Arthur J. Gallagher & Co. Q2 2023 Earnings Call Transcript

Presentation

[Operator]

Good afternoon, and welcome to Arthur J. Gallagher & Company's Second Quarter 2023 Earnings Conference Call. Participants have been placed on a listen-only mode. Your lines will be opened for questions following the presentation. 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. 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 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, President, and CEO of Arthur J. Gallagher & Company. Mr. Gallagher, you may begin.

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

Thank you very much. Good afternoon, everyone. Thank you for joining us for our second quarter '23 earnings call. On the call with me today is Doug Howell, our CFO, as well as the heads of our operating divisions.

We had a fantastic second quarter. For our combined Brokerage and Risk Management segments, we posted 20% revenue growth, 10.8% organic growth. And recall, we don't include interest income in our organic. If we did, our headline number would be 13.4% and over 14% if you levelized for last year's large life product sale.

GAAP earnings per share of $1.48; adjusted earnings per share of $2.28, up 21% year-over-year. Reported net earnings margin of 13.6%; adjusted EBITDAC margin of 30.4%, up 52 basis points. We also completed 15 mergers totaling $349 million of estimated annualized revenue. We had a terrific month to finish the quarter that fueled the upside versus our June IR debut. I could not be more pleased with our second quarter performance and how our teams all around the globe continued to deliver incredible value for our clients.

On a segment basis, let me give you some more detail on our second quarter performance, starting with our Brokerage segment. Reported revenue growth was 20%. Organic was 9.7% or 12.3% if we include interest income and about 13% when levelizing for the large life product sale. Acquisition rollover revenues were $151 million. Adjusted EBITDAC growth was 23% and we posted adjusted EBITDAC margin expense -- expansion of about 50 basis points.

Let me walk you around the world and provide some more detailed commentary on our Brokerage organic. Again, the following figures do not include interest income. Starting with our retail brokerage operations. Our U.S. PC business posted 13% organic. New business production was up year-over-year, while retention was similar to last year's second quarter. Our UK PC business posted 11% organic due to strong new business production. Canada was up 6% organically, reflecting solid new business, similar retention versus last year, and continued but somewhat more modest renewal premium increases. Rounding out the retail PC business, our combined operations in Australia and New Zealand posted more than 10% organic. Core new business wins were excellent and renewal premium increases were ahead of second quarter '22 levels.

Our global employee benefit brokerage and consulting business posted organic of about 2%. That includes a 3 point headwind from last year's life product sale. Excluding the tough compare, organic would have been about 5%, with core health and welfare up low single digits. And then many of our consulting practice groups showed continued strength.

Shifting to our reinsurance, wholesale, and specialty businesses, Gallagher Re posted 11% organic, another outstanding quarter by the team, building upon their excellent first quarter results. Risk Placement Services, our U.S. wholesale operations, posted organic of 10%. This includes 19% growth in open brokerage, and about 6% organic in our MGA programs and binding businesses.

And finally, UK specialty posted organic of 19%, benefiting from excellent new business production and fantastic retention and a firm rate environment.

Next, let me provide some thoughts on the PC insurance pricing environment, starting with the primary insurance market. Global second quarter renewal premiums, which include both rate and exposure changes, were up 12%. That's ahead of the 8% to 10% renewal premium change we were reporting throughout '22 and the first quarter of '23. Renewal premium increases remain broad-based and are up across all of our major geographies. We're also seeing increases across most product lines. Property is up more than 20%. General liabilities up about 8%. Workers' comp is up about 3%. Umbrella and package are up about 11%.

And most lines are trending similar or higher relative to previous quarters, with two exceptions. First is public company D&O where renewal premiums are lower versus last year; and second, cyber, which is flat to down slightly year-over-year. But to put this all in perspective, these two lines combined represent around 5% of our year-to-date brokerage revenues and thus don't have much of an impact.

So, I believe the market continues to be rational, still pushing for rate where it's needed to generate an acceptable underwriting profit. Remember though, our job as brokers is to help our clients find the best coverage while mitigating price increases to ensure their risk management programs fit their budgets. So, not all these renewal premium increases show up in our organic.

Shifting to the reinsurance market. Overall, the June and July reinsurance renewals resulted in similar outcomes to what we saw during January renewals, with most global reinsurance lines continuing to harden. Property continues to experience the most hardening, especially cat-exposed treaties. Within the U.S., Florida property cat renewals were more orderly than January due to an early start and well-defined reinsurer appetites, regardless, price increases were in the 25% to 40% range, causing many seasons to increase their retentions. While property capacity isn't abundant, we ultimately were able to place risk for most all of our seasons.

As for casualty reinsurance renewals, the second quarter showed more stable supply versus demand dynamics, resulting in price increases based on product or risk specific factors. Looking forward, carriers are likely to continue their cautious underwriting posture, given the frequency and severity of weather events, replacement cost increases and social inflation, all of which can impact current and prior accident year profitability. Add to that rising insurance costs and it's easy to make the case for pricing increases, most lines to continue here in '23 and perhaps throughout '24.

Despite these and other inflationary cost pressures, our customers' business activity remains strong. During the second quarter, our daily indications of client business showed positive endorsements and audits. These positive policy adjustments have continued thus far in July. At the same time, labor market and balances remain. Recent data shows the U.S. unemployment rate declining. Continued growth in non-farm payrolls, and a very wide gap between the amount of job openings and the number of people unemployed and looking for work.

And medical cost trends are on the rise. We anticipate these costs to accelerate into '24 due to increased cost of services, more frequent high-dollar claims and the impact of new therapies and specialty medications. So I see demand for our HR consulting and other benefits offerings remaining strong.

So when I bring this all together, as we sit here today, we are more confident with full year brokerage organic in the 8% to 9% range. It was an excellent second quarter in the books, more towards the upper-end of that range, posting that would be another fantastic year.

Moving on to mergers and acquisitions, we had a very active second quarter. In addition to the Buck acquisition, which I will discuss in a moment, we completed 14 new tuck-in brokerage mergers. Combined, these 15 mergers, represent about $349 million of estimated annualized revenues. 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.

