Q1 2022 Arthur J Gallagher & Co Earnings Call
And regarding these measures please refer to the earnings release and other materials in the Investor Relations section of the company's website.
It is now my pleasure to introduce J, Patrick Gallagher, Chairman, President and CEO of Arthur J Gallagher <unk> company. Mr. Gallagher you may begin.
Thank you good afternoon, everyone and thank you for joining us for our first quarter 2022 earnings call.
On the call for you today is Doug Howell, our Chief financial Officer, as well as the heads of our operating divisions.
We had a fantastic start to the year.
For the first quarter, our combined brokerage and risk management segments posted 30% growth in revenue more than 10% organic growth.
Net earnings growth of 28% adjusted EBITDA growth of 34% and adjusted earnings per share growth of 26%.
And we were named a world's most ethical company for the 11th year in a row and outstanding achievement on its own and a testament to our nearly 40000 professionals around the globe.
As you can tell I'm extremely proud of how the team performed during the quarter.
So let me give you some more detail on our first quarter brokerage segment performance during the quarter reported revenue growth was 32% of that nine 6% was organic which is just excellent.
Rollover revenues of $380 million were pretty consistent with our March IR day expectations, and mostly driven by the December reinsurance brokerage acquisition.
Doug will have some further comments on rollover revenues in his prepared remarks.
That earnings growth was 27% adjusted EBITDA growth was 35% and we expanded our adjusted EBITDA margin by about 50 basis points and outstanding all round quarter for the brokerage team.
Let me walk you around the world and break down the nine 6% organic starting with our PC operations first our domestic retail business posted 11% organic driven by terrific new business strong retention and continued renewal premium increases.
Placement services, our domestic wholesale operations posted organic of 10%. This includes more than 20% organic and open brokerage and 6% organic in our MGA programs and binding businesses.
New business was better than first quarter 'twenty, one levels and retention was consistent with prior year.
Outside the U S. Our U K business posted organic of 14%.
Within retail fantastic new business and continued renewal premium increases helped drive 10% organic and all.
London specialty business, including our legacy Gallagher re operations saw 17% organic.
Australia, and New Zealand combined organic was nearly 10% driven by strong new business stable retention and higher renewal premium increases.
And finally, Canada was up more than 12% organically and continues to benefit from renewal premium increases in great new business production.
Moving to our employee benefit brokerage and consulting business first quarter organic was up over 7% more than a point better than our March IR day expectation, our core health and welfare organic was in line with our expectations of 5% and the upside in the quarter was driven by our international operations and our <unk>.
<unk> consulting pharmacy benefits and various other life insurance product sales, so, 7% organic and benefits, 11% organic within our PC operations.
Excellent quarter.
Next I would like to make a few comments on the PC market.
Overall global first quarter renewal premium increases were 8% consistent with the fourth quarter of 'twenty. One after controlling for line of coverage mixed differences recall that renewal premium change includes both rate and exposure. So let me break that down around the world.
About 10% in U S retail, including double digit increases in property professional liability and casualty somewhat offset by workers' comp and commercial auto.
In Canada, New Zealand renewal premiums were up about eight 5% with professional liability seeing the strongest increases in Australia, and UK retail renewal premiums were up mid single digits driven by increases in casualty and package.
Within Rps wholesale open brokerage premium increases were up 11% and binding operations were up 6% and in our London specialty business, we saw first quarter rate increases.
Seven 5%.
Moving to reinsurance as we noted in January are one one renewals showed price increases that varied by geography, and client loss experience and while rate tended to be based on client specific attributes and loss history, even loss free programs faced modest rate increase.
Our April Gallagher re first review report is more focused on Japanese renewals, which tend to dominate the April one renewal season, we saw pricing increases in property related classes, while casualty pricing was flattish despite inflation being a key topic of discussion.
You can access our April insurance reinsurance market report on our website for more information.
So whether retail wholesale or reinsurance premiums are still increasing almost everywhere.
Looking forward, we expect our mix shift away from workers' compensation renewals in Q1 for U S property cat renewals in Q2 will lead to premium increases in second quarter very similar to full year 2021.
And we've seen these difficult PC market conditions, continuing throughout the remainder of this year.
<unk> will likely continue their cautious underwriting stance due to rising loss costs and increases in reinsurance pricing. This comes at a time when the conflict in Ukraine is elevating geopolitical uncertainty courts are reopening and global monetary policy is tightening so from our seat it looks like carriers will continue to push for rate.
And don't see a dramatic change in the near term.
Moving to our employee benefit brokerage and consulting business I see domestic labor market conditions in 'twenty two working in our favor.
There are more than 11 million job openings in the U S. That's 5 million more jobs available then people unemployed and looking for work and.
And that imbalance lays the groundwork for robust demand for our HR and benefits consulting services as employers look to attract retain and motivate their workforce.
So we finished first quarter with organic of nine 6% given our first quarter result in the current insurance market conditions as we sit here today, we think 'twenty two organic should end up even better than 'twenty one.
Moving on to mergers and acquisitions, starting with some comments on our recent reinsurance acquisition.
Integration is progressing at a fast pace and is ahead of schedule alongside the speed that we are executing comes the pull forward of some of the future integration costs, which Doug will cover in his remarks.
