Arthur J. Gallagher & Company (AJG) — Q3 2025 Earnings Call Transcript

Thank you. Good afternoon, everyone, and thank you for joining us for our third quarter '25 earnings call. On the call with me today is Doug Howell, our CFO, as well as members of the management team. Before I start, I'd like to acknowledge the damage caused by Hurricane Melissa in the Caribbean. Our thoughts are with all those impacted, including our own Gallagher colleagues. Our team of experts have been mobilized and are on the ground helping our clients and colleagues. Moving to our financial performance. We had a terrific and obviously very active third quarter. Our two-pronged revenue growth strategy, that's organic and M&A, delivered revenue growth of 20%. In fact, over the last 30 quarters, we've delivered double-digit top line growth 26 times. This is now our 19th straight quarter of double-digit growth. Clearly, our relentless client-centric, team-driven and welcoming culture is thriving. Underlying that headline revenue growth, we posted 4.8% organic, grew adjusted EBITDAC 22% and expanded adjusted EBITDAC margins by 26 basis points, demonstrating we are getting substantial benefits of scale and the value delivered by our strategy of constantly focusing on improving our productivity while delivering our high-quality services. EPS for our combined Brokerage and Risk Management segments, we posted GAAP EPS of $1.76 and adjusted EPS of $2.87. That would have been $0.22 higher had we levelized for the intra-quarter revenue seasonality related to AssuredPartners that we closed on August 18. Doug will unpack this timing aberration in his comments. The punchline is our business continues to shine and the early days of the AssuredPartners folks coming together with the Gallagher team is off to a terrific start. Already, we're selling together. We're showing that we are better by being together. Moving to the results on a segment basis, starting with the Brokerage segment. Reported revenue growth was 22%. Organic growth was 4.5%. Relative to our September IR Day commentary, we did see a little pressure on contingents and a few large life insurance cases shifted out of the third quarter. Adjusted EBITDAC margin headline shows flat year-over-year at 33.5%. But when we exclude merger and acquisition, interest income, it shows underlying margin expansion of 60 basis points. Doug will give you a bridge from last year. That's terrific work by the team to stay vigilant in our relentless pursuit of being more productive every single day. Let me provide you with some highlights behind our Brokerage segment organic. Within our retail operations, we delivered 5% organic overall within P&C with U.S. up more than 7%, international flat, driven by less renewal premium increases and lower contingents. Employee Benefits posted around 1% organic, driven by lower-than-expected large life cases. Shifting to our wholesale and specialty businesses. In total, we delivered organic of 5% with the U.S. outperforming our international businesses slightly. As for reinsurance, it's a relatively small quarter and organic here was in the high single digits. And while not in our organic growth numbers, AP's third quarter organic was 5%. That really shows you that a terrific sales-driven culture is joining our team. So we continue to deliver organic growth across retail, wholesale and reinsurance. Let me provide some thoughts on the P&C insurance pricing environment. Overall, global insurance renewal premium changes remain in positive territory, and we continue to see more carrier competition across property classes, particularly shared and layered programs and cat-exposed risks, resulting in renewal premium decreases. With that said, carriers continue to push for increases across most casualty classes, which are more than offsetting the property decreases. Let me provide a further breakdown on our third quarter global insurance renewal premium changes, which include both rate and exposure by line of business. Property down 5%; casualty lines up 6% overall, including general liability up 4%, commercial auto up 5% and umbrella up 8%; U.S. casualty lines are up 8%, and that increase has been consistent over the past 12 quarters, suggesting domestic carriers are recognizing continued pressure; package, up 5%; D&O down 2%, we think perhaps close to bottoming out; workers' comp up 1 point; and personal lines up 6%. So while property is down 5%, many lines are still seeing increases. In fact, global renewal premium change, excluding property, remains around 4% with good accounts getting some premium relief and accounts with poor loss experience seeing greater increases. Looking at differences in renewal premium changes by client size, we continue to see some bifurcation. For middle market and smaller clients generating less than $250,000 of revenue, renewal premiums were up about 3%. For larger clients generating more than $250,000 of revenue, renewal premiums were down 1%. So many of the market trends that we have been highlighting for the past few quarters persist today. As for the reinsurance market, a very small quarter for us. Looking towards January 1 renewals, the industry remains healthy. There's adequate capacity to meet expected demand. Property coverages continue to favor reinsurance buyers, while casualty reinsurance dynamics are more stable with continued caution for U.S. risks. Moving to Employee Benefits. We continue to see solid demand for talent retention strategies given the resilient U.S. labor market. Further, managing rising health insurance costs is becoming increasingly important for our clients as they deal with continued medical cost inflation. So we are engaging with employers to help them alleviate the pressure from rising medical and pharmaceutical costs. Moving to some comments on our customers' business activity. While the U.S. government shutdown has halted economic data releases, our proprietary data, which has been an excellent indicator of the economy, continues to show solid client business activity. Third quarter revenue indications from audits, endorsements and cancellations remain nicely positive. Interesting, through the first 3 weeks of October, our revenue indications are showing even more positive endorsements and lower cancellations than in September. So while we are watching our customers' business activity carefully, we are just not seeing signs of an economic downturn. Regardless of market and economic conditions, I believe we are very well positioned to grow. From our leading niche experts, vast proprietary data, award-winning analytics platform, extensive product offerings, outstanding service and global resources, this puts us in an enviable spot competitively. As we sit today, we are seeing Brokerage segment fourth quarter organic of around 5%, which would bring our full year organic to more than 6%. Moving on to our Risk Management segment, Gallagher Bassett. Third quarter revenue growth was 8%, including organic of 6.7%. We saw strong new business revenue and excellent client retention in the third quarter and believe these favorable dynamics will continue through the end of the year. Accordingly, we expect about 7% organic growth in the fourth quarter. Third quarter adjusted EBITDAC margin was 21.8%, a bit better than our September expectations. Looking ahead, we see fourth quarter and full year margins around 21%, and that would be another great year for Gallagher Bassett. Let me shift to mergers and acquisitions, starting with some comments on AssuredPartners. Since the mid-August close, dozens of Gallagher leaders and hundreds of others have been traveling to AP offices and hosting gatherings. We've been sharing our stories with thousands of our new colleagues and highlighting all the tools and expertise that is now at their fingertips. I, too, have attended many of these meetings and events. And I have to tell you, the level of excitement all of us have witnessed during these visits is literally palpable. We have shared a view that we will be better together. 1 plus 1 will be greater than 2, and there is immense value creation for our clients, carrier partners and shareholders. Equally important, they know they are now home, and they are getting the resources they have desperately needed for years. For those that are ready to join the amazing Gallagher culture, I welcome you. Outside of AP, we completed 5 new mergers, representing around $40 million of estimated annualized revenue. This brings our year-to-date estimated annualized acquired revenue to more than $3.4 billion or 30% of full year '24 revenue. That is fantastic. And for those new partners joining us, I'd like to extend a very warm welcome. Looking at our pipeline, we have about 35 term sheets signed or being prepared, representing around $400 million of annualized revenue. Good firms always have a choice and it would be terrific if they chose to partner with Gallagher. I'll conclude my prepared remarks with some comments about our Bedrock Gallagher culture. As I am meeting with colleagues, both new and old across our global network, it's always impressive to me how quickly new employees and acquisition partners come together as part of the Gallagher family of professionals, how we embrace the Gallagher Way and enhance our offerings and services to clients. As tenant #24 of the Gallagher Way reminds us, we must continue to build a professional company together as a team. And I believe this spirit of teamwork and shared purpose is precisely what is driving our success today. That is the Gallagher Way. Okay. I'll stop now and turn it over to Doug.

