Good afternoon. Welcome to Arthur J. Gallagher & Co.'s Third 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 meanings 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 statement 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 sections of the company's website. It is now my pleasure to introduce J. Patrick Gallagher, Chairman, President, and CEO of Arthur J. Gallagher & Company. Mr. Gallagher, you may begin. Thank you, operator, and good afternoon, everyone. Thank you for joining us for our Third Quarter 2022 Earnings Call. On the call for today is Doug Howell, our CFO, as well as the heads of our operating divisions. Before I get to my comments about our financial results, I'd like to acknowledge the damage and devastation caused by Hurricane Ian. Our professionals are working diligently to help our clients sort through their coverages, file claims, and ultimately get losses paid. At the same time, many of our own colleagues are doing the same for themselves. Our hearts go out to all of those impacted by the storm. In the aftermath of events such as Ian, the insurance industry's role and response is paramount to help families, businesses, and communities restore their lives. I'm really honored to be part of an industry with such important responsibility. Okay, on to my comments regarding our third quarter financial performance. For our combined Brokerage and Risk Management segments, we posted 15% growth in revenue, 8.4% organic growth, net earnings growth of 12%, adjusted EBITAC growth of 15%, and we completed or signed seven mergers in the quarter, totaling about $60 million of annualized revenues. Another fantastic quarter by our team. Let me give you some more detail on our third quarter performance, starting with our Brokerage segment. During the quarter, reported revenue growth was 16%. Of that, 7.8% was organic. That's right in line with our September Investor Day expectation when we previewed there would be about a full point of headwind related to timing from a tough 2021 comparison within our benefits business. Acquisition rollover revenues were $162 million. Net earnings growth was 11%, and we posted adjusted EBITAC margins of 32.3%, a bit better than our Investor Day guidance. Another excellent quarter for our brokerage team. Focusing on brokerage segment organic, it continues to be broad-based by both business and geography. Let me walk you around the world and provide some more detailed commentary, starting with our PC operations. Our U.S. retail business posted 9% organic with strong new business and solid client retention, both consistent with last year's third quarter. Risk Placement Services, our U.S. wholesale operations, also posted organic of 9%. This includes more than 20% organic in open brokerage and about 5% organic in our MGA programs and binding businesses. New business was strong at more than 27% of prior year revenue, and retention was consistent with last year's third quarter. Shifting outside the U.S., our U.K. businesses posted organic of 15% with excellent new business production and retention. Australia and New Zealand combined, organic was 9%. New business production remained very strong and retention improved relative to last year's third quarter. Canada was up 13% organically and continues to benefit from renewal premium increases, robust new business, and consistent retention. Moving to our Employee Benefit Brokerage and Consulting business. As I mentioned earlier, as we signaled last quarter and again at our September Investor Day, our benefits business faced a tough organic comparison this quarter. Recall that due to last year's upward development in covered lives as employers resumed hiring coming out of the depths of the pandemic. Leveling for that, our benefits business organic was about 3%. That's consistent with our Investor Day expectations and includes strong growth within our HR benefits consulting units and solid growth in our international businesses. Before I conclude my organic comments, let me give you a quick update on our December 2021 reinsurance acquisition. Third quarter revenues were right in line with our expectations, and while not included in our Brokerage segment organic yet, after controlling for breakage prior to closing, organic was around 8%. That's just outstanding. With expected revenues and EBITAC for full year unchanged, reinsurance continues to be a fantastic story. Headline Brokerage segment all in organic of 7.8% and around 9% after controlling for the benefits comparison. Either way, an outstanding organic quarter. Next, let me give you some thoughts on our current PC market environment, starting in the primary insurance market. Overall, global third quarter renewal premiums, that's both rate and exposure combined, were up 10.5%. That's a bit higher than renewal premium change in the first half of 2022. As for rate, most lines of business and geographies saw increases in third quarter similar to the first half, with only one exception being D&O, where rates are now closer to flat, but our customers are buying more limits. Additionally, our customers' third quarter business activity was not reflective of any economic slowdown. In fact, revenue related to third quarter midterm policy endorsements, audits, and cancellations combined were above third quarter 2021 levels. Looking ahead, thus far in October, midterm policy endorsements and audit adjustments remain higher than last year's level, and renewal premium increases are also consistent with the third quarter. Remember, our job is to help our clients mitigate that overall 10% increase in premiums by developing creative risk management solutions that fit their budgets. Let me move to the reinsurance markets. Let me provide you with some broad observations regarding the upcoming 2023 reinsurance renewal season. First, there is no question that rates, terms, and conditions will vary depending on geography, individual ceding and loss history, risk characteristics, and line of business. Second, pricing on peak zone property catastrophe cover is moving higher and tightening terms and conditions are highly likely. Third, while we haven't witnessed the impact of Hurricane Ian spill over to non-property lines yet, it is possible that that could happen if there's a broad shift in reinsurance risk appetite and capacity deployment strategies. Fourth, and finally, the amount of property reinsurance capacity available remains an open question. Some reinsurance providers had already planned to pull back their cat capacity prior to Ian, and now it is likely the significant level of ILS capital will be trapped into 1-1 renewals, further pressuring potential capacity. Ultimately, supply will depend on expected returns from changes in pricing, terms and conditions, and perhaps expected returns will reach a level that will attract additional reinsurance capital. While we have yet to see any significant third-party capital enter the market, given ILS capital can move quickly, there is still time before the January renewal season. This will play out over the next two months, but at this point it