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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon and welcome to Arthur J. Gallagher & Co.’s Third 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 & Co. Mr. Gallagher, you may begin.
Thank you. Good afternoon. And thank you for joining us for our third quarter 2021 earnings call. On the call with me today is Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions. We had a fantastic third quarter. For our combined brokerage and risk management segments we posted 17% growth in revenue, 10% organic growth and nearly 11% organic, if you control for last year's large life sale that we've discussed frequently.
Net earnings growth of 22%, adjusted EBITDA growth of 13% and we completed five new mergers in the quarter bringing our year-to-date closed merger counts in 19 representing nearly $200 million of annualized revenue. And if you add in the pending Willis Reinsurance merger, that number would be pushing $1 billion. So the team continues to execute at a very high level, growing organically, growing through acquisitions, improving our productivity, raising our quality, and most importantly, constantly building upon our unique Gallagher culture, a terrific quarter on all measures.
Let me provide a brief update on our agreement to purchase Willis Re. On the regulatory approval front, we received competition clearance in five or six jurisdictions required to close, including clearance by the U.S. Department of Justice. The final jurisdiction in the UK, where the CMA is reviewing the transaction, that's the final jurisdiction. That review is ongoing, but we believe we are in good shape. Although, there's still work to be done at this point, we believe we're on track for a fourth quarter closing.
On the integration front, hundreds of Gallagher and Willis Re professionals are hard at work ensuring we will be well positioned to service our clients when we close. Our 40 year acquisition history allows us to leverage our proven M&A integration path. Integration is in our DNA. We're looking forward to welcoming 2,200 new colleagues to Gallagher as a family of professionals this holiday season. It's really exciting to think about all the talent and expertise that will be joining us. It's going to be incredible for our combined organization and our clients.
Okay, back to our quarterly results, starting with the brokerage segment. Reported revenue growth was excellent at 16%, of that 9% was organic revenue growth, at the upper end of our September IR Day expectation and nearly 10% controlling for last year's large life product sale. Net earnings growth was 23% and we grew our adjusted EBITDA at 13%. Doug will provide some comments on third quarter margin and our fourth quarter outlook, but needless to say another excellent quarter from the brokerage team.
Let me walk you around the world and break down our organic by geography, starting with our PC operations. First, our domestic retail operations were very strong with more than 10% organic, results were driven by good new business combined with higher exposures and continued rate increases. Risk placement services, our domestic wholesale operations grew 16%. This includes more than 30% organic in open brokerage and 5% organic in our MGA programs in binding businesses.
New business and retention were both up a point or so relative to 2020 levels. Outside the U.S., our UK operations posted more than 9% organic. Specialty was 12% and retail was a solid 6%, both supported by excellent new business production. Australia and New Zealand combined grew more than 6%, also benefiting from good new business. And finally, Canada was up nearly 10% on the back of double-digit new business and stable retention.
Moving to our employee benefit, brokerage and consulting business. Third quarter organic was up about 5% in line with our September IR Day commentary, controlling for last year's large life insurance product sale, organic would have been up high single-digits and represents a really nice step up from the 4% organic we reported for the second quarter and the 2% organic for the first. So we were experiencing positive revenue momentum and really encouraging sign for the remainder of the year and 2022. So total brokerage segment, organic solidly in that 9% to 10% range, simply an excellent quarter.
Next, I'd like to make a few comments on the PC market. Global PC rates remain firm overall, and pricing is positive at nearly all product lines. Overall, third quarter renewal premium increases were about 8% and similar to increases during the first half of this year. Moving around the world, U.S. retail premiums up about 8%, including nearly 10% increases in casualty and professional liability.
Even workers' comp was up around 5%. In Canada, premiums up about 9% driven by double-digit increases in professional liability and casualty, Australia and New Zealand combined up 3% to 4%. And UK retail was up about 7% with double-digit increases in professional liability while commercial auto is closer to flat.
Finally, within RPS, wholesale open brokerage premiums were up more than 10% and binding operations were up 5%. Additionally, improved economic activity, even despite the Delta variant and supply chain disruptions are leading to positive policy endorsements and other favorable midterm policy adjustments as our customers add coverages and exposures to their existing policies.
