Arthur J. Gallagher & Co. (NYSE:AJG) Q4 2022 Earnings Conference Call January 26, 2023 5:15 PM ET
Company Participants
Patrick Gallagher – Chairman, President & CEO
Douglas Howell – Corporate VP & CFO
Conference Call Participants
Weston Bloomer – UBS
Charles Peters – Raymond James & Associates
Michael Ward – Citigroup
Elyse Greenspan – Wells Fargo Securities
Robert Cox – Goldman Sachs Group
Mark Hughes – Truist Securities
Operator
Good afternoon, and welcome to Arthur J. Gallagher & Company’s Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions].Today’s call is being recorded. If you have any objections, you may disconnect at this time.
Some of the comments made during this conference call, including answers given in response to questions may constitute forward-looking statements within the meaning of the securities laws. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the cautionary 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 section of the company’s website. It is now my pleasure to introduce Patrick Gallagher, Chairman, President and CEO, Arthur J. Gallagher & Company.
Mr. Gallagher, you may begin.
Patrick Gallagher
Thank you. Good afternoon, and thank you for joining us for our fourth quarter ’22 earnings call. On the call with me today is Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions. We had a terrific finish to cap off an excellent year. During the quarter, for our combined Brokerage and Risk Management segments, we posted 16% growth in revenue, 11.7% organic growth. GAAP earnings per share of $0.83, adjusted earnings per share of $1.86, up 24% year-over-year, reported net earnings margin of 9%, adjusted EBITDAC margin of 29.6%, up 120 basis points. We also completed 17 mergers totaling more than $140 million of estimated annualized revenues in addition to announcing our agreement to acquire Buck, another fantastic quarter by the team and our best fourth quarter in decades.
Let me give you some more detail on our fourth quarter performance, starting with our Brokerage segment. Reported revenue growth was 16%. Organic was 11%. Doug will explain it does include a point from our Annual 606 review, Brokerage organic and double digits is outstanding. Acquisition rollover revenues were $107 million, and our adjusted EBITDAC margin was 31.3%, up 120 basis points and in line with our December IR Day expectations, another excellent quarter for the brokerage team. Focusing on the Brokerage segment organic, let me walk you around the world and provide some more detailed commentary starting with our P/C operations.
Our U.S. retail business posted 8% organic, our new business was a bit better than last year offset somewhat by less nonrecurring business, client retention and the combined impact of rate and exposure were both similar to last year’s fourth quarter. Risk Placement Services, our U.S. wholesale operations, posted organic above 9%. This includes more than 12% organic and open brokerage and about 7% organic in our MGA programs and binding businesses. New business was strong and retention was consistent with last year’s fourth quarter.
Shifting to outside the U.S. Our U.K. businesses, both retail and specialty combined posted organic of 17% benefiting from excellent new business production, strong retention and the continued impact of renewal premium increases. Australia and New Zealand combined, organic was 12%. Net new versus loss business was consistent with last year and renewal premium increases were above fourth quarter ’21 levels. Canada was up nearly 9% organically, reflecting solid new business and retention.
Moving to our employee benefit brokerage and consulting business. Organic was 3%, consistent with our December IR Day expectations. New business was similar to last year’s fourth quarter and retention remained excellent. And finally, to reinsurance. Our legacy reinsurance operations crushed it with some hard earned new business wins and quarterly organic well into double digits. And recall that December was the first month our newly acquired reinsurance operations were included in organic. And while off a very small revenue base, they too had a spectacular organic growth for the month. So combined, Gallagher Re team continues to deliver outstanding results.
So again, Brokerage segment, all in organic double digits. And with our outstanding fourth quarter finish, full year organic came in at 9.7%. That’s our best full year Brokerage segment organic performance in decades and even more impressive when you consider we grew on top of the 8% organic we posted in ’21.
