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Operator
Good morning and welcome to Arthur J.
Gallagher & Co.'s first quarter 2011 earnings conference call.
Participants have been placed in a listen-only mode.
(Operator Instructions) As a reminder, 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 certain risks and uncertainties described in the company's reports filed with the Securities and Exchange Commission.
Actual results may differ materially from those discussed today.
It is now my pleasure to introduce J.
Patrick Gallagher Jr., Chairman, President and CEO of Arthur J.
Gallagher & Co.
Mr.
Gallagher, you may begin.
Patrick Gallagher - Chairman, President and CEO
Thank you, Rob.
Thank you everybody for being with us.
Good morning and welcome to our first-quarter conference call.
I'm joined this morning by Doug Howell, Chief Financial Officer as well as the head of our Operating divisions, and we appreciate you being on the call this morning.
We're off to a great start in 2011.
I realize that the comparability is tough, because of the adjustments in our earnings release, but you have to look at us on an adjusted basis.
Looking at us that way, we had a great quarter.
Our adjusted numbers as per our earnings release, adjusted Brokerage revenue up 10% adjusted Brokerage EBITDAC up 14% adjusted Risk Management revenue up 18%, adjusted Risk Management EBITDAC of 10%, combining our Brokerage and Risk Management businesses, revenue was up 12%, EBITDAC at 13%, our organic Brokerage growth was 1.6%, and in Risk Management, we were up 5.8% organically.
We've returned organic growth, which I think is a real testament to our sales culture.
And although the first quarter is seasonably our lowest revenue quarter, we actually had a little bit of improvement in margins.
So the way I look at our results, there is an awful lot of positive numbers, and I hope this gives us a little momentum for the rest of the year.
Our retail wholesale PC operations continue to fight in a difficult environment in the United States.
Our wholesalers continue to see softening, and business that would have been in the ENS markets continues to go standard markets.
We had good new business in the quarter, we had good retention, and yet our US PC operations are essentially flat.
The story of our Brokerage growth is coming from 2 operations.
Our US benefits operations, and our international PC operations.
Our benefits team is off to a very good start.
I've said all along that the new law in the United States would help grow our US benefits business, and it has in 2 ways this quarter.
Number one, accounts are leading our competitors and coming to Gallagher.
Our new business is very strong.
And secondly, people who own smaller benefits consulting firms are interested in joining Gallagher benefits platform, which we've invested in for years.
Our international PC operations had solid organic revenue growth, and international acquisitions from 2010 contributed nicely as well.
In particular, our London operations continued to attract talent to our growing team, and our acquisition in Perth, Australia in 2010 has strengthened that part of the world.
During the quarter, I had a chance to visit our offices across Australia.
I was in our PC Brokerage offices in Perth and Sydney, and I was in our Gallagher Basset offices in Melbourne, Sydney and Brisbane.
Our team down under is dynamic, professional, and very turned on.
We have a great business in Australia would presently over 700 employees.
Let me turn to the Risk Management segment.
The integration of our GAB Robins acquisition has made excellent progress during the quarter, our new colleagues are aboard, serving clients, and our client retention has been very good .
GAB's total revenues grew 18% the first quarter.
Organic revenue growth, as I said earlier, was by 5.8%, in GAB which is the best it's been in many, many quarters .
Both the 18% growth and the 5% organic were largely influenced by our international teams in the UK and Australia.
They're doing extremely well.
However, on top of that, domestic claim counts during the quarter even though the economy remains a bit soft.
Let me move to our merger and acquisitions.
We continue to build our pipeline, and to close deals.
We did 4 acquisitions in the quarter, contributing just over $27 million in revenue.
I always want to stop quarter by quarter and welcome our new teammates.
Each of these firms chose to join Gallagher.
They had a choice, and I'm proud of that they chose us, and want to make sure that I welcome them aboard.
Our pipeline is very robust, and I think 2011 will be another solid year for acquisitions.
Let me talk a little bit about the market and the economy.
Even though we continue to fight the headwinds of lower rates, and still a sluggish economy, it's nice to see us post organic growth in the quarter.
Just a few quarters ago, I said I had never seen a more difficult operating environment.
Frankly, I feel a little bit better about the environment today.
Rates are still soft, and renewals are still very competitive, but I have 6 points that I would make that I think point to an improved environment.
Number one, I believe we are past the return premium part of the recession.
Number two, some of our clients are starting to say that their businesses are improving.
