Q3 2022 Arthur J. Gallagher & Co. Earnings Call
At eight 4% organic growth.
Net earnings growth of 12% adjusted EBITDA growth of 15% and we completed or signed seven mergers in the quarter totaling about $60 million of annualized revenues.
<unk> fantastic quarter by our team.
Let me give you some more detail on our third quarter performance, starting with our brokerage segment.
During the quarter reported revenue growth was 16%.
Of that seven 8% was organic that's right in line with our September IR day expectation when we previewed preview there would be about a full point of headwind related to timing from a top 21 comparison within our benefits business.
Acquisition rollover revenues were $162 million net earnings growth was 11% and we posted adjusted EBITDA margins of 32, 3% a bit better than our IR day guidance another excellent quarter for our brokerage team.
Focusing on brokerage segment organic it continues to be broad based by both business and geography.
Let me walk you around the world and provide some more detailed commentary starting with our PC operations.
Our U S retail business posted 9% organic with strong new business and solid client retention, both consistent with last year's third quarter.
Risk placement services, our U S. Wholesale operations also posted organic of 9%. This includes more than 20% organic and open brokerage and about 5% organic in our MGA programs and binding businesses, new business was strong at more than 27% of prior year revenue and.
Pension was consistent with last year's third quarter.
Shifting outside the U S. Our U K businesses posted organic of 15% with excellent new business production and retention.
Australia, and New Zealand combined organic was 9% new business production remained very strong and retention improved relative to last year's third quarter.
Canada was up 13% organically and continues to benefit from renewal premium increases robust new business and consistent retention.
Moving to our employee benefit brokerage and consulting business as I mentioned earlier as we signaled last quarter and again at our September IR day, our benefits business faced a tough organic comparison this quarter recall that due to last year's upward development in covered lives as employers resumed hiring coming out of the depths of the pandemic.
Leveling per that our benefits business organic was about 3% that's consistent with our IR day expectations and includes strong growth within our HR benefits consulting units and solid growth in our international businesses.
And before I conclude my organic comments, let me give you a quick update on our December 21 reinsurance acquisition.
Third quarter revenues were right in line with our expectations and while not included in our brokerage segment organic yet after controlling for breakthrough breakage prior to closing organic was around 8% that's just outstanding.
With expected revenues in EBITDA for full year unchanged reinsurance continues to be a fantastic story.
So headline brokerage segment all in organic of seven 8% in around 9% after controlling for the benefits comparison, either way and outstanding organic quarter.
Next let me give you some thoughts on our current PC market environment, starting in the primary insurance market.
Overall global third quarter renewal premiums, that's both rate and exposure combined were up 10, 5%, that's a bit higher than renewal premium change in the first half of 'twenty two.
As for rate most lines of business and geographies saw increases in third quarter similar to the first half with only one exception being D&O rates are now closer to flat, but our customers are buying more limits.
Additionally, our customers third quarter business activity was not reflective of any economic slowdown in fact revenue related to third quarter midterm policy endorsements audits and cancellations combined were above third quarter 'twenty one levels.
Looking ahead, thus far in October mid term policy endorsements and audit adjustments remain higher than last year's level and renewal premium increases are also consistent with the third quarter.
But remember our job is to help our clients mitigate that overall, 10% increase in premiums by developing creative risk management solutions.
Budgets.
Let me move to the reinsurance markets. Let me provide you with some broad observations regarding the upcoming 23, a reinsurance renewal season first.
There is no question that rates terms and conditions will vary depending on geography in.
Individuals seen loss history risk characteristics and line of business.
Pricing on peak zone property catastrophe cover is moving higher and tightening terms and conditions are highly likely third while we haven't witnessed the impact of hurricane in spillover to non property lines. Yet it is possible that that could happen. If there is a broad shift.
And reinsurance risk appetite and capacity deployment strategies.
Fourth and finally, the amount of property reinsurance capacity available remains an open question.
Reinsurance providers had already planned to pull back their cat capacity priority.
And now it is likely to a significant level of ILS capital will be trapped into one one renewals further pressuring potential capacity.
Ultimately supply will depend on expected returns from changes in pricing terms and conditions and perhaps expected returns will reach a level that will attract additional reinsurance capital.
While we have yet to see any significant third party capital into the market given ILS capital can move quickly. There is still time before the January renewal season.
This will play out over the next two months, but at this point. It seems the stage is set for a hard or even harder reinsurance market as we enter the important one one renewal season.
Reinsurance conditions will no doubt influenced primary markets in 2023 and carriers were already facing rising loss costs and property and casualty lines. We see good reason for our carrier partners to continue to underwrite retail and wholesale risks cautiously for the foreseeable future.
Moving to our employee benefit brokerage and consulting business U S labor market conditions remained tight but broadly favorable.
During August while U S employers reduce job openings by $1 million positions. There is still more than 10 million job openings. According to the most recent data.
And the level of open jobs remains well above the nearly 6 million people unemployed and looking for work as of the end of September .
So we see tight U S labor market conditions lingering for some time and expect strong demand for our HR and benefits consulting services to continuous businesses prioritize attracting retaining and motivating their workforce.
Let me wrap up my brokerage segment organic cameras with three terrific quarters in the books year to date brokerage organic growth stands at nine 3% and as I look to the fourth quarter Ics posting another quarter of above 9% that would deliver a fantastic year.
