Arthur J. Gallagher & Co. Q2 2022 Earnings Call Transcript

Participants

Corporate Executives

• J. Patrick Gallagher, Chairman, President and Chief Executive Officer
• Doug Howell, Chief Financial Officer

Analysts

• Elyse Greenspan, Wells Fargo & Company
• Yaron Kinar, Jefferies Financial Group Inc.
• David Motemaden, Evercore ISI
• Greg Peters, Raymond James
• Mark Hughes, Truist Financial Co.
• Meyer Shields, KBW
• Weston Bloomer, UBS Group AG

Presentation

[Operator]

Good afternoon and welcome to the Arthur J. Gallagher & Company Second Quarter 2022 Earnings Conference Call. Participants have been placed on a listen-only mode. Your lines will be open for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time.

Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the cautionary statements and risk factors contained in the company's 10-K, 10-Q and 8-K filings for more details on its forward-looking statements.

In addition, for reconciliations of the non-GAAP measures discussed on this call as well as other information regarding these measures, please refer to the earnings release and other materials in the Investor Relations section of the company's website.

It is now my pleasure to introduce J. Patrick Gallagher, Chairman, President and CEO of Arthur J. Gallagher & Co. Mr. Gallagher, you may begin.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Thank you. Good afternoon, everyone. Thank you for joining us for our second quarter 2022 earnings call. On the call with me today is Doug Howell, our CFO; as well as the Heads of our operating divisions.

We had another excellent quarter of financial performance. For our combined Brokerage and Risk Management segments, we posted 22% growth in revenue, 10.7% organic growth, net earnings growth of 35%, adjusted EBITDAC growth of 23% and adjusted earnings per share growth of 19%. I'm extremely proud of how our nearly 41,000 colleagues around the globe performed during the quarter in the first half of the year.

So, let me give you some more detail on our second quarter Brokerage segment performance. During the quarter, reported revenue growth was 25%. Of that, 10.8% was organic. We did have a tailwind of about one point from an infrequent large life case that I'll touch on in a minute.

Rollover revenues were about $240 million, consistent with our June IR Day expectations. Net earnings growth was 36%. And as expected, we posted adjusted EBITDAC margins of 32%, an outstanding quarter for the Brokerage team.

Let me walk you around the world and break down our organic, starting with our PC operations. Our US retail business posted 11% organic, with strong new business, retention, and continued renewal premium increases. Risk placement services, our US wholesale operations, posted organic of 8%. This includes more than 15% organic in open brokerage and 4% organic in our MGA programs and binding businesses.

New business was consistent with second quarter of 2021, while retention was down just a bit from last year, as we noted in our June IR Day. Shifting outside the US. Our UK businesses posted organic of 8% with excellent new business overall and another double-digit organic growth quarter within specialty.

Australia and New Zealand combined organic was more than 11%, driven by strong new business, stable retention and higher renewal premium increases. Canada was up more than 14% organically and continues to benefit from renewal premium increases, great new business and great retention.

Moving to our employee benefit brokerage and consulting business. As I mentioned earlier, we were helped this quarter from a large life case. Excluding this, our benefits business organic was about 9%, in line with our IR Day expectations and driven by increased HR benefits consulting work and solid growth in our international and health and welfare businesses.

Finally, our December reinsurance acquisition is right on target. After controlling for breakage prior to closing, second quarter organic was around 7%, just fantastic, and integration continues to progress nicely, on budget and ahead of its original time line. So reinsurance continues to be a really good story. So headline Brokerage segment all in organic of 10.8% and upper 9% after controlling for the large life case, either way, an excellent quarter.

Next, let me give you some thoughts on the current PC market environment, starting in the primary insurance market. Overall, global second quarter renewal premiums, that's both rate and exposure combined, were up 10.5%. That's higher than what our data showed for increases in renewal premiums in both the fourth quarter 2021 and first quarter 2022. When I look at our renewal premiums by line for nearly all coverages, second quarter increases were equal to or higher than first quarter. One exception to this was professional liability, mostly D&O.

