Arthur J. Gallagher & Co. Q1 2024 Earnings Call Transcript

Presentation

[Operator]

Good afternoon, and welcome to Arthur J. Gallagher & Co.'s First Quarter 2024 Earnings Conference Call. [Operator Instructions]

Today's call is being recorded. If you have any objections, you may disconnect at this time. Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws. The company does not assume any obligation to update information or forward-looking statements provided on this call.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the information concerning forward-looking statements and risk factors sections contained in the company's most recent 10-K, 10-Q, and 8-K filings and 8-K filings for more details on such risks and uncertainties. In addition, for reconciliations of the non-GAAP measures discussed on this call, as well as other information regarding these measures, please refer to the earnings release and other materials in the Investor Relations section of the company's website.

It is now my pleasure to introduce J. Patrick Gallagher, Jr., Chairman and CEO of Arthur J. Gallagher & Co. Mr. Gallagher, you may begin.

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

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, merger and 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 PC operations, we delivered 7% in the United States, 6% in the UK, 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 life 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%, UK 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 in 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 two exceptions within professional lines. First, where renewal premiums are down about 5%; and second, cyber, where renewal premiums are flattish. These two lines appear close to reaching a pricing bottom, but combined represent around 5% of our PC 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 CAD cover. Reinsurers continued 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 renewal process was disciplined and predictable. The casualty treaties 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 resolve throughout the rest of the year. Those interested in a 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. A 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.

AM 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 casualty.

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're 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 cost, having a trusted advisor 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 indications showed positive mid-year 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. Non-farm 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 reward 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. Core 360 and Gallagher better works, our niche experts 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 continued to reflect solid new business and 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 onboarded. And we now expect the 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?

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

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 three quarters. Then I'll provide some typical comments on the modeling helpers we provide in the CFO commentary document that we post on our website, and I'll conclude my prepared remarks with a few comments in cash, M&A and capital management.

Okay, let's flip 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 excluded 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, brokerage organic outlook is unchanged. We are still seeing full-year organic growth in that 7% to 9% range.

Flipping 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 rolling 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 rates, gets you to an FX adjusted margin of about 40.2%. And we've done that here, so you can see that in the 2023 column in this table. Third, deduct that 90 basis point rolling impact. Again, that's all due to the rolling math. And just to be clear, these are not businesses with margins that are going backwards. So that gets you to 39.3%, compare that to the 39.9% we showed today, and that gives you the underlying 60 basis points of margin expansion. That is a really great work by the team.

As we look ahead to the following three quarters of '24, it is looking like we could expand margins in the 90 basis point to 100 basis point range in each of the next three quarters. Let me give you some flavor on that.

First, as Pat said, Buck passed its one-year anniversary, so that rolling noise is behind us. Second, as discussed at our March IR Day, the carryover impact of raises given in 2023 is comparatively lesser over the next 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 that 90 to 100 basis points range at each of the next three 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 EBITDA 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 Pages 3 or 4 other than just -- other than a few tweaks to a few numbers such as FX, non-cash items, et cetera. Just do a double check with your models using these numbers.

Page 5 updates our tax credit carry forwards. It shows about $820 million available at March 31, and that we would be -- that we are benefiting our cash flows about $150 million to $180 million a year. Doesn't flow through our P&L, but still a nice annual cash flow benefit to help us fund future M&A.

Turning to Page 6, the top table. Recall we introduced this modeling helper in January. It breaks down the components of investment income, premium finance revenues, booked gains, and equity investments in third-party brokers. Not much has changed from what we provided in March, but that we are still embedding two 25 basis points rate cuts in the second half of '24, and we've also updated for current FX rates.

The lower table on Page 6 is rollover revenues. Blue column subtotal of about $228 million is very close to the $224 million we provided at our March IR Day. And remember, the pinkish columns only include estimated revenues for M&A that we've closed through yesterday. So just to remind you, you'll need to make a pick for future M&A.

Also, a little housekeeping, when you read Note 3 on that page, you'll see we have an estimate change related to some historical acquisitions that causes a gross-up of revenues and expenses. It nets [indecipherable] to close to nothing, but it does flow through the P&L. We've adjusted these out, so there's no impact to organic adjusted net earnings or 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, if any more. As for 2025, looks like we could fund over $4 billion of M&A with free cash and debt, all 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.