Also we had a strong first quarter with the legacy Gallagher re team growing 30% and our new reinsurance operations delivering towards $340 million of revenue and over $170 million in EBITDAX.
In our reinsurance colleagues are melding together extremely well so it continues to be a really good story.
During the first quarter, we completed five new tuck in brokerage mergers representing about $32 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 I look at our tuck in merger and acquisition pipeline, we have around 40 term sheets signed or being prepared representing nearly $250 million of annualized revenue.
We know not all of these will close however, we believe we will get our fair share.
Next I'd like to move to our risk management segment Gallagher Bassett.
First quarter organic growth was 15, 2% better than our IR day expectation due to a strong March some new business wins and higher than expected Covid claims adjusted EBITDAX margin was 17, 3% and would have been 18, 5%, but we had it litigation settlement late in the quarter.
Moving forward, we think the remaining 22 quarterly margins will be closer to a 19% the expectation.
We again saw increases in new arising claims across general liability property and to a lesser extent core workers' compensation during the quarter.
New arising Covid claims were well above what we saw during the fourth quarter. However, core claim counts, which tend to have a greater impact on our results still have room to rebound fully to pre COVID-19 levels.
Looking forward, we see ample opportunity for organic revenue growth from existing clients growing claim counts and new business and expect organic to be around 10% per quarter for the remainder of the year.
And let me finish with some thoughts on our bedrock culture.
I believe our outstanding financial results are made possible because we're able to act as one company United by one set of values the Gallagher way.
As I mentioned earlier, we were once again named a world's most ethical company by Ethisphere.
Truly global effort that reflects our colleagues care and integrity to each other and our clients every day I hear stories of our colleagues working together as one team to give our clients exactly what they need all around the world.
That collaboration as possible because we genuinely want to deliver the best possible service at all times when one team wins, we all win.
And then there is the way our people give back to their communities in March we announced a special matching donation to provide humanitarian relief to the people of Ukraine.
Thanks to the generosity of Mike Gallagher colleagues were able to donate over $1 million for necessities like food water supplies in first aid.
I'm proud to stand together with my Gallagher colleagues impacting communities around the world and that is the Gallagher way.
Okay, I'll stop now and turn it over to Doug Doug.
Thanks, Pat and Hello, everyone as Pat said, a fantastic first quarter and start to the year.
I'll get to my typical comments on organic margins clean energy cash et cetera, and also do a financial recap of the Willis re acquisition.
But first a modeling heads up regarding rollover revenues this quarter.
We typically don't comment on consensus estimates, but this quarter. It looks like there is a large variance in brokerage segment rollover revenues relative to the guidance numbers, we provided within our CFO commentary document during our March 16th IR day.
When do we get to page six of today's CFO commentary document youll.
You'll see we've added a table that shows consensus overstates rollover revenues by approximately $40 million versus the number we provided in March that has an impact of overstating consensus EPS by <unk> <unk>.
I hope you take us into consideration as you analyze our performance relative to consensus and to your model.
With that housekeeping behind us, let's shift to the earnings release to the brokerage segment organic table on page three all in brokerage organic of nine 6%. We had a really strong finish to the quarter. Some nice new business wins by the P&C team and a terrific finish by our benefits consulting teams, you'll also see strong growth in both.
Both contingent and supplemental.
In Ukraine, Russia conflicts impact was small about $5 million of revenue, which is about a one penny hit this quarter looking forward. It's looking like it's small so maybe another $5 million revenue impacts spread over the next three quarters.
Given our strong start and given our current favorable outlook of the market as Pat discussed, we could be pushing nicely towards upper 8% to 9% full year organic growth here in 'twenty two.
Next let's turn to page page five to the brokerage segment adjusted EBITDA margin table.
<unk> all in adjusted margin expansion FERC first quarter was 49 basis points right in line with our March IR day expectation.
Recall that expansion includes a favorable seasonal impact from reinsurance role and offset in part by a return of expenses that we come out of the pandemic and it also has a little more incentive compensation, given our stronger first quarter organic growth and full year expectations.
Repeating what we said during March we are well positioned to deliver around 10 to 20 basis points of full year adjusted margin expansion, but remember as we discussed here in 'twenty, two and there'll be margin change volatility quarter to quarter. That's due to expenses return as we come out of the pandemic and the rolling impact of acquired reinsurance revenues.
So let me walk through what we said in March 50 basis points of expansion here in the first quarter, then expecting second and third quarter margins to each be down around 100 basis points, but then that flips and we expect fourth quarter margins to be up around 100 basis points.
The math given that our seasonally larger in the first quarter gets us back to that 10 to 20 basis points of full year margin expansion.
Looking way out towards 23 that quarterly margins change volatility should go away with the pandemic behind us in reinsurance fully on our books.
Okay, let's move on to the risk management segment and the organic table on the bottom of page five.
Youll see in 15, 2% organic in the first quarter, that's just terrific by the team.
And with continued strong new business and rebounding claim counts, it's looking like organic revenue growth of about 10% each quarter for the rest of 'twenty two.
On the next page Youll see that our risk management segment posted adjusted EBITDA margin of 17, 3% that.
That was compressed by about 120 basis points due to an unusual late quarter litigation settlement as Pat said moving forward, we would expect margins for the remainder of 'twenty two to be closer to 19%.
