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

Good morning, and welcome to Arthur J. Gallagher & Co.'s quarterly investor meeting with management. [Operator Instructions] Today's call is being recorded. [Operator Instructions] 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. These forward-looking statements are subject to certain risks and uncertainties discussed during this meeting or described in the company's most recent earnings release and Form 10-K filing. 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 & Co. Mr. Gallagher, you may begin.

Good morning, everyone, and thanks for joining our quarterly investor meeting. These regular events provide us an opportunity to frame the Gallagher story for you and dive a layer or 2 deeper into our business outside of the busy earnings season. The format for today's call will be similar to previous meetings. I'll start with some prepared remarks covering the state of the insurance marketplace and early indications on how the second quarter is shaping up. Then our business leaders will each speak for 5 to 7 minutes, touching on organic mergers and acquisitions, thought leadership and other important operating initiatives. Our leaders will also provide insights into their respective markets and frame how the second quarter might pan out from an organic perspective. Then Doug Howell, our CFO, will wrap up the prepared comments with some financial commentary. Our prepared remarks this morning should last around 60 minutes. After that, we will open up the line for Q&A from those of you who are dialed in. Okay, to my comments. The good news is, is that very little has changed since we spoke with you about 6 weeks ago. The P/C insurance market remains firm. Exposures are still increasing. The labor market remains extremely tight, and claim counts are rising. While there has been increased headlines regarding a pending or potential recession, we are not seeing that in our data. In fact, revenue related to audit premiums and policy endorsements are increasing year-over-year. As to inflation, absent a deep recession, we are fortunate to be a net beneficiary. Higher sales, property values, payrolls, et cetera, all lead to underlying growth in premium and thus commissions. And our expense base isn't as proportionately unfavorably exposed to inflation. Doug will have more to say on this in his comments. So I remain extremely pleased with our business and our execution. Before I get into the current environment, let me give you some stats of what we have accomplished through the pandemic. For our Brokerage and Risk Management business, when I look at the last 8 quarters, we have grown organic revenues by more than $825 million, acquired nearly $1.3 billion in annualized revenue and delivered cumulative margin expansion of 550 basis points. That's simply fantastic. And to achieve all this while remaining true to our Gallagher culture and being named the world's most ethical company for 11 years running is incredible. Needless to say, our 4-pronged strategy to drive shareholder value through organic growth, M&A, productivity and quality improvements and our unique Gallagher culture is proving successful. I'm really proud of our team and all their efforts. Let me now shift gears a bit and give you some color on the pricing environment and our expectations for second quarter organic. Starting with the P/C market. Pricing continues to increase in effectively all of our major geographies and product lines around the globe. Through the first 2 months of the second quarter, our data is showing global renewal premiums, both rate and exposure, are up around 10% year-over-year. That's better than the first quarter, even after adjusting for mix. And it's broad-based. In fact, our data is showing second quarter renewal premium changes thus far are higher than first quarter and fourth quarter 2021 across lines like property, package, commercial auto, workers' comp, marine and A&H. The 2 exceptions are professional liability and to a lesser extent, casualty, but both are still up around 8%. So as we sit here today, I see similar P/C market conditions continuing throughout 2022. That's because our risk-bearing partners remain cautious on rising loss costs. Social inflation and potential for increases in claim frequency on the casualty side are 2 potential drivers of reduced future underwriting profitability. For property coverages, replacement cost inflation and increased frequency and severity of catastrophe losses, including secondary perils like convective storms and wildfires, are causing underwriters to reassess rate adequacy across their portfolios. So the overarching takeaway is we aren't seeing a meaningful slowdown, and we're in the U.S. wind season. So a major event in the Southeast could cause balance sheet pain for insurers and have a ripple effect to other areas of property. Looking beyond 2022, you'll hear Tom talk about reinsurance pricing. It's going up a lot in many classes. That can't help but find its way into the 2023 primary insurance pricing. On the benefit side, the U.S. labor market remains extremely tight with job openings topping the number of people unemployed and looking for work by more than 5 million. Recent U.S. monetary policy actions could slow this dynamic a bit. Regardless, we expect strong demand for our employee benefit consulting services to continue as employers look to attract, retain and motivate their workforce. So rising global premiums, renewal premiums and challenging labor market, demand for our expertise, data, products and solutions should be robust in times like these. As we sit here today, it is looking like we might deliver second quarter Brokerage segment organic over 9%. That would be fantastic. Moving to our merger and acquisition strategy. Our growing global platform is a great fit for entrepreneurial owners looking to add value to their current clients, grow their business and help further advance their employees' careers. Gallagher can help them achieve all these objectives and more. While we rely on our branch managers and regional leaders to identify merger partners, we have also added to our dedicated staff focused on finding M&A opportunities. Competition for mergers remain similar to recent periods, and we have yet to see any change in behavior from private equity firms given the move, higher interest rates and potential for higher debt financing costs. When I look at our M&A pipeline today, we have nearly 40 term sheets signed or being prepared, representing about $350 million of annualized revenues. While we know that not all of these will close, we believe we'll get our fair share. So let me give you some quick sound bites of what you'll hear from the team today. Our U.S. retail P/C leader, Mike Pesch will tell you his business continues to perform very well. New business and retention are consistent with last year. Renewal premium changes are in the high single digits, and midterm policy adjustments are still a tailwind. Tom Gallagher will tell you that our international P/C and reinsurance operations are also showing strong performance. Organic is trending nicely across all of our major geographies due to higher renewal premiums and strong retention. Tom will also tell you that the reinsurance integration is underway and on track. On the production side, early indications from midyear renewal season are positive. Pricing for property-related classes is hardening and not a meeting goes by on the casualty side where inflation isn't a topic of discussion. So I remain very bullish about our reinsurance brokerage operations. Then Joel Cavaness will tell you his brokerage MGA program and binding businesses is more mixed this quarter with renewal premium increases and heavier weighting of property business, offset somewhat by slightly lower retention. We don't see this as a trend, just a month-to-month volatility. Bill Ziebell will then talk about our employee benefits and HR consulting business. He will tell you demand for our consulting practices and other service groups is very strong and that second quarter organic is benefiting from this trend. Scott Hudson will tell you our third-party claims administration business, Gallagher Bassett, is expecting strong second quarter organic as claim counts continue to increase year-over-year. Then our CFO, Doug Howell, will bring it all together and tell you what we think this means financially for our second quarter results. So from my vantage point as CEO, we are executing on our strategy and are well positioned to deliver another strong quarter of financial performance. I'll stop now and turn it over to Mike Pesch, who's going to discuss our U.S. retail P/C operations. Mike?

