Arthur J. Gallagher & Co.

Good afternoon, and welcome to Arthur J. Gallagher and Company's second quarter 2022 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-Q and 8-K filings for more details 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 Jay Patrick Gallagher, Chairman, President, and CEO of Arthur J. Gallagher and Company. Mr. Gallagher, you may begin.

Thank you. Good afternoon, everyone. Thank you for joining us for our second quarter 2022 earnings call. On the call for you today is Doug Hall, our CFO, as well as the heads of our operating divisions. We had another excellent quarter of financial performance. For our combined brokerage and risk management segments, we posted 22% growth in revenue, 10.7% organic growth, net earnings growth of 35%, adjusted EBITDA growth of 23%, and adjusted earnings per share growth of 19%. I'm extremely proud of how our nearly 41,000 colleagues around the globe performed during the quarter and the first half of the year. So let me give you some more detail on our second quarter brokerage segment performance. During the quarter, reported revenue growth was 25%. Of that, 10.8% was organic. We did have a tailwind of about a point from an infrequent large life case that I'll touch on in a minute. Rollover revenues were about $240 million, consistent with our June IR Day expectations. Net earnings growth was 36%, and as expected, we posted adjusted EBITDA margins of 32%, an outstanding quarter for the brokerage team. Let me walk you around the world and break down our organic, starting with our PC operations. Our U.S. retail business posted 11% organic with strong new business, retention, and continued renewal premium increases. Risk placement services, our U.S. wholesale operations posted organic of 8%. This includes more than 15% organic in open brokerage and 4% organic in our MGA programs and binding businesses. New business was consistent with second quarter of 21, while retention was down just a bit from last year, as we noted in our June IR day. Shifting outside the U.S., our U.K. businesses posted organic of 8%, with excellent new business overall, and another double-digit organic growth quarter within specialty. Australia and New Zealand combined, organic was more than 11%. driven by strong new business, stable retention, and higher renewal premium increases. Canada was up more than 14% organically and continues to benefit from renewal premium increases, great new business, and great retention. Moving to our employee benefits, brokerage, and consulting business. As I mentioned earlier, we were helped this quarter from a large life case. Excluding this, our benefits business organic was about 9%, in line with our IR day expectations and driven by increased HR benefits consulting work and solid growth in our international and health and welfare businesses. Finally, our December reinsurance acquisition is right on target. After controlling for breakage prior to closing, second quarter organic was around 7%, just fantastic. And integration continues to progress nicely on budget and ahead of its original timeline. So reinsurance continues to be a really good story. So headline brokerage segment all in organic of 10.8% and upper 9% after controlling for the large life case. Either way, an excellent quarter. Next, let me give you some thoughts on the current PC market environment, starting in the primary insurance market. Overall global second quarter renewal premiums, that's both rate and exposure combined, were up 10.5%. That's higher than what our data showed for increases in renewal premiums in both the fourth quarter 21 and first quarter 22. When I look at our renewal premiums by line for nearly all coverages, second quarter increases were equal to or higher than first quarter One exception to this was professional liability, mostly D&O. By geography, renewal premiums were up double digits nearly everywhere. Again, that's a combination of both rate and exposure. So next to no slowdown in premium increases during the quarter. Additionally, we are not