Moving to page seven of the earnings release in the corporate segment shortcut table. Most adjusted first quarter items were in line with our March IR day estimates within the corporate line. We did also benefit from an FX remeasurement gain and a larger tax benefit related to employee stock option exercises given the strong performance.
<unk> of our stock late in the quarter.
You also see a couple of non-GAAP adjustments, the first relates to transaction costs and professional fees associated with buying <unk> and the second was a state tax benefit related to the revaluation of our deferred income tax balances.
Alright, let's now go to the CFO commentary document.
Page three has our typical brokerage and risk management modeling helpers.
We've updated our outlook for integration I'll get to that tomorrow in a minute we've updated FX and you will see a slight tick up in our expected brokerage segment tax rate call. It a half a percentage point and.
In addition, the amortization lines in both brokerage and risk management are now highlighted in yellow. This means the item is now being treated as a non-GAAP adjustment.
If you missed our March IR day, we did a vignette on how this change and how we are on this change in how we're reporting adjusted EPS. This is the first quarter reporting under that revised method.
On page four of the CFO commentary, that's our corporate segment outlook, you'll see there is no change in our outlook for second third and fourth quarters.
When you turn to page five to clean energy. The purpose of this pages to highlight that we have over $1 billion of credit carryforwards, and we are now in a cash harvesting era of these investments.
GAAP earnings anymore, other than that a little bit of overhead expense, but rather now substantial cash flows.
You'll see in the pinkish column that the 22 cash flow increase should be substantial.
We should be able to harvest $125 million to $150 million a year of cash flows and perhaps more in 'twenty three and beyond.
That rate of really nice seven year cash flow sweetener and there still is a possibility of an extension in the law. So we remain well positioned to restart production if that happens.
Okay flipping to page six of the CFO commentary document top table is the rollover revenue table recall that we update that thus each earnings release day and also.
Each quarter during our late quarter IR meetings.
The next box highlighted in yellow is the math behind the <unk> impact of consensus versus our March guidance that I touched on in my opening.
At the bottom table as an update our December reinsurance acquisition.
Revenue this quarter was $337 million and EBIT was $172 million.
The very small difference to the numbers we provided during our March IR day reflects two items first the quarterly timing related to further refinement in our ASC 606 accounting for both revenue and expense and second some further movement in FX rates.
In the end if you go all the way back to our original August 'twenty. One projections. There is very little change to our first year of ownership expectations other than a small impact from Russia, Ukraine and FX.
As for integration. The good news is that our original estimate of around a total of $250 million for integration charges.
Through the end of 2024, four is holding close to even better news is that we're making progress at a faster pace than we originally thought.
Integration efforts around people real estate back office transition services et cetera are targeted to be mostly done by late 'twenty two first.
<unk> mid to late 'twenty three as originally planned when it comes to technology rebuilds. We think most of it will be done by the end of 'twenty three are early 'twenty four.
So what that means is.
Is that we will see integration costs lumped more into 'twenty, two and 'twenty three than spreading deep into 24, you'll see the bump up of R. 22 quarterly integration estimates back on page three of the CFO commentary, but it's important to remember it isn't changing our internal view so that continues to be a really good story.
As for cash capital management and future M&A at March 31 available cash on hand was about $450 million and no outstanding borrowings on our line of credit with strong operating cash flow is expected in 'twenty, two and 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.
We continue to see our M&A capacity of more than $4 billion through the end of 'twenty three without using any stock.
So those are my comments, we're off to a great start in 'twenty two from my vantage point as CFO , we are positioned for another great year, a huge thank you to the entire Gallagher team for another terrific quarter back to you Pat.
Thank you Doug.
Daryl I think we're ready to open up for questions. Please.
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Our first questions come from the line of Paul Newsome with Piper Sandler. Please proceed with your questions.
Hi, good morning, Congratulations on good afternoon pardon me.
Congratulations on the quarter.
Paul.
I was going to ask about.
The.
The guidance for organic growth.
The deceleration piece.
Maybe you could talk about sort of the factors.
Go into what might be decelerating.
Prospectively.
Basis attending this afternoon.
Business.
Well listen I think we posted 96 this quarter and I think that we're guiding operate to 9% I wouldn't call that a deceleration I think that there is a reality looking towards where we were in third and fourth quarter as the compares get a little more difficult to have but I don't know if I'd use the word deceleration, but I think it's pretty close.
In fact, Paul we looked at the stats before this call and over the last eight quarters.
<unk> rates across our book, including I should add.
Yeah.
Exposure units.
Flat around eight 5% to 9% so I mean, it varies up to nine nine and a half it comes on it but.
I would say any kind of a wholesale drop off is not is not what we're seeing to doug's point.
My second question.
With interest rates.
We're finally seeing some rising interest rates.
Just wondering what your thoughts are on how that effects.
Your earnings as.
As well as frankly, M&A I'm wondering if we're seeing any.
Change in the competitive environment for any interest rate changes as well so I guess speaking of essentially two questions.
Brian Let me take the investment income for our.
Fiduciary funds and we keep on hand, we would think that a one point rise in interest rates.
Would be about another $40 million a year of investment income versus what we've been showing so far.
That might tick up a little bit more as we get reinsurance completely rolled into our books.
