Q3 2024 Arthur J. Gallagher & Co Earnings Call
[inaudible]
Hello, I'm Douglas Howell.
Speaker Change: Good afternoon. Welcome to Arthur J Gallagher in Company's third quarter, 2024 earnings conference call. Participants have been placed on list and only mode. The lines will be open for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time.
Speaker Change: From the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities loss. The company does not assume any obligation to update information or forward-looking statements for via-dobbing this call.
Speaker Change: These far-looking statements are subject to risk and uncertainties that could cause actual results differently.
Speaker Change: Please refer to the information concerning forward-looking statements and risk factors sections contained in the company's most recent 10K, 10K and 8K filings for more details on such risks and uncertainties.
Speaker Change: In addition for reconciliation of the non-gap measures discussed on this call, this will also be regarding these measures. Please refer to the earnings release and other materials in the Investor Relations section of the company's website.
Speaker Change: is now my pleasure to introduce Jay Patrick Gallagher Jr. Chairman and CEO of Earth Jay Gallagher and Company.
Speaker Change: Mr. Gallagher, you may begin. Thank you very much. Good afternoon everyone and thank you for joining us for our third quarter 24 earnings call. On the call for you today is Doug Howell, our CFL, other members of the management team and heads of our operating divisions.
Speaker Change: Before I get to my comments about our financial results, I'd like to acknowledge the damage and devastation caused by the recent storms and floods.
Speaker Change: Are thoughts with those impacted by these events including our own Gallagher colleagues.
Speaker Change: Our professionals are hard at work helping clients short through their coverage, file claims, and ultimately get losses paid. I'm really honored to be part of a company and an industry with such an important responsibility, helping families, businesses and communities rebuild and restore their lives. And that's a noble cause.
Speaker Change: Okay, onto my comments regarding our financial performance, we had a great third quarter. For our combined brokerage in risk management segments, we posted 13% growth in revenue, 6% organic growth which does not include interest income.
Speaker Change: Reported in that earnings margin of 15.5% adjusted EBITDAG margin of 31.9% up 123 basis points year over year.
Speaker Change: The app earnings per share of $1.90 and adjusted earnings per share of $2.72 up to 16% year over year. Another fantastic operating quarter by the team.
Speaker Change: Good evening.
Speaker Change: Moving to results on a segment basis starting with the brokerage segment.
Speaker Change: reported revenue growth was 13%.
Speaker Change: Organic World was right in line with our expectations at 6%.
Speaker Change: As we forecast your reflex about a point of timing headwind from those large life cases we have highlighted over the past couple of quarters. Douglas provides you with some good news from October related to these sales in his remarks.
Speaker Change: Adjusted EBITDAG margin expanded 137 basis points to 33.6% which is better than I IR day expectations.
Speaker Change: Hello.
Speaker Change: Let me give some insights behind our brokerage segment organic.
Speaker Change: Within our PC retail operations we delivered 5% in the US and 7% outside the US. Internationally Australia and New Zealand led the way with organic of more than 10% The UK was up 6% and Canada was platyx.
Speaker Change: Our Global Employment Benefit Brokriching Consulting Business Posted Organic of about 4% and a few points higher, excluding the timing differences from the large life case sales.
Speaker Change: Shifting to our reinsurance wholesale and specialty businesses overall organic of 8%. So very strong growth with the retail wholesale for reinsurance.
Speaker Change: Next, let me provide some thoughts on the PC insurance pricing environment, starting with the primary insurance market.
Speaker Change: Global Third Quarter renewal premiums, which include both rate and exposure, up 5% and little change from this 6% we discussed at our September IR Day update a few weeks ago.
Speaker Change: Most lines and geographies had very similar renewal premium changes through all three months of the quarter with a couple of exceptions.
Speaker Change: September casually renewal increases outside the U.S. Reload relative to July and August, driven by changes in business mix.
Speaker Change: A guicinald, a large account, and an NS property renewal premium increases, for a bit less than September than the first two months of the quarter.
Speaker Change: But neither of these appear to be a trend. Thus far in October, we are seeing large account property and international casually renewal premium increases higher than September.
Speaker Change: Breaking down third core renewal premium changes by product line we saw the following, property up 4%. General liability up 6%.
Speaker Change: Commercial Auto of 7% from Brella up 10% workers cop up 2% Dino down about 5% cyber was flat and personal lines up 11%
Speaker Change: So overall increases continued to be broad-based and rational in our view, which cares still cautious and pushing for right where it's needed to generate and acceptable underwriting profit.
Speaker Change: We shine in this environment. Our job is brokers is to help clients find the best coverage while mitigating premium increases. So while not all of the increases ultimately show up in our organic, a rational market allows us to further differentiate ourselves with our leading tools, data and expertise.
Speaker Change: Let me shift to the rain insurance market. The July 1st renewal season saw modest property price declines, concentrated at the top end of a re-insurance tower, while casually renewal saw terms in conditions type and some modest price increases concentrated in the U.S.
Speaker Change: Clearly, a lot has happened in the property market over the past month, which is now adding some complexity to January 1st property renewals.
Speaker Change: It's still early, but we now believe a flat-ish renewal is more likely than the downward pressure previously being discussed and don't forget, US hurricane season is not over for another month.
