Arthur J. Gallagher & Co. (AJG) Earnings Call Transcript & Summary

Good morning, and welcome to Arthur J. Gallagher & Company's quarterly investor meeting with management. [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 investor meeting, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws. They are subject to certain risks and uncertainties discussed during this meeting described in the CFO commentary document posted to our website or the company's most recent Form 10-K filing and other filings with the SEC. In particular, COVID-19 has created significant volatility, uncertainty and economic disruption that may impact our forward-looking statements. Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements. It is now my pleasure to introduce J. Patrick Gallagher, Jr., Chairman, President and CEO of Arthur J. Gallagher & Company. Mr. Gallagher, you may begin.

Thank you. Good morning, and happy holidays to all of you joining us today for our quarterly investor meeting. As many of you know, we've done these mid- to late quarter meetings for more than 5 years now. And regardless if in person or virtual, we think it's a nice opportunity for new and long-term investors alike to get an update on our businesses and the Gallagher story outside of the hectic earnings season. Let me lay out the format for you. I'll kick off the meeting with some prepared remarks. Then 5 of our business leaders will speak for 5 to 7 minutes each, describing their business and touching on topics like organic, the M&A pipeline and operating initiatives. They will also provide market insights and some data points on what we are seeing so far during the fourth quarter. Then Doug Howell, our CFO, will wrap up our prepared comments with some financial commentary. In total, our remarks should last around an hour, and then we'll be open for the line -- we will open up the line for questions and answers from those of you who are dialed in. Let me start by welcoming all of our new reinsurance colleagues to the Gallagher family of professionals. We know it's been a long and winding and even bumpy road to get here. But let me tell you this, you're really going to love being part of this growing client-centric culture. Joining forces with -- joining forces with our Gallagher Re teams creates a global reinsurance powerhouse. Now, team up these new reinsurance experts with our world-class retail, wholesale program, MGA, MGU, benefits, captives, et cetera, and claims paying units, delivers a global brokerage and risk management organization, with a nearly unrivaled breadth of capabilities and even more opportunities to service our clients. For any risk anywhere in the world, we can provide the very best expertise to any enterprise. I'm confident we will build on our collective strengths. Why am I confident? Because of our culture. Our culture supports one another to be better together. If you walk through our halls, you will understand every Gallagher colleague wants all of their teammates to be the best they can and to win every day. So as you can tell, I'm extremely excited about adding all these world-class professionals to our team. Welcome again. Okay, let me move on. From my vantage point as CEO, I think the team has done an incredible job over the past 21 months, and we have great momentum and remain very upbeat on our future. We're growing organically, growing through mergers, servicing and retaining our clients, selling new business, improving our productivity and raising our quality and our culture is thriving. Let me be more colorful around why I'm so excited, starting with organic. The global economy is experiencing a robust recovery, despite supply chains disruptions and new variants emerging. Sitting here today, the economic recovery seems poised to continue into '22 and even 2023. Most businesses have shifted back into growth mode and the higher level of economic activity is leading to increases in exposure units in covered lives. And inflation appears to be here and appears to be very real. I think it will stick around for quite a while when it comes to insurance exposures. This will cause additional boost to our insured values and wages. I don't think this will [ stipple ] growth, either. I see our clients overcoming the supply chain, inventory and staffing headwinds and pushing for growth for the foreseeable future. Replacement cost inflation, combined with rising insured units, plus elevated catastrophes and perhaps, now, even historically underpriced risks, creates a strong case for continued rate increases. That said, our job is to help our clients mitigate those increases. The Gallagher team is extremely well positioned to help our clients and prospects in this environment. Remember, we compete across the spectrum of insurance from personal lines to affinity, the commercial SME space to the middle market, and all the way up to the large account risk management business. However, we skew heavily towards the middle to upper market, and most of the time, are competing with local and regional brokers. I believe we are positioned to win in these segments, and based on our niche expertise, thought leadership and data-driven insights. As we sit here today, it is looking like we might deliver fourth quarter brokerage segment organic in the 9% plus range, which would lift our 2021 full year organic in the upper 7% range. Granted, a lot happens here in the last 2 weeks of December, but looking pretty good as of today. As for 2022, given the challenging P/C pricing backdrop, robust GDP growth, inflation and the most sales and client service-centric team, I'm optimistic and think 2022 full year brokerage organic could even be better than 2021. Moving to our merger and acquisition strategy. 2021 is shaping up to be a successful year. Not only will we have completed the acquisition of a leading reinsurance franchise, we will have added numerous growing well-managed tuck-in acquisitions at fair valuations. And we do that again and again, year after year. It's part of our DNA. It's a strategy focused on combining 2 firms and making each other more successful together. Our growing global platform is a great fit for the entrepreneurial owners looking to add value to their current clients, grow their business or to help further advance their employees' careers. Gallagher can help them achieve all these objectives, and more. When I look at our M&A pipeline today, we have around 40 term sheets signed or being prepared, representing approximately $200 million of annualized revenues. While we know that not all of these will close, we believe we'll get our fair share. Our division leaders are going to provide you a lot of detail on our business, but let me give you a global perspective on 2 topics: first, the P/C market, including the rate environment and exposure unit changes. The punchline here, we aren't seeing a rate slowdown. Renewal premium changes are in line with the past 3 quarters and exposures continue to grow; and second, I'll touch on new and lost business trends, which are consistent or trending better than a year ago. Starting with the P/C market, pricing continues to increase in nearly all geographies and product lines around the globe. Capacity in certain lines and geographies remains constrained, and is perhaps even tightening some more in U.S. property CAT. There are a few pockets of the market that I would describe as hard, such as cyber and U.S. CAT exposed property, and we are also seeing firming conditions in lines like umbrella and D&O. While perhaps the rate of increase is mathematically a touch lower than last quarter, it is still a substantial year-over-year increase. There is no question that our customers are feeling the pinch of these rate increases. Overall, it's been a more orderly firming our hard market period, with double-digit increases in some lines for 3 or even 4 years, which is more palatable to the clients in increases of 50% to 100% in 1 year. We saw that type of carrier behavior in previous hard markets, but this time has been different. The longer length of this tough pricing cycle demonstrates to me that carriers are still seeing the need for continuing increases to keep up with rising loss costs. And with this more measured pricing approach, we don't foresee carriers starting a trend of rapid price declines. We also continue to see monthly positive policy endorsements trending above pre-pandemic levels, as customers are adding coverages and exposures to their existing policies. Overall, October, November renewal premium increases were around 8%, which is very similar with the first 3 quarters of 2021 of 6%, 8% and 7.9%. By line of business, professional liability is up double digits, property package and casualty are seeing increases of about 8%, and workers' compensation and commercial auto are up about 4% so far in the fourth quarter. So, the global P/C environment remains hard in a few spots and difficult in nearly all other lines. Looking into 2022, I think rate increases are likely to persist throughout the year. I have yet to see carriers revert back to offering more limits or lower attachment points. Even some of the newer entrants are reluctant to offer big lines at current pricing levels or budge on terms and conditions. Remember, we've had multiple years of higher-than-expected catastrophe losses driven by hurricanes on the East Coast and Gulf Coast, wildfires in the West Coast and rain and flooding in Europe. And last week, a devastating tornado in the mid-South, combined with social inflation, general inflation, the reopening of the courts, the potential for claim frequency to rise and persistent low investment returns, pricing is likely to remain challenging for our clients for some time. On the benefit side, the latest U.S. jobs report showed the unemployment rate dropping to 4.2%, and more workers entered the workforce. These favorable employment trends should lead to higher covered lives within our core health and welfare business. Add to these positive data points, the tight labor market continues, and thus, the war for talent is heating up. That bodes well for our consultants to provide expertise and advice on how to best to attract, retain and motivate employees. So, firm global P/C rates, growing exposure units, inflationary pressures and a challenging employment situation, demand for our expertise, product breadth, carrier relationships and creativity should increase lead times like these. Turning to new business trends and retention. Here is what we are seeing in our P/C book of business through the first 2 months of the fourth quarter. New business production remains excellent. Nicely in the double digits as a percentage of trailing revenue and a couple of points better than the same period in 2020. Client retention remains in the low to mid-90s for most of our retail P/C operations and is consistent with last year. So, in the first 2 months of fourth quarter, we're seeing excellent new business and retention, slightly more favorable net midterm policy adjustments from audits, endorsements and full policy cancellations, and a favorable rate tailwind. Early December indications are just as favorable. That said, please don't forget, December is our largest revenue month of the fourth quarter. Over my 40 years, it nearly always comes down to the last 2 weeks of the year. Roll it all up, we think fourth quarter brokerage segment organic is setting up to be 9% plus. So, let me foreshadow some punchlines you'll hear from the team today. Our U.S. retail P/C leader, Mike Pesch will tell you his business is in great shape and performing well. New business and retention are excellent. Renewal premium changes are consistent with recent quarters, mid-term policy adjustments, our small tailwind and merger and acquisition pipeline is solid. Tom Gallagher will tell you that our international P/C operations are doing extremely well. Organic is strong across all of our major geographies, the U.K., Canada, Australia and New Zealand, due to higher renewal premiums and strong new business trends. We've completed some great international mergers during 2021 and the merger and acquisition pipeline is excellent. Tom will also tell you that our new reinsurance associates all signed up to join Gallagher. The level of excitement within our combined reinsurance operations and around our global retail, especially and claims management operations, is just fantastic. Then, Joel Cavaness will tell you about the outstanding organic growth we are seeing in our domestic wholesale business, RPS. Open brokerage organic still leads the way and is above 20%, with the MGA program and binding businesses seeing organic closer to the mid-single digits. Renewal premium rate changes are high and consistent with the past few quarters, on top of fantastic new business production and retention. Bill Ziebell will then talk about our employee benefits and HR consulting business. Within our traditional medical, dental and vision benefit operations, we are seeing some favorable revenue trends related to the lower U.S. unemployment rate. Demand for our HR consulting practice and other service groups is robust, and being driven by employers pivoting away from strategies to lower cost to trying to motivate, retain and grow their workforce. Scott Hudson will tell you our third-party claims administration business, Gallagher Bassett, is having an exceptional year. Fourth quarter organic is looking like it will be in the double digits again, with margins nicely above pre-pandemic levels. Core workers' comp claims are increasing year-over-year, while COVID-related workers' comp claims are slowing down a bit from the August and September surge related to the Delta variant. Then, our CFO, Doug Howell, will tell you what we think this means financially for our fourth quarter results and will provide some initial thoughts into how we are thinking about 2022. So, from my vantage point, we're executing extremely well against our 4 key operating priorities. 2021 organic should be in the upper single digits, a nice rebound from 2020. Adjusted EBITDAC margins, which Doug will hit on, should also show some expansion, as our cost control efforts hold. We completed the Willis Re acquisition, continued our tuck-in merger strategy and our M&A pipeline is full. And most importantly, our bedrock Gallagher culture is thriving. I'll stop now and turn it over to Mike Pesch, who's going to discuss our U.S. retail P/C brokerage operations. Mike?

