Arthur J. Gallagher & Co. (AJG) 2021 Q3 法說會逐字稿

Good afternoon, and welcome to Arthur J. Gallagher & Co.'s Third Quarter 2021 Earnings Conference Call. (Operator Instructions) 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 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 EBITDAC growth of 13%. And we completed 5 new mergers in the quarter, bringing our year-to-date closed merger count to 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 5 of 6 jurisdictions required to close, including clearance by the U.S. Department of Justice. The final jurisdiction in the U.K. where the CMA is reviewing the transaction, that's the final jurisdiction. That review is ongoing, but we believe we're in good shape. Although there is 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 EBITDAC 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 P/C 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 and binding businesses. New business and retention were both up a point or so relative to 2020 levels.

Outside the U.S., our U.K. 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 a 2% organic for the first.

So we're 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 P/C market. Global P/C rates remain firm overall, and pricing is positive in 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 premium was up about 8%, including nearly 10% increases in casualty and professional liability. Even workers' comp was up around 5%. In Canada, premium was up about 9%, driven by double-digit increases in professional liability and casualty. Australia and New Zealand combined up 3% to 4%. And U.K. retail was up about 7% with double-digit increases in professional liability, while commercial auto was 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 P/C 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 slowdown 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, suggest that 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 P/C 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, the improved 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 2 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 5 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 or being prepared, representing around $400 million of annualized revenues. So even without the reinsurance 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 9 months, I can't help but to be really impressed with our team and our accomplishments. Our commitment to our clients and to each other is 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 team's 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 in itself, but as Pat said, really running closer to 10% due to last year's life sale. 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 to Page 6 to the Brokerage segment adjusted EBITDAC margin table. Okay. Underlying margin after controlling for the life sale was around 160 basis points. Let me take you through the math 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 life sale would bring us back to flat.

Second, in September, we forecasted about $25 million of expenses returning into our structure as we emerge from the pandemic and a small amount of performance comp time. Recall, 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 in 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 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 '21 margins by nearly 150 basis points. And that's even growing over the life sale and the return of costs as we 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 2 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 100 basis points of margin expansion relative to 2020, another fantastic margin story.

Now let's 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, which 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 in the Corporate segment table. Sharing actual third quarter results in the blue section to our September IR estimates in gray. Interest and 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 Re transaction, 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 as a non-GAAP adjustment as well.

On the corporate cost line, in line on an adjusted basis after controlling for $5 million of a onetime permanent tax item, that's a noncash 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 to our 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 Re acquisition 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 borrowings 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 Re.

Before I turn it back over to Pat, our year-to-date performance deserves a 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 investment made at 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 5 to 7 years.

A terrific quarter, in my mind, 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.

(Operator Instructions) Our first question is from Mike Zaremski of Wolfe Research.

[I imagine], great results. So maybe quickly on the Willis Re or maybe I should call it Gallagher Re soon.

Good idea.

There is a gap between kind of the estimated earnings you guys have disclosed and Willis has disclosed. And there's also this kind of shared services stranded costs issue. I'm just kind of curious, 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's looked like in the 9 months, they're 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. Those costs might not be fully loaded for costs that it would take us to run the business or they would be running the business on a stand-alone basis. But it was good to see the fact that their number was higher than ours.

Okay. Yes. That's what I'm moving to. So -- but in terms of the shared services, is your current guidance baking in an expense that will over time fall?

No, I think what they can service it for and -- 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 in the prepared remarks. Did I hear you correct saying that workers' comp was plus 5%? And I guess, just generally, it feels like there has kind of been less deceleration, I think, than some expected in terms of pricing.

It 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 more uncertainty about loss inflation or maybe workers' 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?

Yes. Interestingly enough, with all the cat losses, property is slightly down in rate. Casualty continues to spike up. Property is down quarter-over-quarter just about 1.5 points or so in rate. And our book now, I'm speaking about our book of business, casualty is up a little over 1 point and workers' compensation is up about 5. So these things moderate quarter-to-quarter.

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%.

That's right. Yes, just to add to that, if you look back at third quarter '20, we had our whole portfolio of rate up 7.1%. And this third quarter '21, it's up 7.9%. No, there's a little exposure unit adjustment in there on that. When you look at casualty third quarter last year was 5.7%. It's up 8.4%. Liability was up 10.6 last year, and it's 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, 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, we're higher this year third quarter than we were last year third quarter by almost a full point. And those are global numbers.

Our next question is from Elyse Greenspan of Wells Fargo.

My first question is following up on a topic that we discussed at your recent Investor Day, Doug. So you were discussing the potential for tax changes related to clean energy. And it sounded like there was still maybe a chance that you guys were thinking that 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 roll out some type of cash earnings metric? It sounded like in conjunction with first quarter 2022 earnings.

Yes. We're still on track with a project that's going to convert. 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 on what I'd 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 project is 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?

Yes, 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 go back and represent everything historically on that basis. Lets you be well prepared so that, let's say, we did it first quarter that you wouldn't -- you could 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, I know benefits was a little weak to start the year. So I guess that should be a tailwind. Are there just -- would you expect that to be a tailwind and maybe brokerage slows 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 2 things. I think that there's slightly tougher compares when you get into '22 because we did have -- we're having some good results here in '21. But I think we do have some businesses that are recovering. Our programs, our binding businesses, our new business start-ups are recovering better in the wholesale business. So I think you're starting to see covered lives increase more, 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.

Our next question is from Josh Shanker of Bank of America.

So given a 4Q '21 close, is the Willis Re and the Gallagher Re organizations going to be unfortunately competing against each other on January 1? Or what's sort of the way you're managing that, given such a close proximity 01/01 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 a very complementary business. There might be a few little areas here or there where they each touch. But there are no major renewals across the trading book that are in conflict.