Speaker Change: For casually risks we believe re-insurance will remain cautious heading into next year, especially if there is more noise related to U.S. reserve adequacy. We think differentiating underwriting practices will likely be the key to a successful renewal for clients.
Speaker Change: Overall, the reinsurance industry remains adequately capitalized and is likely to meet capacity demands that the upcoming January-1 renewals.
Speaker Change: We continue to believe Gallaghery will perform very well in 2025, regardless of how the market environment unfolds in the near term.
Speaker Change: Moving to some comments on our customer's business activity.
Speaker Change: Our daily revenue indications from audits and door-sponsored cancellation were again in positive territory for the third quarter.
Speaker Change: While the amount of upward revenue adjustments isn't as much as 2023, they're running in line with 2022. So client, business activity remain solid and we are not seeing any signs of meaningful global economic slowdown.
Speaker Change: Within the U.S., the labor market is on solid footing.
Speaker Change: In fact, the number of open jobs increased in August and remained well above the number of unemployed people looking for work.
Speaker Change: Over all job growth, upward wage pressure and rising medical cost inflation continue to challenge employers, looking for ways to grow their workforce and control their benefits costs.
Speaker Change: Regardless of market or economic conditions, I believe we are well positioned to take market share across our brokerage business.
Speaker Change: Remember, about 90% of the time we are competing against the smaller local broker that cannot match our client value proposition, niche expertise, outstanding service and our extensive data and analytics offerings.
Speaker Change: Putting this all together, we continue to see full year 24 Proper Georgianic around 7.5% and that would be another outstanding year.
Speaker Change: Moving on to our wrist management segment, Jell Grasad.
Jell Grasad: Revenue growth was 12% including organic at 6%.
Jell Grasad: We continue to benefit from excellent client retention increases in customer business activity, rising claim counts and new business winds. Adjusted EBITDAG margin was 20.8% 35 basis points higher than last year and a bit above our September IRJ expectation.
Jell Grasad: Looking ahead, we see organic in the fourth quarter around 7% and full-year organic pushing 9%. Margins for fourth quarter and full-year should be in the 20 and a half percent range. That too would be another outstanding year.
Jell Grasad: Shifting to mergers and acquisitions.
Jell Grasad: During the third quarter, we remain disciplined, completing four new mergers at fair prices representing $47 million of estimated annualized revenue. For those new partners joining us, I'd like to extend a very warm welcome to the Gallagher Family of Professional.
Jell Grasad: Looking ahead, we have more than 100 mergers in our pipeline, representing approximately 1.5 billion dollars of annualized revenue.
Jell Grasad: Of these 100 potential partners we have about 60 turn sheets signed or being prepared representing around $700 million of annualized revenue. Good firms always have a choice and it would be terrific if they chose to partner with Gallagher.
Jell Grasad: Let me conclude with some comments regarding our culture. As we passed our 40th anniversary as a public company, I believe our greatest differentiator continues to be our bedrock culture. It's a culture that runs towards problems not away from them.
Jell Grasad: A filter that supports one another in embraces teamwork.
Jell Grasad: A culture that is grounded in the highest standards of moral and ethical behavior. It's a culture that will continue to guide our success for many years to come.
Speaker Change: Frankly, we love this business. We enjoy taking care of our customers and that is the Caligar Way. Okay, I'll stop now and turn you over to Doug.
Doug Howell: Good. Thanks Pat and the lower everyone.
Doug Howell: Today I'll walk you through our earnings release first.com and on 3rd quarter organic growth in margins by segment.
Doug Howell: Then I'll provide an update on how we are seeing organic growth and margin shape up for fourth quarter and provide an early look on 25.
Doug Howell: Next, I'll move to the CFO commentary document that we post on our IR website and walk you through our typical modeling helpers. I'll conclude my prepared remarks with my usual comments and cash, M&A and Capital Management.
Doug Howell: Okay, let's flip the page three of the orange way.
Doug Howell: Headline Brokerage segment third quarter organic growth of 6% without interesting income. That's right in line with our September IR Day forecast during which we segment about a point of headwind during the due to the timing of large life sales.
Doug Howell: Recall that these live products are interest rates sensitive. So as we've been discussing clients we're waiting for lower interest rates.
Doug Howell: Well the good news patch mentioned happened over the last month or so. We are now seeing clients fund their policies. In fact, here in October we have already caught up with what had slipped from earlier quarters.
Doug Howell: So the quarterly lumpiness that we have been highlighting throughout the year is starting to swing the other way here in October. And thus we are currently seeing fourth quarter organic towards 8% and full year person 7.5%.
Speaker Change: How to start the budget for 25 are early thinking.
Speaker Change: is brokerage segment, full-year organic growth might be in the 6-8% range. If so, that could mean 25 similar to how 24 might ultimately play out. We'll provide some more on our 2025 thinking at our December I.R. Day.
Speaker Change: But an early reason is we remain upbeat on our ability to grow, given the investments we have been making in the business.
Speaker Change: From adding niche experts to rolling out new sales and support tools to expanding our data and analytics offerings. We believe these actions are leading to a higher new business production and strong client retention across the globe. And as Pat Describe, the Market Environment is still a tailwind for us.
Speaker Change: For me now to page 5 of their injuries to the Boigards segment adjusted EBITDA table. Third quarter adjusted EBITDA margin was 33.6% up 137 basis points over last year and above the upper end of our September IR Day expectations.
