Q4 2021 Arthur J Gallagher & Co Earnings Call
Section of the company's website.
It is now my pleasure to introduce J, Patrick Gallagher, Chairman, President and CEO of Arthur J Gallagher <unk> company. Mr. Gallagher you may begin thank.
Thank you good afternoon. Thank you for joining us for our fourth quarter 2021 earnings call on.
On the call for you today is Doug Howell, our CFO as well as the heads of our operating divisions.
Had an outstanding fourth quarter.
For our combined brokerage and risk management segments, we posted 18% growth in revenue.
11% organic growth.
Net earnings growth of 11% adjusted EBITDA growth of 17%.
And we completed 18, new tuck in mergers in the quarter. That's on top of closing our Willis re merger all told for the year, our merger strategy added more than $1 billion of annualized revenue.
It's just fantastic.
Needless to say I'm extremely proud of how the team performed during the fourth quarter and the full year. So let me give you some more detail on our outstanding fourth quarter performance, starting with the brokerage segment.
During the quarter reported revenue growth was an excellent 19%.
Of that 10, six was organic another sequential step up from the third quarter and the fourth consecutive quarter of improvement.
Net earnings growth was 8% adjusted EBIT that growth was 17% and we expanded our adjusted EBIT margin by 13 basis points in line with our December IR day expectations remember, that's lower because of the natural seasonality of the reinsurance acquisition margins would've expanded nearly 90 basis points.
So another great quarter for the brokerage team.
Let me walk you around the world and break down the 10, 6% organic starting with our PC operations first our domestic retail business posted 13% organic driven by excellent new business higher exposures and continued rate increases risk placement services, our domestic wholesale opera.
<unk> posted organic of 15%. This includes more than 30% organic and open brokerage and 5% organic in our MGA programs and by making businesses new business was better than 2020 levels near double digit renewal premium increases help too.
Outside the U S. Our U K business posted organic of 12% specialty, including our existing Gallagher re business was up in the high teens in retail was up 7%, both fueled by new business and retention in excess of 2020 levels.
Australia, and New Zealand combined organic was more than 8%.
Also benefiting from good new business and improved retention and finally, Canada was up more than 13% organically and continues to benefit from strong new business trends stable retention and renewal premium increases.
Moving to our employee benefit brokerage and consulting business fourth quarter organic was up about 7% a couple of points better than our December IR day expectation.
We saw some nice sequential improvement over the course of 2021 up from the 2% organic we delivered in the first quarter. Thanks to a rebound in global economy declining U S unemployment and increased demand for our consulting services as businesses look to grow.
Next I'd like to make a few comments on the PC market.
Overall global fourth quarter renewal premium increases were above 8% broadly consistent with the increases we saw during the first three quarters of 'twenty one.
Moving around the world renewal premium change, which includes both rate and exposure.
About eight 5% in U S retail, including a 13% increase in professional liability, 8% and property and casualty and 4% in workers' comp.
In Canada, Australia, New Zealand, and the U K retail renewal premiums up between 7% to 9%, mostly driven by increases in professional liability and property.
Within Rps wholesale opened brokerage premium increases were up 13% and binding operations were up six.
Shifting to reinsurance January 1st renewals showed price increases that vary by geography, and client loss experience loss free program saw rates flattish to up 10%.
While loss impacted accounts and cat exposed property business experienced rate increases that were in many cases double that so rate tended to be based on client specific attributes and loss history.
And I consider that to be a healthy outcome.
So whether retail wholesale or reinsurance premiums are still increasing almost everywhere.
Looking forward I see a difficult PC market conditions continuing throughout 2022.
Thats, because our risk bearing partners remain cautious on rising loss costs per property coverages replacement cost inflation and the increased frequency and severity of catastrophe losses are causing underwriters to rethink rate adequacy on.
The casualty side, social inflation inflation low investment returns and the potential for increases in claim frequency as global economy economies. Further recover are all potential negative drivers of future underwriting profitability.
And on top of higher loss costs, and lower Investor insurance reinsurance costs are also increasing so I think carriers will continue to push for rate and don't see a dramatic change in the near term.
We shine in this type of environment by helping our clients find appropriate coverage, while mitigating price increases through our creativity expertise and market relationships.
I am equally as upbeat on our employee benefit consulting and brokerage business.
As you know the first quarter is seasonally our largest employee benefits quarter and is looking like the team had a strong annual enrollment season early indications are pointing to an increase in new client wins over prior year consistent client retention and a slight increase in covered lives.
With improved business activity and increased demand for goods and services businesses are trying to grow their workforce, but the labor market remains extremely tight with more than $10 5 million job openings domestically and $6 3 million people unemployed and looking for work. This lays the groundwork for robust demand for our consulting services.
In 2022, as employers look to attract retain and motivate their workforce.
So we finished 21 with full year organic of 8% that's really nice improvement from the three 2% organic we reported in 20 and above pre pandemic 2019 organic of five 8%.
And as we sit here today, we think 'twenty two organic will end up in a very similar range to 'twenty, one and there is a case that it ends up even better.
Let me move on to mergers and acquisitions.