seeing any significant signs of economic slowdown. In fact, Second quarter midterm policy endorsements, audits, and cancellations continue to trend more favorable than a year ago. Thus far in July, midterm policy endorsements continue to move higher year over year, and renewal premium increases are consistent with second quarter. But remember, our job as brokers is to help our clients mitigate premium increases and find suitable insurance programs that fit their budgets. Moving to reinsurance. As we noted in our first view report published by our reinsurance professionals earlier this month, there are very real signs of hardening in the reinsurance market. Property reinsurance pricing is up across the board, and most notably for U.S. hurricane and Australian property risks are up anywhere from 15 to more than 40%. On the casualty side, reinsurance placements experienced more modest price increases and were a little bit less challenging. Regardless, a firm or hardening reinsurance market will naturally show up in primary market rate increases. And there are many other reasons for our carrier partners to maintain their cautious underwriting stance outside of reinsurance market conditions. Inflation, geopolitical tensions, and economic uncertainty, to name a few. These all translate into difficult PC market conditions continuing for our clients across retail, wholesale, and reinsurance for this foreseeable future. Moving to our employee benefit brokerage and consulting business, U.S. labor market conditions remain broadly favorable. Even with a decline in U.S. job postings in each of the last two months, there remain more than 11 million job openings, That's more than double the number of people unemployed and looking for work. We expect strong demand for our HR and benefits consulting services to continue as businesses prioritize attracting, retaining, and motivating their workforce. The timing of the large life case and covered life changes in the second half of 21 will cause the benefits business to post lumpy quarterly organic results this year. But that doesn't change the still favorable underlying environment. So let me wrap up on the brokerage segment organic. A great first half and looking like the second half will lead us to a full year 22 organic over 9%, which would be an absolutely terrific year. Moving on to mergers and acquisitions. During the second quarter, we completed eight new tuck-in brokerage mergers representing about $50 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 more than 40 term sheets signed or being prepared, representing nearly $350 million of annualized revenues. We know not all these will close, however, we believe we will get our fair share. Next, I would like to move to our risk management segment, Gallagher-Bastard. Second quarter organic growth was 10.3%, a bit better than our IR day expectation due to a strong June. Adjusted EBITDAG margin was 18.9%, which is in line with our expectations. For the year, we continue to see adjusted EBITDAG margins near that 19% level. We again saw increases in new arising claims across general liability, property and core workers' compensation during the quarter. Encouragingly, property and liability claim counts are back to pre-pandemic levels. Core workers' claim counts have yet to fully rebound to 2019 levels. which represents a nice opportunity for further growth. Looking towards the second half of the year, we think organic revenue growth will continue to push 10% due to growing claim counts and new business. I'll conclude my remarks with some thoughts on our bedrock culture. As I resume traveling to our Gallagher offices around the globe, I can report to you that our culture is as strong as ever, and that's a reflection of our people, our nearly 41,000 colleagues working together for a common goal, to serve our clients. As I've said before, our people underpin our culture, a culture that we believe is a true competitive advantage and drives our outstanding financial results. Okay, I'll stop now and turn it over to Doug. Doug?