Moving on to mergers and acquisitions during the third quarter, we completed six new tuck in brokerage mergers representing about $20 million of estimated annualized revenues.
We also signed another merger late in the third quarter, representing an additional $40 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 about 50 term sheets signed or being prepared representing nearly $400 million.
The 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.
Third quarter organic growth was 12, 2% a strong finish to the quarter pushed organic a bit higher than our IR day expectation.
We also continued to benefit from increases in new arising claims across general liability and core workers' compensation during the quarter. That's both on an organic existing client basis and also due to some recent new client wins, including the significant insurance company client, we added to our fast growing insurance carrier practice.
And profitability remains excellent third quarter adjusted EBITDA margin was 18, 2% in line with our expectations that would have been closer to 19% without the impact from the new large client ramp up that we spoke about at our September IR meeting.
Looking forward for the fourth quarter, we believe organic revenue growth will be about 10% and adjusted EBIT margins between 18, 5% to 19%.
We've closed out a great year for Gallagher Bassett team.
And I'll conclude my remarks, with some thoughts on our bedrock culture.
October 2nd Mark Gallagher's 95th anniversary.
I took note on that day that our teams were hard at work, helping our clients assess damage filed claims and ultimately start to repairing and rebuilding process for me.
And if not directly assisting individuals and communities impacted many gallagher colleagues around the world donated their own money to help those impacted by it.
What a fitting way for us to soundly celebrate this incredible milestone.
My grandfather, we'd be proud of the company. He founded the employees that embody the culture. He started in the industry in which we toil.
Our people's actions in challenging times that bring our unique Gallagher culture to the forefront.
<unk> that we believe will thrive for another 95 years.
Okay, I'll stop now and turn it over to Doug Doug.
Thanks, Pat and Hello, everyone today, I'll touch on organic and margins using our earnings release.
I'll move to the CFO commentary document that we posted to our website and make some comments on our corporate segment.
Included my prepared remarks, with some thoughts on M&A debt and cash.
During my comments today I'll also provide some thoughts on our fourth quarter and some first thinking around how we are seeing 2023 now that we haven't started our budget process.
Okay, starting with the earnings release, and the brokerage segment organic table on page three.
Headline all in brokerage organic up seven 8% that's over 9% when controlling for the top benefits compare brings us to a strong nine 3% year to date organic growth when.
When I look at our organic quarter to quarter, it's fairly consistent at that 9% range. We bought nine six organic in first quarter about the same in the second quarter. When you exclude that infrequent large lifestyle, we discussed last quarter.
Now we're at about 9% here in the third quarter when adjusting for the benefit of tablet apps.
That's looking like over 9% in the fourth quarter that would deliver a full year 22 organic above 9% a little noisy on the quarters, but very consistent and actually a fantastic performance by our sales team.
And for 2023 early feel is in that 7% to 9% organic range for our brokerage segment.
Next turning to page five to the brokerage segment adjusted EBITDA margin table recall. This is a year of quarterly margin change volatility due to the roll in impact of the acquired reinsurance operation expenses, returning as we come out of the pandemic and the impact of a stronger dollar.
Specifically, we have been saying to expect year over year margins to be up 50 basis points in first quarter down 100 in the second quarter down 125 basis points in the third quarter and up about 125 basis points in the fourth quarter.
Well that was all about right for our third quarter, we posted 32, 3%, which was in line with our IR day guidance and we're still comfortable with our fourth quarter outlook of around 125 basis points of margin expansion relative to the FX adjusted fourth quarter 'twenty, one EBITDA margin.
That would suggest a fourth quarter margin of around 32% at today's FX rates.
In the end since early 2002, we've been targeting around 10 to 20 basis points of full year 'twenty to margin expansion and we're on track to deliver that more importantly that would mean, we improved margins around 570 basis points since 2019.
As we look ahead to 'twenty three we continue to expect margin expansion next year, starting around 4% or better organic growth call. It maybe 50 basis points at 6%.
Moving on to the risk management segment on pages, five and six as pads at 12, 2% organic and 18, 2% adjusted margins, both pretty close to our September IR day expectations and looking forward. We see these excellent results continuing in the fourth quarter organic growth revenue growth of about 10%.
And margins in the mid to upper 18% range that would meaningful year of full year organic growth of about 12% and full year margins around 18, 5%.
Looking at 'twenty, three we will see the roll in of the new large carrier client and we have already had a nice new business win in Australia that will accept midyear and continued strong new business production combined with continued growth in new arising claims we see organic at least in the high single digits and margins around 19%.
And 'twenty three.
Alright, let's shift now to the CFO commentary document.
Starting with page, three which shows our typical brokerage and risk management modeling helpers.
A few things to highlight first the continued strengthening of the U S. Dollar since our September IR day. Please take a look at our updated FX guidance for the fourth quarter of 2002.
As for 2023, perhaps the best start is just to assume what we're projecting for full year 'twenty to repeat in 'twenty three but most of that will be seen in the first half.
Youll see our current estimate for fourth quarter integration costs. Most of all of this relates to the reinsurance acquisition.
We're making really excellent progress on this and is executing at a faster pace than our original plan. It was terrific to see our new reinsurance colleagues colleagues located with our other brokerage operations when I was in London, a couple of weeks ago.
As for technology and system rebuilds, we still see being done by the end of 'twenty three are early 'twenty four.
Turning to the corporate segment on page four realm.
