Arthur J. Gallagher & Company (AJG) — Q1 2024 Earnings Call Transcript

Thank you. Good afternoon. Thank you for joining us for our first quarter '24 earnings call. On the call with me today is Doug Howell, our CFO; and other members of the management team and the heads of our operating divisions. We had a great first quarter to begin 2024. For our combined Brokerage and Risk Management segments, we posted 20% growth in revenue, our 13th straight quarter of double-digit growth, 9.4% organic; Virgin acquisition rollover revenues of approximately $250 million. We also completed 12 mergers totaling nearly $70 million of estimated annualized revenue. Reported net earnings margin of 21.5%, adjusted EBITDAC margin of 37.8%, GAAP earnings per share of $3.10 and adjusted earnings per share of $3.83, up 17% year-over-year. So another terrific quarter by the team. Moving to results on a segment basis, starting with the Brokerage segment. Reported revenue growth of 21%. Organic growth was 8.9% and about 10% if you include interest income. Adjusted EBITDAC was up 18% year-over-year. And we posted adjusted EBITDAC margin of 39.9%, a bit better than our March IR Day expectations. Let me give some insights behind our Brokerage segment organic, and just to level set, the following figures do not include interest income. Our global retail brokerage operations posted 7% organic. Within our P/C operations, we delivered 7% in the United States, 6% in the U.K., 2% in Canada and 8% in Australia and New Zealand. And our global employee benefit brokerage and consulting business posted organic of about 8%, including some large live case sales that were completed in late March. Shifting to our reinsurance wholesale and specialty businesses, overall organic of 13%. This includes Gallagher Re at 13%, U.K. specialty at 10% and U.S. wholesale at 13%. Fantastic growth, whether retail, wholesale or reinsurance. Next, let me provide some thoughts on the PC insurance pricing environment, starting with the primary insurance market. Global first quarter renewal premiums, which include both rate and exposure changes, were up about 7%. Renewal premium increases continue to be broad-based, up across all of our major geographies and most product lines. For example, property was up nearly 10%; umbrella, up 9%; general liability, up 7%; workers' comp, up 2%; package, up 8%; and personal lines, up 13%. So many lines are seeing sizable increases. There are 2 exceptions within professional lines. First, D&O, where renewal premiums are down about 5%; and second, cyber, where renewal premiums are flattish. These 2 lines appear close to reaching a pricing bottom, but combined, represent around 5% of our P/C business globally. So overall, our clients continue to see insurance costs increase, but our job as brokers is to mitigate these increases and deliver comprehensive insurance programs that align with their risk appetite and fit their budget. Moving to the reinsurance market. First quarter dynamics were dominated by the January 1 renewal season where we saw stable pricing and increased demand for property cat cover. Reinsurers continue to exercise discipline and met the increased client demand with sufficient capacity. Importantly, the team was able to secure many new business wins while retaining most of our existing clients. During April renewals, reinsurance carriers maintained their discipline, and with increased demand and stable pricing, we saw more coverage being purchased. Within property, more capacity was available at the top end of programs and the quoting of the renewal process was disciplined and predictable. The casualty treaty market saw stable pricing overall. However, carriers able to differentiate themselves through good management of prior year reserves were able to secure better reinsurance placements. Specialty class renewals were a bit more complex with some changes in terms and conditions. However, many clients were able to secure modestly lower pricing. With that said, the tragedy in Baltimore may cause reinsurance carriers more pricing pressure throughout the rest of the year. Those interested in more detailed commentary on January or April renewals can find our first new market reports on our website. In our view, insurance and reinsurance carriers continue to behave rationally. Carriers know where they need rate by line, by industry and by geography. We are seeing this differentiation in our data. Premiums are increasing the most where it's needed to generate an acceptable underwriting profit. Great example of this is primary casualty, where we are seeing renewal premiums moving higher. Global first quarter umbrella and general liability renewal premium increases are in the high single digits, including 9% increases in U.S. retail. A. M. Best recently maintained its negative outlook on