Q3 2021 Arthur J Gallagher & Co Earnings Call
Percent growth in revenue, 10% organic growth of nearly 11% organic if you control for last year's large life sale that we've discussed frequently net earnings growth of 22% adjusted EBITDA growth of 13% and we completed five new mergers in the quarter, bringing our year to date closed merger.
Count to 19, representing nearly $200 million of annualized revenue and if you add in the pending Willis reinsurance merger that number would be pushing $1 billion. So the team continues to execute at a very high level growing organically growing through acquisitions, improving our productivity rates.
Our quality and most importantly constantly building upon our unique Gallagher culture, a terrific quarter on all measures.
Let me provide a brief update on our agreement to purchase <unk>.
On the regulatory approval front, we received competition clearance and five or six jurisdictions required to close including clearance by the U S Department of Justice. The final jurisdiction in the UK, where the CMA is reviewing the transaction. That's the final jurisdiction that review is ongoing but we believe we are in <unk>.
Good shape, although there is still work to be done at this point, we believe we're on track for a fourth quarter closing.
On the integration front hundreds of Gallagher and real estate professionals are hard at work, ensuring we will be well positioned to service our clients. When we close our 40 year acquisition history allows us to leverage our proven M&A integration path integration is in our DNA.
We're looking forward to welcoming 2200, new colleagues to Gallagher as a family of professionals. This holiday season.
It's really exciting to think about all the talent and expertise that will be joining us is going to be incredible for our combined organization and our clients.
Back to our quarterly results starting with the brokerage segment.
Reported revenue growth was excellent at 16% of that 9% was organic revenue growth at the upper end of our September IR day expectation and nearly 10% controlling for last year's large life product sale net earnings growth was 23% and we grew our adjusted EBITDA, 13% Doug will.
Provide some comments on third quarter margin in our fourth quarter outlook, but needless to say another excellent quarter from the brokerage team.
Let me walk you around the world and break down our organic by geography, starting with our PC operations first our domestic retail operations were very strong with more than 10% organic results were driven by good new business combined with higher exposures and continued rate increases risk placement services, our domestic wholesale.
<unk> operations grew 16% this includes more than 30% organic and open brokerage and 5% organic in our MGA programs and binding businesses, new business and retention were both up a point or so relative to 2020 levels.
Outside the U S. Our U K operations posted more than 9% organic specialty was 12% and retail was a solid 6% both supported by excellent new business production.
Australia, and New Zealand combined grew more than 6% also benefiting from good new business and finally, Canada was up nearly 10% on the back of double digit new business and stable retention.
Moving to our employee benefit brokerage and consulting business third quarter organic was up about 5% in line with our September IR day commentary controlling for last year's large life insurance product sale organic would have been up high single digits and represents a really nice step up from the 4% organic we ripped.
<unk> for the second quarter, and a 2% organic for the first so we are experiencing positive revenue momentum and really encouraging sign for the remainder of the year and 2022.
So total brokerage segment organic solidly in that 9% to 10% range simply an excellent quarter.
Next I'd like to make a few comments on the PC market.
Global PC rates remain firm overall and pricing is positive in nearly all product lines overall third quarter renewal premium increases were about 8%.
And similar to increases during the first half of this year.
Moving around the World U S retail premiums up about 8%, including nearly 10% increases in casualty and professional liability even workers' comp was up around 5%.
In Canada premiums up about 9% driven by double digit increases in professional liability and casualty, Australia, and New Zealand combined up 3% to 4% in U K retail was up about 7% with double digit increases in professional liability, while commercial auto was closer to flat.
Finally within Rps wholesale open brokerage premiums were up more than 10% in binding operations were up 5%. Additionally, improved economic activity, even despite the delta variant and supply chain disruptions are leading to positive policy endorsements and other favorable midterm Paul.
The adjustments as our customers add coverages and exposures to their existing policies. So premiums are still increasing almost everywhere.