Thanks, Pat, and good morning, everyone. I'm Mike Pesch and I lead our U.S. retail property and casualty brokerage operations. Similar to previous investor meetings, my prepared comments today will cover 3 topics: first, I'll start by providing you an overview of the business; second, I'll discuss current U.S. retail market conditions; and third, I'll wrap up with some comments on the first 2 months of the fourth quarter. So, let me start with an overview of the U.S. retail P/C operations. In 2020, we generated around $1.7 billion of revenue, making us the third largest P/C retail broker in the country, according to Business Insurance, placed more than $10 billion of premium annually through more than 150 offices and have around 7,500 employees, including nearly 2,000 in our centers of excellence. We serve all sizes of commercial clients, small, medium and large, but weight more heavily toward the middle to upper middle market, so we are typically placing between $100,000 and $2.5 million of premium for each of our clients. That translates into roughly $10,000 to $250,000 of annual revenue per customer. Outside the middle market, we have a growing large account risk management client list and a decent small size, commercial personal lines and affinity customer base as well. We find the middle market particularly attractive because these clients typically don't have a dedicated risk management professional to evaluate risks and manage the purchase of their insurance coverages. So these businesses really need an outsourced risk manager, a trusted adviser, not just someone to place insurance coverage on their behalf. That aligns closely with our client value proposition, called CORE360. It describes the approach we take when we evaluate our clients and prospects, risk management programs, focusing on the 6 key cost drivers of a company's total cost of risk. And this holistic risk management approach makes us unique and ultimately, embeds Gallagher inside our clients' business and resonates with clients looking for holistic risk management solutions and advice. Our operations are organized around 30 niche practice groups, industry and product verticals where we have specialized insights and deep expertise. Through these industry groups, we believe we better understand unique risks, characteristics of different businesses, and tailored products and services to those industries. And our niche leaders support our producers, making sure we are addressing the distinct risks and challenges that those industries are facing. Take, for example, a higher education client. You simply can't handle an account like this if you don't know anything about the distinct needs and risks of colleges and universities. So, we think this tailored in-depth approach to risk management is a competitive advantage, benefits our retention, drives new business, and ultimately, organic growth over the long run. While we are seeing our clients face-to-face more frequently these days, our producers and niche practice leaders continue to leverage webinars, online industry discussions, and product deep dives that are generating new client leads and revenue opportunities. This year, we hosted nearly 90 webinars with nearly 4,000 attendees. Topics [ discussed ] to have ranged from 6-part series called, Navigating Now that provides clients and prospects, Gallagher's insights on critical risk management topics to insights on risk control and specific practice group areas like cyber, energy and product liability. And we are constantly adding new on-demand content, podcasts and webinars on our website, ajg.com. These include COVID-related topics, like vaccine protocols or returning to the workplace. That's in addition to deep dives into various products and niches like education, public entities and senior living facilities. And we are adding condensed 10-minute webinars we call CORE360 Flashcast on topics such as group captives, trade credit, loss portfolio transfers and business continuity planning. With all of this content available online, our clients and prospects have the ability to tap into our expertise any time, any day of the week, and producers are notified if a client or prospect engages with any of the online content. We are continuing to engage with clients and prospects in a virtual and hybrid environment, driven by client preference, this approach allows more of our industry and product specialists to get in front of our clients, as our experts are spending less time traveling and more time providing advice and solutions. And with our suite of internal tools, we have the ability to efficiently pull the right experts from anywhere around the globe. Additionally, the web-based meetings provide a natural forum for our producers to show off our data and analytics platform called Gallagher Drive, which continues to differentiate us relative to our competitors. These are powerful insights around purchasing behavior of other Gallagher clients, including what coverage types and limits are being bound. And on the topic of tools and data, we are extremely excited about the acquisition of Willis Re, including their third-party partnerships and the in-house technology they bring to Gallagher. Combination of our 2 platforms will help us better analyze and quantify our clients' total cost of risk. Moving on to M&A. We have a long, very successful track record of tuck-in M&A. And today, M&A continues to be an important part of our growth strategy. Most of our tuck-in merger partners are the result of relationships that have been built and developed at the local branch level. So, we know these entrepreneurs and how they compete and understand their culture. And you'll hear this consistently today. The most important piece is the cultural fit. So, we look carefully for the right partners, teams that share our values around ethics and client service, want to be with Gallagher for the long term, know how to grow their business and are already operating at attractive margins. Potential partners are drawn to the Gallagher platform and the tools, expertise and resources we can provide them. We typically target firms generating less than $10 million of annualized revenues. And in 2020, we completed 11 U.S. retail mergers with annualized revenues of about $100 million. Thus far in 2021, we have completed 10 mergers and our pipeline remains very strong, headed into the end of the year. Operationally, the business is in great shape. The actions we have taken over the past 10 years to increase productivity and improve quality have led to a faster and leaner organization. We moved on to a common agency management system, streamlined workflow, standardized processes and leveraged our centers of excellence. While margins have benefited from these actions, they also allow us to better and more effectively service customers. A great recent example was in the aftermath of Hurricane Ida. Following the storm, some of our offices near the Gulf Coast remain closed for a period of time. However, due to the standardization of systems and processes, teams from other Gallagher retail offices across the United States we're still able to help clients looking to file a claim, further understand their coverage or simply speak with one of our experts. And we have even heard from merger partners, the ability to service any client from any other U.S. Gallagher office is another influencing factor that particularly those in catastrophe-prone areas get excited about. Since the onset of the pandemic, the team has done a superb job growing our EBITDAC profits. While we did benefit and continue to benefit from the natural contraction of travel and entertainment expenses, our focus on operational excellence has been a significant driver of our long-term profit growth. And we will always be looking to optimize our operations and increase quality. The benefits of these operational improvements are then used to fund investments, investments in analytics tools and new production talent, all geared towards growth. Moving on to my second topic, the U.S. retail insurance market. Market continues to be very challenging for many of our customers. And frankly, there hasn't been a significant change in the market over the past few quarters. Nearly every area and line of business is seeing rate increase, and there are even a few lines that remain hard. Finding significant capacity for coverage with certain lines is still very difficult and terms and conditions remain tight. Through the first 2 months of the fourth quarter, renewal increases in U.S. retail are similar to the past 4 quarters, up around 8%. Underneath that headline, professional liability up, low teens, property and package premiums are up near 10%, casualty is up 8% and commercial auto and workers' comp are up low single digits. There is nothing in the current environment that suggests the market is poised to change dramatically. And looking forward, it feels like the U.S. market will remain challenging for some time, given carriers' concerns of increased natural catastrophe activities, social inflation, depressed investment returns and the potential for increases in claim frequency. So, clients are likely to face increased insurance costs upon renewal. But remember, this type of market environment is when our colleagues can really separate themselves from the competition. Our job, as brokers, is to help our clients find the best coverage, while mitigating price increases through shopping coverages and tailoring clients' programs by increasing deductibles or reducing limits to ensure their risk management programs fit their budgets. And I think we have the best talent in the industry. And finally, I'll conclude with some thoughts on what we're seeing so far in the fourth quarter. Recall, organic growth held up pretty well during 2020, up about 4% to 4.5% for the year, and that resilience continued into the first 3 quarters of 2021, with organic of more than 7%. Based on what we are seeing thus far, I think fourth quarter organic will be better than that, around 9% to 10%. So far during October and November, new business is up more than 1 point, while retention improved a touch relative to last year's levels. And mid-term policy adjustments, which we track daily, are nicely positive and above pre-pandemic 2019 levels. And as the business environment and economy improve, I think this favorable trend will continue, as clients reset their coverage to reflect these increased exposures. So, the business is very well positioned. Our new and lost business trends are fantastic and renewal premium increases are similar to the past few quarters. Our client value proposition, CORE360, combined with our service and data-driven insights, puts us in a position to consistently win. I am extremely bullish about our prospects. Okay. I'll stop now and turn it over to Tom Gallagher, who's going to discuss our international P/C brokerage operations. Tom?