We see some strengthening in temporary help, transportation, and somewhat in light manufacturing.
Number three, insurance carriers appear to be getting tired of the softening market .
We're being told that they will let accounts go rather than cut the prices again.
Now there's still remains a pricing gap between a new piece of business and a renewal piece of business, but underwriters are truly trying to underwrite their accounts.
I'm not saying that rates are going up, but I do feel that the rate of decline appears to be slowing.
Number four, in places like Florida, California, and Illinois, work comp looks to be a line of coverage that has to have some rate improvement, and the markets clearly know this.
Number five, in Florida, and frankly anyplace else where there is cat exposures, our EMS property lines look to be poised for some rate increases.
The global catastrophe losses over the past few months and the impact of the new RMS 11 catastrophe models have brought steep cuts to a halt.
And six, in our Risk Management business, it appears that claim counts might be growing again.
We've had claim count growth in 5 of the last 7 months.
Let me be cautious here.
This is all just glimmers of change at this point.
This market is still soft, and with oil prices rising our economy could slow again, but I do feel better about 2011 at this point in the year than I did at the same time in 2010.
As I said before, if you give us a little economic growth, slow the rate decreases down, get our clients hiring again, with our expense control in place, we will be in
Doug Howell - CFO and VP
Thanks Pat, and good morning everyone.
Today I want to accomplish two things.
First, I want to walk through some enhancements we've made to our investor materials, and then I'll jump into the Corporate segment and give you some comments in that segment.
Now starting with our earnings release, you'll see the enhancements on pages 6 and 7.
We now include both reported and adjusted information.
We're doing this because we think the adjusted information provides a better basis of comparison between periods, because we eliminate some of the nonrecurring items from the adjusted column.
In addition, over the last couple of months, we've done a substantial make over of our supplemental quarterly package, because unusual, irregular and one-time items are distorting the normalized underlying comp and operating ratios, especially in our Brokerage segment.
We filed 12 historical quarters as part of the BofA Merrill Lynch conference on February 16, and we referenced it again in a special 8-K on March 16.
The current version is on our website and has been updated to include our first quarter 2011 results.
When you take a look at it, the make over follows what we're doing in the earnings release.
It provides both reported and adjusted information.
But now that we've updated it, it has 13 quarters.
Having 13 quarters of adjusted information provides a great basis to see our underlying trends and seasonality, and we really encourage everyone to use the adjusted information as a basis to build your models.
Hopefully, you'll have a copy of the supplement in front of you.
If you don't, print it off after the call and then re-listen or read the transcript of this call.
But I want to walk through it.
If you have it in front of you, start by turning to page 2 of the supplement.
You'll see that page 2 presents our Brokerage segment results for the last 13 quarters on an all-in reported GAAP basis.
Now flip to page 3.
Page 3 lays out those unusual or irregular or one-time items that we've historically discussed, such as sale of book gains, severance, lease abandonment charges, and then last year -- the whole change in timing of supplemental commissions.
Flip to page 4.
Page 4 is really just a sum of pages 2 and 3, and then arrives at our non-GAAP adjusted results.
Page 4 is presented on a sequential basis, and then we present it on a quarter-over-quarter basis when you get to page 5.
Turn to page 5 because I want to spend an extra minute on page 5.
I really like this view.
When you look at our Brokerage segment, this page lays out first quarter, second quarter, third, and fourth, of course, and lays it side-by-side.
It allows you to really see the consistency of our adjusted comp and operating expense ratios in each quarter, and then it also allows you to compare the first quarter to later quarters, and you'll easily see the seasonal nature of our results.
For example, when you look at the first quarter, our comp ratio has been 66% in the first quarter, every single quarter for the last 4 years.
We think this is excellent work in an environment where there is still wage increases that are being given, and in a flat-organic or down-organic market.
Second, when you go to the operating expense ratio, you can see that our -- in our first quarter, we're now down to about an 18% run rate on that.
It was 23% in 2008.
The difference between '08 and '09, that is when we began harvesting all the expense initiatives that we had been working on for years.
When you get to the bottom of page 5, you can see the EBITDAC numbers, and you can see that we've actually -- that our margins have improved substantially since 2008.
In fact this quarter, we posted 16 points of the adjusted EBITDAC margin, which is up 70 basis points from last year same first quarter.
Then you can take a look at quarters 2, 3, and 4, and you can see how the comp ratios are fairly consistent, the operating ratios are fairly consistent in the last couple of years, and it also points out the extreme seasonal nature of our Brokerage segment.
