Arthur J. Gallagher & Company (AJG) — Q3 2024 Earnings Call Transcript

Thank you very much. Good afternoon, everyone, and thank you for joining us for our third quarter 2024 earnings call. On the call for you today is Doug Howell, our CFO, other members of the management team, and heads of our operating divisions. 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. Our thoughts are with those impacted by these events, including our own Gallagher colleagues. Our professionals are hard at work helping clients sort through their coverages, file claims, and ultimately get losses paid. I’m really honored to be part of a company in an industry with such an important responsibility, helping families, businesses, and communities rebuild and restore their lives, and that’s a noble cause. Okay, on to my comments regarding our financial performance. We had a great third quarter. For our combined Brokerage and Risk Management segments, we posted 13% growth in revenue, 6% organic growth, which does not include interest income. Reported net earnings margin of 15.5%, adjusted EBITDA margin of 31.9%, up 123 basis points year-over-year. GAAP earnings per share of $1.90 and adjusted earnings per share of $2.72, up 16% year-over-year. Another fantastic operating quarter by the team. Moving to results on a segment basis, starting with the Brokerage segment. Reported revenue growth was 13%. Organic growth was right in line with our expectations at 6%, which, as we forecasted, reflects about a point of timing headwind from those large life cases we have highlighted over the past couple of quarters. Doug will provide you with some good news from October related to these sales in his remarks. Adjusted EBITDA margin expanded 137 basis points to 33.6%, which was better than our IR Day expectations. Let me give some insights behind our Brokerage segment organic. Within our PC retail operations, we delivered 5% in the U.S. and 7% outside the U.S. Internationally, Australia and New Zealand led the way with organic of more than 10%. The U.K. was up 6% and Canada was flattish. Our global employee benefit brokerage and consulting business posted organic of about 4%, and a few points higher, excluding the timing differences from the large life case sales. Shifting to our reinsurance wholesale and specialty businesses, overall organic of 8%. So very strong growth, whether retail, wholesale or reinsurance. Next, let me provide some thoughts on the PC insurance pricing environment, starting with the primary insurance market. Global third quarter renewal premiums, which include both rate and exposure were up 5% and little change from the 6% we discussed at our September IR Day update a few weeks ago. Most lines and geographies had very similar renewal premium changes through all three months of the quarter, with a couple of exceptions. September casualty renewal increases outside the U.S. were lower relative to July and August, driven by changes in business mix. Additionally, large account and E&S property renewal premium increases were a bit less in September than the first two months of the quarter. But neither of these appear to be a trend. Thus far in October, we’re seeing large account property and international casualty renewal premium increases higher than September. Breaking down third quarter renewal premium changes by product line, we saw the following. Property up 4%, general liability up 6%, commercial auto up 7%, umbrella up 10%, workers comp up 2%, D&O down about 5%, cyber was flat and personal lines up 11%. So overall, increases continue to be broad-based and rational in our view, with carriers still cautious and pushing for rate where it’s needed to generate an acceptable underwriting profit. We shine in this environment. Our job as brokers is to help clients find the best coverage while mitigating premium increases. So while not all the increases ultimately show up in our organic, a rational market allows us to further differentiate ourselves with our leading tools, data and expertise. Let me shift to the reinsurance market. The July 1st renewal season saw modest property price declines concentrated at the top end of reinsurance towers, while casualty renewals saw terms and conditions tighten, and some modest price increases concentrated in the U.S. Clearly, a lot has happened in the property market over the past month, which is now adding some complexity to January 1st property renewals. It’s still early, but we now believe a flattish renewal is more likely than the downward pressure previously being discussed. And don’t forget, U.S. hurricane season is not over for another month. For casualty risks, we believe reinsurance 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. Overall, the reinsurance industry remains adequately capitalized and is likely to meet capacity demands at the upcoming January 1 renewals. We continue to believe Gallagher Re will perform very well in 2025, regardless of how the market environment unfolds in the near-term. Moving to some comments on our customers’ business activity. Our daily revenue indications from audits, endorsements and cancellations were again in positive territory for the third quarter. While the amount of upward revenue adjustments isn’t as much as 2023, they’re running in line with 2022. So client business activity remains solid and we are not seeing any signs of meaningful global economic slowdown. Within the U.S., the labor market is on solid footing. In fact, the number of open jobs increased in August and remained well above the number of unemployed people looking for work. Overall 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. Regardless of market or economic conditions, I believe we are well positioned to take market share across our Brokerage business. 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. Putting this all together, we continue to see full year 2024 Brokerage organic around 7.5% and that would be another outstanding year. Moving on to our Risk Management segment, Gallagher Bassett. Revenue growth was 12%, including organic of 6%. We continue to benefit from excellent client retention, increases in customer business activity, rising claim counts, and new business wins. Adjusted EBITDAC margin was 20.8%, 35 basis points higher than last year, and a bit above our September IR Day expectation. 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 20.5% range, and that, too, would be another outstanding year. Shifting to mergers and acquisitions. 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 professionals. Looking ahead, we have more than 100 mergers in our pipeline, representing approximately $1.5 billion of annualized revenue. Of these 100 potential partners, we have about 60 term 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. 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. A culture that supports one another and embraces teamwork. 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. Frankly, we love this business. We enjoy taking care of our customers and that is the Gallagher way. Okay, I’ll stop now and turn it over to Doug.