Thanks, Mike, and good morning to all of you on the call. My name is Tom Gallagher, and I lead our global property/casualty brokerage business. Today, I'm going to cover the international portion of our P/C operations, following a similar cadence as Mike. First, I'll dimension the business. Then I'll discuss the P/C market environment outside the U.S., and I'll finish up with some comments on the first 2 months of the fourth quarter. Starting with an overview of the business. We finished 2020 with approximately $1.7 billion in international P/C revenues, and placed more than $10 billion of premium on behalf of our clients. We operate in nearly 70 countries. However, our business is predominantly in the U.K., Canada, Australia and New Zealand. We serve a wide range of commercial clients and similar to the U.S., our sweet spot is middle market retail clients. However, we also have a strong large account risk management business and that's in addition to our small business, high net worth personal lines and affinity clients. Also, outside the U.S., we have a leading London specialty broker and a reinsurance brokerage business called Gallagher Re, which as of December, includes the treaty reinsurance operations of Willis Towers Watson. Let me break down our revenues by geography. Starting with the U.K., we generate approximately $400 million of annual revenue in the U.K. and are our top 5 retail broker. We have more than 75 offices around the country, and like the U.S., we utilize a niche specialist network. We're also a top 5 broker in Australia and the largest retail broker in New Zealand. In these 2 countries combined, we have around $350 million of revenue, annually. Moving on to Canada. We have operations in 7 of the 10 provinces and generate about $200 million of annual revenue. Outside of retail, our leading London specialty and global reinsurance platforms, combined, are now more than $1.2 billion of annualized revenue. We have a consistent global approach to the business. So, our international strategy mirrors that of our U.S. business. We're driving revenue growth by utilizing our niche practice groups, leveraging data and analytics, identifying completing and integrating M&A opportunity, and using our focus on operational excellence to fund investments and growth capability. Mike talked about CORE360 in great detail, but this is not just for our U.S. go-to-market strategy, but for our global value proposition. And our teams are consistently innovating and providing new products and insights. In fact, in many instances, what our teams are doing in a particular geography can be institutionalized, applied and delivered to our retail clients around the world. For example, our successful SmartMarket platform, which was developed in the U.S., is now being offered to carriers in Canada, Australia and is really gaining traction in the U.K. And Gallagher Drive, our data and analytics platform, is being used more and more around the globe. Our cohesive global strategy allows us to further leverage data, insights and thought leadership across borders. This is a key advantage of us, with the smaller, local and regional brokers. They just cannot match our offerings, our expertise or service. Moving to mergers and acquisitions. Our reinsurance brokerage unit, Gallagher Re, has now officially joined forces with Willis Re's 3 reinsurance operations. We are very excited to welcome James Kent and team to the Gallagher family. Our new reinsurance colleagues are just simply fantastic and a great cultural fit. And there are many areas across Gallagher that will benefit from this acquisition. For example, our captive and alternative risk solutions business archive is already a leader in insurance-linked securities servicing space, adding our own broker-dealer with broad capital market capabilities and expertise in ILS and catastrophe bonds will provide Gallagher a full service offering of arranging, restructuring and selling catastrophe bonds and ILS issuances, as well as servicing, administration and management of [ bylaw ] structures and transactions. Looking forward, we see many additional opportunities to drive value for clients through the investment in talent and tools. Ultimately, the combination is about delivering the best risk management products, advice and service to our insurance carriers and insurance capital providers. Moving away from reinsurance, our story is resonating with international entrepreneurs, and we continue to see a large number of merger opportunities outside the U.S. Our culture, support tools, specialisms and access to data and analytics all make our partners' businesses better. Partnering with Gallagher can take firms to the next level, offer them great opportunities to grow their book of business and give their employees' career paths. We completed 12 international mergers so far this year, including Bollington in the U.K. majority stake -- excuse me, a minority stake in ACE, which cements our presence in the Middle East and Edelweiss in India. And that is on top of mergers in Canada, New Zealand, Australia, Norway and Turkey. So, we have really nice momentum in our M&A strategy outside the U.S. In terms of productivity and quality, EBITDAC margins have improved significantly over the past 5 years. During the pandemic, the significant improvement in margins and growth in EBITDAC has been the result of the expense savings actions we executed on, the natural contraction of travel and entertainment expenses and additional utilization of our centers of excellence. As we have talked about previously, many of our pandemic period expense saving initiatives were already on the drawing board pre-COVID, and most of these projects were accelerated in the second quarter of 2020. We think our thoughtful strategic expense actions will benefit our long-term expense structure. But more importantly, we think they will have positive implications for quality, which should ultimately benefit growth. Moving to some comments on the global P/C market. Let me walk you around the world. In U.K. retail, renewal premium change is increasing about 7.5% leading the way as professional liability in the mid-teens, followed by property and package, both in the high single digits, while commercial auto and casualty in the low single digits. Within London Specialty, rates are still going up broadly and price increases, on average, are in the mid- to high single digits for most lines of cover. Flow into London from U.S. property CAT and cyber liability remains some of the toughest classes from both capacity and rate perspective. In Australia, rate is up about 8%. Professional liability and casualty are both up low double digits, while commercial auto is up low single digits. In New Zealand, renewal premium change is low single digits with professional liability and commercial auto up mid-single digits and most other lines closer to flat. In Canada, renewal premiums are up nearly 9% overall, with property and professional liability around 10% and most of the lines in the mid-single-digit range. So, let me finish up with some observations from the first 2 months of the fourth quarter. In terms of new business, retention and mid-term policy adjustments, overall, I'm seeing new business more than 1 point better than last year, retention is a little lower, and a small favorable impact from the positive policy adjustment endorsements. In U.K. retail is posting new business nearly 3 points better than a year ago, while retention is also a bit better than last year. Within our U.K. specialty operations, new business is very strong, while retention is in line with prior period. Canada continues to perform very well on both new business and retention, but new business is just a bit off from the stellar 2020 level, due to more nonrecurring business last year. In Australia, new business is in the teens as a percentage of trailing revenue, while retention is a bit below last year's level. And finally, New Zealand. The spread between new business and lost business is very similar to last year. So, pulling it all together, I'm seeing fourth quarter organic around 9%, as favorable trends in new business, strong retentions and positive renewal premiums continue to benefit our results. Overall, our international business is performing extremely well. We are growing organically, growing to mergers and productivity continues to improve, while quality remains at very high levels. I'm extremely optimistic about the prospects of our international P/C business in the fourth quarter, next year and beyond. Okay. I'll stop now and turn it over to Joel Cavaness, who's going to discuss our domestic wholesale brokerage operations, known as Risk Placement Services. Joel?

Thanks, Tom. Good morning to everyone. I'm Joel Cavaness. I'm the President of Risk Placement Services, our U.S. property casualty wholesale intermediary. Similar to Mike and Tom, my comments today will focus on 3 topics: first, I'll provide an overview of the business; second, I'll give some comments on the current wholesale market; and third, I'll wrap up with some observations related to the first 2 months of the fourth quarter. Risk Placement Services, or RPS for short, was founded in 1997. It has grown to be the fourth largest wholesale broker in the U.S. today. We have about 2,500 colleagues, over $500 million in annual revenue, and we placed more than $4 billion of premium on behalf of our clients. As a wholesaler, our customers are independent agents and brokers that need our capabilities, products and carrier relationships. About 75% of our business comes from agents and brokers unrelated to Gallagher, with the balance coming from Gallagher retail brokers. So, let me spend a minute walking you through our 3 main divisions: open brokerage, MGA programs and standard lines aggregation. Beginning with open brokerage, here, we help retail brokers who need access to a specialty product or an insurance carrier they do not have. So, we'll go out into the insurance market to find coverage and negotiate with insurance carriers on behalf of the retailer and their client. The coverage is, we are helping retailers to be very specialized and can range from hard-to-place property lines, like earthquake or flood, to casualty lines like long-haul trucking or liquor liability. Many times, these placements are complex and the resulting insurance programs have multiple layers and carriers involved. Next is our MGA and program business. While we don't take underwriting risk, we do underwrite price, bind, collect premium, and issue policies on behalf of insurance carriers. We have around 40 unique programs that range from commercial coverages for country clubs, food delivery and amateur sports organizations. Our personal lines programs include lines like nonstandard auto, manufactured homes and other low-value dwellings. And our third key business is standard lines aggregation. Here, we provide our retail agent, client, access to admitted products from a particular carrier. For example, a local agency and a small talent might not have a direct appointment with a large insurance carry. However, the agency can still access the large carriers products to us. In essence, it gives that agency more insurance options for its customers. We compete with many different wholesalers, both big and small, and we aim to be the recognized leader in the intermediary market, by providing a wide range of products and services across a very large distribution platform. Clients choose RPS because of our rapid turnaround times, the ease of doing business, product breadth, and the strength of our carrier relationships. Mike told you that the U.S. retail property/casualty rates continue to increase in nearly every line. Capacity remains constrained in certain lines and terms and conditions are tight. So, the insurance market backdrop continues to favor RPS, since retailers increasingly need our help to place coverage. And we have had excellent new business wins, resulting from a higher level of submissions, which is expected to continue well into next year. The increased submission activity can also be seen on our e-commerce platform. Policy counts bound on the platform were up more than 30% during 2020, and that momentum is carried over into 2021, with double-digit growth through the end of November. Today, we offer thousands of retail agents more than 30 distinct specialty products on our platform, including coverage for home-based businesses, cyber, health care, lawyers, E&O, and we're adding to our suite of products which will make us even more attractive partner for retailers. We also offer our SmartMarket platform to a growing number of E&S surplus lines carriers. We currently have 4 insurers using the platform, and we think that, that number can grow significantly next year. We also began rolling out unique tailored coverages with our key trading partners called edge products. These are similar to the advantage product that have been so successful on the retail side. We currently have 2 edge offerings, umbrella and mechanical breakdown, which will provide enhanced coverage to clients. We're working on a management liability edge covered that we hope to launch in early 2022. While on the topics of new products and technologies, I'd also like to quickly touch on our use of robotics within our transportation units. With the use of bots, we can take a single account submission from a retail broker and generate quotes from multiple leading transportation insurance markets. This technology, which we plan on extending into other areas of the business, has positive implications for both efficiency and quote turnaround times. So, many exciting initiatives in RPS. And I also have to mention that we, too, at RPS are very excited about the acquisition of Gallagher Willis Re. We think there are a lot of interesting data sets, tools and market relationships that can be leveraged between the 2 organizations. We, too, are a seasoned acquirer. RPS has completed more than 50 acquisitions since 2000, including 3 in 2020 and 2 so far in 2021. M&A partners are drawn to RPS because they realize that we can make investments in people and data and open doors to thousands of retailers. We look for partners that fit culturally and provide us with expertise or new products. We tend to be more interested in the MGA and program space, versus the open brokerage wholesale opportunities, which could be more easily replicated with seasoned producer hires. And given Gallagher's dual presence in retail and wholesale markets, we tend to be very successful on mergers that have both retail and wholesale pieces. Our M&A pipeline is very strong. We have seen more opportunities in the program space recently, but we're passing on most of them, given their limited operating history and expensive valuations. We strongly prefer mature programs that have a decade or more experience with an established risk-taking partner. So, moving on to the market environment. Last month, we attended WSIA conference, and it was great to see many of our long-standing carrier partners, but also spend time face-to-face with some of our newer partners. On an executive level, we met with 36 different E&S specialty insurance carriers over the course of 4 days, and there seem to be 2 consistent themes: one, a general lack of capacity in property catastrophe; number two, a true shortage of E&S underwriting talent, reducing underwriting appetite and slowing down hold times. The latter is a trend that we've been talking about within the industry, including the wholesale market for some time, that is being exasperated by the pandemic. With that said, our broad and deep carrier relationships position us well to support our retail clients, relative to smaller competitors. On the wholesale market pricing front, we're seeing about 1.5 points more renewal change than what Mike has seen on the retail side. And that's not surprising. Wholesalers generally see sharper premium changes than retailers. Our data is showing open brokerage renewal changes of about 13% in October, November, similar to the increases experienced over the past year. This includes double-digit increases in cyber, casualty, commercial auto, professional liability and property. Our binding operations are seeing single-digit renewal changes so far in the fourth quarter, which is similar to last quarter, but up from low single digits in the first half of the year. Professional liability and package are seeing the largest increases [indiscernible] commercial auto increases are in the low single-digit range. Umbrella and professional liability capacity remains tight, even despite some of the new carrier entrants into the market, trying to capitalize on rate increases that have been compounded over the last 3 years. With that said, we're still finding complex insurance towers extremely difficult to place and many carriers are still not offering large limits. And while losses stemming from 2021 hurricane season, we're manageable for the industry, the frequency of unmodeled CAT events seem to be on the rise. And don't forget it, it's always earthquake season. So, the market remains difficult overall, hard in certain pockets and likely to remain that way for some time. So, let me give you a sense of what we're seeing so far through the first 2 months of the fourth quarter. First, we're having an excellent new business quarter so far. Both brokerage and binding new business production are trending much higher than 2020, and a similar story regarding retention. Binding and open brokerage retention levels are very good, with binding seen improvement over October and November of 2020. Midterm policy adjustments, including positive policy endorsements are trending better than even pre-COVID 2019 levels. Encouragingly, we haven't been seeing any noticeable impact related to COVID, including any of the new variants within our binding authority or program space. So, really, to bring it all together, as we sit here today, it feels like fourth quarter organic will be nicely in the mid-teens. That comes from 25% plus growth in our brokerage and mid- to high single-digit growth in our binding and program business. It's just been fantastic. So, 2021 is well on track to being a great year for RPS. And with the U.S. economy growing, exposures are increasing. Combined with the P/C market environment that remains broadly challenging, we believe we'll see very attractive levels of new business opportunities in 2022. Long term, I believe we're extremely well positioned and remain extremely excited about our future. Okay. I'm going to stop now, and I'm going to turn it over to Bill Ziebell, who is going to discuss our employee benefits consulting operations. Bill?