You can do the same thing on page 9 - - when we get to page 9, for the Risk Management section.
Risk Management segment shows the same thing.
We've had consistent comp in operating expense ratios, and our adjusted EBITDAC margin is, especially this quarter, is well over our 15% target margin on that.
So, when you look at the Brokerage segment, there's 4 pages where we go reported, we show the adjustments, we show sequential, and then we show quarter-over-quarter.
In fact, we do the same thing for Risk Management on pages 6 to 9, and then we do it for combined Brokerage and Risk Management segment on pages 10 to 13.
Finally turn to page 14.
Page 14 gives you a couple years of comparative condensed information for our Corporate segment, and we organize that by activity like we provide on page 3 of the earnings release.
We provided it this way because it's difficult to understand our Corporate segment using a traditional P&L because of the tax-related investments.
I'm still getting some questions on the traditional P&L format, but I think it's a much more productive conversation to have discussions on this segment using the format you see on page 3 of the earnings release, and on page 14 of the supplement.
All right, that's the overview of what the supplement provides.
We expect to update this package quarterly.
So I'm strongly encouraging you to use this adjusted information when you're building your models, because I think it will really help you compare our results and see the trends in seasonality, and the underlying performance of our business.
All right that's probably enough for Investor Relations' administrative comments.
You heard Pat talk about the Brokerage and Risk Management segment, so let me jump down to the Corporate segment.
First, for the Corporate segment we posted $0.08 of loss this quarter.
We told you in January we thought we would lose $0.05 to $0.07.
$0.01 of that difference is due to additional M&A costs, and another $0.01 or so of difference is because our clean energy ventures didn't produce as much as we had thought when we gave you that guidance at the end of January, as we were waiting for our permanent regulatory permit .
We've got 3 of them, we hope the other 3 come quickly, so hopefully we'll be back in production on 3 of those -- actually we are here, come the first of April.
So looking forward, let me give you some thoughts as you build your models for the Corporate segment using -- again I want to follow the table that's on page 3 of the earnings release.
For the Interest and Banking line, assume about $11 million of pretax expense, or about $0.06 of loss per quarter.
For the Corporate line, assume about $2 million of pretax expense, or a little over $0.01 of loss per quarter.
For M&A cost, that's going to be a little bit harder to predict depending on our deal flow.
But if you need a range, I doubt we would have more than about $0.01of cost in any one quarter going forward.
As for our clean energy activities, we give you a lot of detail on page 4 of the earnings release.
In a nutshell, we're making great progress, maybe a little slower than I'd hoped, but this is a complicated deal, and any progress is really good news.
When you get done digesting those words on page 4 from our earnings release, your models should end up with about $0.01 or $0.02 of profit in the second quarter, and profits of about $0.03 to $0.04 per quarter in the third and fourth quarter.
Then by 2012, we hope to have been making $0.08 to $0.10 a quarter of profits, when we get all of our plants in place.
So when you wrap it up, do a little bit of a gut check on this.
When you get done modeling the Corporate segment, you should end up with about $0.06 to $0.07 of loss in the second quarter, and then about $0.05 of loss for the Corporate segment in both the third and fourth quarter.
One other heads up.
Recall that last year, when we put a plant into production, we had a consolidate it, because we were the controlling party of the project during the startup phase.
And then, after we turned the project over into full-time production, we no longer controlled it, and we didn't consolidate it any longer.
We're going to control another project here in the second and third quarter of this year.
So again, it will cause gross-up of revenues and expenses in our Corporate segment P&L.
In the end, it doesn't change the economics that much, but it does cause some gross-up noise through the P&L.
All that said, if you model us using the shortcut table on page 3 of the earnings release, this will make no difference at all to any of your models.
Okay, those are my comments, back to
Patrick Gallagher - Chairman, President and CEO
Rob, if you'd open up for questions and answers, I think we're ready.
Operator
(Operator Instructions)
Patrick Gallagher - Chairman, President and CEO
Anybody dialing in, Rob?
Operator
Yes sir our first question is coming from the line of Adam Klauber with William Blair.
Please state your question.
Adam Klauber - Analyst
Good morning everyone.
Patrick Gallagher - Chairman, President and CEO
Good morning, Adam.
Adam Klauber - Analyst
First question is on the broker organic.
You had effectively 700 basis point swing from a year ago.
Now how much of that was the change in rate exposure and how much of that was the change in net new?
