Arthur J. Gallagher & Company (AJG) — Q4 2021 Earnings Call Transcript

Thank you. Good afternoon. Thank you for joining us for our fourth quarter 2021 earnings call. On the call with me today is Doug Howell, our CFO, as well as the heads of our operating divisions. We had an outstanding fourth quarter. For our combined brokerage and risk management segments, we posted 18% growth in revenue, 11% organic growth, net earnings growth of 11%, adjusted EBITDAC growth of 17%, and we completed 18 new tuck-in mergers in the quarter. That's on top of closing our Willis Re merger. Our total for the year, our merger strategy added more than $1 billion of annualized revenue. That's just fantastic. Needless to say, I'm extremely proud of how the team performed during the fourth quarter and the full year. So let me give you some more detail on our outstanding fourth quarter performance starting with the brokerage segment. During the quarter reported revenue growth was 19%, of that 10.6 was organic, another sequential step up from the third quarter and the fourth consecutive quarter of improvement. Net earnings growth was 8% adjusted EBITDAC growth was 17%. And we expanded our adjusted EBITDAC margin by 13 basis points in line with our December IRD expectations. Remember, that's lower because of the natural seasonality of the reinsurance acquisition, margins would have expanded nearly 90 basis points. So another great quarter for the brokerage team. Let me walk you around the world and break down the 10.6% organic, starting with our PC operations. First, a domestic retail business posted 13% organic, driven by excellent new business, higher exposures, and continued rate increases. Risk placement services, our domestic wholesale operations posted organic of 15%. This includes more than 30% organic in open brokerage, and 5% organic in our MGA programs and binding businesses. New business was better than 2020 levels and near double-digit renewal premium increases helped too. Outside the U.S., our U.K. business posted organic of 12% specialty including our existing Gallagher Re business was up in the high teens and retail is up 7%, both fueled by new business and retention in excess of 2020 levels. Australia, New Zealand combined organic was more than 8%, also benefiting from good new business and improved retention. And finally, Canada was up more than 13% organically and continues to benefit from strong new business trends, stable retention, and renewal premium increases. Moving to our employee benefit brokerage and consulting business. Fourth quarter organic was up about 7%, a couple of points better than our December IRD expectation. We saw some nice sequential improvement over the course of 2021 up from the 2% organic we delivered in the first quarter, thanks to a rebound in the global economy, declining U.S. unemployment, and increased demand for our consulting services as businesses look to grow. Next, I'd like to make a few comments on the PC market. Overall, global fourth quarter renewal premium increases were above 8%, broadly consistent with the increases we saw during the first three quarters of '21. Moving around the world, renewal premium change, which includes both rates and exposure, was up about 8.5% in U.S. retail including a 13% increase in professional liability, 8% in property and casualty, and 4% in workers comp. In Canada, Australia, New Zealand, and the U.K., retail renewal premiums were up between 7% and 9%, mostly driven by increases in professional liability and property. Within RPS, wholesale open brokerage premium increases were up 13% and binding operations were up six. Shifting to reinsurance, January 1 renewal showed price increases that vary by geography and client loss experience. Loss-free programs saw rates flattish to up 10%. While loss-impacted accounts and catastrophe exposed property business experienced rate increases that were, in many cases, double that. So rate tended to be based on clients' specific attributes and loss history. And I consider that to be a healthy outcome. So whether retail, wholesale, or reinsurance premiums are still increasing almost everywhere. Looking forward, I see difficult PC market conditions continuing throughout 2022. That's because our risk-bearing partners remain cautious on rising loss costs. So property coverages, replacement cost inflation, and the increased frequency and severity of catastrophe losses are causing underwriters to rethink rate adequacy. On the casualty side, social inflation, low investment returns, and the potential for increases in claim frequency as global economies further recover are all potential negative drivers of future underwriting profitability. And on top of higher loss costs and