As we look ahead over the coming quarters I see the PC market remaining difficult with rate infusion is persisting for quite a while in the near term, we don't see any meaningful changes in carrier underwriting appetite capacity attachment points or terms and conditions.
Long term markets do not appear to be seeing a slowdown and rising loss costs global third quarter natural catastrophe losses likely in excess of $40 billion increased.
Increased cyber incidents social inflation replacement cost inflation and supply chain disruptions and all of this is before factoring in further increases in claim frequency as global economies recover and become even more robust.
All of these factors combined with low investment returns suggest that carriers will continue to push for rate.
Just don't see a dramatic change for the foreseeable future.
So it's still a very difficult and even hard in many spots global PC environment.
But remember our job as brokers is to help our clients find the best coverage, while mitigating price increases through our creativity expertise and market relationships.
As we think about the environment for our employee benefits.
Let's say improved business activity lower unemployment and increased demand for our consulting services is driving more revenue opportunities in our customers and prospects continue to rapidly shift away from expense control strategies to plans and tactics that will help them grow their business and with rebounding covered lives and one of them.
Most challenging labor markets in memory, our consulting businesses are extremely well positioned to deliver creative solutions to our clients.
So as I sit here today, I think fourth quarter brokerage segment organic will be similar to the third quarter and that could take full year 2021 organic towards 8% that would be a really nice improvement from the three 2% organic we reported in 2020 to put that in perspective, 8% would be our best full year.
Year brokerage segment organic growth in nearly two decades, and we think 2022 organic will end up in a very similar range.
Moving on to mergers and acquisitions I mentioned earlier, we completed five brokerage mergers during the quarter, representing about $16 million of estimated annualized revenues I'd like to thank all of our new partners for joining us and I extend a very warm welcome to our growing Gallagher family of professionals.
As I look at our tuck in M&A pipeline, we have more than 50 term sheets signed or being prepared representing around $400 million.
Of annualized revenues, so even without the reinsurance merger. It's looking like we will finish 2021 strong wrapping up another successful year for our merger strategy.
Next I would like to move to our risk management segment Gallagher Bassett.
Third quarter organic growth was 16, 6%, even better than our September IR day expectation.
<unk> were strong too adjusted EBITDAX margin once again came in above 19%.
Results continue to benefit from late 2020, and early 2021, new business wins. In addition to further improvement and new arising claims within general liability and core workers' compensation, just an exceptional quarter for the team.
Looking forward, while our fourth quarter comparison is somewhat more challenging the recovering global economy, improving employment situation and excellent new business production should result in fourth quarter organic over 10%.
That puts us on track for double digit full year organic and an EBITDA margin nicely above 19%.
As I look back over the last nine months I can't help but to be thoroughly impressed with our team and our accomplishments.
Our commitment to our clients and to each other is evident in our successes and that is due to our unique Gallagher culture.
In these challenging times, our clients are continuing to count on us and I am proud of our team's unwavering client focus.
<unk> unique culture responded.
And the values in the Gallagher way those values have kept us on a steady course throughout the pandemic.
Time and time again during these past months, our clients have shared their trust and appreciation for the value Gallagher brings to the table.
It comes down to talented individuals' tapping into the power of our expertise across the globe working together during this ongoing pandemic backbone of who we are as an organization.
Okay, I'll stop now and turn it over to Doug Doug.
Thanks, Pat and Hello, everyone.
As Pat said, a fantastic third quarter.
Today I'll touch on a few items in the earnings release predominantly organic and margins then I'll walk you through our CFO commentary document and finish up with my typical comments on cash liquidity and capital management.
Okay, let's move to page four of the earnings release, and the brokerage segment organic table.
Headline all in organic of 9% outstanding on its own but as Pat said earlier running closer to 10%, 8% in the second.
As we sit now I'm seeing a fourth quarter organic again pushing that down.
Double digit level.
Segment adjusted EBITDA margin.
Okay underlying margin after controlling for the lifestyle was around 160 basis points, let me take you.
48 basis points right.
But where we forecasted at our September IR day so.
