Good afternoon and welcome to Arthur J. Gallagher & Company's Fourth Quarter 2021 Earnings Conference Call. Participants have been placed on a listen-only mode. Your lines will be open for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time.

Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially.

Please refer to the cautionary statements and risk factors contained in the company's 10-K, 10-Q, and 8-K filings for more detail on its forward-looking statements.

In addition, for reconciliations of the non-GAAP measures discussed on this call as well as other information regarding these measures, please refer to the earnings release and other materials in the Investor Relations section of the company's website. It is now my pleasure to introduce J. Patrick Gallagher, Chairman, President and CEO of Arthur J.

Gallagher & Company. Mr. Gallagher, you may begin..

Thank you. Good afternoon. Thank you for joining us for our fourth quarter 2021 earnings call. On the call with me today is Doug Howell, our CFO as well as the heads of our operating divisions. We had an outstanding fourth quarter.

For our combined brokerage and risk management segments, we posted 18% growth in revenue, 11% organic growth, net earnings growth of 11% adjusted EBITDAC growth of 17% and we completed 18 new tuck-in mergers in the quarter. That's on top of closing our Willis Re merger.

Our total for the year, our merger strategy added more than $1 billion of annualized revenue. That's just fantastic. Needless to say, I'm extremely proud of how the team performed during the fourth quarter and the full year. So let me give you some more detail on our outstanding fourth quarter performance starting with the brokerage segment.

During the quarter reported revenue growth was an excellent 19% of that 10.6 was organic, another sequential step up from the third quarter and the fourth consecutive quarter of improvement. Net earnings growth was 8% adjusted EBITDAC growth was 17%.

And we expanded our adjusted EBITDAC margin by 13 basis points in line with our December IRD expectations. Remember, that's lower because of the natural seasonality of the reinsurance acquisition, margins would have expanded nearly 90 basis points. So another great quarter for the brokerage team.

Let me walk you around the world and break down the 10.6% organic, starting with our PC operations. First, a domestic retail business posted 13% of organic, driven by excellent new business, higher exposures and continued rate increases. Risk placement services, our domestic wholesale operations posted organic of 15%.

This includes more than 30% organic in open brokerage, and 5% organic in our MGA programs and binding businesses. New business was better than 2020 levels and near double-digit renewal premium increases helped to. Outside the U.S., our U.K.

business posted organic of 12% specialty including our existing Gallagher Re business was up in the high teens and retail is up 7% Both fueled by new business and retention in excess of 2020 levels. Australia, New Zealand combined, organic was more than 8% also benefiting from good new business and improved retention.

And finally, Canada was up more than 13% organically and continues to benefit from strong new business trends, stable retention and renewal premium increases. Moving to our employee benefit brokerage and consulting business. Fourth quarter organic was up about 7% a couple of points better than our December IRD expectation.

We saw some nice sequential improvement over the course of 2021 up from the 2% organic we delivered in the first quarter, thanks to a rebound in global economy, declining U.S. unemployment and increased demand for our consulting services as businesses look to grow. Next I'd like to make a few comments on the PC market.

Overall, global fourth quarter renewal premium increases were above 8% broadly consistent with the increases we saw during the first three quarters of '21. Moving around the world renewal premium change which includes both rates and exposure, up about 8.5% in U.S.

retail including a 13% increase in professional liability, 8% in property and casualty and 4% in workers comp. In Canada, Australia, New Zealand and the U.K., retail renewal premiums up between 7% and 9%, mostly driven by increases in professional liability and property.

Within RPS, wholesale open brokerage premium increases were up 13% and binding operations were up six. Shifting to reinsurance, January 1 renewal showed price increases that vary by geography and client loss experience, loss free programs saw rates flattish to up 10%.

While loss impacted accounts and cat exposed property business experienced rate increases that were in many cases double that. So rate tended to be based on client's specific attributes and loss history. And I consider that to be a healthy outcome. So whether retail, wholesale or reinsurance premiums are still increasing almost everywhere.

Looking forward, I see a difficult PC market conditions continuing throughout 2022. That's because our risk bearing partners remain cautious on rising loss costs. So property coverages replacement cost inflation and the increased frequency and severity of catastrophe losses are causing underwriters to rethink rate adequacy.

On the casualty side, social inflation, low investment returns and the potential for increases in claim frequency as global economies further recover are all potential negative drivers of future underwriting profitability. And on top of higher loss costs and lower investment insurance, reinsurance costs are also increasing.

So I think carriers will continue to push for rate and don't see a dramatic change in the near term. We shine in this type of environment by helping our clients find appropriate coverage while mitigating price increases throughout creativity, expertise and market relationships.