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

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

Questions and Answers

[Operator]

Thank you. The call is now open for questions. [Operator Instructions] Our first question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.

[Elyse Greenspan, Analyst at Wells Fargo Securities]

Hi, thanks, good evening. 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. Can you just give us a sense of 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 light 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 Brokerage over the next three quarters?

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

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 headcount 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.

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

Yeah. Listen, we don't see much difference in each quarter going forward. We think we'll be in that 7% to 9% range. Elyse, we do have a large first quarter, and it is heavily weighted to reinsurance. So you would naturally expect us to, if we're going to be in that range, then maybe the first quarter is a touch above the next three quarters but I wouldn't say it's anything meaningful. So we're in that 7% to 9% range each of the next three quarters, which would bring us in that range for the full year. So, really nothing different than what we've talked about the last couple of times we've been with you.

[Elyse Greenspan, Analyst at Wells Fargo Securities]

Thanks. And then the second one is on margin, right? So a little bit, like you said, the Q1 was a little bit better than the March guide. But you previously had said, right, 100 basis points in the out three quarters, now it's 90 to 100. And the full-year guide seems unchanged. Is it just maybe Q1 was a little bit better, so now you're taking some of that to invest internally. I know it's a little nitpicky because it's still 90 to 100. But just trying to kind of square the updated out quarter margin view with what you told us in March.

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

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

[Elyse Greenspan, Analyst at Wells Fargo Securities]

Okay. And then one last one. The FTC, right, is looking to potentially remove non-competes from, I guess, my question is two-pronged, from both the ability, I guess, to bring folks into Gallagher as -- and also considering the potential to lose talent to other players. How do you think this could impact the company if it does actually go through?

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

Well, let me comment on that one. First of all, I think, everybody saw that the U.S. Chamber has filed a lawsuit in Texas that's challenging this. And we're supportive of the Chamber's efforts, we think it's an overreach by the executive branch. But having said that, if the new rules actually hold up, there's a cut out in non-compete agreements as part of a sale of a business. And so we see that rule is having little impact, really, on our M&A strategy. And that's -- when it first came out, that was kind of my concern. Our agreements with our production staff do not contain non-compete provisions. Rather, we use non-solicitation clauses. And there's 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's so important. This is a great place to work. And we attract highly motivated sales people 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 than 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, I do agree with the Chamber's position, we're supportive of that. For our business, I think it's a non-issue.

[Elyse Greenspan, Analyst at Wells Fargo Securities]

Thank you.

[Operator]

{Operator:} Our next question comes from the line of Mike Zaremski with BMO Capital Markets. Please proceed with your question.

[Mike Zaremski, Analyst at BMO Capital Markets]

Thanks, good afternoon. 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 their regions due to a little bit higher turnover, which might be due to Cali not having non-solicit and non-competes. Just curious as -- have you ever sliced and diced your California margins, and are they a little bit lower than the rest of the company?

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

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.

[Mike Zaremski, Analyst at BMO Capital Markets]

Okay, that's clear. Switching gears to the M&A, you guys, and I've asked this in the past but I'll just keep asking because these are big numbers. So Doug, you said $4 billion of capacity for next year, now that's clear, but these are just big numbers, $3.5 billion this year, $4 billion next year. Does this imply, if you look at the top 100 list of brokers, I know that's just U.S., there's lots of overseas stuff. But just should we be thinking that you guys do some chunkier size deals as time progresses to be able to kind of fully deploy cash and debt?

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

Mike, this is Pat. I think it's fair to say that when opportunity presents itself, we're not afraid. I mean, 10 years ago we stepped up and bought Wesfarmers out of Australia for a $1 billion. It was the biggest play we'd ever made, and had in fact get some financing for it, that's worked out incredibly well. I think our purchase of Willis was somewhere on the order of -- Willis Re was somewhere on the order of $4 billion, and last year we spent a good bit as well. So, we're not afraid to look at chunkier deals. But you hit on it, there's 100 -- top 100. There happens to be 29,900 in the United States alone that are smaller than that. That's where our activity is based most of the time.

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

Yes, Mike, this is Doug. I think if we have a chance now that we can bring on a lot of smaller acquisitions, nice family-owned businesses that realize that they can be better together with us. I think that our M&A integration process is pretty smooth, very refined, 700 deals over the last 20 years. So we've got that down. And I think more and more smaller or local brokers are realizing they can get their resources from us overnight that they've been wanting to have for maybe 20 years.