Next, let me give you some thoughts on the current P/C market environment starting in the primary insurance market. Overall, global fourth quarter renewal premiums, that’s both rate and exposure combined, were up more than 9% that’s consistent with the 8% to 10% renewal premium change we have been reporting throughout ’22. Fourth quarter renewal premium changes by line of business were broadly consistent with the first 3 quarters of ’22 with 1 exception, which is D&O. D&O continues to be the one area where rates are flat to down slightly, but in some cases, our customers are using the weaker pricing to purchase more limit.
Exposures also continue to be consistent with the first 3 quarters of ’22, indicating continued strength in our customers’ business activity. In fact, fourth quarter midterm policy endorsements, audits and cancellations were better than fourth quarter ’21 levels. Looking ahead, these trends appear to be holding. Thus far in January, midterm policy endorsements and audit adjustments are trending higher than last year’s level and global renewal premium increases are consistent with the fourth quarter. But remember, our job is to help clients mitigate premium increases and provide an appropriate level of risk transfer that fits their budgets.
Shifting to reinsurance and the important January 1 renewals. As we discussed in our 1st View Market report published earlier this month, it was a very late and complex reinsurance renewal season. Not surprising, U.S. peak zone property cat reinsurance saw some of the largest price increases. But it’s worth noting 4 additional trends within property cat: First, attachment points were raised broadly; second, reinsurers pushed to remove prepaid reinstatements from some contracts; third, reinsurers, in some cases, were able to reduce coverage to named perils only; and fourth, top layers of many programs saw the largest percentage increases as reinsurers sought to push up minimum premium rates.
On the casualty side, prices were up in the single to low double-digit range for most programs, while terms and conditions were more stable. Despite the tough market backdrop of higher prices, lower capacity and tightening terms, the reinsurance team was able to deliver favorable outcomes for our clients. Looking forward, the challenging reinsurance market conditions will, no doubt, put pricing pressure on the primary market during ’23, and that’s on top of our primary carrier partners dealing with catastrophe losses in secondary perils, including convective storms, floods and wildfires, high replacement cost inflation from raw materials to shortages in labor, social inflation, combined with the easing of the judicial system law , escalating medical cost trends and ongoing geopolitical tensions.
So there’s good reason to expect continued price increases and cautious underwriting for the foreseeable future. And as I mentioned before, we are not seeing any signs of exposure contraction. Rather, it seems our clients’ business activity remains unchanged from the past few quarters. Within our employee benefit brokerage and consulting business, the backdrop for ’23 is also broadly favorable. Employers continue to add jobs and wages are growing. So demand for our services and offerings should remain robust. So as I sit here today, ’23 could be another fantastic year with brokerage organic growth nicely in the 7% to 9% range.
Moving on to mergers and acquisitions. We had a really active fourth quarter completing 17 new tuck-in brokerage mergers representing more than $140 million of estimated annual 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.
For the year, we completed 36 mergers, representing annualized revenue of about $250 million. Additionally, we announced an agreement to acquire Buck, a very complementary business providing retirement, HR and employee benefits consulting and administrative services with estimated annualized revenues of $280 million. We expect the transaction to close during the second quarter and look forward to welcoming our new colleagues.
Moving to our merger and acquisition pipeline. We have nearly 45 term sheets signed or being prepared, representing more than $300 million of annualized revenue. We know not all of these will close. However, we believe we will get our fair share. And before I conclude my M&A comments, let me give you a quick recap on our reinsurance acquisition now that we have a full year in our books. We had a fantastic ’22, thanks to strong client retention, the expansion of existing client relationships, some great new business wins and excellent growth in our pro rata business. The team is fully assimilated, is delivering for clients and there’s a lot of momentum. I believe we’re on track for an even better ’23. Needless to say, reinsurance continues to be an exciting story.
Moving on to our Risk Management segment, Gallagher Bassett. Fourth quarter organic growth was 15.6% as a strong finish to the quarter pushed organic above our mid-December expectation. Core new arising claims increased during the quarter, driven by recent new business wins and continued growth from existing clients. And fourth quarter adjusted EBITDAC margin was great at 19.3%. So putting it all together, Gallagher Bassett finished the year with an adjusted EBITDAC margin of 18.5% and 13.3% organic benefiting from increased claim activity coming out of the pandemic and some really nice new business wins.