Thanks, Pat, and hello, everyone. Today, let me first address the third quarter impact from rolling in revenues from AssuredPartners. So let's go to Page 7 of the CFO commentary document that we provide on our website. Over the last 30 days, we finally got usable AP data down to the customer level detail. That gave us the policy inception data necessary to implement our 606 accounting and harmonize revenue accounting methods. First, it's important to note that the new detail did not change our annual view of revenue or EBITDAC. Second, however, it did reveal that AP's business is much more seasonally skewed than we could previously estimate. Two tables here on Page 7 help unpack this. The top table shows you the inter-quarter seasonality. It's easy to see first and fourth quarters have considerable seasonality, which you should consider when building your models. What this table doesn't show is the intra-quarter seasonality. So we've added the lower table. What this shows, while we owned AP for half the quarter, only about 40% of the policy inception dates were between August 18 and September 30. That produces an $80 million revenue difference to our September IR Day estimate where we used a 50% assumption because we owned it for half of the third quarter. That causes a $0.22 shortfall to our indicated September IR Day estimate. You'll see that in the yellow column in that table. It does impact some of my other commentary, but I'll highlight those throughout my remarks. All right. With that said, let's go back to the earnings release, and let's go to Page 3. Brokerage segment organic growth of 4.5%. That's about $11 million of less revenues than our September IR Day thinking. Half of that relates to those lumpy life sales that didn't get closed. And we've talked about that, how that can impact organic a little bit from time to time. That cost us about 30 basis points of growth. The other half or so relates to contingents. While there is some geography with supplementals, we did have an unfavorable estimate change related to one of our international programs. That cost us about 20 basis points of growth relative to our expectations. Looking forward to the fourth quarter, we see organic around 5%. A couple of items that influence our thinking when we make that estimate. First, as we discussed in our IR Day, we are in the midst of our annual update on 606 estimates. When all that settles, that could move that growth estimate 0.5 point either way. We know that's just accounting, but it can cause some noise. Second, always a little sensitive to the timing of those large life sales. If buyers believe rates may come down even more, they might push those into '26. That said, if we were to deliver fourth quarter organic around 5%, we would finish the year with organic above 6%. That would be a terrific year. Flipping to Page 5 of the earnings release to the Brokerage segment adjusted EBITDAC table. Third quarter adjusted EBITDAC margin was 33.5%. That's flat year-over-year on the headline. But as I do each quarter, let me walk you through a bridge from last year. First, if you pull out last year's 2024 third quarter earnings release, you'd see we reported back then adjusted EBITDAC margin of 33.6%. Now adjusting that using current FX rate, and this quarter is about 10 basis points. So FX adjusted EBITDAC margin for third quarter '24 is about 33.5%. From that starting point, the roll-in impact of M&A used about 200 basis points with more than 2/3 of that impact coming from the seasonality of AssuredPartners. Interest income, including the cash we are holding for the AP closing through mid-August, added about 140 basis points of margin. And most important, organic growth of 4.5% gave us about 60 basis points of margin expansion this quarter. This bridge helps you quickly see we continue to deliver terrific underlying margin expansion. As for fourth quarter, we don't see anything that causes us to change how we view underlying margin expansion potential. We still see terrific opportunities. Sticking on Page 5, the Risk Management segment organic growth was 6.7%. That was in line with our expectations, and that resulted due to strong new business revenues and excellent retention. We expect favorable new business and retention again in the fourth quarter, so it's looking like another quarter of organic growth in the 6.5% to 7% range. Adjusted EBITDAC margin of 21.8% was better than our September IR Day expectations. And looking forward, we still see full year margins closer to 21%. Let's turn now to Page 7 of the earnings release and the corporate segment shortcut table. Each of these adjusted lines came in close to the midpoint or just a bit better than our September IR Day expectations. All right. Let's leave the earnings release and go back to the CFO commentary document. Starting on Page 3 with our modeling helpers. Most of the third quarter '25 actual numbers, which were given, excluding AP, were close to what we provided back in September. Looking forward, we are including AssuredPartners in our fourth quarter figures for depreciation, amortization and earn-out payable. Also, please always take a few minutes to look at the impact of FX as you refine your models. Turning to Page 4 and the corporate segment outlook for the fourth quarter 2025, not much change here from our IR Day 6 weeks ago. Flipping now to Page 5 to our tax credit carryforwards. Again, not much change from our IR Day. But as a reminder, it's a nice cash flow sweetener to fund future M&A that doesn't show up in our P&L, but rather via our cash flow statement. Turning to Page 6, the investment income table. We've updated our forecast to reflect current FX rates and changes in fiduciary cash balances. These numbers assume one future 2-basis-point rate cut in December. Shifting down to Page 6 to the rollover revenue table. The third quarter '25 column subtotal around $137 million before divestitures. That's pretty close to our September estimate. Looking forward, the pinkish columns to the right include estimated '25 and '26 revenues for brokerage M&A closed through yesterday, excluding AssuredPartners. And just a reminder, you always need to make a pick for future M&A. Moving down the page, you'll see that we expect fourth quarter '25 Risk Management segment rollover revenues of about $16 million. All right. Flipping next to Page 7, I hit on the major takeaways upfront in my comments, but heads up on a couple of items as you use this page to build your models. First, take a hard read through the footnotes. This table shows our midpoint estimates. It uses a placeholder assumption for growth and also does not include synergies. We still see annualized run rate synergies of $160 million by the end of '26 and $260 million to $280 million by early '28. And the second point, the noncash items that we show here, mostly depreciation and earn-out payable are also reflected in the Brokerage segment fourth quarter estimates on Page 3. So please don't double count those. Moving to cash, capital management and M&A funding. When I look at available cash on hand plus future free cash flows plus investment-grade borrowings, over the next couple of years, it's looking like we might have $10 billion to fund M&A before using any stock, still at multiples with a terrific arbitrage. So before we go to Q&A, a few sound bites on our 9-month combined brokerage and risk management adjusted results. Revenue up 17%, net earnings up 27%, EBITDAC up 25%, organic year-to-date at 6.6% and EBITDAC margin over 36%. Those are stellar results, and I see us finishing '25 strong and '26 is looking like another terrific year. Okay. Back to you, Pat.