Thanks, Pat, and hello, everyone. Today, I’ll walk you through our earnings release. First, I’ll comment on third quarter organic growth and margins by segment. Then I’ll provide an update on our organic growth and margins for the fourth quarter and share our initial outlook for 2025. Next, I’ll review the CFO commentary document available on our IR website and go through our typical modeling tools. I will conclude my remarks with comments on cash, M&A, and capital management. Let’s start with Page 3 of the earnings release. The Brokerage segment reported third quarter organic growth of 6% excluding interest income, which aligns with our September IR Day forecast that indicated about a point of headwind due to the timing of large life sales. These life products are sensitive to interest rates, which is why clients were waiting for lower rates. The positive news Pat mentioned has occurred over the past month, as clients are now funding their policies. In fact, in October, we have already recovered more than half of what was delayed in earlier quarters. The quarterly variability we have highlighted throughout the year is beginning to reverse in October. Consequently, we anticipate fourth quarter organic growth around 8% and a full year growth of approximately 7.5%. As we prepare for 2025, our preliminary thoughts suggest that the Brokerage segment’s full year organic growth could be in the 6% to 8% range, indicating a potential scenario for 2025 similar to what we might see in 2024. We will provide additional details on our 2025 outlook during our December IR Day, but our early assessment shows optimism regarding our capacity for growth due to the investments we have made in the business, including the addition of niche experts, the rollout of new sales and support tools, and the expansion of our data and analytics offerings. We believe these initiatives are contributing to increased new business production and high client retention globally, and as Pat mentioned, the market environment still serves as a tailwind for us. Moving to Page 5 of the earnings release to discuss the Brokerage segment adjusted EBITDA table, the third quarter adjusted EBITDA margin was 33.6%, representing a 137 basis points increase compared to last year and above our September IR Day expectations. To explain this transition from last year, if you refer to last year’s third quarter earnings release, we reported an adjusted EBITDA margin of 32.4%, which would translate to 32.2% using current FX rates. This quarter, organic growth and interest collectively contributed nearly 150 basis points of expansion, while M&A and divestitures accounted for about 10 basis points of margin impact. Following this path brings us to the third quarter 2024 margin of 33.6%, reflecting 137 basis points of Brokerage margin improvement, which is commendable work by the team. Looking forward to fourth quarter 2024, we still anticipate margin expansion between 90 to 100 basis points, based on the fourth quarter 2023 adjusted margin for FX, currently estimated to be about 20 basis points lower than last year’s margin of 31.6%. Achieving this would imply that full year 2024 could demonstrate about 70 basis points of margin expansion and 90 basis points once we exclude the first quarter impact from the Buck merger. Let’s proceed to the Risk Management segment and the organic and EBITDA tables on Pages 5 and 6. We had another solid quarter, achieving organic growth of 6%. This is a point lower than our IR Day guidance due to missing a full revenue