the U.S. general liability insurance market due to worsening social inflation, medical expenses and litigation financing. We've been highlighting these dynamics for a while, along with hearing concerns around historical reserves, which leads us to believe further rate increases are to come in casual. At the other end of the spectrum, we have property. As insurance and reinsurance carriers believe they are getting closer to price and exposure adequacy, we are seeing property renewal premium increases moderating. With that said, first quarter insurance renewal premiums were still pushing double digits. As we look out for the remainder of the year, increased frequency or severity of catastrophes could again move the market in '24. And while capacity was very challenging to come by during '22 and '23, we are now finding, when clients are looking to add coverage or limits, carriers are more than willing to provide additional cover. Notably, we are not seeing a change in the underwriting standards from our carrier partners. While continued premium increases seem rational to our carrier partners, our clients have experienced multiple years of increased costs, having a trusted adviser like Gallagher to help businesses navigate a complex insurance market by finding the best coverage for our clients while mitigating price increases. That's what we do. Moving to our customers' business activity. Overall, it continues to be solid. During the first quarter, our daily indication showed positive midyear policy endorsements and audits ahead of last year's levels across most geographies. So we are not seeing signs of a broad global economic slowdown. Within the U.S., the labor market remains tight. Nonfarm payrolls continue to increase and more people are reentering the workforce. Yet there continues to be nearly 9 million job openings. Wage increases have persisted at the same time, medical cost trends are rising. With these dynamics, employers are focused on total rewards strategy to help them achieve their human capital goals while reining in costs. That's why I believe our benefits businesses will have terrific opportunities in '24. Overall, we continue to win new brokerage clients while retaining our existing customers. In fact, our new business production has been on an upward trend in recent quarters, and our retention is holding. We believe this is a direct reflection of our client value proposition, CORE360 and Gallagher Better Works, our niche expert service and our data and analytics. Don't forget, we're competing with someone smaller than us, 90% of the time. These local brokers just can't match the value we provide. So putting it all together, we continue to see full year '24 brokerage organic in the 7% to 9% range, and that would be another outstanding year. Moving on to our Risk Management segment, Gallagher Bassett. Revenue growth was 19%, including organic of 13.3% and rollover revenues of $14 million. Adjusted EBITDAC margins were 20.6%, up 140 basis points versus last year and a bit better than our March IR Day expectations. Our results continue to reflect solid new business, outstanding retention, continued increases in new arising claims across both workers' comp and liability and resilient customer business activity. Looking forward, we continue to see '24 full year organic in the 9% to 11% range as our larger '23 new business wins have been fully onboarded. We now expect full year margin of approximately 20.5%. That would also be another outstanding year. Shifting to mergers and acquisitions. We had an active first quarter completing 12 new mergers, representing about $70 million of estimated annualized revenue. I'd like to thank all of our new partners for joining us and extend a very warm welcome to our growing Gallagher family of professionals. Looking ahead, our pipeline remains strong. We have around 50 term sheets signed or being prepared, representing around $350 million of annualized revenue. Good firms always have a choice, and we'll be very excited if they choose to join Gallagher. Let me conclude with some comments regarding our bedrock culture. It's a culture that has remained constant through the decades of incredible growth. This is largely due to the 25 tenants of The Gallagher Way, which is entering its fifth decade next month. It is deeply rooted in the values of integrity, ethics and trust, which have been guiding us since 1927. Our culture is not just a differentiator, it's a competitive advantage. It attracts the right talent to our organization and the best merger partners and enables us to build enduring relationships. What makes me particularly proud is that I witness our culture in action every day as our employees demonstrate their commitment to our clients, and that is The Gallagher Way. Okay. I'll stop now and turn it over to Doug. Doug?