So premiums are still increasing almost everywhere. As we look ahead over the coming quarters, I see the PC market remaining difficult with rate increases persisting for quite a while. In the near-term, we don't see any meaningful changes in carrier underwriting, appetite capacity, attachment points or terms and conditions. Long-term markets do not appear to be seeing a slow down in rising loss costs.
Global third quarter, natural catastrophe losses likely in excess of $40 billion increased cyber incidences, social inflation, replacement cost inflation and supply chain disruptions. And all of this is before factoring in further increases in claim frequency as global economies recover and become even more robust.
All of these factors combined with low investment returns suggested carriers will continue to push for rate. I just don't see a dramatic change for the foreseeable future. So it's still a very difficult and even hard in many spots, global PC environment. But remember, our job as brokers is to help our clients find the best coverage while mitigating price increases through our creativity, expertise and market relationships.
As we think about the environment for our employee benefits, let’s improve business activity, lower unemployment, and increased demand for our consulting services is driving more revenue opportunities. And our customers and prospects continue to rapidly shift away from expense control strategies to plans and tactics that will help them grow their business. And with rebounding covered lives in one of the most challenging labor markets in memory, our consulting businesses are extremely well-positioned to deliver creative solutions to our clients.
So as I sit here today, I think fourth quarter brokerage segment organic will be similar to the third quarter and that could take full year 2021 organic towards 8%. That would be a really nice improvement from the 3.2% organic we reported in 2020. To put that in perspective, 8% would be our best full year brokerage segment organic growth in nearly two decades. And we think 2022 organic will end up in a very similar range.
Moving on to mergers and acquisitions. I mentioned earlier, we completed five brokerage mergers during the quarter representing about $16 million of estimated annualized revenues. I’d like to thank all our new partners for joining us. And I extend a very warm welcome to our growing Gallagher family of professionals. As I look at our tuck-in M&A pipeline, we have more than 50 term sheets signed are being prepared, representing around $400 million of annualized revenues. So even without the re-insurance merger, it’s looking like we will finish 2021 strong wrapping up another successful year for our merger strategy.
Next, I would like to move to our Risk Management segment, Gallagher Bassett. Third quarter organic growth was 16.6% even better than our September IR Day expectation. Margins were strong too. Adjusted EBITDAC margin once again came in above 19%. Results continue to benefit from late 2020 and early 2021 new business wins. In addition to further improvement in new arising claims within general liability and core workers’ compensation just an exceptional quarter from the team.
Looking forward, while our fourth quarter comparison is somewhat more challenging, the recovering global economy, improving employment situation and excellent new business production should result in fourth quarter organic over 10%. That puts us on track for double-digit full year organic and an EBITDAC margin nicely above 19%. As I look back over the last nine months, I can’t help, but to be thoroughly impressed with our team and our accomplishments. Our commitment to our clients, and to each other’s evident in our successes and that is due to our unique Gallagher culture.
In these challenging times, our clients are continuing to count on us. And I’m proud of our teams unwavering client focus. Gallagher’s unique culture is founded on the values in the Gallagher way. Those values have kept us on a steady course throughout the pandemic. And time and time again during these past months, our clients have shared their trust and appreciation for the value Gallagher brings to the table. It comes down to talented individuals tapping into the power of our expertise across the globe, working together during this ongoing pandemic to continue to deliver for our clients. That’s the Gallagher way, and it’s the backbone of who we are as an organization.
Okay. I’ll stop now and turn it over to Doug. Doug?
Thanks, Pat, and hello everyone. As Pat said, a fantastic third quarter. Today, I’ll touch on a few items in the earnings release, predominantly organic and margins, then I’ll walk you through our CFO commentary document and finish up with my typical comments on cash, liquidity and capital management.
Okay. Let’s move to Page 4 of the earnings release and the Brokerage segment organic table. Headline all-in organic of 9%, outstanding on its own, but as Pat said, really running closer to 10% due to last year live sales, either way, a nice step up from the 6% we posted in the first quarter and the 6.8% in the second. As we sit now, I’m seeing a fourth quarter organic again pushing that double-digit level.