seems the stage is set for a hard or even harder reinsurance market as we enter the important 1-1 renewal season. Reinsurance conditions will no doubt influence primary markets in 2023, and carriers were already facing rising loss costs in property and casualty lines. We see good reason for our carrier partners to continue to underwrite retail and wholesale risks cautiously for the foreseeable future. Moving to our Employee Benefit Brokerage and Consulting business, U.S. labor markets conditions remain tight but broadly favorable. During August, while U.S. employers reduced job openings by a million positions, there are still more than 10 million job openings, according to the most recent data. The level of open jobs remains well above the nearly six million people unemployed and looking for work as of the end of September. We see tight U.S. labor market conditions lingering for some time and expect strong demand for our HR and benefits consulting services to continue as businesses prioritize attracting, retaining, and motivating their workforce. Let me wrap up my brokerage segment organic comments with three terrific quarters in the books. Year-to-date brokerage organic growth stands at 9.3%. As I look to the fourth quarter, I see us posting another quarter above 9% that would deliver a fantastic year. Moving on to mergers and acquisitions. During the third quarter, we completed six new tuck-in brokerage mergers representing about $20 million of estimated annualized revenues. We also signed another merger late in the third quarter, representing an additional $40 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 about 50 term sheets signed or being prepared, representing nearly $400 million of annualized revenue. We know not all of these will close. However, we believe we'll get our fair share. Next, I'd like to move to our risk management segment, Gallagher Bassett. Third quarter organic growth was 12.2%. A strong finish to the quarter pushed organic a bit higher than our IR Day expectation. We also continued to benefit from increases in new arising claims across general liability and core workers' compensation during the quarter. That's both on an organic existing client basis and also due to some recent new client wins, including the significant insurance company client we added to our fast-growing insurance carrier practice. Profitability remains excellent. Third quarter adjusted EBITAC margin was 18.2%, in line with our expectations. That would have been closer to 19% without the impact from the new large client ramp-up that we spoke about at our September IR meeting. Looking forward for the fourth quarter, we believe organic revenue growth will be about 10% and adjusted EBITAC margins between 18.5% and 19%. That would close out a great year for the Gallagher Bassett team. I'll conclude my remarks with some thoughts on our bedrock culture. October 2nd, marked Gallagher's 95th anniversary. I took note on that day that our teams were hard at work helping our clients assess damage, file claims, and ultimately start the repairing and rebuilding process from Ian. If not directly assisting individuals and communities impacted, many Gallagher colleagues around the world donated their own money to help those impacted by Ian. What a fitting way for us to silently celebrate this incredible milestone. My grandfather would be proud of the company he founded, the employees that embody the culture he started, and the industry in which we toil. It's our people's actions in challenging times that bring our unique Gallagher culture to the forefront, a culture that we believe will thrive for another 95 years. Okay, I'll stop now and turn it over to Doug. Doug? Thanks, Pat, and hello, everyone. Today I'll touch on organic and margins using our earnings release. Then I'll move to the CFO commentary document that we post to our website and make some comments on our corporate segment. I'll conclude my prepared remarks with some thoughts on M&A, debt, and cash. During my comments today, I'll also provide some thoughts on our fourth quarter and some first thinking around how we are seeing 2023, now that we have started our budget process. Okay, starting with the earnings release and the brokerage segment organic table on page three. Headline all-in brokerage organic of 7.8%. That's over 9% when controlling for the tough benefits compare. Brings us to a strong 9.3% year-to-date organic growth. When I look at our organic quarter-over-quarter, it's fairly consistent at that 9% range. We boast 9.6% organic in first quarter, about the same in the second quarter when you exclude that infrequent large life sale we discussed last quarter. Now we're at about 9% here in the third quarter when adjusting for the benefits headline. It's looking like over 9% in the fourth quarter. That would deliver a full year 2022 organic above 9%. A little noisy on the quarters, but very consistent and actually a fantastic performance by our sales team. As for 2023, early feel is in that 7%-9% organic range for our brokerage segment. Next, turning to page five to the brokerage segment adjusted EBITAC margin table. Recall, this is a year of quarterly margin change volatility due to the roll-in impact of the acquired reinsurance operations, expenses returning as we come out of the pandemic, and the impact of a stronger dollar. Specifically, we've been saying to expect year-over-year margins to be up 50 basis points in first quarter, down 100 in the second quarter, down 125 basis points in the third quarter, and up about 125 basis points in the fourth quarter. Well, that was about right for our third quarter. We posted 32.3%, which was in line with our IR Day guidance, and we are still comfortable with our fourth quarter outlook of around 125 basis points of margin expansion relative to the FX-adjusted fourth quarter 2021 EBITAC margin. That would suggest a fourth quarter margin of around 32% at today's FX rates. In the end, since early 2022, we've been targeting around 10–20 basis points of full year 2022 margin expansion, and we're on track to deliver that. More importantly, that would mean we improved margins around 570 basis points since 2019. As we look ahead to 2023, we continue to expect margin expansion next year, starting around 4% or better organic growth. Call it maybe 50 basis points at 6%. Moving on to the Risk Management segment on pages five and six. As Pat said, 12.2% organic and 18.2% adjusted margins, both pretty close to our September IR Day expectations. Looking forward, we see these excellent results continuing in the fourth quarter. Organic growth, revenue growth of about 10% and margins in the mid to upper-18% range. That would mean full year organic growth of about 12% and full year margins around 18.5%. Looking to 2023, we will see the roll-in of the new large carrier client, and we have already had a nice new business win in Australia that will accrue mid-year. Continued strong new business production combined with continued growth in new arising claims, we see organic at least in the high single digits and margins around 19% in 