Controlling for the large lifestyle would bring us back to flat.
In September we forecasted about $25 million of expenses returning into our structure as we emerge from the pandemic.
Small amount of performance comp time.
Recall expenses, returning mostly related to higher utilization of our self insured medical plans.
I'm sort of advertising cost more use of consultants merit increases and a small pickup in <unk> expenses, we came in right on that forecast some.
So controlling for these expenses also brings you to that underlying margin expansion of about 100.
60 basis points.
That feels about right on organic in that 9% to 10% range.
Looking forward, we think about $30 million of our pre pandemic, our pandemic period expense savings returned in the fourth quarter and.
And if you assume say, 9% organic math would say, we should show 90 to 100 100 basis points of expansion here in the fourth quarter.
So in the end the headline story in that we have a really decent chance at growing our full year 'twenty, one margins by nearly 150 basis points and thats, even growing over the life sale and the return of cost as we come out of the pandemic.
Add that to expanding margins over 400 basis points last year means we'd be growing margins.
Since more than 550 basis points over two years.
That really demonstrates an embedded improvements in how we do business.
No matter, how you look at it simply outstanding work by the team.
Moving to the risk management segment, EBIT <unk> table on page seven <unk>.
Adjusted EBITDA margin of 19, 5% in the corner is an excellent result year to date, our margins are at 19, 2%, which underscores our ability to maintain a large portion of our pandemic period.
Looking forward, we think we can hold margins above 19% in the fourth quarter and for the full year that would result in about 100 basis points of margin expansion relative to 2020, another fantastic margin story.
You'll see most of the third quarter items are close to our September IR day estimate one small exception as broker brokerage segment amortization expense.
About $3 million below our September IR day estimate, it's simply because we finalize our valuation work on a recent 21 acquisition or caused a small catch up estimate change we adjusted that out on page one of the earnings release, so it doesn't.
Adjusted EPS.
Flipping to page five in our corporate segment table.
<unk> actual third quarter results in the Blue section to our September IR estimates and gray.
Interest and banking line on a reported and adjusted basis were both in line.
Non-GAAP adjustment here is that $12 million charge related to the early extinguishment of debt that we issued in may related to the terminated <unk> remedy package.
Acquisition cost line, mostly related to the <unk> REIT transaction.
Came in a bit higher than our IR day estimate on a reported basis, but in line on an adjusted non-GAAP basis.
We will see some additional transaction related costs here in the fourth quarter.
Sure.
Should have a sense of what those costs might be at our December IR day again, we plan on presenting these costs and the non-GAAP adjustment as well.
On the corporate cost line in line on an adjusted basis after controlling for $5 billion of a onetime permanent tax items.
Noncash and it's simply a small valuation allowance related to a couple of international M&A transactions.
And finally clean energy, what a terrific quarter came in much better than our estimate thanks to our warm September less wind in certain areas of the country and higher natural gas prices.
We are increasing our full year net earnings range to 87% to $95 million on the back of the third quarter upside.
Okay as for cash and capital management and M&A as you heard Pat say, we have a strong pipeline of tuck in merger opportunities and Thats on top of the <unk> acquisition that we hope to close here in the fourth quarter.
At September 30 cash on hand was about $2 7 billion and we have no outstanding borrowings on our credit facility.
Plan to use that cash cash flow generated during the fourth quarter and our line of credit to fund the acquisition of <unk>.
Before I turn it back over to Pat our year to date performance deserves I mentioned, our brokerage and risk management segments combined have produced 15% growth in rabbit revenue nearly 8% organic growth. We COVID-19, new mergers this year with nearly $200 million of estimated annualized revenue net earnings margin expanded.
One basis point, adjusted EBITDA margin expanded 153 basis points and our clean energy investments are on track to being up 30%. This year studying are setting us up nicely for substantial additional cash flows for the coming five years to seven years.
Terrific quarter and nine months on all measures positions us for another great year. Okay. Those are my comments back to you Pat.
Thanks, Doug and Hillary we can go to questions.