lower investment returns, reinsurance costs are also increasing. So I think carriers will continue to push for rate and don't see a dramatic change in the near term. We shine in this type of environment by helping our clients find appropriate coverage while mitigating price increases through creativity, expertise, and market relationships. I'm equally as upbeat on our employee benefit consulting and brokerage business. As you know, the first quarter is seasonally our largest employee benefits quarter and is looking like the team had a strong annual enrollment season. Early indications are pointing to an increase in new client wins over the prior year, consistent client retention, and a slight increase in covered lives. With improved business activity and increased demand for goods and services, businesses are trying to grow their workforce. But the labor market remains extremely tight with more than 10.5 million job openings domestically and 6.3 million people unemployed and looking for work. This lays the groundwork for robust demand for our consulting services in 2022 as employers look to attract, retain and motivate their workforce. So we finished '21 with full year organic of 8%. That's really nice improvement from the 3.2% organic we reported in '20 and above pre-pandemic 2019 organic of 5.8%. As we sit here today, we think '22 organic will end up in a very similar range to '21 and there is a case that it ends up even better. Let me move on to mergers and acquisitions. It was great work by the team to close the reinsurance acquisition in early December. Integration is well underway and progressing at a good pace. Remember, we are a seasoned integrator. On the revenue side, much like our tuck-in acquisitions, we've mobilized our local teams from retail, wholesale, and even Gallagher Bassett to partner with our new colleagues and generate new revenue opportunities. I'm also very pleased that our combined Gallagher Re team hit the ground running and had a strong finish to the year. Financially, the acquisition added about 20 million of revenue in December and as expected generated a small EBITDAC loss due to seasonality. More importantly, I'm already seeing examples of cross-division cooperation and collaboration. Our new reinsurance colleagues are quickly embracing our Better Together Gallagher culture. Outside of reinsurance, we completed 18 tuck-in brokerage mergers during the quarter, representing about $65 million of estimated annualized revenues. I'd like to thank all of our new partners for joining us and extend a very warm welcome to our growing Gallagher family of professionals. As I look at our tuck-in merger and acquisition pipeline, we have around 35 term sheets signed or being prepared representing over $200 million of annualized revenues. We know all these will not close; however, we believe we'll get our fair share. Next, I'd like to move to our risk management segment Gallagher Bassett. Fourth quarter organic was 13.1%, a bit better than our December IRD expectation. Margins approached 19% in the quarter, leading to full year adjusted EBITDAC margin of 19.1%. Another great quarter and full year for that matter from the team. We saw more new arising claims within General Liability and Property, and to a lesser extent workers compensation during the quarter. New COVID-related workers' comp claims were similar to the third quarter, slightly dated by the late-year surge in cases from the Omicron variant. Regardless of the short-term variability of new rising claim activity, we feel very good about the business. Looking forward, continued strong retention combined with new client wins in the fourth quarter should drive '22 organic into the high single-digit range. So it was another fantastic year for our franchise, and I'm extremely proud of our team and our collective accomplishments. Together, we produced 8.6% organic growth in our combined brokerage and risk management segments, completed 38 mergers with more than $1 billion of estimated annualized revenue, more than 110 basis points of adjusted EBITDAC margin expansion. And we were recognized as one of the world's most ethical companies for the 10th year in a row by the Ethisphere Institute, all this in the face of a pandemic. What a fantastic year; more than ever, our success is due to our bedrock culture. Our culture helps us deliver better results, better results for all of our stakeholders, including our customers, our colleagues, our underwriting partners, and of course, our shareholders. Every day, all of our teammates get up and work diligently to maintain our culture, to promote our culture, and to live our culture. That truly is the Gallagher way. Okay, I'll stop now and turn it over to Doug.