In terms of.
What that means in terms of other pressures inside of our organization. We're just not all that sensitive to interest rates internally.
And our.
Our operating model, but we do know Paul I mean, let's face it.
A lot of the competition from our.
Private equity competitors for acquisitions.
It's been driven by free money.
And if they got to start paying for it.
I think that bodes well for us.
That makes sense, but you haven't seen that yet I assume it's too soon.
Oh gosh, no we haven't seen.
We haven't seen anything.
Great. Thanks, guys I appreciate the help thanks Paul.
Thank you. Our next question is coming from the line of Mark Hughes with <unk>. Please proceed with your question.
<unk>.
Yes, Hello, good afternoon.
Did you give the margin in brokerage if you back out.
I suppose you've given input do you have that handy.
I can take it out here for Ya out here in a second.
We've got it at the table somewhere Mark do you have another question.
Yes.
Pat.
You talked about.
Risk management being helped by an uptick in GL property workers comp claims anything you're seeing either GL or comp that.
Fluids has your view of.
What's going to happen in terms of the cycle.
Courts are opening and Youre seeing a pickup in GL does that tell.
Tell you anything.
There's two things I'd comment on Mark really want one is it's been very interesting hard market and as you've known as you know looking over the past what is now almost four years.
Copper has moved.
<unk> has not been a big rate driver up and it's not coming down so it's been an interesting line.
And as the economy becomes more robust.
And frankly, when we pick up when we start to fill some of those 11 million jobs I think the natural increase in claim activity is going to really benefit Gallagher Bassett clearly can track back that when our economy is humming.
It's just a natural outcome you don't like to see people get hurt, but we have more claim volume. That's number one number two what I continue to be astounded by and I'm sure everybody on this call reads. It every week as well when I look at our social inflation around toward it's incredible.
So I think what Youre seeing is number one case settlements at levels that never any of US would have predicted but also what that does is it drives our clients to be much more cautious and concerned about claims that frankly in the past they might've said.
Page 50 grams move on or let's not settled that it doesn't look like that big a deal.
Not to get anecdotal on you all but it is late in the evening and you probably saw the.
The settlement last week for some Guy got 450000 Bucks because this company through a surprise party for them.
I.
I keep asking the folks for a surprise party.
So it's just.
So that I do think is beneficial to GB in GB continues to invest.
And I think capable of proving that if in fact, you use our services with all that we bring to the table.
Our outcomes are better.
So all of a sudden if you're used to getting a lot of claims but one of them every five years tends to pop and now youre looking at igo manto minute, what's happening I'm starting to get to year three year.
Now who pays those claims makes a bigger and bigger difference and I think that bodes well for the long term.
One more.
I can give you.
If you want to follow up with that and then I'll come back to that.
Okay I was just going to add on the June one.
Reinsurance renewals what kind of rate increases are you seeing how much dislocation there is in Kent property.
Really.
Not that that much dislocation on the reinsurance side.
And I would say back to my kind of my prepared remarks, depending on the carrier depending on the carriers experience.
That's what's driving that's what's driving the renewals.
Okay.
And Doug good yeah on the margin Mark.
Somewhere around high 37% margins in the brokerage business without <unk> and you know there is some variability around that because of allocations between the units right.
Second of all.
Just think in the context of margin as you are looking at what's changed since last year.
This quarter I know that we're ahead on our bonus accrual relative to where we were last year, because we started off with.
Considerably better organic growth so that has a little bit of a margin compression impact, but I would consider that timing. We are in the first quarter and recall, we give our raises out midyear.
So raise impact rolling in versus first quarter as organic develops throughout the year you grow into your raises.
And then when it comes back to cost returning into that business. So if you break it down let's say that expenses year over year on an apples to apples basis are $25 million up $10 million of that bonus you probably can call. It.
$6 million as raise impact and then you get down to.
About $8 million left over that's probably a.
Take a third of that.
And call it increased professional fees that were spending a third of that would be <unk>.
Travel and a third of that would be client entertainment. So when you look at the pieces of being up let's say $25 million of expenses year over year. The way we look at it.
Call. It 10 of it timing and 15 are spread between raising debt.
We'll work ourselves into for the year and then the other piece of it TNA Entertainment and some professional fees does that help.
Yes, I appreciate the detail.
Yes, let me throw into as it were.
I went back why youre doing that I looked at him and.
First quarter of 2019.
Posted 35, and this is where the supplement really helps that we promise not to CFO commentary, but.
Five year supplement we put out there we posted 35, 6%.
EBITDA margin in first quarter of <unk> 19 in this quarter in the brokerage segment were at 39, eight or up 420 basis points if.
If we hit our target this year of being up 10% to 20 basis points for a full year.
Would be up 540 basis points over 2019.
So that's a 180 basis points of margin expansion a year over the last three years each year of 180 basis points.
And truthfully, our reinsurance business is rolling and while seasonally a little better this quarter. When you put full year and it's not all that different than our combined brokerage operation margins. So the margin story is that we believe is pretty darn good and when we're running.
Somewhere around.
34, 34 points of margin for full year, if we hit our targets. This year, that's that's pretty darn good versus the 28 and change in 2019.
I appreciate it.
Thanks Mark.
Thank you our next questions come from the line of Greg Peters with Raymond James. Please proceed with your questions.