It was great work by the team to close the reinsurance acquisition in early December integration is well underway and progressing at a good pace.
Remember, we are a seasoned integrator on the revenue side much like our tuck in acquisitions, we've mobilized our local teams from retail wholesale and even Gallagher Bassett to partner with our new colleagues and generate new revenue opportunities.
I'm also very pleased that our combined Gallagher re team hit the ground running and had a strong finish to the year.
Financially the acquisition added about $20 million of revenue in December and is expected to generate a small EBITDA loss due to.
Seasonality.
More importantly, I'm already seeing examples of cross division cooperation and collaboration so our new reinsurance colleagues are quickly embracing our better together Gallagher culture.
Outside of reinsurance, we completed 18 tuck in brokerage mergers during the quarter, representing about $65 million of estimated annualized revenues I'd like to thank all of our new partners for joining us and extend a very warm welcome to our growing Gallagher family of professionals as.
As I look at our tuck in merger and acquisition pipeline, we have around 35 term sheets signed or being prepared representing over $200 million of annualized revenues.
All of these will not close however, we believe we will get our fair share.
Next I'd like to move to our risk management segment Gallagher Bassett.
Fourth quarter organic was 13, 1% a bit better than our December IR day expectation margins approached 19% in the quarter, leading to full year adjusted EBITDA margin of 19, 1% another great quarter and full year for that matter from the team.
We saw more new arising claims within general liability and property and to a lesser extent core workers' compensation during the quarter.
New Covid related workers comp claims were similar to the third quarter aided slightly by the late year surge in cases from the omicron variant.
Regardless of the short term variability of new ryzen claim activity, we feel really good about the business looking forward continued strong retention combined with new client wins in the fourth quarter should drive 22 organic into the high single digit range.
So it was another fantastic year for our franchise and I'm extremely proud of our team and our collective accomplishments together, we produced eight 6% organic growth in our combined brokerage and risk management segments completed 38 mergers with more than $1 billion of estimated.
<unk> revenue.
More than 110 basis points of adjusted EBITDA margin expansion.
And we were recognized as one of the world's most ethical companies for the 10th year in a row by the Ethisphere Institute.
And all of this in the face of a pandemic.
What a fantastic year.
Than ever our success is due to our bedrock culture, our culture helps us deliver better results better results for all of our stakeholders, including our customers our colleagues our underwriting partners and of course, our shareholders every day all of our teammates get up and work diligently to maintain our culture.
To promote our culture and to live our culture.
That truly is the Gallagher way.
I'll stop now and turn it over to Doug Doug.
Thanks, Pat and Hello, everyone as Pat said, a terrific quarter to close out an outstanding year.
Today, I'll start with our earnings release and touch on organic margins in our corporate segment shortcut table, then I'll move to our CFO commentary document.
I'll talk a little bit about how we're now providing our typical modeling helpers for 'twenty to add some commentary on the <unk> acquisition and our latest thinking on clean energy I'll, then finish up with my comments on cash liquidity and capital management.
Let's flip to page four of the earnings release to the brokerage segment organic table all lend brokerage organic was 10, 6% a nice step up from the 9% posted last night.
And the six plus percent we posted in the first half of 'twenty, one leading to full year organic of 8% looking forward as Pat said, we see full year 2002, similar to 'twenty, one or even better.
Now turning to page six for the brokerage segment adjusted EBITDA margin table headline all in adjusted margin expansion for fourth quarter was 13 basis points right in line with our December IR day expectation.
Call that expansion has the adverse seasonal impact of closing the Willis re on December 1st without that adjusted margins would've expanded 88 basis points also right in line with the forecast we provided in December .
Full year adjusted margin expansion was 123 basis points, excluding <unk>. It was up a 142 basis points and it's important not to forget that's on top of 420 basis points of margin adjusted margin expansion in 'twenty and 75 basis points in 19.
Absolutely incredible execution before during and as we emerge from the pandemic.
Moving on from 'twenty, one looking forward as the pandemic limitations continue to ease in 'twenty. Two we will naturally see some cost returning in areas such as travel entertainment and perhaps some other office consumables.
For mental whole year 'twenty two cost from these three areas could be as much as $25 million, but even then.
Full year spend on these categories would be below.
Pandemic levels showing that we're holding savings also we're back to making targeted investments to drive long term growth in 'twenty. Two we're planning for increases in marketing advertising consulting professional fees and certain it investments these costs combined with higher insurance premiums safer.
D&O and work comp with total around $35 million.
Like we said our December IR day, we should be able to absorb those costs and hold margins. If we post around 7% organic and organic is over 7% even show some margin expansion.
Then by 2023, we can be back to that pre pandemic.
That margin expansion might occur at a 4% or so organic level.
To be clear all of these comments are before the impact there.
There.
The acquisition of wireless rate on a pro forma basis, those margins can run a bit higher so math would say with nationally provide some lift to our consolidated brokerage segment margins in 'twenty two.
A couple of things to keep in mind as you build your quarterly models for our brokerage segment in 2022 first consider seasonality.
Due to our benefits business and now our larger reinsurance business first quarter seasonality. Our first quarter is our largest revenue and EBITDA quarter of the year and.