Looking forward, full year ’23 organic should be pushing 10% and adjusted EBITDAC margins should be around 19%. That would be another fantastic year. And I’d like to conclude with some comments regarding our bedrock culture. It’s a culture of teamwork, client service and excellence, captured and celebrated in the Gallagher way. It is the culture that drove full year ’22 results for our combined Brokerage and Risk Management segments of 24% growth in adjusted revenues, 10% all-in organic, 25% growth in adjusted EBITDAC, adjusted EBITDAC margin in excess of 32% and 20% growth in adjusted EPS. We have a culture that our people believe in, embrace and live every day. It’s a culture that will continue to drive us forward. That is the Gallagher way. Okay. I’ll stop now and turn it over to Doug. Doug?
Douglas Howell
Thanks, Pat, and hello, everyone. A fantastic fourth quarter to close out another outstanding year. Today, I’ll start with our earnings release, touching on organic margins and the Corporate segment shortcut table. Next, I’ll walk you through our CFO commentary document, point out a few items for the next quarter and also provide a first look at our typical modeling helpers for ’23 then I’ll finish up with some comments on cash, M&A capacity and capital management.
Okay. Let’s flip to Page 3 of the earnings release to the Brokerage segment organic table. All in brokerage organic of 11%, above the 9% to 9.5% that we foreshadowed in December. Two drivers of the upside. First, as Pat just discussed, we had a really strong finish within our P&C and reinsurance brokerage operations. Second, our annual update of 606 assumptions added about 1 point to our headline organic. Recall under ASC 606, we must routinely update our assumptions related to the amount of services provided before and after the placement of an insurance policy. Based on our most recent operational analysis, metrics and time studies, more of our services being provided at the time of placement and more of the post placement service is being handled faster in our lower-cost centers of excellence.
This causes less of our revenue to be deferred and thus, we recognized an additional $15 million of revenue in the quarter. That is a small amount relative to our total deferred revenue balance nearly $435 million, but it does cause an additional point of organic. So we’re the call out today.
From an expense perspective, our updated 606 assumptions also caused some additional compensation expense to be recognized during the quarter. The punchline of all this, our fourth quarter organic revenues, EBITDAC and net earnings got a small boost and adjusted EBITDAC margin was not significantly impacted. So 11% headline organic, 10% controlling for 606 and 120 basis points of margin expansion, that’s a terrific quarter.
Looking forward to ’23, we’re currently not seeing a slowdown in our clients’ business activity. We’re not seeing signs of price moderation from the carriers, and we still have loss cost inflation and labor market imbalances. Add that to our client for sales and service culture, we are still seeing ’23 organic in that 7% to 9% range, as we stated during our December IR Day.
Same with our margin outlook for ’23. We are still comfortable with our December commentary. We think we can deliver about 50 basis margin expansion at 6% organic and fiduciary investment income could be a nice margin sweetener provided there isn’t a surge in wage and cost inflation.
One other [indiscernible] heads up for ’23. On December 20, we announced our acquisition of Buck. The business operations operates at an adjusted EBITDAC margin around 20%, so please make sure a portion of your pick for future M&A revenues reflects that versus what you might pick for our other mergers.
Moving on to the Risk Management segment and the organic table at the bottom of Page 6. You’ll see 15.6% organic in the fourth quarter and full year organic in excess of 13%. Some of that growth this year comes from our clients’ business activity still rebounding out of the pandemic and getting back to levels they saw before the pandemic. Accordingly, for ’23, we’re seeing organic revenue approaching 10%.
Flipping to Page 7. The Risk Management adjusted EBITDAC margin of 19.3% in the quarter and 18.5% for the full year. We see a nice step-up in ’23 with margins around 19% even as we continue to make investments to enhance the client experience and in analytics and tools to drive better claim outcomes. Another year of double-digit growth and margin expansion would be another terrific year.