Relative to our September outlook interest and banking clean energy and M&A caulk after adjusting for the large transaction related expenses or three lines totaled to about the mid point of our outlook.
Within the corporate line most of the upside was due to some favorable tax items and a favorable FX remeasurement gain.
Looking towards the fourth quarter, moving down that page only one significant change to our outlook.
As Youll see in the fourth quarter corporate line and read in footnote seven on that page four here in October we settled litigation, resulting gallagher receiving $55 million in cash.
Never litigation cost and taxes, we will record a gain of approximately $35 million and you'll see a few lines down that will adjust that gain out of our GAAP results.
As for the cash proceeds, which because of our tax credits is actually closer to $40 million, we'll put that to good work over the next couple of years to fund incremental production hires and make incremental investments in technology I'll break down our thinking a little more during our December IR day.
Moving now to page five clean energy, that's page should be familiar to everyone by now and highlight that we have close to $1 billion of tax credit carryforwards to.
Pincus column shows that we expect to harvest a $125 million to $150 million of cash flows here in 'twenty, two and the Peach column.
Shows that we could be even greater in 'twenty, three and beyond and as a reminder, that would come through our cash flow statement not our P&L.
Turning to page six the top of the page is the rollover revenue table third quarter revenues of $162 million, that's right in line with our expectations six weeks ago.
Shifting to the lower half of the page. This table is an update on our December 21 reinsurance acquisition.
Third quarter revenue of $120 million is consistent with our September IR day estimate.
And for EBIT tightening tightening difference between third and fourth quarter.
Once line is full year revenue and EBIT should come in very close to our purchase pro forma that's a really terrific story.
Great credit to the team.
Okay, as the cash and capital management and future M&A at September 30 available cash on hand was about $500 million.
And we've been saying that we might have around $4 billion of M&A capacity in 'twenty two 'twenty three combined without using stock that's still seems about right to us today.
Okay. Those are my comments, another fantastic quarter and nine months are in the books another strong outlook for the fourth quarter and its looking like were well positioned for a terrific year in 2023 back to you Pat Thanks, Doug Operator, if you would let's open it up for questions. Please.
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Our first question is from Weston Bloomer with UBS. Please proceed.
Hi, Thanks for taking my question.
First one is on the 7% to 9% organic growth that you're expecting next year I was hoping you could kind of expand on what sort of environment, you're expecting next year in terms of the potential recession and then if you can hit that target in a recessionary environment and then maybe just comment on the magnitude of growth youre seeing across maybe P&C opera.
<unk> versus wholesale or international.
To get a sense of how youre getting to that seven to nine months.
More granularly, let me take the recession question, Doug can take a look at the numbers across I think we did a pretty good job of laying out those numbers by division a moment ago. I think we said we thought that was really pretty consistent next year. So I think if you look at our prepared remarks, you've got that question answered, but the recession. One is an interesting one because one of the reasons in our prepared remarks, we talked.
About what's going on with endorsements.
We can daily look at that information to see what's going on in the underlying business of our clients. We can also look at renewal exposure units as they are being put through to the market for renewal and as you know when you renewal renew renew a client that the estimated sales and payrolls going forward.
Clients are pretty smart.
Not wanting to basically overpay.
And then wait for a return of that premium and an audit 18 months or 15 months. After the close of the year. So, let's say a bit of a yin Yang between the broker the underwriter in the client as we look at what are those payrolls that we should be providing.
We're not seeing a big decrease in sales and payrolls.
Renewals are going out the door.
Perception of their business being okay, and thats verified by the mid term audits and endorsements that we're seeing so I read the Wall Street Journal every day you read the left hand column yesterday, who will just came to an end I just didn't know.
Well listen I think the way we look at it this way we're not seen it in our underlying business today and we're also viewing yes, there is a recession.
<unk> 23, we see that being more like what happened in early 19% to 1990 190 91 period in the 2000 2001 period more of a normal soft landing recession, we do not see a recession next year like the subprime financial shock.
Seven eight or the pandemic recession that we saw it for a few months in 'twenty.
Normal recessions typically lasts about two or three quarters and when we'd go back to the best we can do to get data back and we actually performed very well during those light recessions.
In this case or in this case I think.
Next year, if there is.
Anything happens when we do go into recession, I think it is going to dry up excess demand more than it is to contract supply and we ensure supply. So in our contemplation for next year is a lot like this year.
Exposure units holding stable rates going up like we're seeing this year, but I see $2 I don't see a lot of change all of a sudden not one one.
The World has changed dramatically from what it's been for the last three to six months right now. So that's our that's our go in case, that's how we're preparing our budgets in that range.
So that's how we came up with that 7% to 9%. So we'll give you more of a reflection on that in December .
Got it. Thank you and just one follow up there is is kind of like a high single low double digit growth for <unk>.
Reinsurance brokerage kind of the right range as well and can you remind us how much of that business is more property versus long tailed lines.
Yes, so yes in answer to your question, we see reinsurance in that high single digit range next year.
Right now the best thing you remember you've got a lot of a lot of.
Treaties that are multi line app.
But right now the best we can tell is pure property is 28% you put in the package on that I'd say it might be closer to 40% of the book of business and then you look at some of our our kind of high risk casually lines, maybe you've got a book that's 60% of it is is facing that kind of a tough renewal season.
Yeah.
Great. Thanks, and then just one more on the commentary around 50 bps of margin.