Thanks, Pat, and hello, everyone. An excellent second quarter and terrific half. Today I'll touch on organic margins and the corporate segment using our earnings release. I'll then make some comments using our CFO commentary document posted on our website. I'll end then with my typical comments on M&A, debt, and cash. Okay, starting with the earnings release. To the brokerage segment organic table on page three. Fantastic headline, all-in brokerage organic of 10.8%. As Pat said, we did benefit by about a point or so because of a large group life case bound in late June. With or without that, a great quarter by our sales team. As for the rest of 22, during our June IR day, we said third and fourth quarter would be somewhere around 8% due to a tough benefits compare. As we sit today, we're still seeing third quarter around that 8%, reflecting about a point of that tough benefits compare, and we're becoming more bullish on fourth quarter. Call it nicely over 8% in the fourth quarter. That would lead to full year brokerage segment organic growth of over 9%. So today we're forecasting full year organic growth better than what we were seeing at our June IR day. Next, turning to page five to the brokerage segment adjusted EBITDA margin table. Headline all in adjusted EBITDA margin of 32%, right in line with our June IR day expectation. Recall what we've been saying all year. Because of the rolling impact of the acquired reinsurance operations, which has substantial quarterly seasonality, and because there are still expenses returning as we come out of the pandemic, those in combination create quarterly margin change volatility. As a recap, we posted adjusted margins up 50 basis points in the first quarter, down 97 basis points here in the second, and we're forecasting down 100 basis points in the third, then back up 100 basis points in the fourth. Because we are seasonally largest in the first quarter, those results would roll up to around 10 to 20 basis points of full-year margin expansion. These quarterly margin changes are right on what we've been saying all year. When I think of inflation impact, I just don't see much here in 22 on our expenses. And as we discussed in June, headline inflation doesn't significantly impact 80% of our expense base. And we have mitigation levers to pull on that other 20% if it comes to that. So even with rising CPI, we remain comfortable with our 2020 margin outlook. Looking towards 23, all that quarter margin change volatility should go away with the pandemic behind us and reinsurance fully rolled into our books. Moving to the risk management segment on pages 5 and 6, Pat hit the highlights, 10.3% organic and 18.9% adjusted margins, an excellent quarter. This unit continues to show momentum with rebounding claim counts and a large new business win coming on next quarter. It's looking now like organic revenue growth of around 10% in each of third and fourth quarters 22. Now remember, that's on top of 17% growth in third quarter 21 and 13% growth in fourth quarter 21. That would be a terrific outcome to overcome such a difficult compare. Moving to page seven of the earnings release to the corporate segment shortcut table. Interest in banking is within our June IR day range. Adjusted M&A costs and clean energy, those combine also within our range. And corporate, after adjusting for some favorable tax item, is slightly better than our June IR day range. Call it about a penny due to favorable FX remeasurement gains given the strengthening in the dollar. Let's leave the earnings release and go to the CFO commentary document. On page three, these are our typical brokerage and risk management modeling helpers. With the rally in the US dollar since our June IR day, please take a look at our updated FX guidance for the remainder of 22. This late June strengthening also caused an extra penny headwind here in the second quarter versus our IR day guidance. Next, you'll see our current estimate of integration costs. Most of this is related to Willis-Rhee. The punchline is no change to our original estimate of $250 million for integration charges through the end of 2024. As I mentioned last quarter, the team is making excellent progress and is executing at a faster pace than our original plan. Integration efforts around people, real estate, back office transition services are targeted to be mostly done by late 22. In fact, our new reinsurance colleagues are now moving into our combined Gallagher locations around the world and there's an excitement of coming together. As for technology and system rebuilds, we still see having that done by the end of 23, early 24. So continue good news on the reinsurance integration front. Next, please take a look at the amortization of intangibles line. Recall we now adjust that out of our non-GAAP results. Also, take a look at footnote number two. That will help you reconcile this number to what we're showing on the face of our GAAP financial statements. Next, the change in estimated earn-out payables. This quarter, a subtle component of the earn-out payable adjustment has become more pronounced. The punchline is found in footnote 5. The note, admittedly, is a little accountant-ese, but it's saying that the large non-cash gain in our results this quarter is mostly due to increases in interest rates and market volatility. When these increase, the value of our earn-out liability declines, thus creating gap income. This gain does not reflect any meaningful change to our expectations of the acquired brokerages, nor does it change our view of what we'll ultimately pay and earn out. The accounting is a bit like the change in interest rate assumptions in pension accounting, except for this change in earn-out liability goes to the P&L, not through OCI, as does pensions. In our view, this is a no-never mind, but can dramatically impact comparability, so we adjust it out. Turning now to page four, our corporate segment outlook. No changes to third and fourth quarter estimates. Clipping to page five, clean energy. This page is here to highlight that we have around a billion dollars of tax credit carryovers. And with the sunset of the program late last year, we're now in the cash harvesting era of these investments. You'll see in the pinkish column that the 2022 cash flow increase should be $125 to $150 million, and perhaps more in 23 and beyond. At this rate, these investments will be a really nice seven-year cash flow sweetener. The possibility of an extension of the law still exists, so we have idled our plans rather than decommissioning them. It costs us a little to carry them, but it lets us remain well-positioned to restart production if an extension happens. Turning to page six, the top of the page is the rollover revenue table that we've spoken about in detail. We appreciate all those that have incorporated this disclosure into their models. Moving down the page, the bottom table is an update on our December reinsurance acquisition. You'll see that these numbers are almost spot on to our June IR Day estimates. Delivering $730 million of revenue and nearly $260 million of adjusted EBITDA here in 22 would be very close to our performance when we inked the deal. That would be a really good outcome. Moving on, as to cash and capital management and future M&A, at June 30, available cash on hand was about $450 million. Our operations continue to perform very well, and we expect strong operating cash flows. You know, add to that the cash flow sweetener from our clean energy investments and additional borrowing capacity, it adds up to more than $4 billion of tuck-in M&A capacity here in 22 and 23 combined. So those are my comments. An excellent quarter and first half, and we're extremely well positioned for another terrific year. Back to you, Pat. Thanks, Doug. Daryl, I think we're ready to open it up to questions.