Patrick Gallagher - Chairman, President and CEO
Adam, I think that when you look at the swing between them, let me just tell you what we're seeing
Doug Howell - CFO and VP
We're seeing that organic growth the increase in the economy is probably offset, just the stabilization of the economy, I should say is probably offsetting still some rate cutting that is going on out there is so really of our 1.6% organic growth that's really the new business in that sense of the lost business is really contributing.
Patrick Gallagher - Chairman, President and CEO
Also, Adam, added as I said in my comments, Doug's absolutely right.
The PC business is probably a pretty straightforward offset to actually being still organically down, our benefits business in the United States was up very nicely in the quarter and are organic growth outside the United States, Canada, England, and Australia, is doing very well.
And in Australia that's a factor of both new hires and production as well as the economy is very strong in the UK it's a factor of new teams joining us, and in Canada it's more of just typical North America flattish.
Adam Klauber - Analyst
Okay and the follow up on that as far as the UK you obviously have a presence in Lloyd's now.
What's the atmosphere there after the earthquake?
Are rates can you go up?
And is that going to impact your business your international business?
Doug Howell - CFO and VP
I would say that the underwriting community in London on the cat side has pretty much put a stake in the ground and are saying they want rate.
Patrick Gallagher - Chairman, President and CEO
And that's both, that's for cat cover across the globe.
Adam Klauber - Analyst
Okay.
And then on the benefits business, we been hearing as far as the healthcare legislation that originally there was potentially some pressure on commissions for the small I-business.
More recently we've been hearing that you know maybe one or two large carriers are hundred plus lines they're not pushing for commissions to be down to go into more of a per member, more of a capitated rate or more of a fee based rate.
Are you saying that?
Patrick Gallagher - Chairman, President and CEO
Yes.
And it's really kind of a mixture.
Jim Durkin is on the line and he heads our Gallagher Benefits Services Operation.
Jim, why don't you speak up a little bit about what you're seeing on the commissions side.
Jim Durkin - Pres. - GBS
This is Jim.
Yes.
In terms of the commissions its kind of a mixed bag.
Some carriers are trying to move away from the normal way commissions have been paid.
I can't give you any consistency.
Some carriers are running into resistance in terms of what they want to do by different state regulators but I will tell you clearly the direction is to separate the brokers compensation, have it on a standouts, stand alone line in the bill on some fashion and it's up to the broker then to sell it to the client and convince the client of the value they bring.
Just a comment from our perspective, it's really nothing new for us we've been in disclosure mode for many years.
And quite frankly we bring value to the client and they're willing to pay for that.
It doesn't matter to our customers how it gets billed or how to get collected.
Patrick Gallagher - Chairman, President and CEO
I think Adam, let me follow up on that thank you Jim for speaking out.
I think that's a huge point for us.
I said since this new law has been enacted that I believe the smaller benefits broker is in real trouble especially those that are not transparent.
A, the benefits business was supposed to be transparent since the 1970's but it clearly wasn't with all brokers.
And now that that commission is a separate line and someone has to really talk about what the value is they bring, we've been doing that for 30 years.
We are completely transparent and I really think that the new law puts a smaller broker out of business.
Adam Klauber - Analyst
Thanks and one more question.
On the brokerage compensation, it was up around 9% from last year.
Is there anything specific believe that drove it up during the quarter and can we expect the growth rate to come down on compensation costs?
Doug Howell - CFO and VP
I don't know how.
I think you are talking about in total dollars it might be up 9% but again go back to page 5 of our settlement or you can even pick this up from page 6 of the earnings release.
We are reporting a 66% compensation ratio for brokerage segment in the first quarter of 2011.
It was 66% last year and 66% percent in 2009 and 66% in 2008.
So there is nothing that's contributing to an increase in the compensation ratio in our underlying business.
Granted, our revenues are up because we have acquisitions and everything so the dollar amount will increase but when it comes to the compensation ratio we're pretty happy we've held that thing flat the last four years
Patrick Gallagher - Chairman, President and CEO
And I think that makes a great point to 66% ratio is what we're looking at every quarter were want to look at that ratio I would be the happiest guy in the world to see her compensation in the brokerage segment go through the roof along with revenues.
Doug Howell - CFO and VP
Right.
So the comp ratio is obviously flat so the point that the fact that comp costs are up is a factor that its probably tracking revenues Exactly right
Adam Klauber - Analyst
Thank you
Patrick Gallagher - Chairman, President and CEO
Since we're on this, remember guys one of the things that I think is causing some problems out there is when we had the timing of supplemental commissions last year in the first quarter it put $15 million as a one-time pop into revenues that drove the appearance of a compensation ratio dropping to 63% on a reported basis.