Based on the 6% organic does that contemplate a potential pickup in discretionary spend and inflation may be offset by higher fiduciary income or is that just.
Core expansion net of net of any items, yes, I think for 2023 and again I'll give you some more here in December .
There will be there'll be an upside from investment income.
That.
Not all of that will hit the bottom line because there could be some incremental inflation that we see in some of our numbers remember about 80% of our business. We don't believe have significant exposure to two headline inflation and like we said last at our IR day or on an earlier call about 20% of our expenses. They do have some inflation.
Pressures on it but in our opinion there'll be clearly an upside that thinking as a result of incremental investment income next year, but I still need to work through that math over the next couple of months.
I'm working through too thanks for taking my questions next question.
Our next question is from Mike Sherman ski with BMO capital markets. Please proceed.
Okay.
Good afternoon. Thanks.
Just a follow up on the investment income levels.
Are you. So is the is the guidance that you provided kind of inclusive of using the current level of interest rates.
<unk>.
That makes sense.
Are you talking about for 'twenty three.
Yes, 23, sorry.
I think that when we look at 6% organic growth with possibly 50 basis points of margin expansion that does not include a possible upside from incremental investment income, but yes, but not all of that incremental investment income will likely hit the EBITDA line.
Go to some inflationary pressures on some of our cost base or could go to some discretionary spend but it would be upside to that six points to 50 basis points.
Outlook.
Okay.
Understood. Thanks for the clarification.
Kind of switching gears, a little bit just.
Curious you are not calling out any kind of potential impacts.
Alright to contingents or stops as a result of the.
Of the Hurricane I know the new accounting rules came into place a few years ago.
Is there anything we should be contemplating that could impact.
Gallagher and the year to come or maybe even the kind of.
Programs business. If there is a lack of capacity just trying to.
One of your peers kind of.
Surprised us a little bit to just see if there's anything there we're talking about.
Our outlook on the impact of <unk> into our contingent commissions was $465000.
Impact against our revenues that have all been fully booked.
In the numbers that you see here today, we do not believe that would develop differently than that we just are not that we're just not exposed to that.
Contingent commissions on property placements.
Our book of business.
Okay, Great and lastly.
Any change in the <unk>.
Kind of environment on the M&A side.
There is kind of now a consensus that interest rates.
Stay higher for longer or is it still just.
Very competitive.
No, it's still very very competitive and there's a lot of interest out there in our industry is still.
We're watching that very carefully to see if some of that falls up youll see some write ups recently about the number of deals done coming down a bit.
I don't know if thats, an early sign that maybe some of the people want to sit on the sideline a bit but for the deals that we're after right now the competition is very strong.
Some multiples and I was just trying to get I should've been clearer. So you don't expect multiples to.
To move South and Youre not seeing that.
I hope they do but we're not yet.
Okay. Thank you good luck.
Thanks, Mike. Our next question is from Greg Peters with Raymond James. Please proceed.
Good afternoon.
So hey I.
I wanted to go back.
Pat.
To your comments about the reinsurance market and the reinsurance business and.
Sort of unpack, what's going on and get your perspective, because it really feels like a seminal moment in that marketplace, where we could be in a hard market, especially for cat exposed property, but it seems like it's bleeding over into other lines and <unk>.
The reinsurers haven't been able to get an adequate return on their business and then now the primary companies are going to be asked to take higher Retentions and.
Absolutely pay more on rate online.
So I guess my question is.
If these two partners of yours are getting pressure profitability pressure do you foresee.
A scenario, where you might actually might get some pressure on commission rates.
As is.
As the market evolves here.
No I don't think so I think it's clear it's clear that we earn.
Our money.
And.
You see that in the market.
The business has been very stable.
I've had a chance to meet with a number of managements. They know exactly every dollar that we're making there is no hidden factor here anywhere.
We have to do the work that justifies that income level every single day.
In my experience as a retailer I'm not I'm not a reinsurance person, but a hard market makes you.
Incredibly more valuable.
Soft market in the retail business some person with a shingle out you'll get a quote and beecher.
When you're sitting with someone in a hard market you are talking strategy man you are not talking about what's going to happen to my comp.
Youre talking about am I going to get GL cover.
What's going right down to personalize I've got tons of friends as you can imagine in South Florida.
Am I going to get homeowners next year I don't know.
Thank you will.
Youre going to pay more and they know it now that I think trusted advisor works its way all the way back to reinsurance and this is not a time. When these carriers are going to put a lot of emphasis on how much we get paid when theyre looking at trying to get returns literally hundreds of millions of dollars of ratings.
Yes, Greg.
I will say this it's been 20 years since I've been CFO of insurance companies, but right. Now. This is a time, where my reinsurance brokers would be the most important people to have them.
In my office.
Their skills and their capabilities and this is a time, where they really are and their money.
Fair enough I'm sure.
There is a robust conversation happening happening around all of this stuff so.
I wanted to also and I know you've commented on this before but I wanted to pivot and talk about that.
The brokerage business and the pipeline if we're in a recession, if we go into recession bobble, but it's pretty strong.
Can you remind us again just when.
On the risk management piece, how you think that might perform if we go into a soft landing what kind of and I know you've commented on this before Pat but just give us some.
Some sort of guideposts that we should be thinking about on that.
Well I mean first of all Greg as you know when when prices are going up.
One of the skills that brought us to the point. We are today is the capability of taking people who are should be self insuring into that market.