Thank you, Doug. Operator, if we can go to questions, please.

My first question is about AssuredPartners. When considering new business by AP, I'm assuming that pertains to M&A, but what about synergies? Do those fit into the M&A category, or will they be included in organic revenue growth when they start coming online?

The revenue synergies that are generated from AssuredPartners will be credited to them, not to us. If we book something like a broader base contingent commission or supplemental commission that affects our financials, that will be reflected in the legacy Gallagher organic growth. Therefore, if we gain more from the AssuredPartners book of business, it would understate organic revenues. Does that help?

Yes, that does help. I think in the past you mentioned that next year feels similar to this year. You indicated that the full year is projected to be just over 6%. Considering your current outlook, do you have more specific guidance regarding the organic growth expectations for 2026?

Yes. We're currently in our budget and planning phase, but we are confident that next year could resemble this year. We believe that early signs indicate strong success in our Reinsurance business as well as our P&C businesses. In fact, when we examine the organic growth in the P&C sector, it has remained quite consistent over the past 5 to 7 quarters when excluding property catastrophe. Overall, our businesses are performing similarly to what we've been observing throughout the year, which gives us confidence that next year could be very much like this year.

My final question is about mergers and acquisitions. When you mention the pipeline, is that now a combined Gallagher and AssuredPartners pipeline? Since closing the AssuredPartners acquisition, how has their M&A activity contributed to the pipeline, and what are your thoughts on potential bolt-on acquisitions in the next year or two?