Turning to Page 8 to the Corporate segment shortcut table. In total, adjusted results were at the favorable end of our December IR day forecast. You also see 2 non-GAAP adjustments this quarter. First, our M&A transaction costs of $5 million after tax, mostly related to Buck and a little relates to Willis treaty. And second, as we discussed previously, you’ll see a $31 million after-tax gain related to legal and tax matters.
Now shifting to our CFO commentary document we posted on our IR website, starting on Page 3. As for fourth quarter, you’ll see most of the brokerage and risk management items are close to our December IR day estimates. On the right-hand side of the page, we’re providing our first look at ’23. A couple of things worth highlighting: First, FX. With last year’s midyear strengthening in the U.S. dollar, you’ll see some volatility in how FX will impact our brokerage and risk management results in first half versus second half of ’23. Please make sure to consider these impacts as you’re planning your models.
Second, our adjusted tax rate. With the U.K. corporate tax rate increasing to 25% effective April 1, we’re providing our current estimate for full year ’23 tax rate. More of an impact to our Brokerage segment than it is to our Risk Management segment, given the size of our U.K. retail London specialty and reinsurance brokerage operation. And one other thing. The left side of this page might be a nice reference when making your picks for quarterly margins given our quarterly seasonality. And finally, when you do make your margin picks, recall we were still in the Omicron portion of the pandemic during the first quarter of ’22. So we’re not expecting as much margin expansion in first quarter as we are in the second, third and fourth quarter of ’23.
Okay. Moving to Page 5. This page is here to highlight the incremental cash flows from our clean energy investments over the coming years. And remember, those come through the cash flow statement, not the P&L. You’ll also see that we have $773 million of available tax credits as of December 31, ’22. And that we forecast using about $180 million to $200 million in ’23 and that should step up a bit in ’24 and each later year. That’s a really nice cash flow boost to help fund our M&A.
The way I look at the math, it might say that an additional $773 million of free cash, combined maybe another $70 million of recurring EBITDAC at that 10 to 11x multiple, which would then have a nice arbitrage for our current trading multiple.
Moving to Page 6 on the rollover revenue table. For the fourth quarter, rollover revenues came in higher than our December IR day guidance. Most of all of that came from reinsurance. Over the last 3 weeks, cedents have been closing their books for ’22, and we’re getting updated ceded premium figures. That translated into additional commission revenue for ’22. For the sake of clarity, nearly all of that upside is excluded from our organic results because it likely relates to pre-December 1, ’22, which marked the first year anniversary of the acquisition. And no — also, please note that not all of that hits the bottom line because of production and incentive comp expense on that additional revenue. That said, it’s terrific to get the bump-up.
Staying on Page 6, but moving down to the bottom table. That table shows our actual reinsurance acquisition results. In a transition year, the team overperformed our pro forma expectation. That’s impressive and terrific work by the team.
So now let me move to some final comments on cash, capital management and future M&A. At December 31, available cash on hand was about $325 million. Our current cash position, combined with strong expected cash flows and incremental borrowing positions us well for our pipeline of M&A opportunities. In total, we estimate towards $3 billion to fund potential M&A opportunities during ’23, which would include paying for Buck. And also yesterday, our Board of Directors approved an increase in our quarterly dividend by $0.04 per share. That would imply an annual payout of $2.20 per share. That’s a 7.8% increase over ’22.
So with a strong organic outlook, margin expansion opportunities and an ever-growing M&A pipeline, from my vantage point as CFO, we are extremely well positioned for another fantastic year in ’23. I’d like to thank the entire Gallagher team for another great quarter and outstanding year. Back to you, Pat.
Patrick Gallagher
Thank you, Doug. Operator, I think we’re ready for questions.
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question comes from the line of Weston Bloomer with UBS.