Moving to the Buck merger, which was completed in early April, our integration efforts had begun and the combined business is off to a great start. While it's still early, I'm extremely pleased with how the teams are working together and excited about our combined prospects. Looking ahead, we have a very strong merger pipeline, including nearly 55 term sheets signed or being prepared, representing more than $700 million of annualized revenue. We know that not all of these will ultimately close, but we believe we will get our fair share.

Moving on to our Risk Management segment, Gallagher Bassett. Second quarter organic growth was 18.1%, ahead of our expectations due to rising claim counts and continued growth from recent new business wins. These wins have been broad-based and across all of various client segments, including large corporate enterprises, public entities, insurance carriers, and captives. Growth in each of our client verticals is great affirmation in our ability to tailor our client offerings, utilized industry-leading technology and ultimately deliver superior outcomes for clients across the globe.

Second quarter adjusted EBITDAC margin of 19.4% was very strong, and at that the upper-end of our June expectation. Looking forward, we see full year '23 organic around 30% and adjusted EBITDAC margins pushing 20%. That would be another outstanding year.

And I'll conclude with some comments regarding our Bedrock culture. This past quarter, I was on the road from a month, visiting employees around the globe, traveling to New Zealand, Ireland, the UK and the Czech Republic, and I can say that our culture is thriving, which makes me incredibly proud.

Some of those conversations included the more than 500 young people in our 58th class of the Gallagher Summer internship. This rigorous two-month program is an essential investment in our future, ensuring our unique culture remains strong for years to come. As we continue welcoming new colleagues and merger partners into the Gallagher fold, I'm confident that each new addition will uphold the expertise, excellence and ethical conduct that make Gallagher, the name so trusted worldwide. And that is the Gallagher way.

All right, I'll stop now and turn it over to Doug. Doug?

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

Thanks, Pat, and hello, everyone. What a terrific quarter on all measures. Today, I'll walk through organic and margins by segment, including how we see the remainder of the year playing out, then I'll provide some comments on our typical modeling helpers using 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, capacity, and capital management.

Okay, let's flip to Page 3 of the earnings release. All in brokerage organic of 9.7%. That would be 12.3% if we include interest income and a little over 13% when further levelizing for last year's large life product sale. That's a bit better than what we forecasted at our IR Day in June due to a fantastic finish of the quarter across all of our divisions, especially U.S. retail and London specialty.

You'll also see that contingents were up more than 20% organically. Probably a better way to look at it is in combination with supplementals, because contracts can flip from time-to-time. Together up 12% is much more in line with our base commission and fee organic growth. So, no matter which way you look at it, a fantastic organic growth quarter by the team.

Looking forward, we see headline brokerage organic around 9% for third quarter, and about 8% for fourth quarter. It's important to recall that fourth quarter will have a tough compare, because in Q4 '22, we booked a change in estimate related to our 606 deferred revenue accounting. Controlling for that, fourth quarter '23 organic would be towards 9%. We highlighted this matter last year and again at our June IR Day, so there's nothing new here, it's just a reminder as you update your models.

With all that said, we remain bullish on our organic basket [Phonetic] for the second half. Accordingly, we now believe full year brokerage organic is looking like at the higher end of that 8% to 9% range. Again, these percentages do not include interest income.

Flipping to Page 5 of the earnings release to the Brokerage segment adjusted EBITDAC table. We posted adjusted EBITDAC margin of 32.1% for the quarter, that's up about 50 basis points over second quarter 2022's FX-adjusted margin. And that came in better than our June IR Day expectation of expanding 10 basis points, mostly due to the incremental organic growth.

Looking at it like a bridge from Q2 '22, organic gave us a 100 basis points of expansion. Incremental interest income gave us 90 basis points of margin expansion. The impact rolling of M&A which is mostly Buck uses about 80 basis points. And then we also made some incremental technology investments, call that around $7 million and some continued inflation on T&E called that about $5 million, which in total used about 60 basis points. Follow that bridge and the math gets you close to that 50 basis points of FX-adjusted expansion in the quarter.

As for our margin outlook, we expect about 40 basis points to 50 basis points of expansion for each of the next two quarters. For the -- so for the year, we are a bit more optimistic than our April and June views and now see full year margin expansion of 30 basis points to 40 basis points or that would be 70 basis points to 90 basis points levelizing for the rolling impact of Buck, again both those percentages are increases relative to prior year FX-adjusted margins.

We talked about that during our June IR Day when we provided a vignette on how to model margins. Let me give you '22 margins re-competed at current FX levels for your starting point. In Q3 -- Q3 '22 EBITDAC margins would have been around 31.7% versus the 32.3% we reported. And as for fourth quarter '22, not nearly as much impact, call it around 31.3%.

So now, if you move to the Risk Management segment and the organic table at the bottom of Page 5 of the earnings release. Also had an excellent finish to the second quarter, 18.1% organic growth. As Pat mentioned, we continued to benefit from new business wins from the second half of '22. Looking forward, we see organic in the third quarter around 14% and fourth quarter about 10%, which reflects the lapping of last year's larger new business wins.

As for margins, when you flip to Page 6, and the adjusted margin EBITDAC table, Risk Management posted 19.4%. That was on the upper end of our 19% to 19.5% June expectation. Looking forward, we see margins above 19.5% in each of the last two quarters of '23. So, full year double-digit organic and margins approaching 20%. That would lead to a record year for Gallagher Bassett.

Now, let's turn to Page 7 of the earnings release, and the Corporate segment shortcut -- shortcut table. In total, adjusted second quarter came in right at the midpoint of the range we provided during our June IR Day, even though we did experience a further $5 million of FX-related re-measurement headwinds. That cost us a couple of pennies in the quarter.

Moving -- now, let's move to the CFO commentary document. On Page 3, you'll see most of the second quarter results were in line with our June commentary. And looking ahead, you'll see that we've updated our outlook to reflect current FX rates and provide our usual modeling helpers for the second half of the year.

Moving to Page 4 of the CFO commentary document, and our Corporate segment outlook for the second half, the punch line here is, not much change other than a modest tweaked corporate expense and interest and banking cost as we've assumed a slightly higher balance on our credit line, given our robust M&A activity.

Then on Page 5 of the CFO commentary, that shows our tax credit carry-forwards. As of June 30, we have about $700 million, which will be used over the next few years and that's sweetened our cash flow and helps us fund the future M&A.