Elyse, give us a couple of weeks on that. I mean we just really got closed, and we're kind of getting around that. As I said, we've been doing a lot of visits. We're going to have most of their folks in the field come to the home office over the next 1.5 months or so. And that pipeline has not been yet put into our pipeline report. They did have a good pipeline. Things we're working along. And of course, we're going to bring them together with our M&A people. But I don't have a real good handle on that yet. We're hopeful that, that business and those opportunities will roll that over to us, but I haven't seen that yet.

Yes. One qualitative observation is that when I speak with branch managers or agency presidents who have merged with us, many seem surprised by our interest in them. These individuals are often from smaller communities with smaller books of business. This has opened the eyes of the 30,000 agents and brokers out there, showing that we are interested in partners of all sizes. If you are looking to sell, take care of your customers, and improve together, we are ready to explore M&A opportunities. I believe this will lead to us getting more opportunities and chances to engage with potential partners.

It will also take a little while to recook, if that's the right word. People are naturally cautious. We're going down a discussion and track with AP. You've now gone a different direction with Gallagher. How are you feeling about that? Are you still wanting to put the recruiting press on me? Or are you feeling a little bit hesitant? I think people want to naturally watch that. I'm very hopeful that when it starts to cook, it should cook well for us. That's what I'm hoping.

So I just actually want to build on Elyse's question. The first one on the organic growth. I recently spoke with 2 competitors in the small to middle market brokerage area. And both of them kind of said, in this shallow pricing environment, 4% to 6% is a good organic run rate, that it's very doable and likely. How does that strike you? I mean does that feel like the strike zone as opposed to in the past, you were looking more at upper single digit just given the pricing environment?

Yes. At the beginning of the year, we anticipated growth between 6% and 8%, and that remains our outlook. The distinction lies in our reinsurance and international businesses. I believe we have a solid understanding of what the U.S. retail market may look like. We expect to perform better than initially anticipated due to our strong wholesale business and various programs we have in place, alongside our reinsurance operations. These factors lead me to feel more confident about achieving the higher end of our growth range.

Understood. Regarding mergers and acquisitions, I know it's early to discuss the AssuredPartners pipeline. However, I'd like to know about A.J. Gallagher's interest. If a significant deal were to arise, whether large or outside the United States, would you be in a position to pursue it at this time, considering the scale of AssuredPartners?

Absolutely, yes.

First of all, I appreciate the disclosure on Page 7 of your CFO commentary. Doug, you mentioned the $160 million of synergies that are not included in these estimates; could you confirm that? Can you discuss the geography of that? Will it be reflected in operating expense, or will it affect both revenue and operating expense? I'm not asking for a specific breakdown by quarter, just roughly where you expect those synergies to appear by the end of 2026.

By 2026, I anticipate that we'll achieve a revenue uplift of one-third, benefit from improved efficiencies in our workforce for another third, and see a further third come from our operating expenses. The most exciting potential lies in the $300 million of synergies we plan to generate over the next year and, really, within the next 1.5 years post-2026. I believe this will present us with significant opportunities to utilize our technologies, including the AI initiatives we're currently developing. Greg, you've been with us for a long time. We've invested two decades into transforming our business, leveraging labor arbitrage, and integrating technology into our core operations. When we apply that experience alongside the $3 billion we've identified in areas where we've successfully improved efficiencies, productivity, and quality, I think we are well-positioned for substantial success. In fact, we may exceed our current projections.

I believe the collaboration is particularly evident in the revenue aspect. There is a closer alignment in what we're producing, which opens up more opportunities for joint ventures. While they are clients of RPS, they don’t engage with it to the same degree as our current platform does. They serve a wide range of business needs and, although they primarily cater to the middle market, they have substantial operations in the U.K. We have pinpointed millions of dollars in business opportunities to explore together in that region. In just six weeks, we've already generated $1 million in new accounts with them—accounts that were already in both of our prospect systems. We collaborated using our tools and their networks, which streamlined the process for those buyers to join us. There are thousands of such opportunities available. Therefore, I see the potential for significant collaboration as a real prospect.

In your response, you indicated that the AP will receive recognition for their revenue synergies. It appears that you are maintaining two separate accounts during the earn-out period. Can I conclude from your comments that you will be encouraging AP retail representatives to utilize RPS over other options? Will this strategy aid in enhancing your wholesale organic growth? If this occurs, will it reflect on the AP books, and will we not see that impact organic results for AJG? Does that sound clear?

I'll let Doug explain how we'll account for it. He has that covered, but I want to discuss the opportunity. About 5 or 6 years ago, we undertook the challenging task of reducing the number of wholesalers we worked with from around 500, which was entirely uncoordinated, to just 4 key strategic partnerships, one of which is RPS, our owned wholesaler. We recognized the need for additional partners beyond ourselves. It was a tough process, and we achieved it to benefit our clients, continually improving along the way. Well, AP is similar to where Gallagher was 15 years ago. We will have to embark on a similar journey, and while we won't force the use of RPS, we will initiate the process in the new year, identifying approximately 5 main partners, with plans to expand that slightly. We will continue to push forward, and we anticipate a significant opportunity for RPS as part of this effort. Doug can provide more details on the accounting.