Weston Bloomer
So my first question is on the reinsurance market and the growth you saw there. It’s obviously really strong end of the quarter. And I think you’ve talked about high single-digit growth there for 2023. So did the end of the year kind of change how you think about that level of growth? Or how should we be thinking that going into next year?
Patrick Gallagher
I think we are definitely going with some nice momentum. I wouldn’t bank on some incremental big jump. But what I like about the momentum is when you come through a time like we did in this fourth quarter, it’s interesting because you actually become much more valuable to your clients. And it’s not an easy time when you’re tussling back and forth with the cedents and the reinsurers trying to get these things done, terms are changing. Attachment levels are changing. But in the end, as I said in my prepared remarks, we got the placements made, and I think we are in a very strong position going forward, number one, with those clients, but also with the opportunity to pick up some new business.
Weston Bloomer
Great. And then my second question within brokerage as well. I noticed the compensation ratio as a percentage of revenue dropped pretty materially. And I think you’d called out some back-office saves, lower benefit costs, offset by some hiring. Is there a way you can call out how much each of those had an impact? Or where I’m trying to go with the question is how much additional leverage do you have to kind of bring that lower in 2023?
Douglas Howell
All right. Let me see if I can break that out from memory here. I don’t have it in front of me exactly, but when you’re talking about being down was at 180 basis points, something like that.
Yes. Is that right? I’m just going from memory, Sorry, I’ll look it up here. Probably 1/3 of that is due to the continued efficiency that we bring by being able to push work into our lower-cost centers of excellence. I think that we’ve had some technology wins in that area, too, to help us make our workforce more effective on that and didn’t have to put on additional heads as a result of that — those technology investments. And then I think that when it came to — the other 1/3 is kind of escaping you right here.
Weston Bloomer
Got it. Is there any change to the compensation structure that you make in this market, too? I know there’s some changes just, I guess, higher organic accounts, things like that.
Patrick Gallagher
No. We’re pleased to pay our people for what they do. And we haven’t messed with that compensation arrangement with our production force, in particular, in well over a decade.
Operator
Our next questions come from the line of with Autonomous Research.
Unidentified Analyst
I want to follow up on the almost 10% 2022 brokerage organic results. Would you mind giving us some more color as to how pricing and exposure and net new business drove that year-over-year acceleration in organic. And then from where you sit today, how do you see those drivers changing in 2023?
Douglas Howell
So are you asking for the quarter? Are you asking for the full year? Sorry, just so I’ve got the baseline.
Unidentified Analyst
Yes, yes, for the full year.
Douglas Howell
For the full year, right? So when I look at rate and exposure, as I did, our new business, we had a terrific new business here. So I’ll say that our net new business spread was about 4 points and the rest of that is probably rate and exposure, remember between that. So maybe, again, you think about it, 1/3, 1/3, 1/3 net new business over loss business is 1/3, rate was 1/3 and exposure unit growth was 1/3.
Unidentified Analyst
Got it. Okay. And then as a quick follow-up, do you have any comments on the degree to which fiduciary investment income will impact margins next year, kind of thinking about that 50 bps of expansion on 6% organic, how much that move from fiduciary investment income?
Douglas Howell
I think the — when we give the guidance of 6 points, if we grow organically, 6%, we think we can show about 50 basis points of margin expansion on that. Investment income would be a sweetener to that. to a certain extent. But I don’t have a clear line of sight yet on the size of our raise pool and our hiring needs going into next year. We understand our budget. So I can’t give you a specific number on it, but you give me a pick on what you think wage inflation is going to be next year to take care of our folks, and I can probably give you that number, but I don’t think we’re ready yet. I might be able to give you some more of that in March.
Operator
Our next questions come from the line of Greg Peters with Raymond James.
Charles Peters
I’m going to stick on the margin commentary. In your press releases on Page 4, you talked about the operating expense ratio and some of the pressures on that. So when you — in your guide the 50 basis points or so of margin expansion provided 6% organic, how do we think about those factors affecting your ability to expand margins? And then just on the margin expansion, can you break it out based on business unit like is it going to come in international that you’re going to get margin expansion or is it going to come into the employee benefits business, you get margin expansion? Or can you source where you think that’s going to — where that — where the improvement is going to come from?