So I think we have an advantage right now that a family-owned broker now sees that they get to join us. This is their forever home. They don't have to sell into a different model that maybe will flip them or sell them to a different owner or break them apart in order to get value. They see that what's being talked about of capabilities is real inside of us. And sometimes, when they go to another quarter for them, they're saying what they're going to do versus what they have done. So I think that we have the opportunity to increase the volume of the 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.

[Mike Zaremski, Analyst at BMO Capital Markets]

Okay. Thanks. I'll get back in the queue.

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

Thanks, Mike.

[Operator]

Our next question comes from the line of David Montemaden with Evercore ISI. Please proceed with your question.

[David Montemaden, Analyst at Evercore ISI]

Hi. Thanks. Good morning. Sorry. All right. Sorry, good afternoon. Gees, long day.

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

I don't know. Maybe I thought you were in Asia. That's okay.

[David Montemaden, Analyst at Evercore ISI]

Yes. I actually don't even know where I am. But Pat, I wanted to just talk about your comments you made on the property insurance side and on clients looking to add incremental coverage or limits, and just how I can think about that as a potential offset to some of the moderation in property insurance pricing that you were talking about as well. Just help me think about the -- both of those factors and sort of how to think about that moderation and the impact that could have on your organic growth in the future.

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

Well, first of all, I think 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. And that's why we talk about the fact it was more orderly, this 1/1, we were able to complete what people wanted more or less. But there has been an appetite for more cover there that buyers and sellers have walked away from. But I think as we start to see pricing stabilize, become more predictable, that allows it to flow into their rating structure, etc. There's a demand for more cover on their part, and we're meeting that demand. And I think that is offsetting some of the potential.

Now remember, we didn't see property rates come down this quarter. What we're saying is that the increase moderated. So, I think that there's kind of -- on the retail side, if you're a retail buyer, and remember, most of our book of business is the commercial middle market. Don't get me wrong, we do a lot of risk management business, but these tuck-in acquisitions and the like that we're doing are clearly middle market players. Those people don't have a lot of choice, they're buying full cover at higher prices. And if that moderates a bit, it's good for the clients.

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

Yes. Interestingly, David, we're seeing rate increases and exposure unit increases in the middle and smaller markets, greater than we did in the larger account size. Whereas let's say you go back a year or so ago, it might have been just the opposite. So we're starting to see if you're talking about some rate moderation in the increase, it's starting to pick up a little bit 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 five years or so, but we're seeing customers opt back in to buy more coverage if there's some moderation in the increase of the rates.

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

Also, on the property side, back to that, David, you've got many years where zero interest rates, not the last couple, but zero interest rates left the schedules pretty much untouched. So you do have underwriters now being much more disciplined around the values, and that's pushing values up. So we've got the benefit of more values being insured in the property business. And my prepared remarks basically pointed out that property was up nearly 10% this quarter. So we're not seeing rates dropping, we're seeing rates go up in property a little less viciously.

Now having said that, if the wind blows this fall, we're one 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.

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

No, thanks for that. And I do -- I was referring also, and you guys answered it, just the primary market, the moderation there. It is interesting to hear more about sort of that opt-in, which I have not thought about. So that is helpful to hear about that, so thanks for that.

[David Montemaden, Analyst at Evercore ISI]

And then if I could just add one more question. So it sounds like there were some large life sales that came through towards the end of March. Was that a pull forward from future quarters? Or I guess sort of outlook on the pipeline of the life sales, and just how that -- how you're thinking about that throughout the rest of the year?

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

It's probably more of the -- if you remember, in December we had some push out of the fourth quarter. So I would say, it might be more catch-up than it is pulling from the future. And we're talking about $5 million on a $3 billion revenue quarter. So it's not meaningful in any of our numbers, the difference. We love the business, but it doesn't make a big difference in any of our numbers.

[David Montemaden, Analyst at Evercore ISI]

Got it. So that was in your sort of outlook range that you gave in March, so the upside this quarter was not just solely from the life sale?

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

That's right.

[David Montemaden, Analyst at Evercore ISI]

Perfect. Thank you.

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

Thanks, David.