Thank you. The call is now open for questions. If you have a question, please pick up your handset and press star 1 on your telephone at this time. If you are on speakerphone, please disable that function prior to pressing star 1 to ensure optimum sound quality. You may remove yourself from the queue at any point by pressing star 2. Again, that's star 1 for questions. Our first questions come from the line of Elise Greenspan with Wells Fargo. Please proceed with your questions.

Hi, thanks. Good evening. My first question, Pat, you know, in June I had asked you about recession. You said you guys were not seeing it. And if you were going to see an impact on your business, it wouldn't be in your results until 2023. I recognize, right, that we're sitting here six months in advance, you know, of hitting next year. But, you know, as you think about how things can play out from an economic slowdown, you know, we have inflation, still good property casualty pricing. How could that all shake out from an organic growth perspective next year to see things today?

Well, I think it's not all that different than the discussion that we had in June. We're seeing literally we look at this daily. An interesting pattern of our underlying clients' businesses doing well. They're still recruiting people. Our benefits HR folks are as busy as they can possibly be. We watch for adjustments, both in terms of audits and endorsements, and those are all positive right now. To put that in perspective, we do have a baseline on that during the pandemic, and that was obviously substantially upside down. So we do have a good feel for that, and we feel good about it. Inflation, as Doug said, really has an impact on about 20% of our expenses. I think that's probably good research on the team's part in terms of what's really subject to that that we'll be watching. As you know, we're going into budget time in the next six weeks or so, and there's a lot of discussion around this. So don't hold me to it, but I think that we're We're in a pretty good spot. And I think our mix of business bodes well. I think that the way our expenses shake out, an awful lot of those expenses are variable. I think that's good. A lot of upside for our salespeople this year, obviously. And I think that with rate increases, with interest rates up, It's a pretty good environment for a broker.

Let me pile on that a little bit because we did a little white boarding on that. Like Pat said, we're not seeing daily indications of our customers' growth slowing at this point. Admittedly, that's looking at current and recent past activity. I think your question is really more about a future slowdown. So when we looked at that, what kind of cooling might we see, whether it's a recession or just a slowdown in the economy, because obviously not every recession is the same. We did a lot of work on that, and we see if it happens, and I say if, if more like a normal recession, maybe more like 1990, 1991, and again what happened maybe in 2000, 2001, before 9-11. We do not see next year being a clinch like the subprime financial shock recession of 07 or 08, or the pandemic recession for a few months of 20. So it's also important to note that these more normal recessions in the early 90s and early 2000s both lasted about eight months. So we see it more like that. It's also an important point to remember that brokers We earn a very large portion of our revenues based on the amount of premium placed. If it goes up because of rate or because of exposure, frankly, we're a little indifferent on that. So for us, we think that taking a look at nominal GDP is the bigger factor for our revenue, much more than real GDP. So absolute sales, payroll, like Pat said, and property values are what premiums are placed on. So then you say, what toss in next year, what will premium rate increases do? And you heard us say that we don't see them slowing over the next year or so. And then really our spread between new business and lost business, we're a proficient broker, so it's selling more insurance than we lose every year. So when we put all that together for next year, the brokerage business during a normal recession, during an inflating premium rate environment, can still post terrific organic results. So that's how we're seeing it now. And I talked to you about on the expense side during June that we think that we have some mitigating factors for that 20% that might be highly exposed to the inflation component of that. So it's a long answer to your question between Pat and I on it, but we think 23 could still be a year of terrific organic growth.

Well, let me load in another thought, too, Alicia. We didn't talk about June. But if you go back to 2007, 2008, you go back to the pandemic clenches. We learned again, which we have through many tough times, that our clients will stop paying their people before they stop paying their premiums. And that's a pretty good business to be in regardless of the economy.

Thanks. Thanks for the real thorough answer. My second question is maybe more short term. Doug, you said the fourth quarter brokerage outlook is a little bit better, right, than at the June IR day. What's the reason for that?

I just think sustained rate increases and our teams are doing a great job of selling more than they're losing. So I think that just the environment seems to be better. We're starting to see data come out of what's happening with second quarter rates versus first. And there might have been just a little bit of rate drop. in the first quarter and that seems to be back on a positive slope now. So you see that kind of in first quarters when you go back over the last few years that maybe rate increases aren't quite as big as they are in later quarters because for the carriers they get the full year of the premium in the books by being maybe a little bit more competitive in the first quarter. Second quarter bounced back up again. I think that we've had a chance to look at what's in our pipeline. So I would say it's on all fronts, we're just feeling more optimistic about where we're seeing the second half.

And then one last one. You guys gave the M&A color, so it seems like you still have a good pipeline. Do you think there could be any timing shift in when deals get closed if people are concerned about a recession? I mean, if they're just potentially waiting to get a better multiple or... You know, have you not observed that in the past or do you not expect that to happen this time around?