Thanks, Pat, and good morning, everyone. I'm Mike Pesch, and I lead our U.S. retail property and casualty brokerage operations. My prepared comments today will cover 3 topics. I'll start by providing you an overview of the U.S. retail P&C business. I'll then discuss current insurance and market conditions in the U.S., and I'll end with some comments on how the second quarter of 2022 is shaping up so far. So let me start with an overview of our U.S. retail P/C operations. In 2021, we generated revenue around $1.9 billion, making us the third largest P/C retail broker in the country according to Business Insurance. We placed more than $14 billion of premium annually through more than 160 offices and have around 7,700 employees, including more than 2,000 in our centers of excellence. We serve all sizes of commercial clients, small, medium and large, but have a higher concentration in the middle market to upper middle market. These type of clients are typically paying between $100,000 and $2.5 million for their insurance, which translates into roughly $10,000 to $250,000 of annual revenue to Gallagher. We also have a growing large account risk management client list and a meaningful small commercial personal lines and affinity customer base as well. We find the middle and upper middle market very attractive, and that's because these clients typically don't have a dedicated risk management professional. Rather, they rely on our experts to identify, evaluate and manage risk across their enterprises, and we find the right markets to place insurance coverage on their behalf. That needs align very well with our client value proposition, CORE360. It's the approach we take when we evaluate our clients' and prospects' risk management programs, focusing on the 6 key cost drivers of the total cost of risk. And this holistic approach resonates with clients looking for risk management advice and insurance solutions and embeds Gallagher inside our client's business. We can provide this expertise because we are organized around 30 niche practice groups, different product and industry verticals where we have experts with specialized knowledge and deep insights. Through these practice groups, we better understand the unique risk characteristics of different businesses and tailor insurance products and services to those industries. And our niche leaders support our producers in the field, making sure we are identifying and addressing the distinct risks that those industries are facing through focused offerings and coverages. Take a religious institution client, for example. You simply can't handle a client like this if you don't know anything about distinct risk management and insurance needs of faith-based organizations. So we think this tailored approach to help manage our clients' risk and procure their insurance is a competitive advantage. It benefits retention, drives new business and ultimately translates into organic growth over the long run. While our producers are visiting clients and prospects face-to-face more frequently these days, we continue to have success parachuting our industry experts into meetings virtually. We are also leveraging online thought leadership and are hosting industry discussions to generate new client leads and revenue opportunities. Through May of this year, we have hosted 19 webinars with more than 2,200 attendees. This includes our Futurecast virtual RIMS event. The single day of interactive risk management sessions highlighted Gallagher's expertise across the evolving insurance market and factors facing clients and prospects alike. Topics included renewal strategies for the challenging cyber market, ways to adapt workers' comp for an evolving workforce and a closer look at the frequency of natural catastrophic events. We are constantly adding new on-demand content, podcasts and webinars on our website, ajg.com. Recent topics included product recall risks and health care cyber risk. You can also find our CORE360 Flashcast, condensed webinars and various industry-related items on our website. With all this information available with a simple mouse click, our clients and prospects have the ability to tap into our network of experts 24 hours a day, 7 days a week. Better yet, any time a client or prospect engages with any of our online content, our producers are notified. Remember, 90% of the time, we are competing against a local or regional broker that just can't do this. Our competitors typically don't have a niche expert or much of an online presence. And our producers are further distancing themselves from the competition through Gallagher Drive, our data and analytics platform. Insights we were able to provide clients and prospects include purchasing behavior trends of other Gallagher clients, including what coverage lines, types and limits ultimately being bound, as well as potential catastrophe exposure and claims forecast. Prospects can visit our website and test the platform using our cyber liability or umbrella limits calculator. Moving to mergers and acquisitions. M&A continues to be an important part of our shareholder value creation strategy, and we have a long, successful track record of tuck-in M&A. We have a disciplined approach and focus on cultural fit. We look for teams that share our values around client service, ethics and want to be with Gallagher for the long term, know how to grow their business and are already operating at attractive margins. Many of our tuck-in mergers are the result of relationships that were formed at the branch or a local level, and those relationships have been developed over a period of time, in many cases, multiple years. So we know these entrepreneurs well, have seen them compete and understand their culture. And merger partners are drawn to the Gallagher platform because of our culture and also the tools, expertise and resources we can provide them. We target firms generating less than $10 million of annualized revenues. And thus far, in 2022, we have completed a couple of mergers and have agreed to terms with a handful of additional mergers. We have a really nice pipeline of opportunities across the country, and I think that could grow over the course of the year. Moving on to my second topic, the U.S. retail insurance market. The market continues to be challenging for many of our customers. In aggregate, thus far here in the second quarter, premium changes, again, that includes rate and exposure, are up 9.6%, which is up over first quarter's 8% and nearly what we saw in the fourth quarter of 2021. So while we might be running about 1 point lower than what we were seeing first half of last year, that might be more about an easier compare versus 2020. I would not call it a significant change in the market. Underneath the total, so far this quarter, property is up 14%; casualty, up 8%; work comp, up 5%; and professional liability is up about 3%. Carriers continue to push for rate increases, especially for clients with challenging risk profiles and effectively, every line of business continues to experience upward pressure on renewal premiums. While we have seen some new market entrants in 2022 that have helped certain pockets of the market, finding significant capacity for coverage or carriers willing to offer large lines is still difficult. Cyber continues to be the most challenging coverage for clients in terms of rate, capacity and terms. The increased frequency of cyber events is well documented. And with the ongoing Russia-Ukraine conflict, we think there could be even more demand for coverage. We've added a number of cyber specialists to our producer ranks this year, which positions us well for an increase in net demand. On the other hand, public company D&O, for example, is one area we are seeing a moderation of rate increases. And in certain cases, we are seeing clients renew their programs close to flat. It's a very small portion of our book, but it illustrates carriers are taking more rate online they needed and not where they don't. I call that a healthy and rational market. Looking out to second half in the next year, we believe carriers are seeing the potential for increasing loss costs, the impact of inflation and the current macro uncertainty and increasing reinsurance costs, which are unlikely to keep the rate increases fairly similar with recent periods. Additionally, we just entered U.S. hurricane season, so increased natural catastrophe activity also remains top of mind. On the casualty side, medical and social inflation, reopening of courts and still depressed investment returns are likely to drive another round of renewal premium increases for our clients but perhaps at a lower level than previous