Arthur J. Gallagher & Co. 2026 Q3 Earnings Call

Thank you. Good afternoon. Thank you for joining us for our third quarter 2026 earnings call. On the call with me today is Doug Howell, our CFO, and other members of our management team. We had an outstanding third quarter. Our team delivered strong revenue growth and excellent profitability. For our combined brokerage and risk management segments, our two-pronged revenue growth strategy, growing both organically and through acquisitions, delivered total revenue growth of 18% in the third quarter. Organic growth was also strong at 5%, reflecting excellent new business, strong retention, positive exposure growth, and the diversity of our business. And we continue to generate outstanding profits. Net earnings grew 25% and adjusted EBITDAC also grew 25%. That marks 26 consecutive quarters of double-digit adjusted EBITDAC growth, along with another quarter of margin expansion. Doug will break that down for you in a few minutes.

On a segment basis, brokerage revenues were up 19%, of which organic was 5%. We saw excellent growth across our retail, P&C, wholesale, and reinsurance businesses. We're now more than a year into the AssuredPartners combination. The business is living up to our high expectations. Client retention remains strong and the teams are working very well together. Our risk management segment, Gallagher Bassett, posted revenue growth of 14%, which includes organic of 10%, driven by excellent new business and strong client retention. Our consistent top and bottom line growth is driven by the four strategic pillars that have guided Gallagher for decades, growing organically, growing through M&A, improving our productivity and quality, and maintaining our culture. I'll comment on each of these. First, organic growth. We have a diversified revenue model, but common across that are our client retention remains strong, new business is excellent, and our clients' underlying business activity continues to be positive.

It is well known that insurance rates are currently contributing less to growth than they have over the past several years. Call it about a point of organic growth today is tied to rates. This reinforces that rates are just one part of the equation. The bigger drivers of organic growth continue to be new business, strong retention, exposure growth, as well as the diversity of our model across P&C, benefits, reinsurance, and claims. This shows our business performs well through a wide range of economic interest rate and insurance pricing environments. And we believe our diversified model and breadth of capabilities position us well to continue growing as the market conditions evolve.

We're also benefiting from favorable macro tailwinds. The need for insurance is growing around the world, and risks are becoming more complex, thus requiring broader capabilities and more sophisticated solutions. Think about construction, infrastructure, energy, and data centers, as well as the growing need for clients to understand, mitigate, and insure emerging risks from AI, just to name a few examples. These are the areas where clients need more advice and deeper expertise. That plays directly to Gallagher's advisory strengths and creates a tailwind for durable organic growth. Let me go back to rates for a few minutes. Overall, we continue to see a very segmented P&C market. Property is competitive, casualty varies considerably by line and account, and there's plenty of capacity looking for attractive risks. Carriers want to grow, but they still need the right risks at the right returns.

And for us, that creates opportunities to help clients navigate more choices and find the right solutions. Let me break this down by business. I'll start with our global retail P&C business. Property remains competitive, with renewal premiums declining 6% compared with down 10% in the second quarter. As we discussed in September, that sequential improvement largely reflects the mix and seasonality of renewals rather than a change in the underlying property market. However, casualty remained firmer overall. Even with competition slightly increasing, conditions still varied considerably by line, account, and geography. In the third quarter, casualty renewal premiums, which includes general liability, commercial auto, and umbrella, were up 4% overall. Professional lines, including D&O and cyber, were up 2%. Workers' comp was up 1%, personal lines was up 3%, and package was also up 3%.

Excluding property, renewal premium changes increased 3% in the third quarter, with higher increases in the U.S. versus international markets. And it's important to remember, premium changes in Gallagher's revenues do not move one for one. Renewal premium changes include exposures, changes in limits, coverage, and mix, not just rate. In other words, as property pricing eases, we're seeing clients opting in and using the saving to buy back coverage, increase limits, or improve structure after several years of opting out and making difficult trade-offs. They're also revisiting how much risk they retain, what they transfer, and how they structure their overall programs. And that makes the value of our advice, advocacy, and market access even more important. In the U.S. excess and surplus, property remains very competitive, particularly cat-exposed property. But lower pricing doesn't necessarily mean the business leaves E&S.