I think that's causing some confusion on the street but if you look at page 5 you can see the consistency of our comp ratio.
In addition, look at how when you get to page 5 of the supplement we show about 66% in the first quarter, we've shown 58%, 59% in the second, 58%, 59% in the third, 63% in the fourth.
You can see the seasonal nature of our business and how that impacts the compensation ratio when you look at page 5 of the supplement on our website.
Adam Klauber - Analyst
Okay thanks a lot.
Patrick Gallagher - Chairman, President and CEO
Thanks Adam
Operator
Thank you.
Our next question is from the line of Sarah DeWitt with Barclay's Capital Please state your question.
Sarah DeWitt - Analyst
Hi, good morning.
Patrick Gallagher - Chairman, President and CEO
Good morning, Sarah.
Sarah DeWitt - Analyst
You had mentioned that Florida property prices appeared poised to increase.
Could you elaborate on what your expectations are for the potential magnitude of increases there this year?
Patrick Gallagher - Chairman, President and CEO
I don't know that yet Sarah.
I can't give you a number.
All I can tell you in we've seen this before we go all the way back to 1992 with the hurricane that hit Florida and we've seen this many cycles and property before the earthquake and the tsunami and other cat losses along with this RMS-11 modeling that the model has changed the expectations of underwriters against their aggregations and it's causing some real concern so when you combine both of those significant cat activity with the change in the model, we're just being told by underwriters that they see it that they're just not going to cut prices anymore and that they're going to need some increases.
I don't have a parameter for that yet.
Sarah DeWitt - Analyst
Okay great.
And then given your comments that the economy and PNC pricing appear to be improving, did you discuss what your outlook is for brokerage out will organic growth in margins this year given somewhat of an improved environment?
Patrick Gallagher - Chairman, President and CEO
Well consistently we don't give guidance on that.
I'll let Doug comment on that but let me comment on, I want to be really clear on this.
I'm am not saying that the PC market is turning.
I'm not saying that.
We are still seeing in particularly in the US, PC pricing come down and as I mentioned in my comments in my prepared remarks there's a gap between a new piece of business any renewal.
Underwriting companies are telling us they're going to let business go that needs to be cut again.
Yet we can move that business and get a price cut.
But they are firming, they're digging their heels and when it comes to cutting their existing book of business that's what I mean by gap between renewal and new business.
Having said that, I am seeing some economic improvement and remember we're a lagging indicator we're not going to feel the economic growth in our numbers until clients start to get additional premium audits at the raise their exposure unit at renewal and we're just starting to feel a little of that so I'm pleased that we're up 1.6% organically as I said in my comments, that's primarily driven by our international businesses, our US business is still soft, softer than that but I'm feeling a little better right now than I did at this time last year.
I'm not willing to put any numbers around that.
Doug Howell - CFO and VP
In terms of margins Sarah, I think one of the things that we've been saying and I think it might have been you that even asked the question last quarter, in a flattish type environment in the brokerage space a flattish organic and that could be one point down or one point up or something like that we be happy to hold our margins like we did last year.
If you look at again page 5 of the supplement we posted 22 points of EBITDA margin for more 2009 and 2010 and again in a flat organic environment at posting 22% we been pretty happy with that in 2011 full year.
If you get substantially more organic growth in that you would see some margin expansion absent, we don't get the rampant inflation in our operating costs or for some reason there's a compensation reset out there in the world because of inflation, but by and large in the flat environment if we can post 22 points of EBITDA margin this year we'd be pretty happy with that.
Sarah DeWitt - Analyst
Okay enough I could just sneak one more in.
On the risk management margin it fell year over year unusual items even though you have some pretty meaningful organic growth what drove that?
Patrick Gallagher - Chairman, President and CEO
Sorry, I didn't hear your set up, you said year-over-year what?
Sarah DeWitt - Analyst
The risk management margin fell x usual items even though there was some meaningful organic growth
Patrick Gallagher - Chairman, President and CEO
Yes here's the thing I think what you have to look at on that business we're trying to run that again if you go to page 9 of the supplement were trying to run that business around 15 points of EBITDA margin for the year.
Last year in the first quarter we shared 16.8 points of margin and we're probably running a little hotter there a little excess margin.