I'm equally as upbeat on our employee benefit consulting and brokerage business. As you know the first quarter seasonally our largest employee benefits quarter and is looking like the team had a strong annual enrollment season.

Early indications are pointing to an increase in new client wins over prior year, consistent client retention and a slight increase in covered lives. With improved business activity and increased demand for goods and services businesses are trying to grow their workforce.

But the labor market remains extremely tight with more than 10.5 million job openings domestically and 6.3 million people unemployed and looking for work. This lays the groundwork for robust demand for our consulting services in 2022 as employers look to attract, retain and motivate their workforce. So we finished '21 with full year organic of 8%.

That's really nice improvement from the 3.2% organic we reported in '20 and above pre-pandemic 2019 organic of 5.8%. And as we sit here today, we think '22 organic will end up in a very similar range to '21 and there is a case that it ends up even better. Let me move on to mergers and acquisitions.

It was great work by the team to close the reinsurance acquisition in early December. Integration is well under way and progressing at a good pace. Remember, we are a seasoned integrator.

On the revenue side, much like our tuck-in acquisitions, we've mobilized our local teams from retail, wholesale and even Gallagher Bassett to partner with our new colleagues and generate new revenue opportunities. I'm also very pleased that our combined Gallagher Re team hit the ground running and had a strong finish to the year.

Financially, the acquisition added about 20 million of revenue in December and as expected generated a small EBITDAC loss due to seasonality. More importantly, I'm already seeing examples of cross division cooperation and collaboration. So our new reinsurance colleagues are quickly embracing our Better Together Gallagher culture.

Outside of reinsurance, we completed 18 tuck-in brokerage mergers during the quarter, representing about $65 million of estimated annualized revenues. I'd like to thank all of our new partners for joining us and extend a very warm welcome to our growing Gallagher family of professionals.

As I look at our tuck-in merger and acquisition pipeline, we have around 35 term sheets signed are being prepared representing over $200 million of annualized revenues. We know all these will not close however, we believe we'll get our fair share. Next, I'd like to move to our risk management segment Gallagher Bassett.

Fourth quarter organic was 13.1% a bit better than our December IRD expectation, margins approached 19% in the quarter, leading to full year adjusted EBITDAC margin of 19.1%. Another great quarter and full year for that matter from the team.

We saw more new arising claims within General Liability and Property and to a lesser extent co-workers compensation during the quarter. New COVID related workers comp claims were similar to the third quarter dated slightly by the late year surge in cases from Omicron variant.

Regardless of the short-term variability of new rising claim activity, we feel really good about the business. Looking forward continued strong retention, combined with new client wins in the fourth quarter should drive '22 organic into the high single digit range.

So it was another fantastic year for our franchise and I'm extremely proud of our team and our collective accomplishments.

Together, we produced 8.6% organic growth in our combined brokerage and risk management segments, completed 38 mergers with more than $1 billion of estimated annualized revenue, more than 110 basis points of adjusted EBITDAC margin expansion.

And we were recognized as one of the world's most ethical companies for the 10th year in a row by the Ethisphere Institute and all this in the face of a pandemic. What a fantastic year, more than ever, our success is due to our bedrock culture.

Our culture helps us deliver better results, better results for all of our stakeholders, including our customers, our colleagues, our underwriting partners, and of course, our shareholders. Every day, all of our teammates get up and work diligently to maintain our culture, to promote our culture and to live our culture.

That truly is the Gallagher way. Okay, I'll stop now and turn it over to Doug.

Doug?.

Thanks, Pat. And hello, everyone. As Pat said a terrific quarter to close out in an outstanding year. Today, I'll start with our earnings release and touch on organic margins and our corporate segment shortcut table.

Then I'll move to our CFO commentary document where there I'll talk a little bit about how we're now providing our their typical modeling helpers for '22, add some commentary in the Willis Re acquisition and our latest thinking on clean energy. I'll then finish up with my comments on cash liquidity and capital management.

Okay, let's flip the page for the earnings release to the brokerage segment, organic table. All in brokerage organic was 10.6% a nice step up from the 9% we posted last. And the six plus percent we posted in the first half of '21 leading to full year organic of 8%. Looking forward as Pat said, we see full year '22 similar to '21 or even better.

Now turn to page six for the brokerage segment adjusted EBITDAC margin table. Headline all in adjusted margin expansion for fourth quarter was 13 basis points right in line with our December IRD expectation. But recall that expansion has the adverse seasonal impact of closing Willis Re on December 1.

Without that, adjusted margins would have expanded 88 basis points also right in line with the forecast we provided in December. For full year adjusted margin expansion was 123 basis points. Excluding Willis Re, it was up 142 basis points.