And second perhaps slightly more nuanced since we're not seeing price <unk> exposure increases in benefits and workers comp to the extent we are in other areas of P&C insurance first quarter organic might be a point or so below your full year pack simply due to the mix. So the math would suggest.
Second third and fourth quarters could post over your full year organic pack again, that's just a nuance to help you with your quarterly models.
Moving on to the risk management segment and the organic table at the bottom of page six you'll see that you'll see 13, 1% organic in the fourth quarter and full year organic in excess of 12% what a great re bounce in the depths of the pandemic and as Pat said, it's looking like revenue momentum continues into 'twenty two.
With full year organic growth revenue growth in the high single digits, which is really terrific given 'twenty two will naturally have more difficult compares in 'twenty one.
Moving to the risk management segment EBIT table on page seven.
Adjusted EBITDA margin of 18, 6% in the quarter and more than 19% for the full year, a fantastic result, and just like our brokerage segment, a nice step up from Paypal, sorry, pre pandemic levels of 17, 5% again that demonstrates our ability to maintain a portion of our pandemic periods.
Savings, even as we make some further investments in.
And technology investments.
Looking forward as you.
At our December IR day, we will continue to make investments in analytics and tools to enhance the client experience and drive better claim outcomes, but even with those holding margins close to that 19% is achievable for full year 'twenty tail.
Alright, let's turn to page eight to Corp, corporate segment table.
In total adjusted results two pennies better than the midpoint of our December IR day forecast, mostly as a result of strong clean energy earnings. We did have a couple of notable adjustments. This quarter first Willis re transaction related costs as discussed in footnote two or $22 million after tax.
Second as discussed in footnote three and similar to third quarter, we had noncash deferred tax adjustments related to international M&A earn outs, which is the most of it as well as some other small tax and legal settlement items together about $19 million after tax.
Now, let's shift to our CFO commentary document we posted on our.
Web site, starting with page three.
As for fourth quarter Youll see most of the brokerage and risk management items are close to our December IR day estimates also on that page. We are now providing our first look at items related to the brokerage and risk management segments, a couple of lines worth highlighting.
First FX the late 'twenty one in early 'twenty, two weakening of the U S dollar against our major currency is creating about a four point headwind to EPS next year.
Second integration costs, you'll read in footnote one the integration estimates provided here only reflect expense associated with the loss rate as Pat mentioned integration is well underway and we are still comfortable with our ultimate package of about $250 million of total cost for integration.
Alright, let's turn to page five of the CFO commentary the page addressing clean energy.
The purpose of this page is the highlight we are transitioning from over a decade of showing GAAP earnings to a six day period, where we harvest cash flows.
See in the Blue column that we reported 21 GAAP earnings of $97 4 million.
Nice step up up 39% over 'twenty, and we generated $40 million of net after tax cash flow. So also a nice step up from 20, but the real headline story here is in the pinkish column cash flows take a significant step up in 'twenty two it looks like we will be harvesting a 125 to 150 million.
A year of cash flows and perhaps even more in 'twenty three and beyond.
Now there is still a possibility of an extension in the law and we are well positioned to restart production if that happens, but if not we have over $1 billion of credit carry owners. If we use a $150 million a year, that's a seven year cash flow sweetener.
Looking to page six on the rollover revenue tangible.
The reinsurance acquisition is off to a solid start and we are encouraged with both its December results and early indications from the one one renewal season.
Looking like our pro forma revenue and EBITDA.
$745 million and $265 million, respectively are holding up nicely. So the reinsurance acquisition is off to a terrific start.
Alright.
The cash and capital management and future M&A at December 31 available cash on hand is about $300 million with strong operating cash flows expanded in 'twenty, two and potentially a nice bump in cash flow from our clean energy investments were extremely well positioned to fund future tuck in M&A using cash and debt over.
The next two years, we can do over $4 billion of M&A without using any stock.
You also see that our board of directors announced a <unk> <unk> per share increase to our quarterly dividend.
That would imply an annual payout of $2 <unk> per share that's a six 3% increase over 2021.
Finally, one calendar item.
We are planning on a regular mid quarter IR day from eight am 10 am central time on March 16th.
Again that will most likely be virtual during that we will allocate some time to socialize our planned migration to reporting adjusted GAAP EPS results, excluding the impact of noncash intangible asset amortization will discuss the detail of all the adjustments, including re presenting historical results on the.
A new basis.
Okay. That's it from my vantage point as CFO , we are extremely well positioned for another great year here in 'twenty two before I turn it back over to you Pat I'd like to thank the entire Gallagher team for a terrific quarter and fantastic year Pat.
Doug.
Operator, let's go to questions and answers please.
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One quick question.
Our first question is from Mike Zaremski of Wolfe Research. Please proceed with your question.
Hey, guys. This is actually Charlie on for Mike.
So organic growth in the back half of the year has been.
Outstanding and has been accelerating.
Pricing was positive it seems to be decelerating and GDP is decelerating as well.
Can you provide some color on what makes you comfortable with guiding us to organic growth at almost two times your historical level.
We think that the.
The rates are going to hold.