2023. All right, let's shift now to the CFO commentary document. Starting with page three, which shows our typical brokerage and risk management modeling helpers. A few things to highlight. First, with the continued strengthening of the U.S. dollar since our September IR Day, please take a look at our updated FX guidance for the fourth quarter of 2022. As for 2023, perhaps the best start is just to assume what we are projecting for full year 2022 repeats in 2023, but most of that will be seen in the first half. Second, you'll see our current estimate for fourth quarter integration costs. Most all of this relates to the reinsurance acquisition. The team is making really excellent progress on this and is executing at a faster pace than our original plan. It was terrific to see our new reinsurance colleagues located with our other brokerage operations when I was in London a couple weeks ago. As for technology and system rebuilds, we still see being done by the end of 2023 or early 2024. Turning to the corporate segment on page four. Relative to our September outlook, Interest in Banking, Clean Energy, and M&A costs after adjusting for the large transaction-related expenses, those three lines total to about the midpoint of our outlook. Within the corporate line, most of the upside was due to some favorable tax items and a favorable FX remeasurement gain. Looking towards the fourth quarter, moving down that page, only one significant change to our outlook. As you'll see in the fourth quarter corporate line and read in footnote seven on that page four, here in October, we settled litigation resulting in Gallagher receiving $55 million in cash. Net of litigation costs and taxes, we will record a gain of approximately $35 million, and you'll see a few lines down that we'll adjust that gain out of our GAAP results. As for the cash proceeds, which because of our tax credits, is actually closer to $40 million, we'll put that to good work over the next couple of years to fund incremental production hires and make incremental investments in technology. I'll break down our thinking a little more during our December IR Day. Moving now to page five, Clean Energy. This page should be familiar to everyone by now. It highlights that we have close to $1 billion of tax credit carryforwards. The pinkish column shows that we expect to harvest $125 million-$150 million of cash flows here in 2022, and the peach column shows that we could be even greater in 2023 and beyond. As a reminder, that would come through our cash flow statement, not our P&L. Turning to page six, the top of the page is the rollover revenue table. Third quarter revenues of $162 million. That's right in line with our expectations six weeks ago. Shifting to the lower half of the page, this table is an update on our December 2021 reinsurance acquisition. Third quarter revenue of $120 million is consistent with our September IR Day estimate. As for EBITDA, a tiny timing difference between third and fourth quarter. Punchline is full year revenue, and EBITDA should come in very close to our purchase pro forma. That's a really terrific story and great credit to the team. Okay, as to cash and capital management and future M&A. At September 30, available cash on hand was about $500 million, and we've been saying that we might have around $4 billion of M&A capacity in 2022 and 2023 combined without using stock. That still seems about right to us today. Okay, those are my comments. Another fantastic quarter and nine months is in the books. Another strong outlook for the fourth quarter, and it's looking like we're well-positioned for a terrific year in 2023. Back to you, Pat. Thanks, Doug. Operator, if you would, let's open it up for questions, please. Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Weston Bloomer with UBS. Please proceed. Hi. Thanks for taking my question. The first one is on the 7%-9% organic growth that you're expecting next year. I was hoping you could kind of expand on what sort of environment you're expecting next year in terms of a potential recession. If you can hit that target in a recessionary environment, then maybe just comment on the magnitude of growth you're seeing across maybe P&C operations versus wholesale or international. Just trying to get a sense of how you're getting to that 7%-9% more granularly. Well, Weston, let me take the recession question. Doug can take a look at the numbers across. I think we did a pretty good job of laying out those numbers by division a moment ago. I think we said we thought they'd be pretty consistent next year. I think if you look at our prepared remarks, you got that question answered. The recession one is an interesting one because one of the reasons in our prepared remarks, we talk about what's going on with endorsements, is we can daily look at that information to see what's going on in the underlying business of our clients. We can also look at renewal exposure units as they're being put through to the market for renewal. As you know, when you renew a client, you have to estimate sales and payrolls going forward. Clients are pretty smart about not wanting to basically overpay and then wait for a return of that premium in an audit 18 months or 15 months after the close of the year. It's a bit of a yin and yang between the broker, the underwriter, and the client as we look at what are those payrolls that we should be providing. We're not seeing a big decrease in sales and payrolls. Renewals are going out the door with perception of their business being okay, and that's verified by the midterm audits and endorsements that we're seeing. I read The Wall Street Journal every day. You know, you read the left-hand column yesterday, the world just came to an end. I just didn't know it. Well, listen, I think the way we look at it this way is that we're not seeing it in our underlying business today, and we're also viewing if there is a recession in 2023, we see that being more like what happened in the 1991 period, in the 2001 period, more of a normal soft landing recession. We do not see a recession next year like the subprime financial shock of 2008, 2007 and 2008, or the pandemic recession that we saw for a few months in 2020. Those normal recessions typically last about two or three quarters, and when we go back to the best we can do to get data back then, we actually performed very well during those light recessions. In this case, I think that next year, if anything happens and we do go into recession, I think it's going to dry up excess demand more than it is to contract supply. We ensure supply. In our contemplation for next year is a lot like this year. Closure units holding stable, rates going up like we're seeing this year. I don't see a lot of change all of a sudden on 1/1 that the world has changed dramatically from what it's been for the last three to six months right now. That's our go-in case. That's how we're preparing our budgets in that range. That's how we came up with that 7%-9%. It'll give you more of a reflection on that in December. Got it. Thank you. Just one follow-up there. Is kind of like