And it's important not to forget, that's on top of 420 basis points of adjusted margin expansion in '20 and 75 basis points in '19. That's absolutely incredible execution before during and as we emerge from the pandemic. Moving on from '21.

Looking forward, as the pandemic limitations continue to ease in '22, we will naturally see some costs returning in areas such as travel, entertainment and perhaps some other office consumables. Incremental full year '22 costs from these three areas could be as much as 25 million.

But even then, our full year spend on these categories would be below pre-pandemic levels, showing that we're holding safe. Also, we're back to making targeted investments to drive long-term growth. In '22, we're planning for increases in marketing, advertising, consulting, professional fees and certain IT investments.

These costs combined with higher insurance premiums say for E&O, D&O and work comp would total around 35 million. So like we said in our December IR Day, we should be able to absorb those costs and hold margins if we post around 7% organic. And if organic is over 7% even show some margin expansion.

Then by 2023, we could be back to that pre-pandemic view that margin expansion might occur at a 4% or so organic level. And to be clear, all of these comments are before the impact of the acquisition of Willis Re. On a pro forma basis, those margins can run a bit higher.

So math would say would naturally provide some lift to our consolidated brokerage segment margins in '22. A couple of things to keep in mind as you build your quarterly models for our brokerage segment in 2022.

First consider seasonality, due to our benefits business, and now our larger reinsurance business, first quarter seasonality, our first quarter is our largest revenue in EBITDAC of the quarter of the year.

And second perhaps slightly more nuanced, since we're not seeing price and or exposure increases in benefits and workers comp to the extent we are in other areas of PNC insurance. First quarter organic might be a point or so below your full year pick simply due to the mix.

So the math would then suggest their second, third and fourth quarters could post over your full year organic pick. Again, that's just a nuance to help you with your quarterly model.

Moving on to the risk management segment and the organic table at the bottom of Page Six, you'll see 13.1% organic in the fourth quarter and full year organic in excess of 12%. What a great rebound from the depths of the pandemic.

And as Pat said, it's looking like revenue momentum continues into '22 with full year organic revenue growth in the high single digits, which is really terrific given '22 will naturally have more difficult compares than '21. Moving to the risk management segment EBITDAC table on page seven.

Adjusted EBITDAC margin of 18.6% in the quarter and more than 19% for the full year, a fantastic result. And just like our brokerage segment, a nice step up from pre-pandemic levels of 17.5%. Again, that demonstrates our ability to maintain a portion of our pandemic period savings even as we make some further investment in technology investments.

Looking forward, as you heard on our December IR Day, we will continue to make investments in analytics and tools to enhance the client experience and drive better claim outcomes. But even with those holding margins close to that 19% is achievable for full year ‘22. All right, let's turn to page eight to the corporate segment table.

In total, adjusted results $0.02 better than the midpoint of our December IR Day forecast, mostly as a result of strong clean energy earnings. We did have a couple of notable adjustments this quarter. First Willis Re transaction related costs, as discussed in footnote two were 22 million after tax.

And second, as discussed in footnote three and similar to third quarter, we had non-cash, deferred tax adjustments related to international M&A earnouts, which is the most of it as well as some other small tax and legal settlement items together about 19 million after tax.

Now let's shift to our CFO commentary document we post on our website starting with page three. As for fourth quarter, you'll see most of the brokerage and risk management items are close to our December IR Day estimates. Also on that page, we are now providing our first look at items related to the brokerage and risk management segment.

A couple lines we're highlighting, first FX, the late '21 and early '22 weakening of the U.S. dollar against our major currencies is creating about a $0.04 headwind to EPS next year. Second integration costs. You'll read in footnote one, the integration estimates provided here only reflect expense associated with Willis Re.

As Pat mentioned, integration is well underway and we are still comfortable with our ultimate pack of about $250 million of total costs for integration. All right, let's turn to page five of the CFO commentary, the page addressing clean energy.

The purpose of this page is to highlight we are transitioning from over a decade of showing GAAP earnings to a six-day period where we harvest cash flows. You'll see in the blue column that we reported '21 GAAP earnings of 97.4 million, a really nice step up, up 39% over '20 and we generated 40 million of net after tax cash flow.

So also a nice step up from '20. But the real headline story here is in the pinkish column. Cash flows take a significant step up in '22, looks like we'll be harvesting $125 million to $150 million a year of cash flows and perhaps even more in '23 and beyond.

Now there is still a possibility of an extension in the law and we're well positioned to restart production if that happens, but if not, we have over a billion dollars of credit carryovers. If we use say $150 million a year that's a seven year cash flow sweetener. Flipping to page six in the rollover revenue table.