bonus related to one large account. However, Gallagher Bassett continues to achieve excellent client retention and strong new business production, maintaining an adjusted EBITDA margin of 20.8%, which is up 35 basis points from the prior year and ahead of our IR Day expectations. Looking ahead, we anticipate organic growth of 7% and margins around 20.5% in the fourth quarter. If we achieve this, we would finish the year with organic growth close to 9% and margins approximately 20.5%. That would also reflect great work by the team. As for 2025, our preliminary thoughts suggest organic growth similar to the Brokerage segment, likely in the 6% to 8% range. Now, turning to Page 6 of the earnings release regarding the Corporate segment shortcut table, the overall adjusted third quarter figures for interest and banking, clean energy, and acquisition costs met our September IR Day expectations. However, the corporate line within the Corporate segment fell short of expectations due to roughly $9 million of additional unrealized non-cash foreign exchange re-measurement expense that developed in September and was not accounted for in our IR Day forecast, affecting earnings by about $0.03 after tax. This has reversed in October, so we consider this a non-cash issue. Now, let’s look at the CFO commentary document. Starting on Page 3 regarding modeling tools, there is no new information aside from FX, so please update your models with these revised revenue and EPS impacts. In the Corporate segment on Page 4 of the CFO commentary document, our outlook for the fourth quarter remains unchanged. Moving to Page 5 regarding our tax credit carryforwards, we reported $796 million as of September 30. While this benefit won’t appear in the P&L, it positively impacts our cash flow for the upcoming years, aiding in M&A funding. On Page 6, regarding the investment income table, we are now anticipating two 25-basis-point rate cuts in the fourth quarter of 2024 and have updated our estimates based on current FX rates. Essentially, our fourth quarter estimate remains largely unchanged from what we presented at our September IR Day. Below that, in the rollover revenue table, the subtotal for third quarter 2024 is $111 million and $141 million before divestitures, consistent with our September IR Day expectations. Looking ahead, the projected revenues for Brokerage M&A completed through yesterday are noted on the right. Just a reminder, you’ll need to make decisions regarding future M&A. The Risk Management segment rollover revenues for the fourth quarter of 2024 are anticipated to be around $15 million. Regarding cash capital management and M&A funding, as of September 30, we had approximately $1.2 billion in available cash. Considering this balance alongside our strong expected free cash flow, we are well-positioned to support our robust pipeline of M&A opportunities in 2024. We currently estimate around $3 billion capacity for M&A in 2024, with the potential for another $4 billion for 2025, all while maintaining a solid investment-grade rating. Overall, this has been another strong quarter. In the first nine months of the year, our combined Brokerage and Risk Management segments have achieved a revenue increase of 16%, organic growth of 8%, net earnings up 20%, adjusted EBITDA up 18%, and adjusted EPS up 17%. These results reflect an impressive performance and a resilient culture. We are on track for another outstanding year of financial results. Congratulations to the team for all their hard work. Now, back to you, Pat.