Thanks, Pat. And hello, everyone. As Pat said, a terrific quarter to close out an outstanding year. Today, I'll start with our earnings release and touch on organic margins and our corporate segment shortcut table. Then I'll move to our CFO commentary document where I'll talk a little bit about how we're now providing our typical modeling helpers for '22, add some commentary in the Willis Re acquisition and our latest thinking on clean energy. I'll then finish up with my comments on cash liquidity and capital management. Okay, let's flip the page for the earnings release to the brokerage segment, organic table. All in, brokerage organic was 10.6%, a nice step up from the 9% we posted last and the six plus percent we posted in the first half of '21, leading to full year organic of 8%. Looking forward, as Pat said, we see full year '22 similar to '21 or even better. Now turn to page six for the brokerage segment adjusted EBITDAC margin table. Headline all in adjusted margin expansion for fourth quarter was 13 basis points, right in line with our December IRD expectation. But recall that expansion has the adverse seasonal impact of closing Willis Re on December 1. Without that, adjusted margins would have expanded 88 basis points, also right in line with the forecast we provided in December. For full year adjusted margin expansion was 123 basis points. Excluding Willis Re, it was up 142 basis points. And it's important not to forget, that's on top of 420 basis points of adjusted margin expansion in '20 and 75 basis points in '19. That's absolutely incredible execution before, during, and as we emerge from the pandemic. Moving on from '21, looking forward, as the pandemic limitations continue to ease in '22, we will naturally see some costs returning in areas such as travel, entertainment and perhaps some other office consumables. Incremental full year '22 costs from these three areas could be as much as 25 million. But even then, our full year spend on these categories would be below pre-pandemic levels, showing that we're being prudent. Also, we're back to making targeted investments to drive long-term growth. In '22, we're planning for increases in marketing, advertising, consulting, professional fees, and certain IT investments. These costs, combined with higher insurance premiums for E&O, D&O, and work comp, would total around 35 million. So, like we said in our December IR Day, we should be able to absorb those costs and hold margins if we post around 7% organic. And if organic is over 7%, we could even show some margin expansion. Then by 2023, we could be back to that pre-pandemic view that margin expansion might occur at a 4% organic level. And to be clear, all of these comments are before the impact of the acquisition of Willis Re. On a pro forma basis, those margins can run a bit higher. So, the math would suggest that naturally provides some lift to our consolidated brokerage segment margins in '22. A couple of things to keep in mind as you build your quarterly models for our brokerage segment in 2022. First, consider seasonality. Due to our benefits business, and now our larger reinsurance business, first quarter seasonality means our first quarter is our largest revenue and EBITDAC quarter of the year. And second, perhaps slightly more nuanced, since we're not seeing price and/or exposure increases in benefits and workers comp to the extent we are in other areas of PNC insurance, first quarter organic might be a point or so below your full year pick simply due to the mix. So the math would then suggest that second, third, and fourth quarters could post over your full year organic pick. Again, that's just a nuance to help you with your quarterly model. Moving on to the risk management segment and the organic table at the bottom of Page Six, you'll see 13.1% organic in the fourth quarter and full-year organic in excess of 12%. What a great rebound from the depths of the pandemic. And as Pat said, it's looking like revenue momentum continues into '22 with full year organic revenue growth in the high single digits, which is really terrific given '22 will naturally have more difficult compares than '21. Moving to the risk management segment EBITDAC table on page seven, adjusted EBITDAC margin of 18.6% in the quarter and more than 19% for the full year, a fantastic result. Just like our brokerage segment, we saw a nice step up from pre-pandemic levels of 17.5%. Again, that demonstrates our ability to maintain a portion of our pandemic period savings even as we make further investments in technology. Looking forward, as you heard on our December IR Day, we will continue to make investments in analytics and tools to enhance the client experience and drive better claim outcomes. But even with those, holding margins close to that 19% is achievable for full year ‘22. All right, let's turn to page eight to the corporate segment table. In total, adjusted results were $0.02 better than the midpoint of our December IR Day forecast, mostly as a result of strong clean energy earnings. We did have a couple of notable adjustments this quarter. First, Willis Re transaction-related costs, as discussed in footnote two, were 22 million after tax. Second, as discussed in footnote three and similar to third quarter, we had non-cash, deferred tax adjustments related to international M&A earnouts, which is most of it as well as some other small tax and legal settlement items together about 19 million after tax. Now let's shift to our CFO commentary document we post on our website starting with page three. As for the fourth quarter, you'll see most of the brokerage and risk management items are close to our December IR Day estimates. Also on that page, we are now providing our first look at items related to the brokerage and risk management segment. A couple lines we're highlighting, first FX, the late '21 and early '22 weakening of the U.S. dollar against our major currencies is creating about a $0.04 headwind to EPS next year. Second, integration costs. You'll read in footnote one, the integration estimates provided here only reflect expenses associated with Willis Re. As Pat mentioned, integration is well underway and we are still comfortable with our ultimate pack of about $250 million of total costs for integration. All right, let's turn to page five of the CFO commentary, the page addressing clean energy. The purpose of this page is to highlight we are transitioning from over a decade of showing GAAP earnings to a six-day period where we harvest cash flows. You'll see in the blue column that we reported '21 GAAP earnings of 97.4 million, a really nice step up, up 39% over '20 and we generated 40 million of net after-tax cash flow. So also a nice step up from '20. But the real headline story here is in the pinkish column. Cash flows take a significant step up in '22, and it looks like we'll be harvesting $125 million to $150 million a year of cash flows and perhaps even more in '23 and beyond. Now there is still a possibility of an extension in the law and we're well-positioned to restart production if that happens, but if not, we have over a billion dollars of credit carryovers. If we use say $150 million a year, that's a seven-year cash flow sweetener. Flipping to page six in the rollover revenue table, the reinsurance acquisition is off to a solid start and we are encouraged with both its December results and early indications from the 1-1 renewal season. So it's looking like our pro forma revenue and EBITDAC of 745 million and 265 million respectively are holding up nicely. So the reinsurance acquisition is off to a terrific start. All right, as for the cash and capital management future M&A. At December 31, available cash on hand is about 300 million with strong operating cash flows expected in '22. With potentially nice pumping cash flow from our clean energy investments, we are extremely well positioned to fund future tuck-in M&A using cash and debt. Over the next two years, we could do over $4 billion of M&A without using any stock. You also see that our Board of Directors announced a $0.03 per share increase to our quarterly dividend, that would imply an annual payout of $2.04 per share. That's a 6.3% increase over 2021. Finally, one calendar item, we are planning on our regular mid-quarter IR Day from 8 am to 10 am, Central Time on March 16. Again, that will most likely be virtual. During that, we will allocate some time to socialize our planned migration to reporting adjusted GAAP EPS results excluding the impact of non-cash intangible asset amortization. We’ll discuss the details of all the adjustments including representing historical results on the new basis. Okay, that's it. From my vantage point, as CFO, we are extremely well positioned for another great year here in '22. Before I turn it back over to you, Pat, I'd like to thank the entire Gallagher team for a terrific quarter and fantastic year.