No, I think brokers are opportunistic, smart people. If I had a business to sell, now is when I'd sell it.

Okay. Thanks for the color.

Thanks, Louise.

Thank you. Our next question has come from the line. If you're on, Kinnar, with Jeffries, please proceed with your questions.

Good evening.

Hi, good evening. And congrats on a good quarter. Thank you. First question, the large life case that you mentioned, what's the margin profile on that? Is that accretive or dilutive to the overall brokerage business?

It's about the same. So it doesn't have the leverage as you would see in some of the other incremental amounts.

Okay. And then was FX, did that have an impact on margins or only on revenues?

Well, we adjust that out of our margin profile, so it would be just on the revenue side.

Okay. And then another one, I know you said you haven't fully closed the books on clean coal, holding on hope that maybe you do see some extension come through in D.C. I guess with the Democrats kind of coming to agreement in the Senate this week, or actually today, I think, Is it so premature to say what you've learned from that, or if there's maybe an increasing chance of that clean coal credit continuing or extending?

Well, it's a 742-page draft bill that we're going to do a lot of word searches on it. I'm not seeing how long it's in that, but if you get into the kind of – in the Senate next week to see what other senators might want to include in the package or look at it. I think that we're never out of it until we're not. And even if it doesn't come through in this package, it could be later in the year, too. So it doesn't cost us that much to carry the plants. Our utility partners have been very understanding about this. They're not pressing us to decommission. So if we have to carry it for another six months, we will. But if it happens, it'd be great. If not, we're in the cash harvesting era, just like we thought about for the last 15 years. We're at that point now. So harvesting the cash is pretty nice.

All right, to be continued. And good luck for the rest of the year.

Thanks, Darren.

Thank you very much.

Thank you. Our next questions come from the line of David Motaman with Evercore. Please proceed with your questions.

Hi, thanks. Good afternoon. I appreciate all the detail just on the midterm policy endorsements, audits. And I guess I'm wondering, you know, just on the employee benefits business, maybe you could talk about what you're seeing there on HR consulting and benefits consulting, specifically with the pipeline, any changes there, any signs of weakness at all that you're seeing?

I'll tell you, it's really interesting to see. As you can imagine, I think we talked about this, when the pandemic hit, that business shut down in a quarter. And now, and what an interesting turnaround for our clients. Now, their biggest problem is attracting and retaining. So there's demand everywhere. frankly, at a level that exceeds what we saw pre-pandemic. And I think in that case, things were kind of going along well. Everything was kind of fine. And then everyone tried to come down to the lowest amount of employee base they could. Now they're coming back. Their businesses are back. As we said when we looked at our adjustments and endorsements and audits, our clients' businesses so far are robust. And that creates a demand for more people. So, I mean, I can't get specific with you by exactly which practice group. It's the entire consulting part of our employee human resource and human capital business is doing extremely well this year.

Yeah, let me add to that. During the pandemic, people were all about cost containment. And so they cut down their costs and they were cut any discretionary costs. It's regardless of what happens with this recession and all the Fed actions, I just don't believe that it's going to have a dramatic impact on unemployment. I think that employers are really thinking about attracting, retaining, and motivating their talent. I just don't see any type of eight-month or year-long recession putting a dent in the employment numbers. So employers are still going to have to make sure they're out there competing for talent, and that's where we really provide value. So I don't see this like the pandemic or in 2008. Again, we see it a lot if it happens, like 90 and 2000. And there was still a war for talent back then, too.

Let me give you an example, David. This is one that kind of floored me in the last month. I won't mention any names, but we have a sizable client that has engaged us on a multimillion dollar contract to improve and help them with their communication with their employee base. This is a significant client, obviously, but they are willing to spend multiple millions of dollars in an outreach to existing employees to make sure they understand why they've got it so great being part of their organization. communicating what are in the benefits plans, why they take care of them, how they're educating, what the career path is, what the growth of the company means, all those things that go into a solid communication plan. How cool is that?