By geography, renewal premiums were up double digits, nearly everywhere. Again, that's a combination of both rate and exposure. So next to no slowdown in premium increases during the quarter. Additionally, we are not seeing any significant signs of economic slowdown. In fact, second quarter midterm policy endorsements, audits and cancellations continue to trend more favorable than a year ago. Thus far in July, midterm policy endorsements continue to move higher year-over-year, and renewal premium increases are consistent with second quarter. But remember, our job as brokers is to help our clients mitigate premium increases and find suitable insurance programs that fit their budgets.

Moving to reinsurance. As we noted in our first view report published by our reinsurance professionals earlier this month, there are very real signs of hardening in the reinsurance market. Property reinsurance pricing is up across the board. And most notably, for U.S. hurricane and Australian property risks are up anywhere from 15% to more than 40%.

On the casualty side, reinsurance placements experienced more modest price increases and were a little bit less challenging. Regardless, a firm reinsurance market will naturally show up in primary market rate increases. And there are many other reasons for our carrier partners to maintain their cautious underwriting stance outside of reinsurance market conditions, inflation, geopolitical tensions and economic uncertainty to name a few. These all translate into a difficult PC market conditions continuing for our clients across retail, wholesale and reinsurance for this foreseeable future.

Moving to our employee benefit brokerage and consulting business, U.S. labor market conditions remained broadly favorable. Even with a decline in U.S. job postings in each of the last two months, there remain more than 11 million job openings, that's more than double the number of people unemployed and looking for work. We expect strong demand for our HR and benefits consulting services to continue as businesses prioritize attracting, retaining and motivating their workforce. The timing of the large life case and covered live changes in the second half of 2021 will cause the benefits business to post lumpy quarterly organic results this year, but that doesn't change the still favorable underlying environment.

So let me wrap up on the Brokerage segment organic. A great first half and looking like the second half will lead us to a full year 2022 organic over 9%, which would be an absolutely terrific year.

Moving on to mergers and acquisitions, during the second quarter, we completed eight new tuck-in brokerage mergers representing about $50 million of estimated annualized revenues. I'd like to thank all of our new partners for joining us, and extend a very warm welcome to our growing Gallagher family of professionals.

As I look at our tuck-in merger and acquisition pipeline, we have more than 40 term sheets signed or being prepared, representing nearly $350 million of annualized revenue. We know not all of these will close, however, we believe we will get our fair share.

Next, I would like to move to our Risk Management segment, Gallagher Bassett. Second quarter organic growth was 10.3%, a bit better than our IR Day expectation due to a strong June. Adjusted EBITDAC margin was 18.9%, which is in line with our expectations.

For the year, we continue to see adjusted EBITDAC margins near that 19% level. We again saw increases in new arising claims across general liability, property and core workers' compensation during the quarter.

Encouragingly, property and liability claim counts are back to pre-pandemic levels. Core workers' comp claim counts have yet to fully rebound to 2019 levels, which represents a nice opportunity for further growth.

Looking towards the second half of the year, we think organic revenue growth will continue to push 10%, due to grow in claim counts and new business. I'll conclude my remarks with some thoughts on our bedrock culture.

As I resume traveling to our Gallagher offices around the globe, I can report to you that our culture is as strong as ever, and that's a reflection of our people, our nearly 41,000 colleagues working together for a common goal to serve our clients.

As I've said before, our people underpin our culture a culture that we believe is a true competitive advantage and drives our outstanding financial results. Okay. I'll stop now and turn it over to Doug. Doug?

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

Thanks, Pat, and hello, everyone, an excellent second quarter and terrific count. Today, I'll touch on organic margins and the corporate segment using our earnings release and then make some comments using our CFO commentary document posted on our website. I'll end then with my typical comments on M&A, debt and cash.

Okay, starting with the earnings release, to the Brokerage segment organic table on page three. Fantastic headline all-in brokerage organic of 10.8%, as Pat said, we did benefit by about one point or so because of a large group live case found in late June, with or without that a great quarter by our sales team.

As for the rest of 2022, during our June IR Day, we said third and fourth quarter would be somewhere around 8% due to a, tough benefits compare. As we sit today, we're still seeing third quarter around that 8%, reflecting about one point of that tough benefits compare.