It's just that simple market falls out.
<unk> market holds the way it is it will see all kinds of reasons for it to continue as laid out in my in my prepared remarks, but beyond that.
You've got a situation where underwriters are not backing off from their need for rate.
We're seeing that every single day, we are into the renewals, obviously now deep into the first quarter.
And we're not we're not seen rate relief.
Any way shape or form along the lines of what I talked about in my remarks remarks, I still think Theres a lot of pent up exposure unit growth that's still to come we think theres inflation sitting there we think that there's a need for our benefit consulting.
Advice more and more we think that wholesaling markets are becoming tough in order to find placement. We think there are more.
Accelerators when it comes to that then there are maybe a slight half a point pull back and what the underwriters are asking foreign rate that far overshadows.
Got it that's great color.
And then on.
On M&A I guess.
I know you said the integration is going well.
<unk> transaction have any impact on M&A decisions this year or.
Is there any chance you don't spend your entire free cash flow.
Because of it.
It wasn't I said, we think we have $4 billion to spend over the next couple of years. So I think that's.
Almost $2 billion next year and a little over $2 billion in the final year. So we have plenty of free cash to fund acquisition our pipeline. It does get a little slower in the first quarter Theres people that push more to have something done by year and we have that happen every year, but we're pretty excited about what we're seeing in our pipeline right now.
Thank you.
Thanks, Charlie.
Okay.
Our next question is coming from Greg Peters of Raymond James. Please proceed with your question.
Good afternoon, everyone.
Sure.
No I can't do it Doug, but I'm wondering if you can say pre pandemic 10 times really fast pre pandemic creep and obviously I cant.
[laughter].
I'm just teasing.
So, let's let's start.
I had a question about the M&A and I was looking in the CFO commentary on page three and of course, Pat you always give us a view on term sheets outstanding et cetera.
Two part question.
When you give us a term sheet numbers the number of term sheets that are out there and then ultimately to close can you talk about how that ratio. The close rate has changed over the last two or three years.
And then secondly on page three of the supplement Doug you drop in <unk> give us the quarterly weighted average multiple of EBITDA for tuck in.
And it's definitely trending up so I'm just curious about your views there.
Okay, Great. Let me just let me take the first part of your question when we get to an actual term sheet, we're usually moving down, especially on our tuck ins, we're usually moving down a path, where we're going to do a deal.
And one of the things about our reputation is that we will close.
Having said that over the last two to three years. There is considerably more competition. So you could take a $5 million deal today, and if it's going to get spreadsheet it there'll be a dozen.
There are a dozen bids.
So we are really trying hard to make sure that all of our new partners are.
Are excited about what the future provides being part of Gallagher, which quite honestly, we think is substantially better and more exciting than our private equity competitors.
But that doesn't diminish the fact that there are good competitors and they are smart people and they are well funded.
So I don't have a number for you specifically I can't say Oh, yes, we closed 32% of the ones that we finally get to.
We don't keep the records that way I don't do that but anecdotally I will tell you that we should close more than half of the ones that we get to where we have a we have a signed term sheet where well.
It takes it back we should close 90% of the ones, where we have a signed term sheet.
10% will slip out of the net.
And where we're preparing term sheets, we should close about half of those.
In terms of a multiple Greg.
Yes, the multiple ticked up a little bit not as much as what our multiple has so theres still a terrific arbitrage there, but also you have to realize the growth rates that drive those multiples have gone up quite a bit too. So I think theres justification for higher multiples.
But if we're still buying in that.
To 10 range when it comes to tuck in acquisition.
It's a pretty good run rate versus our trading multiple of 15 16 17.
Got it yeah, I guess a follow up question.
It's been a rough start to the year for the market and for the insurance brokerage stocks and your stock is traded off a little bit.
And it feels like a times some are speculating that the.
First for the brokerage space is in the rearview mirror.
Yet the rhetoric from you Marsh and Brian Brown.
Our directly polar opposite seem to map out a pretty optimistic future.
So I guess I'm just trying to gauge what your perspective is on the market considering that the stock market certainly doesn't seem to appreciate what you guys are doing at this.
At this moment in time.
Greg This is Pat you've normally for 20 years, and there's never been a time in that period, where I've been as bullish as I am today.
Now everything everything is going our way so let me try not to spend 20 minutes to answer to your question here, but let's start with the fact that we have never been stronger vertical.
Vertical capabilities are absolutely critical data and analytics are absolutely critical when you take a look at the volumes that we now have that we can do the data and analytics around we can tell you whats happening.
By day with rates and renewals and what have you.
10 years ago, we flew blind totally on that customer asked why do I, even know I've got a good deal with the rate environment going like it is we can show them, what's happening to the rates by line by geography, and why they have a good deal and that type of question is getting asked right into the middle market.
And over 90% of the time when we compete we compete with a smaller competitor.
That's why these people are selling to private equity that's why that's why these these roll ups are working.
And I'm, telling you it's unbelievable the opportunity we have right now so I see this as the greatest buying opportunity in the last five years.
Yes.
Just in your answer and it was part of your comments you talked about the difficult risk bearing market.
Driving further rate.
And.