Hey, Greg Good afternoon, Hey, good afternoon, everyone.
I can say listening to your comments Pat I'm sure a number of US myself included would take a piece of the action on your surprise party.
Keep this in mind.
Hey.
I guess from a from a macro perspective I'm going to comment.
Paul tried to ask a question I'm going to come at it from a different way I know, you've you've mapped out a pretty robust outlook for the remainder of the year. There are a number of economists and other reports out there that are speculating about.
The potential oncoming of a recession and obviously the data is not showing it yet at least your data isn't but.
I'm, just curious from a enterprise risk management perspective.
When you think about that type of risk what are you doing.
At the corporate level to prepare for something like that if you think that might be in the cards.
Well first of all.
Greg I'm going to I'm, not going to sit here and predict a recession. Unfortunately.
Lived through them before.
And I think we do know.
How to react to those and when Youre in a recession a couple of things happen that are very very negative exposure units drop.
Companies go broke expenses become even more important not that theyre ever not important in shopping can go up now.
Now when shopping goes up for our strength in particular in the middle market I think we show well so we hold we hold our own there.
But when you've got a robust economy falling off.
And up with negative audits and you've got lesser exposure units and depending on the depth of that recession, it's not a pretty picture. So when you talk about what are we doing relative to our risk management approach.
We talk about it every quarter, we take a look at where we are we've got significant margins and we prepare to say here's what we have to do to make sure that.
One of the things I really like about our model is we basically pair production for us on how their book of business performs so we're all in this together.
If the business is thinking now in <unk>.
Previous recessions, so I won't go back too far we have not had the benefit of inflation.
So inflation may in fact help cause a recession and I don't know whether that will be a 0.2 points I know the first quarter GDP was down.
But if youre talking 5% to 8%.
Inflation.
That is the exact opposite impact as you know payrolls go up we're all seeing that I mean, I can't go a day without somebody stopped demand sand and are getting whacked, they've got a mid level.
Service person and it's a problem and what am I going to do about it and every customer is coming to bills of Bell's team and saying how am I going to hold onto my people Liberty wants them to go to a restaurant they don't have people that conservative.
There's just huge demand and thats pushing payrolls up.
And our contractors book, they bid everything out and now they've got to deliver it inflation rates they never anticipated when they made the pit well if theres other business to bid those rates are going up so sales will go up.
So there is offsetting factors there and I think our business holds up pretty darn well in a recession.
Yes.
Couple of things when we look at daily endorsements cancellations audits, we get out of the daily feed and this was the biggest month of positive audits that we've seen and again thats historical.
A rearview mirror metric, but I'm not seeing that trail off at all so I'm not seeing any early signs of.
A recession happened because the first thing that customer will do is that will bring up the phone and they'll adjust their their their expected payroll down so we're not seeing that.
We're not seeing it in our exposure unit in a rate.
Monitoring that we look at renewals everyday also so we're just not seeing it happen, but what we've proven throughout the Covid, we've got a pretty resilient model that we have a lot of levers to Paul.
Should we get into a situation, where we're growth becomes.
More difficult and I think we've proven we can do that so we think the model's resilience. We think that inflation is going to help us on the top line when it comes to revenues for the business.
That's there, but we do have levers that we can pull in order to help us get through a recession and also let me remind you back in 2789.
And this is just an incredible supported this model again.
You would think Oh, my God, it's going to be true our clients will stop paying their people before they stopped paying their insurance bill.
That's how important we are to them.
That's a good spot to be.
Indeed.
For the color on that.
Pivot to <unk>.
Perhaps a little bit more detailed question.
Doug Your your guidance and commentary.
The various parts in your CFO commentary quite helpful and I guess, what I wanted to ask about was the free cash flow excluding clean energy.
Because you talked about the integration expense and some other things.
Just wondering what you think the cadence of that looks like now for 'twenty. Two is there been a change versus previous expectations.
How you would suggest we look at that.
All right, let's see if I can break it down let's start with $4 billion that we have leftover for M&A in 'twenty, two and 'twenty three.
Cash.
Clean energy provides $250 million of that.
Integration is already net and that number alright, so I've already given you a number net of integration also when we talk about integration you've got to look at it as half of it being noncash and half of it being cash if you recall that in the integration expenses are the sign up bonuses that we delivered in mostly.
Equity plans. So that's amortizing of the noncash item against that so I would say that integration won't consume an excessive amount of cash I would say that the clean energy I mean, maybe you think about it this way the clean energy basically offset the cash portion of that and all of that is all washed out.
Our $4 billion expectation for M&A over the during 'twenty, two and 'twenty three.
Help you can give a thought on it.
It does.
You've given me similar answers like that in the past it feels like that should be your voicemail, but thanks. Thanks for reminding me of all the pieces there.
And it generates a lot of cash like I say around here I don't make the money I, just count it and Theres a lot of it coming in.
Got it thanks, guys for the answers.
Thanks, Greg.
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Our next questions come from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.
Please.
Hi, Thanks, good evening.
My first question is kind of going back to the earlier discussion on organic Pat when you gave us. The initial outlook for 2022, you had said that the full year would be about 1% above the Q1.
So is it just that the.