Turning now Page 6 to the Brokerage segment adjusted EBITDAC margin table. Okay. Underlying margin after controlling for the live sale was around 160 basis points. Let me take you through the map to get you to that. First, headline margins were down 48 basis points, right about where we forecasted at our September IR Day. So controlling for the large live sale would bring us back to flat.
Second, in September, we forecasted about $25 million of expenses returning into our structure as we emerged from the pandemic and a small amount of performance comp time. We call expenses returning mostly relate to higher utilization of our self-insured medical plans, resumption of advertising costs, more use of consultants, merit increases, and a small pickup and T&E expenses
We came in right on that forecast. So controlling for these expenses also brings you to that underlying margin expansion of about 160 basis points that feels about right on organic in that 9% to 10% range. Looking forward, we think about $30 million of our pre-pandemic period expense savings return in the fourth quarter. And if you assume say 9% organic math would say, we should show 90 to 100 basis points of expansion here in the fourth quarter.
So in the end, the headline story is that we have a really decent chance at growing our full year 2021 margins by nearly 150 basis points. And that’s even growing over the live sale and the return of costs would come out of the pandemic. Add that to expanding margins over 400 basis points last year means we’d be growing margins more than 550 basis points over two years. That really demonstrates the embedded improvements in how we do business. No matter how you look at it, it’s simply outstanding work by the team.
Moving to the Risk Management segment EBITDAC table on Page 7. Adjusted EBITDAC margin of 19.5% in the quarter is an excellent result. Year-to-date, our margins are at 19.2%, which underscores our ability to maintain a large portion of our pandemic period savings. Looking forward, we think we can hold margins above 19% in the fourth quarter and for the full year. That would result in about a 100 basis points of margin expansion relative to 2020, another fantastic margin story.
Now I shift to our CFO commentary document we posted on our IR website. Starting on Page 4, you’ll see most of the third quarter items are close to our September IR Day estimates. One small exception is Brokerage segment amortization expense about $3 million below our September IR Day estimate. It’s simply because we finalized our valuation work on a recent 21 acquisition would causes a small catch-up estimate change. We adjusted that out on Page 1 of the earnings release. So it doesn’t benefit adjusted EPS.
Flipping to Page 5 and the Corporate segment table. There in actual third quarter results in the blue section to our September IR estimates in gray. Interest in banking line on a reported and adjusted basis were both in line. The non-GAAP adjustment here is that $12 million charge related to the early extinguishment of debt that we issued in May related to the terminated Aon and Willis remedy package. Acquisition cost line, mostly related to the Willis retransaction came in a bit higher than our IR Day estimate on a reported basis, but in line on an adjusted non-GAAP basis. We will see some additional transaction related costs here in the fourth quarter should have a sense of what those costs might be at our December IR Day. Again, we plan on presenting these costs of the non-GAAP adjustment as well.
On the corporate cost line, in line on an adjusted basis after controlling for $5 million of a one-time permanent tax item. That’s a non-cash and it’s simply a small valuation allowance related to a couple of international M&A transactions. And finally, clean energy. What a terrific quarter, came in much better than our estimate. Thanks for a warm September, less wind in certain areas of the country and higher natural gas prices. We are increasing our full year net earnings range to $87 million to $95 million on the back of the third quarter upside.
Okay. As for cash and capital management and M&A. As you heard Pat say, we have a strong pipeline of tuck-in merger opportunities, and that’s on top of the Willis reacquisition that we hope to close here in the fourth quarter. At September 30, cash on hand was about $2.7 billion and we have no outstanding borrowers on our credit facility. We plan to use that cash, cash flow generated during the fourth quarter and our line of credit to fund our – the acquisition of Willis Ray.
Before I turn it back over to Pat, our year-to-date performance deserves I mention. Our brokerage and risk management segments combined have produced 15% growth in revenue, nearly 8% organic growth. We completed 19 new mergers this year with nearly $200 million of estimated annualized revenue, net earnings margin expanded 81 basis points, adjusted EBITDAC margin expanded 153 basis points and our clean energy investments are on track to being up 30 this year. Setting us up nicely for substantial additional cash flows for the coming five to seven years. A terrific quarter in nine months on all measures, positions us for another great year.