years. Remember though, challenging insurance markets allow our colleagues to shine. Our job as brokers is to help our clients find the best coverage while mitigating price increases through shopping coverages and tailoring clients' programs to ensure their risk management program fits their budgets. And I think we have the best talent in the industry. And finally, I'll conclude with some thoughts on what we are seeing so far in the second quarter. Through the first 2 months of the second quarter, we are seeing, as I said, greater than 9% renewal premium increase, new and lost business consistent with last year and year-over-year increases in midterm policy adjustments, including higher audit premium and positive policy endorsements. So based on what we are seeing thus far, we think second quarter organic will be similar to first quarter, call it somewhere in the 10% to 11% range. So the business is very well positioned. Our clients 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. This 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 as well as reinsurance. First, I'll dimension the business, including an update on our reinsurance operations, Gallagher Re. Second, I'll discuss the P/C market environment outside the U.S. And third, I'll finish up with some comments on the first 2 months of the second quarter. Starting with dimensioning the international and reinsurance businesses. We finished 2021 with approximately $2.1 billion in revenues and placed more than $15 billion of premium on behalf of our clients. We operate in over 60 countries. However, our business is predominantly in the U.K., Canada, Australia and New Zealand. We serve a wide range of commercial clients. And while our sweet spot is middle to upper market retail clients, we also have a strong large account risk management business in addition to small business, high net worth personal lines and affinity clients. We also have a leading London specialty broker and reinsurance brokerage business, Gallagher Re. Let me break down our revenues by geography. Starting with U.K. retail. We generate approximately $525 million of annual revenue in the U.K. and are a top 5 retail brokers. We have more than 75 offices across the country. And like the U.S., we use a niche specialist network. We are the largest retail broker in New Zealand and 1 of the 5 largest brokers in Australia. In these 2 countries combined, we have around $400 million of revenue annually in nearly 100 different locations. Moving on to Canada. We operate in 8 of the 10 provinces and generate about $250 million of revenue. Outside of retail, our leading London specialty and global reinsurance platforms combined are now more than $1.2 billion of annualized revenue. Focusing on reinsurance for a minute. The team is making terrific progress. We are down to just one country for secondary closings. Integration is moving along faster than we planned and most importantly, June-July client renewals are going very, very well. Let me give you a quick update on each. First, integration. Work across our 13 different work streams is progressing well. Our efforts around people, real estate and back-office transition services are targeted to be done later this year. And the technology portion should be mostly completed by late 2023 or early 2024. I am extremely pleased with the progress being made. Second, since the primary closing in December, we have completed 11 of the 12 deferred country closings and believe we will complete the final closing during the third quarter of this year. Third, midyear reinsurance renewals are in full swing, and our teams are doing a great job helping our clients navigate difficult market conditions, causing increased pricing across a number of areas. Here's what our reinsurance team has seen. Starting with property. It's hardening in the U.S. peak tails and in Australia. The recent June 1 Florida renewal cycle showed price increases ranging from 10% for loss-free accounts up to more than 50% increases for those loss-impacted seasons. There are challenging supply-demand dynamics in some parts of the property market, and many reinsurance -- reinsurers are pulling back capacity. And there is limited new capital entering the market, which is already creating challenges for a number of July property renewals. We see that likely to continue into 2023 renewals as well. Outside the U.S., there is a divergence between loss-free and loss-impacted programs as well. In other words, where loss activity has occurred, reinsurers are driving price increases, while clean renewals are closer to flat. Casualty reinsurance pricing, both U.S. and international, is on more stable footing today. However, the growing threat of inflation and the potential for post-COVID frequency and severity increases are likely to lead reinsurers to push the rate on upcoming renewals. More specialty lines like aviation, marine, energy and cyber are all seeing varying levels of very high rate increases as well. Aviation and marine is being driven by the impact of losses from the Ukraine conflict, while cyber is a factor of demand outweighing supply. So pricing is clearly moving higher in most areas of the reinsurance market. And despite these difficult conditions, the really good news is we continue to get great feedback from our clients and prospects. Moving on to our global P/C retail operations. Our approach to the retail P/C business is consistent around the globe. So our international strategy echoes our U.S. business that Mike just spoke about. We're leveraging our niche practice groups, utilizing insight screen from our data and analytics, identifying, completing and integrating M&A opportunities and capitalizing upon our operational excellence to fund investments and growth capabilities. Our teams are constantly innovating, developing new products and providing insights. In many instances, what our teams are doing in a particular geography can be standardized, applied and delivered to our retail clients around the world. A great example of this is CORE360. Mike introduced our U.S. go-to-market strategy and holistic approach to risk management. However, CORE360 is now our global value proposition. And our successful SmartMarket platform, which was developed in the U.S., is now being utilized by carriers in Canada, Australia and the U.K. We have nearly 30 carriers globally using the platform and have plans to add to that roster over the next 12 months. And Gallagher Drive, our data and analytics platform, is seeing increased mileage by our producers around the globe. It's clear every day that our clients and prospects also want more data-driven insights. So we have a cohesive global strategy that allows us to develop a product, a process of service offering and deliver it to our clients anywhere across our footprint. This is a key advantage over the smaller local and regional brokers. They just can't match our offerings, expertise or service. Moving to mergers and acquisitions. Our story continues to resonate with entrepreneurs around the globe from our culture, support tools, carrier relationships, specialisms and access to data and analytics. We have the ability to make their businesses better. Merging with Gallagher can take their firms to the next level, provide great opportunities to grow their book of business and give their employees career paths. We have completed 2 international mergers this year, and our pipeline of opportunities outside the U.S. remains strong and continues to grow. 