Thanks, Pat, and hello, everyone. Today, I'll walk you through our earnings release. I'll comment on first quarter organic growth and margins by segment, including how we are seeing full year organic growth and margins in each of the next 3 quarters. Then I'll provide some typical comments on the modeling helpers we provide in the CFO commentary document that we posted on our website, and I'll conclude my prepared remarks with a few comments on cash, M&A and capital management. Okay. Let's look to Page 2 of the earnings release. Headline, first quarter brokerage organic growth of 8.9%. That's a bit better than our March IR Day expectation of 8% to 8.5%. And remember, we exclude interest income. Including such, we would have shown about 10% organic growth. Looking ahead, we continue to see strong new business production and favorable client retention. Combine that with further rate increases, a resilient economic backdrop and sticky inflation, our 2024 brokerage organic outlook is unchanged. We are still seeing full year organic growth in that 7% to 9% range. Moving to Page 4 of the earnings release, to the Brokerage segment adjusted EBITDAC table. First quarter adjusted EBITDAC margin was 39.9%, a bit better than our March IR Day expectations. The footnote on that page explains what we discussed in our January earnings call and again at our March IR Day. There is 90 basis points of roll-in impact from M&A, principally Buck, that naturally runs lower margins. So on the surface, it is showing 30 basis points lower, but underlying margins actually expanded 60 basis points. Again, that improvement is a little better than what we forecasted in March. Let me walk you through a bridge from last year. First, if you were to pull out last year's 2023 first quarter, you would see we reported, back then, adjusted EBITDAC margin of 40.4%. Second, when we update that margin using current period FX rate, gets you to an FX adjusted margin of about 40.2%. And we've done that here. You can see in the 2023 column of this table that after deducting the 90 basis point roll-in impact, which is due to the roll-in math, the margins are not going backwards. This brings us to 39.3% compared to the 39.9% we present today, resulting in an underlying margin expansion of 60 basis points. This is a commendable achievement by the team. Looking ahead to the next three quarters of 2024, it appears we could achieve a margin expansion in the 90 to 100 basis point range for each of those quarters. To elaborate, first, Buck has now completed its first year, so the roll-in noise is no longer a factor. Second, as mentioned during our March Investor Relations Day, the carryover effect of raises given in 2023 will be relatively lower over the upcoming three quarters. And third, the reality is we are typically posting margins higher than most of our M&A targets. While that slightly impacts what we report as margin expansion, we will do these mergers all day, any day. These are great businesses with terrific talent. And when we combine, we are better together. So to repeat, expansion in 90 to 100 basis points range in each of the next 3 quarters would get you to about 60 basis points of full year margin expansion. That assumes we would post organic in that 7% to 9% range and it still is allowing us to continue to make substantial investments in data analytics, sales tools, digital service and arming our sales and service folks with the best resources in the business. Okay. Let's move to the Risk Management segment and organic and EBITDAC tables on Pages 4 and 5. Another fantastic quarter benefiting from new business wins and excellent client retention, 13.3% organic growth and margins at 20.6%. Looking forward, we are now lapping growth associated with our large new business wins from '23, and so we see quarterly organic for the rest of '24 in the 8% to 9% range. As for margins, the team has done a great job posting margins above 20% this quarter, and we believe we can hold that for the remainder of the year. That also is a bit better than our March IR Day outlook. Turning to Page 6 of the earnings release, in the corporate segment shortcut table. Adjusted first quarter numbers came in better than the favorable end of our March IR Day expectations due to lower acquisition costs and some favorable tax items, primarily associated with stock-based compensation, and that's shown in the corporate line. So now let's move to the CFO commentary document that we posted on our website. Not much changes at all on Page 3 or 4 other than a few tweaks to a few numbers such as FX, noncash items, etc. Just do a double check with your models using these numbers. Page 5 updates our tax credit carryforwards. It shows about $820 million available at March 31, and we expect to benefit our cash flows by about $150 million to $180 million a year. While this doesn't impact our P&L, it provides a nice annual cash flow benefit to support our future M&A activities. Turning to Page 6, the top table, we introduced this modeling helper in January. It breaks down the components of investment income, premium finance revenues, book gains, and equity investments in third-party brokers. There have not been significant changes from what we provided in March, but we are still including 225 basis point rate cuts in the second half of '24. We have also updated the figures based on current FX rates. The lower table on Page 6 shows rollover revenues. The blue column subtotal of about $228 million is very close to the $224 million we provided at our March Investor Relations day. Please remember that the pinkish columns only include estimated revenues for mergers and acquisitions that we've closed through yesterday. You'll need to consider future mergers and acquisitions as well. Additionally, when you read Note 3 on that page, you'll notice we had an estimate change related to some historical acquisitions that increases revenues and expenses. It effectively nets to nothing, but it does flow through the profit and loss statement. We've adjusted these figures, so there is no impact on organic adjusted net earnings, adjusted EBITDAC, or adjusted EPS. Moving to cash, capital management and M&A funding. Available cash on hand at March 31 was around $1 billion, which includes a portion of the proceeds from our February debt offering. So with $1 billion in the bank and expected strong future cash flows, we are still estimating we have total capacity in '24 of about $3.5 billion to fund M&A without issuing stock nor having to borrow much of any more. As for 2025, it looks like we could fund over $4 billion of M&A with free cash and debt, all of this while maintaining a solid investment-grade rating. Okay. Another terrific quarter and start to the year. Looking ahead, we see continued strong organic growth, a growing pipeline of M&A, further opportunities for productivity improvements and a culture that makes us hard to beat. I believe we are very well positioned to deliver another fantastic year here in '24. Back to you, Pat.