And we're becoming more bullish on fourth quarter call it nicely over 8% in the fourth quarter. That would lead to full year Brokerage segment organic growth of over 9%. So today, we're forecasting full year organic growth better than what we were seeing at our June IR Day.

Next, turning to page five to the Brokerage segment adjusted EBITDAC margin table. Headline all-in adjusted EBITDAC margin of 32%, right in line with our June IR day expectation. Recall what we've been saying all year, because of the roll-in impact of the acquired reinsurance operations, which has substantial quarterly seasonality and because there are still expenses returning as we come out of the pandemic, those in combination create quarterly margin change volatility.

As a recap, we posted adjusted margins up 50 basis points in the first quarter, down 97 basis points here in the second, and we're forecasting down 100 basis points in the third, then back up 100 basis points in the fourth. Because we are seasonally the largest in the first quarter, those results would roll up to around 10 to 20 basis points of full year margin expansion. These quarterly margin changes are right on what we've been saying all year.

When I think of the inflation impact, I just don't see much here in 2022 on our expenses. And as we discussed in June, headline inflation doesn't significantly impact 80% of our expense base. And we have mitigation levers to pull on that other 20% if it comes to that. So even with rising CPI, we remain comfortable with our 2020 margin outlook. Looking towards 2023, all that quarter margin change volatility should go away with the pandemic behind us and reinsurance fully rolled into our books.

Moving to the Risk Management segment on pages five and six, Pat hit the highlights. 10.3% organic and 18.9% adjusted margins, an excellent quarter. This unit continues to show momentum with rebounding claim counts and a large new business win coming on next quarter. It's looking now like organic revenue growth of around 10% in each of third and fourth quarters 2022. Now remember, that's on top of 17% growth in third quarter 2021 and 13% growth in fourth quarter 2021. That would be a terrific outcome to overcome such a difficult compare.

Moving to page seven of the earnings release to the Corporate segment shortcut table. Interest in banking is within our June IR Day range. Adjusted M&A costs in clean energy, they combined -- those combined also within our range. And corporate, after adjusting for some favorable tax item, is slightly better than our June IR Day range, call it about $0.01 due to favorable FX remeasurement gains given the strengthening of the dollar.

Let's leave the earnings release and go to the CFO commentary document. On Page three, these are our typical brokerage and risk management modeling helpers. But the rally in the U.S. dollar since our June IR Day, please take a look at our updated FX guidance for the remainder of 22. This late June strengthening also caused an extra $0.01 headwind here in the second quarter versus our IR Day guidance.

Next, you'll see our current estimate of integration costs. Most of this is related to Willis Re. The punchline has no change to our original estimate of $250 million for integration charges through the end of 2024. As I mentioned last quarter, the team is making excellent progress and is executing at a faster pace than our original plan. Integration efforts around people, real estate, back-office transition services are targeted to be mostly done by late 2022. In fact, our new reinsurance colleagues are now moving into our combined Gallagher locations around the world, and there's an excitement that is coming together. As for technology and system rebuilds, we still see having that done by the end of 2023 or early 2024. So continued good news on the reinsurance integration front.

Next, please take a look at the amortization of intangibles line. Recall we now adjust out our -- not out of our non-GAAP results. Also take a look at footnote number two, that will help you reconcile this number to what we're showing in the base of our GAAP financial statements.

Next to the change in estimated earn-out payable. This quarter, some component of the earn-out payable adjustment has become more pronounced. The punchline is found in footnote number five. The note admittedly is a little account needs, but it's saying that the large non-cash gain in our results this quarter is mostly due to increases in interest rates and market volatility.

When these increase, the value of our earn-out liability declines, thus creating GAAP income. This gain does not reflect any meaningful change to our expectations of the acquired brokerages nor does it change our view of what we'll ultimately pay an earn-out. The accounting is a bit like the change in interest rate assumptions and pension accounting, except this change in earn-out liability goes to the P&L, not through OCI as does pensions. In our view, this is a no never mind but can dramatically impact comparability, so we adjusted out.

Turning now to page four, our Corporate segment outlook. No changes in the third and fourth quarter estimates.

Flipping to page five, Clean Energy. This page is here to highlight that we have around $1 billion of tax credit carryovers. And with the sunset of the program late last year, we're now in the cash harvesting year of these investments. You'll see in the pinkish column that the 2022 cash flow increase should be $125 million to $150 million and perhaps more in 2023 and beyond.