The reinsurance acquisition is off to a solid start and we are encouraged with both its December results and early indications from the 1-1 renewal season. So it's looking like our pro forma revenue and EBITDAC of 745 million and 265 million respectively, are holding up nicely. So the reinsurance acquisition is off to a terrific start.

All right, as for the cash and capital management future M&A. At December 31, available cash on hand is about 300 million with strong operating cash flows expected in '22. And potentially a nice pumping cash flow from our clean energy investments, we are extremely well positioned to fund future tuck-in M&A using cash and debt.

Over the next two years, we could do over $4 billion of M&A without using any stock. You also see that our Board of Directors announced a $0.03 per share increase to our quarterly dividend, that would imply an annual payout of $2.04 per share. That's a 6.3% increase over 2021.

Finally, one calendar item, we are planning on our regular mid quarter IR Day from 8 am to 10 am, Central Time on March 16. Again, that will most likely be virtual. During that we will allocate some time to socialize our planned migration to reporting adjusted GAAP EPS results excluding the impact of non-cash intangible asset amortization.

We'll discuss the detail of all the adjustments including representing historical results on the new basis. Okay, that's it. From my vantage point, as CFO we are extremely well positioned for another great year here in '22. Before I turn it back over to you, Pat, I'd like to thank the entire Gallagher team for a terrific quarter and fantastic year.

Pat?.

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

Thank you. The call is now open for questions. Our first question is from Mike Zaremski of Wolfe research..

Hey, guys, this is actually Charlie on for Mike. So organic growth in the back half of the year has been outstanding and has been accelerating. But pricing while positive seems to be decelerating and GDP is decelerating as well.

Can you provide some color on what makes you comfortable with guiding us to organic growth at almost two times your historical level?.

We think that the rates are going to hold. It's just that simple. market falls out. They won't, market holds the way it is, it will. I'd see all kinds of reasons for it to continue, as laid out in my prepared remarks. But beyond that, you've got a situation where underwriters are not backing off from their need for rate.

We're seeing that every single day. We're into the renewals, obviously now deep into the first quarter. And we're not seeing rate relief in any way, shape or form along the lines of what I talked about in my remarks..

I still think there's a lot of pent-up exposure unit growth that still to come. We think there's inflation sitting there. We think that there's a need for our benefit consulting advice, more and more. We think that wholesaling markets are becoming tough and harder to find placements.

We think there are more accelerators when it comes to that then there are maybe a slight, 0.5 point pullback in what the underwriters are asking for in re that far overshadows it..

Got it. That's great color. And then, on M&A. I guess there's -- I know you said the integration is going well.

Does the reinsurance transaction have any impact on M&A decisions this year? Or is there any chance you don't spend your entire free cash flow because of it?.

Of course, I said we think we have 4 billion to spend over the next couple of years. I think that's almost 2 billion next year and a little over 2 billion in the final year. So we have plenty of free cash to fund acquisition our pipeline. It does get a little slower in the first quarter.

There's people that push more to have something done by year end and we have that happen every year. But we're pretty excited about what we're seeing in our pipeline right now..

Our next question is coming from Greg Peters of Raymond James..

I know I can't do it Doug, but I'm wondering if you can say pre-pandemic 10 times really fast..

Pre-pandemic, Pre-pandemic..

Obviously, I don’t know. I couldn’t..

I'm just teasing. So let's see, I had a question about the M&A. And I was looking in the CFO commentary on page three. And of course, Pat, you always give us a view on term sheets, outstanding, et cetera. So, two-part question.

When you give us term sheet numbers, the number of term -- sheets that are out there, and then ultimately, to close, can you talk about how that ratio, the close rate has changed over the last two or three years? And then, secondly, on page three of the supplement Doug, you drop in, you give us the quarterly weighted average multiple of EBITDAC tuck-in.

And it's definitely trending up. So I'm just curious about your views there..

Yes, great. Let me take the first part of your question. When we get to an actual term sheet, we're usually moving down, especially in our tuck-ins, we're usually moving down a path where we're going to do a deal. And one of the things about our reputation is that we will close.

Having said that, over the last two to three years, there's considerably more competition, you can take a $5 million deal today and if it's going to get spreadsheet, there'll be a dozen, really thinking of a dozen bids.

So we are really trying hard to make sure that all of our new partners are excited about what the future provides being part of Gallagher, which quite honestly, we think is substantially better and more exciting than our private equity competitors. But that doesn't diminish the fact that they're good competitors and they're smart people.

And they're well funded. So I don't have a number for you specifically, I can't say, oh, yeah, we closed 32% of the ones that we finally get to. We don't keep the records that way. I don't do that.

