Today's Viewpoint: A MarshBerry Publication

Arthur J. Gallagher & Co. (NYSE: AJG) reported third quarter adjusted Earnings Per Share (EPS) of $1.33 on revenue of $2.1 billion vs. consensus estimates of adjusted EPS of $1.21 on $2.0 billion. This compares to adjusted EPS of $1.17 on revenue of $1.9 billion in the second quarter of 2021. AJG’s Brokerage and Risk Management segments turned in strong performances that are seen continuing into the fourth quarter driven by strong new business production and economic improvements.

Here are notable takeaways from AJG’s third quarter earnings:

  • AJG’s Brokerage segment reported organic revenue growth of 9%, at the high end of guidance given at AJG’s Investor Day in September, vs. the 8.6% in 2Q21. The segment saw total revenue growth of 16% compared to the 17% in 2Q21. Brokerage operations’ revenue benefited from “clients’ improving business conditions which increases insured exposure units (i.e., insured values, payrolls, employees, miles driven, gross receipts, etc.) and covered lives.”
  • The company sees the Brokerage segment’s organic growth continuing at similar levels in the fourth quarter. This would have full year 2021 organic reaching around 8% and above the 3.2% organic reported in 2020. “To put that in perspective, 8% would be our best full year Brokerage segment organic growth in nearly two decades and we think 2022 organic will end up in a very similar range.”
  • Risk Placement Services increased by 16% in the third quarter with over 30% organic growth in open brokerage reporting and 5% organic growth in MGA programs and binding businesses.
  • For international operations in 3Q21, AJG’s U.K. operations posted over 9% organic growth, while specialty posted 12% and retail saw 6%, driven by new business production. Australia and New Zealand increased by more than 6% combined. Canada was up nearly 10% benefiting from double-digit new business increases and stable retention.
  • The 3Q21 Employee Benefit brokerage and consulting segment was up about 5% in organic growth compared to the 4% organic growth in 2Q21. CEO J. Patrick Gallagher noted that: “Controlling for last year’s large life insurance product sale, organic would have been up high single digits” for the segment.
  • Gallagher Bassett Services, Inc., AJG’s Risk Management segment, reported third quarter organic growth of 16.6% above the guidance from AJG’s September Investor Day. The group continues to benefit from late 2020 and early 2021 new business and an improvement in new arising claims within general liability and core workers’ compensation.
  • AJG expects to see double-digit organic growth for Risk Management for the full year 2021. The company sees fourth quarter organic growth exceeding 10% driven by an improving economy, better hiring situation, and strong new business production, but potentially impacted by more challenging comparisons.
  • Global Property & Casualty (P&C) rates remained firm in 3Q21 with positive pricing in most product lines. Third quarter renewal premium increases were about 8% compared to last year, roughly on par with the first half of 2021. However, property rates were down 1.5% compared to 2Q21. CEO J. Patrick Gallagher commented on the earnings call: “As we look ahead over the coming quarters, I see the P&C market remaining difficult with rate increases persisting for quite a while. In the near term, we don’t see any meaningful changes in carrier underwriting appetite capacity, attachment points or terms and conditions.”
  • In terms of mergers & acquisitions, the company completed five brokerage mergers during the third quarter, totaling about $16 million in annual revenue. AJG stated that it has more than 50 term sheets signed or being prepared, representing about $400 million in annual revenue.
  • Regarding the purchase of Willis Reinsurance brokerage operations, AJG received competition clearance in five of six jurisdictions required to close, including clearance by the U.S. Department of Justice. The final jurisdiction in the U.K. where the review is ongoing. AJG sees the closing on track for fourth quarter.

Overall, AJG had a strong quarter, growing organically and through acquisitions, improving productivity, and continuing to focus on its culture. The company is confident in its ability to meet its growth plans and was positive on its clean energy investments, which are projected to increase by 30% in 2021 and produce “substantial” additional cash flows over the next five-seven years.

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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.