<unk> them, how to take high Retentions and bringing Gallagher Bassett in.
Recessionary work is the same now I'm talking about the larger upper middle market. The recession has the same kind of impact, especially if you get a recession while at the same time pricing is going up they're looking for alternatives and when I say your alternative is to pay tomorrow instead of today and they're really manage your claims hard and worked it hard at preventing them Theres a.
A lot better listeners than when the prices are dropping and thats going right to the bottom line and they are private companies and they're happy as a clam.
When you get to the larger accounts. These are very sophisticated buyers and they don't move around based on recessions now if there is a recession in our larger clients.
A lesser population they closed down shifts then youll see claim counts drop, but I don't think youre going to see an impact on that business that happens in the short term.
Well no well in advance.
Any kind of a downturn.
As people start slowing their business down and cutting shifts will be well aware of it. We can we can probably comment better as we go into the new quarter. So we're just not seeing that right now Greg I think that's the interesting thing to me as I said I read the journal every day and I'm sitting here go okay.
And then we test and test and test and our primary business partners are doing really well when you look at the <unk> results in claim counts are up.
Down.
So it's I.
I get why you're questioning it I really do get the conundrum.
But here's the thing Doug pointed out that in other recessions, we've done well clients do not jumping out of self insurance you make that decision to move to taking a big retention and paying your clubs. You may have you may see your claim counts go down because hours worked or less.
But you're not jumping into the market.
It's a pretty good place to be.
Got it well thanks for the answers and I read the journal too and it does seem like the end of the world is imminent, but.
You guys are posting good results. So congratulations thanks, Greg.
Our next question is from Elyse Greenspan with Wells Fargo. Please proceed.
Hi, Thanks, good evening.
My first question.
Go ahead in the opposite direction of talking about a recession.
I want to go to the flip side and talk about how good I guess 2023 could be I said, 6% to 9% organic in September today, you're saying, 7% to 9% for next year, we could have a really strong reinsurance market and it sounds like you would have really good exposure on the wholesale side, where the market is really firming.
And 80% of your revenue is commission based so could there be an environment next year, where pricing is still firm that gallagher could print double digit organic revenue growth.
Well from your lips to God's ears.
You know if you take a look back at our results and other hard markets, yes that could happen.
I'm not going to sit here and say no if capacity drives up.
Smaller brokers in those environments can't get the job done reinsurance.
Reinsurance clearly is.
And look at cap trap little in the ILS market, depending on whether capacities there whether capacity comes in yeah. I think you could see a very bullish.
Red Bull story.
And then assuming right Doug you said.
6% organic.
50 basis points of margin improvement so assuming that the base is seven right.
It sounds like it could be better than that so is the base case that we will see something margin improvement that's above that 50 50 basis point level next year.
Uh huh.
It's not linear and if we posted 9% I don't think you have 150 basis points of margin expansion, but you might have 75 to a point something like that but I think that let us get through this and get through our December look at our budget and some of this is as discretionary spending that we might want to make and Dustin.
And in technologies and other organic growth strategies, but yes, I mean, there is a case that that could happen.
And then on the M&A side, you guys, obviously have a good amount of capital flexibility over the next couple of years. It does seem like maybe it's because you guys have had such a strong track record of M&A like deal flow has been a little light relative to historical levels this year or so.
No. The pipeline is still strong at what point do you reach that level would you consider buying back your shares or is it something where deals just ebb and flow depending upon time of hearing.
We will give it some time and then maybe consider buybacks.
It wasn't if we ended up with excess capital. Our first our first metric would be is to make sure that we maintain a solid investment grade rating on our borrowings with interest rates going up that's more and more important every day second of all I think that our M&A pipeline is still robust and the third thing is remember the arbitrage that we get on the multiples add.
More importantly.
We're building out the team we bring more people.
On our side of the field to go out and compete on it.
On every day and create more organic afterwards, so frost.
Buying back stock is certainly what we can do it certainly part of the math and that's part of the story, but I would like to see us doing more and more M&A every day to put our cash to work at multiples that are that deliver arbitrage value too.
Our shareholders. So we're out there working very hard sometimes you win sometimes you lose a but I think we've got a ton of opportunities in our pipeline right now.
Given the strength of the U S. Dollar are you guys seeing more opportunities for international deals.
Well listen we've got some pretty good pipelines going on especially in Canada, Australia.
In the U K right now so we'd be happy to continue to look at those those are.
Those acquisitions, there and yes, if the dollar does have a little bit of an impact on that but it's not what drives our investment choices.
Okay. Thanks for the color.
Thank you.
Our next question is from Yaron <unk> with Jefferies. Please proceed.
Thanks, Good afternoon everybody.
My first question is on head count I missed if there was a nice pickup in our head count.
And the one I'm, referring to specifically is in brokerage I think it's up 7% year to date.
Can you maybe talk a little bit about what that is going into what type of.
Rules, you are hiring and secondly.
I'm actually I was very impressed to see that the comp.
Comp and benefit ratio is actually coming in year over year. Despite the increase in head count so.
Is there a catch up that we should.
Expect or how are you keeping that number down.
Alright, So a couple of things you got a couple of things done pack their first let's talk about the increase in the head count we have actually substantially increased our head.
Head count in our offshore centers of excellence as you know we've been talking about it for 15 years now we think that that's a terrific spot to improve the quality of the offer of our insurance offerings and as a result.
Ramping up significantly more than that.
