Today's Viewpoint: A MarshBerry Publication

AJG Announces 3Q20 Earnings

  • Highlights from the AJG earnings release and analyst call

Arthur J. Gallagher & Co. (“AJG”) reported a strong third quarter with total brokerage and risk management up approximately 6% or $1.5 billion. Results in the Brokerage segment, the operations which most closely align to MarshBerry’s clients, continued to be strong despite macro-level headwinds from the on-going COVID-19 pandemic. Highlights from the quarter include:

  • Revenue within AJG’s Brokerage segment grew 8.3% in the third quarter to nearly $1.3 billion, including 4.2% organic growth. Results were positively impacted by the one-time sale of a large life insurance pension funding product. Excluding this sale, organic growth would have been approximately 3%.
  • In the third quarter, AJG’s Retail Property & Casualty (“P&C”) business in the U.S. grew approximately 4% organically. U.S. P&C premium rates increased nearly 8%, and are more than offset by exposure unit declines. Premium rate increases spanned across most geographies and lines of coverage, with property, professional liability and umbrella coverage types noted by management as experiencing the most significant increases. Management indicated that new business generation remained strong and retention was up slightly versus the prior year.
  • Through October, P&C retention, new business, full policy cancellations and other mid-term policy adjustments are in line to slightly better than the third quarter.
  • AJG’s Employee Benefits (“EB”) business saw 6% organic growth in the third quarter, including the one-time large life insurance policy referenced above. Excluding that large policy, organic growth was low single digits. AJG experienced a decrease in covered lives on renewal business within its EB business, which management believes could persist, or deteriorate further, if the economy is slow to recover from the COVID-19 pandemic.
  • In response to the COVID-19 pandemic, AJG continued to focus on actively managing its discretionary spending during the third quarter, decreasing expenditures in categories such as travel and entertainment, advertising, capital expenditures, outside labor and consultants. The company also adjusted portions of its workforce. Combined, these efforts resulted in approximately $70 million in cost savings. Management noted that a portion of these cost savings will ultimately be permanent.
  • The company closed five acquisitions in the third quarter, representing $13.1 million in annualized acquired revenue. After a short lull in activity in early 2020, AJG’s merger & acquisition pipeline is once again full. AJG has over 40 letters of intent signed or being prepared, which amounts to approximately $350 million of annualized revenue. Additionally, management noted that it feels like the end of 2020 will be especially active as merger prospects have concerns over potential tax law changes in 2021 and beyond.

Overall, AJG posted another strong quarter in the face of significant on-going challenges driven by the global COVID-19 pandemic, which speaks to the resiliency of the insurance brokerage industry. Although much remains unknown about the severity or duration of COVID-19, AJG management remains optimistic about both the near-term and long-term future. Continued positive trends quarter-to-date is yet another encouraging sign as the firm looks towards the end of what has been a tumultuous and unpredictable year.

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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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