No, I mean, that is exciting. So, yeah, it definitely doesn't sound like, at least now, you're seeing really any sign of a slowdown. So I guess maybe just switching gears, if I think about You know, if we do see a slowdown and, you know, next year, I guess one thing that I've noticed the past couple quarters in the press release, sort of in the fine print, there's been mention of office consolidations. And I believe you spoke, Doug, I think last, on the June call about the Agile Workforce Strategy. So I guess could you maybe just talk a little bit more about what you're doing on the real estate front and if maybe that could be a bigger benefit or a bigger lever to pull if we do get into a tougher revenue backdrop and maybe if you could put some numbers around potential saves, that would also be helpful.

Yeah, I think when we talked about it early, when we were coming out of the pandemic, we thought there could be 30 or 40 or $50 million of annualized savings coming from real estate. I think we're still on target about that. I think we're harvesting maybe about $8 million a year on that effort. And there's a couple of big office footprints that are coming up here in the next year that I think that maybe will be a little bit more on that over this next year. What are we doing? We're going to an office footprint that basically is covering 50% or so of the number of employees that we have. We're bringing technologies to bear so that they're agile within the work, so we're not dedicated locations. For those employees that have to come in every day, clearly they have a designated spot. And we're finding that the employees are responding to it very well, especially in cities where there's a substantial commute. So I see us continuing to do that. I don't know whether it would be a more rapid response exercise if we had a normal recession over the next year. I think the pace that we're making change is the pace that the organization have. Either you wait until the lease expires and then downsize or you get out of it and you end up paying the rent for the rest of the term. So I think a paced and measured approach to that is where we are and I don't see that changing if there was this normal recession happening over the next year.

I'll tell you again on the anecdote side, these plans were afoot, Doug leading the charge on this prior to the pandemic. And I don't know about your experience, but my experience in telling people that this isn't their workstation anymore or that that office is, it's not a good experience. And people being able to go home and get their job done and come back in the office where we do believe the social connections are important and we're not eliminating our footprints, but allowing them to plug in in a plug-and-play way on the days that they should be there for customer contact, for employee meetings. It's kind of like the pandemic was a real helper.

Yeah, I know. It sounds like – sorry, go ahead.

really, if you leave the offices too big, it can kind of look like there's no vibe going on in the office. So we do a lot of things to make sure that we can track the workforce, or that the footprint responds to the workforce. It's like going into a restaurant and every other table's empty. It doesn't feel like there's much of a vibe. Same number of people in a smaller restaurant, you walk out saying, wow, that was really a happening place tonight. So we're trying to make those experiences when people come into the office more more collaborative, more near each other, and it's actually working. We were just in London not too long ago, and there's a real bounce in everybody's step when they come into a full office.

Yeah, Doug's just trying to do the AIDS thing on me because I go to a full restaurant, I can't hear.

Yeah, no, I agree with all of those changes. And so, yeah, it sounds like $20 million to $30 million of a benefit, but it sounds like that's maybe a bit more gradual unless things change.

Yeah, maybe a couple years, two and a half years. We'll get it.

Great.

Thank you.

Thanks, David.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next questions come from the line of Greg Peters with Raymond James. Please proceed with your questions.

Good afternoon. Hey, good afternoon, everybody. You provided a pretty robust answer about the recession and or a potential recession and its effect on your brokerage business. But in your answer, you kind of didn't really talk about its effect on the risk management business. So maybe or if you did, I missed it. So because I was more focused on brokerage. So maybe you could pivot and just tell us about your whiteboard approach. sort of conclusions on the effect of a potential recession on the risk management business?

I don't think there was substantial employment changes in a normal recession. So with Gallagher Bassett being so tied to the number of people employed in places where there might be slips and falls, et cetera, I think that I'm not saying they're immune to it in this next normal recession. but I think that they're pretty resilient in that right now. Same thing with the benefits business. There's still a competition for talent. I think that there's – you heard Pat say that there's 11 million open jobs right now, and there's 5 million people out of work or something like that. So I think that – I personally believe that this next – if there's a slowdown, it's about drying up excess demand versus supply. And Scott pays claims on what the supply is, not the demand. Right, Pat. You know, we sell stuff on supply, not demand. So I think that, I think his business is pretty good.

Yeah, and Greg, you heard us say that of all the lines of cover right now that are adjusted by Gallagher Bassett, work comp is still one line that's not, and it's our core business in the U.S., is not back to pre-pandemic claim counts. So it takes a while to build that back, but that's, as Doug said, directly connected to the employee headcount. And so if employee headcounts get slashed, they'll have an impact on Scott's business if they stay stable. And what we're seeing on the benefits side is aggressive hiring, aggressive attempts at retention, and I think, you know, I think we're in pretty good shape.