<unk>.
Offshore right now that can do that work for us.
We're up considerably and and and that so that's what's driving the metrics youre seeing is mostly offshore.
Our resources are when it comes to.
The opportunity.
The drop in the comp ratio this quarter some of that has to do with bonus timing. If you recall last quarter. I said, we are a little ahead on our bonus accruals. So we didn't have we didn't have to post quite as much this quarter.
Which probably offset some of the well we did have a little bit of inflation in a raise pool, maybe we gave away another 8 million Bucks a share something like that.
That and the raise pool this year so.
What's offsetting that is the timing of the bonuses.
Got it.
And.
Im curious what led to the increase in the organic growth for 'twenty or at least the bottom end of the range from six to seven.
What changed in the last six weeks.
And I think that I think that Ian.
Has brought a different tone in the marketplace thing Youre seeing some reports of reserve strengthening across line you saw the reinsurance outlook, we've talked about and remember the reason why you got the six to nine as we were saying that 23 felt somewhere between 2019 and 2022 and 19 are happen to be 6% organic growth sort of context.
The comment in September was relative to different years.
Now as we're getting closer on our budget process and really looking at what we're starting to see in the renewal pipeline.
We thought we could tighten that range up a little bit also and I think that before and.
It was clear that loss costs in Nordics and what have you, we're putting pressure on our carriers today, we look across the losses and the cat level Im wonder if theyre not going to bleed into the casualty lines.
Had some conversations with some of our reinsurance program, we think that Thats a very good that's a very good possibility.
If that happens that'll be that'll be that will benefit from that as well.
Got it.
Maybe one last one and following up on Greg's question, I guess and what markets what kind of environment do you typically see some pressure on commission rates or maybe clients trying to shift over to the fees.
Primarily in the retail market.
Accounts go from.
In let's say upper middle Middle market.
Typically you'll have about 85% to 90% of your clients well over 100% transparent. This is their choice leading adult conversation. They know we collect contingence list I'd go back to 2004 and getting it all in trouble again for accepting contingents and supplemental theyre all disclose this as client choice and so.
As they get a little bigger if they bring in a risk manager that type of thing then theres, usually a shift to fee and we're happy with that.
Got it okay. Thank you.
Thanks you.
Our next question is from David mode in Madden with Evercore ISI. Please proceed.
Hi, Thanks, good afternoon.
Just had a question on the investment income side the fiduciary income.
Could you just quantify how much that generated this quarter I think you've said in the past it's $40 million for every 100 basis points move in short term rates, but just wanted to.
Just to double check what the benefit was to revenues this quarter and then maybe just talk about how that.
Impacted margins, how much of it fell to the bottom line.
Okay I'll take that in a couple of different bites I just quarters, let's call it $12 5 million Bucks.
We had as additional investment income.
As a result of rate changes, then you're asking how much of that fell to the bottom line.
Maybe a better way for me to do this is to take a look at what does it mean for full year. If you recall at the beginning of the year.
What we said is since when we're sick.
In January we look back and we had said that we had posted about 550 basis points of margin expansion and when we looked out and that was over two years. When we said when we look forward again I am standing in January of 2022, we said that we might be able to get margin expansion of 10 to 20 basis points on organic.
I'm about 8% here in 'twenty two.
What's happened since that those expectations right.
We're still looking at 10 to 20 basis points of margin expansion.
<unk> running a point better than let's say investment income between this year that might be up let's say $30 million more of investment income in the year.
So that's about $80 million more of revenues this year and sort of the way I look at his word that go with the $80 million of revenue.
First of all we dropped a third of it we're going to drop a third of that to the bottom line right. So that leaves $50 million to $53 million of additional revenues well, we have to pay our producers field leadership and support staff and usually that runs about 45%.
Of the revenue on that organic of $50 million call that $23 million. So now we're down to explain where did $30 million go do it.
As a result of incremental.
Organic and incremental investment income again relative to our outlook at the beginning of the year well I can tell you that we spent about $10 million on incremental hiring some incremental raises and some incremental incentive comp. This year, maybe it's a third a third a third and we also know that we have about $10 million went to incremental.
Travel and entertainment expense now that's mostly due to inflation and it's not due to increased trips versus our expectation again all of this was against our expectations and the year and then finally, we spend an extra $10 million on IP betterment project than probably we would have expected it.
The beginning of the year, because we have the bandwidth in order to implement those.
So for me sitting here relative to our expectations at the beginning of the year I think it's a really terrific.
But I'm really proud of the team's done a great job this year.
They have been disciplined in their travel and they've been selected and they are there.
Value added efforts that they are bringing to the clients and they've been pretty wise about.
Other investments and yet still delivered 10 to 20 basis points of margin expansion. This year in an inflationary environment on top of the 550 that we have delivered in the previous two years I think it's a pretty darn good year in my opinion, so relative to expectations. That's a long winded answer, but I think it gives you a person.
Our perspective on incremental investment income and incremental organic relative to where we were sitting at the beginning of the year I remember, we still held at the beginning of the year, we have the omicron.
Crisis going on and we were still in the depths of the pandemic. So we still have done our way out of those pandemic expenses returning along the way. So it's a long story long answer, but I hope it gets you to where you need to go.
Yes that definitely did thanks for all that color that's really helpful.
I guess, maybe just switching gears.
The reinsurance the reinsurance deal and how thats been going.