Listen you're looking at a global picture, so, but I look at reported results travelers was out with an 88% combined ratio Berkley just came out with an 80% combined ratio Tonight. It seems like the risk bearers are the results are beginning to improve.
So I guess it months of question what are we missing when you say, it's difficult risk bearing market.
Well, let's start with inflation.
You've done you've done all your actuarial work at a 2% inflation rate and now it's six Oh, yeah that was a blip on the radar I was going to be gone by now I guess, that's not going to happen.
Secondly, let's look at loss costs.
What does it cost to build a house today, we got it done for $200 a square foot a few years ago, certainly isn't that now and I could go on and on and on I mean, the level of the level the level of nuclear the number of nuclear settlements don't take too as I've been saying this now for years and I think it's more true than ever our underwriters are.
Underwriting Carters are very very smart and they've got incredible data and analytic skills, they know where theyre, making money in that 88% everywhere around the world every day, and they know where theyre not making money.
You walk in and start talking about a deal that you want a broker its something thats going to be substantially less than.
And they know that will get our deserve.
They're just not buying it.
I think Greg Theres also something ex cat.
As X reserve releases.
I think that and then the prospect of just inflation just of a reserve.
<unk> coming in.
10% more than what the what the original estimate was that's a huge difference on a combined ratio. So I think that the im not challenging the health of the insurance companies I think they've got their rates are where they think they need them right. Now I don't know if there is a there is a case that would say that they're too high I think case.
Say horse out that there are too low and I just don't see when the courts open up.
Youre going to see more and more.
Unfortunately, CASM losses or just the current picks while the best information I have right now are just too low.
I think there is not a case for cutting rates by any means.
There is a case for continued increase in rates.
Everything that we look at it they'll be interesting when the yellow books get filed but it's not this is not a hard market as it was in the <unk>.
It'll eighty's, where everything goes up you know that were accomplished flat through most of this adjustment where comp is now up.
His work comp comes up a little bit professional liability is going through the roof cyber is almost unbroken.
So you sit there and you look at this these carriers are looking line by line.
Geography by geography, and from our perspective daily placing accounts, we are not seeing them lose discipline.
Got it thanks for the answers and congratulations on the quarter and the year. Thanks, Greg.
Our next question comes from Juran Qunar of Jefferies. Please.
Please proceed with your question.
Thank you and good afternoon, Hi, Eric.
So my first question.
In the earnings release, there is comment that if the pace of economic recovery accelerates beyond your expectations you could see expenses increase.
More than the current estimate.
I, just wanted to confirm or pick at that a little bit.
Expenses may rise in that situation, but wouldn't organic revenue also accelerated in that case.
What I'm trying to get at margins don't don't get compressed with that right, but that's not a margin comment that's just.
Okay.
Okay.
And I.
I guess all else equal if the economy does accelerate beyond your expectations.
Margins would margins actually come in better than expected.
Well, we say that listen we think that there is a case that we can do better next year on organic then we have we did this year if the economy accelerates exposure units grow the pent up demand for goods and services increased.
Supply chains get back to normal Yup Youre your.
Your implication that question is right.
Okay.
And then in the CFO commentary page three.
Comment on full year margins in brokerage being approximately 34%.
They were at 34% in 'twenty, one right at 33 nine so.
There should still be some upside to that is that just a rounding issue.
Alright. Thanks first of all don't something 34 is pretty darn. Good I mean, when you look across the brokerage space, we're pretty proud of that margin and I tell you I haven't been here 18, plus years. It wasn't that way that that long ago. So you got to be pretty proud of that number compared to the industry second of all yes, 34%. The reason why we don't round. It even more is because we don't have a car.
It'll ball.
We also have FX adjustments that won't come true.
Change that number slightly and as with our international business over the next year, but what were saying right. There just like we said in the commentary at 7%, we've got a decent chance of holding those margins. We really think we do at 8%, we could see a little bit more over 8%, maybe a little more than that so I wouldn't read a rounded.
34% with all those factors as being an indicator that I'm that we're pegging exactly 33 nine like we have this year, but 34 integrated and sorry, three nine and then when you roll in the reinsurance operations, you could get a little bit more or less than that so I would say I would not read too terribly much into it.
Okay got it and I'm glad that that's confirmed.
Finally, any update on <unk>, the revenues and margin I think the initial guidance you offered for 'twenty two it's still based on the 2020 numbers kind of used as a placeholder.
Feel really good about the team we're in.
Onboard just over a little bit over a month almost two months now and as we said in our prepared remarks, the teams coming together extremely well.
With a good strong January one.
We bought $745 million of revenue and $265 million of EBIT and that's still looking good.
Okay. Thank you very much.
Sure.
Okay.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from David Martin Maiden of Evercore ISI. Please proceed with your question.
Thanks, Good afternoon.
David just that.
Good afternoon, just a question on.
On the brokerage organic in 2021% to 8% wondering if you could just walk through the different drivers.
Behind that in terms of exposure pricing.
Net new business.
How much those contributed to that 8%.
How you see those elements shaping up in 2022 outlook.
Okay. So first let's break that down there's the components.
New lost.