Thanks, Doug. And operator, if we could go to questions-and-answers, please.

Thank you for the questions. The first one is about the transition in the Brokerage segment from third quarter organic growth to fourth quarter organic growth, indicating a two-point uplift sequentially. Are you suggesting that most of this is driven by life insurance, or does it seem like RPC is still somewhat subdued? Are you indicating that RPC is beginning to trend upwards into the fourth quarter? I’m trying to grasp the details of this.

All right. So I think when you, renewal premium changes is what you’re referring to as RPC, I’m assuming.

Yeah.

We’re not seeing underlying 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 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 rates for the fourth quarter, we’re assuming about the same as what we’re seeing here, yeah, in the third quarter, which is the same as in the first and the second. As for the increase next quarter, yes, we are getting about a point of additional organic growth from the life insurance sales. But when you bake all this in, we think that we’re 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% to 8% range.

Okay. Got it. So no other seasonality or anything there, okay.

We are a little slower 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.

Okay. All right. That makes sense. Okay. Switching gears a bit to, I guess, the margins or just if I look at the fiduciary investment income, 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?

Well, I think, you have to look at our premium funding business there. So when you take a look at the table on Page 6 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.

Okay. Okay. Got it. And I guess just, Doug, as a follow-up to some of the comments you made earlier on renewal price change. So 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 what you’re hearing from carriers is that they’re under earning on some of the major casualty lines. So is that still kind of in your thought process, as you think that you gave us some tidbits on how 2025 could play out, that there could be some price hardening on the casualty side?

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. But as you heard us earlier, umbrella is presently rising at about 10%. The only line in casualty that seems to have a difficult time finding bottom is D&O. The rest, however, are showing strength.

Yeah. Thank you.

Yeah. I just got one number here. Our U.S. business, our casualty lines are up a 4-point third quarter versus second quarter.

Thank you.

Hey. Thanks. So appreciate all the guidance on the Brokerage organic. 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.

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.

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 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.

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. So, if you look at our prepared remarks, we talked about the fact that we’re a good part of our growth this quarter was international considering finance.

Yeah. I mean, our Australia and New Zealand operations killed it this quarter. So, they’re up nicely. Canada’s a little flattish. I mean, if you...

Yeah.

… want to do that, if you look at the U.K., there was a mixed issue there in the third quarter also that you could see through. But by and large, I wouldn’t say that there’s tatters anywhere that are causing us concern.

International is up 10% this quarter. And Doug’s comment’s right. The lead by New Zealand and Australia.

Thanks, guys. Appreciate it.

Thanks.

Hi. Thanks. Good evening. My first question, embedded within your fourth quarter guidance, the 8% Brokerage organic, is there any assumption for an impact on continued commissions from the recent storms?

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.

Okay. Within the guidance, you mentioned a 6% to 8% Brokerage growth for next year. What are your expectations for the benefits business? I understand there was some seasonality this year. Are you expecting it to be in line with the rest of the segment? I know you usually wait a bit longer to provide the bi-segment guidance, but due to the volatility this year, I wanted to get an idea of where you believe it will trend next year.

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.

For next year.

Yeah. For next year.

Okay. And then, with the M&A, I know, like yield flow rate has probably been a bit lighter through the first three quarters, right, then what we’ve seen in prior years. Do you guys think, just given it’s a presidential election year, has that caused, I guess, a slowdown in just the closing of transactions and are you expecting more activity in the fourth quarter early next year? How do you guys see things on that front?

I believe that the general marketplace for acquisitions has experienced a slowdown over the past year. However, we have a strong pipeline that I consider to be one of the best we’ve ever had. I think once the focus on the election subsides, especially if the Democrats win, there could be a swift increase in activity. I'm not sure what the outcome would mean if the Republicans win, but overall, I anticipate that once the situation stabilizes, there will be significant opportunities and a return to a more active market.

I believe if you look at the year-to-date numbers for 2021, we were closing around 17 deals, and in 2022, we closed 19. Currently, for year-to-date 2024, we’re at 27. Last year, we had closed 37 year-to-date with the additional deals from recent acquisitions. This quarter was a bit slower, but as you might have heard from Pat’s detailed comments, our pipeline is looking excellent right now.

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 reversed in the fourth quarter, but then the Q4 guide…

That’s right.

… for Corporate did change. Are you just not modeling that in yet?

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. So we just didn’t feel like for a couple pennies it was worth changing that number.

Okay. Thank you.

Thanks, Elyse.

Thanks.

Yeah. Good afternoon, everyone. Just building on your…

Hi, Greg.

Building on your last answer about acquisitions, one thing that stood out to me while reviewing the supplement was that the weighted average multiple for tuck-in acquisition pricing decreased significantly in the third quarter. Can you help me understand what caused this decline in the multiple? I don't perceive that multiples are falling in the market. Pat, in your prepared remarks, you seemed to highlight your pricing discipline a bit more than usual when discussing tuck-in acquisitions.