I think the team has been told make sure you hit at least 15 points of margin this year they hit 15.7 so we think that's pretty good work.
I know we're spending some money on the GAB Robbins acquisition.
We carve that out in the release but there's still cost associated with that and we're making nice enhancements to our IT systems they are we're doing some nice things in that segment so if we can end up the year and show between 15 and 16 points of EBITDA margin in the risk management space will be happy with that would close to 15.7 this quarter.
Okay.
Sarah DeWitt - Analyst
Okay thanks for the answers
Patrick Gallagher - Chairman, President and CEO
Thanks Sarah
Operator
Thank you, our next question is from the line of Mark Hughes of SunTrust, please state your question
Jack Shorkin - Analyst
Thank you very much.
Its actually Jack Shorkin in for Mark this morning.
My first question is on the gap using between the new versus renewal business.
Has that gap closed recently or what are your thoughts there?
Doug Howell - CFO and VP
No.
I think it's still about where was in the fourth quarter and I can't put a percentage around it but I guess I could put a little bit of a percentage around it.
Typically, if you've got an account that's renewing and we're talking to underwriters about trying to renew that account lets say five to seven down and they're digging in their heels and saying no more cuts, we'll get the 5% to 10% off when we move the account.
It's never our goal to be jumping business around the marketplace but our job is to make sure we get the best program, the best risk management program for our clients.
And that's really what the gap is right now between somebody try to hold a renewal and somebody willing to price it to take it as new business.
Jack Shorkin - Analyst
Okay.
And then on the Florida market, just curious on your thoughts of the magnitude of the change or how would one relate to the other in terms of the upcoming change for citizens with their pricing and outlook there versus the RMS models which would have a larger impact on your business?
Doug Howell - CFO and VP
Well we are the largest ENS broker in the state of Florida.
We place more of that business than anybody in the state so that is a percentage of our overall company is not that great but any kind of movement in that regard would be beneficial to us as long as we can A, have customers have customers that pay the bill and B, we can get the market to supply us the coverage.
The problem with Florida property is when rates go screaming up capacity comes down and often times you're not just placing as much of the business as you did before when rates, so you end up not getting the benefit as much of a run-up.
Right now I can't give you a percentage that we're expect them.
We're trying to be in front of the wave of telling our clients look we've had a great six, seven, eight years and there's problems on the horizon.
Jack Shorkin - Analyst
Okay.
And then just my final question is on the risk management business, the up-tick that you've seen in claim counts of that across any end markets or is it more widespread?
Patrick Gallagher - Chairman, President and CEO
I think it's more widespread.
What we're seeing, I believe, is the up-tick in the economy in the United States
Jack Shorkin - Analyst
Okay great thank you very much.
Patrick Gallagher - Chairman, President and CEO
Thank you
Operator
Thank you.
Our next question is from the line of Brian DiRubbio of Field Capital.
Please state your question.
Brian DiRubbio - Analyst
Good morning guys how are you doing?
Patrick Gallagher - Chairman, President and CEO
Good, Brian.
How are you?
Brian DiRubbio - Analyst
I am well.
Todd or Doug, as I look at the GAB Robbins acquisition from last year and then the more recent purchase of Risk Lenders this year I get the sense that you're funding more motivated sellers.
Am I reading this right and are there some more similar opportunities out there for you guys?
Doug Howell - CFO and VP
I think we're seeing an interesting point in th Gallagher Basset space.
I think that smaller competitors, unless they are specifically niche focused into one particular product or one particular locale are having a problem with the fixed cost structure of their operation.
I think this is a business of scale and I think that the GAB Robbins was a great example management team that came in and stabilized that teaming did a nice job of holding onto their nice client list and that was a great opportunity for us to join forces and basically you can eliminate and infrastructure that supporting a smaller competitor.
So we think that there is good opportunities on the horizon for that.
We have some great competitors out there so I see that space is having more opportunities.
On the other hand if the clients are aren't priced right and are not being service driver not to be jumping in and just trying to consolidate them.
I also.
Brian, want to weigh in on this that I have been very excited about that business for about 25 years.
And really when I look out and see where the world is going if you think about it $0.65 of every premium dollar at some point in time turns into a claim.
And if you can empirically show that your outcomes in terms of claims adjusting are better than your competitors whether they be front-line standard insurance companies or other TPA's, ultimately that's where the cost in insurance is and we're going to be winners in that space and we're getting to a point where we can start to show people if you higher Gallagher-Basset your claim costs are going to go down.