Thanks, Doug. Operator, let's go to questions and answers please.

Hey, guys, this is actually Charlie on for Mike. So organic growth in the back half of the year has been outstanding and has been accelerating. But pricing, while positive, seems to be decelerating and GDP is decelerating as well. Can you provide some color on what makes you comfortable with guiding us to organic growth at almost two times your historical level?

We think that the rates are going to hold. It's just that simple. If the market falls out, they won't; if the market holds the way it is, it will. I see all kinds of reasons for it to continue, as laid out in my prepared remarks. But beyond that, you've got a situation where underwriters are not backing off from their need for rate. We're seeing that every single day. We're into the renewals, obviously now deep into the first quarter, and we're not seeing rate relief in any way, shape, or form along the lines of what I talked about in my remarks.

I still think there's a lot of pent-up exposure unit growth still to come. We think there's inflation sitting there. We think that there's a need for our benefit consulting advice, more and more. We think that wholesaling markets are becoming tough and harder to find placements. We think there are more accelerators when it comes to that than there are maybe a slight 0.5 point pullback in what the underwriters are asking for, and that far overshadows it.

Got it. That's great information. Regarding M&A, I understand that the integration is progressing well. Does the reinsurance transaction influence M&A decisions this year? Or is there a possibility that you won't utilize your entire free cash flow because of it?

Of course, I said we think we have $4 billion to spend over the next couple of years. I think that's almost $2 billion next year and a little over $2 billion in the final year. So we have plenty of free cash to fund acquisition in our pipeline. It does get a little slower in the first quarter. There are people that push more to have something done by year-end and we have that happen every year. But we're pretty excited about what we're seeing in our pipeline right now.

I know I can't do it Doug, but I'm wondering if you can say pre-pandemic ten times really fast.

Pre-pandemic, pre-pandemic.

Obviously, I don’t know. I couldn’t.

I'm just teasing. So let's see, I had a question about the M&A. And I was looking in the CFO commentary on page three. And of course, Pat, you always give us a view on term sheets, outstanding, etc. So, two-part question. When you give us term sheet numbers, the number of term sheets that are out there, and then ultimately, to close, can you talk about how that ratio, the close rate has changed over the last two or three years? And then, secondly, on page three of the supplement Doug, you drop in, you give us the quarterly weighted average multiple of EBITDAC tuck-in. And it's definitely trending up. So I'm just curious about your views there.

Yes, great. Let me take the first part of your question. When we get to an actual term sheet, we're usually moving down, especially in our tuck-ins, we're usually moving down a path where we're going to do a deal. One of the things about our reputation is that we will close. Having said that, over the last two to three years, there's considerably more competition. You can take a $5 million deal today, and if it's going to get spreadsheeted, there'll be a dozen, really thinking of a dozen bids. So we are really trying hard to make sure that all of our new partners are excited about what the future provides being part of Gallagher, which quite honestly, we think is substantially better and more exciting than our private equity competitors. But that doesn't diminish the fact that they're good competitors, and they're smart people, and they're well funded. So I don't have a number for you specifically; I can't say, oh yeah, we closed 32% of the ones that we finally get to. We don't keep the records that way. I don't do that. But anecdotally, I'll tell you that we should close more than half of the ones that we get to with a signed term sheet; while I will take it back, we should close 90% of the ones where we have a signed term sheet; 10% will slip out of the net. And where we're preparing term sheets, we should close about half of those.

In terms of the multiple, Greg. Yes, the multiples ticked up a little bit, not as much as what our multiple has. So there's still a terrific arbitrage there. But also, you have to realize the growth rates that drive those multiples have gone up quite a bit too. So I think there's justification for higher multiples. But we're still buying in that eight to ten range when it comes to tuck-in acquisition. It's a pretty good run rate versus our trading multiple of 15, 16, 17.

Got it out. I guess, a follow-up question. It's been a rough start to the year for the market, and for the insurance brokerage stocks and your stock too has traded off a little bit. It feels like at times some are speculating that the best for their brokerage space is in the rearview mirror. Yet, the rhetoric from you, Marsh, and Brown & Brown are directly polar opposite, it seems to map out a pretty optimistic future. So I guess I'm just trying to gauge your perspective on the market, considering that the stock market certainly doesn't seem to appreciate what you guys are doing at this moment in time.