Yeah. When we prepared the remarks, Greg, we did discuss whether in the past we’d been undisciplined. What I said…

Yeah. No, I think it’s just a good reminder. We have a lot of people listening to these calls, our own people included, and a lot of acquisitions, we try to maintain a good discipline around the pricing and we seem to strike a fair balance between that and the great people that join us.

And the multiple for the third quarter acquisitions came down materially. It’s like I felt like…

Yeah. I think…

... I took a step back in time.

One of those acquisitions was not priced, what I would say, it was priced a little under market because we have some opportunity to help get better.

Okay. Another sort of nitpicking item, you were going through your earnings press release and I was going through the adjustments to earnings to get your adjusted EBITDA. I’m Page 5 of Brokerage. And one of the things that stuck out to me is just the huge jump up in workforce and lease termination related charges in the year, this year versus last year, and the third quarter versus the third quarter last year. Is there something going on, on a bigger scale? Is this more offshoring that’s going on or maybe you could just help, 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?

Greg, I’m sorry. Go ahead.

I was just going to say, Greg, you hit on the offshoring thing is 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 and as we do acquisitions and go across the Board, illustrating the type of quality and the speed with which we can do things like issue certificates, there’s pretty quick adoption. It’s pretty good.

I believe you are noticing that we are strengthening the flywheel as we take advantage of scale, the technologies we are implementing, and our offshore standards of excellence. This allows us to continuously optimize our workforce. This quarter, we had a slight increase because we identified some opportunities to enhance our workforce, and you can expect to see this periodically.

Great. Looking at the bigger picture, I have one final question. I understand that your commercial customers establish their budgets annually. Based on the significant rate increases you've managed to implement, it appears the market is starting to stabilize compared to two years ago. How are your customers' budgets shifting in relation to their insurance expenditures? Are you noticing more consistent budgets, or are they still anticipating...?

No.

… increases? Give us a sense of what’s going on there.

Really not flat, Greg, for two reasons. Exposure units, thankfully, are continuing to grow. This is why we go through our daily review of the things that are coming through audits, et cetera. We’re seeing a robust economy and that’s clearly in a 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. We are not leading customers to believe that there’s any kind of nirvana relative to rates. That is not what’s happening. We show them our detail that we go over with you quarterly. Property is up 4%. General liability is up 6%. You may not deserve that. That may not hit your P&L. But on the other hand, you may deserve 25%. And this is a rational market and we’ve got to talk through that, which leads us right into discussing how much you retain, 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, is understanding that appetite for risk that each individual account has, working with those primary buyers to decide how they’re going to get their best spend, and it’s not a discussion all around rate by any means.

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 will show the tools and capabilities that we have, and that will shine through and differentiate ourselves. 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.

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? 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? 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.

Fair enough. Thanks for the answers.

Thanks, Greg.

Hi. I was hoping if you guys could provide maybe some additional color on the sequential decrease in the organic growth in Brokerage, especially in the context of that renewal premium change holding up pretty strong sequentially.

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. But if you bounce those two things out of there a little bit, again, we’re running around 7.5% organic growth each quarter. So while it looks like that on the face, yes, we’re at 6% now, but we warned that there was a 4-point headwind against that. Also, we’re not seeing substantial rate differentials, rates between the quarters. So really underline it when you carve out the seasonality of a couple of our businesses, some of the mixed differences between when property renews versus when casually renews, the life lumpiness. You got to take our word for it. It’s pretty steady underlying other than that those things that I’ve said. So it’s pretty steady right now underlying.

Yeah. And if you want to go back three years or four years, D&O is up 300%. So by line, by geography, these rates do make a difference. They move. So we’re not seeing a D&O renewal anywhere near 300%. In fact, it’s off 5% or 6%. So the percentages do move. This is not an environment where you say for the next 10 years, good news is it’s 4% a quarter, bing, bang, boom.

Got it. That makes sense. And then my second one, a few of your competitors have made some large acquisitions to help improve their middle market capabilities. And I was wondering what implications do you think that have on the competitive environment going forward, sort of being that you guys are a dominant player in that space?

