Good afternoon, and welcome to Arthur J. Gallagher & Companies 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. 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 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.

Thank you very much. Good afternoon, and thank you for joining us for our second quarter 2023 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 products 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 Day view. I could not be more pleased with our second quarter performance and how our teams all around the globe continue 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 expansive expansion of about 50 basis points. Let me walk you around then Howell will provide some more detail commentary on our brokerage organic. Again, the following figures do not include interest income. Starting with our retail brokerage operations. Our US PC business posted 13% organic. New business production was up year over year while…

Thanks, Pat. 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 post 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 three 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 live 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 2022, we booked a change in estimate related to our 606 deferred revenue accounting. Controlling for that, fourth quarter 2023 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 prospects for the second half. According, we now believe, full-year brokerage…

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

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

Hi. Good evening. My first question, really good strong organic growth within brokerage and around 200 basis points of above what you'd said, I guess about a month ago. I was curious if you could spend on maybe what lines of businesses or geographies, or maybe whether supplementals or contingent that drove that out performance? Curious of what we can extrapolate for the back half of the year or what is about the nature?

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 second two quarters 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 U.K. specialty, they just had a terrific in the June. So, but we're seeing that across the globe, there is a noticeable uptick here in June of success on our sales. And our retention are good and there is some positive light movement in those numbers too.

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

Great, thanks. And second question on M&A. I believe you said 55 term sheets for $700 million in revenue. If I kind of go back do my model. I believe that's 700's the highest I've seen maybe away from Gallagher Re. 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?

No I think that what we're seeing is, first of all, remember, we talked about this quite often. We don't have one individual out prospecting. And we've got dozens and dozens of people that have now done deals in our company. They are constantly 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're 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 calls, talking to people, renewing relationships we've had for years. And people get into a point where they're possibly ready to sell.

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

Got it. Thanks. Yes. It was double-digit. I think $1 million in revenue per term. So I got a little excited there.

Me too.

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

Yes, I think that this, I think the biggest job 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 gives us maybe only 50 basis points of margin expansion in the fourth quarter just because rates have been popping up.

Great. Thank you.

Thanks Weston.

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

Hi, thanks. Good evening. My first question, Pat, I know when asked on your 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 a thing of the brokerage business from an organic growth perspective, how do you think 2024 shaping up?

Elyse, I think it's going to look a lot like 2023. 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 implications we're searching for. It's very, very troubling. And then you had inflation. We've been talking about inflation, and it's called now for over a year. And you look back in the reserves and inflation 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's walking in 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're living with it across the board, and inflation is good for a broker, honestly. So I think next year looks very, very strong.

And then Doug, I know, the bar was a little bit higher for the level of margin improvement this year, as 2024 looks like 2023 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?

Well, I guess my reaction to that is going back, I think that you'd see some margin expansion at 6%. I don't know if you'd get it necessarily at 4%. I don't -- I think by the time you got up to 9%, it'd be better than 50 basis points of margin expansion. And we do have one more quarter of roll and impact of Buck that would, the underlying business would be going up, but that business runs a lower margin. So, depending on which question you're asking me, I would think that margin expansion in 2024 could be very similar to what we thought it'd be in this year. Give us six points of organic and there might be 40, 50 basis points, give us nine points of organic, you might get 75, 80 out of it.

And then, 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 2024, that will continue to exceed loss trend?

Well, I think that's the battle isn't Elyse. I mean, the carriers 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.

And one last one. Do you have some initial thoughts on what we could see from reinsurance pricing at January 1, 2024?

No. It's too early for me to comment on that, Elyse. I think, we just finished July, not as bigger month, obviously, as January, but interesting that the pricing was still very, very, very firm. The market after January 1 had a time, better chance to settle down, look at their books to understand, 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.

Thank you.

Thanks, Elyse.

Our next question comes from the line of Mike Zaremski with BMO Capital Markets. Please just use your questions.

Hey, good afternoon. Investment income, is this the new run rate was better than expected or should we expected to take another like I guess, well, of course, the company's growing too?

Listen, I think the impact on our numbers, I think that it's actually will be the change in margin from investment income was 90 basis points. This quarter, we think it would 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 amounts that you're seeing in the second quarter are not just similar to the dollar amounts that you would see in third and fourth quarter.

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, I mean, just that will be realistic. U.K. inflation, the stats look like, it's high and there's wage pressures and some, at least slow in GDP outlook. How does your business look there -- has look there currently? Margin has been growing as much there, and any comments on that?

Our U.K. retail business is on fire, really on fire. And I give a lot of credit to the team on two ways. 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 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 spent on branding had paid incredible dividends. And people know who we are now across the entire U.K. 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 in Belfast and I can just say this. There's a bounce in every retailer step. They're kicking ass, they're having fun and they're taking names and getting more business for next quarter.

Okay. And just because Elyse asked for, I mean, I'm just 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 passed through? And it sounds like you don't -- 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 something on the reinsurance side?