Opt in when customers opt in for more coverages opt out when customers opt out because they want to control their budget for insurance bands and then you've got the impact of rate.
The fact is is that we believe where if you break that 8% down.
Say that a third of it comes because we're just selling more business than we have before versus what we're losing.
I think theres, probably a third of that number that's coming from exposure and a third of it is coming from rate. So you've kind of got all three of them there.
It's interesting on a multi multiyear impact is that customers can come.
Come up with we can help our customers come up with creative ways to mitigate the rate increases as their exposures grow which we see is happening more and more over the next couple of years, it's harder to opt out of exposures. If you add 20 trucks and now you got to ensure 22 of them. It can't you.
You can't just not insure two trucks.
If you have a 20% increase in premiums maybe to take a higher deductible or you take less limits on it and you can kind of opt out of the rate increase but as we see exposure units fueling that organic growth going forward top that off with rate increases that mixed up.
Think would toggle probably more to exposure.
More than net new wins.
And maybe less impact from rate as we continue to grow as you pushed 10% of organic growth, it's going to be exposure unit driven.
Awesome, that's great color thanks for that.
And I guess, maybe just also Doug you mentioned the cadence.
Maybe the first quarter being a little light.
I don't want to get too.
You know too granular here.
It's a long year, but.
It sounded like that was really driven by employee benefits and workers' comp and just seasonality there.
But when I think about the 7% organic in employee benefits that seems pretty strong definitely better than it was in December .
Are you expecting a deceleration off of that up seven.
And Thats partially.
Why why maybe the first quarter would be a little bit lower than the full year or is it is it more workers comp driven.
I actually said that if you pick I'm, just saying you have to make the pack if youre picking 8% next year.
It's about a point lower than the first quarter that 7% is probably the number that you get to 6%.
I don't think that it would have that big of an impact on yes. So what I said in my comments is about one point lower than the full year average so.
That's.
That's what I would say, it's just cautioning that that business doesn't grow as fast as our P&C right now.
Yes.
Okay that makes sense.
And then if I could just sneak one more in.
On the $4 billion of dry powder for M&A you guys have over the next two years.
Without without issuing stock and Thats a lot it's a lot for tuck in.
You mentioned earlier competition is also increasing.
I guess I'm wondering if at some point.
You would consider allocating some capital return through share repurchases.
Is that something Thats come up at all is something that you think you might institute over the next year or two.
Absolutely that's something if we have excess capital, we'll want to make sure that we maintain our solid investment grade rating.
Alright, and then we'll absolutely look at share repurchases and dividends.
Great. Thank you.
Thanks, David.
Okay.
Our next question is from Elyse Greenspan of Wells Fargo. Please proceed with your question.
Hi, Thanks, Good evening My first question.
Is it related to clean energy So Doug I think you said that there was a chance.
That's a boss could be extended I just wanted to get a sense of the timing you thought there and then I thought in the past you guys had perhaps implied.
You continue to be able to generate credits you would not go the route of rolling out some kind of ex amortization EPS.
It is now independent event, so, meaning if you're able to generate more credits on the clean energy investments.
You roll out some.
EPS estimate that.
Cash in nature and backs out intangibles among other items.
Don't see us backing off of going towards that metric, regardless of what happens with an extension or not so in answer to your question. We're going that route we've done a lot of work on it we think it's consistent with what other brokers are doing and so we're pretty comfortable whats going that route what happens with an extension I think it's going to be in the spring we think that the Congress is.
Has woken up to the fact that this technology provides a terrific benefit to our environment. So we hope that they see their way for free.
<unk> cleared.
A spot in a bill to include it.
So if that does happen from.
Cash from our credit generating perspective.
Perhaps beyond chat gentleman credits at a cadence that you were generating in 2021, just depending upon when you can get back on track with that.
Yes, you kind of broke up a little bit on that question can you just say it again Elyse Si.
I was saying if you are able to regenerate credits from your clean energy investments. This year would you expect it to be at the same cadence that we saw in 2021, Yeah, I think sorry lesson, we posted $97 million.
After tax earnings on it the pic would be $80 million more not 40, not 50, but there will be some plants that won't start up they were planning to decommission. It made a whole location as being decommissioned so I wouldn't see it as being as high.
As it was in <unk>.
Had a terrific year, one of our best years ever and.
I, just don't see that happening again.
If it restarts.
Clearly you would have from the restart detail.
But if we don't get them.
If it's retroactive these have been idled theyre sitting there it's not like we can go back and increased credits in January for our <unk>.
In March if it doesn't get passed until April .
Okay, and then with Willis re M&A. She thought that you guys put it in with the Q4 bucket.
So I'm assuming based on the commentary is the embedded revenue from Louis We trust that that 745, and then if there is growth off of that that would be additive to the M&A build.
And then im assuming on a go forward basis, you would just give us the revenue from Willis suite just on your quarterly calls like you did today, yes.
I think let me make sure I can restate if you go to page six of the CFO commentary, we provided a grid that shows the fourth quarter acquisition activity.
I understand your question there how much of that line adds up.
And then subtract out the 745 of the $745 in that line.
Including what other acquisitions.