At this rate, these investments will be a really nice seven-year cash flow sweetener. The possibility of an extension of the loss still exists, so we have idled our plans rather than decommissioning them, cost us a little to carry them, but it lets us remain well-positioned to restart production if an extension happens.

Turning to page six. The top of the page is the rollover revenue table that we've spoken about in detail. We appreciate all those that have incorporated this disclosure into their models.

Moving down the page, the bottom table is an update on our December reinsurance acquisition. You'll see that these numbers are almost spot on to our June IR Day estimates. Delivering $730 million of revenue and nearly $260 million of adjusted EBITDAC here in 2022 would be very close to our pro formas when we inked the deal. That would be a really good outcome.

Moving on as to cash and capital management and future M&A. At June 30, available cash on hand was about $450 million. Our operations continue to perform very well, and we expect strong operating cash flows. Add to that, the cash flow sweetener from our Clean Energy investments and additional borrowing capacity, it adds up to more than $4 billion of tuck-in M&A capacity here in 2022 and 2023 combined.

So those are my comments. An excellent quarter and first half, and we're extremely well-positioned for another terrific year. Back to you, Pat.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Thanks Doug. Daryl, I think we're ready to open it up to questions.

Questions and Answers

[Operator]

Thank you. The call is now open for questions. [Operator Instructions] Our first questions come from the line of Elyse Greenspan with Wells Fargo.

[Elyse Greenspan, Analyst at Wells Fargo & Company]

Hi thanks. Good evening.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Hi.

[Elyse Greenspan, Analyst at Wells Fargo & Company]

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

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Well, I think it's not all that different than the discussion that we had in June. We're seeing -- literally, we look at this daily, an interesting pattern of our underlying clients business is doing well. They're still recruiting people. Our benefits HR folks are as busy as they can possibly be. We watch for adjustments, both in terms of audits and endorsements, and those are all positive right now. To put that in perspective, we have -- we do have a baseline on that during the pandemic, and it was -- that was obviously substantially upside down. So we do have a good feel for that, and we feel good about it.

Inflation, as Doug said, really has an impact on about 20% of our expenses. I think that's probably good research on the team's part in terms of what's really subject to that, that we'll be watching. As you know, we're going into budget time in the next six weeks or so, and there's a lot of discussion around this. So don't hold me to it, but I think that we're pretty -- in a pretty good spot. And I think our mix of business bodes well. I think that the -- the way our expenses shake out, an awful lot of those expenses are variable, I think that's good. A lot of upside for our salespeople this year, obviously. And I think that with rate increases, with interest rates up, it's a pretty good environment for a broker.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

So let me pile on that a little bit because we don't want whiteboarding on that. Like that, we're not seeing daily indications of our customers grow slowing at this point. And admittedly, that's looking at current and recent past activity. And I think your question is really more about a future slowdown. So when we looked at that, what kind of cooling might we see, whether it's a recession or just a slowdown in the economy because, obviously, not every recession is the same, we do a lot of work on that. And we see if it happens, and I say it more like a normal recession, maybe more like 1990, '91, and again, of what happened maybe in 2000, 2001, and before 9/11.

We do not see next year being a couch like the subprime financial shock recession of '07 or '08 or the pandemic recession for a few months of '20. So it's also important to note that these more normal recessions in the early '90s and early 2000s, both lasted about eight months. So we see it like that. It's also -- it's an important point to remember that brokers -- we are in a very large portion of our revenues based on the amount of premium placed. If it goes up because of rate or because of exposure, frankly, we're a little bit different on that. So for us, we think that like taking a look at nominal GDP is the bigger factor for our revenue much more than real GDP. So absolute sales, payroll, like Pat said, and property values are what premiums are placed on.