[Operator]

Our next question comes from the line of Mark Hughes with Truist Securities. Please proceed with your question.

[Mark Hughes, Analyst at Truist Securities]

Yes, thank you. Good afternoon.

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

Hi, Mark.

[Mark Hughes, Analyst at Truist Securities]

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

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

I did not.

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

We did about 16% open brokerage this quarter.

[Mark Hughes, Analyst at Truist Securities]

And then, that was the binding, I think it's been running mid-single digits. Is that the same?

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

I don't know. I think it's a point higher than that. So more like 10, 11.

[Mark Hughes, Analyst at Truist Securities]

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 inflecting?

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

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. I mean, it's just going along. You might see two here, three there. And it's really just kind of flat.

[Mark Hughes, Analyst at Truist Securities]

Yes. Thank you very much.

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

Thanks, Mark.

[Operator]

The next question comes from the line of Katie Sakys with Autonomous Research. Please proceed with your question.

[Katie Sakys, Analyst at Autonomous Research]

Hi. Thanks. Good afternoon. Firstly, I 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 in property, rates reaccelerating or from something else, how much of that would you guys kind of envision letting fall to the bottom line? Like, could we expect to see greater margin expansion or are there other areas of investment opportunity that you guys would kind of like to see some progress made on?

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

Well, listen, I don't think that our investment opportunities would be rolled out fast enough in order to spend more going into if we had a pop-up in organic growth, and starting in August, it's not that the wind blows or something like that. So I don't think we would have the ability even to ramp up on some of the -- some big investment opportunities to offset that additional organic growth.

But I'm trying to do some mental math here. If we were up another 0.25 point in organic, it might produce another in a quarter or two, $10 million or $15 million if we had it for a half a year, or something like that if I'm doing my math right. So I don't think -- it would probably naturally improve the margins a little bit.

I want to make sure we go back and clarify the question within wholesale, all right. When you combine binding and programs, 11%. The programs are really more running around 2% to 3%, and open brokerage is in that 16% range. So just to make sure that we, I answered one question, Pat answered a combined question. And just to break those three out, 16 -- over 10% and low-single-digits on the program side.

[Katie Sakys, Analyst at Autonomous Research]

Thanks. That's a helpful clarification. Just maybe as a quick follow-up, in terms of benefits from headcount controls and client-related expenses, are those anything that you expect to persist as the year goes on, or are those more specific to 1Q in particular?

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

Well, listen, I think the team does a really nice job of looking at our headcount controls. We have work models 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 has 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. So overall, I think our work planning models and our ability to kind of forecast retention have helped us not have to push and pull on the joystick there to see how many more we need to bring on, how many do we need to take off. So it's pretty steady right now.

[Katie Sakys, Analyst at Autonomous Research]

Got it. Thank you.

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

Thanks, Katie.

[Operator]

Thank you. Our next question comes from the line of Yaron Kinar with Jefferies. Please proceed with your question.

[Yaron Kinar, Analyst at Jefferies Group]

Thanks. Good afternoon. I have no idea where I am, but I'm pretty sure it's afternoon.

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

[Indecipherable]

[Yaron Kinar, Analyst at Jefferies Group]

I just want to touch on a couple of market questions, if I could. I think in the prepared remarks you were talking about general liability and retail being up like 9%. If I go back to the investor meeting from like a month or so ago, I think you were talking about maybe seeing liability lines moving up to the 9%, 10% range over the course of a year or two. So are you -- are we talking apples-to-apples here, or are you surprised by the magnitude of improvement that you're seeing in liability lines right now?

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

I think, let me go back to my prepared remarks. We've seen umbrella in the quarter up 9%, which is kind of in line with what we were talking about in March. GL7, and that's where I think probably we've got to look at our carriers and say, are there going to be some reserve challenges going forward. So 7 seems, it seems pretty stable, maybe there'll be a push up a bit. And package, which is of course property and liability together at 8, we're comp -- really not much, 2%. I think that feels like it's going to be there for the year. I think you could take our March discussions and kind of update them six weeks later for those numbers.

[Yaron Kinar, Analyst at Jefferies Group]

Okay.

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

There is a tone of concern that seems to be louder today in our interactions with carriers and clients around casualty rate adequacy. So, I would say that what we were chatting about in January and February seems to be louder today, the concerns to a little bit louder today. And so I think that, and we're just, I don't know if I have enough data yet to say absolutely that there was a tone shift in March in our data compared to what we were seeing in January and February.