Shifting to rollover M&A revenues on Page 6 of the CFO commentary document, $151 million in the quarter with Buck contributing nearly half of that. Remember, numbers in this table only include estimates for M&A closed through yesterday. So you need to make a bed for future M&A and you should also increase interest expense if you assume we borrow for a portion of the purchase price.

One other call-out, and that's back at the bottom of Page 3 of the earnings release, we did use a higher-than-normal amount of stock for tax free exchange mergers this quarter. That can be a little lumpy, but we do like doing them. It's attractive to the sellers that are looking to defer the full tax consequence of selling the firm and it's also attractive to us, because that fully aligns our new partners with our long-term shareholders.

As for future M&A, we remain very well-positioned. At June 30, available cash on hand was more than $400 million. Our cash flows are strongest in the second half of the year and we have room for incremental borrowing, all the while maintaining our strong investment grade ratings. We continue to see our full year '23 M&A capacity upwards of $3 billion and another $3 billion or more in '24 without using any equity.

So another outstanding quarter by the team. From my position as CFO sitting halfway through the year, our full year '23 outlook on all measures continues to improve, better organic, better margins and a more robust M&A pipeline. Bottom line, we're in great spot to deliver another record year of financial performance.

Okay. Back to you, Pat.

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

Thanks, Doug. Operator, let's go ahead and open up for questions.

Questions and Answers

[Operator]

Thank you. The call is now open for questions. [Operator Instructions] Our first question is coming from the line of Weston Bloomer with UBS. Please proceed with your questions.

[Weston Bloomer, Analyst at UBS Group]

Hi, good evening. My first question, really strong organic growth within brokerage and around 200 basis points of above what you had said, I guess, about a month ago. I was curious if you could expand on maybe what lines of businesses or geographies or maybe was it supplementals or contingents that drove that outperformance? I'm curious what we can extrapolate for the back half of the year or what [Indecipherable] the nature?

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

Yes. I think, extrapolating for the back half of the year, we feel that our look towards nine and then eight adjusted to nine for the [Indecipherable] two quarters is probably the best way to look at what we think for the rest of the year. The upside was due to U.S. and also UK specialty that just had a terrific end of June. So we're seeing that across the globe, there is a noticeable uptick here in June, success in our sales and our retentions are good and there are some positive rate movement in those numbers today.

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

Also, I would say, it's -- clients are getting pretty darn weary of a hard market, and they're looking for good advice. And where we're finding great strong growth is in property/casualty, the basic blocking and tackling workers' comp, areas that in the United States at least, we stand an opportunity to stand really head and shoulders above our competition, especially the little guys.

[Weston Bloomer, Analyst at UBS Group]

Great. Thanks. And second question on M&A, I believe you said 55 term sheets for $700 million in revenue. If I go back to my model, I believe that $700 million is the highest I've seen maybe away from Gallagher Re. Is that -- so could you maybe just expand, is there any shift in your M&A strategy or any like larger deals in the pipeline or could you maybe just expand on what you're seeing in the market more broadly as well?

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

No, I think that what we're seeing is, first of all, remember, we talk about this quite often. We don't have one individual out prospecting. We've got dozens and dozens of people that have now done deals in our company. They are out casually talking to our competitors. The more deals we do, the more friends they have in the industry, that they're telling it's working well. And they are pleased to be with us. And I think it's just a matter of straight-up blocking and tackling when it comes to the typical, making cold calls, talking to people, renewing relationships we've had for years and people getting to a point where they are possibly ready to sell.

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

Yes. I think they see our capabilities and I think some of the appeal of maybe selling to a PE firm, there is some concern about that given the increase in interest rates and the borrowing costs. There has been some stress in that side of that -- of the industry. And so we're seeing that, that folks are really more interested in being with a strategic now than trying to sell into a PE rollout.

[Weston Bloomer, Analyst at UBS Group]

Got it. Thanks. Yes, it was double-digit, I think, dollar million in revenue per terms. I got a little excited there.

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

Me too.

[Weston Bloomer, Analyst at UBS Group]

And then last one, just on fiduciary, you'd highlight around 90 bps benefit in the quarter. Is that roughly what you have baked-in into the back half of the year when we think about your guidance?

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

Yes. I think that -- I think the biggest jump is here in Q2. I think in the second half of the year, you might see something like 70 basis points in the third quarter and it give us maybe only 50 basis points of margin expansion in the fourth quarter just because rates have been popping up.

[Weston Bloomer, Analyst at UBS Group]

Great. Thank you.

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

Thanks, Weston.

[Operator]

The next question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.

[Elyse Greenspan, Analyst at Wells Fargo & Company]

Hi, thanks. Good evening. My first question, Pat. I know, when asked, you're typically willing to provide a little bit of an outlook on how you're seeing things more than just the current year. So, based on how you think about things right now, how do you think -- from seeing the brokerage business from an organic growth perspective, how do you think 2024 is shaping up?

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

Elyse, I think it's going to look a lot like '23. I'm not seeing any hesitation of underwriters asking for rate. I do think the cycles have shifted. When you see cyber and D&O coming down, they probably are coming down and that's reasonable. Property through the roof is reasonable. What we're seeing in inflation in terms of lawsuit, social inflation is the word I was searching for, it's very -- it's very, very troubling. And then you add inflation. We've been talking about inflation in this call now for over a year. And you look back into reserves and inflation, it tips those into a very difficult spot. And you're not going to get those healthy in one year.

So, I feel very strong about -- and I'll tell you, our insurance companies are very -- our partners are very smart about their numbers. They know where they're making money, where they're not making money and they're telling us what they need. So, I don't see people backing off on that. No one is walking in and saying the gates are wide open, let's just get volume. It's a reasonable market that you can get deals done at a reasonable price. Our clients actually understand inflation. They are living with it across the board. And inflation is good for a broker, honestly. So, I think, next year looks very, very strong.

[Elyse Greenspan, Analyst at Wells Fargo & Company]

And then, Doug, I know, the bar was a little bit higher for the level of margin improvement this year. If '24 looks like '23 from an organic revenue growth perspective, would we see more margin improvement next year at the same level of organic that we saw this year?