I don’t think it has any impact, to be perfectly blunt, on our business at all.

Okay. Thank you.

Thanks, Dean.

Yeah. Thank you. Good afternoon. Doug, did you give early margin thoughts for 2025 for Brokerage and Risk Management?

I have not. I will in December as we go through the budget. But I will say this, we post 6% to 8% organic growth next year. It’s there, Mark. There’s an opportunity for us to continue to get better. Our scale advantages are coming through our technologies, 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 and in other categories of our spend, that we continue to have opportunities to get better and better. And when you’re punching out 6% to 8% organic growth, the underlying margins will absolutely have opportunity for expansion.

Very good. And then, did you give organic, 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?

Some of our affinity businesses might be around 12%. Our program businesses could be around 6%. The open brokerage is about 8% or 9%, and reinsurance is also around 8% or 9% this quarter. Overall, our affinity business performed slightly better this quarter, while the program business was just below 8%. We grouped them together to keep the discussion concise, but there's not much difference since they are all around 8%.

Understood. And then any comment, Pat, on the mixed shift out of admitted into the E&S line?

I find it quite interesting, Mark, that we are seeing a strong and ongoing supply of submissions into our wholesaling operation RPS, which has not diminished. Additionally, we are not observing a significant number of accounts returning to the primary market. The excess and surplus market, which has absorbed a substantial portion of the P&C market over the last five to ten years, appears to be maintaining its growth and holding onto its accounts. The team at RPS offers more than just competitive pricing; they bring substantial expertise. A lot of effort goes into the layering and structuring of these deals that local retailers, including ourselves, may not provide. It’s worth noting that 50% of our wholesale business goes to RPS for a reason. This demonstrates that both professional capabilities and market access are important, and the market continues to grow positively.

Thank you very much.

Thanks, Mark.

Hi. Thanks for taking my question. So, I mean, when I hear what you’re saying about reinsurance and the strength and growth there, the wholesale business seems like it’s growing very nicely as well. When I look at the 6% and I guess run rating closer to 7% and change, but does that mean, I guess, it obviously means that the businesses other than reinsurance and wholesale, like the more core retail is doing something lower. 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 and puts and takes headed into next year for the core retail piece of it?

Always consider our benefits business, which is currently around 5%. Excluding the large life cases that can fluctuate, those performing above that level are in the 7% range. It's important to note that the benefits businesses generally operate below that threshold, and some of our actuarial services also trend lower. Looking at the overall organic growth, Canada has remained fairly flat, but there are several factors that balance each other out. There isn't a specific area that is consistently performing below that level at this time.

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?

Yeah. I think demand seems very, very strong, which is good news for us. Also, I think our level of expertise in helping clients in a market environment where there is capacity 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? 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.

Great. Thanks for the responses.

Sure. Thanks, Alex.

Hi. I apologize. Thank you for the question. There might be some background noise. There’s a fire going on right now. I want to circle back to the subject of valuations. You’re thinking about acquisitions in the middle market that are 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 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?

Listen, I think that there’s no question the larger you are, probably the higher the multiple might be for somebody that’s out there looking for an opportunity. But when we look at our tuck-in acquisitions, I think that people understand that we’ll pay a fair price. And the advantage is they get to stick with us. They come in and they get to work inside of a broker. It’s a broker selling to a broker. They understand that if they decide to take our stock, that they get to participate in equal form as you do, as I do, as Pat does, everybody else in this room. It’s one stock for every person. They get our resources. They get to put their employees and their clients into an environment where actually joining us is going to deliver considerably more career value and more insurance 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 a 10, 11 or 12 multiple. That’s the reality about it, is 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 and that’s valuable to them, too. Don’t forget that.