The organic I think accelerated a point to 8% this quarter from 7% in <unk>.
<unk>.
I guess it.
High single digits in 'twenty three fields.
Maybe a little conservative, but maybe could you just talk about the range of outcomes around that high single digit and I.
I guess, what's stopping it from being well above that just given the market that you're.
Sure well first of all is experiencing.
Anything there.
With the most sophisticated buyers in the market.
And as John as Doug just said a minute ago when he is buying reinsurance.
Wasn't messing around worried about what the guy or Gal was getting paid the point is this is this is talking at the essence of their capital.
The returns how they're going to balance out the demand you've got a supply and demand imbalance. It's looking like it's coming down the path to being very substantial they want to be good players. They want to take advantage of it they want to make sure that they get good returns and so has good returns that ultimately hopefully bring in more capacity Budd.
East buyers are very sophisticated they'll pay us more money I mean, the question earlier on was are they going to keep pace with their used to pay us.
And they'll they'll pay us more money, but it's not this is not a linear progression I get down to the BOP policies and into the lower middle market.
It's linear prices up 10%, we're going to help the client reduce that by moving deductibles around dropping umbrella limits etcetera, but by and large.
Policy by policy, we're going to get that commission.
That's not the case in reinsurance, yes, I think it's a little bit of a.
I wouldn't say, it's a symmetrical bell curve, but around 8%.
I put it.
6% to 10% on that so I mean, it's two points on either side of it I would probably favor the bull case on that more than the bear case on.
Got it that's helpful.
And then maybe just one more.
Yeah.
You mentioned that you don't expect a recession.
I don't want to be a Debbie downer here, but if there is one like there was in the early Ninety's early two thousands.
Have you guys given any thoughts on what organic growth would be in that type of scenario.
I think Doug did a very good job.
Earlier that have taken it back in time, when we go back and take our.
Our results are.
Go back to 84, I think we do extremely well in good times and bad times, certainly recessions are not good for brokers sales and payrolls are what drive our R. R.
Premiums.
So there's no question that if sales of payrolls go down.
The impact of that.
Having said that people get more interested in listening through his talk to them about how our professionalism our capabilities in our.
In our niches and whatever you can help them deal with this the local brokers who takes a hit.
I would say listen we get into a recession that you wanted to refer to as you being a downer on at that type of recession.
We're still in an inflating reach environment and we're not seeing a slowdown on that when it comes to the contraction.
Exposure units I'm, not seeing trucks, just come out of the fleet. They may not be running quite as much and I know theres, a mileage adjustment on it but I'm not completely convinced that the stuff that we ensure we'll just all sudden evaporate next year might have to they may take different covers on it they may take some.
Deductibles.
When you're also looking at an environment, if you get into a recession.
That will help us on our employee retention because they will stay with a good company versus jumping for a new opportunity. So when those three or four things Clyde.
Rate increases stable workforce, a flight to quality in what but what people are looking for in terms of their broker IC is performing very well in that environment. If you want me to pick a number in there if we have a downer.
I'd be hard pressed to see how it would be less than 5% organic growth.
Oh, Okay. Yeah, that's what I was looking for thank you I appreciate the answers.
Sure.
Our next question is from Rob Cox with Goldman Sachs. Please proceed.
Hey, I just had one question I noticed open brokerage accelerated to 20% versus 15% last quarter and I was just hoping you could talk about what inflected quarter over quarter and how you see open brokerage in the E&S market broadly trending from here.
Mark it's on fire and I think you'll see more premiums moved their freedom of rate freedom of form clients need cover.
Everything from small accounts the large accounts, that's why you're seeing so much interest in terms of people investing in that market that the primary markets quite honestly are not as flexible as the E&S markets enabled to move at the pace that they can move and they are in a tough market.
Sucking business out of the primaries.
Yeah.
That answer your question Rob.
Yes, Thank you very helpful.
Our next question is from Mark Hughes with truly Securities. Please proceed.
Yeah. Thank you good afternoon.
You talked about the potential spillover to non property lines.
The reinsurance market.
Have you seen that in the past, but I just wonder how much influence.
You know the cat property business is going to have on some of the other casualty lines, but I hear what you're saying.
Curious to hear more about it.
Let me.
Caution because I've been in retail in my whole life, but for the last year I've had a chance to spend a good bit of time with our reinsurance broking gaming I candidly are in that business.
Talked about this at length in the last quarter and it has happened in the past I can't give you dates times at amounts of percent, but yes, when you have a.
Capital situation, where you need to increase the <unk>.
Pricing.
And you can add cat loads on other lines of coverage.
You will do that when you have too.
Again, I can't say to you that this is exactly what travelers are hyper data. This year given this situation or what have you I can't take you back to Andrew or something like that or or even Katrina.
But what the team is telling me is that it's very likely given the dearth of capacity and the need because of the supply demand imbalance the need for more rate.
But there are other lines or selling that are likely to take in advance as well and sorry that I'm not more specific about that along with you.
No no interesting. Thank you and then any shading you're talking about the the economy still looking good in terms of exposure units and endorsement any differentiation you see between larger accounts middle market smaller accounts.
No and Thats the thing Thats.
Keep referring to the Wall Street Journal saw but we didn't necessarily go okay, and then I come back and I talked to her.
Data people and they're like no I'm, not saying I can't say I can't I also can't break it so well constructions in the tank.
Retail is going through the roof.