But anecdotally, I'll tell you that we should close more than half of the ones that we get to we have a signed term sheet, while I will take it back, we should close 90% of the ones where we have a signed term sheet, 10% will slip out of the net. And where we're preparing term sheets, we should close about half of those..

In terms of the multiple Greg. Yes, the multiples ticked up a little bit, not as much as what our multiple has. So there's still a terrific arbitrage there. But also, you have to realize the growth rates that drive those multiples have gone up quite a bit, too. So I think there's justification for higher multiples.

But we're still buying in that eight to 10 range when it comes to tuck-in acquisition. It's a pretty good run rate versus our trading multiple of 15, 16, 17..

Got it out. I guess, a follow up question. It's been a rough start to the year for the market. And for the insurance brokerage stocks and your stock too is traded off a little bit. And it feels like at times, some are speculating that the best for their brokerage space is in the rearview mirror.

Yet, the rhetoric from you, Marsh and Brown & Brown are directly polar opposite, it seem to map out a pretty optimistic future. So I guess I'm just trying to gauge what your perspective is on the market, considering that the stock market certainly doesn't seem to appreciate what you guys are doing at this moment in time..

Well, Greg, this is Pat. Normally for 20 years, and there's never been a time in that period where I've been as bullish as I am today. I mean, everything, everything is going our way. So let me try not to spend 20 minutes answering your question here. But let's start with the fact that we've never been stronger.

Vertical capabilities are absolutely critical. Data and analytics are absolutely critical. When you take a look at the volumes that we now have that we can do the data and analytics around we can tell you what's happening by day with rates and renewals or what have you.

10 years ago, we flew blind totally on that customer asked why do I have even know I've got a good deal with the rate environment going like it is. We can show them what's happening to the rates by line, by geography and why they have a good deal. And that type of question is getting asked right into the middle market.

And over 90% of the time when we compete, we compete with a smaller competitor. That's why these people are selling to private equity. That's why these roll ups are working. And I'm telling you it's unbelievable the opportunity we have right now. So I see this is the greatest buying opportunity in the last five years..

Yes. Just in your answer. And it was part of your comments, you talked about the difficult risk bearing market and driving further rate. And listen, I, you're looking at a global picture, so but I look at reported results, Travelers was out with an 88% combined ratio, Berkeley just came out with an 88% combined ratio tonight.

It seems like the risk bearers are -- the results are beginning to improve.

And so I guess it lends the question, what are we missing when you say it's difficult risk bearing market?.

Well, let's start with inflation. You've done all your actuarial work at a 2% inflation rate. And now it's six. Oh, yeah, that was a blip on the radar, was going to be gone by now. I guess that's not going to happen. Secondly, let's look at last costs.

What does it cost to build a house today? Well, we got it done for $200 a square foot a few years ago, certainly isn't that now. And I could go on and on and on. I mean, the level of nuclear, the number of nuclear settlements. The other thing too is, I've been saying this now for years, I think it's more true than ever.

Our underwriters or our underwriting partners are very, very smart. And they've got incredible data and analytic skills. They know where they're making money in that 88% everywhere around the world every day and they know where they're not making money.

And you walk in and start talking about a deal that you want to broker, it's something that's going to be substantially less than they know, they'll get or deserve. They're just not buying it..

I think, Greg, there's also some things, x cat, x reserve releases, I think, and then the prospect of just inflation just have a reserve be coming in, let's say just 10% more than what the original estimate was. That's a huge difference on a combined ratio. So I think that the -- I'm not challenging the health of the insurance companies.

I think they've got their rates where they think they need them right now. I don't know if there's a case that would say that they're too high. I think the case wouldn't be say more so that they're too low.

And I just don't see when the courts open up, you're going to see more unfortunately losses that are just the current picks, while the best information they have right now are just too low. So I think there's not a case for cutting rates by any means. There's a case for continued increase in rates. And I just -- everything that we look at.

There'll be interesting when other books get filed..

This is not a hard market is, it was in the middle 80s where everything goes up, you know that work comp was flat, through most of this adjustment work comp is now up. As work comp comes up a little bit professional liability is going through the roof. Cyber is almost unbreakable. So you sit there and you look at this.

These carriers are looking line by line, geography by geography and from our perspective, daily placing accounts, we are not seeing them lose discipline..

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

Our next question comes from Yaron Kinar of Jefferies..

So my first question in the earnings release, there's comment that if the pace of economic recovery accelerates beyond your expectations, you could see expenses increase more than the current estimate. I just want to confirm or pick up that a little bit.

Expenses may rise in that situation but wouldn't organic revenue also accelerate in that case? Essentially, what I'm trying to get at, margins don't get compressed with that, right?.

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

Okay.