Rates are clearly down, but for us, our teams continue to win new business, helping to offset rate decline. Within casualty, capacity is increasing, but loss costs remain an important consideration, so conditions vary by line and risk. In this case, we continue to see tailwinds, rate tailwinds, and strong growth in casualty. In our renewal book, we are not seeing any meaningful movement back to the admitted market. We are seeing new business still using the E&S market at levels broadly consistent with what we saw over the last couple of years. This shows that it is a different marketplace today. For us, the E&S market is here to stay. It provides important capacity and deep expertise with flexibility on terms and creative structures. All that is critical to delivering customized solutions to our customers. We are seeing a similar story in London specialty.

Competitive North American cat property has been more than offset by certain marine, aviation, and political violence risks. These risks remain more challenging, and they require careful structure and coordinated execution across markets. In reinsurance, the market has plenty of capacity. Property cat pricing remains competitive while casualty is more nuanced given loss cost trends. Reinsurance is another example where price is only one part of the story. New business, the amount of protection clients buy, and how they structure their programs all matter. Our expert capabilities across facultative, casualty, life, and capital advisory give Gallagher multiple ways to grow. Moving to employee benefits. We have seen solid organic growth in our core health and welfare business so far this year. But in the third quarter, however, a few larger consulting projects were pushed out as clients focused on controlling rapidly rising medical and prescription costs.

Employers still want competitive benefits to attract and retain people, but managing those rapidly rising costs is their immediate priority. That is where our people really help, working side by side with clients to manage costs and keep their benefits competitive. Let me turn to Gallagher Bassett. It was another terrific quarter with organic growth of 10% driven by excellent new business and strong client retention. Our investments in GB are paying off in both growth and margins. Clients are benefiting from our expanded capabilities, deeper data, and more robust technology. Each of these improves our advice and service and helps drive better claim outcomes. Those investments, together with the depth and experience of our people, continue to strengthen GB's competitive position. With a good pipeline of opportunities, we feel terrific about where the business is positioned. Now a quick comment on what we are seeing in the economy.

Our daily revenue indications from our clients' underlying insurance activity, such as audits, endorsements, and cancellations, have historically given us a good and practically real-time window into broader economic conditions. When I look at yesterday's report, those indicators continue to be nicely positive, pointing to solid business activity and steady underlying exposure growth. To wrap up my thoughts on organic growth, property pricing is moderating, and that is well understood. But property is only one part of our very large and very diverse business. Retention remains strong, new business is excellent, and client activity continues to be positive. As pricing changes, clients are buying more coverage, increasing limits, lowering deductibles, and turning to us for advice on how to structure their risk programs. Those are bigger drivers of organic growth, even as pricing continues to change. We also have a very diverse business.

Our growth is not tied to one product, one geography, or one client segment. We have many ways to grow across P&C, benefits, reinsurance, and claims. We are large, yet we still have very little market share, and we operate in an industry where demand for advice, expertise, and risk solutions continues to expand. When I look forward, I remain confident in our 2026 full year organic growth outlook of approximately 6% for our combined brokerage and risk management segments. Looking to 2027, we see many of the same drivers: strong new business, excellent client retention, positive exposure growth, and our diversified business mix. Those support another year of strong organic growth. Now shifting to our second strategic pillar, mergers and acquisitions. We continue to see good opportunities, and as always, we're staying disciplined on strategic fit, culture, valuation, and returns.

During the third quarter, we completed five new tuck-in acquisitions, representing approximately $100 million of estimated annualized revenue. That brings us to 21 so far this year, with approximately $225 million of estimated annualized revenue. Our pipeline remains active with over 30 term sheets signed or being prepared, representing around $300 million of annualized revenue. These mergers continue to add terrific people and capabilities across our businesses and geographies. AssuredPartners, Woodruff Sawyer, and dozens of others that have joined us are great examples of that strategy at work. We're connecting teams, sharing capabilities, and bringing Gallagher's tools, data, and expertise across the combined team. In turn, these mergers accelerate our opportunities for future organic growth as we become better together. To all of our new merger partners, I'd like to extend a very warm welcome to the Gallagher family of professionals.