And so what you've got is the Gallagher Re people, who you could imagine if you're just reading about these 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 we're 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 that is outstanding for all parties, and it brings tremendous additional capabilities.

Because as a start-up, as you could imagine, over 3, 4, 5 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 100 years old. They've built this stuff. They've got -- they've just got terrific depth. And so it's going to be a very strong combination with almost no conflict whatsoever.

And when you talk about $400 million, 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, that it's a matter of size. But hear, 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 list 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 in 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 #1 due diligence effort 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 million, 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.

Yes -- no.

I get that.

I get it.

Thank you for correcting.

Sure. But there are some nice ones in that $20 million range there, so.

And you're right. The top 100 have probably sold more of those in the last 2 years than probably 5 years before that combined. And that's a matter of all kinds of things, appetite, age, multiples, tax law, et cetera. And we look at those and, if they fit culturally, we try hard to get them to join the team.

Our next question is from Mark Hughes of Truist.

Workers' comp, it sounds like it's doing better. Any way to characterize, is this a change in appetite on the part of certain carriers? Is it just 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've just got more work being done. And I think that makes a difference. But we're talking rates here. And that's really driven by loss ratios and what they see. And the thing about workers' 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 rate -- 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 are 25 points behind the 8 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 a need for more premium in the line.

Doug, I'm not sure if I'm being dense here, but I'm looking at your P&L in the press release, I guess, on Page 6, the change in estimated acquisition earn-out payables of $34 million. And then in the CFO commentary, the recurring is, I think, described as $8 million pretax. What is the distinction between those 2 numbers? And 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 the change and what 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, you've got an 8% accretion on $30 million.

But if one day, they really overperform and we've got to pump that up to a $40 million expectation, that's the difference that goes to change in earn-out piece as well as an accretion piece. So those are the 2 different pieces. What you're seeing this quarter is we did have some acquisitions that have -- are looking like they're going to better perform. And it's 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.

And is that adjusted out?

Yes, we do adjust that out.

Okay. So the reported EPS corrects for that, is it correct, to like $9 million or $8 million or $9 million? Or does it go to -- take it to 0.

Well, the EPS is only adjusted for the change in the acquisition earn-out payable. It's not adjusted out. For EPS, it's not adjusted out for amortization.

Yes. Exactly.

The normal accretion of the liability stays in. It's the change in the ultimate payment.

Our next question is from David Motemaden of Evercore ISI.

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 4%, call it, 4%, 5%. I guess how are you thinking about Willis Re? Should we think about it as just increasing the base, so we have like more of a higher base and will 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 everyone 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/casualty 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 in the middle market.

Take construction. 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 percent 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 in the retail level.

And then you go into looking at reinsurance, this isn't true, but there's 3 main players, we're going to be one of those. And yes, there are other players, and we were proud at Capsicum, Gallagher Re to become the fifth largest at $100 million in revenue. That's a great accomplishment. But a $1 billion player? That new capital coming into that market, those carriers that are looking to do new things, treaties that need to be reworked and tweaked, 3 competitors? I think we're going to do really well.

Yes, I'll put -- I don't think there's any fantasy in that at all. I think that it'll outperform our regular organic growth. So I think how much more of that will be determined. But it's at the nub 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 captive. We take it with our -- the wholesale and where we're creating capital with other capital markets there to come up with programs [in the end]. 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 liabilities like workers' comp and general liability, I think that we can bring some pretty exciting capital formation together with Gallagher Bassett 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. It'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 obviously was some volatility earlier this year and in the summer. So I 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. So our insight into the performance of that business is limited. It's necessary where 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 it's holding up well, and I've got to give that team a lot of credit. Man, they're holding that team together. They know it's going to be an exciting opportunity to be at Gallagher. So I'm not seeing financially any weakness in what we think that [we're getting].

Yes. I think that 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 has faced. Now it's one thing to say, we've got an acquisition, it's going to 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 is the head butting going to be? Wow, you work 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 head butting. They're not as big as we were. Together, we're not going to 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 is 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.

Our next question is from Meyer Shields of KBW.

This is a related question on Willis Re and, hopefully, it's something you can answer. Are they in a position to hire right now sort of in between being owned by Willis Towers Watson and being owned by Gallagher?

Yes, of course.

Okay. Well, perfect. I just don't know whether there's any disruption in terms of -- on capital or whatever. A broader question, I'm just curious in terms of how this works. When you've got rising rates in the inflationary period, are your clients more or less price-sensitive?

Man, are you kidding me?

No.

I'd tell you, this is so good for us. The team is laughing in the room, it's like, oh, no. 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, blah, going up like crazy. Every cost on their P&L is 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 on 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 a good new business for us.

Okay. And then the follow-up, which I guess you mostly answered already. Does that mean that your win ratio or your win rates go up relative to smaller competitors because of capability?

Yes.

Our final question comes from Mark Hughes of Truist.

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 a good bogey for next year as well? Or are there any other costs coming or going that will influence that?

Yes, I think -- let's break it down. I think an organic, much like this year, next year in 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 have a pretty low cost basis still in the first quarter of '21. So that will revert to next quarter in '21 also. So that will put a little pressure on the year-over-year.

We're in the middle of our 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 until 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 or 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, 100% of that has been added back. You've got [the tax effectively], but that's something -- it's a big number.

And you wouldn't want to be outside of the mainstream on that, would you? Didn'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 [nut back]. You would want to do the same thing, I presume.

I think comparability would be very helpful.

Thanks, Mark, and thanks, everybody, for your questions. 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.