Thank you, Doug. Operator, I think we're ready for some questions.

My first question is on the brokerage segment. So organic, as you guys said, right, a bit better than what you expected in March. So close to the top end of the full year guided range, right, that you guys are maintaining that outlook, could you just give us a sense, do you expect growth to slow over the balance of the year? Is there some level of conservatism? I mean, Pat, you seemed positive on the pricing environment. We saw a little bit like GDP numbers today come out. I'm just trying to think about how you put that all together and how you would think growth would trend within the brokerage over the next 3 quarters.

Well, I'm going to let Doug do the numbers. But yes, I mean, I think you're reading me right, Elyse. I'm bullish on the environment. We are not seeing a downturn in terms of our clients. They're employing more people. We're seeing robust client activity at Gallagher Bassett. That's a very good bellwether of what's going on in the economy. Interest rates are up. The market hates inflation, but it's good for brokers and high interest rates help us as well in terms of the growth in revenues and head count and all the rest of it. So the fundamental business environment is really, really good for us. As far as the numbers, Doug, go ahead.

Yes, we don't anticipate much variation in each quarter moving forward. We expect to remain in the 7% to 9% range. The first quarter is typically strong and heavily focused on reinsurance, so while it may exceed the next three quarters slightly, it won't be significant. Overall, we expect to maintain that 7% to 9% range for each of the next three quarters, aligning with our outlook for the full year. This is consistent with what we've previously communicated.

The second question is about margin. As you mentioned, Q1 performed slightly better than the March guidance. You had previously indicated an expectation of 100 basis points across all three quarters. Now, it's adjusted to 90 to 100, while the full-year guidance remains unchanged. Is the improvement in Q1 prompting you to allocate some of that for internal investments? It might seem like a minor point since it's still within the 90 to 100 range, but I'm trying to understand how the updated margin outlook for the out quarters aligns with what you communicated in March.

Well, listen, I think that the CFO commentary document has kind of said 90 to 100, I think, consistently. If I said 100% of the last IR Day, I may have said towards 100 basis points. So I think our guidance feels, to us, about the same.

Okay. One last question. The FTC is considering the removal of noncompetes. My question has two parts: how might this affect our ability to attract talent to Gallagher, and what could be the implications of potentially losing talent to competitors if this change happens?

I want to address that point. Firstly, it's important to note that the U.S. Chamber has initiated a lawsuit in Texas challenging this matter, and we support their efforts. We believe this is an overreach by the executive branch. However, if the new regulations are upheld, there is a provision regarding noncompete agreements in business sales. As a result, we anticipate this rule will have a minimal effect on our mergers and acquisitions strategy. Initially, I was concerned when the rule was first announced. Our agreements with our production team do not include noncompete clauses; instead, we utilize non-solicitation clauses. And there is a fine line difference there, but those cover clients and employees. And from our first look, we think those are going to remain enforceable. Having said all that, we want people to want to work here. The reason, this is why culture is so important. This is a great place to work, and we attract highly motivated salespeople and entrepreneurs that are passionate about doing what they do, and they want to leverage their expertise and capabilities. And we give them the data and analytics and the centers of excellence to work with. We arm them with way better armament that they get from being part of a local competitor. We're a great place to work. So while I don't agree with the FTC, and I do agree with the Chamber's position, we're supportive of that, for our business, I think it's a nonissue.