Douglas Howell
Right. A couple of things. On the operating expense ratio, it was up in fourth quarter versus ’21 fourth quarter, was up about 30 to 40 basis points, let’s call it, 40 basis points on that. I think the footnote on that is explaining where it’s coming from, mostly travel and entertainment, some consulting use and investments in technology. So I’d say it’s probably half of that increase is investments and half of it is just the inflation that we’re seeing in travel and consulting costs on that. When you’re — I think the next question was how am I seeing that vis-a-vis next year.
Remember, we were still in the omicron portion of the pandemic in the first quarter. So we are going to see a little more travel and entertainment expense return in our first quarter, but we don’t see it being up significantly in the second, third and fourth quarters. So we’re looking at 50 basis points of expansion next year. Most of that will come in the later 3 quarters than the first quarter. And what was there was another piece of your question, Greg?
Charles Peters
It was just when I think about within the Brokerage business, the different business units, the employee benefits, the international the retail RPS, when you look at it that way, where do you think the opportunity is for margin expansion in the context of that 50 basis points or so guidance?
Douglas Howell
Yes, it’s pretty much so across all of them, Greg — there is no standout in there anywhere that’s a laggard in there.
Charles Peters
Makes sense. Okay. And the other — just the other sort of cleanup question on Buck consulting. Can you give us — is there any sort of cadence in terms of how the revenue flows and how the margins are. I mean is it heavier in the first quarter, either revenue or margins? Or any sort of color you can add as we — and just as a follow-up, I assume that’s also going to get folded into the Brokerage segment, correct?
Douglas Howell
Yes. So it will be part of our Brokerage segment and our Employee Benefit operation. Greg, we don’t think we’re going to close that in the first quarter. We think it’s more of a second quarter close at this point. I don’t really have a good quarterly spread that I would feel comfortable giving on the call today for that because we have to apply our study on conforming the accounting principles to theirs, apply our 606 assumptions to it. So I need a little more time to work through that. And we just signed the deal 30 days ago, and I just need to until March to give you that quarterly spread.
Operator
Our next questions come from the line of Michael Ward with Citi.
Michael Ward
We heard, I guess, one of your peers about — talk about programs participants pushing back on capacity or trying to restructure commissions. I was wondering if you’re seeing something similar.
Patrick Gallagher
No.
Douglas Howell
Not really.
Patrick Gallagher
Not really.
Michael Ward
Okay. Second one, I guess I was wondering, your deal spend has kind of accelerated over the last few months. It seems hoping you could maybe discuss the drivers behind that. And maybe talk about how you see 2023 playing out in this regard?
Patrick Gallagher
We have definitely seen a change in the competitive environment vis-a-vis mergers and acquisitions in the last 60 days. I’m not going to sit here and say it’s not still competitive, it is. But I would say that the number of bidders is reduced, and we are seeing maybe, what I would call, a more attentive seller to exactly who the buyer is, what the culture is, the strategic value of that buyer that maybe existed 12 months ago.
Douglas Howell
Yes, we usually see a little bit of an uptick in the fourth quarter as people push to get things done by the end of the year, sometimes that’s driven by tax or other financial planning that the sellers want to get done. But if there is a noticeable change in the market. I would say that we feel very good about our pipeline right now. There are some names on there that are really nice to have looking at us. So a little bit of an uptick in the fourth quarter, naturally, change in market competitiveness a little bit. But I also think it’s going to be pretty strong in the first couple of quarters of the year relative to what we saw this year, in particular.
Operator
Our next questions come from the line of Elyse Greenspan with Wells Fargo.