Thanks, Joel. Good morning, everyone. I am Bill Ziebell, and I lead Gallagher Benefit Services, our employee benefits and HR consulting business. Our prepared remarks this morning will cover 3 topics: first, I'll provide an overview of GBS; second, I'll give you an update on how we are executing; and third, I'll walk you through some takeaways from the first 2 months of the fourth quarter. Starting with an overview of Gallagher Benefit Services or GBS for short. The business began in the mid-'70s and generated around $1.3 billion of revenue during 2020. Today, GBS is the fourth largest benefits broker and HR consultant in the world, with more than 4,600 employees. We operate across 100 different locations within the U.S., the U.K., Canada and Australia. However, about 90% of our annual revenues are domestic, 10% being international. Our producers sell traditional insurance products like medical, disability, dental, vision and voluntary insurance products that employers offer to their employees. We also advise on employer benefit plan design, financial projections of these plans and potential funding alternatives. All of these products and services represent 3/4 of our revenue. The other 25% comes from HR and compensation plan consulting, pharmacy benefit management consulting, retirement plans, executive benefits, individual products and other services that help employers address their human capital needs and organizational well-being. Similar to our retail P&C counterparts, most of the time, we are competing against smaller local or regional benefit firms and our typical client or middle market businesses that have somewhere between 100 and 5,000 employees. However, we also have many larger corporate clients, offering them a fresh alternative to some of our bigger competitors, as well as a formidable small group benefits business. Within GBS, our client value proposition is called Gallagher Better Works. Our approach examines the most important lever that an employer has to attract, engage and retaining talent. Our professionals explore the entire spectrum of employee benefits and rewards, from financial well-being to maximizing the workforce by investing in physical and emotional health, to how employers can offer motivating and competitive compensation plan. And the solutions we offer are tailored to align with our clients' specific needs regarding their people on benefits, compensation, communications and so forth. Clients typically recommend us for our outstanding service and partnership approach, but also for our tools and resources thought leadership and strategic thinking. Pre-pandemic, attracting and retaining talent was the top priority for most employers, while controlling and lowering costs was secondary according to our national benchmarking survey. That shifted during the pandemic, with most employers focusing on business continuity and cost control as the top concern. Today, the war for talent is front and center again with our recent benchmarking survey showing attracting and retaining talent, again, as the top priority. And our approach to Gallagher Better Works positions us to help our clients attract new talent and drive costs out of the benefit plans. Moving to M&A. Some of the P&C brokerage side, GBS is also a seasoned acquirer and is actively engaged in finding, recording and completing mergers. Since 2010, we have completed more than 170 mergers, including 8 during 2020, and 6, so far, this year. Merger partners are drawn to GBS due to our specialized practice groups, niche experts, marketing initiatives, thought leadership, technology and our culture. They want these resources and tools, and frankly, they need them to be successful. Our pipeline of opportunities around the globe is robust and is particularly strong in the U.S. due to improved financial results. So, we think 2022 will be an active and successful year for our merger strategy. Let me make some quick comments regarding our sales process. Over the past quarter, our professionals have been engaging and interacting with clients and prospects more and more on a face-to-face basis. With that said, we continue to have good success selling in a hybrid environment, where in-person meetings are supplemented with experts brought in via video conference, and it's really because we are able to more consistently deliver expertise to our clients and prospects at the point of sale. So, we think, remote and hybrid client engagements, in some form, is likely to here to stay. Ultimately, we will follow our clients lead as how they would like to interact with our professionals. We also engaged with our clients and prospects through our webinar and insightful thought leadership. For example, earlier this year, we released our 2021 state of the sector survey, which summarized responses from nearly 800 organizations in 45 different countries. The survey provided insight into best practices for engaging, motivating and retaining talent. These are especially important topics in the current tight labor market. Over the summer and into the fall, we published a series of reports on workforce trends, touching on topics identified in our benchmarking survey. Topics range from employee engagement related to physical and emotional well-being, compensation strategies and HR technology and communication. We are seeing many new leads following nearly 15,000 downloads, and our team continues to host monthly town hall discussions and webinars, bringing our thought leadership to a wide group of clients and prospects. We've hosted more than 75 webinars this year across a variety of topics such as vaccination policies, health care utilization, mental health and preparation for this year's annual enrollment season. And these sessions have drawn tremendous client and prospect interest. So, whether through engagement of our niche experts, leveraging our thought leadership or hosting in-depth industry discussions, our efforts continue to separate Gallagher from the brokers and consultants we are competing with on a regular basis. And that's showing up in our recent Net Promoter Score. Among other things, our survey question, how likely clients would recommend Gallagher to a friend or colleague, as well as how likely clients would use Gallagher for the same service in the future. Under both categories, our scores were in the excellent range and far above the norm for the industry. Let me finish up with some thoughts on October and November. Starting with the U.S., which again represents 90% of our annual revenues, business continues to trend favorably. About 80% of our domestic revenues relate to typical coverages you get via your paycheck from your employers, medical disability, dental, vision, and voluntary insurance products. In terms of new business and retention, we are seeing trends broadly similar to fourth quarter of 2020 and with U.S. unemployment rate dropping below 5%, our U.S. Health and Welfare business is seeing covered lives increase across many of our clients, providing a small tailwind to revenue. A few more early fourth quarter industry observations. We are seeing year-over-year increases in medical plan utilization and a large part of that is preventative services. Health medicine continues to drive a lot of the increases in utilization. We are starting to see more emotional well-being including, mental health services being accessed via telemedicine. While the volume of elective procedures are mixed around the country, our carrier partners are reporting that they are seeing an increase in pre-authorization for services and testing. This is an early sign for the return of elective procedures and catch up for delayed care. It's still not clear whether delayed care or deferred procedures will have a significant impact on future costs. We were continuing to look at claims data as it emerges. One last point related to the war for talent. We have seen some employers enhance their voluntary benefit offerings and in certain cases, are reducing employee contribution toward their benefits as part of an overall employee retention strategy. It really highlights the competitiveness of the labor market. Moving to the remaining 20% of our U.S. revenues. This includes our future service, individual products and retirement consulting businesses. Most of our practices are seeing higher level of engagement relative to October and November of last year. For example, revenue within our HR and compensation consulting practice was up double digits again in October and November, and is up about 13% year-to-date, a very encouraging sign. And I continue to hear our strong pipeline of opportunities and new engagement we have in the works for 2022. Importantly, the size of our engagements are moving closer to 2019 levels, rebounding nicely from the projects that were downsized by many clients during 2020. This should also bode well for future revenue growth. And this is the most complex labor market we have ever seen. Many clients are looking for updates to their compensation and human resource programs to better address today's hybrid work environment. It's driving employers to prioritize strategies to attract, retain and motivate their workforce, which is right in our wheelhouse and should lead to more traditional insurance, product revenues and consulting work, too. Shifting gears to outside the U.S., which, is again, about 10% of our total revenues. Overall, revenue was up low single digits in the first 2 months of the fourth quarter, with the U.K. and Australia showing better results than Canada. So when I combine domestic and international, fourth quarter organic feels like it should be similar to third quarter organic of 5%. So, we are seeing nice improvement relative to first half 2021 and full year 2020. So to wrap up, the business is performing very well. Fourth quarter organic is expected to be better than first half 2021 and full year 2020. We have the tools, products and expertise to help our clients navigate one of the most complex labor markets ever. I like our competitive position and combined with an improving economy and labor market, I'm excited about our future. Okay. I'll start now and turn it over to Scott Hudson, who's going to discuss our Risk Management segment, or Gallagher Bassett. Scott?