Yes, Greg, in that example, if we transition from wholesaler X, Y, Z to RPS, that would be classified as organic growth in our legacy numbers. We’re discussing about an additional 10 months of this. So that would reflect legacy Gallagher organic growth. If they switch to a base commission schedule, where we receive 16% commission and they receive 14%, the additional 2% of that base commission would be attributed to AssuredPartners' historical branch. Does this prevent us from having to consolidate these businesses for that purpose? No. There is a self-adjusting mechanism because the extra compensation will go to the producer, and tracking the producer as they move from branch A to branch B won't create additional challenges. We are not keeping them separate from us. There are no earnouts on AssuredPartners other than those from acquisitions still on earn-out, which will also expire in about 1.5 years. This won't create any burden, and we are focusing on integrating everyone into the same system and aligning everyone with the same playbook as quickly as possible.

For the final cleanup question regarding market conditions, there is a lot of discussion about the pricing cycle. I noticed your comments about seeing ongoing stability, particularly in your middle and small market exposures. Pat, considering your extensive experience through various cycles, I'm interested in your perspective on how this might unfold over the next two to three years. It appears that large account property is facing significant pressure, along with other areas that show pressure points.

Yes, I’d be happy to discuss that. I’ve addressed this before, and it aligns with my previous statements. A couple of years ago in London, we had just implemented significant renewal increases on our public company D&O book. While with the FI team there, they mentioned to me that the market was going to soften quickly, which surprised me. I thought it was impossible for D&O rates to decline, along with cyber rates. That trend began about 2.5 years ago and has persisted, while other lines remained stable during that time. What’s different this time, compared to cycles in the late '80s through the '90s and the cycle in 2005, is that we're not seeing a uniform trend across all lines. The property market is in a favorable position for clients after a challenging period, providing some much-needed relief. It’s interesting that the casualty market is still experiencing rate increases as they adjust to the changing conditions. I believe we see cycles within cycles, which is different from what I've observed in previous years. I think we’re always one major event away from a firming property market. The casualty market takes longer to stabilize since costs aren’t immediately clear. Additionally, we have ancillary lines that impact this situation. A notable distinction this time is that our larger accounts are negotiating for and receiving bigger discounts, which is expected since they handle more premium. In contrast, smaller accounts, which were previously positioned to negotiate better terms, are not as strong now. We will see how the situation unfolds, but the overarching trend is that it will be cyclical and differentiated by line and performance, indicating cycles within the broader cycle.

This is Meyer. My first question is about the pricing dynamics. We're seeing some slowdown in casualty, with a 6% change this quarter. Do you expect this trend to continue decreasing or stabilize? What are your expectations moving forward?

So what you're saying is that you're noticing a slowdown in the increases in casualty pricing, but not a drop in casualty pricing? We don't see that. We disagree with that.

Yes. On a quarter-by-quarter basis, there might be some mix differences to consider. However, the overall trend is a consistent increase of 6% to 8% per year, which has been stable for the past 3 to 4 years. The current environment remains risky, and carriers are wisely keeping ahead by continuing to push forward on casualty pricing. It's important to note that while you are asking about rates, there are also changes in exposure units to factor in. Additionally, when rates decrease, our customers tend to purchase more insurance; conversely, when rates increase, they tend to buy less. As a result, we are actually seeing revenue growth in segments where the rate declines are occurring. People are opting for more coverage, such as lowering their deductibles and increasing their limits. Brokers may not fully capture the complete picture of rate changes due to this behavior. It’s not solely about rates; it also depends on what our customers can afford. As our customers expand, we will also be able to sell more insurance. For example, if a customer has 100 trucks and acquires 5 additional ones, they will need to purchase 5% more truck insurance.

The employee benefits, you had some slippage in a couple of large life cases. But as a general line of business, how do you see that shaping up for the fourth quarter 2026?

The fourth quarter is a crucial time for our customer enrollment efforts, and we are experiencing strong demand in this area. Many customers are looking to adjust their strategies, especially as they prepare for proxy season. We're also seeing a significant focus on base medical sales. Human resource leaders are becoming increasingly aware of rising medical inflation costs, which are affecting both utilization and the associated expenses. This is creating a noticeable frequency of concerns. Historically, there's always been competition for talent, but currently, HR professionals are actively addressing the growing challenges of medical inflation costs. This situation is likely to lead to new opportunities for us in the fourth quarter and will keep us quite busy in the year ahead.

Yes. How about new business? Pat, in your experience at this point in the cycle, considering that casualty remains high and the market is still challenging, is it somewhat easier, harder, or about the same to acquire new business?

No, Mark, you're asking a relevant question. It's an interesting time. Firstly, it's great that we can deliver for our clients even now. We are not limited by capacity in any significant way. At the same time, we face competition from smaller players, with whom we compete 90% of the time. They can surprise us with unexpected quotes, and we may find ourselves facing a deal that seems excellent only to have someone undercut it. Honestly, our clients are not satisfied. They have spent five years dealing with price increases. We have been able to explain to them, using our data and analytics, why these changes occur and what to anticipate. However, sometimes a local competitor can underbid us, forcing us to match their offer. Overall, I believe this is a favorable time for acquiring new business because our team members who are proactive in outreach can effectively close deals. Meanwhile, we also need to focus on retaining and re-selling to our current clients, and I think we excel in that area. Overall, I see a positive outlook for new logos, though it might not significantly boost top-line revenue growth.