Speaker Change: Let me walk you through a bridge from last year. First of all, we pull out last year's 2020-23 earnings release. You would see where you reported back then, adjusted EBITDAC margin up 32.4%.
Speaker Change: But now using current period FX range, that would have been 32.2%.
Speaker Change: Then Organic Anentros gave us nearly 150 basis points of expansion this quarter.
Speaker Change: Finally, the impact of M&A and investors'ers used about 10 basis points of barginess quarter.
Speaker Change: If I will get you to third quarter 24 margin of 33.6% and that's the 137 basis points of brokerage margin expansion.
Speaker Change: That is really, really great work by the team.
Speaker Change: As we look at how to afford quarter 24, we are still expecting margin expansion in the 90 to 100 basis point range.
Speaker Change: And again, that would be off a fourth quarter, 23 adjusted margin for FX, which currently is estimated to be about 20 basis points lower than last year's headline margin of 31.6%.
Speaker Change: If we do that, that would mean, four-year 24 could show about 70 basis points of margin expansion and 90 basis points, excluding the first quarter impact from the role in the buck merger.
Speaker Change: Okay, let's move on to the risk management segment and the organic and EBITDA cables on pages five and six. It was another solid quarter. We personally are a gain of six percent.
Speaker Change: That's a point lower than our IRD guidance because we just miss qualifying for a full revenue bonus related to one large account. That's that Gallauder Basset continues to see excellent client retention and strong new business production.
Speaker Change: And still deliver than a Joseph E.V. at margin of 20.8% which is up 35 basis points over prior year and ahead of our IR day expectation.
Speaker Change: Looking forward, we see our gain of 7% and margins around 20.5% in the fourth quarter. If we were to post that, we would finish the year with organic, 49% and margins of approximately 20.5%. That too would be great work by the team.
Speaker Change: Howell for 25 are early thinking is for organic growth similar to the brokerage segment. Call it in that 68% range.
Speaker Change: Training now to page 6 of the earnings release in the corporate segment shortcut table. In total, adjusted third quarter numbers were interest in banking, clean energy and acquisition costs came in within our September IR Day expectations.
Speaker Change: The corporate line of the corporate segment was below our expectations.
Speaker Change: Due to a proximate leave, due to a proximate leave, 9 million dollars of additional, unrealized, non-cash, foreign exchange, remesurement expense that developed during September, and wasn't included in our IRD forecast. After tax call it about three cents.
Speaker Change: That is already reversed here in October, so it really is a non-cast nothing in our opinion. But the accounting does cause some noise.
Speaker Change: So now move to the CFO commentary document. Start your page 3 modeling helpers. There's no new news here other than FX. So just consider these updated revenue and EPS impacts as you update your models.
Speaker Change: Turning to the corporate segment on page 4 of the CFO commentary document, no changed or outlook for 4th quarter.
Speaker Change: For P9aPH5 to our tax credit carry forwards shows $796 million at September 30th. While this benefit won't show up in the P&L, it does benefit our cash flow for the next few years, which helps us fund future M&A.
Speaker Change: Turning to page 6, the investment income table, we are now embedding 2-25 Vs. Rate cuts in the fourth quarter of 24 and up updated our estimates in this table for current FX rates. Once flying here is our fourth quarter estimate does not change much from what we provided at our September IR Day.
Speaker Change: Shifting down that page to the role of a revenue table, the third quarter 24 column, sub total is $11 million and $141 million before divestitures.
Speaker Change: These are consistent with our September IRD expectations.
Speaker Change: Looking forward, the Pinkish columns to the right include estimated revenues for brokerage M&A through closed through yesterday. So just a reminder, you'll need to make a pick for future M&A.
Speaker Change: And when you move down in that page you'll see the risk management segment roll over revenues for fourth quarter twenty four expected to be approximately fifteen million dollars.
Speaker Change: So moving to cash, capital management and M&A funding, available cash on hand at September 30 was about $1.2 billion. Considering this balance in our strong expected free cash flow, we are an excellent position to fund our robust pipeline of M&A opportunities here in 24.
Speaker Change: We currently have to make capacity around $3 billion for M&A here in 24 and is looking like we could have another $4 billion to fund M&A in 25. All while making solid, I've been changing in a solid investment grade rating.
Speaker Change: So, it's another iPhone quarter in the box. Through the first nine months of the year for our combined brokerage and risk management segments, we have delivered revenues up 16%. Organic growth of 8%. Net earnings of up 20%. Adjusted EBITDAQ up 18%. And adjusted EPS up 17%.
Speaker Change: Those are terrific numbers in reflect an unstoppable culture. We are well on our way to another great year of financial results. Absorb to the team for all of their hard work. So back to you Pat. Thanks Doug. And operator if we could go to questions and answers please.
Speaker Change: Thank you. The call has now opened for questions. If you have a question, please pick up your handset and press star 1 on your telephone at this time. If you're on a speaker phone, please disable that function prior to pressing star 1 to ensure optimum sound quality.
Speaker Change: You may remove yourself from the Q at any point by pressing star 2. Again, that's star 1 for questions.
Speaker Change: Our first question comes from line of Mike Zermt with BMO Capital Market. Please just use your question.