And I think that was may be based off of the benefits business, perhaps being a little lighter and heavier concentration into Q1, but is there something that changed or is it just I understand that the rest of the your outlook is close to the Q1.
Is there something that perhaps cause that change or is it just that just as simple as the Q1 being better than you expected. When you made that comment I'll, let Doug answer the actual number piece on that because a lot of that's mathematical but in terms of what im seeing for the year I am not seeing I'm not anticipating significant change in the operating environment.
Over the next.
Three quarters, yes, I think that our cautious guidance in January and then again in March really as Tom was talking about the fact that you're not we're not getting rate left from workers' comp, which is heavier in the first quarter and then also.
Youre, not really seeing rate and benefits yeah, now it's interesting since that guidance.
There was not a core inflation thats coming back fast and furious and I think that.
Give us another quarter on that and we might become a little bit more bullish because I think that.
Of course that will eventually translate into workers' comp to absence of frequency.
Declining are holding in there, but I think our cautiousness on the benefits business.
Might have been overly cautious, but again, we just need to see another quarter of that before we.
We get into a position of declaring that there's there's true medical inflation thats going on in fact, that's going to affect next year's growth too, but I don't see it as a headwind or tailwind or organic.
Great and then my second question.
You guys have mentioned, having around $4 billion.
Capital over the next couple of years to spend on M&A.
Tuck ins right, we're just around $30 million this quarter, so maybe a little bit light relative to some historical averages so as we thought.
Think about just kind of deal flows.
It sounds like interest rates can impact private equity interests. So maybe that helps with the pipeline is there a certain point and maybe we have to wait till next year, whereas deals don't materialize.
Since that's a pretty high level of capital.
Gallagher might consider.
Using some some buybacks as well with the excess capital.
I think the answer to that is yes, let's clarify I think that first quarter is always seasonally the smallest when it comes to M&A. It's historically been that five out of the last six years.
So I think there's just a natural little push towards year end, and then theres a pause in the first quarter. So I think there could be a rebound and opportunities through the rest of the year.
If those rebounds don't materialize and we're not seeing opportunities for it and then our next place that we would go is to make sure that our data is clearly within an investment a solid investment grade rating and then use it for stock buybacks next and then maybe even consideration on the dividend. So those are that those are the three or four.
Our things that we're seeing how the deal flow look next thing is.
Well.
What do we do with it with the excess cash in the deal flow isn't there and will stack that up to two to controlling the debt for sure then making sure that possess.
Positioned well to buy back stock or do dividend increases.
Okay and one last one on Louis we recognize the revenue was close to what you guys had laid out at the Investor Day can you give us a sense of just.
Retention in new business and how.
That's been trending in your first full quarter of owning the business.
Yeah, I will do that.
Really Ben.
And amazing and let's let's remember as we finished the quarter were four months in so as we have this call were close to five months.
But I will tell you that the team we're not losing people, we're not losing clients our renewals have been.
Fantastic.
Tom myself, others at the table have had a chance to meet with reinsurance clients. They continue to be very open about the fact that they're glad that there are there's not one less competitor in the marketplace. They are also very clear with us that the reason.
The business held together over the years of discussion as to where this business was going to land was because of the people handle in their business and those people are still in place.
Our losses in terms of people out the door are minimal to zero.
And so when I look at it.
I'm really really happy about it and new business pipeline is strong.
Very excited about is the integration that we're seeing or the sharing of information from our retail everybody said at the beginning what why is this good for retail and people also would ask was reinsurance care what youre doing is a retailer well I'll tell you what.
There is so much going back and forth right now in terms of data relative to the business, we're doing with all kinds of carriers with things that arent reinsurance people are seeing can help our retailers and their melding. So the business is strong we are.
Sure absolutely nailing it when it comes to what we hope the pro forma would be.
I think it's going to continue to just be a great business for US yes, I can give you some numbers behind that flavor is that and I'll give it to you.
Net new or net new.
Yeah.
<unk> was over 5% this quarter, if you control for those people that put on a different jersey before we bought it.
And our overall organic is nicely, let's call it 8% first quarter, plus or minus a point so our organic really how I got it I got to give it to the team for what they went there for three years for them to be out there battling their way to have holding their clients writing new business.
It's really a terrific terrific story, so when you're posting organic nicely in that upper single digits after what they've been through.
I couldnt be more pleased with the team.
Great. Thanks for all the color.
Thanks Luis.
Thank you. Our next question is come from the line of David <unk> with Evercore. Please proceed with your questions.
Hey, good evening, How's it going guys alright.
Great great to hear the outlook on organic in the brokerage segment.
But obviously still keeping the 10 to 20 basis points full year margin expansion outlook.
I'm I guess I'm wondering you definitely sounds like it's a bit more positive on the organic growth side. So I guess I'm wondering.
Why I guess, we're not expecting or why you guys aren't expecting more margin improvement.
Then the 10 to 20 basis points is it is it additional investments that you're making is it the bonus accruals is it something in addition, I think you had called out $60 million of incremental costs coming back in this year.
Is that higher now that that sort of keeps it at 10 to 20 basis points of margin expansion.
I think there were just a little reluctant right now to push that up when it really comes down to it I think that theres a lot of things that we'd really like to do and I'll I'll segue into some of the exciting stuff. When you look at what's going on with it.