Let's also consider the market landscape. We don't discuss this enough because high-profile deals capture the headlines, and those are the major platforms. We estimate there are 29,000 agents and brokers in the U.S. Last year, business insurance ranked the top 100 in the country, with the 100th ranked having generated $30 million in revenue. This leaves 28,900 brokers operating in America, referring to firms rather than individuals. Hence, we believe that about 90% of the time, which has been consistent over the past decade, when we compete, it is against smaller firms. In fact, we only compete with Marsh and Aon, the world's two largest brokers, less than 10% of the time. This does not imply a lack of competition; there is a robust high-end market. Given this context, we can allocate our funds at lower multiples, maintaining a pipeline of 100 opportunities, working out pricing for 70 of them, and potentially generating $1 billion in revenue from brokers who are interested in joining us. These individuals have not aligned with other firms and are looking to integrate into a culture that resonates with theirs. As noted, we are a brokerage run by brokers. While it may not attract much attention, this seems to me like a solid strategy and an effective way to utilize our resources.

Got it. Thank you so much for the comment.

Yeah. You better evacuate, Katie.

Hey. Good evening. I just had a question in Brokerage and the contingents were up 24% on an organic basis. I was wondering if you could just talk about what was driving that in the quarter.

I think that it developed into an additional $7 million or $8 million. Between our benefits business and our U.S. Retail business, we picked up a few extra contingents in the quarter. There wasn’t anything particularly unusual about that. We might return a couple million of that next quarter due to the storms and floods, but overall, I would suggest that it reflects a few million dollars in both of those businesses.

Got it. Okay. That’s helpful. And then I guess just a bigger picture question. I heard the commentary on the term sheets being prepared or in the process of getting signed with $700 million of revenues. Do you have any stats historically on just how many of those are 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?

I really don’t. Here’s the thing. Every one of these is a very interesting story unto itself. You’ve heard me say, I think the longest time we spent talking to a client, talking to a prospect and getting to know each other was 20 years. Sometimes they happen in a quarter. Sometimes they take a couple of years. And but when we get to pricing and we get to putting together a letter of intent, we’re getting serious. And that’s a deal that’s going to get decided in the next six months. I don’t really have a stat on how many of those do close, how many don’t. It’s a full-on sales process. It’s just like selling insurance, frankly. If you don’t have a lot in the hopper, you’re not going to close a lot.

Yes.

We feel very good about these 60. You can ask me this every quarter and I will try to give some color. Right now, 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.

Okay. That’s good to hear. And then just finally, so it sounded like the U.S. Retail, P&C 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?

Yeah. Listen, I’m just looking at my sheet here. If it moved, it moved a 0.5 point one way or another. We did have more. 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.

Great. Thank you.

Thanks, David.

Hi, everyone. I was hoping we could talk about the contingents a little bit more. Just given the ongoing conversation around the casualty market, I was wondering how you 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?

If that were the case, we would be discussing a few million dollars. I wouldn’t consider that a systemic issue we need to address. Similar to the storms, it’s just a few million. We do have some limits on our contingents in certain areas. So, if carriers experience more losses than anticipated, it may still allow us to reach our full contingent level because of those limits. Currently, we aren’t facing significant pressure from this, both in our past business and looking ahead. If carriers continue to improve their casualty rates as they have been, based on what we are hearing and reading, it should help us maintain our contingent level as well.

Thank you. And just a quick follow-up on the lumpy life sales. If I’m understanding correctly, you all are expecting pretty much all of the timing issue to work itself out in 4Q or should we expect any sort of lagging impact from that in early 2025 as well?

What I mentioned earlier is that as of October, we have recovered half of the timing impacts from the first and second quarters. We anticipate further improvements, potentially recovering everything by the end of the year, after which we will start fresh next year and look for new opportunities. This product is increasingly vital for many not-for-profits to remain competitive in their executive benefit offerings, and we believe it has strong potential for growth in the coming years.

Thank you.

Thanks, Grace.

Oh! Great. Just a quick follow-up on life insurance. So just ballpark, 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 traditional life?

The lumpy business that we’re talking about is about $125 million business.

Okay, that helps explain why it could move organic that much. Thank you. That's all. Thanks.

Thanks, Mike. I think that’s it, Operator. Thank you again, everyone, for joining us this afternoon. 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. 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.