Mike Zermt: Hey, thanks for the questions. First one is on the bridge from...
Mike Zermt: In the brokerage segment from 3Q organic to 4Q organic to kind of at the 2.0 uplift.
Speaker Change: To Clenchily, is are you saying most of that is life insurance?
Speaker Change: And if not, you know, some like RPC was still, you know, kind of more muted. But as you say, RPC is kind of lifting off into it, is trending higher.
Speaker Change: In the 4K, you just try to understand some of the pieces there.
Speaker Change: I think when you ring a premium change is what you're referring to as RPC I'm assuming.
Speaker Change: Get your vaccine underlined that our rates that what we're seeing for rates are not different all that much in the third quarter at all compared to what.
Speaker Change: We saw in the first two quarters and I think you're seeing that in a lot of the carrier releases right now too. So for the fourth quarter we're assuming about the same as what we're seeing here in the third quarter which is the same as in the first one the second.
Speaker Change: As for the increased next quarter, yes, we are getting about a point of additional organic growth from the life insurance sales.
Speaker Change: If we bake all this in, we think that it's well running around 7.5% in our business right now. That's the underlying growth when you take out the puts and takes quarter to quarter. Yeah, we're nicely in that 7.8% range.
Speaker Change: Okay, got it. So no, no other seasonality or anything there. Okay.
Speaker Change: Well, we are a little slow in the fourth quarter. It's not as big a quarter for reinsurance for us. And that has been an organic leader over the last couple of years. So yes, we do have a little bit of that impact because we're not so heavily weighted in the fourth quarter to reinsurance.
Speaker Change: Okay, that makes sense. Okay, I'm switching gears a bit to I guess the margins or just if I look at
Speaker Change: fiduciary investment income.
Speaker Change: It looks like it was much better than expected, but I think you're guiding down. What caused the spike and why is it expected to go back down?
Speaker Change: Well, I think you have to look at our premium funding business there. So when you take a look at the the table on page six
Speaker Change: of the earnings release. I don't think we've changed our estimates all that much for the, excuse me, of the CFO commentary. I don't think we've changed our comments all that much for the fourth quarter.
Speaker Change: Okay. Okay. Got it. Okay. You also realize there can be some times where we have, obviously, fluctuations in our fiduciary cash balances, too, that can impact that number.
Speaker Change: Okay, got it. And I, I guess just Doug is a.
Speaker Change: Follow-up to some of the comments you made earlier on renewal price change. So, you know, actually from a number of the carriers we've seen so far, we have seen an uptick on the casualty side in terms of pricing. And I know in the past, too, you guys have had a view that, you know, what you're hearing from carriers is that, you know, they're under-earning on some of the major casualty lines.
Speaker Change: Is that still kind of in your thought process as you think that you gave us some tidbits on how 25 could play out, that there could be some price hardening on the casualty side?
Speaker Change: There's definitely some price concern on casualty across the board, and I don't know if that'll filter into discipline on their part to continue to take it up more than we're presently seeing.
Speaker Change: But as you heard us earlier umbrellas presently rising at about 10% The only lining casually it seems to have a difficult time finding bottoms. Do you know the rest however are showing strength?
Speaker Change: Page PAGE of NUMPAGES www.verbalink.com
Speaker Change: I just got one number here, our U.S. business, our casualty lines are up a full point third quarter versus second quarter.
Speaker Change: Thank you.
Speaker Change: Our next question is from the line of Rob Cox with Goldman Sachs. Please proceed with your questions.
Speaker Change: Hey, thanks.
Rob Cox: So appreciate all the guidance on the brokerage organic.
Rob Cox: I was just curious about the components. I think in the beginning of this year, you guys had talked about maybe it was a third, a third, a third exposure, new business and pricing. I was just curious how you guys expect that might unfold in 2025.
Speaker Change: I think it's going to be half new business in excess of lost business and I think that it's going to split the rest of it between exposure and rate.
Speaker Change: Okay, got it. That's helpful. Yeah, just curious, maybe it's a little bit tough to go through all the comments, but it seemed like maybe international retail decelerated a little bit.
Speaker Change: more than the U.S. this quarter. I guess I was just curious also on your views between international and U.S. retail going into next year.
Speaker Change: Well, I think you're going to see strong international growth. That's where our strongest component is right now. And that does not seem to be backing off.
Speaker Change: If you look at our prepared remarks...
Speaker Change: We talked about the fact that a good part of our growth this quarter was international. Let's see if I can find that. Our Australia and New Zealand operations killed it this quarter, so they're up nicely. Canada is a little flattish. I want to do that. If you look at the UK, there was a mixed issue there in the third quarter also.
Speaker Change: to see through, but by and large, I wouldn't say that there's tatters anywhere that are causing us concern.
Speaker Change: Thanks guys, appreciate it.
Speaker Change: The next questions are in the line of Elyse Greenspan with Wells Fargo. Please proceed with your questions.
Elyse Greenspan: Hi, thanks. Good evening. My first question, you know, embedded within your fourth quarter guidance, the 8% brokerage organic. Is there any assumption for an impact on continued commissions from the recent storms?
Speaker Change: Yeah, we don't think we're going to be heavily impacted. Maybe a couple million bucks from the storms, but that wouldn't move that. Maybe it moves at 10 basis points.