I was just, you know, as you were providing the answer, I was recalling an old adage, and I never really – tested it out to know whether it was true or not. But, you know, as a recession, as there was an onset of recession, that claim counts, workers' claim counts would actually increase as more employees sharing the worst would slip and fall in advance of actually, you know, facing the Grim Reaper. I don't know if that's something that is... I think that's an old wives' tale. Yeah, yeah, exactly. Okay, um...

thing that as workers' comp premium rates increase, and we're not fully into big jumps in workers' comp, but if we get a harder market in workers' comp, that will push more people to self-insurance, and that leads to pretty good growth for Gallagher Bassett, too, when they look at self-insurance as an alternative. If we go into a recession where workers' comp rates go up, it's medical costs inflate, et cetera, you might have more people looking for self-insurance with Gallagher Bassett paying the claims.

Is it your view that the work from home versus work from work is one of the contributing factors to the lower claim count in workers' comp, at least from what you're seeing at Gallagher Bassett?

No, not really.

Okay. Okay. Two other questions. From your property answer regarding where your real estate footprint, should I infer that about 20,000 or so of your employees are in full work from home? If you said your property is target, your real estate footprint is?

No, no, no, no, no. Gallagher Bassett has moved to a more virtual environment. and that people are embracing that and really like that. The brokerage business is allowing agile work. We're working to be agile and to be flexible, but these office footprints can actually handle everybody coming in at the same time, and we are encouraging people to come in.

Yeah, I think, Greg, a number of people that actually are designated as purely work-from-home employees might be in the 8,000-person range.

Okay.

A big part of that, GB.

Right.

I'm sorry, what was that last answer, Pat?

A big part of that is Gallagher Bassett.

Right. Okay. The final just detailed question, and I'm sure you've probably provided this before, but I just forget. Is there any cadence to how the cash flow comes out from the energy business as we think about the annual sort of – is it heavier in the first quarter – you're harvesting it or is it spread out evenly, et cetera?

It probably more closely correlates to the days that we do our estimated tax payments because we can anticipate using those credits and therefore we would pay less than estimated tax payments.

That's done on a quarterly basis, correct?

That's right.

Got it. All right. Thanks for your answers.

Thank you, Greg. Thanks, Greg.

Thank you. Our next question has come from the line of Mark Hughes with Truist Securities. Please proceed with your questions.

Yeah, thank you. Good afternoon. Hello, Mark. Pat, the renewal premium number you gave us, the 10.5%, was that for the global P&C market?

Wait a minute, Mark. I don't think I gave you renewal premiums. Take a look.

Yeah, well, I understand what you're saying. You asked about the global second quarter renewal premiums. That's both rate and exposure up 10.5%. Yes. Yes, that's right.

And that's higher than the first quarter. That was 8% in the first quarter. Do I have that straight?

I'd have to pull out the script on that, but I do think that's right.

Okay. All right. And then I'll say this slightly tongue-in-cheek, but also seriously. Do you know if West Virginia Senator Joe Manchin, does he like the clean coal business?

I think he does. I mean, he's got a lot of interest in it. The real question is, is he willing to sponsor a change in this, uh, as a part of, of a compromise plan. So we'll, we'll find that out over the last, over the next, uh, over the next week or 10 days or 10 months. Right. I don't think it's a pretty small program to be honest. So I think that they're trying to get a deal done. Is this something that he's willing to champion? Maybe not, but we'll see what happens when we get into next week.

In the MGA business within wholesale, the 4% organic, do you think that'll continue at that level, or is there anything unusual this quarter?

No, I think it's just the nature of some of those programs.

an mg you should hold should all not be better that's pretty that stuff is pretty subject mark to the to the economy you know it's bars opening restaurants opening contractors starting with a wheelbarrow houses does get hit by hail a lot yeah okay and then did i hear you comment on workers comp pricing i know you talked about claims frequency and a lot of other factors but how about pricing in the quarter

Flat. On rate amount, it's actually showing some nice single-digit type growth numbers right now.

But rates are flat.

That's right.

Yeah, yeah. It seems to be a line that our carrier partners are happy to continue to grow and are satisfied with the results.

Yep, understood. Appreciate it.