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 10%. Leading the way is property, package and professional liability in the teens and casualty in the mid-single digits. Within London specialty, rates are still going up across nearly all lines of coverage, still in the 6% to 8% range on average, with specialty coverage like aviation, war and cat-exposed property seeing significant increases. And cyber liability continues to be a challenge from both the capacity and rate perspective. Moving to Australia. It's up about 11%. Property is up in the high teens; casualty, mid-teens; and professional liability is mid-single digits. New Zealand. Renewal premium change is around 13%, with property up mid-teens and professional liability and commercial auto up around 10%. In Canada, renewal premiums are up about 13% overall with most lines up double digits and commercial auto up 5%. So let me finish up with some observations from the first 2 months of the second quarter. In terms of new business, retention and midterm policy adjustments, overall, I'm seeing favorable retention trends, new business a bit below last year due to lower nonrecurring business so far, strong renewal premium increases and a small tailwind from positive policy and adjustment endorsements. In the U.K., our London specialty operations are having an excellent new business quarter and so is our retail operations. Canada's new business is similar to 2021, even taking into account lower nonrecurring business this year, and retentions are consistent with prior years in the low 90s. In Australia and New Zealand, new business is also being impacted by slightly lower nonrecurring business. However, retention is trending similar to last year. So pulling it all together, internationally, I'm seeing second quarter organic around 9%, and solid new business and retention and positive renewal premiums continue to benefit our results. So as you can see, our international brokerage and reinsurance businesses are performing very well, and I remain excited about our prospects in 2022 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, and good morning to everyone. I'm Joel Cavaness, and I lead 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 state of the wholesale market. And third, I'll wrap up with some observations related to the first 2 months of the second quarter. Risk Placement Services, or RPS for short, was founded in 1997 and has grown to be the fourth largest wholesaler in the U.S. today. We have over 2,500 colleagues, nearly $600 million in annual revenue, and we place more than $4 billion of premium on behalf of our clients. As a wholesaler, our customers are independent agents and brokers that need our specialized capabilities, products and carrier relationships. About 75% of our business comes from agents and brokers unrelated to Gallagher. We have 3 main businesses: open brokerage, MGA programs and standard lines aggregation. Let me walk you through each one of these. Starting with open brokerage. Here, we help retail brokers with access to a specialty product or insurance carrier they didn't happen to have. So we will find coverage and negotiate with insurance carriers on behalf of the retailer and their client. The coverages we are helping retailers with tend to be very specialized and can range from hard-to-place property lines, like hurricane-exposed property, wildfire exposure or flood to casualty lines like long-haul trucking or liquor liability. Many times, these placements are complex, involving multiple layers and carriers to fill out a particular program. Next is our MGA and program business. While our organization doesn't take underwriting risk, we do underwrite price, bind, collect premium and issue policies on behalf of insurance carriers. We have around 40 distinct programs that range from commercial coverages for food delivery vehicles, country clubs and amateur sports organizations. Our personal lines programs include lines like nonstandard auto, manufactured home and other low-value dwellings. And our third main business is standard lines aggregation. Here, we provide our retail clients access to admitted products from different carriers. For example, in an agency in a small town might not have direct appointment with a large insurance carrier. However, that agency can still access the large carrier's products through us. In essence, it gives that agency more insurance options for its customers. RPS' goal is to be the recognized leader in the intermediary market by providing a wide range of products and services across a very large distribution platform. And we compete against many other wholesalers, both big and small, but clients choose us because of our quick turnaround times, ease of doing business, product breadth and the strength of our carrier relationships. Mike told you that the U.S. P/C market is challenging with rates increasing in nearly every line, somewhat limited capacity and tight terms and conditions. And the admitted market backdrop continues to favor RPS since retailers need our help to place coverages for them. So moving to our e-commerce strategy. We continue to see an incredible amount of traffic on our platform, and that traffic is turning into bound premium. In fact, during the first 5 months of 2022, premium bound on our platform was up more than 25% year-over-year, just a fantastic result. And we continue to add products, including our new real estate appraiser E&O product, and we have more than 30 distinct specialty offerings that our retail customers can access with the click of the mouse, which makes us a very attractive partner and in line with our strategy of becoming increasingly digital over the coming years. We also offer our SmartMarket platform to a growing number of E&S lines carriers. We currently have 6 insurance carriers using the platform and believe that number is likely to grow this year. And our edge products provide our clients unique, tailored and enhanced coverage with our key trading platforms. These are similar to the very successful advantage products on the retail side. We're also working on a management liability edge cover that we hope to launch in the next month or 2. So lots of exciting things happening inside of RPS. Like the retail P&C business, we, too, are a seasoned acquirer. RPS has completed more than 50 acquisitions since 2000, including 3 in 2021 and 2 so far this year. Culture is paramount for us. So we focus on finding partners that fit Gallagher and provide us with expertise or new products. We tend to be more interested in the MGA and program space versus open brokerage wholesale opportunities, which can more easily be replicated with seasoned producer hires. M&A partners are drawn to RPS because we make investments in people and data, and we open doors to thousands of retailers. 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 remains very strong with some nice binding authority and program operations. We're being very selective with the firms we are pursuing on the program side, looking for unique, well-established, mature programs. So moving on to the domestic wholesale market environment. Our data is showing open brokerage renewal premium changes of 13% for April and May, a bit above what Mike has seen on the retail side. That's not surprising. Wholesalers generally see rates move up [indiscernible] at least as much as retailers. The 13% increase includes double-digit increases in property and professional liability. And our binding operations are seeing nearly 8% renewal increases so far in the second quarter. That's similar to the first quarter. Here, too, professional liability and property are seeing the largest increases, while casualty is also up mid- to high single digits. Overall, capacity remains tight, and despite multiple years of rate increases, carriers are still not willing to deploy large limits on any one risk. So we're still finding complex insurance towers extremely difficult to place. And Southeastern cat-exposed property continues to be a particularly difficult line of business right now. We are in the midst of second quarter renewals, and we're seeing pricing move higher and with very limited capacity, particularly in Florida. We continue to observe personal lines business moving into Florida and Louisiana citizens, each state's insurer of last resort, as private insurance carriers cut back their exposures. And with hurricane season officially underway and many forecasters calling for an active season, it looks like more difficulty ahead for this section of the market. So the market remains difficult overall and is 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 second quarter. We're having a very strong new business quarter thus far, with brokerage a bit below and binding new business production a bit above 2021 levels. Retention is down a bit from last year, mostly in open brokerage, due to the retailers losing the underlying business. It's unfortunate and not much we can do about it, but we do see an uptick in loss business in a particular month from time to time. Midterm policy adjustments, including positive policy endorsements, are trending better than last year's levels, producing a small tailwind. So if we bring it all together, and as we sit here today, it feels like the second quarter organic will be around 8% to 9%. That would be around north of 10%, factoring for the tick-up in lost business. So in summary, the E&S market remains challenging, but demand for our services is strong. Our product offerings continue to grow, and our relationships with our carrier partners are excellent. We should continue to build upon our strong first quarter here in the second quarter and ultimately deliver another great year for RPS. Okay. I'll stop now, and I'm going to turn it over to Bill Ziebell, who's going to discuss our employee benefits consulting business. Bill?