So then you say, what next year will premium rate increases do? And you heard us say that we don't see them slowing over the next year or so. And then really, our spread between new business and lost we're proficient broker. So selling more insurance than we lose every year. So when we put all that together for next year, the brokerage business during a normal recession during an inflating premium rate environment can still post terrific organic results. So that's how we're seeing it now. And I talked to you about on the expense side during June that, we think that we have some mitigating factors for that 20% that might be highly exposed to the inflation component of that. So it's a long answer to your question between Pat and I on it, but we think 2023 could still be a year of terrific organic growth.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

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

[Elyse Greenspan, Analyst at Wells Fargo & Company]

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

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

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

[Elyse Greenspan, Analyst at Wells Fargo & Company]

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

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

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

[Elyse Greenspan, Analyst at Wells Fargo & Company]

Okay. Thanks for the color.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Thanks, Elyse.

[Operator]

Thank you. Our next question is come from the line of Yaron Kinar with Jefferies. Please proceed with your question.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Good evening.

[Yaron Kinar, Analyst at Jefferies Financial Group]

Hi, good evening. And congrats on a good quarter.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Thank you.

[Yaron Kinar, Analyst at Jefferies Financial Group]

First question, the large life case that you mentioned, what's the margin profile on that? Is that accretive or dilutive to the overall brokerage business?

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

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

[Yaron Kinar, Analyst at Jefferies Financial Group]

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

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

We adjust that out of our margin profile. So it would be just on the revenue side.

[Yaron Kinar, Analyst at Jefferies Financial Group]

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

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

Well, it's a 742 page draft bills that we're doing a lot of word searches on it. I'm not seeing that. But if you get into the, kind of, Board of [Indecipherable] in the Senate next week to see what other senators might want to include in the package or look at it, I think that we're never out of it until we're not.

And even if it doesn't come through in this package, it could be later in the year too. So it doesn't cost us that much to carry the plants, our utility partners have been very understanding about this. They're not pressing us to decommission. So if you -- if we have to carry for another six months, we will. But if it happens, it would be great. If not, we're in the cash harvesting era just like we thought about for the last 15 years, we're at that point now. So harvesting the cash is pretty nice.

[Yaron Kinar, Analyst at Jefferies Financial Group]

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

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

Thanks. Thank you very much.

[Operator]

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

[David Motemaden, Analyst at Evercore ISI]

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

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

I'll tell you. It's really interesting to see. As you can imagine, I think we talked about this when the pandemic hit that business shut down in a quarter. And now -- and what an interesting turnaround for our clients -- now their biggest problem is attracting and retaining. So there is this demand, frankly at a level that exceeds what we saw pre-pandemic.

And I think in that case, things were, kind of, going along well. Everything was kind of fine. And then everyone tried to come down to the lowest amount of employee base they could. Now they're coming back. Their businesses are back.

As we said, when we looked at our adjustments and endorsements and audits, our clients' businesses so far are robust and that's a demand -- that creates a demand for more people. So, I mean, I can't get specific with you by exactly which practice group. It's the entire consulting part of our employee human resource, and human capital business is doing extremely well this year.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

Yes. Let me add to that. There's -- during the pandemic, people were all about cost containment.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Right.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

And so they cut down their cost and they were cut any discretionary costs. It's regardless of what happens with this recession. And all the Fed actions, I think -- I don't -- I just don't believe that it's going to have a dramatic impact on unemployment. So, I think, that employers are really thinking about attracting, retaining and motivating their talent. So I just don't see any type of eight months or yearlong recession putting a dent in the employment numbers. So employers are still going to have to make sure they're out there competing for talent, and that's where we really provide value. So I don't see this like the pandemic or in 2008. Again, we see it a lot, if it happens like 1990 and 2000, and there is still more for talent back then too.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

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

[David Motemaden, Analyst at Evercore ISI]

No. I mean that is exciting. So yes, it definitely doesn't sound like, at least now you're seeing really any sign of the slowdown. So I guess, maybe just switching gears, if I think about, if we do see a slowdown in next year, I guess one thing that I've noticed the past couple of quarters in the press release sort of in the fine print, there's been mention of office consolidations.

And I believe you spoke, Doug, I think last -- on the June call, about the agile workforce strategy. So, I guess, could you maybe just talk a little bit more about what you're doing on the real estate front? And if maybe that could be a bigger benefit or a bigger lever to pull if we do get into a tougher revenue backdrop? And maybe if you could put some numbers around potential saves, that would also be helpful?