Well, Greg, this is Pat. Normally for 20 years, and there's never been a time in that period where I've been as bullish as I am today. I mean, everything is going our way. So let me try not to spend 20 minutes answering your question here. But let's start with the fact that we've never been stronger. Vertical capabilities are absolutely critical. Data and analytics are absolutely critical. When you take a look at the volumes that we now have that we can do the data and analytics around, we can tell you what's happening by day with rates and renewals or what have you. Ten years ago, we flew blind totally on that. If a customer asked why do I have even know I've got a good deal with the rate environment going like it is, we can show them what's happening to the rates by line, by geography and why they have a good deal. And that type of question is getting asked right into the middle market. And over 90% of the time when we compete, we compete with a smaller competitor. That's why these people are selling to private equity. That's why these roll-ups are working. And I'm telling you it's unbelievable the opportunity we have right now. So I see this is the greatest buying opportunity in the last five years.

Yes. In your response, you mentioned the challenging risk-bearing market and the push for higher rates. While you are considering the global perspective, I am focused on the reported results. Travelers recently reported an 88% combined ratio, and Berkeley also posted an 88% combined ratio. It appears that the results for risk bearers are starting to improve. This raises the question of what factors we might be overlooking when you describe it as a difficult risk-bearing market.

Well, let's start with inflation. You've done all your actuarial work at a 2% inflation rate. And now it's at six. Oh, yeah, that was a blip on the radar; it was going to be gone by now. I guess that's not going to happen. Secondly, let's look at loss costs. What does it cost to build a house today? Well, we got it done for $200 a square foot a few years ago; it certainly isn't that now. I could go on and on and on. I mean, the level of nuclear, the number of nuclear settlements. The other thing too is, I've been saying this now for years, I think it's more true than ever. Our underwriters or our underwriting partners are very, very smart. And they've got incredible data and analytic skills. They know where they're making money in that 88% everywhere around the world every day, and they know where they're not making money. And you walk in and start talking about a deal that you want to broker; it's something that's going to be substantially less than they know they'll get or deserve. They're just not buying it.

I believe, Greg, there are several factors to consider, excluding catastrophes and reserve releases. The potential impact of inflation could mean that reserves come in about 10% higher than initially estimated, which could significantly affect the combined ratio. I'm not questioning the health of the insurance companies; they have set their rates according to their assessments. I don't think there's a strong argument suggesting their rates are too high; rather, the evidence might indicate they are too low. When the courts reopen, we will likely see more losses that are not adequately represented by current estimates, which I believe are insufficient. Therefore, there is no justification for reducing rates; instead, we should expect continued rate increases. Everything we analyze supports this view, and it will be interesting to see when other reports are submitted.

This is not a hard market as it was in the mid-80s where everything goes up, you know that work comp was flat through most of this adjustment; work comp is now up. As work comp comes up a little bit, professional liability is going through the roof. Cyber is almost unbreakable. So you sit there and you look at this. These carriers are looking line by line; geography by geography and from our perspective, daily placing accounts, we are not seeing them lose discipline.

Got it. Thanks for the answers. And congratulations on the quarter and the year.

So my first question in the earnings release, there's a comment that if the pace of economic recovery accelerates beyond your expectations, you could see expenses increase more than the current estimate. I just want to confirm or pick up that a little bit. Expenses may rise in that situation, but wouldn't organic revenue also accelerate in that case? Essentially, what I'm trying to get at is margins don't get compressed with that, right?

But that's not a margin comment. That's just a comment.

Okay. And I guess all else equal, if the economy does accelerate beyond your expectations, margins would actually come in better than expected?

We believe there is a possibility of achieving better organic growth next year than we did this year if the economy improves, exposure units increase, pent-up demand for goods and services rises, and supply chains return to normal. Your implication in the question is correct.

Okay. And then in the CFO commentary, page three together, comment there on full year margins and brokerage being approximately 34%.? They were at 34% in '21, right at 33.9. So there should still be some upside to that. Is that just a rounding issue?

All right, thanks. First of all, said 34 is pretty darn good. I mean, when you look across the brokerage space, we're pretty proud of that margin and I have ever been here 18 plus years, it wasn't that way that that long ago. So you got to be pretty proud of that number compared to the industry. Second of all, yes, 34%. The reason why we don't round it even more is because we don't have a crystal ball. We also have FX adjustments that will come true. Yes, we could change that number slightly as with our international business over the next year. But what we're saying right there, just like we said in the commentary at 7%, we've got a decent chance of holding those margins. We really think we do. At 8%, we could see a little bit more; over 8%, maybe a little more than that. So I wouldn't read a rounded 34% with all those factors as being an indicator that we're pegging exactly 33.9 like we have this year, but 34 is greater than 33.9. And then, when you roll in the reinsurance operations, you could get a little bit more left than that. So I would not read too terribly much into it.