I had a question just on the property market. It was encouraging that RPC held in at down 5%. I think it was down 7% in the second quarter. Just given the light storm season, I'm just wondering how you're thinking about just the property market overall going forward, not only for the fourth quarter, but then also for next year?

I think the property market is going in a direction that makes some sense given the fact that they've got good results. The cat bond industry is doing well, record ILS activity. Reinsurers are making a good return on what they put at risk. I think there is more capacity available. I think there's continued pressure on the downside.

And that influences our pick. If it was down 5% to 7% this year and what we post this year. And next year, if it's down 5% to 7%, that's baked into our outlook for next year.

I will say this, David. I do not sense a dramatic decrease coming in the fashion of past cycles where all of a sudden you turn around, it's off 15%. I'm not sensing that at this point.

Got it. That's helpful. And so the sort of like a down 5% to 7% is embedded, Doug, and your early thoughts on next year looking similar to this year?

That's right.

Yes, I think overall that we're seeing basically a 4% increase across the book. I think Pat said that in the early part of his comments, probably got lost in there a little bit that overall, we're still seeing a business where the rate and exposure are moving north of 4%, 5%, something like that.

Got it. If I could ask one more question, I noticed that you generated about $500,000 on AssuredPartners fiduciary balances in the third quarter. I thought this would be a significant opportunity for you. It doesn't seem like there is much change in your fiduciary expectations for the fourth quarter. I know the interest rate environment has shifted a bit, but how are you viewing the fiduciary cash at AssuredPartners? How much revenue do you anticipate generating from that next year?

I believe it's a significant long-term opportunity. Reflecting back, one of you, possibly Adam Klauber, asked about our strategies for managing working capital. We have consistently discussed consolidating our bank accounts for the past decade, and we have successfully improved the efficiency of our free cash flow management and pooling across divisions. Additionally, we've enhanced our ability to quickly manage fiduciary funds by investing them into interest-bearing accounts. I see this as an excellent opportunity. I will revisit our future assumptions, likely making some updates in December. Overall, I anticipate that over the next few years, we can consolidate these accounts and capture cash flows more efficiently. With interest rates now being higher than they were a decade ago, the potential returns on this strategy look promising.

Definitely like one of my favorite leadership teams has been Pat, Doug, Ray, but I got a couple of kind of tough questions. First one for Pat, second for Doug. So first one, I was going through some old transcripts like I think it was 2013, maybe 2014, but it was when the last hard market was kind of in this situation, and you guys were doing 1% organic. And like what I'd say, Pat, is like you sounded like on those transcripts the same way you do now. We're killing it, we're doing everything.

Positive, bullish and really excited.

Exactly, but you're doing 1% organic and like that was execution, and now you're talking about 6%. So my question for you is like what is actually different because like I think you appreciate this time in the market. I'm curious, what you're thinking about why you'd be able to do 6% now and back then 1% was good?

It's quite straightforward. First, the market isn't declining as quickly as it has in the past. Currently, we're experiencing a positive growth of 4% across all lines. If we look back to 2012, 2013, and 2014, there wasn't any significant price growth until around 2015 and 2016. Our renewal book is still generating organic growth between 3% and 4%. While property rates have decreased, during 2012 and 2013, we clearly understood our goals. Even when the pricing environment was challenging, we identified opportunities for strategic acquisitions to enhance efficiency. We have over 20 years of collaboration with our teams in locations such as India, the Philippines, Scotland, and Las Vegas, with about 16,000 employees providing over 500 services globally. Although there's a cost advantage in employment, the increase in productivity and quality is substantial. Our performance has improved, and we remain optimistic about it. Reflecting on that period, we communicated our two-pronged approach. Many observed rising acquisition activity, but they failed to acknowledge the growth we achieved through those acquisitions, often at a significant discount. It’s essentially like getting a dollar's worth of value for fifty cents, which is quite advantageous. I see similar conditions now, if not stronger, as our presence, brand, and data analytics capabilities have grown. Back in 2012, we lacked the ability to analyze structured data in the way we can today. For instance, I can tell you what happened last month in Oregon regarding workers' compensation, and even what occurred yesterday. Our data lake, OneSource, now holds three years of data and we've managed to complete that in less than two months. When we present Gallagher Drive in the field and discuss current rate trends, we base our information on accurate Gallagher/AP data, tailored by SIC code, line, and geography. Customers are interested in this data. So yes, we navigate fluctuating rates effectively. Ryan, just look at the chart—our total shareholder return indicates our strategies are effective.

