Arthur J. Gallagher & Company (AJG) — Q4 2025 Earnings Call Transcript

Thank you. Good afternoon, and thank you for joining us for our fourth quarter 2025 earnings call. On the call for you today is Doug Howell, our CFO, and other members of the management team. We had an excellent fourth quarter and a terrific year. Our two-pronged revenue growth strategy, which includes organic growth and M&A, delivered revenue growth of more than 30% during the fourth quarter. That includes organic growth of 5%. Adjusted EBITDA growth was 30%, marking our twenty-third consecutive quarter of double-digit growth. So a great quarter, highlighting our durable value creation strategy that drives consistent double-digit growth in revenue and profits. Moving to results on a segment basis, starting with the brokerage segment. Reported revenue growth was 38%, organic growth was 5%, in line with our December commentary. Adjusted EBITDAC margin was 32.2%, ahead of our expectations with underlying margin expansion of 50 basis points. Let me provide you with some insights behind our brokerage segment organic. America's retail PC organic was up 5%. UK and EMEA up 7%, APAC up 3%, specialty and wholesale up, US wholesale up 7%, reinsurance up 8%, and benefits up 1%. We continue to deliver organic growth across retail PC benefits, wholesale, and reinsurance. Doug will further unpack organic in his comments. Next, let me provide some thoughts on the global PC insurance pricing environment. Fourth quarter insurance renewal premium change, which includes both rate and exposure, continued to increase in the low single digits. Property decreases were more than offset by increases across most casualty classes. Property lines were down 5%. Casualty lines, including general liability, commercial auto, and umbrella, were up 5%. US casualty lines were up 7%. Package up 3%, D&O down a point, workers' comp up a point, and personal lines up 5%. Excluding property renewal premium change, we would be up about 3% during the quarter. With that said, premiums are ultimately determined by loss experience, and good accounts will get some premium relief, while accounts with poor loss experience will see greater increases. Moving to reinsurance. With the strong underwriting results posted by carriers during 2025, which was helped by a quiet US wind season, there was plenty of reinsurance capacity to support client demand. The property reinsurance market saw rate decreases in the teens with lower layers holding up better than the top end of reinsurance towers. We saw continued demand for more cover and increased purchasing by clients. Despite double-digit price declines for property-cat globally, property reinsurance premiums were down only mid to high single digits relative to last year. Within specialty lines, marine and energy experienced increased carrier competition. Pricing across casualty lines continued to be broadly stable because most reinsurers remain very cautious of US-focused casualty risks. Looking ahead, we expect the buyers' market will persist through 2026 absent any outsized current year or prior year loss activity. Our global resources, data and analytics, expertise, and unique product offerings put us in a spot to compete and to win. Moving to employee benefits. We continue to see strong demand for our services as clients manage rising health insurance costs. Medical costs are expected to be up high single digits again in '26 driven by increased utilization, provider consolidation, and newer high-cost treatments and therapies. We're engaging with employers to help them implement innovative solutions such as telemedicine programs, wellness initiatives, and tailored benefits packages to alleviate cost pressures. Additionally, talent retention strategies remain top of mind for many of our clients given the resilient US labor market, so we expect another strong year of growth. Moving to some comments on our customers' business activity. Our proprietary data, which has been a valuable indicator of the economy, continues to show solid client business activity. Fourth quarter revenue indications from audits, endorsements, and cancellations remain nicely positive and were more favorable compared to both fourth quarter 2024 and third quarter 2025. And through the first three weeks of January, these favorable trends continue. Regardless of market and economic conditions, I believe we are very well positioned to grow. As we sit here today, we continue to see brokerage segment full year '26 organic growth of around five and a half percent. Moving into the risk management segment, Gallagher Bassett. Fourth quarter revenue growth was 13%, including organic 7%. Strong new business growth and excellent client retention place us well for the future. Fourth quarter adjusted EBITDAC margin was 21.6%, a bit better than our December expectations. Moving to mergers and acquisitions, we are already seeing a lot of success with the Assured Partners team leveraging our products, data and analytics, insights, and tools. Our teams are hard at work integrating the over 300 tuck-ins, agency management system conversions, and training of our middle office will be in full swing during 2026. Additionally, a little more than a week ago, all of our US retail operations were rebranded Gallagher. Today, our pipeline shows more than 40 term sheets signed or being prepared, representing around $350 million of annualized revenue. For all of our new partners joining us, I'd like to extend a very warm welcome. Looking ahead, there are thousands of brokerage firms across our footprint, and Gallagher is a great home for entrepreneurs looking to grow their business.

Thanks, Pat, and hello, everyone. Today, I'll first walk you through our earnings release and provide some brief comments on organic growth and margins by operating segment, as well as our corporate segment results. Next, I'll move to the CFO commentary document we posted on our IR website. I'll walk you through our typical modeling helpers and our outlook for '26. Additionally, this is where I'll spend a little more time on organic and margins. Then I'll conclude my prepared remarks with my usual comments on cash, M&A, and capital management. Brokerage segment fourth quarter organic growth was 5%. That's right in line with the information we provided at our December IR day. Since then, we've received really positive feedback from the investment community for levelizing the quarterly noise caused by the timing of large life sales and deferred revenue accounting assumptions. That's a fantastic reflection of our sales culture to post 5% in this quarter and 6% for the year. Flipping to page five of the earnings release to the brokerage segment adjusted EBITDAC table, we told you in December that our fourth quarter '25 headline margin would not be comparable to fourth quarter '24 because, as the footnote to that table explains, we are no longer earning investment income on funds we were holding to buy Assured Partners, and there would also be a rolling impact of 130 basis points. So the quick math shows levelizing for that gets you to 50 basis points of underlying expansion, right at the midpoint of our estimated 40 to 60 basis points of expansion during our December IR day. Sticking on page five, fourth quarter risk management segment organic growth was 7%, right in line with our December expectations, reflecting strong new business revenues and excellent client retention. Looking to full year '26, we continue to see organic growth around 7%. Turning to page six of the CFO commentary document, for the adjusted interest and banking, clean energy and acquisition lines, all were very close to the midpoint of our December expectations. The adjusted corporate line was a couple pennies less than our midpoint estimate partly due to a noncash unrealized FX remeasurement loss and a small tax item. Also, while we adjusted out the wind-down and annuitization of our long-ago frozen pension plan, this creates a noncash gap expense here in the fourth quarter and will again in Q1 '26. But more importantly, we hit the market just right and didn't have to inject any cash into the plan. When looking at the CFO commentary document, these are typical modeling helpers. Most of the fourth quarter '25 actual numbers were close to what we provided back in December, so there's nothing new here. As for '26, please use these helpers in your models, particularly the estimated impact from FX and the forecasted depreciation and earn-out payable expense.