a high single, low double-digit growth for reinsurance brokerage kind of the right range as well? Can you remind us how much of that business is more property versus long-tail lines? In answer to your question, we see reinsurance in that high single-digit range next year. Right now, remember, you got a lot of treaties that are multi-line. Right now, the best we can tell is pure property is 28%. You put in the package on that, I say it might be closer to 40% of the book of business. Then you look at some of our kind of high-risk casualty lines, maybe you've got a book that's 60% of it is facing a kind of a tough renewal season. Great. Thanks. Then just one more. On the commentary around 50 basis points of margin, based on the 6% organic, does that contemplate a potential pickup in discretionary spend and inflation may be offset by higher fiduciary income? Or is that just a core expansion net of any items? Yeah. I think for 2023, and again, we'll give you some more here in December, there'll be an upside from investment income that, not all of that will hit the bottom line, because there could be some incremental inflation that we see in some of our numbers. Remember, about 80% of our business, we don't believe has significant exposure to headline inflation. But like we said last, at our IR Day, or on an earlier call, about 20% of our expenses, they do have some inflation pressures on it. But in our opinion, there'll be clearly an upside to that thinking as a result of incremental investment income next year. But I still need to work through that math over the next couple of months. Yep. I'm working through it, too. Thanks for taking my questions. Next question. Our next question is from Mike Zaremski with BMO Capital Markets. Please proceed. Hey. Good afternoon. Thanks. Just a follow-up on the investment income levels and, you know, so is the guidance that you provided kind of inclusive of, you know, using the current level of interest rates or the curve? Does that make sense? Are you talking about for 2023? Yeah, 2023. Sorry, Doug. Yeah. I think that when we look at 6% organic growth with possibly 50 basis points of margin expansion, that does not include a possible upside from incremental investment income, but not all that incremental investment income will likely hit the EBITDA line. It could go to some inflationary pressures on some of our cost base, or it could go to some discretionary spends, but it would be upside to that six points, 50 basis points, outlook. Okay. Understood. Thanks for the clarification. Kind of switching gears a little bit, just curious, you know, you're not calling out any kind of potential impacts to contingents or subs as a result of the hurricane. I know, you know, the new accounting rules came into place a few years ago. Is there anything we should be contemplating that could impact Gallagher in the year to come, or maybe even a kind of, you know, into programs business if there's a lack of capacity? Just trying to. One of your peers kind of surprised us a little bit, so just kinda see if there's anything there worth talking about. Our outlook on the impact of Ian to our contingent commissions is $465,000 of impact against our revenues. That have all been fully booked in the numbers that you see here today. We do not believe that would develop differently than that. We're just not exposed to contingent commissions on property placements in our book of business. Okay, great. Lastly, any change in the competitive environment on the M&A side, given there's kind of now a consensus that interest rates may stay higher for longer? Or is it still just very competitive? No, it's still very, very competitive. There's a lot of interest out there in our industry still. We're watching that very carefully to see if some of that falls off. You'll see some write-ups recently about the number of deals done coming down a bit. I don't know if that's an early sign that maybe some of the people want to sit on the sideline a bit. For the deals that we're after right now, the competition is very strong. I should have been clear. You don't expect multiples to move south, and you're not seeing that? I hope they do, but we're not yet. Okay. Thank you. Good luck. Thanks. Thanks, Mike. Our next question is from Greg Peters with Raymond James. Please proceed. Good afternoon. Yes. I wanted to go back, Pat, to your comments about the reinsurance market and the reinsurance business. Sort of unpack what's going on and get your perspectives because it really feels like we're at a seminal moment in that marketplace where we could, you know, be in a hard market, especially for cat exposed property, but seems like it's bleeding over into other lines. The reinsurers haven't been able to get an adequate return on their business, and then now the primary companies are gonna be asked to take higher retentions and, you know, absolutely pay more on rate on line. I guess my question is, you know, if these two partners of yours are getting pressure, or profitability pressure, do you foresee a scenario where you actually might get some pressure on commission rates, you know, as you know, as the market evolves here? No, I don't think so, Greg. I think it's clear that we earn our money and, you know, that's, you see that in the market. I mean, it's, the business has been very stable. I've had a chance to meet with a number of managements. They know exactly every dollar that we're making. There is no hidden factor here anywhere, and we have to do the work that justifies that income level every single day. Now, in my experience as a retailer, I'm not a reinsurance person, but a hard market makes you incredibly more valuable. You know, soft market in the retail business, some person with a shingle on will get a quote and beat you. When you're sitting with someone in a hard market, you are talking strategy, man. You are not talking about what's gonna happen to my comp premium. You're talking about, am I gonna get GL cover? That's going right down to personal lines. I've got tons of friends, as you can imagine, in South Florida. Am I gonna get homeowners next year? I don't know. I mean, I think you will, but you're gonna pay more, and they know it. Now that, I think, trusted advisor works its way all the way back to reinsurance, and this is not a time when these carriers are gonna put a lot of emphasis on how much we get paid when they're looking at trying to get returns literally on hundreds of millions of dollars of writings. Yeah, Greg, yeah. I will say this, it's been 20 years since I've been CFO of insurance companies, but right now, this is a time where my reinsurance brokers would be the most important people to have in my office with their skills, their capabilities, and this is a time where they really earn their money. Fair enough. I'm sure there's a robust conversation happening around all of this stuff. I wanted to also, and I know you've commented on this before, but I wanted to pivot and talk about, you know, the brokerage business and the pipeline, you know, if we're in a recession, if we go in a recession, blah, blah. You