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

Well, I guess my reaction to that is going back to -- I think that you'd see some margin expansion at 6%. I don't know if you can get it necessarily at 4%. I don't -- I think by the time we got up to 9%, it would be better than 50 basis points of margin expansion. And we do have one more quarter of roll-in impact of Buck, that would -- the underlying business would be going up, but that business runs at lower margins. So, depending on which question you're asking me, I would think that margin expansion in '24 could be very similar to what we thought it would be in this year, give us 6 points of organic and there might be 40 basis points, 50 basis points; give us 9 points of organic, you might get 75 basis points, 80 basis points out of it.

[Elyse Greenspan, Analyst at Wells Fargo & Company]

And then, Pat, when you're talking about price increases, are you making that comment on like a nominal basis or are you expecting that when you think about property/casualty pricing over the balance of this year in '24, that will continue to exceed loss trend?

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

Well, I think that's the battle, isn't it, Elyse. I mean it -- the carriers [Phonetic] are very much wanting and telling us they need that. So yes, I think that would be the objective and we're finding that we can get it. So, I do think that they're going to look at loss trends and they're going to try to definitely keep the rate structure moving ahead of that.

[Elyse Greenspan, Analyst at Wells Fargo & Company]

And one last one, do you have some initial thoughts on what we could see from reinsurance pricing at January 1, '24?

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

It's too early for me to comment on that, Elyse. I think, we just finished July, not as big amount obviously as January, but interesting that the pricing was still very, very firm. The market after January 1 had a time, had a chance to settle down, look at their books, understood. January was a nightmare. So as we said in our prepared remarks, July was a little bit more orderly, but still difficult. So, give me another quarter on that one.

[Elyse Greenspan, Analyst at Wells Fargo & Company]

Thank you.

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

Thanks, Elyse.

[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]

Hey, good afternoon. Investment income, is this the new run rate? It was better-than-expected or should we expect it to tick another leg up, I guess, just relative -- of course, the company is growing too?

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

Listen, I think the impact on our numbers, I think that it's actually what the -- the change in margin from investment income was 90 basis points this quarter. We think it will be about 70 basis points in the third and about 50 basis points of margin expansion in the fourth. So, to me, I would say that the actual dollar amount that you're seeing in the second quarter are not dissimilar to the dollar amounts that you would see in third and fourth quarter.

[Mike Zaremski, Analyst at BMO Capital Markets]

Okay. And you guys are firing on all cylinders, I'm just trying to poke some holes here. Let's see if I can. So...

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

Now why would you do that, Mike?

[Mike Zaremski, Analyst at BMO Capital Markets]

I mean, just realistic [Speech Overlap] UK inflation, the stats look like it's high and there is wage pressures and some at least slowing GDP outlook. How does your business look there -- look there currently? Are margins been growing as much there and any comments on that?

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

Our UK retail business is on fire, really on fire. And I give a lot of credit to the team on two areas. One, as you know, we've spent money there in terms of branding. And we did not do that for years when we were putting together our Giles, Oval, Heath, those firms were trading under those names. We brought those together. We started talking about ourselves as Gallagher in the field. And our rugby partnerships there and the efforts that we spend on branding have paid incredible dividends. And people know who we are now across the entire UK. And our people are taking advantage of that. And I just visited, in -- I was in our London offices for a good part of June. I was in Dublin and Belfast. And I can just tell you this. There is a bounce in every retailer's step. They are kicking ass, they are having fun, and they're taking names, and getting more business for next quarter.

[Mike Zaremski, Analyst at BMO Capital Markets]

Okay. And just because Elyse asked four, I'm going to sneak in a quick one. In terms of the pricing environment, taking a kind of a step-up, how much do you think is due to the reinsurance cost trying to be pass through? And it sounds like you don't -- and it sounds like it's not a big deal, because you're saying that next year could be similar to this year. So there wouldn't be a step down. But I'm curious if you think some of the momentum coming on the reinsurance side?

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

Let's be clear. I'm saying that we're being told by our carrier CEOs, that they have to cover their increasing cost base. That starts with inflation in their past reserves. And if you plan to rebuild a house for $1 million two years ago, you're not going to spend $1 million. So they are looking at those reserves.

Then secondly, they are still in a process of making sure that we get our -- the values right. These values haven't been touched for a decade. They haven't needed to be touched. So now you got a value increase, you've got exposure units growth. Then you add to that the cost of reinsurance, which is clearly a cost. They are not separating it out and telling our retail clients, well, this part is for reinsurance. They say, look, guys, on this line of cover, we need 25 points, go get it. And that will hold as long as we have to, in fact, do that to get the deal done. Now remember, we are scouring the market for some that will do for 10 because that's our job. But right now, there's no break in that.

[Mike Zaremski, Analyst at BMO Capital Markets]

Thank you.

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

Thanks, Mike.

[Operator]

Our next question comes from the line of Greg Peters with Raymond James. Please proceed with your questions.

[Greg Peters, Analyst at Raymond James]

Hey, good afternoon, Pat and Doug.

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

Hey, Greg.

[Greg Peters, Analyst at Raymond James]

Hey, wondering just have you, for a moment, talk about new business, because you look at the organic results, 10.8%, you look at renewal pricing 12%. Well, you went through a bunch of lines, Pat, where pricing was clearly double digit. And so -- and you also made this comment about your clients having a budget. Just curious how much of the growth organic is rate versus exposure, existing clients versus new business? And has that balance changed at all in the last year?

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

Let Doug talk about the actual numbers because I'm more off the cuff, and then I'll come back in on how I see the market shaping up. Go ahead, Doug.

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

So, Greg, our net new business versus lost business is up this year by 2 percentage points compared to where it was. Their rate is -- then that's the total rate and exposure is up about 1.5 points. So you can see here that it's our net new -- our increased new is actually up more than the impact from rate is up.

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

Now, let me add some color to that, Greg. Number one, we're doing a much better job, I think, than ever of measuring kind of this new business stuff that you're talking about. We know that our average production is actually increasing in the income -- the commission income receiving on new business has moved up from, let's call it, $50,000, $60,000 into closer to $175,000 to $100,000. That's per item as we start bringing it in. So we're actually finding those clients that have, for a long time, probably been pretty happy with either their local broker or their relationship with a larger broker, giving us a chance, and we're doing very, very well.