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

Yes. I think when we talked about it early, when we were coming out of the pandemic, we thought there could be $30 million or $40 million or $50 million of annualized savings coming from real estate. I think we're still on target about that. I think we're harvesting maybe about $8 million a year on that effort, and there's a couple of big office footprints that are coming up here in the next year that I think that maybe will be a little bit more on that over this next year.

What are we doing? We're going to an office footprint that basically is covering 50% or so of the number of employees that we have. We're bringing technologies to bear, so their ads are within the work, so they're not dedicated locations. For those employees that have to come in every day, clearly, they have a designated spot. And we're finding that the employees are responding to it very well, especially in cities where there is a substantial commitment.

So, I see us continuing to do that. I don't know whether it would be a more rapid exercise, if we had a normal recession over the next year. I think the pace that we're making change is the pace that the organization has. And you got to either you wait until the lease expires and then downsize or you get out of it and you end up paying the rent to the rest of the term. So I think a paced and measured approach to that is where we are, and I don't see that changing if there was this normal recession happening over the next year.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

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

[David Motemaden, Analyst at Evercore ISI]

Yes, I know it sounds like -- sorry, go ahead.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

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

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Yes. Doug is just trying to do the age thing on me, because I go to a full restaurant I can't

[David Motemaden, Analyst at Evercore ISI]

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

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

Yes. I mean over a couple of years, 3.5 years. we'll get it.

[David Motemaden, Analyst at Evercore ISI]

Right. Thank you.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Thanks, David.

[Operator]

Thank you [Operator Instructions] Our next questions come from the line of Greg Peters with Raymond James. Please proceed with your questions.

[Greg Peters, Analyst at Raymond James]

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

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

I don't think there was substantial employment changes in a normal recession. So with Gallagher Bassett being so tight, to the number of people employed in places where there might be slips and falls, etc, I think that -- I'm not saying they're immune to it in this next normal recession, but I think that they're pretty resilient in that right now.

Same thing with the benefits business, there's still a competition for talent. I think that there's -- you heard Pat say that there's 11 million open jobs right now for -- and there's five million people out of work or something like that. So I think that I personally believe that this next -- if there's a slowdown, it's about drying up excess demand versus supply. And Scott's claims on what the supply is not the demand. And we sell stuff on supply, not demand. So I think that -- I think as business.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

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

[Greg Peters, Analyst at Raymond James]

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

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

I think that's in life still.

[Greg Peters, Analyst at Raymond James]

Yes, yes. Exactly. Okay.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

One thing on that -- one thing to add that as workers' comp premium rate increase, and we're not fully into big jumps in workers' comp. But if we get a harder market in workers' comp, that will push more people to self-insurance, and that leads to pretty good growth for Gallagher Bassett, too so when they look at self-insurance and alternatives. So to go into a recession, workers' comp rates go up, it's medical costs inflate, etc, you might have more people looking for self-insurance, Gallagher Bassett paying the claims.

[Greg Peters, Analyst at Raymond James]

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

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

No, not really.

[Greg Peters, Analyst at Raymond James]

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

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

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

[Greg Peters, Analyst at Raymond James]

Got it.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

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

[Greg Peters, Analyst at Raymond James]

Okay.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Big part of that GB.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

Right.

[Greg Peters, Analyst at Raymond James]

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

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Big part of that is Gallagher Bassett.

[Greg Peters, Analyst at Raymond James]

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

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

That probably more closely correlates to the day that we do our estimated tax payments, because we can anticipate using those credits. And therefore, we would pay less than estimated tax payment.

[Greg Peters, Analyst at Raymond James]

That's done on a quarterly basis, correct?

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

That's right.

[Greg Peters, Analyst at Raymond James]

Got it. All right. Thanks for your answers.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

Thank you, Greg. Next question?

[Operator]

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

[Mark Hughes, Analyst at Truist Financial]

Thank you. Good afternoon.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

Hi, Mark

[Mark Hughes, Analyst at Truist Financial]

Pat, the renewal premium number you gave us, the 10.5%, was that sort of the global P&C market?

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

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

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

Yes. Well, I understand, you asked about the global second quarter renewal premiums, that's both rate and exposure of 10.5%.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Yes, yes.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

Yes, that's right. And that's high

[Mark Hughes, Analyst at Truist Financial]

That was 8% in the first quarter. Do I have that straight?