Elyse Greenspan
Maybe sticking on the M&A point. You guys seem pretty optimistic with the pipeline, and you have announced a good number of deals of late. But if I look on the CFO commentary sheet, you also write the multiples you’re seeing on deals went up 1x, right, 10 to 11x from 9 to 10, what are you seeing, I guess, in the market that’s driving up multiples a little bit?
Douglas Howell
I think it’s mix right now is what we’re seeing is — I think that you’re seeing some pretty high performing names on the list where the growth factors are a little bit bigger than maybe they were in the past. But one turn on that, it wouldn’t overly react to it one way or another.
Elyse Greenspan
And then with your margin guide for kind of the 50 to 60 basis points of expansion, are you assuming any wage inflation embedded within that guide?
Douglas Howell
Yes. We’re assuming that we’re paying raises this year about similar to what we have for the last 2 years. So that’s in the numbers. Also in that, I did a little — I did a small vignette during the December IR Day. If you really look underneath that, there’s probably 10 or 15 basis points as we toggle to Software as a Service that might be against that 50 basis points, too. So maybe it’s more like 60 basis points, but in the accounting of where that expense gets charged does influence that a little bit. You and I talked about that in December, I think, too.
Elyse Greenspan
And then on the reinsurance side, strong into the year, great rate increases we saw at January 1, but also we’ve seen higher retentions by primary companies. And I don’t think we’ve really been in a similar environment, right, where you have 40% price increases with perhaps less premium to the market. So when you put that all together, does ’23 feel like an environment where you could show double-digit organic growth within your reinsurance business?
Patrick Gallagher
Yes, I think we could.
Operator
Our next questions come from the line of Rob Cox with Goldman Sachs.
Robert Cox
My first question is on the U.K. retail and specialty organic of 17%. Obviously, very strong. And I was just wondering if you could talk a little bit about what’s driving that growth.
Patrick Gallagher
Yes. As we said, a very, very strong new business in specialty with tenant rate increases. And as we’ve talked earlier, there were some term changes and the like. But also our aviation specialty team just crushed it this quarter in the U.K. And our retail operation across the United Kingdom did extremely well also. But I just think the whole London-based specialty team, reinsurance aviation just is set phenomenal close to the year.
Robert Cox
That’s great. And just a question on the labor market. A number of companies are instituting layoffs. I’m just curious what type of unemployment rate is embedded in your organic guide of 7% to 9%. And if we did start to see some erosion there, at what point in the year do you think we would start to see that impact potentially in your organic growth?
Patrick Gallagher
Well, let me just back up to our prepared comments again. It’s very, very interesting. First of all, we don’t play that much in the high-tech Employee Benefit business, and it’s not that big a segment for us in terms of the layoffs you’re seeing that are making the newspaper. And as I’ve said in previous quarters, we’re already in the same papers, right? And we all see the same news reports. However, our middle market, core business is doing — our clients are doing extremely well, and we keep reporting our — what we’re seeing in our midterm endorsements and changes to policies and as we see both our renewals and the audits going forward, our middle market, retail, property casualty benefits business, these people are doing very, very well.
Truck counts are up. Our trucking business is very strong. Our work comp renewals in terms of payrolls are not being diminished. Now that doesn’t mean that if there is, in fact, a global recession that it won’t impact us, of course, it will. But at this point in time, we’re not seeing that. So if you ask me where do we see an impact on that type of growth as we go forward this year. I’ll tell you, our plans at present don’t count on any recessionary pressure. And that could be wrong.
Operator
Our next questions come from the line of Yaron Kinar with Jefferies.
Unidentified Analyst
This is Andrew on for Yaron. Just looking at head count in Brokerage, it looks like there’s been a pretty good pickup year-to-date and in the quarter specifically. Can we kind of talk about what’s going on there? And roles you’re hiring and the degree to which those hires have been reflected in organic yet?
Douglas Howell
Yes. Well, a lot of that — remember those numbers are impacted considerably by our M&A program. So as we close the year out strong on M&A, those numbers would be in the December numbers and not in last year’s December numbers, and that would impact the quarter 2.