Okay. Those are my comments, back to you, Pat.
Thanks, Doug. And Hillary, we can go to questions.
Thank you. The call is now open for questions. [Operator Instructions] Our first question is from Mike Zaremski of Wolfe Research. Please state your question.
Great. Good evening. Hey, how are you?
Terrific.
Maybe – great. Yes. Imagining great results. So maybe quickly on the Willis or maybe I should call it AJ Gallagher soon. There’s a gap between kind of the estimated earnings you guys have disclosed and Willis disclosed, and there’s also this kind of shared services stranded costs issue. And just kind of curious is, is that any color you can provide on whether your guide is baking in some, I guess, sharing of expenses that will eventually change over time and I guess, improve the earnings levels of the operation for you all.
Good question. Here’s the thing. We believe we bought about $265 million worth of EBITDA, right? And I think if you kind of do some math on this morning’s report, it looks like in the nine months reporting around $321 million – excuse me, $315 million worth of EBITDA. So their numbers are a little higher than ours. I can guess on why there’s some differences. Their cost might not be fully loaded for costs that would – it would take us to run the business or they would be running the business on a standalone basis. But it was good to see the fact that their number was higher than ours.
Okay. Yes. That’s what I’m living too. So – but in terms of the shared services, is your current guidance baking in an expense that will over time fall?
No. I think that what they can service it for and well under the TSA and what we can ultimately service it for gets us back to that $265 million.
Okay. I guess moving gears to the pricing environment from your color and the prepared remarks. Did I hear correct saying that worker’s comp was plus five? And I guess, just generally it feels like there’s kind of been less deceleration, I think, than some expected in terms of pricing. That seems like it’s – I’m curious, if you think it’s emanating just from the property side or it’s coming back on the casualty side as well, because maybe there’s a more uncertainty about a loss inflation or maybe worker’s comp claims are coming back. I know it’s a long-winded question. But any color on kind of what’s moving the pricing environment. Thanks.
Yes. Thanks, Mike. Yes. Interestingly enough, with all the cat losses properties slightly down in rate, casually continues to spike a properties down quarter-over-quarter, just about a point and a half or so in rate and our book now. I’m speaking about our book of business. Casually, is up a little over a point and worker’s compensation is up about five. So these things moderate quarter-to-quarter that this is not a prediction of any sort for next year, but when we get ready for this call, we look at that and say, okay, what’s actually happening in the market. By the way, our statistics are airtight, by-product, by geography, by billing as of yesterday. So I’m very confident in these numbers. Overall rate is continuing to be up about 8%.
Yes. Just to add to that, if you look back at third quarter 2020, we had our whole portfolio of rate up 7.1%, and this third quarter 2021, it’s up 7.9%. Now there’s a little exposure unit adjustment in there on that. When you look at casually third quarter last year was 5.7%. It’s up 8.4%. Liability was up 10.6% last year, it was up 10 points this year. Commercial auto granted I would – there’s exposure units, and this was flat it’s up 4% this quarter. Package, third quarter is 5.7% up 8.9% this quarter. Property up 11.2%, this quarter up 8%. Marine was 3% and it’s up 6%. So when you look across all in were higher this year third quarter than we were last year third quarter by almost a full point.
Interesting. Thank you for the color.
Thanks, Mike.
And those are global numbers.
Our next question is from Elyse Greenspan of Wells Fargo. Please state your question.
Hi, thanks. Good evening. My first question is following up on a topic that we discussed in your recent Investor Day, Doug. So we’re discussing the potential for tax changes related to clean energy, and it sounded like there was still maybe a chance, but you guys were thinking the laws would sunset at the end of this year. Has anything changed there? And is it still the plan based on the discussion from September to rollout some type of cash earnings metrics? Is it sounded like in conjunction with first quarter of 2022 earnings?