Thank you.
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Again that sorry, one quick question.
Our first question is from Mike Zaremski of Wolfe Research. Please state your question.
Okay great.
Deep Inc.
Okay Alright.
Willis re.
Maybe I should call it energy Calgary soon.
Our estimated earnings you guys have disclosed.
And we're also disclose and there is also this.
Shared services.
Stranded costs.
Issue and just kind of curious is is that.
Any color you can provide on whether your guide is baking in some I guess.
Sharing of expenses that will eventually.
Change over time and I guess.
<unk>.
<unk> earnings levels.
The operation for you all.
A good question here.
We believe we bought about $265 million worth of EBITDA and I think if you kind of do some math on this morning.
Report it looks like in the nine months Theyre reporting around $321 million excuse me $315 million worth of EBITDA. So their numbers are a little higher than ours.
I can count on why there are some differences third costs might not be fully loaded for cost debt.
That it would take us to run the business or they would be running the business on a standalone basis.
It was it was good to see the fact that there are a number was higher than ours.
Okay, that's I'm living in.
In terms of the shared services alright.
As your current guidance.
Baking in an expense that will over time.
Paul.
No I think that what they what they can service their foreign while under the TSA and what we can ultimately service at far gets us back to that $265 million.
Okay.
I guess moving gears to the.
Pricing environment from your color.
In the prepared remarks.
Thank you, Craig, saying that workers' comp was.
Was plus five.
And I guess, just generally it feels like.
There is kind of been.
Less deceleration I think than some expected in terms of pricing and it seems like it's I'm curious if you think it's emanating just from the property side or it's coming back on the casualty side as well because maybe there's more uncertainty about.
Loss inflation or maybe workers' comp claims are coming back I know, it's a long winded question, but any color on kind of what's moving the pricing environment, yes.
Yes.
Thanks, Mike, Yes, interestingly enough with all of the cat losses properties slightly down in rate casually.
Casualty continues to spike a property is down quarter over quarter, just about a point and a half or so in rate.
Our book now I'm speaking about our book of business casualties up a little over a point.
And workers' compensation is up about five so these things moderate quarter to quarter that this is not a prediction of any sort for next year, but when we get ready for this call. We look at that and say, okay, what's actually happening in the market by the way our statistics are airtight byproduct by geography by billing as of yesterday.
So I'm very confident in these numbers overall rate is continuing to be up about 8%.
Yes, just to add to that if you look back at third quarter 'twenty.
<unk>.
We had a whole portfolio of rate up seven 1% and this third quarter 'twenty. One that's up seven 9% now theres a little exposure into the adjustment in there on that when you look at casually third quarter last year was.
Five 7% it's up eight four liability was up 10 six last year is up 10 point this year.
Marshall Auto.
Granted.
Exposure units and this was flat it's up 4% this quarter package.
Third quarter was five 7% up eight nine this quarter property up 11 point to this quarter up 8%.
Marine was three and Thats up six.
So when you look across all of them were higher this year third quarter than we were last year third quarter by almost a full point.
Interesting. Thank you for the color.
Mike those are global numbers.
Our next question is from Elyse Greenspan of Wells Fargo. Please state your question.
Alright, thanks, good evening.
My first question is following up on the topic de discontinuities bin.
Buster day, Doug so.
Discussing the potential.
Changes related to clean energy and it sounded like.
Maybe a chance that you guys were thinking that.
Mars with bonds.
Then at the end of this year has anything changed there and is it.
Still the plan.
And the next question is from September <unk>.
Cash earnings metric.
In conjunction with first quarter 2022 earnings.
Yes, we're still on track with a project that's going to convert a I don't know if I would necessarily call. It cash let's be careful about that but we're taking a look at how other publicly held brokers and professional services report.
Our non-GAAP EPS on what I call a modified cash approach and there are a number of different approaches out there whether it's adjusting for amortization depreciation, but then there's the subtleties of pension and stock based compensation. So we're working through that nothing to report today, but the project is ongoing and I hope to give you a better update at our December IR day.