Thanks, Bill, and good morning, everyone. My name is Scott Hudson, and I lead Gallagher Bassett, our third-party claims administration business. Within our financial reporting segments, Gallagher Bassett is synonymous with our Risk Management segment. I have 3 topics to cover this morning. I'll start by providing an overview of Gallagher Bassett's business. Then I'll give some insight into what we're seeing in the fourth quarter of 2021, and I'll finish with some thoughts on our longer-term positioning. Gallagher Bassett, or GB for short, was founded in 1962 by the Gallagher Brothers and Sterling Bassett. GB generated over $800 million of revenue during 2020 and is one of the world's largest P&C third-party claims administrators. A little less than 85% of our revenue is U.S. based and the remaining spread across Australia, and to a lesser extent, New Zealand, the U.K. and Canada. We have over 6,300 employees, most of which work from home. We do not take underwriting risk, but rather, adjust claims for our clients. In 2020, we closed approximately 900,000 claims and paid out nearly $10 billion on behalf of our clients. That level of annualized claims paid would make us the eighth largest P&C insurance company in the U.S. Nearly 2/3 of our revenue is from workers' compensation claims, another 30% or so is liability and less than 10% relates to property claims. We also have specialty offerings in the property casualty lines like medical malpractice, products liability, environmental, professional liability and cyber. So, a well-rounded set of products that addresses a large portion of our clients' exposures. We segment our business into 4 different client types. First, we serve large Fortune 500 businesses. Those are commercial clients who self-insure or have large deductible programs and then outsource the claims resolution process to Gallagher Bassett. This is our largest client segment. Second, we have public sector clients, which include school districts, municipalities, state entities and federal governments. Third, there are alternative market or group captive clients. These entities utilize our services for claims handling and their overall claims infrastructure. And fourth and last -- our last client segment is insurance carriers, which includes carriers of all sizes outsourcing a portion of their claims handling to us. We believe we deliver clients the very best claims outcomes through our expertise and superior execution. In certain cases, the best outcomes can mean the avoidance of loss, as well as the mitigation of a loss. We're able to customize our services to align with our clients' expectations of best outcome, provided brand protection and customer loyalty or back to work sooner. So, we tailor our offerings to provide value and the best outcomes for clients. Then we have numerous recognitions highlighting our ability to provide superior claims outcomes. For example, just last month, our GB transportation team was awarded TPA Team of the Year by Business Insurance. This recognition was triggered due to the team's identification, triaging and ultimate closing of some of our clients' most challenging and complex transportation claims, and of course, at a cost well below of what was estimated in reserved for. The team of 100 professionals, including expert pulled from IT, legal and our claims resolution managers, highlights our ability to manage highly specialized complex claims. That level of specialization and expertise helps us retain clients and the business is highly recurring. In fact, our annual revenue retention runs in the mid- to upper 90s, which is even better than our brokerage operations. New business production tends to be lumpier than the brokerage business and varies from quarter-to-quarter, because many of our prospects have very large claim volumes. So our quarterly organic typically bounces between low single digits to low double digits. But annually, in the 3 years prior to the pandemic, we ended up running around 5% each year. Moving to mergers and acquisitions. GB is also acquisitive, but not to the same extent as the brokerage businesses. Our industry is already highly consolidated and few larger customers are using small or local TPAs. Our M&A strategy is to look for companies that will help us deliver better claim results for our clients. That could be through a new product offering, a new capability, or providing deeper expertise. Ultimately, we're looking for highly specialized and complementary claims adjusting and risk consulting entities. During 2021, we've acquired 2 such entities: Carrier Claims Service and Total Safety. Carrier Claims Services brings enhanced claims investigation and property adjusting services, while Total Safety provides a full range of construction safety services. These 2 firms are both excellent examples of how we're expanding our client risk and loss mitigation capabilities. Moving to productivity and quality. We believe we have industry-leading margins. Pre-pandemic adjusted EBITDAC margins were in the 17% to 17.5% range, an increase to more than 18% in 2020. Even with the negative organic, as we executed on specific targeted expense actions, combined with the natural contraction in travel and entertainment. Over the last year, adjusted margins have improved further with expense discipline and improvement in organic growth. On a trailing 12-month basis, our adjusted margins have benefited from lower levels of travel, reduced real estate and other building occupancy costs. We expect some of the expense learnings from the past year to stick with us. For example, while a large portion of our colleagues work from home prior to COVID, we believe that number could be significantly higher, going forward, perhaps as much as 70%. That has favorable implications on our future real estate and other building occupancy costs. Second, we think there could be some permanent savings from lower travel as well. Frankly, this pandemic period has proven we can provide clients with a similar level of service and, in many cases, a higher level of service and engagement in a virtual environment. So, we could see some future benefit to our cost structure from this dynamic as well. But let's not forget that these type of savings allow us to invest further and make enhancements to our products and services. For example, within our managed care operations, we have developed and successfully piloted lower-cost early intervention approach through GB Care that leverages nurses, automation and state-of-the-art case management software. We're also continuing to refine decision support tools to identify the highest performing treating providers through our evidence-based medicine tests. And on top of that, we nearly doubled the number of nurses on staff during calendar year 2021. We've also made enhancements to our RMIS platform, LUMINOS, including adding industry-leading insights on medical utilization, prescription drug usage and spend. We've added tools that help insurance carriers and clients -- our insurance carrier clients manage the health of their books of business, assess renewals and make better underwriting decisions. We've had litigation data and GB's proprietary legal scores, which provide deep insights into the performance of litigated claims and another -- a number of other support tools to foster the timely return to work for injured workers. And these are on top of updates to our mobile application, GBGO, an advancement of our decision support tools built using state-of-the-art data analytics, artificial intelligence and machine learning tools. Needless to say, a lot of exciting things going on around the organization. Looking forward, as we -- even as we continue to make substantial investments to improve our products, platform and service levels, we are expecting full year 2021 margins to be above 19%. It's an excellent productivity and quality store. Let me shift gears now and walk you through what we are seeing in October and November. First, client retention remains very strong in the high 90s and hasn't changed in the recent periods. Second, we've had another excellent new business year, and we have had a couple of really nice new business wins recently, including a new insurance carrier client. Challenging P&C insurance market conditions continue to present GB with new opportunities and our new business pipeline is extremely healthy. Third, new COVID claims arising. Following the August and September spike driven by the Delta variant surge, COVID-related work comp claims are trending lower. Despite the recent slowdown in new claims arising, our specialized COVID claims team is standing ready and is well prepared to tackle any change in trajectory. And fourth, specific to just overall new core claims arising. Through the first 2 months of the fourth quarter, we continue to see year-over-year improvement in new claims arising. Core new claims arisings are up more than 10% year-over-year, but still have room to grow, since both workers' compensation and liability claims are not back to pre-pandemic levels. While not directly tied to revenue in many cases, these claims trends are encouraging for our business going forward. Overall, our outlook for organic hasn't changed from what we provided on our third quarter earnings call 1.5 months ago. We continue to expect fourth quarter organic to be above 10% and think margins will be in the 19% range. This would result in full year organic in the double digits and margins in excess of 19%, both much better than pre-COVID levels. Longer term, GB is extremely well positioned. Client satisfaction and revenue retention remain at very high levels. At the same time, we continue to make investments to enhance our current products and services. We're expanding our claims handling expertise in numerous specialty lines of business, and with our enhanced and broader offerings, our products and services are resonating with more and more new customers. So, the team is executing our strategy extremely well, and I'm excited about our near-term and long-term prospects. Okay. I'll stop now and turn it over to our CFO, Doug Howell. Doug?

Thanks, Scott. Happy holidays to everyone, and thanks for joining the call. Today, I'll cover 3 topics in my prepared comments: first, I'll provide a quick recap of what you heard from our business leaders; next, I'll speak to our fourth quarter '21 adjusted margin expectations and provide our initial thoughts on full year '22 margins; then I'll provide some sound bites from our updated CFO commentary document that we posted on our website, which we'll include an update on expected cash flows from our clean energy investments, and also a first look at early estimates for that 2022 corporate segment. Okay, to recap. Mike and Tom had very positive commentary on our global retail specialty and reinsurance brokerage operations. New business production and retentions are excellent. Positive policy endorsements are trending and slightly more favorable, and renewal premium changes are consistent with the previous 3 quarters. So, it feels like our global P&C fourth quarter organic will come in somewhere around 9% to 10%. You also heard from Tom, the terrific news about signing up all of our new reinsurance colleagues, the combined Gallagher Re team is energized and excited. Joel provided an update on our domestic wholesale brokerage business, RPS. He's expecting another quarter of fantastic organic result. Open Brokerage wholesale operations running in the mid-20% range, and binding and program business in the mid-single-digit range. Taken together, organic within our wholesale units should be in the mid-teens for the fourth quarter. Then, Bill walked you through our employee benefits and HR consulting business. Our traditional health and welfare brokerage is improving, as unemployment declines and people enter the workforce. Employees are looking for solutions and advice and retaining, motivating and growing their employee base, which is beginning to provide a tailwind to many of our practice areas. Right now, it's looking like our benefits division will post fourth quarter organic growth somewhere around 5%, driven by good growth in some of our larger practice groups, such as HR consulting. So when I put it all together, it feels like our total brokerage segment, fourth quarter organic, should be in the 9%-plus range. That would lead to full year organic in the upper 7% range. That's outstanding work by the team. And then, you just heard Scott say -- regarding our Risk Management segment, that fourth quarter organic is shaping up to be in low double digits. New business and retention remain excellent. Encouragingly, we're seeing core workers' compensation new arising claim volumes increased over last year, with room to further grow as we are not yet back to pre-pandemic levels. So, let me now shift back and talk about our fourth quarter '21 margins. Recall during our October earnings call, we thought that fourth quarter organic was say, 9%, we could show about 90 to 100 basis points of adjusted margin expansion. Those estimates were given, excluding any impact of closing Willis Re before December 31. So, as I sit here today, it's looking like that statement still holds true, again, before the impact of Willis Re. That would mean, full year, [indiscernible] rate would show over 140 basis points of adjusted margin expansion. That's a terrific year, given last year, we expanded over 400 basis points. Now, because we closed Willis Re on December 1, you will need to layer that into the impact into your models. That business has significant seasonality. Most of the revenue and profit comes in the first quarter and fourth quarter typically generates a small EBITDAC loss. Accordingly, for the month of December, we are estimating that we will see about $20 million of revenue and post negative EBITDAC of about $5 million, before integration costs that we will treat as a non-GAAP adjustment. So, adding in those seasonal results, means all-in fourth quarter brokerage segment adjusted margins would expand about 10 basis points and full year brokerage segment adjusted margin would expand around 120 basis points. As for the Risk Management segment, fourth quarter adjusted margins, those should be around 19% and finish the year at a similar level. That's a really nice step up from the 17% to 17.5% margins we are reporting pre-pandemic. So, now, let's shift to what we're starting to see for 2022. While we are still in the midst of our budget process, I can offer you some early thinking. Again, all of this is without the impact of Willis Re or any future acquisitions. Also recall, pre-pandemic, we said we would be able to hold margins if organic was in that 3% to 4% range. Today, given that we have already stepped up full year margins over 530 basis points in 2019, and given we are still seeing some cost return as we come out of the pandemic, such as travel, entertainment, employee benefit costs, advertising, et cetera. If in 2022, we hit 8%, organic that will give us enough to execute on our investment and hiring initiatives and still show some margin expansion. If we're in the 6% to 7% range, I see margins more flattish. Again, assuming we continue to make the same level of investments in hires that we're currently planning. And it's important to note, those are the comments for 2022. By '23, the level of organic necessary for margin expansion should revert back closer to that 4% range that we talked about pre-pandemic. For the Risk Management segment, a pretty similar story. You heard Scott talk about the enhancements he is making to his operations, technology and tools. But even with those, holding close to that 19% is achievable for full year '22. So, let's now move to the CFO commentary document to Page 3. As always, a few minor updates on this page related to FX, but most importantly, we're now providing fourth quarter estimates for brokerage segment amortization, depreciation and earn-out payable, including the December impact of Willis Re. When you turn to Page 4 of the CFO commentary, the fourth quarter '21 corporate segment outlook in the red-ish column, take a look at that. Interest and banking costs reflect our November debt offering. Demand for our paper was very strong. Our $400 million at 10 years at 2.4% and the $350 million, 30 years, that tick over 3%. It was a good offering. Moving down a couple of lines to M&A, reported numbers now include an estimate for legal, due diligence and other costs related to Willis Re closing. And also, as mentioned during October earnings call, these incremental nonrecurring costs will be treated as non-GAAP adjustments. We think those costs will be in that $10 million to $14 million range after tax. Clean energy. We have an excellent in October and November. So, we're increasing the midpoint of our fourth quarter estimate by $3.5 million. Recall that 2011 era clean energy plants are all scheduled to sunset before year-end. There's always chatter in D.C. about an extension. But right now, it's looking like we won't really know until January or February at this point. I've also added our initial view of the 2022 corporate segment. You'll see that in the peach colored column. That's our initial look as of today, but as we finish our budgets, we'll update that on our January earnings call. So, turning to Page 5. There's a lot of repeat historical information on this page around our clean energy investments that are sunsetting, but the punchline remains the same. You'll see that in '21, is the -- '21 is the last year of GAAP earnings in our P&L. But beginning in '22, we will start showing substantial cash flows, as we start using perhaps $125 million to $175 million of tax credits a year until we exhaust our $1 billion plus tax credit balance that we have in our balance sheet, calling it spread over 6 to 7 years. So, the story is still the same. A really nice cash flow sweetener, not GAAP earnings, but will come through in our cash flow statement. Now, let's flip to Page 6 in the rollover revenue table. With only 2 weeks left in the quarter, our fourth quarter '21 rollover expectation, in the red column, shouldn't change much from here. So please, take a look at your rollover assumptions as you fine-tune your estimates. You'll also see that we added a rogue beneath the fourth quarter for Willis Re, which represents our December expectation and full year -- we've used full year pro forma 2020 estimates there. With less than 2 weeks has passed since the transaction closed, we're in the midst of the budget and planning process. We should have a better estimate of Willis Re '22 revenues during our January earnings call. So, those are my prepared comments. It's looking like another fantastic year, high single-digit brokerage segment organic, double-digit risk management organic. $250 million of roll-in revenues from tuck-in M&A, closing the Willis Re transaction, and we're maintaining a good portion of our pandemic period expense savings, thus again, showing full year '21 margin expansion in both segments. That would be an awesome year, and it sets us up with some really nice momentum as we head back to '22. Back to you, Pat.

