organic growth, surpassing original expectations of 5-6%, due to a strong March.
  • Employee Benefit brokerage and consulting was up “slightly.” The company expects that a recovering labor market in 2021 should favorably impact the core health and welfare business and is optimistic that HR consulting and special project activity will pick up in the remainder of the year.
  • Gallagher Bassett Services, Inc., AJG’s Risk Management segment, reported organic growth of 0.6% and the company is seeing an uptick in workers’ comp claim activity compared to this time last year. Looking forward to the next three quarters, AJG expects new claims to be higher than last year, but perhaps not quite back to pre-pandemic levels.
  • Global P&C rates remain firm in nearly all geographies and lines. In the U.S., rates were up 7% overall, including double-digit rate increases within AJG’s wholesale open brokerage operations. The company noted that capacity is constrained in certain lines and carriers are pushing for tighter terms and conditions. Looking ahead, AJG management does not believe the environment will change any time soon.
  • AJG finished 1Q21 with five completed acquisitions versus eight transactions in the year ago period. The five completed transactions represent approximately $90 million of estimated annualized revenue. In its pipeline, there are more than 40 term sheets signed or being prepared, representing about $250 million of annualized revenue. The company has upwards of $2.5 billion of merger & acquisition capacity in 2021.
  • Net earnings were up 17% and adjusted Earnings Before Interest, Taxes, Depreciation, Amortization and Coronavirus (EBITDAC) was up 24%. The company noted that some of the current expense savings will diminish as activity resumes, but it expects to retain roughly half of the cost savings after 4Q21.
  • Looking ahead, management indicated that thus far, second quarter new business and retention trends are similar to the first quarter, and noticeably improved from April 2020.

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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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