know, it's pretty strong. Can you remind us again, just, you know, when, on the risk management piece, how you think that might perform if we go into a soft landing. You know, what kind of, I know you've commented on this before, Pat, but just give us some sort of guideposts that we should be thinking about on that. Well, I mean, first of all, Greg, as you know, when prices are going up, one of the skills that brought us to the point we are today is the capability of taking people who should be self-insuring into that market and showing them how to take higher retentions and bringing Gallagher Bassett in. Recessionary work has the same—now I'm talking about the larger upper middle market—the recession has the same kind of impact, especially if you get a recession while at the same time pricing's going up. They're looking for alternatives. When I say your alternative is to pay tomorrow instead of today, and to really manage your claims hard and work hard at preventing them, there's a lot better listeners than when the prices are dropping, and that's going right to their bottom line, and they're private companies, and they're happy as a clam. When you get to the larger accounts, these are very sophisticated buyers, and they don't move around based on recessions. Now, if there is a recession and our larger clients have a lesser population, they close down shifts, then you'll see claim counts drop. I don't think you're gonna see an impact on that business, that happens in the short term. You know, we'll know well in advance of any kind of a downturn as people start slowing their business down and cutting shifts, we'll be well aware of it. We can probably comment better as we go into the new quarters. We're just not seeing that right now, Greg. I think that's the interesting thing to me. As I said, I read the Journal every day, and I'm sitting here going, okay. Then we test and test and test, and our primary business partners are doing really well. Then you look at the GB results, and claim counts are up, they’re not down. So I get why you're questioning it. I really do get the conundrum. Here's the thing. Doug pointed out that in other recessions we've done well. Clients do not jump in and out of self-insurance. You make that decision to move to taking a big retention and paying your claims. You may see your claim counts go down because hours worked are less, but you're not jumping in and out of that market. It's a pretty good place to be. Got it. Well, thanks for the answers. you know, I read the journal too, and, you know, it does seem like the end of the world is imminent, but you guys are posting good results, so congratulations. Thanks, Greg. Our next question is from Elyse Greenspan with Wells Fargo. Please proceed. Hi. Thanks. Good evening. My first question, you know, I'm gonna head in the opposite direction of talking about a recession. You know, I wanna go to the flip side and talk about how good, I guess, 2023 could be. You guys said 6%-9% organic in September. Today, you're saying 7%-9% for next year, but we could have a really strong reinsurance market, and it sounds like you'd have really good exposure on the wholesale side where the market's really firming. At 80% of your revenue is commission-based. Could there be an environment next year where pricing is so firm that Gallagher could print double-digit organic revenue growth? Well, from your lips to God's ears, Elysse. You know, if you take a look back at our results in other hard markets, yeah, that could happen. I mean, I'm not going to sit here and say no. If capacity dries up, smaller brokers in those environments can't get the job done. Reinsurance clearly is. Look at cat capital in the ILS market, depending on whether capacity is there or whether capacity comes in. Yeah, I think you could see a very bullish. You could write a bullish story. Assuming, right, Doug, you said, you know, at 6% organic, we could see 50 basis points of margin improvement. Assuming that the base is 7%, right? You know, sounds like it could be better than that. Is the base case that we'll see something, margin improvement that's above that 50 basis point level next year? You know, I think that it's not linear. If we posted 9%, I don't think you'd have 150 basis points of margin expansion, but you might have 75 to a point, something like that. I think that, let us get through this and get through our December, look at our budgets, and some of this is discretionary spending that we might want to make in investing in technologies and other organic growth strategies. Yes, I mean, there is a case that could happen. On the M&A side, right, you guys obviously have a good amount of capital flexibility over the next couple years. It does seem, maybe it's because you guys have had such a strong track record of M&A, right? Deal flow has been a little light relative to historical levels this year. I know the pipeline's still strong. At what point do you reach that level where you consider buying back your shares? Is it something where deals just ebb and flow depending upon time of year and, you guys will give it some time and then maybe consider buybacks? Well, listen, if we ended up with excess capital, our first metric would be is make sure that we maintain a solid investment grade rating on our borrowings. With interest rates going up, that's more and more important every day. Second of all, I think that our M&A pipeline is still robust. The third thing is, remember the arbitrage that we get on the multiples. More importantly, it's the, we're building out the team. We bring more people on, you know, on our side of the field to go out and compete on a, you know, on every day and create more organic afterwards. For us, buying back stock is certainly what we can do. It's certainly part of the math, and it's part of the story. I'd like to see us doing more and more M&A every day to put our cash to work at multiples that deliver arbitrage value to our shareholders. We're out there. We're looking very hard. Sometimes you win, sometimes you lose, but I think we've got a ton of opportunities in our pipeline right now. Given the strength of the U.S. dollar, are you guys seeing, you know, more opportunities for international deals? Well, listen, we've got some pretty good pipelines going on, especially in Canada, Australia, and the U.K. right now. We'd be happy to continue to look at those acquisitions there. Yeah, the dollar does have a little bit of an impact on that, but it's not what drives our investment choices. Okay. Thanks for the color. Sure. Thank you. Thanks, Elyse. Our next question is from Yaron Kinar with Jefferies. Please proceed. Thanks. Good afternoon, everybody. My first question is on headcount. I noticed there was a nice pickup in headcount, and the one I'm referring to specifically is in brokerage. I think it's up 7% year -to -date. Can you maybe talk a little bit about what that is going into? What type of roles you're hiring? And secondly, I was very impressed to see that the comp and benefit ratio is actually coming in year-over-year despite the increase in headcount. Is