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 and their past reserves and, if you plan to rebuild a house for a million dollars two years ago, you're not going to spend a million dollars. So they are looking at those reserves. Then secondly, they're still in a process of making sure that we get our 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're not separating it out and telling our retail clients, well, this part is for reinsurance. They're say, look guys, on this line of cover, we need 25 points. Go get it. And that'll 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 little do-for-ten, because that's our job. But right now, there's no break in that.

Thank you.

Thanks, Mike.

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

Hey, good afternoon, Pat and Doug. Hey, I wanted just to have you for a moment talk about new business. Because when you look at the organic result, 10.8%. You look at renewal pricing 12%. When 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?

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. Go ahead Doug.

So, Greg, our net new business versus loss business is up this year by two percentage points compared to where it was there. Rate is, then that's the total rate in exposure is up about a point and a half. So, you can see here that it's our net -- our increased new is actually up more than the impact from rate is up.

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 in new business. Our goal has always been 15% of trailing. We're just about right there. 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, et cetera, you're getting very, very nice. You're getting very nice upside.

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

I'll give you that. Go and ask.

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 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 your comments?

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 have 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 lost cost increases that it's going to have. I think there's going to be medical inflation in that coming up. We're going to see on that a lot, but by and large, medical cost 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 for too much longer. So that would happen. On the program business, you just understand in our case, there's some programs that if there's a change in the state or 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.

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're doing everything they can to mitigate increased costs and 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 that the orders that are coming through are spectacular. So it's really a balance of all 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 in their compensation costs for their people and doing everything. And that's where we make our living, its 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 giving GBS, a 10% rate increase. I think by -- I think getting five points is pretty damn good.

Fair enough. Just I know you provided some data. It's just the final question. I know you 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?

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 reporting out to our board as we do in 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've 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's 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 takeouts. 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.

Well, thank you for your answers and the answers make sense.

Thanks, Greg.

Our Next question is from the line of David Montemaden with Evercore ISI. Please proceed with your question.

Hey, thanks. I just wanted to follow-up just on the group benefits organic and just on the deceleration, which is still a 5% is good extra life sale comp. But that was down for seven 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?

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 now looking it. I'm now 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 a client. It's more akin to what Gallagher Bassett's 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 to 12%. That's not happening.

That business also can be heavily first quarter weighted. So you get a little bit of that, not only 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 a little --you grow a little bit more than -- because if you think about it, most people are one-one type benefit customers. So they're putting the final touches on their business in January on some of the programs. So we tend to make a little bit more money in the first quarter.

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 it's sure it's in property, casualty, its specialty 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 it absolutely recognized as the best in the business. I mean, it puts us over the top and 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.

No, thanks. I appreciate that. That's helpful, Pat. And I guess just maybe just switching gears just on the property casualty rating increases. You gave some numbers earlier. 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?

What I've said in my prepared remarks, David, is the general liabilities of about eight. Workers comp, which has been flat to down for a number of years is up about three. And umbrella and package you're up about 11. So now, embedded in each of those lines have different reasons. General liability is social inflation, probably aging population. Workers comp is clearly, it floats with medical costs and it floats with employment. An 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.

Yes. David, when I look at it, you want to break it on general liability umbrella of 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 a U.S. business that I'm telling you about. So I think in the second word, call it 8% to 9% on casualty.

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

Yes.

A little bit.

Yes. Especially commercial auto its more around six and now its 10.5.

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

Properties is our largest line. Doug, will give that number.

What was the specific question?

How much of our business is property?

About 30% here for the full year 2022. That's about 30% of what we write.

Great, thank you.

Thanks, David.

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

Yes, thanks. Good afternoon.

Hi, Mark.

Pat, you talked about medical inflation. You think it's 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?

I don't know if I'd say it's confidence, Mark. I mean, I'm not so sure it's good news for this society or for our clients. But social inflation, medical practice cost cover, and any kind of losses in that regard in the cost of employees. And you take your 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 are doing that.

Specialty drug.

No, on specialty builds helping me out here, specialty drug costs and procedures are up significantly.

Understood. Thank you very much.

Thanks, Mark.

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

Hi, Thanks. Good evening. I want to follow-up a little bit on the line of questioning on the Buck. And clearly an acquisition that definitely expands here. Ability to serve your clients from this portfolio. 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 drive or the impact that Buck has on brokerage margins over the back half of the year? Any opportunity you guys are seeing to increase cross sells or maybe find some expense synergies. Or should we kind of expect that to materialize more in 2024?

I think it's more 2024, Doug?

Yes. I would say 2024 and 2023, we're still getting our feet under it. But also I'd like to have a friendly amendment to the statement. So that roll in natural impact of a business, it just run naturally slightly lower margins. 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 opportunities as we join forces together to get better themselves. And that's really what we're looking at. If we can take this business that'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 cut that at best. They've wrote to five different owners. They have spent so much of their time and in the last couple of recent roles of becoming a free standing independent organization. And there's extra conflict 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 creative after you get to, as they improve their margins, they will improve our margins once we get through the first quarter of 2024.

