Douglas K. Howell
Corporate Vice President, Chief Financial Officer at Arthur J. Gallagher & Co.
Thanks, Pat, and hello, everyone. Today, I'll walk you through our earnings release, commenting on fourth quarter and full-year organic and margins by segment. I'll also provide some comments on our full-year '24 outlook. I'll then shift to the CFO commentary document that we posted on our IR website, where I'll provide some comments on our typical modeling helpers, and then give two short vignettes: one on investment income and another as a quick refresher on earn-out payable accounting. I'll then conclude my prepared remarks with a few comments on cash, M&A and capital management.
Okay. Let's flip to Page 3 of the earnings release. Headline fourth quarter Brokerage organic of 7.2% is right in line with our December IR Day expectation of 7.0% to 7.5%. But as Pat noted, we see that closer to 8.7% and organic of 11%, if we were to also include interest income. That's a darn good quarter, no matter what percentage you want to focus on. A couple of other puts and takes to call-out on that page. First, contingents did come in a little bit better than our December thinking due to more favorable carrier performance than we thought at that time. And second, base commission and fee organic of 6.5%. That's where you should levelize for the impact of 606 and those life cases. Controlling for those, takes at over 8%. Looking ahead to '24, our Brokerage segment organic outlook is unchanged from our late October and mid-December expectations. We still see full-year organic growth in that 7% to 9% range.
All right. Let's flip to Page 5 of the earnings release, to the Brokerage segment adjusted EBITDAC table. Adjusted fourth quarter EBITDAC margin was up 48 basis points. But remember, to get to that requires re-computing last year's fourth quarter using current FX rates. We've done that in this table and it's 31.3% for fourth quarter of '22. So, posting a 31.6% margin this quarter gives you that 48 basis points of margin expansion, and that's right at the high-end of our December IR Day expectation. Then, if you control for the rolling of Buck and other mergers we closed late in the quarter that have some seasonality, that would have been 150 basis points of expansion. That's simply terrific work by the team.
Looking ahead to next year, we anticipate seeing some full-year margin expansion, starting at 4% organic, and if organic was, say, double that, maybe around 60 basis points of expansion. And note, that includes about 40 basis points of pressure against it due to the rolling of M&A, mostly Buck. On a quarterly basis, the headwind is about 80 basis points to 90 basis points in the first quarter '24. So, please don't forget to reflect this nuance in your models.
Okay. Moving to the Risk Management segment and the organic and EBITDAC tables on Pages 5 and 6. Another excellent quarter for Gallagher Bassett. 13.2% organic growth and margins at 21%. We continue to benefit from new business wins and excellent retention. Looking forward, even as we lap growth associated with some large new business wins from early '23, we see full-year '24 organic in that 9% to 11% range and margins around 20%. That's -- again, that's unchanged from our December views.
So, let's turn to Page 7 of the earnings release and the Corporate segment shortcut table. Total segment adjusted fourth quarter numbers came in a little better than the favorable end of our December IR Day expectations due to less borrowing on our line of credit and slightly lower corporate expenses.
So, now, let's shift to the CFO commentary document, to Page 3. That's where we provide many modeling helpers. Most of the fourth quarter actual numbers are very close to our December IR Day estimates. We've also now added 2024 information. So, take a look at that. In particular, as we're -- take a look at FX. We are expecting a small headwind to EPS in the first half within the Brokerage segment.
Now, moving to Page 4 of the CFO commentary document, to the Corporate segment outlook for full-year '24. There's no change there to our full-year estimate that we provided six weeks ago during our IR Day. But we are now providing quarterly estimates. So, please take some time to refine your models with this added information.
When you get to Page 5, this page shows our tax credit carry-forwards, you'll see what we discussed at our December IR Day. We're able to reestablish a portion of our tax credits following the change in tax method election, when we filed our '22 U.S. federal tax return here in the fourth quarter. Accordingly, as of December 31st, we have about $870 million of tax credits available, that's a nice future cash flow sweetener that helps us fund future M&A.
So, let's turn to the new table that we put at the top of Page 6. We thought this would be helpful as we've been getting a lot of questions about our investment income line. The punch line is that this line includes items such as premium finance revenues, book gains and equity investments in third-party brokers in addition to interest income. So, this table breaks it down for you by quarter. We hope you will find this helpful. We've also renamed that line in our financial statements to clarify that it contains other items. No number has changed. We have just broadened the descriptor.
So, just shifting down on that page, on Page 6, you'll see total brokerage rollover revenue for fourth quarter was $180 million, that's consistent with our IR Day expectation. Looking forward, we've included estimated revenues for mergers closed through yesterday for the Brokerage segment in that table, and for the Risk Management segment in the text below that table. Based on Brokerage and Risk Management mergers closed through yesterday, we're estimating around $540 million of rollover revenues to be recognized in '24. And also don't forget, you will need to make a payment for future M&A and also add interest expense as we fund a portion of those acquisitions via future borrowings.
So, while I'm on the topic of M&A, as we foreshadowed in December, we did increase our estimated earn-out payable for Willis Re during the quarter, because we now have good line of sight of what we might payout in the first quarter of 2025. Remember the accounting for earn-out payables is a bit backwards. If expectations of performance are more favorable, it creates GAAP expense. And if expectations of performance are less favorable, it creates GAAP income. That's what Pat meant when he said counter-intuitive accounting. That said, we do adjust out these estimate changes, but worth a highlight, because it does create some GAAP earnings noise. The punch line on all this and what's more important, our reinsurance business is performing extremely well.
So, moving to cash, capital management and M&A funding. Available cash on hand at December 31st was about $400 million. And with another year of strong expected cash flow generation here in '24, we estimate about $3.5 billion of capacity to fund M&A in '24 using only free cash and incremental borrowings. So, those are my comments.
As I reflect on '23, two metrics for our combined Brokerage and Risk Management segments really sum up how good our year was. Revenue growth of 18%, up $1.5 billion; and adjusted EBITDAC growth of 20% or nearly $550 million. So, the team delivered another terrific year. And we all have tremendous momentum to do it again here in '24.
Back to you, Pat.