Speaker Change: Okay, and then within the guidance, right, I think you guys said six to eight brokerage for next year. Are you assuming
Speaker Change: What are you assuming for the benefits business? I understand there was some seasonality this year. Are you just assuming it's kind of in line with the rest of the segment? I know you typically wait a little longer to give the bi-segment guidance, but just because that's brought on some volatility this year, I wanted to get a sense of where you think that will head next year.
Speaker Change: Listen, if you want to pick the midpoint of that range, maybe benefits is around 5 and reinsurance is around 9, something like that, when you're looking for a couple points on either side of the midpoint.
Speaker Change: for next year yeah for next year
Speaker Change: just the closing of transactions? And are you expecting, you know, more activity in the fourth quarter early next year? How do you guys see things on that front?
Speaker Change: Well, I think if you take a look at this, Pat, if you look at the general marketplace in terms of acquisitions, there's been a bit of a slowdown.
Speaker Change: In general, across the board for the last year. We've got a great pipeline. In my experience, we've got one of the best pipelines we've ever had. So, I think that possibly when the discomfort, if you want to call it that, or concentration on this election finally ends,
Speaker Change: Clearly, if the Democrats get in, I think there could be a rush for the door. I don't know what happens in the case the Republicans win, but at any rate, I think when things settle out, we do think there'll be continued great opportunity, and I do think that there'll be a return to a little bit more robust market.
Speaker Change: Yeah, I think we're gonna be I think if you looked at a year-to-date in 21 20 and 21 We are closing around 17 and 22. We closed 19 year-to-date 24 at 27. Yeah last year. We closed 37 year to date
Speaker Change: always talk in deals, acquisition. So it was a little slower this quarter. But I think as you heard from paths, pretty detailed comments, our pipeline is terrific right now.
Speaker Change: And then one last one on like that corporate line within the corporate segment, Doug, I thought you said that it was worse, right, than September IR day because of the FX re-measurement, but that that reversed in the fourth quarter, but then the Q4 guide for corporate didn't change. Are you just not modeling that in yet?
Doug Howell: Yeah, that's a good point. We might be a little bipolar on that. We might have been able to schedule a couple extra pennies on that line for the reversal of what we saw at the end of the third quarter, but that bounces around quite a bit. So I think that we'll see what happens. Again, we just didn't feel like for a couple pennies it was worth changing that number.
Speaker Change: Okay, thank you.
Speaker Change: Thanks, Elyse.
Speaker Change: The next question is from the line of Gregory Peters with Raymond James. Pleasure to see your questions.
Gregory Peters: Yeah. Good afternoon, everyone. Just building on your...
Gregory Peters: Building on your last answer on acquisitions, one of the things that struck out, or stuck out to me, I should say, as I was going through the supplement was the weighted average multiple for tuck-in pricing of acquisitions came down a lot in the third quarter.
Gregory Peters: Is there any... maybe you can just...
Gregory Peters: Help me understand what happened why the multiple came down because I don't feel like multiples are coming down in the marketplace
Speaker Change: And Pat, in your prepared remarks, you seem to emphasize your price discipline a little bit more than usually referenced in talking about tuck-in acquisitions.
Pat: Yeah, when we prepared the remarks, Greg, we did discuss whether in the past we've been undisciplined. Understood. No, I think it's just a good reminder. You know, we have a lot of people listening to these calls, our own people included, and this is a theme for us.
Pat: that we want to do great deals at the right price. We've done that now for a good 30 years.
Pat: It's just a reminder to our own folks and to our listeners that
Pat: We do.
Speaker Change: Thank you.
Speaker Change: A lot of acquisitions.
Speaker Change: We try to maintain a good discipline around the pricing, and we seem to strike a fair balance between that and the great people who join us.
Speaker Change: Okay, another sort of nitpicking item, you know, you were going through your earnings press release.
Speaker Change: And I was going through the adjustments to earnings to get to your adjusted EBITDA. I'm on page 5 of brokerage.
Speaker Change: And one of the things that stuck out to me is just this huge jump up in workforce and lease termination related charges in a year.
Speaker Change: This year versus last year in the third quarter versus the third quarter last year. Is there something going on, you know, on a bigger scale, is this is this more offshoring that's going on, or maybe you could just help.
Speaker Change: I know it's a small item inside your income statement, but maybe you could just give us a sense of what's going on in that place.
Speaker Change: What I was just going to say, Greg, you hit on the offshoring thing, it really continues to be a very strong play for us and you'll recall years ago we started with a very small group. We're 12,500 people strong there now.
Speaker Change: and as we do acquisitions and go across the board, illustrating the type of quality and
Speaker Change: The speed with which we can do things like issue certificates
Speaker Change: There's pretty quick adoption. It's pretty good.
Speaker Change: We benefit from technologies that we're deploying, and we're benefiting from our offshore standards of excellence. It just gives us an opportunity to continue to optimize our workforce. And so I think you're seeing that this quarter. Yeah, it popped up a little bit because we had some opportunities to optimize our workforce. So you'll see that from time to time.
Speaker Change: Great, and then just step back, macro question, and this will be the last one. You know, I know your commercial customers...
Speaker Change: you know, set their budgets for the year. In the past, given the robust rate increases that you've had to sell, it seems like the market's beginning to stabilize a little bit more than, say, for it was two years ago.