Yes. We’re still on track with a project that’s going to convert it. I don’t know if I’d necessarily call it cash. Let’s be careful about that. But we’re taking a look at how other publicly held brokers and professional services report their non-GAAP EPS and what I call a modified cash approach. And there are a number of different approaches out there whether it’s adjusting for amortization depreciation, but then there’s the subtleties of pension, stock-based compensation. So we’re working through that, nothing to report today, but the projects ongoing, I hope to give you a better update at our December IR Day.
But if you were to roll it out, the plan would be sometime in March early April next year.
Yeah, I think so. I think we’ll finish this year on this basis and then go to that basis next spring, the first quarter. We clearly have an IR Day, we’d go back and represent everything historically on that basis. Let you be well-prepared so that let’s say we did it first quarter that you wouldn’t – that you can adjust all your models before we release.
And then in terms of the organic outlook for next year for brokerage, it sounds like you’re expecting around 8% growth, which is what you expect this year to come in. Within I mean, I know we’re still a little ways away and it’s hard to have precision. But within that guide benefits was a little weak to start the year. So I guess that should be a tailwind or there just – would you expect that to be a tailwind and maybe brokerage slowed a little bit. But can you just help me understand kind of how you’re seeing the moving parts within your businesses for 2022 as it sits today?
Well, I think we’ll have two things. I think that they’re slightly tougher compares when you get into 2022 because we did have this – we’re having some good results here in 2021. But I think we do have some businesses that are recovering our programs, our binding businesses, our new business startups are recovering better than the wholesale business. I think you’re starting to see covered lives increase, more consulting work coming back into the structure. Rate increases, we’re not seeing that slowing down at all. So I think there’s enough there on those other – in those other places that would offset the tougher compares next year.
Okay. Thanks for the color.
Thanks, Elyse.
Thanks, Elyse.
Our next question is from Josh Shanker of Bank of America. Please state your question.
Yes. Thank you very much for taking my question. So, given a 4Q 2021 close is Willis Re and the Gallagher Re organizations going to be unfortunately competing against each other on January 1. What’s sort of the way you’re managing that given such a close proximity to one, one renewals?
Well, what’s really nice about this acquisition is there is very little, if almost no overlap. We are not competing head to head really on much at all Capsicum, which was a startup, very successful became of course, Gallagher Re. This is very complimentary business. There might be a few little areas here or there where they each touch, but there are no major renewals across the treaty book that are in conflict. And so what you’ve got is the Gallagher Re people who you could imagine if you were just reading about this numbers to numbers, could be worried about a much larger competitor being acquired, being able to come in with their name, of course, and our brand and how are we going to sort that out? And what does that mean to the clients that they’ve been calling on? Virtually none of that exists.
So what you’ve got is a team of people from the Willis Re side that are very excited. The people from Gallagher Re existing are very excited. They hit the ground running in January with a new, improved, much expanded Gallagher Re, and that’s a branding exercise. It is outstanding for all parties and it brings tremendous additional capabilities because as a startup, as you can imagine, over three, four or five years, Capsicum Re has had to develop all the individual capabilities, one at a time, pay for it as they go, still driving decent margins and top line growth. Willis’ is over a hundred years old. They built this stuff they’ve just got terrific depth. And so it’s going to be a very strong combination with almost no conflict whatsoever.
Thank you. And when you talk about $400 million of annualized revenue on 50 term sheets, I sort of look at these lists of the biggest brokers and $20 million per acquisition, obviously they’re going to come in different sizes, but there’s obviously some larger ones out there numbers, $11 million through, let’s say $50 million on any list you look at. In terms of cultural fit, do the – have you for the most part found cultural fit in the smaller tuck-ins that have that same entrepreneurial spirit? And are the larger brokers they have their own culture at this point that may not be as good of a fit for Gallagher going forward.
I don’t know if I’d say Josh it’s a matter of size, but here let’s put this in perspective. There’s according to Bobby Reagan’s organization there’s 39,000 agents and brokers in America and that’s firms, not people. Now, number 100 on business insurances lists did $26 million last year. So when you look at what’s available to be purchased, you’ve got 100 that take you to $26 million. You’ve got 38,900, less than that. And our people are out every day talking to our competitors and this is done right at the Street level. Not all of them are brought to the table by brokers that are representing them.