Thanks, Joel, and good morning. I'm Bill Ziebell, and I lead Gallagher Benefit Services, our employee benefits insurance brokerage and HR consulting business. Today, I will cover 3 topics in my prepared remarks. First, I'll provide an overview of Gallagher Benefit Services, or GBS for short. Second, I'll give you an update on how we are executing in the current environment. And then I will finish up with some early takeaways from the second quarter. Starting with an overview of GBS. The business began in the mid-70s and generated around $1.4 billion of revenue during 2021. Today, GBS is the fourth largest benefits broker and HR consultant in the world with more than 4,700 employees. We operate across nearly 100 different locations within the U.S., the U.K., Canada and Australia. The United States is our biggest geography, represents about 90% of our annual revenues, while 10% of revenues are international. Our producers sell traditional group health insurance products like medical, dental, vision and voluntary products that employers offer to their employees. We also provide advice, recommendations on employer benefit plan design, financial projections of the plans and potential funding alternatives. Combined, those products and services represent about 75% of our annual revenue. The other quarter comes from HR and compensation consulting, pharmacy benefit consulting, retirement and other services that help employers address their human capital needs and organizational well-being. Our typical clients are middle market businesses, which we define as having somewhere between 100 and 5,000 employees. However, we also have many larger corporate clients, offering them a fresh alternative to some of our competitors, and a formidable small group benefits business. And similar to our retail property/casualty business, most of the time, we are competing with smaller, local or regional benefit firms. Mike and Tom talked about CORE360 on the P&C side. GBS' client value proposition is called Gallagher Better Works. It's an approach that examines the most important levers that an employer has to attract, engage and retain talent while simultaneously managing costs. From financial well-being, investing in physical and emotional health to competitive compensation plans, our professionals explore the entire spectrum of employee benefits and rewards, and the solutions we design are tailored to align with our clients' unique needs regarding their people. Today, with the unemployment rate below 4% and job openings near double the number of people looking for work, the war for talent is front and center. In fact, our recent benchmarking survey showed attracting and retaining talent is back to being the top priority versus cost containment priorities seen during much of the pandemic. And our approach, through Gallagher Better Works, positions us to help our clients attract new talent and drive costs out of their benefit plan. Moving to M&A. GBS is a seasoned acquirer and is constantly looking for talented entrepreneurs looking to take their operations to the next level. We have completed nearly 60 mergers over the last 5 years, including 8 during 2021 and 3 so far this year. Merger partners are drawn to GBS due to our resources and tools, specialized practice groups, niche experts, marketing initiatives, thought leadership, technology and, of course, our culture. Our pipeline of opportunities around the globe is excellent, and we think 2022 will be a successful year for our merger strategy. Switching gears a bit and an update on our sales process. GBS professionals have been increasingly engaging and interacting with clients and prospects on a face-to-face basis. At the same time, we continue to have success selling in a hybrid environment, where in-person meetings are supplemented with experts brought in via video. We will ultimately follow our clients lead as to how they would like to interact with our professionals, but we think hybrid client engagement is likely here to stay. In addition to hybrid meetings, our webinars and insightful thought leadership are driving engagement with our clients and prospects. We have hosted 20 different webinars this year with more than 11,000 attendees. This includes 2 female leadership webinars, one on emotionally intelligent leadership and the second titled Advocating for Your Time (sic) [ Advocate for Your Time. ] These online events have already generated 1,300 leads and around 400 meeting requests. And these interactive web-based events are on top of the thought leadership that we are publishing on a regular basis. For example, in May, we released our second quarter Better Works Insights Report, which included articles on 5 different topics, such as best practices for modernizing benefit offerings and supporting agile people strategy. So whether leveraging our thought leadership, engaging directly with our experts or attending in-depth industry discussions, our broad offerings, deep expertise and innovative solutions continue to separate Gallagher from the brokers and consultants we are competing with day in and day out. Let me finish up with some observations from April and May. Starting with the U.S., which again represents about 90% of our annual revenue. About 80% of our annual domestic revenues relate to typical coverages you get via your paycheck from your employer, medical, dental, vision and long-term insurance products. Covered lives are still increasing. In fact, U.S. nonfarm payrolls are up by more than 800,000 jobs over the last 2 months, which could provide a modest tailwind for our revenue. Moving to the remaining 20% of our U.S. revenues. This includes our fee-for-service, individual products and retirement consulting businesses. Most of our practice groups continued their positive momentum into April and May. That includes really nice growth within our HR consulting, pharmacy benefit management, executive benefits and some new life product sales. We are encouraged by all the activity, and our pipeline for future opportunities is fantastic. And that's because the U.S. labor market remains extremely tight. It's driving employers of all sizes to prioritize strategies to retain, attract and motivate their workforce, and the complexity of today's hybrid working environment is causing clients to refresh and revamp their compensation and human resources program. So we see strong demand for our advice and services continuing for some time. Shifting gears to outside the U.S., which is again about 10% of our total revenue. Overall, revenue was up double digits through the first 2 months of the second quarter in the U.K. and Australia, while Canada is showing mid-single-digit increases. So when I combine what we are seeing across our global business, second quarter organic feels like it could be up over 9%. That's better than what we thought 6 weeks ago and following our first quarter earnings call, mainly due to higher consulting and project work. So second quarter is shaping up to be a very strong quarter for our benefits operation, and demand for our services remain strong given the challenging labor market. Looking out further, I believe we have the right people, product and solutions to help our clients navigate their most pressing organizational well-being and human capital needs. Needless to say, I am extremely excited about our future. Okay. I'll stop 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, or GB for short, which is our third-party claims administration business. For those of you that are familiar with our financial reporting segments, it's our Risk Management segment. Today, my comments will cover 3 topics. I'll start by providing an overview of GB's business. Then I'll give some insights into what we are seeing thus far in the second quarter, and I'll finish with some thoughts on our longer-term positioning. Gallagher Bassett was founded in 1962 by the Gallagher brothers and Sterling Bassett. GB generated north of $950 million of revenue during 2021 and is one of the world's largest P/C third-party claims administrators. A little more than 80% of our revenue is U.S.-based, and the remaining is spread across Australia and to a lesser extent, the U.K., New Zealand and Canada. We have about 6,600 employees, most of which work from home. We do not take underwriting risk, but rather adjust claims for our clients. In 2021, we closed over 900,000 claims and paid out $11.5 billion on behalf of our clients. That level of annual claims paid would make us 1 of the 10 largest P/C insurance companies in the U.S. More than 60% of our revenue is from workers' compensation claims. Another 30% is from liability claims, and less than 10% relates to property claims, but we are not storm or catastrophe adjusters. We also offer specialty product services in lines such as medical malpractice, products liability, environmental, professional liability and cyber. So we have a large number of products that address the bulk of our clients' exposures. We segment our business into 4 different client types. First, we serve large Fortune 500 businesses, commercial clients who have strong balance sheets and can self-insure or have large deductible programs. So they outsource the claims resolution process to Gallagher Bassett. This happens to be our largest client segment. Second, we have public sector clients. This includes school districts, municipalities, state entities and federal governments. For example, the Australian workers' compensation schemes. Third, alternative market or group captive clients. These entities utilize our services for claims handling and infrastructure. And our fourth and last client segment are insurance carriers. It includes carriers of all sizes outsourcing a portion of their claim handling. We believe we deliver the very best outcomes through a combination of deep expertise and solid execution. In certain cases, the best outcome can be the avoidance of loss as well as the mitigation of loss resulting from superior risk management and risk mitigation. We're also able to customize our services to align with our clients' expectations of the best possible outcome, providing brand protection and customer loyalty or back to work sooner. So we tailor and customize our offerings to provide value and the best outcome for clients. And we have numerous recognitions highlighting our ability to provide superior claim outcomes. For example, last year, we were named TPA of the Year at the US Captive Review Awards. And more recently, GB and our RMIS platform, LUMINOS, was top-ranked in the TPA category for the fifth straight year by the 2022 RMIS Report. Moving to mergers and acquisitions. GB has done its fair share of acquisitions, but the TPA industry is already highly consolidated. So the subset of potential merger opportunities is much smaller than on the brokerage side. Our M&A strategy is to look for companies that will help us deliver better outcomes and enhance the claim results for our clients. That could be through a new product offering, a new capability or by providing deeper expertise. So we're not just trying to add scale. We're ultimately looking for highly specialized and complementary claim adjusting and risk consulting services. In a typical year, we will compete -- complete 1 or 2 acquisitions. Last year was one of those typical years, and we completed 2 mergers in total. So far this year, we have completed one merger and have a nice pipeline of potential opportunities. Shifting to productivity and quality. We believe we have industry-leading margins. Prepandemic adjusted EBITDAC margins were in the 17% to 17.5% range and increased to more than 19% in 2021. While the initial uplift during the height of the pandemic was due to some targeted expense actions, the improvement during the latter half of 2021 was due to expense discipline combined with improving organic revenue growth. Looking forward to 2022, we are expecting full year margins to be close to our -- be close to the 19% range, even as we continue to make substantial investments to improve our products, platform and service levels. Let's shift gears now, and let me walk you through what we are seeing in April and May. First, client retention. Frankly, it remains fantastic, and we have yet to see any significant changes from recent periods. Next, new business. Our broadening product offering, combined with a challenging P&C -- P/C insurance market, has created a nice uptick in new business opportunities. We are seeing more shopping as carriers and businesses look for ways to control costs, and we are converting these opportunities into wins. Third, new COVID claims arising. They're trending lower than the first 3 months of the year. While these claims were a nice volume filler as core claims recover, they tend to be lower revenue generating over claims overall. I am encouraged by this trend. However, the team is ready to respond quickly if there is any change in trajectory. And fourth, our core new claims arising. Through April and May, we continue to see year-over-year increases in new claims arising. So far, during the second quarter, core new claims arising are up about 6% versus last year, and they still have plenty of room to grow since workers' compensation and liability claims are still below prepandemic levels. While claim counts aren't always tied directly to revenue, we are encouraged by the improving trends. So putting it all together, second quarter organic is likely to be approaching 10%. That would be another fantastic quarter of growth. Longer term, GB is extremely well positioned. Client satisfaction remains at very high levels. Revenue retention remains excellent. We are making investments to improve and enhance our current products and services, and we're expanding into numerous specialty lines of business, aligning our services with new potential customers. So the team is executing on our strategy, and I'm very excited about both our near-term and long-term prospects. Okay. I'll stop now and turn it over to our CFO, Doug Howell. Doug?