there a catch-up that we should expect, or how are you keeping that number down? All right. A couple of things. You got a couple of things to unpack there. First, let's talk about the increase in the headcount. We have actually substantially increased our headcount in our offshore centers of excellence. As you know, we've been talking about it for 15 years now. We think that that's a terrific spot to improve the quality of our insurance offerings. As a result, we're ramping up significantly more in offshore right now that can do that work for us. We're up considerably in that. That's what's driving the metric you're seeing is mostly offshore resources there. When it comes to the opportunity, you know, the drop in the cap ratio this quarter, some of that has to do with bonus timing. If you recall last quarter, I said we're a little ahead on our bonus accrual, so we didn't have to post quite as much this quarter, which probably offsets some of the, you know, we did have a little bit of inflation in our raise pool. Maybe we gave away another $8 million this year, something like that, in that, in the raise pool this year. What's offsetting that is the timing of the bonus. Got it. I'm curious, what led to the increase in the organic growth estimate for 2023, at least the bottom end of the range from 6% to 7%? What changed in the last six weeks? Well, listen, I think that Ian, you know, has brought a different tone in the marketplace. I think you're seeing some reports of reserve strengthening across lines. You saw the reinsurance outlook we've talked about. Remember, the reason why you got to 6%-9% is we were saying that 2023 felt somewhere between 2019 and 2022, and 2019 happened to be 6% organic growth. The context of the comment in September was relative to two different years. Now, as we're getting closer in our budget process and really looking at what we're starting to see in the renewal pipeline, we thought we could tighten that range up a little bit. Also, Yaron, I think that, you know, before Ian, it was clear that loss costs and verdicts and what have you were putting pressure on our carriers. Today, we look across the losses on the cat level and wonder if they're not going to bleed into the casualty lines. I've had some conversations with some of our reinsurance pros who think that that's a very good possibility. If that happens, that'll be—we’ll benefit from that as well. Got it. Maybe one last one, and following up on Greg's question. I guess in what markets, what kind of environments do you typically see some pressure on commission rates or maybe clients trying to shift over to fees? It primarily in the retail market as accounts go from, say, upper middle market, where typically you'll have about 85%-90% of your clients. By the way, we're 100% transparent. This is their choice. We have an adult conversation. They know we collect contingents. Let's not go back to 2004 and get me all in trouble again for accepting contingents and supplementals. They're all disclosed. This is client choice. As they get a little bigger, if they bring in a risk manager, that type of thing, then there's usually a shift to fee, and we're happy with that. Got it. Okay. Thank you. Thanks, Yaron. Our next question is from David Motemaden with Evercore ISI. Please proceed. Hi. Thanks. Good afternoon. Hey, David. Just had a question on the investment income side, the fiduciary income. Could you just quantify how much that generated this quarter? I think you've said in the past it's $40 million for every 100 basis points move in short-term rates. Just wanted to double-check what the benefit was to revenues this quarter, and then maybe just talk about how that impacted margins, how much of it fell to the bottom line? Okay. I'll take that in a couple different bites. All right? This quarter is, you know, let's call it $12.5 million that we had as additional investment income as a result of rate changes. Then you're asking how much of that fell to the bottom line. Maybe a better way for me to do this is to take a look at what does it mean for full year. If you recall at the beginning of the year, what we said is since, you know, when we're sitting in January, we looked back, and we had said that we had posted about 550 basis points of margin expansion. When we looked out, that was over two years. We said, if we look forward, again, I'm standing in January 2022, we said that we might be able to get margin expansion of 10–20 basis points on organic of about 8% here in 2022. What's happened since that, those expectations, right? We're still looking at 10–20 basis points of margin expansion. But organic's running, you know, a point better and let's say investment income between this year that might be up, let's say $30 million more of investment income in the year. So that's about $80 million more of revenues this year. The way I look at it is where'd that go? Where'd the $80 million of revenue go? Well, first of all, you know, we're gonna drop a third of that to the bottom line, right. So that leaves $50 million-$53 million of additional revenues. Well, we have to pay our producers, field leadership, and support staff. Usually, that runs about 45% of the revenue on that organic of $50 million. Call that $23 million. Now we're down to explaining where did $30 million go as a result of incremental organic and incremental investment income, again, relative to our outlook at the beginning of the year. Well, I can tell you that we spent about $10 million on incremental hiring, some incremental raises, and some incremental incentive comp this year. Maybe it's a third, a third, a third. We also know that about $10 million went to incremental travel expenses and entertainment expense. Now that's mostly due to inflation and it's not due to increased trips versus our expectation. Again, all this is against our expectation at the beginning of the year. Finally, we spent an extra $10 million on IT betterment projects than probably we would have expected at the beginning of the year because we have the bandwidth in order to implement those projects. For me, sitting here relative to our expectations at the beginning of the year, I think it's a really terrific outcome. What I'm really proud of is the team's done a great job this year. You know, they have been disciplined in their travel, and they've been selective in their you know, value-added efforts that they're bringing to the clients. They've been pretty wise about, you know, other IT investments. Yet to still deliver 10–20 basis points of margin expansion this year in an inflationary environment on top of the 550 that we had delivered in the previous Two years. I think it's a pretty darn good year in my opinion. Relative to expectations, that's a long-winded answer, but I think it gives you a perspective on incremental investment income and incremental inorganic relative to where we were sitting at the beginning of the year. Remember, we still, you know, at the beginning of the year, we had the Omicron, you know, crisis going on, and we were still in the depths of the pandemic. We still have