Speaker Change: How are the budgets, when you hear from your customers, how are the budgets changing for their insurance spend? Is it, is, you're seeing more flat budgets, or are you still seeing them assume, you know, increases? Give us a sense of what's going on there. Really not flat, Greg, for two reasons. Exposure units.
Speaker Change: Thankfully are continuing to grow our this is why we go through our daily daily review of the things that are coming through audits Etc
Speaker Change: We're seeing a robust economy and that's clearly in the big part of the middle market And so from SME all the way through large accounts We've got the data on that people are expanding their exposure units. So budgets are going up secondly. We're very very cautious
Speaker Change: We are not leading customers to believe that there's any kind of nirvana relative to rates. That is not what's happening.
Speaker Change: Which leads us right into discussing how much you retain?
Speaker Change: what you bring back into the coverage stack that you might not have had before, and that's where the real strength and art of being a broker is.
Speaker Change: is understanding that appetite for risk that each individual account has working with those primary buyers.
Speaker Change: to decide how they're going to get their best spend.
Speaker Change: And it's not a discussion all around rate by any means.
Speaker Change: Yeah, I think you take the chaos out of the pricing cycle and have this rational pricing cycle that we're seeing right now our guys
Speaker Change: We'll show the tools and capabilities.
Speaker Change: that we have, and that will shine through and differentiate ourselves.
Speaker Change: That's why when I said before that I see a better new business versus lost business year next year than we've even seen in the last couple of years.
Speaker Change: And by the way, to that point, Greg, we can take clients into our data now, and I think you know this. We can say clients like you buy this, and their quotes and cover looks like this, and by the way, their costs are this. Well, why is that?
Speaker Change: Think about selling or buying a house on the street. One's been taken care of, looks pretty darn good, has street appeal. The other looks like junk. Guess who gets the better price? Why don't we try to get you looking more like the house on the street people want to buy?
Speaker Change: And that, back to my point of art, is what it's all about to be a good broker. And that's why when we get a rate environment like this, I feel very confident talking to our salespeople about, we better see some increased sales, folks. Let's go.
Speaker Change: Sure enough, thanks for the answers. Thanks, Greg.
Speaker Change: The next question is from the line of Dean Cristiello with KBW. Please proceed with your question.
Dean Cristiello: I was hoping if you guys could provide maybe some additional color and the sequential decrease in the organic growth in brokerage, especially in the context of that, you know, renewal premium change holding up pretty strong sequentially.
Dean Cristiello: All right.
Speaker Change: Well listen, I think I said earlier that our first quarter is strong because it's a heavy reinsurance quarter, right? We've talked about some of the life insurance being a little lumpy.
Speaker Change: But if you bounce those two things out of there a little bit again We're running around seven and a half percent organic growth each quarter. So while it looks like that on the face Yes, we're at six now, but we warned that there was a full point of headwind against that
Speaker Change: Also, we're not seeing substantial rate differentials, you know, rates between the quarters. So really underline it when you carve out the seasonality of a couple of our businesses.
Speaker Change: Some of the mixed differences between when property renews versus when casually renews.
Speaker Change: The life lumpiness, you've got to take our word for it, it's pretty steady underlying other than that, you know, those things that I've said. So, it's pretty steady right now underlying. Yeah, and if you want to go back three or four years, DNO is up 300%.
Speaker Change: So, by line, by geography, these rates do make a difference, they move.
Speaker Change: So we're not seeing a DNR renewal anywhere near to 300%. In fact, it's off five or six. So the percentages do move. This is not an environment where you say for the next ten years good news is it's 4% a quarter, big bang boom.
Speaker Change: Got it. That makes sense. And then my second one, a few of your competitors have made some large acquisitions to help, you know, improve their middle market capabilities. And I was wondering, what, what implications do you think that have on the competitive environment going forward, sort of being that you guys are, you know, a dominant player in that space?
Speaker Change: I don't think it has any impact, to be perfectly blunt, on our business at all.
Speaker Change: Okay, thank you.
Speaker Change: Thanks, Steve.
Speaker Change: The next question is from the line of Mark Hughes with Truist Securities. Please receive your questions.
Mark Hughes: Yeah, thank you. Good afternoon.
Mark Hughes: Doug, did you give early margin thoughts for 2025 for brokerage and risk management?
Doug Howell: I have not. I will in December as we go through the budget, but I will say this.
Doug Howell: You know, we post six to eight percent of our organic growth next year. It's there, Mark.
Doug Howell: There's an opportunity for us to continue to get better. Our scale advantages are coming through, our technologies.
Doug Howell: Using the Offshore Centers of Excellence, it still gives us an opportunity in an environment that we're seeing with current wage inflation, with current inflation in other categories of our spend.
Doug Howell: that we continue to have opportunities to get better and better. And when you're punching out six to eight percent organic growth, the underlying margins will absolutely have opportunity for expansion.
Speaker Change: Very good. And then the, could you give organic.
Speaker Change: broken out by the wholesale components and then reinsurance I think you might have given those collectively at up 8% but do you happen to have the components of that?