Okay, good. I'm glad that's confirmed. Finally, any update on Willis Re, the revenues and margin? I think the initial guidance you offered for '22 was still based on the 2020 numbers kind of used as a placeholder.

Yes. We feel really good about the team. We're onboard just over a little bit over a month, almost two months now. As we said in our prepared remarks, the team's coming together extremely well. With a good strong January 1, and we brought $745 million of revenue and 265 million of EBITDAC, and that's still looking good.

Just a question on the brokerage organic in 2021 that 8%, wondering if you could just walk through the different drivers behind that in terms of exposure, pricing, net new business, how much those contributed to that 8%. And how you see those elements shaping up in the 2022 outlook.

Let's break that down. There are components like new lost opt-in, where customers choose to add more coverage, and opt-out situations where customers decide to leave to manage their insurance budgets, along with the impact of rate changes. If we analyze that 8%, we believe about a third of it comes from selling more business than before, while another third is related to exposure and the final third comes from rate changes. Over the years, it's interesting to note that we can assist customers in finding creative ways to manage rate increases as their exposures grow, which is something we expect to see more of in the coming years. It's difficult to reduce exposure. For instance, if you have 20 trucks and now need to insure 22, you can't simply decide not to insure two. If you experience a 20% increase in premiums, you might opt for a higher deductible or lower coverage limits as a way to offset the rate increases. We anticipate that exposure units will drive organic growth as we move forward, with rate increases having a lesser impact as we continue to grow. As we approach 10% organic growth, it will primarily be driven by exposure units.

Awesome, that's great color. Thanks for that. And I guess maybe just also Doug, you mentioned the cadence, maybe the first quarter being a little light. I don't want to get too granular here. It's a long year, but it sounded like that was really driven by employee benefits and workers comp and just seasonality there. But when I think about the 7% organic in employee benefits, that seems pretty strong, definitely better than it was in December. Are you expecting a deceleration off of that up seven? And that's partially why maybe the first quarter would be a little lower than the full year? Or is it more workers comp driven?

Actually, seven, if you pick, I'm just saying you have to make the pick. If you're picking 8% next year, 7%, and I said it's about a point lower in the first quarter, that 7% is probably the number that you get to. If you pick 6%, I don't think that it would have that big of an impact on you. So what I said in my comments was about a point lower than the full year average. So that's what I would say just cautioning that business. It doesn't grow as fast as our PNC right now.

Okay. That makes sense. And then if I could just sneak one more in, on the $4 billion of dry powder for M&A guys have over the next two years. Without issuing stock, that's a lot; a lot for tuck-ins. You mentioned earlier competition is also increasing. I guess I'm wondering if at some point you would consider allocating some to capital return through share repurchases? Is that something that's come up at all, something that you think you might institute over the next year or two?

Absolutely, that's something if we have excess capital, we'll want to make sure that we maintain our solid investment grade rating, right? Absolutely, look at share repurchases and dividends.

My first question is related to clean energy. So Doug, I think you said that there's a chance that the laws could be extended; I just wanted to get a sense of the timing you thought there. And then, I thought in the past you guys had perhaps implied if you continue to be able to generate credits, you would not go the route of rolling out some kind of x amortization EPS. So are these now independent events? So meaning if you're able to generate more credits on the clean energy investments, you will still roll out some EPS estimate that is cash in nature and backs out intangibles, among other items.

I don't see us backing off of going towards that metric, regardless of what happens with an extension or not. So an answer to your question, we're going that route. We've done a lot of work on it. We think it's consistent with what other brokers are doing. And so we're pretty comfortable with going that route. What happens with an extension? I think it's going to be in the spring. We think that Congress has woken up to the fact that this technology provides a terrific benefit to our environment. So we hope that they see their way cleared, finding a spot in a bill to include it.

So if that does happen from a cash from a credit generating perspective and you would perhaps be unchecked, generate credits at a cadence that you were generating them at in 2021, just depending upon when you can get back on track with that?

Yes, I think so. We recorded $97 million in after-tax earnings from it. The estimate would be an additional 80 million, not 40 or 50. However, some plants that were planned for decommissioning will not be starting up, so I wouldn't expect to see the numbers as high as they were before. We had an excellent year, one of our best ever, and I don't believe that level of performance will happen again. If it does restart, we would have time from the restart date, but if we don't receive a retroactive solution, these plants have been idled. They are not in a position to produce credits for January, February, and March if approval comes only in April.