dug our way out of those pandemic expenses returning along the way. A long story, long answer, but I hope it gets you to where you need to go. Yeah, that definitely did. Thanks for all that color. That's really helpful. I guess maybe just switching gears to the reinsurance deal and how that's been going. The organic, I think accelerated a point to 8% this quarter from 7% in 2Q. I guess it, you know, high single digits in 2023 feels maybe a little conservative, but maybe could you just talk about the range of outcomes around that high single digit and, you know, I guess what's stopping it from being well above that, just given the market that you're. Yeah, sure. Well, first of all. is experiencing. You guys are experiencing there. You're dealing with the most sophisticated buyers in the market. As Doug just said a minute ago, when he was buying reinsurance, he wasn't messing around worrying about what the guy or gal was getting paid. The point is, this is talking at the essence of their capital, the returns, how they're going to balance out the demand. You've got a supply and demand imbalance that's looking like it's coming down the path at being very substantial. They want to be good players. They want to take advantage of it. They want to make sure that they get good returns. It's those good returns that ultimately, hopefully bring in more capacity. These buyers are very sophisticated. They'll pay us more money. I mean, the question earlier on was, are they going to keep paying us what they're used to paying us? They'll pay us more money, but it's not a linear progression. I get down to the, you know, the BOP policies and into the lower middle market, it's linear. Price is up 10%. We're going to help the client reduce that by moving deductibles around, dropping umbrella limits, et cetera. But by and large, policy by policy, we're going to get that commission. That's not the case in reinsurance. Yeah. I think it's a little bit of a. I wouldn't say it's a symmetrical bell curve, but around 8%, I'd put it, you know, 6%-10% on that. Maybe it's two points on either side of it, and I'd probably favor the bull case on that more than the bear case on it. Got it. That's helpful. Maybe just one more. You know, you mentioned that you don't expect a recession. I don't want to be a Debbie Downer here, but if there is one like there was in the early 1990s or early 2000s, have you guys given any thoughts on what organic growth would be in that type of scenario? I think Doug did a very good job earlier, David, taking it back in time. I mean, our results are public now back to 1984. I think we do extremely well in good times and bad times. Certainly, recessions are not good for brokers. Sales and payrolls are what drive our premiums. So there's no question that if sales and payrolls go down, we'll feel the impact of that. Having said that, people get more interested in listening to us talk to them about how our professionalism, our capabilities in our niches and what have you can help them deal with this. The local broker is who takes the hit. Yeah. I would say, listen, we get into a recession that you wanted to refer to as you being a downer on it, that type of recession. We're still in an inflating rate environment, and we're not seeing a slowdown on that. When it comes to the contraction of exposure units, I'm not seeing trucks just come out of the fleet. They may not be running quite as much, and I know there's a mileage adjustment on it, but I'm not completely convinced that the stuff that we insure will just all of a sudden evaporate next year. They may take different covers on it. They may take some additional deductibles. When you're also looking at an environment, if you get into a recession, that will help us on our employee retentions because they will stay with a good company versus jumping for a new opportunity. When those three or four things collide, rate increases, stable workforce, a flight to quality in what people are looking for in terms of their broker, I see us performing very well in that environment. If you want me to pick a number in there, if we have a downturn, I'd be hard pressed to see how it'd be less than 5% organic growth. Well, okay. Yep, that's what I was looking for. Thank you. Appreciate the answers. Sure, Dave. Our next question is from Rob Cox with Goldman Sachs. Please proceed. Hey, I just had one question. I noticed open brokerage accelerated to 20% versus 15% last quarter. I was just hoping you could talk about what inflected quarter -over -quarter and how you see open brokerage and the E&S market broadly trending from here. The E&S market's on fire, and I think you're seeing more premiums move there, freedom of rate, freedom of form, clients need cover, everything from small accounts to large accounts. That's why you're seeing so much interest in terms of people investing in that market. The primary markets, quite honestly, are not as flexible as the E&S markets and able to move at the pace that they can move, and they are in a tough market sucking business out of the primaries. Did that answer your question, Rob? Yes. Thank you. Very helpful. Our next question is from Mark Hughes with Truist Securities. Please proceed. Yeah, thank you. Good afternoon. Pat, you talk about the potential spillover to non-property lines from the hardness of the reinsurance market. Have you seen that in the past? I just wonder, you know, how much influence the, you know, the cat property business is going to have on some of the other casualty lines. But I hear what you're saying. I'm just sort of curious to hear more about it. Well, let me caution because I've been a retailer my whole life, but for the last year, I've had a chance to spend a good bit of time with our reinsurance folks and do everything I can to learn that business and have talked about this at length in the last quarter. It has happened in the past. I can't give you dates, times, and amounts or percents. Yes, when you have a capital situation where you need to increase the pricing, and you can add cat loads on other lines of coverage, you'll do that when you have to. Now, again, I can't say to you that this is exactly what Travelers or Hartford did in this year, given this situation or what have you. I can't take you back to Andrew or something like that or even Katrina. What the team is telling me is that it's very likely, given the dearth of capacity and the need because of supply and demand imbalance, the need for more rate, that there are other lines you're selling that are likely to take an advance as well. Sorry that I'm not more specific about that. I'm learning along with you. No, no. Interesting. Thank you. Any shading you talk about the economy is still looking good in terms of exposure units and endorsements. Any differentiation you see between larger accounts, middle market, smaller accounts? No, that's the thing that's, you know, I keep referring to The Wall Street Journal. Sorry, but I mean, I read it, and I sit there, and I go, okay. Then I come back, and I talk to our data people, and they're like, "No, I'm not seeing it." I