But if you already rolled out the plan would be some time.
In March early April next year.
So I think we'll finish this year on this basis and go to that basis next spring.
First quarter we.
We clearly have an IR day, we go back in.
<unk> represent everything historically on that basis.
Be well prepared so that let's say we did it first quarter that you wouldn't you.
You can adjust all your models.
Yes.
Before we release.
And then in terms of the organic outlook for next year for brokerage.
Sounds like you're expecting about 8% growth, which is Lee it's Matt.
Amen.
And then I know, we're still a little ways away and it's hard to have precision, but within that guide.
Benefits one.
A little late to start the year, so I guess that should be a tailwind either Kim would you expect that will be a tailwind maybe brokerage slowed a little bit but can you just help me understand.
How youre seeing the moon and moving parts within your business is for 2020 bank that they are slightly tougher compares when you get into 'twenty two because we did have were having some good results here in 'twenty, one, but I think we do have some businesses that are recovering.
Our programs are binding businesses, our new business startups are recovering better in the wholesale business. I think you are starting to see covered lives increase more more consulting work coming back into the structure rate increases, we're not seeing that slowing down at all so I think there is enough there on those other than those others.
Places that would offset the tougher compares next year.
Okay. Thanks for the color.
Thanks, a lot thanks Elyse.
Our next question is from Josh Josh Shanker of Bank of America. Please state your question.
Yes. Thank you very much for taking my question.
Tom.
So.
Given our four Q 'twenty one close.
<unk>.
Is the Willis re and the.
The Gallagher.
Re.
Organization going to be unfortunately, competing against each other on January 1st or what's sort of.
The way, you're managing that given such a close proximity to one one renewals.
Well, what's really nice about this acquisition as there is very little if almost no overlap.
We are not competing head to head really on much at all capsicum, which was a startup very success will became of course Gallagher re.
This is very complementary business.
It'd be a few little areas here or there where the each touch but there are no major renewals across the treaty book that are in conflict and so what you've got is the Gallagher re people who you could imagine if you were just reading about this numbers the numbers could be.
Worried about a much larger competitor being acquired.
Being able to come in with their with their name of course in our brand and how are we going to sort that out and what does that mean to the clients that they've been calling on virtually none of that exists. So what you've got is a team of people from the Willis re side that are very excited that people from Gallagher re existing are very excited to hit the ground.
<unk> running in January with a new improved much expanded Gallagher re and Thats a branding exercise. It is outstanding for all parties and it brings tremendous additional capabilities because as a startup as you could imagine over 345 years Capsicum re has had to develop all the.
Individual capabilities, one at a time pay for it as they go still driving decent margins and top line growth.
This is over 100 years old they built.
Built this stuff they've got they've just got terrific depth.
And so it's going to be a very strong combination with almost no conflicts whatsoever.
Thank you and when you're talking about $400 million of annualize.
Annualized revenue on 50 term sheets.
Sheets.
Sort of look at these lifts of the biggest brokers and $20 million per acquisition, obviously are going to come in different sizes, but theres, obviously, some larger ones out there numbers 11%.
So, let's say 50 on any list you look at in terms of cultural fit.
Do the have you for the most part bound cultural fit in the smaller tuck ins that have that same entrepreneurial spirit and are the larger brokers they have their own culture at this point here.
So let's put this in perspective.
According to Bobby Reagan's organization, there's 39000 agents and brokers in America, and Thats firms and business Insurance's list to $26 million last year.
So when you look at what's available to be purchased.
<unk> got 100 that take you to $26 million, you've got 38900 less than that and our people are out every day talking to our competitors and this is done right at the street level.
Not all of them are brought to the table by brokers that are that are representing them.
And you have large ones that come up from time to time and when we get a chance at the Sim and we get a chance to get to know them are number one due diligence efforts still remains culture.
Don't get to wash away culture by size and dollar amount.
And no I wouldn't say some bigger ones don't fit because they are bigger.
There are some larger acquisitions, we've done in the past years.