Patrick Gallagher
And I would want to comment on that as well. We are not undergoing an organic surge in new hiring. We have a very strong internship. We bring on a very strong number of young people every year. Of course, we’re always looking for good solid production hires, but you are not seeing our organic head count surge beyond the M&A activity that Doug just mentioned.
Unidentified Analyst
Great. And as we think about supplemental and contingent commissions, I suppose a part of that is based on underwriting profitability of those programs. So when you think about ’23, is there kind of a loss trend that you bake into forward guidance there? Or maybe more broadly, what is your view on loss trends over the course of the next year?
Douglas Howell
Are you’re talking about the carriers loss trends?
Patrick Gallagher
Yes, our contingents.
Douglas Howell
Right, that relates to the contingents.
Patrick Gallagher
Supplementals are not subject typically to profit-sharing arrangements, our contingents are. And to date, I’d say we probably factored nothing in, in terms of having significant increases in our operating loss ratios.
Operator
Our next questions come from the line of Mark Hughes with Truist.
Mark Hughes
Another P&C CEO suggested he didn’t see as much increase in property rates in the fourth quarter as you might have expected in light of the reinsurance market dynamics, but maybe that’s something that builds up as the time goes by is the higher reinsurance rates do directly impact the carriers. Would you share that observation? Do you think property could get firmer on the primary level?
Patrick Gallagher
I think property could get a lot firmer. I would say in the fourth quarter, it was very firm, in particular, in anything that had to do with Coastal, any area that was exposed to wind and fire. This market in terms of property is very difficult as it exists. And, yes, the changes to reinsurance at 1/1 will filter additional pressure onto the retail buyer. And we are out early telling our retail buyers about this. And it is going to get more difficult in what is already a very extremely difficult situation.
Douglas Howell
Yes. If you think about — remember, our fourth quarter, Ian hit right at the beginning of the fourth quarter, there were replacements that were done in October and November that hadn’t had the full impact of the $70 billion loss.
Mark Hughes
Yes. Yes. And then, Pat, last quarter, you mentioned a potential spillover effect on casualty. I don’t know whether you updated your commentary on that this quarter, but do you think the reinsurance market, how much of an impact, I think, it’s having on casualty, ?
Patrick Gallagher
Mark, I don’t have a number on that yet. I just think that it’s possible that in order to pay for some of these property increases, other lines are going to have to be tagged. And I think I’ll be able to feel that since it maybe have a better number around that at the end of the first quarter. And I may be wrong on that. At this point, I’m not being told by our carriers that that’s happening.
Operator
Our final question will come from the line of Michael Ward with Citi.
Michael Ward
I just had a quick follow-up maybe on Elyse’s question and the potential for double-digit growth in reinsurance. Just wondering if that’s kind of — if we should think about that as being achievable with current capacity or if incremental capacity might need to come to the market in order to get there?
Patrick Gallagher
I think that it will be achievable with existing capacity. I was very pleased — our reinsurance people were telling us in late November and December, early December that they were very fearful some of these placements just weren’t going to get done. And that is a nightmare on all sides of the equation. And in fact, really, really pleased and proud of the team that did the work to bring the programs together for our clients as January got going here. So I think on existing capacity, of course, the largest renewal season is now winding down. It’s not over, but it’s winding down. And so I do think the increases going forward could come off existing capacity. However, having said that, any additional capacity would be very welcome and will be utilized quickly and would add to that.
All right. Then let me just add a few comments as I wrap up. I want to thank you again for joining us this evening. Obviously, I’m very pleased with our ’22 financial performance. I am still very excited about our future. I want to thank our clients for their continued trust, our 43,000-plus colleagues for their passion, hard work and dedication. And finally, I need to mention our carrier partners. They do play an integral role in meeting our clients’ insurance and risk management needs. And we look forward to speaking with you all again at our March IR Day. So thank you for being with us, and we’ll talk to you then.
Operator
Thank you. This does conclude today’s conference call. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.
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