Okay. And then, with Willis Re in the M&A sheet, I saw that you guys put it in with the Q4 bucket. So I'm assuming based on the commentary is the embedded revenue from Willis Re just at that 745. And then if there's growth off of that, that would be additive to the M&A build. And then I'm assuming on a go-forward basis, you'll just give us the revenue from Willis Re just on your quarterly calls like you did today?

Yes. I think let's make sure I can restate and go to page six of the CFO commentary. We provided a grid that shows the fourth quarter acquisition activity. I would I understand your question there, how much of that line adds up and then subtracts up to 745. And the 745 is in that line, including what other acquisitions we did during the fourth quarter for the vast majority of it. I'd have to do that add up while we're on the phone here.

No, that's fine. That's helpful. And then one last one on margin.

Let me restate that. We have a separate line for the reinsurance acquisition. I just didn't have my glasses on here. So we have other fourth quarter acquisitions in the line above it. So take a look at that.

Okay, sorry. Thank you. And then the margin guide that you could see some expansion above 7%. I guess that was unchanged from December, right? So we should expect if you're going to get to around 8% or so organic this coming year in brokerage, we should expect a modest level of margin expansion, correct? Let me take all of your expense commentary throughout the call into account?

Yes, that would be what you would assume.

Great, thanks for allowing me to ask a follow up. I wanted to spend a minute and ask about your supplement and contingent line in the brokerage business. If the profitability of the carriers starts to improve, when we expect supplements and contingents to also grow maybe a little bit faster than just the base organic that you're expecting, or maybe more broadly, just one of the drivers of growth in supplements are contingents outside of acquisitions?

The answer to your question is yes. And the driver is very simple: profitability on contingents, and revenue growth, premium growth on supplements. And both of those should be impacted nicely by inflation, growing premiums, and profitability.

Additionally, we are enhancing the value we provide through our smart market and our advantage products, which allows us to align our customers' needs with the carriers' willingness to take on risk. We are experiencing steady progress in that area, and we are continuing to strengthen our relationships with our carriers, who are acknowledging this effort. Therefore, your observation is accurate. As the business climate improves, we anticipate continued growth that will benefit everyone involved.

I remember and this is dating me, but I remember when you started smart market. So I guess since you brought it up, can you give us an update of how that business looks today versus where it was a year ago or two years ago? Whether it's in terms of number of clients, the amount of premium that it's accounting for or whatever metrics you're using?

Well, first of all, yeah, I can do that, Greg. The proof has been in the pudding with smart market. You were there when we started it. And to be perfectly blunt, there was some skepticism for all kinds of reasons around whether or not data and analytics being sold to insurance companies was really worth it. Okay, that question has been answered. It's very well accepted. It's now being utilized in RPS, been utilized across our Gallagher global brokerage operation, including locations outside the United States, Canada, and U.K, etc. So it's getting very broad acceptance across more than probably 15 to 20 carriers today.

Yes. Reflecting on our investor relations days, we primarily discussed our U.S. business and the initiatives we've implemented, such as our relationships with carriers, our core 360 platform, and the use of offshore centers of excellence. We're now expanding these efforts to Canada, Australia, New Zealand, and the U.K. retail sector, and possibly into other retail locations in Europe as we consider taking minority positions. This illustrates how concepts developed in the U.S. can be shared globally and how we also bring international techniques back to the U.S. You're correct, Greg; we are successfully proving and implementing this across the world. That's why when we discuss retail on a global scale, it appears consistent with specific variations in each country.

And it's been very, very good for our people to tie closer to the insurance companies, and we're generating about $25 million of income from that. So it's been a win-win for everybody.

Thank you for the insights. Doug, I recall your remark about margins, specifically that trees don't grow to the moon. Given that you have a 34% EBITDAC margin in your brokerage business, when do you anticipate reaching a peak? While everyone is reporting margin expansion, it seems likely that there could be downward pressure on fees or commissions at some point, potentially affecting margins.

Well, I think there's a difference between non-discretionary margin expansion and discretionary margin contraction. I think that scale has its advantages; there are limits to scale and all the product of organic. I think we'd be very happy if we can somehow post 9% organic growth for the rest of our lives and have just incremental margins. And that's a pretty good story.

Right. It's just not about talking margin strategy, acquisition strategy. You are right. They don't grow to the moon. More importantly, what does the client demand from us that require us to continue to make investments? It's not there yet 100%, but clients are becoming more demanding. And in order for us to compete and post that stellar organic growth, we need to make investments in the business. So I don't have an answer for you. But when we do, we will announce.

Well, I like the idea of putting 9% organic and margin expansion in my model for the next five years, so go get them, Tiger.