We are a new business machine. And when I take a look at the percentage of trailing revenue that we try to accomplish every year new business, our goal has always been 15% of trailing. We're just about right there. And that's -- and as our trailing revenue growth continues, that pushes us in terms of our goals for more new business, and we are right on track with that. And when you start having 15%, 16%, 13% of trailing in new business, as long as you continue those retention levels, 94, 95, etc., you're getting very, very nice -- you're getting very nice upside.

[Greg Peters, Analyst at Raymond James]

Yes, that's good -- those are good numbers. Sorry, I think I've opened up a can of worms because we kind of want to start tracking the net new business wins you guys are posting on a quarterly basis.

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

We kind of give you that. Go ahead and ask.

[Greg Peters, Analyst at Raymond James]

Yes. In your comments, Pat, you also talked about on the theme of poking holes, right? You talked about the employee benefits business kind of stood out, that and the MGA business being low single digit, mid single digit type of organic. Maybe, I don't want to call that an underperforming, but relative to the group, I guess, it kind of is. So maybe you could spend a minute and talk about those two businesses because you called them out in our comments?

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

Well, let's talk about the benefits business first. It's adjusted for the large life case 5%. I think that's pretty in line with maybe what some of the other brokers talked about in their employee benefit space. So I wouldn't say it's necessarily out of whack compared to what's going on. That business right now doesn't have the loss cost increases that it's going to have. I think there's going to be medical inflation in that coming up. We were going to fee on that a lot, but by and large, medical costs inflation does have an impact.

When you go back to my early days here in 2003 through 2007, you were seeing medical loss inflation -- cost inflation in the double digits, and that business was growing almost double digits also. So that will have an impact because you can't keep the inflation out of that space too much longer. So that would happen.

On the program business, there are some -- just understand in our case, there are some programs that if there's a change in the state or if there's a change in the carrier appetite, sometimes that can cause a little bit of stress in that business. But still being in those single digit organic ranges are still pretty damn good in this environment.

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

Yes, and let me add to that. Greg, right now, our clients are dealing with wage cost inflation as people say, look, I've got -- I'm having a hard time buying eggs. And they are not looking to be expanding benefit offerings. In fact, they are doing everything they can to mitigate increased cost benefits, while at the same time, being able to balance what they need to give their people in their regular income. While at the same time, maintaining, as you know how difficult this is, their employee base. So it is a really tough time. And our consultants, our people are doing a great job.

Outside of health and welfare, the effort in terms of our consulting business, the orders that are coming through are spectacular. So it's really a balance of all of that. And I agree with Doug. I think that it's a matter of them trying to deal with inflation in the cost of the cover, inflation and their compensation costs for their people and doing everything. And that's where we make our living. It's helping to mitigate that. Plan, design, change, getting that down. And then lastly, a lot of that, as you know, we do on a fee. So when you're facing compensation costs, inflation costs in the underlying purchase of health insurance, the last thing you're doing is given GBS, the 10% rate increase. I think by -- I think getting 5 points is pretty damn good.

[Greg Peters, Analyst at Raymond James]

Fair enough. Just -- I know you've provided some data. It's just a final question. I know you've provided some data around Buck and the integration. That's a business that has had sort of a checkered past of success and maybe some challenges. Maybe spend a second, and this is my last question, talking about the integration and why you think the outlook for that business is strong relative to its history?

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

I'll tell you what I am really excited about that business. And I'm a quarter in, right? And we had our Board meeting yesterday and the team that's involved in the integrating and the onboarding is reporting out to our Board as we do on our large deals every quarter. The synergies there -- first of all, the management team could not be more excited to be finding a home. They have been traded five times, then that's part of what you're talking about, Greg.

You wake up and your name is not changing, but the owners are changing. And then you're changing it again. You don't know who's on first, who is on second. A big part of our effort of onboarding here has been to tell those people, look, you found your last place, now let's go take care of clients. And there's nothing consultants like to hear more than that. So that has been a big message to them, and I spent time with those folks in the UK, I've spent time with them here. It's resonating. Our retention of people is outstanding. And the orders we're getting in one quarter are mind boggling. So I'm really -- then you add to that, we do think there's some great synergies there, and that's not cost take-outs that's cross-selling, seeing some of that already. And I think it's going to be just fine. And I'm one quarter in.

[Greg Peters, Analyst at Raymond James]

Well, thank you for your answers. And the answers makes sense.

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

Thanks, Greg.

[Operator]

The next question is from the line of David Montemaden with Evercore ISI. Please proceed with your questions.

[David Montemaden, Analyst at Evercore ISI]

Hey, thanks. I just wanted to follow up just on the Group benefits organic and just on the deceleration, which still 5% is good extra life sale comp, but that was down versus 7% in the first quarter, but it does sound like the acceleration is expected. Is that something -- is it second half expectation or is that something you think will start to move up higher in 2024?

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

I wouldn't be modeling out, David, a huge acceleration there. I mean, I spent a lot of time with Doug on the street explaining why 3% organic was outstanding just a few years ago. Yes, there's all I'm not looking at. I'm not looking at a business here that is accepting hard rates given the fact that there's big loss cost trends or reinsurance trends. These are people buying insurance and in many instances, not buying insurance. That's the biggest part of what we do is help people self-fund. And that 5% growth is earned with a lot of discussion with the client. It's more akin to what Gallagher Bassett is getting in terms of their renewal increases rather than what you look at on the PC side. So I'm very happy at 5%. I don't want to give you this idea that you're going to see some acceleration of 12%. That's not happening.

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

That business also can be heavily first quarter weighted. So you get a little bit of that, not only do you have to recognize the full year of an account that you sell on the health and welfare side. But the consulting in the first quarter tends to be a little heavier or little -- you grow little bit more than -- because if you think about it, most people are one-one type benefit customers. So they are putting the final touches on their business in January and on some of the programs. So we tend to make a little bit more money in the first quarter.