Patrick Gallagher - Chairman, President and CEO
We love that business Brian as you know.
Brian DiRubbio - Analyst
I know you guys do.
Are you still finding, just impending on that, is re-bundling happening or is that stopped?
Patrick Gallagher - Chairman, President and CEO
I'll Scott Hudson weigh in on that.
Scott Hudson - Pres., CEO - Gallagher Bassett Services
It's still happening on a probably the same frequency that it has over the last year so nothing particularly noticeable and when it happens is on accounts for us that are in the $0 to $500,000 range not the larger risk management type business for us but it hasn't, we haven't seen an appreciable but is still very competitive with a lot of the carriers
Doug Howell - CFO and VP
And Brian I would say you have loss pick out there over $5 million, you're going to be un-bundled forever.
Brian DiRubbio - Analyst
Got you.
Pat a comment you made about the potential for rate increases I think it was referred to in Florida, you know as I remember last time you guys started seeing rate increases you lost some business or your business retention wasn't that great because you weren't properly training your folks to counsel the clients, preparing them for this.
Are you guys handling this a little bit differently this time?
Patrick Gallagher - Chairman, President and CEO
Well Brian I don't remember ever publicly saying that our guys weren't doing a good job renewing their business.
When you're in a 10 year cycle you have to realize that the people you hired over the last eight years have never seen any firming in rates so what they've done is what they basically gone into the marketplace and been able to get reduced pricing for clients year in and year out.
We are not at this point out training our folks on explaining to people that we're in a hard market.
I'm not trying to say that.
In Florida, yes, we are absolutely training our folks to explain to clients what it means because as I said we're the largest excess and surplus broker in the state.
The excess and surplus market is the one that hardens first it softens last especially cat property and of course we're training our folks to be able to explain the market to our clients.
The other good thing is frankly in Florida a lot of our clientele are very sophisticated.
Their risk management accounts, they have professional risk managers that understand this very well, they react to a tightening market by increasing their retentions buying less on the top end and managing their costs.
So in part in a place like Florida I think we're pretty well covered in that regard.
By the way I will tell you Florida in particular in every hard cycle I've seen since 1974 our business has gone up.
We have not lost accounts.
We have improved our, we have held onto our accounts and added new ones because clients need somebody that knows somebody that knows how to navigate this world.
Brian DiRubbio - Analyst
Got you.
Thanks a lot guys that's all I had.
Patrick Gallagher - Chairman, President and CEO
Thank you Brian.
Operator
Thank you.
(Operator Instructions)
Our next question is coming from the line of Dean Evans of Keefe, Bruyette & Woods.
Please state your question.
Dean Evans - Analyst
Thanks.
Most of my questions have been answered at this point but a couple I wanted to hit.
At Gallagher-Bassett, out of the 5.8% organic growth looks like half of that came from adjustments for large international cat events.
Can you sort of discuss how that, how we should think about that for the second quarter, should we see more benefits like that coming through and I guess am I thinking about it correctly when I state that?
Patrick Gallagher - Chairman, President and CEO
Yes.
Here is the thing.
What we are is, we provide earthquake claim settlement services in New Zealand and you will see in the press release we recorded a little over $3 million worth of revenue for that.
It will go on for a number of quarters.
Whether that's four quarters or eight quarters I don't know I just don't know how long it's going to take us to get through a couple hundred thousand claims down there but it will eventually go away unless of course another situation happens there.
So we're breaking it out for you separately.
You're right but to understand that about three points of our organic growth came from just that program.
The other 3% or 2.8% of growth came from around the globe particularly in our UK and Australian operations and other programs there not natural disaster related.
But it will go away eventually and that's what we're breaking it out and the earnings release there so you can see it so when it goes away you'll understand what happened.
Dean Evans - Analyst
Is the right magnitude to think about around that $3 million per quarter or is that kind of the first quarter higher number?
Doug Howell - CFO and VP
Yes that's what we've had for the last two quarters to be go back to work fourth quarter I think it never was about the same in the fourth quarter of last year in the first quarter of this year so it's about $3 million a quarter.
Its not super, the margins in that business are acceptable to us based on what we're doing there, the value we are providing, I think we get okay margins on it but $ 3 million a quarter is not a bad guess.
Dean Evans - Analyst
Okay.
Another thing I wanted to touch on was the corporate segment.
You gave some good detail for the rest of 2011.
How can we think about 2012 I guess assuming that the plants operate at full steam?