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

I'd have to pull up the script on that, but --

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

I do think that's right.

[Mark Hughes, Analyst at Truist Financial]

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

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

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

[Mark Hughes, Analyst at Truist Financial]

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

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

No, I think it's pretty -- it's just the nature of some of those programs in MGU.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Yes, It should hold.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

Should hold better.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

That's pretty -- that stuff is pretty subject, Mark, to the economy. It's bars opening, restaurants opening, contractors starting with the wheel barrel. Houses that get hit by hail a lot.

[Mark Hughes, Analyst at Truist Financial]

Yes. Okay. And then did I hear you comment on workers' comp pricing. I know you talked about claims frequency and a lot of other factors. But how about pricing in the quarter?

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Flat.

[Mark Hughes, Analyst at Truist Financial]

Okay.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

Is growing. It's actually showing some nice mid-single-digit type growth numbers right now.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

But rates are flat.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

That's right.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

It to be aligned that our carrier partners are happy to continue to grow and are satisfied with the results.

[Mark Hughes, Analyst at Truist Financial]

Yeah, understood. I appreciate it.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Thanks, Mark.

[Operator]

Thank you. Our next question is coming from the line of Meyer Shields with KBW. Please proceed with your question.

[Meyer Shields, Analyst at KBW]

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

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

It could have an impact on -- yes, that would be. And I think a good point on that, our supplementals and contingents, there is some difference in contract year-over-year. So it's always good look at those two together, not individual. So -- but together, they were up 12% this quarter together.

[Meyer Shields, Analyst at KBW]

Okay. Perfect. And then a second question on reinsurance. How comfortable are you with the idea that the breakage that you factored in goes away once we get into 2023? Is that can be a factor anymore?

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

I would say it's behind us. So we've done a really good job of holding the teams in. We're not having substantial attrition on that. In fact, I think we're in good shape on that. So I would not expect -- we anticipated what we give them breakage and the team is holding -- that leadership team has done an amazingly good job.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

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

[Meyer Shields, Analyst at KBW]

Perfect. That's positive. And then one last question. I know this is nitpicky. But the large life deal that came in June, is that something that occurs next year? Is this a onetime deal?

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

One-time deal.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

We get them from time-to-time, but I wouldn't say that they're annually predictable year-over-year.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Right.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

They solid remain.

[Meyer Shields, Analyst at KBW]

I'm sorry.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

They bind when they bind. It's not like it's saying you've got to have this all put to by January 1, by October 1. It doesn't really drive necessarily with the calendar or fiscal year of the client. It's whatever they want to put these cases in place is when they were buying. So it would not be predictable quarter-over-quarter-over-quarter.

[Meyer Shields, Analyst at KBW]

Okay. That's perfect. That's all I have. Thank you.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

Thanks, Meyer.

[Operator]

Thank you. Our next question is come from the line of Weston Bloomer with UBS. Please proceed with your question.

[Weston Bloomer, Analyst at UBS Group]

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

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

Well, that margin for the year is somewhere around 36%. So I think that we're very happy with that margin. I think holding that margin is the right answer for that business. It takes heavy investment. They've been underinvested for the last three or four years on that. So that is not a business, if you go back to our acquisition that was expecting substantial margin change on that.

So we're happy with the margins the way they are. We think they're competitive. Sure, there will be opportunities for us to become more efficient, and we do that every year. We always become more efficient. But I think there's a ripe opportunity right now to hire brokers in that space that would like to join us. It's a hot thing going right now. So it would be nice to take and higher folks into that business. I think it's 34% for the year where we are.

[Weston Bloomer, Analyst at UBS Group]

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

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

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

[Weston Bloomer, Analyst at UBS Group]

Got it. Thank you.

[J. Patrick Gallagher, Chairman, President and Chief Executive Officer at Arthur J. Gallagher & Co.]

Thanks, Weston. Thanks for being in this call, Weston. Thank you.

[Doug Howell, Chief Financial Officer at Arthur J. Gallagher & Co.]

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

[Operator]

[Operator Closing Remarks]