Trucking is really hurting now and something that so and we've checked things like our marine business.
Whats happening with cargo.
<unk>.
Cargo seems to be holding up and if there's any if there's any decrease in cargo then cruise ships or I mean going through the roof.
So it's kind of a it is a it's a weird time based on what we read and what we see in our.
These are not anecdotal stores. These are hard data points that I've got and I can get them every day.
And.
Broad geographic solid continued.
This growth so what we're seeing.
I appreciate it.
Off a cliff I guess.
They're just not seeing it.
Understood.
Thanks Mark.
Our next question is from Josh Shanker with Bank of America. Please proceed.
Yes. Thank you for getting me at the end here.
Sometimes people ask about competition for deals I, just wanted to talk about that and we think about private equity being one of your competitors.
The marketplace is different for them, if they have to borrow at higher costs.
Is it still that generally cheap in your mind and so we're not at the market, where that's consideration how do you think about their role and their appetite and a higher interest rate environment.
Yes, we kind of signaled laterally on appetite still strong right now, but when you are adding an extra 300 basis points of that cost into the structure. It does change return expectations.
And I think that really.
We are not competing on price when we come to these deals.
Josh we're really competing on capabilities and we win on those every day if somebody decides our prices arent just similar to what they're offering that maybe be a turn higher.
People just have chosen that they don't want to be in an organization with increased capabilities or resources.
So that's.
This will cause a compression of pricing by the Pea is it will probably come down to two were comfortable with pain and I think we should excel in that then because now it isn't about price it's entirely about capabilities well dream was being a little here, Josh I mean, yeah, I think what Doug meant is that our price is similar to ours.
Competitors, yes multiples over the last five years have expanded substantially prices are higher for these deals.
But money was free.
So now you start paying for that money.
And I'm not hoping for a recession and we don't see one but show a little slowdown in there.
And maybe that annuity isn't as strong as it was before.
Our lever it was about two three times EBITDA.
We've got competitors in the market they are happy to be at nine times.
I'm sorry at some point the music has got to stop and all the chairs arent going to be full.
And if you think over a 2030 year based I mean, 4% tenure, it's not really that high.
I mean, we'll see where it goes from here, but Doug seem to have more confidence that maybe they would go away but.
If we're at the peak year, and we stay here for a while 4% isn't going to scare them away I suppose the amount that they're going to pay more than what the tenure is but.
It's got to go hire really should cause their exit I guess.
Yes, I'd agree with that their returns have been outstanding.
I agree with that.
Alright, thanks for the answers sure.
Yeah.
Our final question is from Ryan Tunis with Autonomous Research. Please proceed.
Hey, guys.
I first just wanted to say.
<unk> 5 million good Guy.
That's a nice line I can't remember the last time and broker land you're on a below the line items.
Somehow went in the right direction I think some of your competitors might even counted as organic.
Good morning.
Sure.
Yeah.
Right.
Yes, so I'll take your time spending.
To lead our margins in 'twenty three.
I just had one bigger picture question I guess on margins.
So organic similarly strong for the past couple of years, and obviously, but I mean it.
It could have not been strong two in which case I also don't think your expense growth would have been as high as it's been.
It seems to be some element of.
Clearly the organic that's allowed you guys to have what.
I want to make sure I'm thinking about this right.
What kind of an investment cycle.
So I'm just curious is that the right way to think about it like it has with strong organic allowed you to kind of.
Pull forward some investment you had to deal with I'm just kind of curious.
Maybe some of the capabilities that you guys have been able to take on.
I guess to include the organization over the past couple of years that you wouldn't have if we were.
In more of a 4% organic growth environment.
Yeah, I think you've got your nose right and I think if you go back and listen.
Two our IR day as these earnings calls and we get an hour to talk to you about during our IR day as well.
Sure.
Our five or six division leaders talk about all the investments if you listen to the first.
Five minutes or six minutes of there.
<unk> remarks.
We're talking about all that.
Value added features and client centric enhancements that we're doing in our business and we're spending a lot of money on that we've talked about Gallagher drive talk about smart market, we've talked about Gallagher submit we've talked about our niche resources.
Yeah. If you look at our content that's out there all of that is investment and what we're adding to it every year. So we are running our business right now that has a substantial amount of investment in it to make us better I think it's showing up in our organic to be real honest I think the reason why we perform well on <unk>.
As we continue to make investments into R. R.
Production in our sales.
And and niche capabilities our service.
15 years ago, we didn't know how long it took us the turnaround of salt right now, we turnaround 99, 9% of them within one hour of request because of the.
Investments that we've made to better the service.
Those type of things are just in our blood at this point and it's in our operating partner yet we're still posting terrific margins on it so.
To add to that.
I would say take a look at our internship we're very proud of the fact that this summer we had 500 young people.
Look at our business.
These are paid insurance he's arent in terms of coming to work for free and that's a that's a U S. Based number if we take the people outside the U S. It's probably closer to 600.
No another organization investing in the future of their people like that.
And our business or frankly another business.
So I'm very proud of that.
Thank you guys.
Thanks, Ryan and thank you everybody for joining us we really appreciate this evening, we had an excellent third quarter, we're well on our way to delivering a fantastic year financial performance.
I need to think more than 42000 colleagues around the globe for their hard work and dedication to our clients. We look forward to speaking with you again in person in December our investment day Investor Day in New York. Thanks, again, everybody have a great evening.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
Mhm.
Yes.
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