Just as a quick follow-up on the FTC question. One of the top 10 brokers is on record saying that their California margins are a bit lower than the rest of the rest of the regions due to a little bit higher turnover, which might be due to California not having non-solicited noncompetes. Just curious, have you ever sliced and diced your California margins? And are they a little bit lower than the rest of the company?

Sliced and diced every margin by every possible measure you can think of. And no, they're not a bit lower. We've been trading in California for 50 years. We love the state, we're big, big there, and our people love working there.

Okay, that's clear. Switching topics to mergers and acquisitions. I have asked this before, but I will continue to ask because these numbers are significant. Doug, you mentioned a capacity of $4 billion for next year, which is understood. However, these figures are substantial, $3.5 billion this year and $4 billion next year. Should we consider that you might pursue larger deals over time to fully utilize cash and debt?

Mike, this is Pat. I believe it's accurate to say that we embrace opportunities when they arise. Ten years ago, we made a significant investment by acquiring Wesfarmers from Australia for $1 billion, which was our largest move to date and has been a successful financial decision. Our acquisition of Willis Re was around $4 billion. Last year, we also made considerable investments. We are open to exploring larger deals, but as you pointed out, there are many options available. The top 100 companies include 29,900 smaller entities in the United States alone, which is where we focus most of our efforts.

Yes, I think that we now have a structure in place that allows us to pursue many smaller acquisitions, particularly family-owned businesses that understand they can achieve more by partnering with us. Our merger and acquisition integration process is quite smooth and well-developed, having successfully completed 700 deals over the past 20 years. Additionally, many smaller or local brokers are beginning to recognize that they can access the resources they have desired for many years from us almost immediately. So I think that we have the opportunity to increase the volume of that nice tuck-in deals that we see out there. And I think that our story is getting stronger and stronger every day. Higher interest rate, it does not help others reinvest into their business. We reinvest so much into our business day in and day out. There are new ideas for tools and capabilities and the others just can't say that. They haven't done it. I don't think they're going to do it in a higher interest rate. So I think the volume of our tuck-in deals will increase. Will we spend $3.5 billion this year and $4 billion next year? Yes, maybe we'll see. I think we've got a good shot at it.

Pat, I wanted to discuss your remarks regarding property insurance and how clients are considering increasing their coverage or limits. I'm also curious about how this could counterbalance the moderation in property insurance pricing that you mentioned. Please help me understand both of these factors and how they might influence your organic growth moving forward.

Well, first of all, I think that when you look at that, those were in the section of the prepared remarks that had to do with reinsurance. There's been a lot of demand the last number of years for cat covers and what have you that frankly were hard to meet. There has been a demand for more coverage that both buyers and sellers have moved away from. As pricing begins to stabilize and become more predictable, it allows for that to be integrated into their rating structure. There is a need for more coverage from their side, and we are addressing that need, which is helping to mitigate some of the potential challenges. It's important to note that property rates did not decrease this quarter; rather, the rate of increase has slowed down. On the retail side, if you are a retail buyer, keep in mind that a significant portion of our business comes from the commercial middle market. We do engage in a lot of risk management business, but our recent acquisitions are primarily targeting middle market players. Those customers often have limited options and are purchasing full coverage at elevated prices. If the rate of increase slows, that would benefit the client.