We did during the fourth quarter.
Okay.
For the vast majority of it.
I'd have to I'd have to do that while we're on the phone here.
No Thats fine Thats helpful.
And then one last one on margin.
Hey, Mark.
Let me restate that we have a separate line for the reinsurance acquisition I just didn't have my glasses on here. So we have other fourth quarter acquisition and the line above it so take a look at that.
Okay, Alright, Thank you and then.
The margin guide.
You could see some expansion above 7%.
I guess that was unchanged.
From December right. So we should expect if youre going to get to around 8% or so organic this coming year in brokerage, we should expect a modest level of margin expansion correct. When you take all of your expense commentary throughout the call into account.
Yes that would be what you would assume.
Okay. Thank you alright, thanks Louise.
Our next question is from Greg Peters of Raymond James. Please proceed with your question.
Great. Thanks for allowing me to ask a follow up.
I wanted to Doug.
Spend a minute and ask about your supplement and contingent line.
In the brokerage business.
If the profitability of the carriers starts to improve.
When we expect supplements and contingents to also grow.
Maybe a little bit faster than just the base organic that youre expecting or.
Maybe more broadly just what are the drivers of growth in supplements our contingents outside of acquisitions. We answered your question is yes.
The drivers very simple profitability on contingents.
And revenue growth premium growth on supplemental.
Yes, both of those should be impacted nicely by.
Inflation growing premiums and profitability.
And then also the added value that we bring through our our smart market through our advantaged products.
We really can help match our customers need to that the carriers appetite harassed we're getting continued momentum on that Greg you've been around a lot and so.
We're continuing to add value in the relationship with our carriers and they recognize it so so.
Your statement there is right it should continue to grow and as profit.
Business becomes more should all benefit from that.
I remember I remember this is dating me, but I remember when you started smart market. So.
I guess I guess.
Since you brought it up.
Can you give us an update of how that business looks today versus where it was a year ago or two years ago.
Whether it's in terms of number of our clients the amount of.
Premium that it's accounting for whatever metrics you are using.
Well first of all I can do it great.
The.
Proof has been in the pudding with Smart Maher you were there when we started it and to be perfectly blunt there was some skepticism.
All kinds of reasons around whether or not.
Data and analytics being sold to insurance companies was really worth it. Okay. That question has been answered is very well accepted now being utilized in rps being utilized across our Gallagher global brokerage operation.
Including locations outside the United States, Canada, the UK et cetera, So it's getting very broad receptors.
Across more than probably 15 to 20 carriers today.
Think about when we think back to our IR days that we talked about the aerospace mostly about our.
Initially about our U S business one of the things that we've done in our U S business and in terms of carrier relations in terms of R. R.
Our core 360 platform.
Use of offshore centres of excellence and then how we're bringing that to Canada, Australia, New Zealand the U K retail now into some of the other retail locations as we take minority positions, perhaps in Europe . This is an example of how our seed planted and developed here in the U S can be spread around the world and vice versa.
Techniques around the world that we bring back to the U S. So Greg Youre right.
So this is something we are proving out and rolling out around the world and that's why when we talk about retail around the world. It all looks the same with different nuances by country and it's been.
Very very good for our people to tie closer to the insurance companies and we're generating about $25 million.
Income from that.
So it's been a win win for everybody.
Great. Thank you. Thank you for the color there I guess the last question I would have.
Doug.
Used your quote before about <unk>.
Reference to margins I think you previously had said on our conference calls will trees don't grow to the moon.
So.
You guys have a 34%.
<unk>.
EBITDA margin in your brokerage business.
Hum.
When do we begin to top out I mean everyone's reporting margin expansion at some point.
You would think that.
There might be some downward pressure on fees or commissions or something that might.
Cause downward pressure on margins.
Well I think there was a difference between non discretionary margin expansion and discretionary margin contraction.
Think that.
Scale has its advantages there are limits to scale in all of the product of organic I think call. It would be very happy if we could somehow post 9% organic growth for the rest of our lives and haps incremental margins because that's a pretty good story.
Hi, Justin.
It's not about.
Plus a tuck in margin strategy.
Acquisition strategy, where you're right they don't grow to the Moon and more importantly, what is the client demands from us that they would.
Requires to continue to make investments.
It's not there and 100% yet, but our clients are becoming more demanding and in order for us to compete and post that stellar organic growth, we need to make investments in the business. So I don't have an answer for you.
Yeah.
Well I like the idea of putting 9% organic and margin expansion in my model for the next five years or so go get them Tiger.
Hi.
Good luck.
[laughter].
Our next question is from Mark Hughes of true. It. Please proceed with your question.
Yes. Thank you. Good afternoon, just a quick question on the risk management business.
What's your latest view on kind of broader outsourcing trend among the major P&C player.
Potential shifts to using third parties like your risk management operation to do that in a more comprehensive way and just a quick update would be interesting. Thank you.
Well thanks for the question Mark.
I think youre going to see a continued move in that direction, it's been going on now for almost a decade.
I don't think its finished secret that we've been at the forefront of that.
Starting literally before the Chubb and Ace combination.
We were doing work on behalf of Chubb.