We were thrilled with the fit and <unk> been thrilled with.
Now by item Count as you know, our most of our acquisitions falls to $10 million or less level.
And yes, they fit extremely well into our entrepreneurial culture.
Yes, Josh just to clarify we've got 50 outstanding term sheets on 400, which makes the average broker size about $8 million there.
Your math is better than mine, but it's been a long couple of days, yes, I get that.
Thank you for correcting Joanna.
But there are some nicely at $20 million range there.
And Youre right. Thank you top 100, the top 100.
We sold more of those in the last two years, probably five years before that combined.
And that's a matter of.
All kinds of things appetite age multiples tax law et cetera.
When we look at those in.
If they fit culturally we try hard to get them to join the team.
Wonderful. Thank you thanks, Ron Thanks, Josh.
Our next question is from Mark Hughes of Charlie.
Please state your question.
Yes. Thank you good afternoon, Hi, Mark.
Workers' comp.
Sounds like it's doing better any way to characterize it as a change in appetite on the part of certain carriers.
Higher payroll, what's driving that.
I think all of the above I think you've got.
Well first of all you have the.
Recovery, so we see that in our Gallagher Bassett numbers, you can see the economy.
In claim count growth.
You do have social inflation and you have.
You just got more work being done and I think that makes a difference, but we're talking right here and thats really driven by bi loss ratios and what they see in the.
The thing about workers' comp I have to give our carrier partners credit they know what's going on in that line every day.
And when they see a need to move right and that's why during the hard market. Many many quarters, we reported flat work comp.
Because they didn't need the right. So this is really interesting to me because they're not waiting around.
To find out that Theyre 25 points behind the eight ball and then trying to get it back in one swoop.
So I think it's a good sign both of their being on top of their numbers incredibly well a recovering economy and.
Our need for more and more premium in the line.
Doug I'm not sure if I'm being dense here, but im looking at your P&L in the press release.
The change in estimated acquisition earn out payables $34 million.
And then in the CFO commentary the recurring is.
I think described is $8 million pre tax what is the distinction between those two numbers, what's a good number going forward do you think.
Okay. So you've got the natural accretion of the earn out liability by somebody and they have got.
Got.
$50 million on an earn out.
We just got that background at about 8% per year. So you've got the accretion what's going to be paid out and then you've got to change and why do you think the ultimate so again think that total payout can be $50 million, let's say, we put up $30 million worth of liability.
Expecting kind of they're going to perform at the 60% range, 8% accretion of $30 million, but if one day. They they really over performed and we've got a pump that up to $40 million expectation if that that's the difference that going to change.
Earn out piece as well as in accretion.
Two different pieces, what youre seeing this quarter is we did have some acquisitions that have.
Looking like Theyre going to.
Better perform and it's not that.
That odd accounting that says that when we think that our acquisitions are going to perform better we have to take a charge for that as we increase that liability.
And is.
And then adjust it out yes, we do adjust that up.
Okay.
The reported EPS correct for that the correct too like the $9 million or $8 million and $9 million or does it go to.
That's true.
Well the the EPS is only adjusted for the change and the acquisition earn out payable.
It's not a joke it out for EPS, it's not adjusted out for amortization.
Yes exactly.
Yeah.
Okay, well I appreciate I guess liability state them, it's a change in the ultimate payment.
Yeah.
Yes, I think I probably got it.
I appreciate it.
Alright. Thanks.
Our next question is from David Moulton Nathan of Evercore ISI. Please state your question.
Hi, good afternoon, David.
Hi.
I had a bigger picture question just on the growth profile of the business.
It would be in 2023, when when Willis re has incorporated in the organic growth.
If I look back over the last 10 years it looks like brokerage organic has been around for call. It four 5%.
I guess, how are you thinking about Willis re or should we think about it is just increasing.
The base. So we have like more of a higher base and will grow at a similar pace.
As we did in the previous 10 years or do you see this enhancing the company's growth profile going forward once that's fully reflected in organic.