And you have large ones that come up from time to time. And when we get a chance at the SIM and we get a chance to get to know them, our number one due diligence efforts still remains culture. You don’t get to wash away culture by size and dollar amount. And no, I wouldn’t say some bigger ones don’t fit because they’re bigger. There are some larger acquisitions we’ve done in the past years that we were thrilled with the fit and they’ve been thrilled with the fit. Now by item count, as you know, most of our acquisitions fall at the $10 million or less level, and yes, they fit extremely well into our entrepreneurial culture.
Yes. Josh, just to clarify, we’ve got 50 outstanding term sheets on 400, which makes the average broker size about $8 million there.
Yes. Your math is better than mine. It’s been a long couple of days.
I get that.
I get it.
Thank you for correcting me.
Sure. But there are some nice ones in here in that $20 million range too.
And you’re right. The top 100 have probably sold more of those in the last two years than probably five years before that combined. And that’s a matter of all kinds of things, appetite, age, multiples, tax law, et cetera. And when we look at those, and if they fit culturally, we try hard to get them to join the team.
Wonderful. Thank you.
Thanks.
Our next question is from Mark Hughes of Truist. Please state your question.
Yes. Thank you. Good afternoon.
Hi, Mark.
Worker’s comp you sounds like it doing better, any way to characterize, is this a change in appetite on the part of certain carriers? Is it just a higher payrolls what’s driving that?
I think all of the above. I think you’ve got, well, first of all, you have the economy recovering. So, we see that in our Gallagher Bassett numbers. You can see the economy in claim count growth. You do have social inflation, and you have you just got more work being done. And I think that makes a difference, but we’re talking right here, and that’s really driven by loss ratios and what they see. And the thing about worker’s comp, I have to give our carrier partners credit. They know what’s going on in that line every day, and when they see a need to move, right? And that’s why during the hard market, many, many quarters we report flat work comp, because they didn’t need the rate. So this is really interesting to me because they’re not waiting around to find out that they’re 25 points behind the eight ball, and then trying to get it back at one swoop. So, I think it’s a good sign, both of their being on top of their numbers, incredibly well, a recovering economy and need for more and more premium in the line.
Doug, I’m not sure if I’m being dense here, but I’m looking at your P&L on the press release, I guess in Page 6, the change in estimated acquisition or non payable to $34 million. And then in the CFO commentary, the recurring is I think described as $8 million pre-tax, what is the distinction between those two numbers? What’s a good number going forward, do you think?
Okay. So you’ve got the natural accretion of the earn-out liability. So, if we buy somebody and they’ve got – we’ve got $50 million on an earn-out. We discount that back around at about 8% per year. So, you’ve got the accretion of what’s going to be paid out. And then you’ve got to change and what do you think the ultimate is? So again, think that total payout could be $50 million, let’s say we put up $30 million worth of liability expecting kind of that they’re going to perform at the 60% range. Yes, 8% accretion on $30 million, but if one day they really over-performing. We’ve got to pump that up to a $40 million expectation. That that’s the difference that goes to the change in an earn-out piece, as well as an accretion piece.
So there were the two different pieces. What you’re seeing those quarters. We did have some acquisitions that have are looking like they’re going to better perform. And it’s that that odd accounting that says that when we think that our acquisitions are going to perform better, we have to take a charge for that as we increase that liability. So…
And is that adjust that out?
Yes. We do adjust that out.
Okay. So the reported EPS is correct for that. Does it correct to like the $9 million, $8 million or $9 million? Or does it go to take it to a…
Well, the EPS is only adjusted for the change and the acquisition earn-out payable. It’s not a adjusted out, for EPS, it’s not adjusted out for amortization.
Yes, exactly. Okay.
The normal accretion of liability say then, it’s the change in the ultimate payment.
Yes, I think I’d probably appreciate it.
All right, thanks.
Our next question is from David Montemaden of Evercore ISI. Please state your question.
Hi, good afternoon.
Hi, David.
