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Today's Viewpoint: A MarshBerry Publication

Arthur J. Gallagher & Co. (NYSE: AJG) reported second quarter adjusted earnings per share of $1.17 on revenue of $1.9 billion, above consensus estimates of $1.07 on $1.72 billion. This is down from $2.02 on $2.17 billion revenue in the previous period. Looking ahead, AJG sees organic growth benefiting in the second half of the year from improved economic activity across its client base, new business and retention, and continued tailwinds from the Property & Casualty (P&C) environment.

Below are notable takeaways from the second quarter:

  • Within its Brokerage segment, the company reported 8.6% organic growth in 2Q21, up from 6% organic growth in 1Q21. The segment posted 17% total revenue growth for 2Q21, up from 12.2% in 1Q21. AJG noted that a favorable timing nuance in the first quarter related to contingent income contributed to unfavorable timing impacting 2Q21’s organic and total revenue growth by about 70 basis points.
  • Managing General Agent (MGA) program binding businesses were up approximately 6%, up from 4% in the prior quarter.
  • In the U.S., 2Q21 retail organic growth was 8%, up from 5% in 1Q21. In 2Q21 U.S. wholesale operations, Risk Placement Services grew 12% (vs. 6% in 1Q21) organically, and open Brokerage organic growth was nearly 25% due to rate increases, new business, and improved retention. Outside of the U.S., U.K. P&C operations posted more than 9% organic growth. Canada was up a strong 16%, from a combination of new business, retention, and rate and exposure growth. Australia and New Zealand combined increased by 4%, benefiting from new business and steady retention.
  • The Employee Benefit brokerage and consulting segment was up about 4% in organic growth, a “sequential step-up over first quarter of 2021.” The company is benefiting from continued business recovery leading to growth in core health and welfare, fee-for-service and retirement consulting businesses, which it sees continuing in the second half of 2021.
  • Gallagher Bassett Services, Inc., AJG’s Risk Management segment, reported organic growth of about 20%, above its June Investor Relations Day estimates of mid-teens growth and 1Q21’s 0.6%. This was driven by new business, increased claims in workers’ compensation and easier comparisons vs. the pandemic period.
  • For the second half of 2021, AJG projects organic growth close to double digits, driven by the rebound in employment, economic activity, and solid new business. For full year 2021, AJG expects organic growth to be slightly over 10%; and EBITDAC (Earnings Before Interest, Taxes, Depreciation, Amortization & Coronavirus) margin to be above 19%.
  • Global P&C rates remain firm in nearly all geographies and lines. CEO J. Patrick Gallagher noted that “customers are adding coverages and exposures to their existing policies, and monthly positive policy endorsements are trending higher than pre-pandemic levels.” Renewal premium increases in 2Q21 were similar to those in 1Q21, which were up 7% in the U.S. overall. Looking ahead, AJG management sees premiums continuing to increase across all geographies.
  • AJG completed eight mergers during the second quarter, comprised of seven in the brokerage segment and one in risk management. The eight completed transactions represent approximately $70 million of estimated annualized revenue. In its pipeline, there are more than 40 term sheets signed or being prepared, representing about $300 million of annualized revenue. AJG said it sees its U.S. merger & acquisition pipeline increasing in the second half of the year given the potential changes in capital gains taxes, however it noted that competition remains high and pricing is not likely to decrease in the current environment.
  • In the quarter, there was net earnings margin expansion of 107 basis points, and there was adjusted EBITDAC margin expansion of 30 basis points.
  • In May, AJG committed to purchasing the Willis Towers Watson brokerage book of business following its merger with Aon via an issuance of $1.5B in notes. With the merger subsequently called off, AJG exercised its right to redeem $650M of the notes and expects to incur a charge in 3Q related to the terminated transaction.

In sum, AJG had a strong second quarter, driven by growth in acquisitions and improved productivity. AJG sees positive momentum going into the second half of the year, as the economy continues to improve, and the company is expecting to hold “a lot of its pandemic savings.”

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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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