And to our March.
Our mid or late quarter IR days, we talk about all the great things we're doing in the business. When you look at what's going on with our our electronic delivery platform. When youre looking at the automation that we're doing that we're writing 6000 policies a month with hardly anybody involved on cyber the depth of the Gallagher drive the advantage programs.
Art market and then you look at the advertising and brand building that we're doing and spend the money on that.
System, So we're spending money on hardening the environment.
Delivering more point of sale capabilities to the sales force when you look at all of those things posting another 10 2030 basis of margin expansion on top of already.
Posting 540 basis points of expansion since 2019, I think we'd just like to spend a little money. This year when you get to 2023.
A lot of this.
This level is between the pandemic in between.
And the rollout of the reinsurance M&A, you might see a little bit more expansion in that if we're still posting in that 9% range, but right. Now. This is a this is a great opportunity for us to invest in our future organic growth of the company. So.
That's where we are on it.
You wanted to add that voluntary spend call it voluntary spend but it's not it's not a must.
Must spend.
No no that makes sense.
That makes sense.
And I guess just maybe.
It sounded like the international business did.
Did quite well in the first quarter.
So I guess I'm wondering Pat just just specifically could you just talk about what youre seeing on the ground in Europe and in the U K.
Any sign of any wobbles, there in terms of exposure growth or demand.
As I think.
Some of the some of the leading indicators are pointing towards a economic slowdown there.
Well, let me let me go around the World again as I did in my prepared remarks, when you take a look at.
What we're seeing in Canada.
Our team in terms of new business is on fire when we close on <unk> years ago, and the Canadian economy was a little flush.
<unk> was a little slow.
Together.
<unk> was seven separate businesses kind of operating separately now that business is totally together. The Gallagher branding is working extremely well people are pumped up we're using salesforce. Our pipeline has grown in the 10% organic yes is helped by rate, but new business is much better than it's ever been when you go to the U K.
That same timeframe, we added new we call we bought Heath Lambert Giles et cetera, again, a lot of time on integration today, we'll do an acquisition of size in the UK and frankly, we've got that thing integrated and five to seven months and they are putting on a Gallagher Jersey, they're excited about it.
Our team just gets stronger and stronger there no I can't tell you that economic.
Vince arent going to impact us recessions or are terrible bad for our clients, they're bad for us and bad for our business, but I will tell you that where we are from a team perspective is fantastic. So youre right to look through the numbers and say it seems like international is doing really well because as we walked around the world and told you the organic.
They're killing it everywhere Latin America is strong New Zealand is strong Australia is strong and all of that is not just rate driven thats. The thing I want to make sure. We realized is that it's not just because rates are moving.
We are getting our fair share of our of our new business opportunities and in fact, we're seeing hit ratios improve.
And we are being helped by our clients' business expansions and just.
Just blocking and tackling so it's a very good spot to be.
Can't predict the trickle on effect, but remember we're primarily in the U K, we do have inflow from.
The rest of Europe , not heavily based in by any means in eastern Europe . So we don't have that and I think at one point, we looked at and our inflows from from Europe might have been in that $40 million range in total revenues.
Think about it in the context of what it means to Gallagher if all of it.
All of Europe would stop sending any business to London.
<unk> million dollars of lost revenue to us.
Pushing $8 billion of revenue as a total organization.
We feel it but it wouldn't register at all.
So David I think it's fair to say to what we've done in the United States in terms of the things you've seen in your smart market Gal.
Gallagher drive.
Those things are impacting our new business with the carriers our retention in our.
Clearly, our new business hit ratios using smart market and we're taking those internationally now so that was born and bred here in the U S.
Those are products that are going to be available in Canada, and the U K to start.
In there there are difference makers.
And really remember when we compete and this is one of the things about again kind of being in a lucky spot 90% of the time when our people go out the door to compete we're competing with somebody smaller.
10, 11, and 12% of the time, we're competing with folks that frankly can come to the table at the same type of resources or story.
But every other time when I talked to our sales force I think we should win.
We don't obviously.
But I think Thats I think thats, having an impact.
Our people go out the door thinking theyre going to win and I'll tell you that.
Yes, yes definitely it definitely looks like you guys are getting your fair share of wins and I know in the past.
You've broken out the brokerage organic in terms of drivers by exposure.
Pricing and net new.
I think in the past you said, it's about a third a third a third is that has that changed at all this quarter.
Well I think rates might be fueling that just a little bit more but probably need a little more time to peel it apart.
Let's see if I can give you something we can get back together in June on that but right now.
Our rates probably used to be a third a third a third and I think rates might be more 40% then.
30, 30, something like that.
Okay, great. Thank you.
Thanks, David.
Thank you. Our next question comes from the line of Meyer Shields with K VW. Please proceed with your question. Please.
Thanks.
I hope all is well.
One I guess dumb question when I look at page three.
So commentary.
It's still anticipate full year margin of 19% in risk management is that.
Does that mean that we're going to unwind some of the.
So cora underperformance or is that assuming that based on that it might be 85.
I think it will be somewhere nicely in 2018 for full year. So I think that if we post three quarters of 19%, while we'll claw back into that 17, three for this quarter and again.
We got a we got an unusual legal settlement probably once every four or five years. So it's unfortunate happened this quarter, but that business is really doing well.