Hi. I had a bigger picture question just on the growth profile of the business. I guess it would be in 2023, when Willis Re is incorporated in the organic growth. If I look back over the last 10 years it looks like brokerage organic has been around for call it 4% or 5%. I guess, how are you thinking about Willis Re or should we think about it as just, increasing the base? So, we have like more of a higher base and we’ll grow at a similar pace as we did in the previous 10 years or do you see this enhancing the company’s growth profile going forward once that’s fully reflected in organic?
Well, I’ll let Doug anchor you in reality. And let me give you fantasy. I think the fact is that this is a leg on the stool that we haven’t had. And I think everybody on this call knows that I’ve tried for years to be a big player in this business, failed miserably once got together with a great team and had a terrific start up a second time. I had a really exciting spring thinking that we were going to land this group of people into the company, through the acquisition of Willis by Aon had that rug pulled out from under me – in late May into June. And somehow was lucky enough to be in the right place at the right time to get this back on track for a close this year. So it’s been a bit of a seesaw for me.
And part of the reason I’m excited about it is that it adds so much to the company. It adds, frankly, interestingly enough, to our ability to produce middle market retail property casually business on a global basis. Now, how is that possible? Well, number one data, number two, that data and analytics, but it also gives us a clear insight into what is troubling and exciting to the carrier world. What’s going on in their capital plans. What are they seeing in accumulations? Where are we helping them? And how does that translate to what’s going on the middle market take instruction. So that’s just a whole another opportunity for me to get out in front of our team and say, look, our hit ratio today is improving, but it’s still not that different than when I joined the business.
Now, how can that be? We know that 90% plus of the time when we compete in the marketplace, we’re competing with somebody smaller, typically the local agent or broker that we’re buying. And frankly, we should be crushing that. So, I would hope that that would lead to even more organic growth, even into retail level. And then you go into looking at re-insurance, this is a – this isn’t true, but there’s three main players. We’re going to be one of those. And yes, there are other players. And we were proud at [indiscernible] Gallagher to become the fifth largest at a $100 million in revenue. That’s a great accomplishment, but a $1 billion player, that new capital coming into that market, that those carriers that are looking to do new things, treaties that need to be reworked and tweaked three competitors, I think we’re going to do really well.
Yes. I’ll put, I don’t think there’s any fantasy in that that at all, I think that it will all perform our regular organic growth. So, I think how much more of that will be determined. But it’s at the knob of capital creation. If you look at the Genesis of Gallagher way back when to really pioneer the alternative market, which is really capital creation, we take that with our cap as we take it with our, that the wholesaling where we're creating capital with other capital markets there to come up with programs.
And, I think that it's going to give us an opportunity to create more capital combine that with the knowledge that we have with respect to certain long tail liability, like workers comp and general liability, I think that we can bring some pretty exciting capital formation together with Gallagher asset to help our self-insured clients. So, and then if you just get down into our retail business globally, I think a close partnership with the Willis and Gallagher Re, reinsurers will come up with much, with considerably more creative ideas. I believe in our culture where creative ideas get pursued. I think that will help us grow better together. So I don't think there's any fantasy in what Pat was saying.
Got it. Thanks so much for that answer. That's really helpful. I guess just also sticking on Willis Re, or I guess now Gallagher Re but wondering if you can just comment on the, just the third quarter performance and how that has compared to your expectations. I'm particularly interested in just attrition levels and Doug, I think you mentioned there's obviously was some volatility, earlier this year and in the summer. So just wanted to see just how retention has been holding up, employee retention since the announcement if you have a view on that?
Well, I'll be honest; we're not really allowed to have some of that while we're going through regulatory approval. And so our insight into the performance of that business is limited. It's necessary where with advanced integration planning can happen, but based on what I'm seeing; being reported right now is that it seems to be holding up very well. And I don't think that the breakage that we've assumed in our assumptions, is that they've hit anywhere near that. So I think that what it's holding up well and I got to give that team a lot of credit and they're holding that team together. They know it's going to be an exciting opportunity to be at Gallagher. So I'm a not seen financially any weakness in what we think that we're getting.
Yes, I think that's was going to be my comments around the team, that management team has held their team together through what I consider to be one of the greatest leadership challenges our industry's faced. Now, it's one thing to say, we've got an acquisition, it could be good for everybody, and we're going to get together with Aon and this is going to be terrific. And you've got a lot of doubters on both sides. And to your point earlier, where's the conflict, where's the headbutting going to be? Wow, you worked that through and then that's not really, what's going to happen.