Interestingly, David, we are observing rate increases and greater exposure unit increases in the middle and smaller markets compared to larger account sizes, which is a change from about a year ago when it was the opposite. We are beginning to notice some rate moderation and an increase that is starting to gain traction in the middle and small market space. The second thing is, remember, if the rate moderates, our customers are very good about opting out of coverage or as much coverage as rates go up and then opting back in for coverage to buy more when rates are coming down. So we've never captured the full increase of the rate and we won't suffer the entire give back if rates moderate a little bit. So there's that opt in, opt out. We haven't really talked about that much in the last 5 years or so. But we're seeing customers opt back in to buy more coverage if there are some moderation in the increase of the rates.

Additionally, regarding the property sector, there have been many years of zero interest rates, except for the past couple, which kept schedules largely stable. Currently, underwriters are being more cautious about values, leading to an increase in those values. This results in more values being insured within the property business. As I mentioned earlier, property rates increased by nearly 10% this quarter, indicating that we are not witnessing a decline in rates. We're seeing rates go up in property a little less viciously. Now having said that, if the wind blows this fall, we're 1 month away from the start of the hurricane season, I'm just telling you all bets are off. I don't know what's going to happen. So for our clients' sake, I hope that we have a benign season.

Thank you for that response. I was also referring to the moderation in the primary market, and it was interesting to hear more about that opt-in concept, which I hadn’t considered before. That insight is helpful. I have one more question. It appears there were some significant life sales towards the end of March. Were these sales pulled forward from future quarters? I’m curious about the outlook for the pipeline of life sales and how you plan to approach that for the rest of the year.

In December, we saw some delays from the fourth quarter. I would characterize it more as catch-up rather than a pull forward from future periods. We're discussing $5 million in a $3 billion revenue quarter, so it's not significant in the grand scheme of our numbers. We appreciate the business, but it doesn't have a major impact on our overall figures.

Pat, did you give the breakout for open brokerage versus the MGA or binding business within the wholesale?

I did not.

You got about 16% open brokerage this quarter.

And then with the binding, I think it's been running mid-single digits. Is that…

Higher than that. So more like 10%, 11%.

Okay. And then anything on the workers' comp side? Or just waiting for signs of life there in terms of frequencies, severity, pricing? Is it more of the same? Or do we have some reason to think it could be in selecting?

No, I think that's really interesting, Mark. In my career, that line has been, at times, pretty darn cyclical, and it is just as flat as a pancake. It's just going along. You might see 2 here, 3 there. And it's really just kind of flat.

First, just kind of wanted to touch on the margin expansion guidance for the full year. If organic revenue growth were to come in higher than the current guide, whether that comes from the wind blowing and property rates reaccelerating or for something else, how much of that would you guys kind of envision letting fall to the bottom line? Like, should we expect to see greater margin expansion? Or are there other areas of investment opportunities that you guys would kind of like to see some progress made on.

I don't believe we would be able to implement our investment opportunities quickly enough to increase spending even if we experienced a surge in organic growth starting in August. Therefore, I don't think we would have the capacity to take on significant investment opportunities that could counterbalance that extra organic growth. I'm doing some calculations here. If we see another 0.25 point increase in organic growth, it could translate to an additional $10 million or $15 million in a quarter, assuming we experience that for half a year, if my calculations are correct. Therefore, it would likely improve the margins a bit.

It's a helpful clarification. Just maybe as a quick follow-up. In terms of benefits from head count controls and client-related expense saves, are those things that you expect to persist as the year goes on? Or are those more specific to 1Q in particular?

Listen, I think the team does a really nice job of looking at our head count controls. We have work model that show how many people we need to have, how many do we have. Do we need to hire in July, August and September, we can kind of forecast that. Our retention's been very good. I got to say that when you look at it, our retention is better today than it was, let's say, in '18 and '19. So I think we've done a really nice job of taking care of our employees throughout this inflation period. So we're not seeing significant terminations here.

I would like to discuss a few market questions. In your prepared remarks, you mentioned that general liability and retail have increased by about 9%. Referring back to the investor meeting from about a month ago, you indicated that liability lines might rise to the 9% or 10% range over the next one to two years. Are we comparing the same data, or are you surprised by the extent of improvement in liability lines that we are currently witnessing?