Thanks, Doug. Let's go ahead and go to questions and answers.

[Operator Instructions] Our first question comes from the line of Elyse Greenspan with Wells Fargo.

My first question, if I'm looking at your organic growth outlook for this year, you're talking about upper 7s, I think. And your last quarter's call, you said approaching 8%. That kind of feels like the same. I just want to verify if that's correct. And is anything, with your outlook today, for the fourth quarter changed from what you would have expected around the time of your third quarter earnings call?

No, Elyse, you got it right.

Okay. And then, my second question is on Willis Re. And Doug, I think you might have partially answered it in your concluding comments. So, on that CFO commentary sheet, it ties if we add this Q4 plus the 4 quarters of next year to that $745 million of revenue that you guys announced when you announced the transaction that was for 2020. So, has that business grown in 2021? And is it just that, normally, that M&A just does not assume any growth? And I would assume that you expect that Willis Re would show some level of growth next year?

Yes. I think off of the baseline, I think we'd expect it to grow. I think that with 2 weeks behind us, we're still trying to assess what the breakage might have been that would happen before the closing. So, we're looking at that. But I still believe that we're on target to be in that $265 million of EBITDAC range, also. So, revenues, there might be some more breakage that we're unaware of at this point. Renewals are happening here on 1/1. We'll give you a good update on that in January.

And then just keeping with that for a second. I think, Pat, you and some of the executives at Willis Re had given some interviews following that deal closing. And I think you guys are pointing to getting to around $1 billion of revenue in 2024. Is that how we should think about the growth trajectory, I guess, assuming, maybe there was some breakage that took place in 2021?

Yes, that's what you should be taking, Elyse. I mean, there's some breakage. We're getting our hands around that, as Doug said, in the process. Not very substantial, as we see kind of an early returns and looking at annualized, but a team here, a team there. But I think we've got some energy. There should be some acquisition opportunities and the aspirational goal of $1 billion is right around the corner.

Yes. I mean, I think, the early indicators, we've signed up the -- I think, everybody that have the...

Literally everybody.

So we've signed up everybody. So if we sign up and take care of the professionals that are coming over with us, and they can take care of their client, I think we've got a great outlook for next year.

And then one last one. Doug, when we spoke last quarter, you said that you would have some kind of update for us on potentially shifting to a new earnings metric kind of ex intangibles next year that you would provide that at this meeting. Is there any kind of update on the thought process there?

Yes, good memory. We're still working through it and I think we should be well positioned to educate where we're going in March. I think when we do that at our IR Day in March, we'll give you -- well, we'll foreshadow it in January, and I think we'll have a -- maybe devote a significant portion of that day to toggling to that. But your nose is in the right spot on that.

Our next questions come from the line of Mike Zaremski with Wolfe Research.

Maybe just a quick follow-up to Elyse's question, because I wasn't sure, if I'm understanding the answer correctly. So, the -- for [ Asia ] Gallagher Re, you're using that 2020 revenue numbers for Willis Re and you're using kind of the 2020 instead of '21 because of -- there was -- like, do you think that 2020's are similar to '21's because there was breakage? Or should we be thinking, when we -- as we model out to '22 and '23, that '21 had some natural growth in it?

I think, the natural growth probably offset the breakage on it. I think our -- the numbers that we have best right now are the 2020 numbers. We're still waiting for 2022 to be wrapped up. As you know, it's complex. I'm scrambling the egg, but I think right now, we still believe that we're on track to show what we bought in the pro forma. And I think that we should be able to deliver that next year. That's our best estimate at this point.

Okay. That's clear. Okay. Got it. And on the transaction, too, I believe there's like some type of expense sharing agreement with Willis. Any additional color, now that the transaction is closed, you can shed on that? And is it -- How do we think about that? Is it Gallagher providing some revenues to cover legacy costs that will eventually fade? Any color would be great.

Yes. I think it's basically a cost reimbursement agreement. So, to the extent that it costs Willis to do something for us over this 3-year period, we'll pay them for that. And then -- but over that period, but obviously, there's incentives for us to move as fast as we possibly can to have it be our own cost structure. And I think we've got great opportunities with synergies, with our existing reinsurance platform. I think that using our centralized sourcing, centralized real estate, centralized human resources, we have a lot of centralized function and putting another $740 million of revenues over that chassis. I think we've got opportunities there, going forward. Now there are some investments that we need to make, too. That -- we want to invest in analytics. We want to invest in hires. We want to invest in recognizing our new associates for the contribution they gave. So, I think the savings that we get that from our centralization will be reinvested into that business. This isn't a synergistic acquisition, it's a strategic acquisition. We think the revenue synergies is where the excitement is. I was in London for a couple of weeks in November. It's an exciting time to be with these guys.

Okay. Great. And definitely, we read the articles, too. So, I think we can tell you guys are pumped about the transaction and the growth into '22. I guess my last question...

It never bears not repeating, right?

Great. I guess, Pat, my last question. You talked about, kind of, an expectation for at least in the near term for pricing to kind of remain likely at current levels. You mentioned the term social inflation, reopening of the courts, potentials for frequencies to rise. Maybe kind of thinking about those comments along with kind of Scott's comments on the claims operations, are you seeing kind of claims levels spike in either comp or general liability, as the economy reopens? Will the courts, reopen?

I'll let Scott talk about the day in day out amounts of claims that are flowing into the system. But I would tell you that social inflation is going to really be something that impacts the industry. You probably saw some of the settlements today around some of the misconduct claims that have been rolling around out there. I mean, it's huge. And the courts, let's remember the courts have not been open for 2 years. And so, some of these settlements, to be perfectly blunt, in my crew, they're kind of shocking. The first round of anticipated demand out of the Houston concert, it's over $1 billion. Now, that may or may not happen, but you had 10 people, killed. Now, I'm not trying to put a value on human life, but the fact, is those kind of expectations are immense. So, I do think you add to that inflation on a whole host of reserves that, are on your books, 10 years old, that have been probably reserved and actuarially properly sold 1% to 2% inflation. And you've got a conundrum. Scott, why don't you comment on what you're seeing in terms of claim [ counts ]?

So the accounts are -- I think they're growing. What I mentioned is, we're still not back, kind of, for the clients that would have been with us pre-pandemic. For a number of them, we're still not quite back to that level. I made a comment that I think that's one reason why we still see some strong growth potential in the future. But different than 9 months ago, there is growth. I wouldn't -- you mentioned a spike. I don't think there's necessarily a spike that's happened in any way recently. And then the other thing I would just comment on is, our specialty liability operation, what Pat's referring to, in terms of in the liability space and social inflation and so forth. That's exactly what we're targeting with those particular groups, is the specialized expertise to be able to address those sort of exposures that a lot of our clients have.

Our next questions come from the line of Greg Peters with Raymond James.

I'd like to start just from a big picture perspective, and in talking about pricing and some of the really strong increases that you're seeing in some lines. Pat, I know in the past, you've commented on the fact that your customers have raised deductibles and changed policy terms. So, the actual -- their actual cash outflow isn't as pronounced as the rate increase might suggest. So, wondering if you could give us an updated perspective on how that -- the give and take of those change in deductibles might have on price increases?