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

Can I answer an underlying question I hear from you, David and the others, why do we do the Buck deal? It looks like its growth isn't great, doesn't have the margins that a PC broker does. You realize where the pain is for our clients right now and what we are is pain mitigation people. And sure, it's in property/casualty, especially in property, and we're out there working every day to help them get that down. We're bringing self-insurance plans, captive plans, group plans, what we can on the PC side.

And every year, year and out, our clients are dealing with how do we get people, how do we keep them, how do we pay them and how do we motivate them and at the same time, take care of their benefits needs. And to get a firm like Buck on our team when absolutely recognized as the best in the business, I mean, it puts us over the top in that ability to respond to our clients' needs across all of what we do for them. And I think 5% is outstanding. I want to tell the team, congratulations.

[David Montemaden, Analyst at Evercore ISI]

No, thanks. I appreciate that. That's helpful, Pat. And I guess just maybe just switching gears, just on the proper/casualty rate increases, you gave some numbers earlier. I missed -- I missed some of them. I was hoping you could talk a little bit about what you're seeing specifically on casualty rates. And it sounds like we're seeing an acceleration there if I just strip out D&O and workers' comp. But I'm wondering if that is, in fact, what you guys are seeing and how sustainable you guys think those -- that acceleration is? But I said in my prepared remarks, David, is the general liability is up about 8%. Workers' comp, which, as you know, has been flat to down for a number of years is up about 3%, and umbrella and package are up about 11%. So now embedded in each of those lines are different reasons. General liability is social inflation, probably aging population. Workers' comp is clearly -- it floats with medical costs and floats with employment and umbrella and package is probably also looking at social inflation and property up 20% is clearly -- that's about exposure units and the need for rate.

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

Yes, David, when I look at it, you want to break it down general liability and other casualty, call that 8% to 9% is what we're seeing here on the sheet. Commercial auto is 8.5% or more. And that's U.S. business that I'm telling you about. So I think in the second quarter, call it, 8% to 9% on casualty.

[David Montemaden, Analyst at Evercore ISI]

Got it. And those did tick up versus 1Q, it sounds like.

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

Yes.

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

A little bit.

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

Yes, especially commercial auto is more around 6% and now it's 8.5%.

[David Montemaden, Analyst at Evercore ISI]

Got it. And then could you just level set me if I think about full year, the business, the Gallagher rights in brokerage. How much of that is coming from property at this point?

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

Property is our largest line. Doug, you have that number?

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

What was the specific question, sorry.

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

How much of our business is property?

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

About 30% for the full year '22. That's about 30% of what we write.

[David Montemaden, Analyst at Evercore ISI]

Great, thank you.

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

Thanks, David.

[Operator]

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

[Mark Hughes, Analyst at Truist Securities]

Yes, thanks. Good afternoon.

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

Hi, Mark.

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

Hi, Mark.

[Mark Hughes, Analyst at Truist Securities]

Pat, you talked about the medical inflation you think is going to accelerate given that the broader measures of medical costs are pretty calm these days. I wonder what gives you confidence that, that's going to happen?

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

I don't know if I'd say it's confidence, Mark. I mean, I'm not so sure it's good news for the society or for our clients. But social inflation, medical malpractice costs cover, and any kind of losses in that regard and the cost of employees. When you take hospitals right now are working very hard to make sure that their people stay with them. Their turnover rates with the pandemic and the like have increased. Keeping their employees is a big deal, and the cost of doing that.

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

Specialty drugs.

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

On specialty -- those helping me out here, specialty drug costs and procedures are up significantly.

[Mark Hughes, Analyst at Truist Securities]

Understood. Thank you very much.

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

Thanks, Mark.

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

Thanks, Mark.

[Operator]

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

[Katie Sakys, Analyst at Autonomous Research]

Hi, thanks, good evening. I wanted to follow-up a little bit on the line of questioning on Buck. And clearly, an acquisition that definitely expands your ability to serve your clients amidst your portfolio. I'm kind of thinking about what you guys have seen in the first quarter of integration so far? Is there any opportunity to tighten up the drag or the impact that Buck has on brokerage margins over the back half of the year? Any opportunities you guys are seeing to increase cross-sales or maybe find some expense synergies or should we kind of expect that to materialize more in 2024?

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

I think it's more '24. Go ahead, Doug.

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

Yes. I would say '24. As '23, we're still getting our feet under us. But also, I'd like to -- as a friendly amendment to the statement, the roll-in natural impact of a business that's just -- it just runs naturally slightly lower margin, call it, in the 20s somewhere versus in the 30s, right. So the drag on us is what you see on the face of it, but they actually have a nice improvement opportunity as we join forces together to get better themselves. And that's really what we're looking at. If we can take this business, it's in the upper teens and move it into the mid-20s. I think that's a good march for that business.

And I think Pat said it best. They broke through five different owners. They have spent so much of their time and in the last couple of recent roles of becoming a freestanding independent organization. And there's extra cost that goes into that. By being a part of us and us being better together, I think we'll naturally see that natural improvement in their underlying margins. So they should be margin accretive after you get to -- as they improve their margins, they will improve our margins once we get through the first quarter of '24.

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

And then, Katie, to your point about cross-selling, let me be clear. We do see cross-selling opportunities, PC to benefits, benefits to PC for sure. But where we see -- what we're very excited about is cross-selling inside Gallagher Benefit Services. Their strength in the United States is in areas that were not as strong. We've always been in defined benefit pension consulting, for instance. But they come with terrific strengths there. And they're not probably as strong, although they do quite well, but not probably as strong as we've been in health and welfare.

So if you take a look at that, now you're not trying to talk to a new party at a client, you're already dealing with the person who buys benefits. Let me bring in my partner who does health and welfare. And we're already seeing a lot of that. So I think there is good cross-selling. I think that margin improvement will come and I'm excited about it.

[Katie Sakys, Analyst at Autonomous Research]

Thank you so much. And then one more question on the outlook for risk management. [Speech Overlap] So sorry, just one more question on risk management. Doug, your comments seem to imply a little bit of a sequential slowdown in organic on the back half of the year, adjusting for lapping last year's exceptional outperformance. I'm just kind of curious, is there anything you'd call out on that 14% and 10% organic growth guide that might be a slight headwind to growth as the year wraps up?