Well I'll, let I'll, let Doug anchor you in reality and let me give you a fantasy.
I think.
The fact is that this is a leg on the stool that we haven't had and I think everybody on this call knows that I've tried for years to be a big player. In this business failed miserably one's got together with a great team and a terrific start up a second time.
Really exciting spring thinking that we're going to land. This group of people into the company through the acquisition of Willis by on had that rug pulled out from under me and in late May into June and somehow was lucky enough to be in the right place at the right time to get this back on track for a close this year. So.
It's been a bit of a seesaw for me and part of the reason I am excited about it is that it adds so much to the company. It adds frankly interestingly enough to our ability to produce middle market retail property casualty business on a global basis now how is that possible world number one data number two that data and analytics, but it also.
Gives us a clear insight into what is troubling and exciting to the to the carrier world what's going on in their capital plans. What are they what are they seeing an accumulation where are we helping now and how does that translate to what's going on in the middle market take construction. So that's that's just a whole another opportunity for me to get out in front of our team.
<unk> and say look.
Hit ratio today is improving but it's still not that different than when I joined the business and how can that be we know that 90 plus percent of the time when we compete in the marketplace. We're competing with somebody smaller typically the local agent or broker that were buying.
And frankly, we should be crushing that so I would hope that that would lead to even more organic growth even at the retail level.
Then you go into looking at reinsurance.
This is <unk>.
This isn't true, but there's three main players we're going to be one of those and yes. There are other players and we were proud at Capstone Gallagher re to become the fifth largest at $100 million in revenue, that's a great accomplishment, but a $1 billion player.
That new capital coming into that market.
Those carriers that are looking to do new things treaties that needs to be reworked and tweaked three competitors.
I think we're going to do really well.
Yes ill put out I don't think Theres any fantasy.
That all I think that it will outperform our regular organic growth.
So I think how much more of that will be determined but its at the novel capital creation. If you look at the Genesis of Gallagher way back when really pioneered the.
Alternative market, which is really capital creation.
When you take that with our captive we've taken with R. R.
Wholesaling, where we're creating capital with with other capital markets there to come up with programs and I think that it's going to give us an opportunity to create more capital combine that with the knowledge that we have with respect to certain long tail liability like workers' comp and general liability I think that we can bring some pretty exciting capital formation.
Together with Gallagher Bassett.
To help our self insured clients. So and then if you just get down into our retail business.
Globally, I think a close partnership with the wealth and Gallagher re reinsurers will come up with much with considerably more creative ideas I believe in our culture.
We're creative ideas get get get pursued I think that will help us grow better together, so I don't think theres any fantasy and what palisade.
Got it thanks, so much for that answer that's really helpful.
I guess just also sticking on Willis re alright, I guess now Gallagher re but.
Wondering if you can just comment on just the third quarter performance and how that has compared to your expectations I am, particularly interested in just attrition levels and.
Doug I think you mentioned Theres, obviously with some volatility.
Earlier, this year and in the summer.
So just wanted to see just how retention has been holding up employee retention.
Since the announcement, if you have a view on that.
Well I'll be honest, we're not really allowed to have some of that while we're going through regulatory approval.
Our insight into the performance of that business is limited.
It's necessary advanced integration planning can happen, but based on what im seeing being reported right now is that it seems to be holding up very well.
I don't think that the breakage that we've assumed in our assumptions.
They've hit anywhere near that so I think.
It's holding up well I got to give that team a lot of credit and they're holding that team together. They know what's going to be an exciting opportunity to be at Gallagher, so im not seeing financially any.
Weakness in what we think that work yet.
That's what's going to be my comments around the team that management team.
As held their team together through what I consider to be one of the greatest leadership challenges our industry space now.
It's one thing to say, we've got an acquisitions could be good for everybody and we're going to we're going to get together with E. On and this is going to be terrific and you got a lot of doubters on both sides and to your point earlier, whereas the contract Brewers the headbutting gonna be while.
You work that through and.