I would like to refer back to my prepared remarks. We've seen umbrella lines increase by 9% this quarter, which aligns with our discussions from March. General liability is up 7%, prompting us to consider whether there may be reserve challenges with our carriers moving forward. The 7% appears stable, and there may be a slight upward adjustment. For the package, which includes both property and liability, the increase is 8%, while compensation is relatively flat at 2%. I believe this trend will persist throughout the year. You can take our discussions from March and update them based on the current numbers from six weeks ago.

There is a noticeable increase in concerns during our interactions with carriers and clients regarding the adequacy of casualty rates. The discussions we had in January and February seem to have gained more emphasis now, indicating a stronger sentiment. While I can't definitively state that there has been a shift in tone in March compared to January and February due to limited data, certain isolated instances suggest a trend that aligns with what we've been observing. When you combine that with what we hear in meetings with the carriers, we believe that casualty rates are likely to increase in the next three quarters rather than decrease. There seems to be a shift in tone. While I can't see it completely reflected in our data yet, it appears to be on the horizon.

I was hoping to start on the reinsurance side. I think you talked about 13% organic growth. And is there any way of breaking that down between maybe the increasing limits that are being purchased versus market share wins versus pricing?

I don't have the actual stats on that.

I want to share that we had a fantastic new business quarter. Our teams are collaborating effectively, and I believe we're beginning to see positive outcomes from our partnerships with retailers. We have been receiving encouraging feedback about our teams settling in. Reflecting on our merger efforts, our teams are joining forces successfully, and we are achieving greater new business sales. Our retention seems to be pretty darn good on that. And I think the fact is customers are buying some more cover while you're seeing a little price stability maybe. So we're checking the box on everything that we've considered to be this to be a successful merger.

Okay. That's helpful. And second question, and clearly, I guess, the premise is we're not seeing any successful pressure on the part of carriers to reduce commission percentages. I was hoping you'd update us on efforts that are being made, even if they're not successful.

No. I think that our partners are being very reasonable. We're not we're not having a lot of headbutting on that subject at all.

So I think in March, at the Investor Day, you guys were pretty optimistic on the potential for reacceleration in RPC in the remainder of 2024 due to higher exposure to property business and less workers' comp and the potential for casualty pricing increases. Is that still the case? Or is the property rate environment, with a little deceleration in the rate of increase, made you change your view a little bit?

No, I think our view is unchanged. We're very bullish.

Okay. Okay. Got it. And then maybe sort of a similar question in some ways. But if we strip out reinsurance, is the touch lower organic guide for the remainder of the year the same? Or do you think ex reinsurance, what would you say, for the trend of organic growth ex reinsurance?

Well, yes, I think just because reinsurance is a little more skewed seasonally to the first quarter, it did help us, let's say, get from 8% to 8.9% this quarter, right? We do have some pretty good April 1 renewals coming in, so we'll see that in the second quarter. So I think we'll get the benefit of reinsurance a little bit in the second quarter, even though it's not as big percentage-wise as the total amount of our revenues. And then in the third and fourth quarter, we'll see what happens. We'll see what happens with the wind. Hopefully, there's not a shake anywhere else in the world. But right now, that's why I say, I feel pretty comfortable each quarter in that 7% to 9% range because reinsurance did help, but it wasn't like it moved us from 6% to 9%. It moved us up 75 basis points, something like that this quarter.

Got it. And if I could sneak 1 more in. In the Brokerage segment, could you remind us how much you're reinvesting in the business annually and what you're spending it on?

It's a comprehensive list. First, we focus on our people. Our training, development, and internship programs are important, and we’re seeing a lot of interest from experienced producers wanting to join Gallagher because they recognize the value we offer. Next, we are heavily investing in technology that allows us to sell more effectively and improve our service. The costs for our projects could be around $75 million. When I look at this year's budget, some of that's capital, some of that is operating expense. Like, we're spending about $75 million a year on cyber today. If you go back 5 years ago, we were spending about $15 million on that. So the fact that we're investing in infrastructure improvement, cyber and other infrastructure improvements. Then you get down into the data and analytics. We are hiring more and more people every day that help us slice and dice our data, look at industry statistics and bring a better delivery of that data through a digital platform to our customers. My guess is we're spending $30 million a year on those efforts. And then you look at AI now. There's starting to be a lot of AI projects inside of the company that are starting to deliver some yield. And so we're spending $5 million a year kind of on AI-related activities out there. So you add all that up, it can get to $200 million to $300 million pretty quickly in what we think we're doing to make a better franchise going forward.