Their risk management portfolio prior to that in fact, we were doing all of the outsource service for arch.
We began the program of growth in the United States and right now.
The outsourced work that we do for insurance companies as it is a very big part of Gallagher Bassett its revenues and I would say, it's a is probably our largest.
Opportunity looking at the looking at the future over the next five to 10 years.
So I'm very substantial companies I can't name them you understand that that are seriously looking at this and quite honestly. It makes a heck of a lot of sense.
We've got trading partners that when I mentioned to them. The Gallagher Bassett pays more claims than you do and again I can't mention names Doug I know you don't have you don't.
Actually we do and I'll bet, you, we invest twice as much in data and analytics and in a river systems and you do know well will actually stay at <unk> to show you that.
With that ends up driving is the ability we believe to prove that our outcomes are superior.
And those superior outcomes come from all kinds of advantages both of scale, but also the expertise.
And once you start talking to management these insurance companies.
The fact that you've got pent up return on investment you.
<unk> got our Roe opportunities.
And we can do that.
I honestly believe that there will come a day when people ask why did insurance companies pay their own claims.
Very good thank you.
Thanks Mark.
Our final question comes from Daragh Quinn of <unk>. Please proceed with your question.
Good afternoon. Thank you.
Your comp ratio was quite good in the quarter, which kind of benefit from some of the actions you've taken in 2020, but I was hoping that you could kind of talk about wage inflation is impacting that number and just curious.
The impact is more pronounced among <unk>.
Produces producers that you churn at higher versus the support staff.
Yeah.
Well one of the things I'm very proud of that because we're one of the probably the only significant.
Broker Theres still is very comfortable paying our producers on a formula that pays him a percentage of their book.
And that's very competitive with the local brokerage community. So think about it this way where do you want to sell for them what platform a platform that gives you the kind of data and analytics that we've got that as the relationships that we've got that as the global reach that we've got.
Or would you like to do it from the Jones agency in Alsip, Illinois Hope there isn't one there.
But the fact is.
We're happy to have you come aboard.
Pay you a percentage so really.
A big part of our benefits in comp expense for producers to self generated and self regulated.
And our middle office layer in our back office layer as you know.
We've made substantial investments and standardizing our processes and using our offshore centers of excellence as a result of that 17 years ago. We made a decision that that we did raise our quality and reduce our cost and it's actually helping us a little bit of an inflation hedge.
I'll tell you we have been.
Taking care of our employees, we gave a sizeable raised Paul this year, we gave raises even in the depths of the <unk>.
Pandemic.
Bonuses, we've been fair people earn them they earn their raises the reasons are not as a result of.
Because we feel like we've got a hold our people our culture holds our people the reasons what recognize their contribution to what we've been doing.
So it's Jimmy inside of it the best as you can't have a low cost without high quality and we've worked for years on raising our quality and that's reducing our costs. It's also making our folks more effective we have 20000 people that do service plus another 6000 in India to get up every day and want to do a great job for our clients. So we pay.
I'm well.
Our attrition is up our retention is as good today as it was pre pandemic.
So I think that our workforce is well well positioned.
Right now so.
I'm proud of our workforce and we've recognized our workforce and I think they deserve to be recognized upon that and despite that our volumes are helping us on our scale, helping us our technologies are helping us control, perhaps the numbers, but those people that are here get paid very well well also you hear now everywhere agile work agile work work from home.
We've been agile and how we've worked with our workforce for the last 25 years. So.
Pre pandemic.
Probably 50% of Gallagher Bassett its entire field force was at home.
So this is not new territory for us we listened to the employees, we want people to stick around.
As Doug said, our retention rates and our turnover rates are no different than they were pre pandemic.
So the great resignation Hasnt hit Gallagher yet.
Okay, that's really really helpful. Thank you.
Just going back to your expectations on the brokerage organic growth of 8% plus.
Are you embedding any kind of slowdown for potential rate hikes, or maybe kind of beating supply chain constraints or maybe labor constraints.
I know you sounded very confident about achieving that but kind of wanted to get a sense of what could derail the percent plus organic growth.
Ted.
I'm, sorry, I'm too much of an optimist, but I look at the.
The stimulus bills coming out of Washington D. C. The kind of money that's going to flow into infrastructure every contractor in our book of business is going to be loaded up with work.
Every single personal lines account all the way through small commercial to large commercial has got significant increases that they need in their in the cost of their <unk>.
Property portfolio Payrolls are up as you mentioned earlier Derek from from.
Just the whole employment situation and all of that.
It's not an industry that I can think of that benefits more than the insurance brokerage business from a nice little touch of inflation hold all tickets.
Great. Thank you for all the answers.
Thanks Derek.
Thanks, everybody I appreciate you being here today, thanks for joining us.
As you all know we delivered an excellent fourth quarter and full year 2021, I'd like to thank our colleagues around the globe for such an outstanding year. Our results are a direct reflection of their efforts. We look forward to speaking with you again at our March Investor meeting and have a good evening. Thank you very much.
This does conclude today's conference call you may disconnect. Your lines at this time. Thank you for your participation and have a great evening.
Okay.