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

It's just the nature of this business. If you look at it over the last 20 years is that you can get some pretty large clients that roll into your business, and they don't come as steady as, let's say, a smaller clients might do. So if you sell the likes of large U.S. Corporation acts, and you sell them in the fourth quarter last year, you're going to get the benefit in the fourth quarter, first, second, third and then you got to lap yourself in the fourth. So it's more the timing of new business on larger accounts that's causing that.

But if you stack it up, 18% this quarter, and if you think 14% and 10%, when you get down to the end of the year, you're talking some nice one, the 13% organic growth in that business. And then we do have some nice larger clients on the drawing board right now that we're proposing on. I don't know if they'll hit in the fourth quarter or they'll hit in the second or third quarter. It takes a year or two to sell these larger accounts. So it's just a little bit more naturally lumpy on a quarter-by-quarter basis. So I would encourage you to look at it on an annual basis. And if you think about what they did last year and then you're looking at this year at 13%, there's actually a sequential step up on an annual basis.

[Katie Sakys, Analyst at Autonomous Research]

Great. Thanks for your insights.

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

Thanks, Katie.

[Operator]

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

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

You're out there, Meyer?

[Meyer Shields, Analyst at KBW]

Sorry, I was on mute. Am I coming through?

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

Yes, there you go. Yes, you're coming through now.

[Meyer Shields, Analyst at KBW]

Okay. Yes. Well, I'll probably do better on mute. Same question from two perspectives. Are your clients dealing with affordability issues? And I'm asking that in the context of what you said about pricing legitimately needing to go up. And I'm wondering how much of that can client -- how much more of that can clients take? And is that going to shift sort of the revenues that you get from commissions as opposed to captive management or something like that?

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

Yes. And that's one of the things that gets us excited because that's the genesis of our growth. That's what took us to a place where we could get public in '84. We are the people that help folks deal with untenable situations and turn them basically into risk management approaches. It's called larger tensions. We do that in a number of ways, whether it's by line, by state, whether it's by putting someone into a cell captive, whether it's just finding them a pool to be part of. That is a real defining aspect of Gallagher's capabilities. You know that.

[Meyer Shields, Analyst at KBW]

Okay. Yes. I know that conceptually, I'm just trying to -- I'm trying to digest the idea of how much more insured and I'm just trying to get my head around that, which may be an odd with what underwriters actually need for rate. Go ahead, I'm sorry.

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

I think you have to look at it this way. What percentage of a customer's budget really is spent on insurance. And let's say some of the averages are 3%, 4%, 5% of what their total budget they're spending on insurance. So this isn't 30% of their cost structure. So how much more can customers take in terms of this. Our job is to make that as small as possible. Never ever forget that. That's what we do day in and day out. But how much more can they take? Well, their loss experience is bad, they're going to have to take some more.

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

Well, also, if I remember, this is not anti-underwriter. Underwriters are happy to have us help clients move away from loss to them. If there's more self assumption and they pick up an excess placement at the right rate, they're happy. It's not like they say, oh my God, you ripped all this premium away from me. They understand the partnership. So we're counseling on, look, take more rate, make it easier for that carrier to participate in this at the right place on the coverage map and we'll be able to get the limits you want if you got to take more skin in the game. That's all. And that, I think, is what we do better than anybody.

[Meyer Shields, Analyst at KBW]

Okay. That's tremendously helpful. Same question on the reinsurance side. We've got property rates going up pretty dramatically. Is Gallagher Re telling its property clients that they should be buying more reinsurance in 2024 than they did in 2023?

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

I'd tell you what, what I'm impressed with our reinsurance people, and it's way more sophisticated than I am, frankly. But they are the best in the world at capital management with their clients. And this isn't a matter of us going in and talking to the local contractor that doesn't know what I'm going to do with a big time property increase or something like that. These are sophisticated buyers. They see it coming. They know how to balance their portfolio. And really, the advice Gallagher Re gives is not just biased, it's all about -- and again, I mean this is one of the things that's exciting to me in terms of my learnings with Gallagher Re is that they are right at the crux of helping these clients manage their capital.

[Meyer Shields, Analyst at KBW]

Okay. And then one more final question, if I can. Just because you talked about medical cost inflation. Is the medical cost inflation that you're anticipating on the, call it, consulting side, is that manifesting itself at all in workers' compensation claims that Gallagher Bassett is processing?

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

Sure. Yes, absolutely. I mean, a big part of workers' comp is medical only. And that's escalating every month. Our job to help mitigate that, just like we do on the employee benefit side. Use of managed care is very, very important.

[Meyer Shields, Analyst at KBW]

Yes, I'm just wondering.

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

Your -- greater growth in export adjusting and services in Gallagher Bassett as medical cost inflation hits that, too. Clients will look to a Gallagher Bassett, they help them reduce their total cost of risk. And when medical inflation goes up, they will be clamoring for Gallagher Bassett services.

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

And that's part of making sure we deliver the best outcomes.

[Meyer Shields, Analyst at KBW]

No, absolutely. I'm just wondering when do workers' comp [Indecipherable] that this has been tremendously helpful. Thank you.

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

Thanks, Meyer.

[Operator]

Thank you. Our final question is from the line of Michael Ward with Citi. Please proceed with your questions.

[Michael Ward, Analyst at Smith Barney Citigroup]

Hey, guys. Thank you. I was just wondering on the M&A pipeline that you're talking about in the beginning. Is that -- would you say that's skewed to P&C? Or could there be employee benefits in there, too?

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

Well, there will be both. Yes, we keep a good strong pipeline on both. No, we're not going to have another Buck on that list. I mean, Buck is one of the biggest players in that industry. It clearly moves us up in the ranking substantially. But there are plenty of smaller practitioners we'd love to have on board. Our tuck-in acquisition process has been benefits forever along with P&C. So that's not a new thing, and there's lots of activity in that regard.

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

Yes. I think fundamentally, any smaller brokerage business that finds that they need more capabilities, whether it's P&C or benefits, it's the same decision by the owners of those businesses. They just think that they can use -- join us together will be better as we service those clients and the capabilities they can get from us. They'll get it from whether it's wholesale, whether it's retail, whether it's benefit, even in Gallagher Bassett as they have specialty acquisitions there. If it's -- as the owners, it's the same reason they're selling themselves is because they need capabilities, and they think Gallagher is the right place to get those capabilities.