Before you ask me a tough question, let me mention something. In 2013, we had no international presence to speak of. We hadn't made any acquisitions and built our business in the U.K., Australia, and New Zealand. We didn't have reinsurance available. RPS was an option, but we didn't have the programs we currently offer. Back then, Gallagher Bassett was growing well, and it continues to do so in the claims business as people recognized the value it provides. Our business today is vastly different. The excitement about our opportunities remains unchanged because we still see potential for improvement in our trading and we aim to capture more market share while outperforming our smaller competitors. Our franchise today is distinct from what it was in 2012. This should give you some optimism that if we're achieving 1%, then reaching 6% should be quite attainable now.

I wouldn't say easy.

Ryan, next, give me my hard one.

Here you go. So your hard one, Doug. It's not easy, but like you're known on the Street definitely for throwing a real fast ball, like 101, you always nail everything. I go back to 2020. It's like you had a bug in everyone's room. You know exactly what you're going to do. This wasn't like the most uncertain environment in the history of the world. There's been a couple of quarters here, though, where we've had an investor preview, and then you've fallen a little bit light. I'm a little worried you are over worked. But I'm wondering like where is the fast fall a little bit in terms of being able to like forecast adequately or accurately exactly what's going to happen?

The 5% that we talked about in September, I did give you a heads up that there could be some slippage because of the large life sales. That's $11 million on a $3 billion quarter. So yes, that one, I told you was coming. The adjustment in the contingent commission line that they have to true up for an international program that sometimes have some 3-year rating on it. I just didn't have insight to it, but across about on a contingent contract where we've probably got about 600 different contingent contracts, that cost us $4 million too. You're right. Of the $11 million out of $3 billion, I was off my game on those 2, half of it got past me.

No, no. I love you guys.

You're right. I missed $4 million out of $3 billion, sorry.

Just as we're thinking about kind of the building blocks to organic here, I think you've talked about international a bit as maybe being additive or incremental. I guess if I look at some international retail, U.K., Canada, Australia and New Zealand, it's kind of been like low single-digit year-to-date. Are you expecting some uplift in '26 or kind of steady in that market?

I believe our businesses are performing at a level that aligns with expectations for next year. I am consistently impressed with our specialty business in the U.K. They are innovative and effectively utilize our tools, and they possess excellent market insight. I am particularly excited about the niche experts within our business. The addition of the AP business strengthens our niches, and we are also gaining some fantastic new niches from AP that have very talented individuals. Our skilled team consistently excels, and we have dependable professionals even in challenging markets. Therefore, I don't anticipate significant changes between this year and next. Our team is doing an excellent job of serving their clients, and I don't see any weaknesses at this moment.

Got it. And then in the past, we've talked about maybe 6% organic underlying expansion of 60 bps or so. How should we think of maybe the sensitivity there if that growth is being led by specialty, which I would think is a little bit higher margin versus retail, which is maybe a little bit below? Any sensitivity would be thinking about there?

Our specialty business is quite complex, and the professionals we have on staff provide targeted services. It's not just generalists discussing oil wells, SpaceX cargo, or marine placements. These areas generally require more substantial support costs. In terms of our benefits business, particularly the actuarial services we offer stemming from the Buck acquisition, I believe our niche retail business performs strongly across various regions, including the U.S., Australia, and New Zealand, yielding healthy margins. Therefore, I wouldn't consider specialty to be underperforming compared to retail when it comes to margins.

Just a quick one from me. I realize it might be a little bit too soon to tell, but thinking about the 200 bps headwind from roll-in on this quarter's Brokerage adjusted EBITDAC margin, how might we think about impact from rolling of M&A going forward?

Good question. First, it's important to consider the seasonality we mentioned earlier, which is reflected in only capturing about 40% of the quarter. This impacts our fixed cost structure over a shorter period. Looking specifically at the fourth quarter, I anticipate that AssuredPartners' seasonality might negatively affect margins by approximately 1 percentage point. Additionally, the integration of newly acquired businesses, which typically operate at lower margins, is expected to contribute about a 40 basis point headwind. We may also see a reduction in interest income around 0.5 percentage points. However, the underlying margin in the fourth quarter should still experience a 40 to 60 basis point expansion. Overall, I expect a 0.5 percentage point increase from organic growth, but we will offset that by a point due to AssuredPartners' seasonality and the integration of M&A targets that haven't reached our margin standards, resulting in an additional 0.5 percentage point impact. That's my outlook on it.

Just a question on reinsurance brokerage. Just wanted you guys to help me out here. So you've been growing in excess of your 2 larger peers in this business for a while. It sounds like you're still confident here. If pricing takes another leg downward, I'm just trying to gauge your confidence level in still being able to achieve like high single-digit organic here, and is that due to growth in adding new accounts? Or is that growth in accounts that you already have?

