Today's Viewpoint: A MarshBerry Publication

AJG Announces 2Q20 Earnings

Highlights from the AJG earnings release and analyst call

Arthur J. Gallagher & Co. (“AJG”) reported 2Q20 results and had a call with the investment community after the market closed yesterday evening. The company exceeded analysts’ earnings expectations but reported lower than expected revenue. Highlights from the call are below:

  • The company noted several cost reduction actions it took during 2Q which resulted in higher margins and approximately $74M of cost savings. The company reduced discretionary travel & entertainment (“T&E”), advertising, outside consulting and technology spend, implemented a hiring and wage freeze, terminated leases for physical locations, and reduced headcount in its hardest hit divisions, among other actions. Workforce reductions to date impacted less than 3% of its workforce, with potentially another 1% reduction later in 2020. These savings are expected to largely hold into 3Q except for potentially lower T&E savings as the team begins to travel more and the resumption of other suspended investments if the underlying business fundamentals continue to improve. Permanent or structural cost savings related to footprint reductions, fundamental changes in business practices, etc. could be in the $30-40M range quarterly.
  • AJG’s brokerage segment was up 2.1% organically in 2Q (U.S. retail Property & Casualty [“P&C”] was up 4% organically). The company indicated that while exposure units are down on both the employee benefits side (as measured in lives) and the P&C side (as measured in coverage units) it has been somewhat offset by rate increases. Additionally, policy cancellations related to bankruptcies/business closures and new business generation remain at pre-pandemic levels. Management also noted it has yet to see “meaningful” declines in customer cash receipts, however the pace and duration of the economic recovery could have an impact on this in the coming quarters.
  • Wholesale brokerage posted mid-teens organic growth, while program business was down 5% in the quarter, as specific segments within the program division have been harder hit (transportation, sports, construction).
  • AJG’s Risk Management segment is largely dependent on claims activity, and it saw organic revenue decline almost 10% related to lower employment levels and a reduction in general business activity. New claim activity has recovered since its lows in April, but are still “well below” pre-pandemic levels, according to management.
  • With regards to the outlook, AJG noted nearly every metric it tracks in its P&C brokerage business are trending better in July than 2Q. AJG’s CEO also commented that July is a big month for the company and it saw a “very, very strong July,” which is supporting its 3Q outlook that organic growth is expected to be similar to 2Q in both its P&C and employee benefits segments.
  • AJG noted its four completed brokerage acquisitions in 2Q are less than “normal” activity, but that the volume of potential candidates is picking up already into 3Q. The company did not comment on valuations other than to say its four transactions in the quarter were completed at “fair” multiples.

Similar to other broker reports, AJG does not appear to expect any kind of “worst case scenario.” This was a greater potential in March when 1Q results were reported. While there are clearly still economic headwinds, particularly on its employee benefits and program business, the company was optimistic about the trajectory of the recovery.

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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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