[Michael Ward, Analyst at Smith Barney Citigroup]

Great. That's helpful. Thank you. And then maybe in terms of -- internally, in terms of your own wage sort of inflation monitoring, just curious if that has calmed down a little bit as inflation overall has slowed down?

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

Yes. Here's the thing. We didn't see the great resignation that you've read about in the papers. We've talked about that quite a bit. We were very fair with our employees on the amount of raised pools that we've given. Those raised pools are larger in '22 and '23 than they were in '18 and '19 on a per employee basis. So we've recognized that there is some cost that our employees have to bear. And so we think that the raises we've given them have been very fair and have acknowledged the inflation and the environment.

We haven't really sat down to plan for next year yet to see where we'd be in those raised pools. But obviously, it would be fair with our folks. But as you see, some of the inflation numbers are cooling down on what it cost to live. But by and large, I think that we've been very fair. We -- throughout our history, we have given raises every single year that I've been at Gallagher, and we recognize the importance of our employees to do that. So we haven't seen a big stress on that.

[Michael Ward, Analyst at Smith Barney Citigroup]

Awesome. Thank you, guys.

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

Thank you.

[Operator]

Thank you. Our next question is from the line of Scott Heleniak with RBC Capital Markets. Please proceed with your question.

[Michael Ward, Analyst at Smith Barney Citigroup]

Yes. Just a quick question on the risk management side. The -- wondering if you could give a little detail on the claims count differences and changes, both claims count and severity and kind of what you're seeing versus either recent quarters or year-over-year? And I guess, I'm more interested. I know you touched on it a little bit, just on some of the casualty lines and workers' comp and liability and kind of what you're seeing there in terms of the counts and the average claim size that you're handling at Gallagher Bassett?

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

All right. So three things on there. First, when you look at it, we were seeing more COVID claims last year, and that's basically gone to very little at this point, yet we still grew through that. Kind of existing customers, we consider the claims are rising for our existing customers to be flattish, maybe up a little bit. Now that was a trend that we were seeing also when you go back pre pandemic because as workplaces get safer and safer, so really the success that you're seeing in the organic is really our new business and excellent retention. So that kind of tells you, flattish from existing customers, growing through the loss of COVID claims and conservatively better new business and better retention. What are we seeing for severity, within that severity is going up. There's no question on average as a percentage, I don't know if it's 5% or 7%, but overall, something like that.

[Scott Heleniak, Analyst at RBC Capital Markets]

Okay. That's helpful detail. And then just another question on the M&A pipeline since it was so significant compared to recent quarters. Just wondering if you can also just talk about or comment on how much of that is -- how much of the trend you're seeing is international versus domestic. I'm not looking for a specific breakdown, but anything you can share there on -- are you continuing to look at a lot more international deals than you had over the past few years?

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

Our international pipeline is pretty steady. It's -- the majority of what we're looking at is U.S. domestic.

[Scott Heleniak, Analyst at RBC Capital Markets]

Yes. Okay. And then finally, any earlier read on July renewal premium? I know it's probably a little bit early, but how that's comparing to the 12%? Or is it just too early on that?

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

Our July numbers are better than our June numbers. I looked at the overnight from last year, and there is a noticeable difference. Now July is not over. A lot of your activity happens in the last week here. But right now, our early reads, month-over-month, is there is another step up.

[Scott Heleniak, Analyst at RBC Capital Markets]

Okay, interesting. Great. Thanks for all the answers.

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

You bet.

[Operator]

Thank you. The final question is a follow-up from Weston Bloomer with UBS.

[Weston Bloomer, Analyst at UBS Group]

Hey, thanks for taking my follow-up question. Are you guys disclosing what free cash flow was in the 2Q? Or any updates on the level, maybe as a percent of revenue that you're expecting for full year as you integrate Buck or given the strong 2Q?

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

Well, Q2 is our notoriously smallest quarter because that's when we pay out all of our incentive compensation we paid out in April. So the Q2 is our smallest. The second half of the year is the largest as a percentage. You all toil in that -- those numbers more than we do. That's just not really how we look at it. The fact is our cash flows closely track to our EBITDA growth. As you know, that because of our tax credits, our tax load as a percentage of our EBITDAC is usually somewhere in the 8% range. Our capex is pretty consistent with prior year. So you don't have a significant change in that. So the only thing that really kind of impacts our cash flow is different than EBITDA would be a little bit to taxes, a little bit -- a little growth in capex. And then obviously, if we're paying integration costs, some of those will go out in cash too on that. But right now, we track close -- our cash flows track very close to what our EBITDA is. So the growth in the EBITDAC is pretty much so what you're going to see in the growth in our cash flows.

[Weston Bloomer, Analyst at UBS Group]

Got it. Thanks. And then maybe ex integration costs, is Buck maybe cash flow neutral or maybe slightly cash flow negative just given the lower margin there?

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

Well, it's cash flow positive. I mean -- we're not spending that much on integration on this acquisition. So I would say over three years, I think we're going to spend $125 million, something like that. And it throws off cash flows in excess of that.

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

It's a great business.

[Weston Bloomer, Analyst at UBS Group]

Great. Thank you.

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

All right. Thanks for being with us this evening, everybody. I really appreciate you joining us. I think you can probably tell that myself and the team are extremely pleased with our second quarter performance. We're reflecting on full year '23 financial outlook relative to our early thinking. It has improved on every measure. As we sit here today, we remain very bullish on the second half. And most importantly, to our more than 48,000 colleagues around the globe, thank you, for all you do day in and day out. I believe our continued financial success is a direct reflection of our people and our culture. Thank you very much. We look forward to speaking with you again at our IR Day in September. Thanks for being with us.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

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

Analysts

• Weston Bloomer, UBS Group AG
• Elyse Greenspan, Wells Fargo & Company
• Mike Zaremski, BMO Capital Markets
• Greg Peters, Raymond James
• David Montemaden, Evercore ISI
• Mark Hughes, Truist Securities
• Katie Sakys, Autonomous Research
• Meyer Shields, KBW
• Michael Ward, Smith Barney Citigroup
• Scott Heleniak, RBC Capital Markets