I think it's both. But I'll tell you one of the things that has worked out, Rob, at a level that I'm very, very proud of. When we did the Willis transaction, one of the things we told the investment community and our people is that we thought there was an advantage of making sure that our retail operations, our wholesale operations and our reinsurance operations were seen together on the same page, helping each other produce and service clients. And frankly, that's a bit of a different model than some of our competitors. And that has worked to a level that I think is better than any of us expected. So our team is talking all the time. We are connected at the hip. You can see that the CIAB, that's the Council of Insurance Agents and Brokers, just had their, rendezvous, if you will, out at The Broadmoor a month ago. And the meetings are comprised of all the parties that are trading with those companies, the discussion on strategies are together, and I think that's a big part of it. And so I think that when I look at where we are, we've had good growth with our existing clients. We've been able to help them, and we're very appreciative of that, and we have added new accounts. Now the thing that I'm kind of excited about with AP, quite honestly, is that they're trading with a lot of smaller markets that we've never traded with. I won't get into a bunch of names, but you know them all. And yet we didn't really transact. And AP has very good relations with those companies. So coming out of The Broadmoor, we're kind of excited to say, this doesn't diminish our continued commitment to our large trading partners that we've had at Gallagher forever, but adding some new people to the list that AP already has a real positive relationship with, I think, once again, will be tied together at the hip. It will be good for production on all sides. So I think new account opportunities benefit from that as well as penetration from our existing business. I continue to be very, very bullish on reinsurance. I'm very impressed with our team there. We've got a very smart group of people.

Every time we establish a new carrier relationship on the retail side, it not only opens up the opportunity for reinsurance but also for claims management. Our Gallagher Bassett unit has an excellent outsourced practice in this area, focusing on white labeling their programs. Additionally, we are quite strong in casualty within our reinsurance program. While there may be a decrease in property, I believe there will be significant demand for more reinsurance, but we are well-positioned in casualty. It's important to remember that our entire reinsurance portfolio shouldn't be viewed solely as a catastrophe property portfolio. I hope this clarifies things.

That's super helpful. And just wanted to follow up on contingents. I mean, profitability for these insurers seems to be pretty good. And I think those are a little lag there. So I'm just curious if your thought process on contingents plays into your thought process on relatively stable organic growth next year?

Yes, I believe that when the carriers perform well and we operate on a contingent commission, which is a significant aspect of our roles as wholesalers, MGAs, and program managers, we benefit as well. I'm pleased with the performance of the carriers we represent and partner with, and we will receive our fair share of contingencies from that. On the other hand, we also have supplementals, which rely on growth rather than profitability, and I see very good growth in that area too. I also believe that our agreements with many of the carriers AP trades with are more advantageous than theirs, which will work to our benefit. Overall, I am optimistic about our supplementals and contingents as we look ahead to next year.

Yes. They are growing about 1.5 times faster organically than we are in the retail sector. So they are slightly outpacing our organic growth. Looking ahead to next year, we do not anticipate a significant increase or decrease in those areas. The profitability for the carriers is strong, which could provide some upside and contribute to our organic growth next year.

On the organic viewpoint next year, what's your estimate of embedded in there on lumpy life sales? I know you guys don't love us asking about it or maybe I'm wrong, but you do keep bringing it up. So I feel like I have to ask.

No, we appreciate you asking about it because it provides useful insights on some of these smaller amounts. We believe next year will be positive as interest rates decrease, assuming that occurs. One of two things will happen: either rates will drop, encouraging buyers to purchase since it becomes a more affordable option, or rates will stabilize, leading to less hesitation among potential buyers. Many of these products are time-sensitive, so while there may be short-term fluctuations, overall, I expect 2026 to present a more favorable environment for these products compared to 2025. Throughout the year, the overall changes aren't substantial, but the quarterly variations sometimes generate discussion. We're confident in our products and their necessity, and I think we could have a lot to be excited about in 2026. However, this outlook hasn’t altered our projections for next year, although I can foresee a potential upside as well.

Okay. While not quantifying it, I wonder if we should consider the RPC trends from recent quarters. Based on what you shared about next year in response to David's question, it seems that if the current RPC trend continues, achieving a 6% to 8% increase might be challenging unless there are other factors at play. Perhaps the contingent and sub trends are growing faster or there are influences from reinsurance. I know this is a lot to unpack, but should we not focus on RPC as we previously did? It seems there are other ways to drive organic growth next year despite a slowing pricing environment.

We've always stated that we are in an opt-in phase regarding insurance coverages. As people receive reductions in their base rates, they are likely to purchase more insurance, which should drive growth next year. I believe there has been significant underbuying of insurance in the past five years. A major issue remains the rising replacement costs. Insurance carriers have been hesitant and are trying to increase rates for that aspect. They need to resume efforts in that area because replacement costs continue to soar. There's potential for growth as carriers seek to adjust rates for underinsured values. The relationship is not straightforward, which is why our property business did not grow by 20% when the market did. We are experiencing lower growth. Currently, more consumers are expected to opt-in for additional coverage. I believe we will secure more business because we can effectively showcase our value in a calmer market through Gallagher. Clients recognize the benefits we provide. Our retention rates are solid, although there are some dissatisfied clients who may seek new options. However, I think our team effectively communicates that staying with us will lead to favorable outcomes. No, we actually appreciate your questions about it because they provide valuable insight into the small amounts involved. We believe we'll have a strong year ahead as interest rates decrease, assuming that happens.

Well, thank you again, everyone, for joining us. We've had a great 2025 thus far. And as you can tell, I remain very excited about the rest of the year and beyond. To our now 71,000-plus colleagues, thank you for all that you do for our clients day in and day out. We've got the best team in the industry, and I think it shows. Thank you all for sticking around late in the evening, and have a good rest of the evening.