Speaker Change: Yeah, you know listen some of like our affinity businesses might be at 12 some of our Program businesses might be around that six six percent. I think our open brokerage is you know somewhere around
Speaker Change: 9% 8 or 9% the reinsurance is somewhere around 8 or 9% this quarter So I would say other than a couple
Speaker Change: You know, maybe the affinity business just a little better this quarter, and maybe the program business just a little below that 8%. But the reason why we lumped them together, and it was just to shorten the script, but, you know, there's not a lot of difference when you're looking at, you know, around 8%.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Understood. And then any comment, Pat, on the mixed shift out of admitted into the PNF line?
Speaker Change: Yeah, I think it's very it's a really interesting one mark. I think we're seeing continued tremendous submission supply into our wholesaling operation RPS that has not slowed down which is which is really interesting and we are not
Speaker Change: to the primary market in any great extent.
Speaker Change: seems to be continuing its growth and it's maintaining its accounts. And I think that's, you know, we've got people in RPS that bring more than just pricing to the deal. There's a lot of expertise there. There's a lot of layering and structuring that goes into some of these deals that your local retailer
Speaker Change: Ourselves included, quite honestly 50% of our wholesale business goes to RPS that's for a reason. So I think it's both professional capabilities as well as market access and that market is still growing nicely.
Speaker Change: Thank you very much. Thanks Mark.
Speaker Change: Thank you.
Speaker Change: Our next question is from the line of Alex Scott with Barclays. Please proceed with your question.
Alex Scott: Hi, thanks for taking my question.
Alex Scott: So, I mean when I hear what you're saying about Reinsurance and the strength and growth there the wholesale business, you know, it seems like it's growing very nicely as well You know when I look at the six
Alex Scott: You know percent and maybe yeah, I guess
Alex Scott: Does that mean, you know, I guess it obviously means that the businesses other than reinsurance and wholesale, like the more core retail, is doing something lower?
Alex Scott: Is there anything that's causing some of the price there to not flow through? Is that just maybe some of the property deceleration we saw? I'm just trying to understand that piece of it specifically. What are some of the trends you're seeing in puts and takes headed into next year for the core retail piece of it?
Speaker Change: There's a few that offset each other, but it's not like there's any one particular area that is systemically running below that level right now.
Speaker Change: Got it. And maybe if we can go back to reinsurance. I mean the growth rate you're anticipating sounds pretty robust there despite the flight pricing and I just want to see if you could add some color around that. I mean does that have to do with demand? Can you talk a bit about what you're seeing in terms of your clients demand for reinsurance?
Speaker Change: Yeah, I think demand seems very very strong which is good news for us
Speaker Change: Also, I think our level of expertise in helping clients in a market environment where there is capacity.
Speaker Change: and they can move around how they play in that capacity. It's a very strong demand for our consulting capabilities around reinsurance. What's the next move for the carriers that are our customers?
Speaker Change: So, you have both. You've got demand, I think you have more utilization, there's strong growth at the primary level, and all that flows up into the funnel for reinsurance. And as one of the top three players in that business, we have a lot of good prospects on the list.
Speaker Change: Great. Thanks for the responses.
Speaker Change: Sure. Thanks, Alex.
Speaker Change: Our next question is from Katie Sackis with Autonomous Research. Please proceed with your question.
Katie Sackis: Hi, I apologize. Thank you for the question. There might be some background noise. There's a fire drill going on right now. I want to circle back to the subject of valuations. Thinking about
Katie Sackis: acquisitions in the middle market that are, you know, really concentrated in excess of $15 million of revenue. We've seen a couple of those lately and the multiples on those deals have been
Speaker Change: a lot higher than we've seen in the past. I was curious how that compares to what you guys are seeing for those larger middle market deals and whether your appetite to participate in larger acquisitions has shifted at all.
Speaker Change: value to their customers. So many times they look at it and they say that they get the opportunity to continue on doing what they're going to do. And so they get excited about it.
Speaker Change: 10, 11, or 12 multiple. That's the reality about it. They're making a great return for their family, and they know they get to continue doing it with us for as long as they would like to do in their career.
Speaker Change: And that's valuable to them, too. Don't forget that. Let's also take a look at the landscape. We don't talk about this, I think, enough. Because the big deals get big headlines. And they are big platforms.
Speaker Change: We estimate there's 29,000 agents and brokers in America. Last year, business insurance, last July, business insurance ranked the top 100 in the United States. Number 100 did $30 million in revenue.
Speaker Change: So there's 28,900 brokers in America, that's firms, not people, that are out there trading. And that's why we say 90% of the time, which continues to be consistent over the last decade, when we compete in the marketplace, we're competing with somebody smaller.
Speaker Change: And it's probably less than 10% of the time, really, that we're competing with Marsh and Aon, who are the only larger brokers in the world today. It's not that we don't compete. We do. There's a robust market at the top end.
Speaker Change: When you think about that, we can use our funds, as Doug says, at lower multiples. We can have 100 of these opportunities in our pipeline. We can be pricing out 70 of them and possibly put on a billion dollars of revenue with people that want to join us.
Speaker Change: have not joined somebody else, want to bring their culture and their people aboard a culture that fits and matches theirs, as Doug said, a brokerage run by brokers.
Speaker Change: It doesn't get the press.
Speaker Change: But it seems like a pretty good strategy and a good use of our cash dust.
Speaker Change: Thank you. Thank you.
Speaker Change: Got it. Thank you so much for the color.