Well, first of all, Greg, I think that you, probably, over the last 2 years, seen about as much appetite there as you're going to see. In other words, when these price increases hit, our people were out talking about the risk management approach of mitigating that by either moving to some deeper form of self-insurance, forming a captive, being part of the group captive, those types of things. But that continues to be major discussion, in particular, in the commercial middle market. I can't sit here today and give you a percentage of what that means. So, if we're seeing x percent in excess liability as an increase, are we seeing a mitigation of 2.5%. But I'll turn it over to Mike Pesch to give you more of a street view of what he's seeing with the actual clients.

Yes. Greg, it's interesting by line of coverage. So, I mean, when you take certain lines of coverage, so take cyber, for example, you can't assume enough risk to offset some of the rates. So, in those lines of coverage, we are seeing the pass-through of rate in terms of premium growth and things of that nature.

Or people going there.

Or people going there, it's a good point. But other lines, take primary casualty, where clients will assume a lot more risk and, therefore, mitigate the increase in premium. So, it's very different from one line to the next, depending upon the client and the industry. And then excess liability, right? It's sitting over the top of the primary casualty, very difficult to assume risk in those layers. So, the natural reaction then would be to potentially purchase less coverage. But again, we use our platform Gallagher Drive to coach those clients so that they don't take their limit down by too much, by comparison to their peer group. So, it's really -- like Pat said, it's a coaching, getting out ahead of it early, weigh in advance of the renewal, understanding the industry and then guiding them through that process and what's realistic and what's unrealistic.

I'll tell you what's interesting about this is, you there, you can't throw a net over this in terms of what's right by client. You can have 2 risks that are virtually the same across the street from each other. And those middle market owners will have a different appetite for risk. Some will be very interested in taking much higher retentions. Others will be more conservative, and will pay the rate. And so, knowing those accounts, risk by risk is really important.

Yes, you're talking about the opt-out portion of organic. We do track our renewals. We know exactly what the premium increase was and then we know what our commission or fee increase has been. If you take out the fee-related clients, I'm just making -- going from memory, I don't have the report right here in front of me, but if rates are going up 10%, which would -- rate and exposure is up 10%, we'll typically capture 80% of that.

I guess where I was going with this, is because we're in several years of this hardening hard market, I'm just curious if the clients have hit that level where they've exhausted the deductible option or changes to terms and conditions. And so, I think, Doug, you said 80%, right? Is it possible that, that 80% goes to 90% or 95% of the rate going forward just because they've pulled all the tricks that are possible and they have exhausted that?

Yes. I mean, Greg, I guess it's certainly possible. Again, that, maybe, is probably where the data becomes a little bit less scientific because every client is negotiated at the point of sale with the account executive, so you don't necessarily get that throughput on understanding where the rate is by comparison to how much risk they're taking. The best we can do is coach them on what others are doing in their same industry. But your point is valid. Again, I don't know that we could speak to exactly it being 90% or it being 80% of the pass-through given rate on rate. But remember, if you start comparing rate to where rate was 6, 7 years ago, many -- or 10 years ago, in many cases, they're catching up to where some of their rate was a while back. So we walk them through, if they've been a client with us for 10, 12 years, we're going to walk them through where their rate environment was 10, 12 years ago, where the soft market impacted it and now where it's getting back up to. So, while it's always a shock. It's not necessarily unrealistic for the exposure that they've had over a lengthy period of time.

Greg, it's Pat. I wouldn't put in your formula -- your model, some increase in that respect because rates are up now with the capture more of it. I think these clients are not -- they have not exhausted all their opportunities. They're cautious to start. Mike's got a good point. Many of them over the last 2 years have not reached parity with rates that were charged 7, 8 years ago. And I think that they need a lot of education to move into that risk management space. So, I would not calculate that in your model.

Got it. And I'd like to pivot now. Tom, you mentioned when you were talking about the international operations, you talked about the M&A market and you talked about opportunities you were seeing there. To be perfectly blunt, we've seen some astronomical multiples being paid for some international base properties. How do we think about the content -- the context of you talking about this pipeline when we can compare it with some of these really high multiples we're seeing paid for some other properties?

Greg, great question. I mean, we see [ Sky ] have multiples in the U.S. as well. And frankly, there's a certain point in time where we won't chase. But the key thing is, it's the same message that we've given forever. And the key is, if we've got people who care about their team, care about their clients and we've got a very good cultural fit with them, we'll do what we can to be competitive, but we won't chase [ 20 -- 22x ]. David Howden can have those all day long.

And when he wants to say that multiples don't matter. Well, that's fine. Someday, they will.

That was a pretty striking comment. I guess the last question...

They matter to us, Greg.

Pardon me?

It matter to us.

Yes. I guess the last question is a detailed question. Doug, in your CFO commentary, you rolled out -- you gave us some updated estimates on amortization and depreciation. And I think you suggested that now, the revised estimates include the month of December for amortization, depreciation for Willis Re, is that correct?

That is correct.

So, could I take the difference of your previous guidance with this and then take the month of December and annualize that as sort of a bogey for next year's amortization and depreciation as it relates to Willis Re?

Yes. I think so.

[Operator Instructions] Our next question has come from the line of David Motemaden with Evercore.

I just had a question on the brokerage margins for 2022 on the 8% organic outlook. Is the reason why we're not getting more expansion off of that 8%, is it solely because of the expenses that are coming back? I think I calculated about $50 million of incremental expenses that you guys had not fully come back in the first quarter of '21, and then gradually came back over the rest of the course of this year. Is it just that, that's the sort of preventing there from being more margin expansion? Or is there anything else -- potentially employment, wage inflation related that's impacting that?

I think you have to look at it a little bit of that, but as much of that is -- right now, we're planning on making some pretty good investments into new hires next year. We've got some nice technology opportunities down the plate. I think, for the last -- we're coming up to 2 years now, kind of, maybe holding back on some of the investments. And just the simple fact that we have expanded margins in 2 years, 530 basis points, we're going to invest some money back into the business. We have terrific opportunities for hiring right now. So, if you think about the $50 million box, I would say 1/3, 1/3, 1/3. Maybe, 1/3 of it is coming back and just expense is coming back on travel, employee utilization or our self-insured medical plans, et cetera. I think 1/3 of it is hiring and I think 1/3 of it's investment.

Got it. No, that makes sense. And then, maybe, just another question on the employee benefits business. I believe you said that we'd be at about 5% organic growth for the fourth quarter. Been seeing pretty nice recovery over the course of the year. I guess, I may have heard this incorrectly, but I think you guys had said in the third quarter, if we took out the large life sale, you would have had about 10% organic growth in the third quarter. So, I'm just looking at the 5% expectation in 4Q versus the 10% on sort of a clean basis in 3Q, and just wondering why there's a bit of a step back there in the employee benefits organic.

Yes. This is Bill. The employee benefits business, I just want to remind you, we have about 80%, which is traditional insurance products, which is a little bit more consistent month-to-month. You have your ups and downs based on people coming in and out of the plans, things of that nature. There's a little bit more lumpiness in the rest of the business where we have good quarters and down quarters based on what gets billed out, things of that nature. So, that's where you see a little bit of the fluctuation. We had a really strong Q3 and some of that fee-for-service type business, which offset quite a bit of the -- that large life sales the year before.

Yes, a lot of our work, David, too, also happens in the third quarter, because if you think about the enrollment period -- so a lot of the planning work. That's really done in late summer and early fall. So you would expect to have just a little bit less of that work going on here in December. Let's face it, the last 2 weeks of the month that a lot of -- work gets done, we've already -- people have already enrolled during November, usually those windows shut down sometime in late November, early December. So, it's traditionally just probably not as much new business or special billing work in December. Also think that it's important to note on that business is we didn't really see the step back in that business. We weren't overly exposed to sectors of the economy that were most hit by COVID, like hospitality, travel. That's not a big portion of our book. We have a large not-for-profit book. And then, we also have lots of hospitals and -- but just travel and leisure is not necessarily a big portion of our book. But I think, 5% based on what we're seeing underlying, sets us up pretty nicely coming into next year.

Got it. Okay. That's helpful. I appreciate that color. And then, maybe if I could just sneak one more in, and this is a bigger picture question. Just on -- I think you guys in the past, and you said at this call as well, you're focused on more on the middle market, and that's where most of your customer base is. But I'm wondering, if maybe you could just talk about how big the large account businesses, specifically within the brokerage business. And one of your peers is increasingly trying to penetrate the large account business. And I'm wondering, is that a concerted effort that Gallagher is making now, too, especially with some of the capabilities that you've added?

Sure. Let me comment on first one and then I'll turn it over to Mike, but absolutely. Number one, we're seeing that our average account size is increasing as we close them out, as we win them. But the other thing is, that there's no question about the fact that with our capabilities, our global reach with the fact that -- and the reinsurance acquisition helps us. When you go in to talk about Gallagher, again, I hate to be the old man in the sea here, but we used to talk about, no, we don't just do public entities in schools and diocese. Today, you talk about a multinational across all services that a client could possibly need, added to now by the knowledge that we get from our reinsurance partners. So, you've got a very strong story in the Fortune 500 to tell. Now, we're doing a good portion of work in the Fortune 500 already. Our opportunity there is to expand it. So Mike, why don't you talk a little bit more about what you're seeing in that regard?

Yes, David, when I shared my comments, we talked about our average size account being between about $50,000 and $250,000 in revenue. But if I really start to dissect those accounts, our growth, over the last 4 to 5 years, on accounts north of $250,000 in revenue, is significant and is actually outpacing the growth in the other areas of our business in the mid and upper middle market. So, to past comments, why is that? Well, I think a lot of it has to do with the reinvestment that we've done in our value proposition and the technology platform that we have in Gallagher Drive. I think, risk managers and CFOs appreciate that kind of advice. But make no mistake, we don't chase logos. And so much of what you'll see, when we talk about the Fortune 500, is opportunistic opportunities when we can add value. So, that might be taking over the cyber placement for a Fortune 500 customer, or the D&O, or management liability, where we know we have strength and we can match that strength against the need of the customer. So, the growth is there. Again, I think it's part of idea of the reinvestment back in the business. That's why Doug's comments, a minute ago, were so interested in reinvesting because we know we can continue to take market share where we have the opportunities. But again, not chasing logos, chasing opportunities that fit our expertise.