Thanks, Scott, and thanks, everyone, for joining. Here's what I'll cover today. First, I'll recap what we are seeing in terms of organic revenue growth as earlier discussed by each of our business leaders, and I'll also do a small vignette on revenue recognition related to our benefits business. Next, I'll address margins and do a vignette on how we're seeing expense inflation. Third, I'll give you some sound bites from our updated CFO commentary document that we posted on our website. I'll do a short vignette on investment income and then wrap up with some comments on cash and capital management. Okay, to the business unit organic revenue recap. Mike and Tom had upbeat comments on our global P&C retail, specialty and reinsurance brokerage operations. New business production is strong. Retention is excellent. Positive policy endorsements remain favorable, and renewal premium increases are trending similar to first quarter '22. So it feels like our global P&C second quarter organic could come in somewhere around 10%. Tom also shared that our Gallagher Re business continues to perform nicely. We had a successful June renewal season, and we're making terrific progress integrating the support and service functions as well as working closely with other sales teams across our global operations. I'll add that we should post results this year that are in line with our purchase expectations. And I'll repeat that the reinsurance pricing environment could add upward pressure to primary rates this fall and into '23. Joel is expecting another quarter of strong organic results in our domestic wholesale brokerage business. This quarter is a big property renewal quarter, and the rates are still fueling our organic growth. Even with some loss of business from the underlying retailers losing accounts, Joel's wholesale unit should still post solid 8% to 9% organic growth. Then Bill walked you through our employee benefits and HR consulting business. Employment at our clients remains strong, and we're seeing increased demand for solutions that help retain, motivate and grow their employee base. It's looking like Bill's business could post second quarter organic growth of around 9%. So when I put all these comments together, it feels like total Brokerage segment second quarter organic above 9%. As for our Risk Management segment, you heard Scott tell you that second quarter organic is shaping up to push 10%, driven by continued strength in core new arising claim volumes and solid new business. Before I leave revenues, I want to do a 2-minute reminder vignette on how revenues are recognized for employee benefits brokerage business. First, when we write or renew an employer's medical, dental, vision plan, we must always receive our commissions on a monthly basis based on covered lives when the employer pays their monthly premiums over the policy year. Second, we recognize for GAAP most all of that annualized revenue upfront on the annual policy effective date using our best estimate of what we will get. Third, the accounting requires us each month to update our estimates as we get monthly data on actual covered lives. Fourth, don't forget that a big majority of our medical, dental, vision business is effective on January 1 of each year. So while it all works out on an annual basis, it can cause quarterly year-over-year comparison issues if covered lives develop over the year different than our January 1 estimate. To illustrate, during 2020, we were downwardly adjusting our January 1, '20 estimates over the year as the pandemic reduced employment. Then during '21, it went the other way. We were upwardly adjusting our January 1, '21 estimates over the year as employment recovered coming out of the pandemic. Thus far, here in '22, we are not seeing meaningful change in our clients' employment levels. Thus, there is no need for any meaningful upward or downward adjustments to our Jan 1, 2022, estimates. So here's the punch line. It does cause some subtle quarterly organic growth comparison issues. In the later quarters of '20, it created a difficult compare versus those quarters in '19. In later quarters of '21, it created an easier compare versus those same quarters in 2020. So now here in '22, if we don't see the upward development like we did last year, that will create a slightly more difficult compare in our third and fourth quarter, call it an impact to organic of about 50 to 75 basis points each quarter. Again, it doesn't cause a full year compare issue, just on a couple of quarters. Regardless, we think full year '22 total Brokerage segment organic will still be approaching 9%. That includes first quarter reported organic 9.6%, expected second quarter organic above 9%, and it's looking like a bit more than 8% organic for the last half of the year, which reflects the possibility of that more difficult benefits comparison. Let me move to adjusted EBITDAC margins. We are still comfortable with what we said during our April earnings call. Here is what we said. First, we see full year '22 margins expanding 10 to 20 basis points should we post 8% organic growth. Historically, we said we thought we could expand margins if organic was 4% or more. We still believe that could be the case in '23 and beyond. But here in '22, we're absorbing a return of pandemic-related savings, and we also have the impact of rolling in the acquired reinsurance operations. Second, as a reminder, here in '22, those both create margin change volatility quarter-to-quarter. Recall that we expanded adjusted margins by about 50 basis points in the first quarter. For second and third quarters, we're expecting adjusted margins to each be down around 100 basis points, yet that should put the other way in the fourth quarter, and we're expecting adjusted margins to be up around 100 basis points. The math, given that we are seasonally larger in the first quarter, gets us back to that 10 to 20 basis points of whole year expansion. Then ahead in '23, most of that quarterly margin change volatility should go away with the pandemic behind us and the reinsurance acquisition fully in our books. As for risk management, you heard Scott say he thinks we can deliver margin slightly ahead of 19% for the second quarter and second half of the year. That should lead to margins approaching 19% for full year '22. All right. Let me move to my vignette on inflation. We asked ourselves some questions. First, how does the inflation impact our revenues? Well, we believe inflation will be a positive to our revenues because premiums rise to increased exposure unit values. That's increased property values, increased replacement costs, increased medical costs, wages, et cetera. When those go up, premiums go up. So our revenues will go up. Second, how does inflation impact our expense? Well, we did some whiteboarding on our Brokerage segment cost structure and categorized our costs into minimal impact from inflation, some impact from inflation and similar impact. We estimate about 40% of our costs, that's combined comp and operating expenses, are seeing minimal inflation impact. Much of these costs are what we pay for our production force. Those costs move mostly in tandem with revenues, not headline inflation. Another 40% of our costs have some impact from inflation, but not nearly as much as headline inflation nor will those expenses grow as much as organic revenues grow. Examples would be our service and back-office layer costs, which includes salaries, incentive compensation, some professional fees, consulting fees on project work as well as some technology and advertising expenses that are on multiyear contracts. And the remaining 20% may see inflation pressures similar to headline reports. Examples are travel, entertainment, marketing, employee medical costs, some IT project costs, et cetera. So third, when we look at each cost categorization to see if we could manage the expense lower rather than just accepting the inflation, there are 4 examples of what we could do. First, our service layer includes over 7,000 colleagues in our centers of excellence. That acts as a safety valve for wage and employee medical cost inflation. And as we have talked about in the past, we see significant opportunity to further leverage our centers of excellence while improving our service quality across the organization. Second, we continue to substantially reduce our real estate footprint in support of our agile workforce strategy. We are seeing our real estate cost decline in this current environment, both from a cost per square foot basis as well as consolidated and downsizing offices. Third, we also have the ability to lessen T&E by reducing nonclient-facing travel. Fourth, we do have the flexibility to reduce discretionary project work, much of which is supported by external resources. Those are just 4 of the levers. We proved that we can execute on these during the pandemic. But with that said, I don't believe it would need to be as dramatic. So to wrap up on this inflation vignette, we believe the current inflationary environment will inflate revenues more than our compensation and operating expenses. So we are just not whiteboarding much impact on our profits nor on our free cash flows. Now moving to the CFO commentary document, on Pages 3 and 4. Not much here other than the usual modeling helpers related to foreign exchange and noncash expense items on Page 3. And on Page 4, an update for legal costs associated with deferred closings on the Willis Re deal, which we will adjust out. Turning to Page 5. Not much to update here. So this page is really just a repeat reminder that we are still expecting a 6- to 8-year period of incremental cash flows from our clean energy investments. That doesn't go through the P&L, but rather through our cash flow statement. The pinkish column shows that we still expect to harvest $125 million to $150 million a year of cash flows, which could perhaps be even greater in '23 and beyond. And it's not too late for Congress to extend the law, so we remain well positioned to restart production if that happens. Moving on to the top of Page 6 and the rollover acquired revenue table. These estimates for second quarter shouldn't change much at all given only 2 weeks left in the quarter. This caused some confusion last quarter, so please take an extra look and compare to what you have in your estimates. Sticking on Page 6 and shifting to the bottom table. You'll see our most recent update to the full year and quarterly outlook for Willis Re. Punch line here is no change from what we provided in April. Let me do a small vignette on investment income, which we earn on our fiduciary fronts. With the increase in short-term interest rates, we think we can see a few million more of investment income during the second quarter. But the more impactful message here is that further increase in short-term rates could generate more investment income going forward. We currently estimate that we could generate as much as $40 million annually for every 100 basis point increase in short-term rates. And that incremental income comes with essentially no incremental cost. Finally, regarding our own cash. At the end of May, available cash on hand was about $450 million. And with strong expected operating cash flow in the second half of '22, including a nice bump from clean energy investments, we are extremely well positioned to fund future tuck-in M&A using cash and debt. When I look at '22 and '23 together, our cash flow and incremental borrowing can fund more than $4 billion of M&A without using any stock. And like I've said, if we cannot find attractive M&A opportunities, we will return cash to shareholders through stock or perhaps dividends, of course, at a level that preserves our solid investment-grade rating. Okay. Those are my prepared remarks. The second quarter is shaping up to be another excellent quarter, and with resilient organic, a nice M&A pipeline, durable margin and strong expected cash flow, I think we are very well positioned to deliver another strong year of financial performance here in '22. Okay. Rob, we're ready to move to Q&A.