Speaker Change: Hey, you better evacuate, Kitty.
Speaker Change: Our next question is from the line of David Muldermadden with Evercore ISI. Pleased to see you with your question.
David Muldermadden: Hey, good evening. I just had a question in brokerage and the contingents.
David Muldermadden: We're up 24% on an organic basis. I was wondering if you could just talk about what what was driving that in the quarter
Speaker Change: You know, listen, I think that, you know, when you're talking about that, it's another seven or eight million dollars of where it developed from. We just had, you know, between our benefits business and our U.S. retail business, that's where we picked up a few extra contingents in the quarter, or our estimation for those contingents in the quarter. So there was nothing special in there.
Speaker Change: Got it. Okay, that's helpful.
Speaker Change: And then I guess just a just a bigger picture question
Speaker Change: You know, I heard the commentary on the term sheets being prepared, or that, you know, in the process of getting signed with 700 million of
Speaker Change: of revenues. Do you have any stats historically on just how many of those closed? Like what percentage of those closed in the next year? Just to help us level set how much the contribution could be going forward.
Speaker Change #100: You really don't. Here's the thing, every one of these is a very interesting story unto itself.
Speaker Change #100: You've heard me say, I mean, I think the longest time we spent talking to a client talking to a prospect and getting to know each other was 20 years. So sometimes they happen in a quarter. Sometimes they take a couple of years. And but when we get to pricing.
Speaker Change #100: and we get to putting together a letter of intent, we're getting serious. And that's a deal that's gonna get decided in the next six months.
Speaker Change #100: We feel very good about the deals that we're proposing right now. I would think we'd have a good shot at an awful lot of those.
Speaker Change #101: Okay, that's good to hear. And then...
Speaker Change #102: Just finally, so it sounded like the US retail, PNC organic, it sounded like that slowed a little bit. I think it was 5% if I heard that right, and I think it was 6% last quarter. Was that just the large account property business that you were talking about that has reaccelerated here in the fourth quarter?
Speaker Change #103: You know, listen, I'm just looking at my sheet here. If it moved, it moved a half a point one way or another. We did have more, you know, first quarter was just a little bit better than that, but second quarter is about the same number as what we've got right now.
Speaker Change #104: Great, thank you.
David Muldermadden: Thanks, David.
Speaker Change #105: Our next question is from the line of Grace Carr with Bank of America. Please receive your question.
Grace Carr: Hi, everyone. I was hoping we could talk about the contingents a little bit more. Just given kind of the ongoing conversation around the casualty market, I was wondering if
Grace Carr: how y'all are thinking about any potential risk of maybe some of the pressures from the casualty line that we saw in contingents last quarter resurfacing over the next few months.
Grace Carr: You know if it did we're talking a few million bucks. I mean I wouldn't I wouldn't call that as being a systemic issue that we're going to have to face just like with the storms it's a few million that you know there are some corridors we know that that you know
Speaker Change #107: We do have caps on our contingents, and so sometimes if the carriers have, let's say, maybe more losses than they had hoped, it may still let us get to our full contingent level because there's caps on that.
Speaker Change #107: And if carriers continue to strengthen their casualty rates the way they have been and what they're saying, what we're hearing from them, what we're reading about what they're saying, it should maintain our contingent level also.
Speaker Change #108: Thank you.
Speaker Change #109: Thank you. And just a quick follow-up on the lumpy life sales. If I'm understanding correctly, y'all are expecting pretty much all of the timing issue to work itself out in 4Q, or should we expect any sort of kind of lagging impact from that in early 2025 as well?
Speaker Change #110: Now what I said is already here in October, we have recouped half of what had been the timing that had come out of this first and second quarter, excuse me, second and third quarter, so we're going to pick up, so far it's half.
Speaker Change #110: We think that we've got a pipeline, maybe to recover at all between now and the end of the year, and then we'll start over again, just like every other sales organization, we've got to start over next year, and go out there and see if we can gin up some opportunities. But this product is becoming...
Speaker Change #110: more and more Necessary for many not-for-profits in order for them to be competitive in their executive benefit package So this is a product that we think has long legs over the over the next many years, you know several or many years
Speaker Change #110: Thank you.
Speaker Change #111: Thanks guys.
Speaker Change #112: Thank you. Our last question is from the line of Mike Zaremsky with BMO Capital Markets. Please proceed with your question.
Mike Zaremsky: Oh great, just a quick follow-up on life insurance.
Mike Zaremsky: What percentage of your brokerage revenues are life insurance? And I don't know if you want to break it out into this new product that might be more lumpy or just growing faster over time than, you know, traditional life. The lumpy business that we're talking about is about a $125 million business.
Speaker Change #114: OK, OK then. OK, that that helps explain why it could move organic, but that much. OK, thank you. That's all.
Speaker Change #115: I think that's it, Operator. Thank you again, everyone, for joining us this afternoon.
Speaker Change #116: We had an excellent third quarter and we're well on our way to delivering another excellent year of financial performance I'd like to thank our 55,000 colleagues around the globe for their hard work and dedication to our clients
Speaker Change #116: We look forward to speaking with you again in person at our December Investor Meeting in New York City. Thank you very much for being with us this evening. We'll talk to you then.
Speaker Change #117: This does conclude today's conference call. You may disconnect your lines at this time.