Right. That makes sense. Yes, it feels like a big opportunity for you guys, especially with the capabilities you've added. If I just sort of think about it like, how big is it, as a percentage of your book currently? And how big do you think you can get in that Fortune 500 space?

Yes. I mean, I would tell you, if you're just talking about the Fortune 500, the opportunity is significant in terms of our market share to be able to take away from our competitors. I would tell you, in the Fortune 500, up to Fortune 1000, we touch, probably, somewhere between 10% to 12%, upwards to maybe 15% in some capacity. Again, back to my comments about being on where we add value and not necessarily -- and by the way, risk managers like that, they like the idea of having multiple brokers who bring specific expertise work on their business. And so again, that's where we can really, I think, shine in the marketplace to go grab additional market share.

David, I don't like to end the conversation like this without reminding the listeners that, 90% of the time when we compete, we compete with somebody smaller than we are. And that's where the market is. I mean, if you take a look at Business Insurance, the top -- #100 in the top 100 is $26 million. And their statistics that show there's over 35,000 agents and brokers in America. And as this market becomes more sophisticated and we become better at our vertical capabilities, that is where the opportunity to just be kill or good, still exists.

Our next questions come from the line of Yaron Kinar with Jefferies.

My first question is actually, probably, a follow-up on David's last question. As you're moving upmarket and into accounts of $250,000 or more of revenues, I would think that, that comment around competing against smaller brokers and agents, 90% of the time, becomes maybe diminished over time, and you do find yourself competing against some of the larger players more frequently. So, I guess, one, is that thought process accurate? And two, if that does happen, do you feel as confident around your capabilities to compete against some of the larger players as you do when competing against the smaller competitors?

Yes. I mean -- this is Mike Pesch, Yaron. When you look at large accounts over $250,000 in revenue, you might be surprised or shocked, even, how many of those accounts are handled by regional or super regional brokers that are smaller than Gallagher, but have a local presence, have local relationships. And truthfully, that's where we shine, because we can bring in -- my comments earlier about bringing in experts from all across the globe, especially in a virtual setting, where we can really show the expertise in London and the expertise in the other parts of the U.S. gives us a leg up. And so again, it's not necessarily just, hey, we're taking market share or competing toe-to-toe against some of our competitors who are as big or larger than us. Many big accounts are handled by medium to regional type brokerage firms that have those local relationships. And those are the ones that we focus in on oftentimes.

Understood. Okay. And then, I realize these are probably still very early days here, with the storms over the weekend. But could you maybe help us think about what the impact of those storms could be to 1/1 renewals? Helps realize that the reinsurance business is still fresh, as well. But nonetheless, if you have any thoughts or comments around 1/1 renewals with regards to these storms, it would be helpful.

Well, I can plunge in on what I'm seeing from the finance side. We are seeing that our reinsurance season is a little slower this year. I think there's a lot of concern out there. And most importantly, from a CFO's desk, this shows you the catastrophes don't just happen on the coast. It's not just shake, it's not just tropical storms, there is some really serious catastrophe risk that's still right in the middle of the country. So, from a pricing standpoint, hailstorms, tornadoes, this shows you that there is substantial risk. And when you look at some of the way building has happened not only on the coast, but in some areas of the Midwest, insured values are much higher than what would first, maybe, hit your radar screen. So, from a finance standpoint, there's -- this shows the risk that's happening in the middle of the country.

Yes. I think it's -- this is Joel Cavaness. From what I've read thus far, as you said very early, this is a substantial personal lines loss, and maybe not because of the areas that it hit other than the commercial accounts that we've all read about, the Kindle factory in the Amazon facility. The -- it is predominantly personal lines. And if you look at some of the reports coming out of the carriers that had significant exposures, they were predominantly personal lines. So, I wouldn't say that it's going to hit the commercial sector quite as much, as quite as hard. But it will hit these personal lines companies in a pretty big way.

Well, I think -- this is Pat. Once again, I also think it's going to call into question in people's models, because Doug's right. You're modeling out catastrophe losses on the coast. And the other thing it's going to do is prove out that, what we said earlier in our comments, insured values have to go up. Homeowner insurance, in my estimation, is really undervalued. Construction costs across the country per square foot are up. We're seeing our home prices rise, and I do think that construction prices are rising. So that, I think, is all going to come home to roots. Does that impact today's renewal of CAT reinsurance? I don't have an answer to that, but it's certainly going to impact what goes on in the next year.

Got it. And maybe, one follow-up to that. One of the things that I've been hearing is that you're seeing several of the large national carriers pull their residential books out of the admitted market and to E&S, I think, specifically in California, completely. Does -- what kind of impact does that have on Gallagher, specifically? Is it just a simple switch from retail into wholesale for you guys? Or does it have broader implications?

Yes. This is Mike Pesch, Yaron. I mean, so the personal lines book of business, for us, is about 6%, 7% of our overall revenues here in the U.S. We do have a fair amount in California, and I'd also mentioned Texas as being some of the areas of difficulty. And yes, we are seeing a pullback in those areas and entering into the wholesale marketplace. I'll let Joel comment on that. But personal lines, for us, is an area that we like, but it's also, when you look at, again, as a percent of our revenues, a smaller piece of our revenue by comparison to the commercial book.

We -- personal line is a great space for us, and it's actually a growing space. And if you look broadly across the country and some of the hotspots, California is certainly a hotspot. Not a lot of the admitted carriers in California, because of the way California works, and you can only get like 7% approved, and that's not enough to really cover the losses that carriers have had over the years. So yes, in answer to your question, a lot of them have pulled out. And if they have the capabilities to do on a surplus lines basis, where they can have freedom of rate and form, that's generally what they're doing. It's still a tough area, and it's different call even for E&S carriers to accept that particular wildfire exposure in California. Fortunately, RPS is rolling out a new homeowners product in California. We can't write the world, but at least, it is a product offering. I think, you'll find the same when you get to specific areas in Louisiana. It's going to be a difficult renewal season for a lot of policyholders when you get down in those areas because of being hit back to back multiple years with hurricanes. Some of the carriers have said they've had enough. And that same personal experience on my insurance in Louisiana, it's expensive.

Yes. I'll just add one more comment. One of the cool things, sort of, the better together things about, now, having the Willis Re team part of Gallagher Re. Within just a few hours after the unfortunate that happened this week, I received, from our colleagues, real analytic mapping of not only what occurred, but then how to use that information to help coach and guide our clients going forward, so whether they're commercial clients or personal lines clients, we have much more capabilities now together with them from an analytics perspective. So, as we position our book of business and be able to go to market on behalf of our clients, we're much better equipped to be able to guide those clients in terms of not only what capacity might be available, but what risks are presenting themselves to those customers.

That's very helpful commentary. I guess, the one thing I was just trying to get at, though, on top of that, was on a net basis, as we look at the shift from retail into wholesale and then the residential market. Is that a net positive, net neutral, net negative for the brokerage business from an organic growth and margin perspective?

It's a net positive.

It's a big net positive.

Our next question's has come from the line of Meyer Shields with KBW.

Just let me start with one guidance or outlook question for Doug, if I can. You talk about, maybe, 8% being the bogey for margin expansion in 2022, because of recovering expenses and investment. That's still excluding Willis Re. In other words, if Willis Re comes in at the [ 35.6 ], then an inclusion of full year there would still have an upward impact on margins. Am I thinking about that correctly?

Yes, 2 things. Let's make sure you're refined. At 8%, I think there would be margin expansion. At 6% to 7%, if we continue to make the same level of investments that we're contemplating right now, there could be some in that range, but it probably feels more flattish, because we probably would continue to make investment. There's a lot that goes behind that statement. What's the nature of an 8% versus the 6%? I'm just using it illustratively. It's 6%, because we got unlucky for a quarter. It's 6% because rates, all of a sudden, took a turn for the lower. Is -- there's a lot of things that go into that 6% that would influence the level of investments that we might want to make. So, please don't just think that you've got to hit 8% in order to have margin expansion, it can happen below that. But also, the nature of the organic does influence what we do as we have our hands on the expense structure here, when do we want to loosen up just a little bit and invest in the thing. So, those qualify that, first of all, to make sure you understand the nature of my comments on that. Second of all, when it comes to Willis Re, if you look at it, its really comes in about 1 point higher than where we're running right now, this year, if we hit our numbers for the end of the year. It might have as much as a 10 or 20 basis point positive lift on next year's margins just because it rolls in at a higher margin based on the pro formas that we got. We'll tighten that up in January, but there would be a slight lift just from the Willis Re roll in.

Okay. No, that's perfect. I just wanted to make sure that there wasn't the same sort of pent-up investment, relative to the pro forma numbers, on the Willis Re side?

Oh, there is. I mean, we think we have a lot of really great hiring opportunities right now. When you look at the investments we're talking about there, read through what we're saying. There are production hiring opportunities that are coming to us left and right. And I think, that this change in the market, with organic being the way it is, with our forecast that rates should continue to go up, exposure should to be go up. If we can pick up some nice teams, we're going to do that.

I think it's very important. We've been very clear, from the beginning of this acquisition, that the Willis Re acquisition has 0 synergy looks in it at all. We see this as an opportunity to invest in that business. Now, that doesn't mean it's uncontrolled, unlimited. But Doug is right. If we've got good people to pick up and we've got analytic needs to invest in, we're going to do it.

Okay. No, understood. That's helpful. The second question, and this is on the breakage side. I guess, when we look at reinsurance brokerage M&A history. It took Aon almost 3 years to get back to positive organic growth after buying Benfield . It was a lot quicker at Guy Carpenter with JLT Re. I was wondering, when you look at breakage, the potential breakage that you talked about with Willis Re, should we -- can we expect that it's maybe a 1-year phenomenon and after that, we're back to whatever the market implies, plus market share gains?

Yes. Where there's business, you grow it.

Thank you. There are no further questions at this time. I would like to turn the call back over to Pat Gallagher for any closing comments.

Thank you very much, and thanks again, everybody, for listening to us this morning. We appreciate it. I think, as you can see from our comments today, we are very bullish on our fourth quarter and full year 2021, setting up to be another record year for Gallagher. We look forward to speaking with you again during our fourth quarter earnings call at the end of January. On behalf of our extended Gallagher family, I'd like to wish you a wonderful holiday season and a very happy New Year. Thanks for being with us today.

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