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

What we say that -- listen we think that there's a case that we can do better next year on organic than we have. We did this year if the economy accelerates exposure units grow the pent-up demand for goods and services increase, supply chains, get back to normal. Yes, your implication that question is right..

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

Is that just a rounding issue?.

All right, thanks. First of all, said 34 is pretty darn good. I mean, when you look across the brokerage space, we're pretty proud of that margin and I have ever been here 18 plus years, it wasn't that way that that long ago. So you got to be pretty proud of that number compared to the industry. Second of all, yes, 34%.

The reason why we don't round it even more is because we don't have a crystal ball. We also have FX adjustments that will come true. Yes, we could change that number slightly as with our international business over the next year.

But what we're saying right there, just like we said in the commentary at 7%, we've got a decent chance of holding those margins we really think we do. At 8%, we could see a little bit more, over 8%, maybe a little more than that.

So I wouldn't read a rounded 34% with all those factors as being an indicator that we're pegging exactly 33.9 like we have this year, but 34 is greater than 33.9. And then, when you roll in the reinsurance operations, you could get a little bit more left than that. So I would say would not read too terribly much into it..

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

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

Our next question comes from David Motemaden of Evercore ISI..

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

Okay. So first of all, let's break that down. There's the components of new lost opt-in, when customers opt-in for more coverages opt out when customers opt out because they want to control their budget for insurance spends and you got the impact of rate.

So the fact is, is that we believe we're -- if you break that 8% down, let's just say that a third of it comes because we're just selling more business and we have before versus what we're losing. I think there's probably a third of that number that's coming from exposure, and a third of its coming from rate.

So you've kind of got all three of them there. What's interesting on a multi-year impact is that customers can opt -- come up with -- we can help our customers come up with creative ways to mitigate the rate increases as their exposures grow, which we see is happening more and more over the next couple of years. It's harder to opt out of exposures.

If you had 20 trucks and now you got to insure 22 of them. You can't just not insure two trucks. If you have a 20% increase in premiums, maybe you take a higher deductible, or you take less limits on it, and you can kind of opt out of the rate increases.

But as we see exposure units fueling that organic growth going forward, top that off with rate increases that mix of -- I think would toggle probably more to exposure, more than net new wins and maybe less impact from rate as we continue to grow. As you push 10% of organic growth, it's going to be exposure unit driven..

Awesome, that's great color. Thanks for that. And I guess maybe just also Doug, you mentioned the cadence, maybe the first quarter being a little light. I don't want to get too granular here. It's a long year, but it sounded like that was really driven by employee benefits and workers comp and just seasonality there.

But when I think about the 7% organic in employee benefits that seems pretty strong, definitely better than it was in December.

Are you expecting a deceleration off of that up seven? And that's partially why maybe the first quarter would be a little bit lower than the full year? Or is it more workers comp driven?.

Actually 7, if you pick, I'm just saying you have to make the pick. If you're picking 8%, next year 7, and I said it's about a point lower in the first quarter, that 7% is probably the number that you get to. If you pick 6%, I don't think that it would have that big of an impact on you.

So what I said in my comments was about a point lower than the full year average. So that's what I would say it's just cautioning that business. doesn't grow as fast as our PNC right now..

Okay. That makes sense. And then if I could just sneak one more in, on the 4 billion of dry powder for M&A guys have over the next two years. Without issuing stock, that's a lot. It's a lot for tuck-ins. You mentioned earlier competition is also increasing.

I guess I'm wondering if at some point, you would consider allocating some to capital return through share repurchases? Is that something that's come up at all, something that you think you might institute over the next year or two?.

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

Our next question is from Elyse Greenspan of Wells Fargo..

My first question is related to clean energy. So Doug, I think you said that there's a chance that the laws could be extended, I just wanted to get a sense of the timing you thought there.

And then, I thought in the past you guys had perhaps implied if you continue to be able to generate credits, you would not go the route of rolling out some kind of x amortization EPS. So are these now independent events.

So meaning if you're able to generate more credits on the clean energy investments, you will still roll out some EPS estimate that is cash in nature and backs out intangibles, among other items..

I don't see us backing off of going towards that metric, regardless of what happens with an extension or not. So an answer to your question, we're going that route. We've done a lot of work on it. We think it's consistent with what other brokers are doing. And so we're pretty comfortable with going that route.

What happens with an extension? I think it's going to be in the spring, we think that Congress has woken up to the fact that this technology provides a terrific benefit to our environment. So we hope that they see their way cleared, finding a spot and a bill to include it..

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

You kind of broke up a little bit on that question.

Can you just say it again, Elyse, sorry?.

I was saying if you are able to regenerate credits from your clean energy investments this year, would you expect it to be at the same cadence that we saw in 2021?.