And then that's not really what's going to happen you're going to join Gallagher.
That's going to be great because theres not going to be the head butting there not as big as we were together, we're not going to be as big but thats going to be great for you to well that's not going to happen either so theres no theres no surprise as to why there was some attrition.
And I can tell you since the announcement.
Anecdotally, because doug's right, we can't get into the numbers, but there's been very little attrition since the announcement that this is really going to happen.
Got it thanks, Thats exactly what I was looking for thank you.
Thanks, David.
Our next question is from Meyer Shields of <unk>. Please state your question.
Yes.
This is a related question on.
Well, hopefully, it's something you're cancer.
In addition to <unk>.
Higher right now sort of in between being owned by Willis towers, Watson and being owned by Gallagher, Yes.
Yes of course.
Okay perfect.
If any disruption in terms of capital.
Capital or whatever.
Another question.
I'm just curious in terms of how this works when you've got rising.
And the NIM fleet reinsurance hasten inflationary period are your clients more or less price sensitive.
Oh man you kidney.
No. This is so good for us the team's lapping in the room. So I don't know some slow down everybody.
Of course, the clients are freaking out.
Got their costs going up before they've got their revenue.
Adjusted to cover it.
So take our construction risk <unk> all bid everything already there in the middle of the job.
Supply chain cost as some of that cost of lumber blah blah blah going up like Crazy every cost on their P&L under they've got to look at everything so here we come.
A really really good player in the construction area again, we compete 90% of the time on very nice accounts with smaller competitors.
We can analyze and show them whats actually happening in the book by that type of cover by that type of client.
And then we can show them that we can improve upon what <unk> been getting from their local agent.
Yeah.
Sensitive yet that should be good new business for us.
Okay, and then the follow up which I guess you mostly answered it already does that mean that your win ratio when rates go up relative to smaller competitors because the capability.
Yes.
Okay perfect just wanted to frame all of us. Thank you.
Thank you ma'am.
Our final question comes from Mark Hughes of true. Please state your question.
Yeah. Thanks, Doug could you comment on you talked about organic for 2022 being similar.
This year.
Did 150 basis points in the brokerage segment on that organic.
Is that a good bogie for next year as well are there any other costs coming or going that will influence that.
Yes, I think that let's break it down I think organic much like this year next year in that 9% to 10% range as possible eight 9% 10% range.
What will margins due next year some of that depends on how much.
Further cost returned to our structure that haven't yet returned to our structure remember we are pretty low cost basis still in the first quarter up 21, So that will reverse next quarter and 21 also so I'll put a little pressure on the year over year.
The middle of our budget and planning cycle right now Mark.
Our answer for you on that in December but it worked.
Pumping out organic growth pushing 10% next year, there is still opportunities for us too.
To take some of that to.
To the bottom line, how much is that going to improve margins next year give me till December to figure that out.
Very good and then ill.
Ask you on the.
Shifting to cash EPS I'm just looking at your.
CFO commentary in looking at that recurring amortization of $95 million.
Any.
Your comments you'd like to add.
Hello out how much of that.
Might be.
Added back for a cash EPS number well $400 million out a year I think that in all cases that we've looked at a 100% of that has been added back.
We got a tax effected but.
Okay, Thats something thats.
It's a big it's a big number.
And you wouldn't want to be at the mainstream on that legit didn't sound like it.
Say that again.
I said, you wouldn't want to be outside of the mainstream if everybody else is adding the whole nut back you would want to do the same thing I presume I think comparability would be very helpful.
Right. Okay. Thank you for that I appreciate it thanks, Mark Thanks, Mark and thanks, everybody for your questions. So thank you again all of you for joining US today as we said over and over we delivered a great third quarter and I'd like to thank our 35000 plus colleagues around the globe for their hard work dedication and unwavering client centric.
<unk>, we look forward to speaking to you again at our December Investor Day, Thank you for being with US and have a nice evening.
This does conclude today's conference call you may disconnect. Your lines at this time and have a wonderful day.
Okay.
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Sure.
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