But when you look at some isolated situations, you boil that down with what we all read. When you combine that with what we hear in meetings with the carriers, we feel that casualty rates probably are more likely to be going up again in the next three quarters -- each of the next three quarters than we would see going down by any means. So there is a tone shift there. I just can't quite see it 100% in our data yet, but it seems like it's coming.

[Yaron Kinar, Analyst at Jefferies Group]

That makes sense. I appreciate the color. And then -- and I apologize if you've already addressed this and I missed it. But we saw the stamping office data come out in March around E&S flows and rates, and it seems like it was a little bit of a surprise and disappointment. How much of that do you think is noise? Are you seeing that slowdown in your wholesale business or is that real -- and, sorry, or is that just noise, and you're kind of looking past that and still see a very strong E&S market?

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

That is noise. Our E&S business is on fire. It is -- we are seeing submissions come in. We're renewing our businesses. I don't have any caution on that.

[Yaron Kinar, Analyst at Jefferies Group]

Thank you.

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

Thanks.

[Operator]

Our next question comes on the line of Meyer Shields with KBW. Please proceed with your question.

[Meyer Shields, Analyst at Keefe, Bruyette & Woods]

Great, thanks. I was hoping to start on the reinsurance side, because 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?

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

I don't have the actual stats on that. Doug, do you?

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

Well, listen, I will tell you this, that we had a terrific new win this quarter. Our teams that are working together, I think we're starting to see some nice wins of working with our retailers on that. So when you go down -- that we were hearing a lot of great stories about the team settled in. When we look back and see it and try to measure our success on doing that merger, our teams are working together. We're selling more new business. 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 would consider to be this to be a successful merger.

[Meyer Shields, Analyst at Keefe, Bruyette & Woods]

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?

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

No, I think that our partners are being very reasonable. We're not having a lot of head-butting on that subject at all.

[Meyer Shields, Analyst at Keefe, Bruyette & Woods]

Okay. Perfect. That's what I need to know. Thank you.

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

Thanks, Meyer.

[Operator]

Our next question comes from the line of Rob Cox with Goldman Sachs. Please proceed with your question.

[Rob Cox, Analyst at The Goldman Sachs Group]

Hey, thanks. So I think in March, at the Investor Day, you guys were pretty optimistic on the potential for re-acceleration 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?

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

No, I think our view is unchanged.

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

We're very bullish on that.

[Rob Cox, Analyst at The Goldman Sachs Group]

Okay. Got it. And then maybe a sort of 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?

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

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 with 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.

[Rob Cox, Analyst at The Goldman Sachs Group]

Got it. And if I could sneak one 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?

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

Well, it's a laundry list. I mean, at first you start with our people. I think that our training, our development, our internship program, I think bringing on more producers. We are seeing lots of interest in joining Gallagher by experienced producers out there. I think they see that the organization has a lot to offer for them.

Then the next thing you'd look at is technology. We're spending a ton on technology that both enables us to sell more, right? Enables us to service better. Those numbers are probably, the projects on the sheet could be $75 million, something like that. When I look at this year's budget, some of that's capital, some of that's operating expense.

When we'll will look back, we're spending about $75 million a year on cyber today. If you go back five years ago, we were spending about $15 million on that. So the fact that we're investing in infrastructure improvement is 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, you can get to $200 million to $300 million pretty quickly in what we think we're doing to make a better franchise going forward.

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

I'd like to emphasize what Doug -- I've got a lot of listeners on this call. I'd like to emphasize where Doug started this. Most of that spend is, in one way or another, directly related either to making our service offering to our clients better. And we happen to know, for instance, that our digital offerings from small accounts through the risk management accounts, connectivity, things like Gallagher Go or even a middle market client can see what their policies are, what's going on with their buildings, etc., etc., are being incredibly well-received. And we're rolling things out like that literally every quarter. So that spend, and then you get into the data and analytics.

And if you'd asked me five years ago, if clients would really care that much about being able to tell them what people like you buy, oh my god, they care. And then they want to know the rate structure and they want to know why. And when I was starting -- when I was selling insurance day-to-day, I'd tell them they had a good deal, because Hartford quoted and so did CNA, buy the cheaper one, let's move on, or I'd have a reason why they should stay where they were. But I had the capability of saying, here's what's happening in the world market, it's incredible.