Yes, I think so. I listen, we posted $97 million of after tax earnings on it. The pick would be 80 million more not 40, not 50. But there will be some plants that won't start up. They were planned to be decommissioned, made a whole location as being decommissioned. So I wouldn't see it as being as high as it was in.

We had a terrific year, one of our best years ever and I just don't see that happening again, if it restarts. And clearly you'd have from the restart date to but if we don't get a -- if it's retroactive, these have been idled. They're sitting there.

It's not like we can go back and produce credits in January, February and March but doesn't get passed until April..

Okay. And then, with Willis Re in the M&A sheet, I saw that you guys put it in with the Q4 bucket. So I'm assuming based on the commentary is the embedded revenue from Willis Re just at that 745. And then if there's growth off of that, that would be additive to the M&A build.

And then I'm assuming on a go forward basis, you'll just give us the revenue from Willis Re just on your quarterly calls like you did today?.

Yes. I think let's make sure I can restate and go to page six of the CFO commentary we provided a grid that shows the fourth quarter acquisition activity. I would I understand your question there, how much of that line adds up and then subtract up to 745.

And the 745 is in that line, including what other acquisitions we did during the fourth quarter for the vast majority of it. I'd have to do that add up while we're on the phone here..

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

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

Okay, sorry. Thank you. And then the margin guide that you could see some expansion above 7%.

I guess that was unchanged from December, right? So, we should expect if you're going to get to around 8% or so organic this coming year in brokerage, we should expect a modest level of margin expansion, correct, let me take all of your expense commentary throughout the call into account?.

Yes, that would be what you would assume..

Our next question is from Greg Peters of Raymond James..

Great, thanks for allowing me to ask a follow up. I wanted to spend a minute and ask about your supplement and contingent line in the brokerage business.

If the profitability of the carriers starts to improve, when we expect supplements and contingents to also grow maybe a little bit faster than just the base organic that you're expecting, or maybe more broadly, just one of the drivers of growth in supplements are contingents outside of acquisitions?.

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

And then, also they added value that we bring through our smart market through our advantage products, where we really can help match our customers need to the carrier's appetite for risk. We're getting continued momentum on that, Greg, you've been around a lot. And so it's -- we're continuing to add value in the relationship with our carriers.

And they recognize it. So your statement, there is right. It should continue to grow as business becomes more positive, should all benefit from that..

I remember and this is dating me, but I remember when you started smart market.

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

Well, first of all, yeah, I can do that, Greg. The proof has been in the pudding with smart market. You were there when we started it. And to be perfectly blunt, there was some skepticism for all kinds of reasons around whether or not data and analytics being sold to insurance companies was really worth it. Okay, that question has been answered.

It's very well accepted. It's now being utilized in RPS been utilized across our Gallagher global brokerage operation, including locations outside the United States, Canada, and U.K., et cetera. So it's getting very broad recepients across more than probably 15 to 20 carriers today..

Yes. Think about when we think back to our IR days that we talked about. Here we speak not mostly about our -- initially about our U.S. business and the things that we've done in our U.S. business and in terms of carrier relations in terms of our core 360 platform, our use of offshore centers of excellence.

And then, how we're bringing that to Canada, Australia, New Zealand, the U.K. retail, now into some of the other retail locations as we take minority positions perhaps in Europe. This is an example of how a seed planted and developed here in the U.S. can be spread around the world and vice versa.

There are techniques around the world that we bring back to the U.S. So, Greg, you're right at the , yes, this is something we're proving out and rolling out around the world. And that's why when we talk about retail around the world, it all looks the same with different nuances by country..

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

Great, thank you. Thanks for the color there. I guess the last question I would have, Doug, I've used your quote before about in reference to margins. I think you previously had said on a conference call, well, trees don't grow to the moon. So you guys have a 34% in on rounding up, EBITDAC margin in your brokerage business.

When do we begin to top out? I mean, everyone's reporting margin expansion, at some point, you're going to -- you would think that there might be some downward pressure on fees or commissions or something that might cause some downward pressure on margins?.

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

And that's a pretty good story..

Right. It's just it's not about talking margin strategy, acquisition strategy. You are right. They don't grow to the moon and more importantly, what does the client demands from us that require us to continue to make investments. It's not there and 100% yet, but clients are becoming more demanding.

And in order for us to compete in post that stellar organic growth, we need to make investments in the business. So I don't have an answer for you. But when we do, we will announce..

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

Our next question is from Mark Hughes of Truist..

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

Well, thanks for the question, Mark. This is Pat. I think you're going to see a continued move in that direction. It's been going on now for almost a decade. I don't think it's any secret that we've been at the forefront of that.