can't also break it and say, well, construction's in the tank and retail is going through the roof, or, you know, trucking is really hurting now and something. We've checked things like our marine business, you know, what's happening with cargo. You know, cargo seems to be holding up. If there's any decrease in cargo, then cruise ships are, I mean, going through the roof. It's a weird time based on what we read and what we see in our, these are not anecdotal stories. These are hard data points that I've got, and I can get them every day. Broad geographic, solid, continued business growth is what we're seeing. Appreciate it. Could it fall off a cliff? I guess. At least not seeing it. Understood. Thanks, Mark. Our next question is from Josh Shanker with Bank of America. Please proceed. Yeah, thank you for getting me at the end here. You know, some of the people ask about competition for deals. I just want to talk about debt and when I think about private equity being one of your competitors. Is the marketplace different for them if they have to borrow at higher costs? Is still debt generally cheap in your mind, and so we're not at the market where that's a consideration? How do you think about their role and their appetite in a higher interest rate environment? Yeah, we kind of signaled that early on. The appetite's still strong right now, but when you're adding an extra 300 basis points of debt cost into the structure, it does change return expectations. I think that we're really not competing on price when we come to these deals, Josh. We're really competing on capabilities, and we win on those every day. If somebody decides our prices aren't dissimilar to what they're offering, they'll maybe be a turn higher, but people just have chosen that they don't want to be in an organization with increased capabilities or resources. This will cause a compression of pricing by the PEs. It'll probably come down to, well, we're comfortable with paying, and I think we should excel in that then because now it isn't about price, it's entirely about capabilities. Well, dream with me a little here, Josh. I mean, yeah, I think what Doug meant is that our price is similar to our competitors. Yes, multiples over the last five years have expanded substantially. Prices are higher for these deals. Money was free. Now you start paying for that money, and I'm not hoping for a recession, and we don't see one, but show a little slowdown in there, and maybe that annuity isn't as strong as it was before. Our lever is about 2.3x EBITDA. We've got competitors in the market that are happy to be at 9x. I'm sorry. At some point, the music's got to stop, and all the chairs aren't going to be full. If you think over like a 20, 30-year base, I mean, 4% 10-year, it's not really that high. I mean, we'll see where it goes from here. You know, Doug seemed to have more confidence that, maybe they would go away. If we're at the peak here and we stay here for a while, 4% isn't going to scare them away, I suppose. I mean, obviously, they're going to pay more than what the 10-year is, but it's got to go higher, really, to cause their exit, I guess. I would agree with that. Am I right, Doug? Yes, I would agree with that. Their returns have been outstanding. I agree with that. All right. Thanks for the answers. Sure. Our final question is from Ryan Tunis with Autonomous Research. Please proceed. Hey, thanks. Yeah, I first just wanted to say that the $55 million goodwill, that's a nice find. I can't remember the last time in broker land you had a below-the-line item that somehow went in the right direction. I think some of your competitors might even count that as organic. Oh, yeah. Go ahead, Ryan. Yeah, Doug, take your time spending it. We don't need it to lean on margins in 2023. I just have one bigger picture question, I guess, on margins. Organic's been really strong for the past couple years and obviously. I mean, it could have not been strong too, in which case I also don't think your expense growth would have been as high as it's been. There seems to be some element of clearly the organic has allowed you guys to have, I wanna make sure I'm thinking about this right, like kind of an investment cycle. I'm just curious, like is that the right way to think about it? Like, has the strong organic allowed you to kinda potentially pull forward some investing you had to do? I'm just kinda curious, you know, maybe some of the capabilities that you guys have been able to take on, you know, I guess, to improve the organization over the past couple of years that you wouldn't have if we were, you know, in more of a 4% organic growth type environment. Yeah. I think you've got your nose right in it. I think if you go back and listen to our IR days, these earnings calls, you know, we get an hour to talk to you, but during our IR days, you hear, you know, our five or six division leaders talk about all the investments. If you listen to the first, you know, five minutes or six minutes of their prepared remarks, they're talking about all the value-added features and client-centric enhancements that we're doing in our business, and we're spending a lot of money on that. We've talked about Gallagher Drive. We've talked about SmartMarket. We've talked about Gallagher Submit. We've talked about our niche resources. You know, if you look at our content that's out there, all of that is investment, and we're adding to it every year. We are running a business right now that has a substantial amount of investment in it to make us better. I think it's showing up in our organic, to be real honest. I think the reason why we perform well on organic is we continue to make investments into our production and our sales, and niche capabilities, our service. You know, 15 years ago, we didn't know how long it took us to turn around a cert. Right now, we turn around 99.9% of them within one hour of request because of the investments that we've made to better the service. Those type of things are just in our blood at this point, and it's in our operating target, yet we're still posting terrific margins on it. To add to that, I would say take a look at our internship. We're very proud of the fact that this summer we had 500 young people look at our business. These are paid interns. These aren't interns that come to work for free, and that's a U.S.-based number. If we take the people outside the U.S., it's probably closer to 600. I don't know another organization investing in the future of their people like that in our business or frankly, another business. I'm very proud of that. Thank you, guys. Thanks, Ryan. Thank you everybody for joining us. We really appreciate it this evening. We had an excellent third quarter. We're well on our way to delivering a fantastic year of financial performance. I need to thank more than 42,000 colleagues around the globe for their hard work and dedication to our clients. We look forward to speaking with you again in person in December at our Investor Day in New York. Thanks again, everybody. Have a great evening. Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.