And remember what we said in our prepared remarks, 90% of the time our people go out and they're fighting against somebody who's substantially smaller and doesn't have any of this, let alone $200 million to $300 million to reinvest in more of it. I mean, it's just -- it's an incredible advantage. I appreciate the question.

[Rob Cox, Analyst at The Goldman Sachs Group]

That's awesome color. Thank you.

[Operator]

Our next question comes from the line of Mike Ward with Citi. Please proceed with your question.

[Michael Ward, Analyst at Smith Barney Citigroup]

Thank you, guys. Kind of 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.

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

It's really where we had dreamed it would be. The team is incredibly solid. We're not having defections. We've got -- what's been fun about that is that there's a remarkable interest in having continued relationships and building relationships with the retail side of the house, which is what we predicted. We predicted, we did it that we would be not only getting data and analytics, but we'd be working together. And we've seen that impact on existing, for instance, pooled accounts that were the biggest and probably the longest running pooling broker in the country, especially in public sector business. It's been incredibly helpful, the dialogue back and forth. That's just one example.

But -- and the business now, I think, they really feel like they're part of the enterprise. They're not the new kids anymore. There's always a period when you come to school and you're the new kid. You're the new kid, right? Well, that's not it anymore. I mean, you see them in the hall, they recognize the retailers, they recognize me, Doug, whatever. And the opportunities to invest in data and analytics there, and the thirst for that from their clients, tremendous opportunities. And it's working out incredibly well.

[Michael Ward, Analyst at Smith Barney Citigroup]

Thanks. And then maybe just one last one on group benefits. Kind of curious if you can sort of discuss how the renewals have gone and how top line is trending from your perspective. And I guess the -- what's the tone like among the customer base in terms of help of the economy, and then hiring and labor?

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

Well, interesting, like the tone from our clients is there's a large amount of concern. And we're sitting with clients that; A, in some instances, don't know why they have turnover. And we're able to get in and do some data analytics around what's going on with them and where -- what's going on there. So a very deep concern about wanting to hold on to their top people.

You also have -- an awful lot of people just trying to attract people to fill jobs, pick stuff off a rack, serve tables, whatever. And that's difficult. So they're trying to differentiate themselves in that regard. And there's a lot of concern on their part around cost. Medical inflation is real. Now, those costs get passed directly back to the employer. Then you've got the whole problem of inflation. You know, inflation is difficult.

So I think what it's doing is it's making our professionals far more valuable than the local person that comes out, and says, there's four of us in the office and we're really good at this. And let me show you a PPO, and maybe I can get another quote for your insurance. That's just not cutting it anymore. And that's not -- I'm not talking about 5,000 life cases here. 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?

[Michael Ward, Analyst at Smith Barney Citigroup]

Thank you so much.

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

Thanks, Mike.

[Operator]

Thank you. And our last question is coming from Mike Zaremski with BMO Capital Markets. Please proceed with your question.

[Mike Zaremski, Analyst at BMO Capital Markets]

Great. 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?

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

I'll see if I can dig it out. Did you have a second piece of that?

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

Do you have another question, Mike? We'll dig on that for a second.

[Mike Zaremski, Analyst at BMO Capital Markets]

No, I -- that was actually my only question.

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

We'll look in here.

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

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

[Mike Zaremski, Analyst at BMO Capital Markets]

Okay. Thanks so much. Have a good evening.

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

Thanks, Mike.

[Douglas K. Howell, Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.]

Thanks, Mike.

[J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer at Arthur J. Gallagher & Co.]

All right. Well, I think that's it for questions. If I could 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.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• J. Patrick Gallagher, Jr., Chairman and Chief Executive Officer
• Douglas K. Howell, Corporate Vice President, Chief Financial Officer

Analysts

• Elyse Greenspan, Wells Fargo Securities
• Mike Zaremski, BMO Capital Markets
• David Montemaden, Evercore ISI
• Mark Hughes, Truist Securities
• Katie Sakys, Autonomous Research
• Yaron Kinar, Jefferies Group
• Meyer Shields, Keefe, Bruyette & Woods
• Rob Cox, The Goldman Sachs Group, Inc.
• Michael Ward, Smith Barney Citigroup