Starting literally before the Chubb ACE combination, we were doing work on behalf of Chubb and their risk management portfolio. Prior to that, in fact, we were doing all the outsourced service for Arch as they began their program of growth in the United States.

And right now, the outsourced work that we do for insurance companies is a very big part of Gallagher Bassets revenues. And I would say it's probably our largest opportunity, looking at the future over the next five to 10 years. There are some very substantial companies, I can’t name them, you understand that. That are seriously looking at this.

And quite honestly, it makes a heck of a lot of sense. We've got trading partners that when I mentioned to them that Gallagher Bassett pays more claims than you do. And again, I can't mention names. They go, no, you don't. I actually we do. And I'll bet you we invest twice as much in data and analytics.

And then, in our Willis systems than you do, no you don’t. Well, we will actually stand toe to toe with you and show you that. But that ends up driving is the ability we believe to prove that our outcomes are superior. And those superior outcomes come from all kinds of advantages. Both of scale but also have expertise.

And once you start talking to management at these insurance companies about the fact that you've got pent-up return on investment, you've got ROE opportunities and we can do that.

I honestly believe that there will come a day when people ask why did insurance companies pay their own claims?.

Our final question comes from Derek Han of KBW..

Your comp ratio is quite good in the quarter, which kind of been a threat from some of the actions you've taken in 2020. But I was hoping that you could kind of talk about how wage inflation is impacting that number.

And just curious if you know, the impact is more pronounced among producers that you're trying to hire versus the support staff?.

Well, one of the things I'm very proud of Derek is, we are one of the -- we're probably the only significant broker that still is very comfortable paying our producers on a formula that pays them a percentage of their book. And that's very competitive with the local brokerage community. So think about it this way.

Where do you want to sell from what platform, a platform that gives you the kind of data and analytics that we've got that has the relationships that we've got, that has the global reach that we've got? Or what would you like to do it from the Jones agency in Alsip, Illinois, hope there isn't one there.

But the fact is, we're happy to have you come aboard and pay you a percentage. So really, a big part of our benefits and comp expense for producers is self-generated and self-regulated..

And our middle office layer and our back office layer, as you know, we've made substantial investments in standardizing our process and using our offshore centers of excellence. As a result of that, 17 years ago, we made a decision that we could raise our quality and reduce our costs. And it's actually helping us a little bit of an inflation hedge.

I'll tell you, we've been taking care of our employees. We gave a sizable raise pool this year. We gave raises even in the depths of the pandemic. Bonuses, we've been fair, these people have earned them, they've earned their raises. The raises are not as a result of -- because of we feel like we've got to hold our people, our culture holds our people.

The raise is what recognize their contribution to what we've been doing. So Deming said the best is you can't have low cost without high quality. And we've worked for years on raising our quality and it's reducing our costs. It's also making our folks more effective.

We have 20,000 people that do service plus another 6000 in India that get up every day and want to do a great job for our clients. So we pay them well. Our retention is as good today as it was pre-pandemic. So I think that our workforce is well-positioned for right now.

So we're proud of our workforce and we've recognized our workforce and I think they deserve to be recognized on that. And despite that our volumes are helping us, and our scales helping us, our technologies are helping us, control press the numbers but those people that are here get paid very well..

Well, also you've heard now everywhere agile work, agile work, work from home. We've been agile and how we work with our workforce for the last 25 years. So pre-pandemic probably 50% of Gallagher Bassett's entire field force was at home. So, this is not new territory for us. We listen to the employees. We want people to stick around.

As Doug said, our retention rates and our turnaround rates are no different than they were pre-pandemic. So the great recognition hasn’t hit Gallagher yet..

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

But kind of wanted to get a sense of what could real the percent plus organic growth..

I’m sorry, I’m too much of an optimist. But I look at the stimulus bill is coming out of Washington DC. The kind of money that’s going to flow into infrastructure. Every contractor and our book of business is going to be loaded up with work.

Every single personal lines account all the way through small commercial, it’s a large commercial has got significant increases that they need in their -- in the cost of their property portfolio. Payrolls are up as you mentioned earlier Derek from just the whole employment situation and all of that.

There is not an industry that I can think of that benefits more than the insurance brokerage business from a nice little touch of inflation. Hold all tickets..

Well, thanks everybody. I appreciate you being here today. Thanks for joining us. As you all know we delivered an excellent fourth quarter and full year 2021. I would like to thank our colleagues around the globe for such an outstanding year. Our results were direct reflection of their efforts.

We look forward to speak with you again in our March Investor Meeting. And have a good evening. Thank you very much..

This does conclude today’s conference call. You may disconnect your lines at this time. Thank you for your participation and have a great evening..