Thanks, Mark. Thank you. Our next question has come from the line of Meyer Shields with KBW. Please proceed with your questions.

Great, thanks. Just a couple of quick ones. First off, when we look at supplementals and contingents as a percentage of core commissions and fees, they're down year over year. Is that reinsurance?

It could have an impact on it. Yes, that would be. And I think a good point on that are supplementals and contingents. There is some difference in contracts year over year. So it's always good to look at those two together, not individual. But together, they're up 12% this quarter together.

Okay, perfect. And then the second question on reinsurance, how comfortable are you with the idea that the breakage that you factored in goes away once we get into 2023? Is that going to be a factor anymore?

I would say it's behind us. We've done a really good job of holding the teams in. We're not having substantial attrition on that. In fact, I think we're in good shape on that. So I would not expect, you know, we anticipated what we'd get from breakage, and, you know, the teams holding it together, that leadership team has done an amazingly good job. I've talked about this quarter in and quarter out.

I'm really, really happy with and proud of the fact that that team joined us 7% organic growth in the second quarter after the two to three years that they had prior to an acquisition getting completed in December. We're nine months into this thing, and they're generating 7% organic. That's fantastic. And we were sitting there, you know, talking about breakage early on. Is there going to be more? And let's be honest. Breakage is people left us, and accounts in that business like to work with their team. And so people staying there. The other thing I would comment on is the amount of interaction and the amount of help that reinsurance is to our retail brokerage operations on a global basis is exceeding our expectations. There are risk-sharing pools in the United States that we've done longer and better than anybody in the marketplace, and along comes a fresh look. and fresh markets and a team that works together with us, the data sharing, the discussion of our partner markets and the sharing there, it's almost unbelievable to me on a multiple number of levels how good a fit this is.

That's tremendously positive. And then one last question. I know this is nitpicky, but the large life deal that came in June, Is that something that recurs next year, or is this a one-time deal? One-time deal.

We get them from time to time, but I wouldn't say that they're annually predictable year over year. Right. They bind when they bind. It's not like it's saying you've got to have this all put to bed by January 1 or by October 1. It doesn't really drive necessarily with the calendar or fiscal year of the clients. It's whenever they want to put these cases in place is when they will bind. So it would not be predictable quarter over quarter over quarter.

Okay, that's perfect. That's what I needed. Thank you.

Thanks, Mayor. Thank you. Our next question is coming from the line of Weston Bloomer with UBS. Please proceed with your questions.

Hi. Thanks for taking my questions. My first one is just a follow-up on Willis-Ree. Obviously, good organic there of 7%. The investments ahead of schedule. I'm curious how you're thinking about growth and margin improvement in that business in 2023. Could we potentially see, you know, organic come in above the 7%? How should we think about potential margin improvement? Would it potentially grow faster than the core portfolio currently?

Well, remember, that margin for the year is somewhere around 36%. So I think that we're very happy with that margin. I think holding that margin is the right answer for that business. It takes heavy investment. They've been underinvested for the last three or four years on that. So that is not a business, if you go back to our acquisition, that was expecting substantial margin change on that. So we're happy with the margins right now. We think they're competitive. Sure, there will be opportunities. for us to become more efficient. And, you know, we do that every year. We always become more efficient. But I think there's a ripe opportunity right now to hire brokers in that space that would like to join us. It's a hot thing going right now, so it would be nice to take and hire folks into that business. I think it's 34% for the years where we are.

Got it. Thank you. And then my follow-up is just on M&A. Curious on what you're seeing on the international M&A market. Is that more attractive from a multiple perspective or a competition perspective right now? Or is maybe your term sheet disclosure more international, U.S.-weighted versus store? Just kind of curious on what you're seeing.

It's not more international-weighted. It's about the same. And multiples around the world, you can throw a hat over them.

Got it. Thank you.

Thanks, Weston. Thanks for being on the call, Weston. Nice to hear from you. Thank you.

All of you, by the way. Doug, let's not single any out here. All right. I think that's our questions for now. I'd like to thank everyone on the call again for joining us. Obviously, we're excited. We had a fantastic second quarter and first half of 2022. I'd like to thank all our colleagues around the globe for their hard work. our carrier partners for their ongoing support, and our clients for their continued trust. We look forward to speaking to you again at our September Investor Day meeting, and thank you all, everyone, for being with us.

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