Yes, thank you. Good afternoon. Quick question in the risk management business, what's your latest view on kind of broader outsourcing trends among the major PNC players, the potential shifts to using third parties like your risk management operation to do that in a more comprehensive way, just a quick update would be interesting. Thank you.

Well, thanks for the question, Mark. This is Pat. I think you're going to see a continued move in that direction. It's been going on now for almost a decade. I don't think it's any secret that we've been at the forefront of that. Starting literally before the Chubb ACE combination, we were doing work on behalf of Chubb and their risk management portfolio. Prior to that, in fact, we were doing all the outsourced service for Arch as they began their program of growth in the United States. And right now, the outsourced work that we do for insurance companies is a very big part of Gallagher Bassett's revenues. And I would say it's probably our largest opportunity looking at the future over the next five to ten years. There are some very substantial companies, I can’t name them, you understand that, that are seriously looking at this. Quite honestly, it makes a heck of a lot of sense. We've got trading partners that when I mentioned to them that Gallagher Bassett pays more claims than you do. And again, I can't mention names. They go, no, you don't. I actually, we do. And I'll bet you we invest twice as much in data and analytics. And then, in our Willis systems than you do; no, you don’t. Well, we will actually stand toe to toe with you and show you that. But that ends up driving is the ability we believe to prove that our outcomes are superior. Those superior outcomes come from all kinds of advantages, both of scale but also have expertise. Once you start talking to management at these insurance companies about the fact that you've got pent-up return on investment, you've got ROE opportunities and we can do that. I honestly believe that there will come a day when people ask why did insurance companies pay their own claims?

Your comp ratio is quite good in the quarter, which kind of been a threat from some of the actions you've taken in 2020. But I was hoping that you could kind of talk about how wage inflation is impacting that number. And just curious if you know, the impact is more pronounced among producers that you're trying to hire versus the support staff?

I'm very proud that we are likely the only major broker still willing to pay our producers based on a formula that gives them a percentage of their book. This approach is highly competitive within the local brokerage market. Consider the advantages: would you prefer to operate on a platform that provides comprehensive data and analytics, strong relationships, and global reach, or would you rather work with a local agency? We are pleased to welcome you on board and offer a percentage-based compensation. A significant portion of our benefits and compensation expenses for producers comes from our own efforts and regulations.

Our middle and back office operations have seen significant investments aimed at standardizing processes and utilizing our offshore centers of excellence. We decided 17 years ago that this strategy would enhance quality and reduce costs, providing a bit of an inflation hedge. We take care of our employees by offering sizable raises, even during the pandemic, and we reward them with bonuses they've earned. These raises are not merely about retaining people; our culture keeps them engaged. They recognize their contributions and the value they bring to our work. As Deming stated, you can't have low costs without high quality, and our focus on quality has effectively decreased our costs and improved our team's efficiency. We have 20,000 service staff plus another 6,000 in India, all committed to delivering excellent service to our clients, and we compensate them well. Our employee retention remains strong, comparable to pre-pandemic levels, and I believe our workforce is primed for success. We take pride in recognizing our workforce, which they truly deserve, while our volumes, scales, and technologies help us manage costs effectively, ensuring that those on our team are well-compensated.

Also you've heard now everywhere agile work, agile work, work from home. We've been agile and how we work with our workforce for the last 25 years. So, this is not new territory for us. We listen to the employees. We want people to stick around. As Doug said, our retention rates and our turnaround rates are no different than they were pre-pandemic. So the great recognition hasn’t hit Gallagher yet.

Okay. That’s really, really helpful. Thank you. And just going back to your expectations on the brokerage organic growth of 8% plus. Are you embedding any kind of slowdown from potential rate hikes or maybe kind of beating supply chain constraints or maybe labor constraints? I know you sounded very confident about achieving that. But kind of wanted to get a sense of what could reel the percent plus organic growth.

I’m sorry; I’m too much of an optimist. But I look at the stimulus bill coming out of Washington D.C. The kind of money that’s going to flow into infrastructure. Every contractor and our book of business is going to be loaded up with work. Every single personal lines account, all the way through small commercial and large commercial, has got significant increases that they need in the cost of their property portfolio. Payrolls are up as you mentioned earlier, Derek, from just the whole employment situation and all of that. There is not an industry that I can think of that benefits more than the insurance brokerage business from a nice little touch of inflation. Hold all tickets. Well, thanks everybody. I appreciate you being here today. Thanks for joining us. As you all know, we delivered an excellent fourth quarter and full year 2021. I would like to thank our colleagues around the globe for such an outstanding year. Our results were a direct reflection of their efforts. We look forward to speaking with you again in our March Investor Meeting. And have a good evening. Thank you very much.