Okay. That's helpful.
Second issue and I know these are small numbers, but does the.
Colt withdrawal from Russia on the reinsurance business does that have any impact on the earn out.
Yes, technically have impact if we don't reach some of our milestones in it that loss of 10 million Bucks over the course of the year that might have.
It would have an impact on it theyre going to overdo that.
That's not okay.
My prediction is it will not.
Okay.
So compensating.
Correct.
Okay and then one final question on the reinsurance side and Pat you talked a lot about the fact that some of the people there were under some strain over the past couple of years.
Did that depressed what <unk> was able to charge is there an opportunity for revenue growth.
Now that.
Simply because it's a more stable platform, where you can invest in a more heavily.
Well I got to understand the question.
Our reinsurance clients pay us very very very well and very fairly stable.
Stable.
Table environments that can give us the ability to charge our clients.
Does it give us the ability to invest more favorably absolutely.
Because you now have people in our.
Earl businesses people.
Blunt there were people who join him before I joined them in the middle of a sale.
By the way remember.
Not making this up it was public I mean, they couldnt tell the people at <unk>.
Where theyre going to sit who they're going to work for.
It's not easy to recruit into as well.
So there is lots of opportunities to invest there's lots of at the same time reinsurance buyers were kind of frozen in the headlights.
Want to see we want to see competition in the market, we don't want Williston clinically superior.
We're not going to build the problem bigger.
So yeah theres opportunities for us to go back to those clients and say hey.
We think we've got something to tell you now.
I think once it settles down and we all get.
And again I'm four months into the quarter.
Five months in total a year from now.
I'll have a much better feel for the individuals.
They all add a thirst for information from our reinsurance partners.
As is there and if we can if we can bring them the information that they're looking for.
That maybe they haven't been able to get in the past.
I believe that that will help them.
Attract more new clients and perhaps broaden out the book of business, they're doing with their existing clients I do believe that our ability to provide real time data like we do for our retail business to them.
Pelling.
<unk> advantage for them in the marketplace.
Okay that was very helpful. Thank you so much.
Thanks.
Thank you.
Our final question comes from the line of Weston Bloomer with UBS. Please proceed with your questions.
Yes.
Alright, Thanks for taking my questions. My first one is just a follow up on the investments that you guys described around the systems and point of sales I guess, what's the pipeline and timing for that does that extend into 2023.
Just curious because in.
In 2023 can we go back to a world where the pre pandemic commentary was we expand margins. If organic is over 4% is that baseline potentially still the same or could it be lower given the higher investments that youre, making.
And that is not the 34% and 19% margins are still impressive, but curious how to think about that in 2023.
That's one of the things I'd like to say about it. So we've been investing in these technologies all along the way so when we're talking about investing in another three or four or $5 million a quarter. I mean, this is smart market advantage.
Better works.
Three six.
360.
All the things that we're doing we're continuing to invest in them and were really going to slow that down much.
The incremental spend on them to make them, even better and more competitive that's what we want to do I mean, if you looked at our GB go I'm just talking in risk management right now what they can do to adjust the claim on your phone with you track it monitor it.
You get.
Get back to work it's impressive. So these are the type of enhancements. So that we have on that on the table, how do we make that better how do we make Gallagher drive better.
Right now Rps is 24 different products on their on their quote and bind system. That's basically a no touch system, they're doing 6000 policies.
What happens when we took that up to 48 policies and our investment spend on that illustrative leaves about $2 million a year well, what if we could get 48.
Different lines of cover on that and then go to 72, and then go to a 100.
Those are the type of incremental investments that we would like to make because I think they are powerful I say this all the time, what we're doing on the Rps automation side.
Alone is $1 billion business and I think we'd like to do that across 20 different things inside of the company, So where our margin is going to be in 'twenty three.
We're going to.
I think that we're going to be over the return of expenses from the pandemic. The real question is how much are we going to spend on investment on that but it would stand to reason that if we posed to at least 4% organic growth there'll be opportunities.
Expand on that.
Got it that's helpful color and then my second question just a follow up to the leases on M&A I just want to clarify it was all of the term sheet disclosure is all of that seasonal or is there any is that strategic around <unk> you didnt asking is I'm trying to frame the potential for maybe a pickup in that.
Number eight in the second half as you annualized it annualize the deal.
The numbers, we were talking about in the pipeline in our prepared remarks.
Our totally outside of <unk>.
He has done.
Well what I meant was is the pipeline.
Yes is the pipeline potentially later as you focus on integrating Willis re no.
Our retail acquisitions.
Zero.
Traction by the Willis re folks.
Actually we're starting to see some ranch small little boutique reinsurance opportunities pop up on our deal for detail.
Alrighty Okay.
Okay.
That's great to hear thank you.
Thanks Wilson.
I think that's all our questions for Tonight.
So I'd like to just say, thank you again for joining us.
Obviously, we had a fantastic start to 2022 I'd like to thank our colleagues around the globe for their hard work.
People business and our results directly reflect your efforts. Thank you. We look forward to speaking with you again at our June Investor day, and thanks for being with Us everybody.
Thank you. This does conclude today's teleconference. You may disconnect your lines at this time.
Thank you for your participation and enjoy the rest of your day.
Yeah.