[Operator Instructions] Our first question is from Elyse Greenspan with Wells Fargo.

My first question is on the organic outlook. So you guys said full year brokerage organic of 9%. Pat, I know in your introductory comments, you said that you guys aren't seeing any impacts of a slowdown in economy or a recession. What are you guys assuming for the back half of the year just in terms of the economy embedded within that 9% full year guide?

Well, I think that -- first of all, let me make a note here that Joel Cavaness is not with us for the questions and answers. He had to take off. But thanks for the question, Elyse. Look, it changes almost on a daily basis as we're watching Washington. As Doug said, the whiteboarding that he and the team have done around what's going on with the numbers and what have you, I think, is pretty extensive. And at present, we're not seeing any negative impact on our clients. Now when you talk recession, as Doug was saying, again, we look at our client base as those that will be impacted, those that won't, those that might actually do well in a recession. And we're not at a point yet where we're saying that's going to happen. As Doug mentioned, we've got levers if they do. But back to your question, Elyse. I think the fact is we're seeing that our customer base at present is pretty darn strong. We're seeing that the sales, in particular, are a little bit hindered probably by supply chain issues, but by and large, are strong. Our construction project clients are strong. And so if we do get a recession, my own estimation, and again, it's just me, is that you won't see much impact this year. I think we have plenty of time to look at it. I think you'll hear about it. And then I think that will be a question for next year.

Okay. And then in terms of the margin guide, Doug, you said 10 to 20 basis points of improvement with 8% organic. But the guide is 9%. So could you guys exceed that margin target for the year if you do see this 9% organic growth?

There might be a little bit there, Elyse, but I think probably what we would do is if -- we really believe that we're going to post that 9%, which is kind of what we're running at. We'll get to this next month or so. There are some investments we'd like to make between -- there are discretionary investments, and we'll look at it. But I think if we can deliver -- if we post between 8% and 9%, if we're delivering in that 20 basis points of margin expansion, I think that would be a pretty good year after posted 550 basis points. So we may choose to spend some of that versus letting it all drop to the bottom line.

Okay. And then my last question. You guys in the past have spoken about your reinsurance business reaching over $1 billion of revenue in '24. It sounds like from the commentary today, you guys are pretty bullish on the pricing environment there and things for this year seem to be trending in line with expectations for the Willis Re piece. So could you guys exceed that level? Just help us think about the growth trajectory for the reinsurance business from here.

Well, we closed on that a little less than 7 months ago. And I'm very pleased. And we'll give you more commentary at the end of the second quarter, but really very pleased to be nicely on pro forma and the numbers that we talked about in the fall. Our historic Gallagher legacy group is having a very, very strong year. I don't think I'd jump my revenues up to that $1 billion mark sooner than we kind of hoped for. But the team is doing a very, very nice job. I mean, Doug, do you want to add any more color to that?

Yes, I can. I think that we're looking at running at over $900 million this year, is what our forecast would be. You hear a lot of reports that are going on that's talking about the marketplace. If rates were to continue to run up and capacity remains constrained, that will give us a little lift in it. We don't want capacity to dry up, certainly. But in '24, $1 billion is certainly not out of the reach. So we seem to be on track for it.

Our next question comes from the line of Greg Peters with Raymond James.

I'm going to just follow up to the last question on reinsurance. And I was listening to Tom's commentary about reinsurance and pricing in reinsurance. And I'm -- given -- in Florida, in particular, where the property market is under a lot of pressure, I'm wondering if any of the brokers are seeing any pressure on commission rates on the reinsurance side yet?

I don't know if Tom can come off mute for a second and answer that.

I am off mute, and I will tell you, Greg -- can you -- first all, can you hear me, Doug?

Yes.

Yes, yes, yes.

All right. Good. Greg, I would tell you that our guys are being asked on a regular basis to find ways to work with commissions with the insurance companies because the underlying rate is moving. However, at the same time, our compensation is improving as well. So yes, the simple answer is sure. They're negotiating with us because rate is moving up, and yet, they may consider that we're whole and improving our position on an annual basis.

Got it, Tom. And you said you were getting great feedback from the clients. And I know one of the challenges with the reinsurance brokerage operation is those clients often want access to your retail flow. Can you give us some perspective on how those conversations are going?

Well, your first part of the comment was things are going great. The last couple of weeks, I've been in the U.K. and have been visiting with a number of our reinsurance clients as a result of the merger with the Willis Re team. And again and again, I've heard that, I can't believe that you guys are only 6 months into the journey, all right? It just -- it feels like you have been working together far longer than that. There's a lot of communication between both sides. We feel really good about what's happening there. When I take a look at the opportunities for us on a going-forward basis, I see the one place in the world where we all touch together is in the London marketplace. And I see the team working extraordinarily well together at the moment to continue to take the business forward. So we're very bullish about what's going on. Our retention rates of our team, our retention rate of our book of business has been better than we expected, frankly, and look for a great second half of the year as well.

Greg, to your point, though, I think Tom -- yes, Greg, we are seeing all kinds of meetings being asked for and people wanting to get into the business flow, which, frankly, we're very supportive of. We like that. Now one thing from the very beginning of this acquisition that we made clear to everybody is that, number one, we're not going to use the power, if you -- if that's a proper word, of our inward placements to demand any work on the back end, stuff coming out the back. We've got good relationships. You know our people. Of course, we'd like more business, but you're not going to hear us say the $1 billion in needs to have $500 million coming off the back. Having said that, the fact that a lot of these management teams want to come in and talk about what more they can do with us, that suits us. We're very clear with them that we're not rolling books. You can't look at us and say, "We're your biggest reinsurance buyers. So we need you to close out that market and roll all the business to us." We don't -- those conversations don't even happen. But the fact that senior leadership wants to come in and sit down, understand our book of business, know what we're doing on acquisitions, it's fantastic. We're really supportive of that. And there's a lot of that going on. You're absolutely right.