Our M&A strategy is about being better together, so that one plus one can equal three, four, or even five. We believe it is likely that some carriers will explore buying additional protection to further reduce earnings volatility or support growth throughout 2026. Although we are very well positioned to drive new business production, we also believe full-year '26 margins in the 21 to 22% range. Shifting to merger activity, we completed seven new mergers representing around $145 million of estimated annualized revenue. This brings our full year '25 annualized acquired revenue to more than $3.5 billion. That's fantastic! Our culture is unstoppable, and it drives our success year after year. I will stop now and turn it over to Doug.

Hey, thanks. Good afternoon. Could you just talk about how you're positioned to take advantage of digital infrastructure build-out and somewhat related, I'm just curious how your construction practice has been performing recently?

Our construction practice is our largest practice. We emphasize our vertical capabilities at every production opportunity, and about 90% of our new production around the United States falls into those niches. We have very strong vertical capabilities. When we do an acquisition, one of the benefits is we pick up people that add to our vertical capabilities. We've got the ecosystem to do the job for clients across the entire span of what needs to go into a data center construction site. There's a huge demand for capabilities locally just for the construction expertise. I think everyone that has contact with clients that are going to be building those centers will need an awful lot of cover, and we are right there in the mix.

Thank you. That's helpful. And then I just had a follow-up on casualty pricing and your outlook for RPC.

No, we're not seeing people jumping on the casualty bandwagon. Property is softening, and while casualty still has a heavy focus, I am not seeing the same kind of activity there. We're not seeing any big pullback in casualty pricing. Overall, we still assume that category rates will be up in that 7 to 8% range.

We're just not seeing in our numbers any big pullback in casualty pricing. The systemic factors that are out there are naturally pushing casualty rates higher. So for next year, we are assuming that category rates will be up in that 7 to 8% range.

Could you talk about Arthur J. Gallagher & Co.'s ability to retain its producers in particular? How do you see that playing out on your organic revenue?

Our retention of producers has not changed against historical norms. We've recruited through the acquisition process over 2,000 new production talents last year, and we pay our people to produce. Our retention rates remain strong. We have about 600 young people in our internship every year, and this continues to grow. It has a huge impact on the sales firepower that we bring into the company.

The percentage of producer retention is exactly dead flat. It's been that way since 2019. The need for producers to grow and sell is critical. We think that being a broker run by brokers is important. We're investing significantly in sales tools, which is our key goal.

Could you talk about how AI might affect your small business production?

A lot of small accounts are not going to pick their insurance online. The trusted adviser is more important today because of AI than it was before. Everyone is confused by the information AI provides. They need real human counsel.

We view AI as a terrific tool to improve processes. However, it will not replace production. AI can help us automate many back-office functions, offering better service, and improving retention rates. It is a long way to go before AI replaces a customer service representative.

Can you help break down the M&A activity and outlook for the company?

We have substantial opportunity to continue to acquire firms. Many agencies are owned by baby boomers who don't have succession plans. We're confident that we'll be able to clip off 75 deals a year and have a great outlook for the future.

We're able to do acquisitions globally across all lines of business. In 2014, we completed 59 deals, and we plan to continue clipping off 50 to 75 deals a year. There are about $7 trillion of premium floating around globally. The opportunity is huge.

So how has the specialty U.S. Wholesale been performing, and can you add commentary on how one-one renewals may play into organic revenue for 2026?

We were forecasting about 10% organic growth in reinsurance, but it came in at 8% for the fourth quarter. The difference is only about $1.5 million in terms of estimation. Specialty came in a couple points better due to a strong wholesale month.

Can you provide insights into your outlook for pricing trends in property versus casualty?

We have seen property pricing decreasing, but casualty remains stable. Our expectations include about 4-5% growth in the outlook for pricing dynamics. There remains pricing power and demand across most of our casualty lines.

Could you elaborate on the & Co.'s benefits brokerage and consulting outlook and how it might evolve moving forward?

Our benefits brokerage is on a per-employee monthly basis, and rising benefit costs can lead to more advisory projects, giving us more opportunities for consulting engagements. We feel solid about maintaining our growth in this area.

What do you think will help maintain the 4% organic growth rate in employee benefits each year?

As people are pressured by health costs, businesses will shop their employee benefits more vigorously. Our creative solutions and capabilities will likely lead to increased business opportunities. This gives us a lot of chances to build our pipeline.

For the 2026 EBITDA margins, what are your expectations?

I believe we will be able to maintain margins above 60 basis points as we see some upside in synergies. Therefore, I'm optimistic about our future profitability.

I want to thank everyone for being with us this afternoon. We had a great quarter and a great '25. We're very excited about '26.