And then, Katie to your point about cross selling, maybe cleared. We do see cross selling opportunities, PC to benefits, benefits PC for sure. But what we see -- we're very excited about is cross selling inside Gallagher benefit services. Their strength in the United States is in areas that we're 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, add 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.

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

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 client 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 to benefit in fourth quarter, first second third and 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 of 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.

Great. Thanks for your insights.

Thanks Katie.

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

You out there, Meyer.

Sorry, it’s unmute. Can I connect there?

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

Okay, yes, well, I probably do better on unmute. Same question from two perspective. Are your clients dealing with affordability issues in a maximum that in the context of what you said about pricing legitimately needing to go up. And I'm wondering how much of that is in client? How much more of that can client take? Is that going to shift sort of the revenue that you get from commissions as opposed to cash advantage or something like that?

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 self-captive, whether it's just finding them a pool to be part of, that is a real defining aspect of Gallagher's capabilities. Do you know that?

Okay. Yes, I know that its excellent at this point. I'm trying to digest the idea of how much more insured and pay. I'm just trying to get my head around that, which maybe at all with what underwriters actually need for rate.

I think we have to look at it this way. What percentage of customers budget really is spend 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 a small as possible. Let's never forget that. That's what we do day in and day out. But how much more can they take? Well, if their loss experience is bad, they're going to have to take some more.

Well, also, remember, this is not anti-underwriter. Underwriters are happy to have a self-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 sell, 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.

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

I'd say, 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 of capital management with their clients. And this isn't a matter of us going in and talking to the local contractors 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 buy it. And 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 is that they are right at the crux of helping these clients manage their capital.

Okay. And then one of the final question if I can. Just could you talk about medical cost inflation. Is the medical cost inflation that you're anticipating on the college consulting side. Is that manifesting itself at all in worker's competition claimed to Gallagher Bassett processing?

Sure, absolutely. I mean, a big part of workers' cap is medical only. That's escalating every month.

Okay.

Our job to helped mitigate that just like we do on the employee benefit side. Use of managed care is very, very important. You'll put a better growth in expert adjusting in at services in Gallagher Bassett that is medical cost inflation hits that too. Clients will look to a Gallagher Bassett to help them reduce their total cost of risk. And when medical inflation goes up, they will be clamoring for Gallagher Bassett services.

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

No, absolutely. I'm just wondering why the workers come take some joy right. I'm just going to end. If this has been tremendously helpful.

Thanks Meyer.

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

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

Oh, there'll be both. Yes, we keep a good strong pipeline on both. Now, we're not going to have another Buck on that list. I mean, Buck is one of the biggest players in that industry. 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.

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 that they just think that they can use, join us together when we better as we serve as 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, they have especially 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.

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?

Yes. Here's the thing. We didn't see the great resignation that you read about in the papers. We talked about that quite a bit. We were very fair with our employees on the amount of raise pools that we've given those raised pools are larger in 2022 and 2023 than they were in 2018 and 2019 on a per employee basis. So we've recognized that there are some costs 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 we'd be fair with our folks. But as you see, some of the inflation numbers are cooling down and what it costs to live. But by and large, I think that we've been very fair. 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.

Awesome. Thank you guys.

Thank you.

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

Yes. Just a quick question on the risk management side. Wondering if you could give a little detail on the claims count differences and changes, you've 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 at. I know you touch on 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 claims size that you're handling at Gallagher Bassett?

All right. So three things on that. 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 that we still grew through that. Kind of existing customers, we consider that the claims are rising for existing customers to be flat-ish, maybe out 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 we're really the success that you're seeing in the organic is really our new business and excellent retention. So that kind of tells you, flat-ish 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.

Okay. That's a helpful detail. And then just another question on the M&A pipeline since it was so significant compared to recent quarters. Just wanting 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, or you continue to look at a lot more international deals than you had over the past few years?

Now international pipeline is pretty steady. The majority of what we're looking at as U.S. domestic.

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

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

Okay. Interesting. Great. Thanks for all the answers.

You bet.

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

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

Well 2Q is our notoriously smallest corners because that's when we pay out all of our incentive compensation. We pay that in April. So the 2Q is as 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 tracked to our EBITDA growth. As you know that that because of our tax credit. Our tax load is 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 flows different than EBITDAC would be a little bit taxes, a little bit the little growth in CapEx and then obviously, we're paying integration costs some of those we'll throw out in cash too on that. But right now we track close -- our cash flows tracked very close to what our EBITDAC is. So the growth in the EBITDAC is pretty much so what you're going to see growth in our cash flows.

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

Oh, it's cash flow positive. I mean, we're not spending that much that 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 and that's what's about.

Great. Thank you.

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 fully year 2023 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 a 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.

This does conclude today's conference call. You may now disconnect your line at this time.