Got it. I wanted to just pivot, and I know you referenced this in your opening comments, Pat, but then Joel talked about it, too. And I guess he's not on the call anymore. But I just can't recall a previous call where you've specifically called out lost retail accounts or retention. And obviously, your outlook is very strong. So I don't want to make too much of this, but it just -- it seemed unusual to me. And so I just thought I'd follow up with that, the commentary about that. Is there something underlying going on there? Or is this just...

Just trying to give you more flavor. Nothing -- don't read anything into that.

Yes. I mean on a specific -- Greg, there were 2 or 3 large accounts that the underlying retailer didn't make the placement or substantially changed the placement, not away from RPS, but they just didn't place the cover, which I guess, could be a lost account to another broker. But it's just kind of a onetime thing. If you look at 16 quarters, it'll probably be one time. We just have a little bit of a tick-up in lost business.

Got it. Okay. The final question is probably going back to a bigger picture, and it's something we've talked about before. But I'm saying -- I'm asking it again because I do get questions on this, and that's just the balance between harvesting margin and investing in business, and I know in the various executives' comment about investing in their business. You've generated tremendous margin improvement over the last couple of years. And as we sit on the outside, how can we evaluate your ongoing investments and if you're meeting the hurdles necessary to grow your business other than just looking at the results?

Well, maybe I can answer that, Greg. Financially, here's the thing. We're not underinvesting in our business first and foremost, right? And I do this a lot -- and the place that we'd like to make [indiscernible] investments [indiscernible] that we're behind making investments is in the IT arena. I think that we're more constrained by our bandwidth to accomplish our objectives than we are the financial pressures of posting higher margins or holding margins. It just takes time to get projects in place, get them up and running. But if you're going to ask me to wiggle my nose and say, if you could just have a pot of money, how much more would you like to spend to get you all caught up every place that you're looking at, the number is $30 million, $40 million, $50 million. We're not looking at an investment spend where I've got a project list of $200 million of ask. It's a pretty manageable number. So if you think about $7 billion worth of revenue, if we wanted to spend an extra $20 million to $30 million, it really doesn't move the margin story one way or another either way. It just -- this year toward the end of the year, if we're starting to push that 9%, maybe spend another $5 million -- yes, this -- $10 million in the second half of the year in order to march towards that. So we're not underinvesting. The teams have a good investment bucket. We'll start the budget process here in another couple of months to look at what we want to spend next year. But I hope that gives you some flavor. We're not underinvesting. We've got -- there's a lot of investment going on. Maybe if I were just to poll everybody, it'd be in that $20 million, $30 million that they would want to spend more immediately on something, if we can get to it even.

Yes. By the way, Greg, I think you know us well enough. I would have no problem in a quarter or a year explaining to all of you that we needed to spend $25 million or $50 million for this because it was really critical to us. And I think you've also been watching us long enough to know that even when we get into situations where we want to say, look, we're crunching down, we never close the spigot for recruiting hires for -- in particular, production ever. And we never stop investing in those enterprises. And it's mostly around production. I mean Doug's right, there's going to be IT cost requests that we might say, "Could you hold off a little bit?" But by and large, the requests from the field are usually around production efforts, and we invest in those all day long.

[Operator Instructions] Our next question comes from the line of Yaron Kinar with Jefferies.

So I just want to continue on this last line of questions and answers around the margin. So if I take, let's say, 9% organic growth as the guidance or target for the year. We also have slightly higher or significantly higher interest rate environment. Those 2 together, I think, come to more than a $20 million lift in your revenues. And I think if I understood correctly, Doug, you were saying kind of the wish list of additional discretionary spending could come to another $20 million or so. So shouldn't there still be further margin left with all that?

Well, first of all, you're asking about sort of the precision here that -- when we're talking about 10 to 20 basis points margin expansion. We have an extra point of organic growth, right? That's $70 million more of revenue, right, for the full year. We've gotten some of that already. We've got the second half of the year. So maybe it's another $30 million in the second half of the year. 1/3 of that goes to the production to have, 1/3 of it goes to just supporting existing margins. So it gives us maybe $10 million, $15 million more in there. The precision around that on a $7 billion company, you got to understand that there are other opportunities, if we get a recruiting, a team that we'd like to bring in. So I think when we say 10 to 20 basis points, it's pretty -- it's in the ballpark. But could it be 30? Maybe. Could it be 5? Maybe. We just want to make sure that we have room in our discussion here. But it's certainly capable to do it. If it's one of those things that the management team sat down and said, we have to show more margin improvement in the next 3 months of the year, we could do that. I mean that we have so many levers to pull. We've proven that during the pandemic. We proved it during the Great Recession. We can pull some levers. The question is, what do we want to spend the money on? And if we have a really great team out there, we're going to go hire them. If we have an opportunity to seize on some opportunities to do some more IT development, we're going to do that. So it's not the inability to do it. It's just the willingness over the next 6 months to let that all drop to the bottom line. I think we'd like to spend some of it because I think it will help us in the future and help build a better franchise. So on $7 billion of revenue, we're talking about $10 million around the estimate here.

Got it. That's very helpful. And then another question just on M&A. It seems like, at least in the first half of the year, it's been a little bit light. And it's certainly not a Gallagher phenomenon. I think we've kind of seen it across some of your other peers. Is there -- I guess, why do you -- can you maybe offer some rationale as to why this is relatively late in the first half of the year? And do you expect it to pick up in the second half?

Well, seasonally...

I do think it will pick up in the second half. Go ahead, Doug.

Yes. Yes. Seasonally, we're always a little short. We're always a little lower in the first quarter. And we're only 5 months into the year now. It always picks up more towards the end of the year as people targeted. So I would say there is some seasonality, but it was pretty competitive out there, too. There's some multiples being thrown around that we're just not going to chase.

But I do think that -- Yaron, part of your question is on the industry as a whole, and I've read the same statistics. I think a lot of that is just because an awful lot cleared out in the fourth quarter.

Okay. Yes. That makes sense.

Now if you look at last year's numbers, they're off the Richter scale records, and a ton of that closed in the fourth. And I don't know if that's tax driven or capital gains type of things. We see that every year. There's kind of a rush for the door in the fourth, and that does put the first quarter in particular kind of as a slowdown. And we've seen that across the whole industry this year.

Right. So would you expect that to maybe repeat to some extent in the fourth quarter of this year?

I think so. I think Doug's point is exactly right on. We've always -- our own experience is that seasonally, we're a little stronger in the fourth. And yes, I would tell you that our tuck-in acquisitions, when you get to November, December always press us to let's get this thing done in the fourth.

Mr. Gallagher, that was our final question. I'll turn the floor back to you for any closing comments.

Thank you very much. And thank you, everybody, again, for joining us this morning. I think as you can see from our comments today, we are upbeat about our prospects for the second quarter and the full year 2022 and frankly, beyond. We look forward to speaking with you again during our second quarter earnings call at the end of July, and thank you very much. Have a great day.

Thanks, everyone.

This does conclude today's conference call. You may disconnect your lines at this time.