I'd like to highlight what Doug mentioned at the beginning of this call. A significant portion of our spending is aimed at improving our service offerings to clients. We know, for instance, that our digital tools, ranging from small accounts to risk management accounts, and services like Gallagher Go, are being very well received by clients, including those in the middle market who can easily access their policies and monitor their properties. We are continuously implementing improvements every quarter, focusing on spending. Additionally, the demand for data and analytics has significantly increased. Five years ago, I wouldn't have imagined clients would have such a strong interest in understanding purchasing patterns. They are eager to know about pricing structures and the reasons behind them. When I was actively selling insurance, I would advise clients about the best deals based on quotes from competitors. I either told them to choose the cheaper option or justify staying with their current provider. However, I lacked the ability to provide insights into global market trends, which is now astonishingly valuable. And remember what we said in our prepared remarks, most of the time our people go out and they are competing against someone who is significantly smaller and lacks the resources, including $200 million to $300 million to reinvest. It’s just an incredible advantage. I appreciate the question.

Kind of a similar question, but specifically on reinsurance. Just curious where you guys are in terms of the innings of getting that business where you want it to be.

It's really where we had hoped it would be. The team is extremely strong. We’re not experiencing any departures. What has been enjoyable is the remarkable interest in maintaining and building relationships with the retail sector, which is what we anticipated. We anticipated not only collecting data and analytics but also collaborating closely, and we have observed that impact on our existing pooled accounts, particularly the largest and most established pooling broker in the public sector. This engagement has been tremendously beneficial, serving as one example of our success. Now, the business team truly feels integrated into the enterprise; they no longer feel like newcomers. Initially, there’s always an adjustment for new individuals, but that's no longer the case. They are now familiar faces, recognized by retailers and by me, Doug, and others. The desire for investment in data and analytics from their clients presents significant opportunities, and everything is progressing exceptionally well.

I'm curious if you can discuss how the renewals have gone and how the top line is trending from your perspective. What's the sentiment like among the customer base regarding the health of the economy, hiring, and labor?

Interestingly, our clients express a significant amount of concern. We are meeting with clients who, in some cases, are uncertain about the reasons behind their turnover. We can conduct data analytics to better understand their situations. There is a strong worry about retaining their top employees. We have many people trying to attract individuals to fill various jobs such as picking items off shelves or serving tables, which can be challenging. They are working to set themselves apart in this competitive environment. There is significant concern regarding costs, with medical inflation being a pressing issue that directly affects employers. Additionally, the overall problem of inflation complicates matters. As a result, our professionals are becoming more valuable compared to someone who simply claims to be proficient and offers a basic insurance quote. That approach is no longer effective, and this observation applies beyond just a few specific cases. The people that are employing 100, 150, 200 people, they need this kind of help. So it's a very robust period for us, and it is a difficult time for employers. Where are they going to get the right people to fill the jobs and then how do they hold on to them.

Just a quick follow-up. You guys always give color on umbrella, lots of people do. Just curious, is there any way you can dimension what percentage of your business is umbrella?

I can dig it out.

We're looking here.

So let's see, in '23, I would say, it makes up 6% of our business.

Well, I think that's it for questions. If I can just make a comment here. Thank you again for joining us this afternoon. And I would like to thank our 53,000 colleagues around the world for their efforts. Their hard work and dedication is evident when we report another fantastic quarter of growth and profitability. As I look ahead, I remain very bullish on our prospects and believe we are well positioned to deliver another excellent year of financial performance. We look forward to speaking with the investment community at our IR Day. Thank you again for being with us this evening. Have a nice evening.