You're going to join Gallagher and that's going to be great, because there's not going to be the headbutting. They're not as big as we were together. We're not going be as big, but that's going to be great for you too. Well, that's not going to happen either. So there's no surprise as to why there was some attrition. And I can tell you since the announcement anecdotally, because Doug's right, we can't get into the numbers, but there's been very little attrition since the announcement that this is really going to happen.
Got it. Thanks. That's exactly what I was looking for. Thank you.
Thanks, David.
Our next question is from Meyer Shields of KBW. Please state your question.
Thanks. It's related question on Willis Re and hopefully it's something you can answer. Are there any position to hire right now sort of in between being owned by Willis Towers Watson and being owned by Gallagher?
Yes, of course.
Okay. Perfect. I just didn't know whether there's any disruption in terms of I don't know capital or whatever. Broader question, I'm just curious in terms of how this works, when you've got raising insurance rates in an inflationary period, are your clients more or less price sensitive?
Oh man, are you kidding me? I I'll tell you.
Nope.
This is so good for us. The team's laughing in the room so I’ve gone now, slow down everybody. Of course the clients are freaking out. You've got their costs going up before they've got their revenue adjusted to cover it. So take our construction risk. They've all bid everything already. They're in the middle of the job. Supply chains, cost of cement, cost of lumber, blah, blah, going up like crazy, every cost on their P&Ls under, they've got to look at everything. So here we come as a really, really good player in the construction area. Again, we compete 90% of the time and very nice accounts with smaller competitors.
We can analyze and show them what's actually happening in the book by that type of cover by that type of client. And then we can show them that we can improve upon what they've been getting from their local agent. Yes, they're sensitive. Yes, it should be good new business for us.
Okay. And then the follow-up, which I guess you mostly answered already. Does that mean that your win ratios or your win rates go up relative to smaller competitors because of capability?
Yes.
Okay, perfect. I just wanted frame all this. Thank you.
Thanks Meyer.
Our final question comes from Mark Hughes of Truist. Please state your question.
Yes, thanks. Doug, did you comment on, you talked about organic for 2022 being similar. This year you did 150 basis points in the brokerage segment on that organic, is that’s a good bogie for next year as well? Are there any other costs coming or going that will influence that?
Yes, I think let's break it down. I think that an organic much like this year, next year that 9% to 10% range is possible 8%, 9%, 10% range. What will margins do next year? Well, some of that depends on how much further cost return to our structure that haven't yet returned to our structure. Remember we are pretty low cost basis still in the first quarter of 2021. So that will revert to next quarter in 2021 also. So I'll put a little pressure on the year-over-year. We're in the middle of budget and planning cycle right now. Mark, I'll have a better answer for you on that in December, but if we're pumping out organic growth pushing 10% next year, there's still opportunities for us to take some of that to the bottom-line. How much is that going to improve margin next year? Give me till December to figure that out.
Very good. And then I'll ask you on the shift to cash EPS I'm just looking at your CFO commentary and looking at that recurring amortization of $95 million any comments you'd like to add throw out how much of that might be added back for a cash EPS number?
Well, $400 million out a year. I think that in all cases that we've looked at a 100% of that has been added back. You got a tax effectively, but that's something that's, it's a big number.
And you wouldn't want to be outside of the mainstream on that. Would you doesn't sound like it?
Say that again?
I said you wouldn't want to be outside of the mainstream, if everybody else is adding the whole net back, you would want do the same thing that I presume?
I think comparability would be very helpful.
Right. Okay. Thank you for that. Appreciate it.
All right. Thanks Mark.
Thanks Mark. And thanks everybody for your questions. So thank you again, all of you for joining us today. As we said over and over, we delivered a great third quarter and I'd like to thank our 35,000 plus colleagues around the globe for their hard work, dedication and unwavering client-centric attitude. We look forward to speaking to you again at our December Investor Day. Thank you for being with us and have a nice evening.
This does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day.