What are you thinking that there?
Doug Howell - CFO and VP
I think that's a great question.
When you look at 2012 there a lot of things that can happen when you put these plans into place but assuming we get them up and running on that line in the corporate segment we'll make $0.08 to $0.10 per quarter of profits.
So assuming we don't put on anymore debt, assuming that our acquisition levels stay, M& A stays about the same, and assuming our corporate allocation stay about the same as they've been in the last quarter and then what I gave you for guidance going forward, the only deadline that we change in 2012 is that segment or that line dentures should ultimately show about $0.08 to $0.10 of earnings per quarter.
Dean Evans - Analyst
Okay.
That makes perfect sense.
Thank you.
Doug Howell - CFO and VP
Thanks Dean.
Operator
Thank you, our next question is from the line of Meyer Shields from Stifel Nicolaus.
Meyer Shields - Analyst
Thank you, good morning everyone.
Patrick Gallagher - Chairman, President and CEO
Good Morning, Meyer.
Meyer Shields - Analyst
Doug if I can continue on that.
You said that earlier in your comments that the ramp up is lower slower than you were expecting with the clean energy ventures.
That doesn't postpone the profit period does it?
Its still in for 2019 and it's lower than that net income that is gone?
Am I thinking about that right?
Doug Howell - CFO and VP
There is a yes and no answer to that question.
Yes for the existing plans that we have in place and those that we are going to put in place.
If we put them in service like we did by the end of 2009 we'll get 10 years worth of earnings on that plant.
The law has been extended so if we put up a new plant let's say between now and the end of the year, we'll get a full 10 years, and additional 10 years worth of earnings on that so as you know we have two plants that we're looking for locations for.
It could very well be that by the time we get to the end of this year we simply build a new plant and put it in place, save the existing tier to put into place after a 2011.
The life on those two remaining plants would be eight years then but the new plant that we built we get 10 years out of.
So in a way I'm giving you a yes answer and a no answer and remember, these plans are not very expensive to build.
Meyer Shields - Analyst
Okay that's what I was looking for.
Very helpful thank you.
When you look at supplementals in the insurance brokerage component here if we continue seeing what you've been describing which is a worse at the rate decreases but I would guess and this is my comment not yours that loss costs and inflation is still outpacing any rate increases that are out there so underwriting profitability is getting worse.
How does that increase in volume decrease in profitability shakeout in terms of expectations of supplemental the contingents?
Doug Howell - CFO and VP
That's a great question Meyer.
It's a constant dialogue with our underwriting companies in terms of how we should be compensated.
There's always a balance, contingence as you know it and one of the reasons we break that revenue out so clearly for in the earnings release you recognize it is contingent so the supplementals are negotiated every year and those are accrued quarterly based on the contract we have with our carriers.
The contingents are based on revenue growth and profitability and there is a ying and yang between as underwriting profitability goes down and continuing commissions look like they're under pressure we are asking the underwriting companies to provide us with additional supplementals.
It's important revenue to our company, it's very important compensation to their distribution source and we expect to do everything we can to hold that revenue even when markets are not performing well themselves financially.
Meyer Shields - Analyst
Okay.
That's great.
One last question if I can on risk management.
$3 million, the performance fee, is there any compensation or other expense associated with that or is that the bottom line?
Doug Howell - CFO and VP
That mostly goes to the bottom line.
You have to look at that a little bit like a profit sharing contingent or commission that we get on our wholesale business or in our risk management.
It's very, it's highly profitable business.
We pay some bonuses on that so if you want to assume that 85% to 90% of that falls on the bottom line is probably a fair guess.
Meyer Shields - Analyst
Thanks very much guys
Doug Howell - CFO and VP
Thanks Meyer.
Operator
Thank you.
Our next question is from the line of Dan Farrell with Stern Agee.
Please state your question.
Dan Farrell - Analyst
I was wondering if you could just comment on the international organic growth and maybe talk about some of the factors that are driving the better results there versus the US brokerage business?
Patrick Gallagher - Chairman, President and CEO
Yes that's a good question I'm glad to take that one.
We've got solid organic growth in the PC brokerage space in both England and in Australia.
As well as Canada.
But the real growth is in England and Australia and they are driven differently in each place.
In England, as you know we've been the basket growing large broker probably for the last seven years.
We have a team of people there that I think are just virtually second to none and we've recruited a number of teams that over the last five years have taken a business that was a relatively quiet business in the UK to probably one of the probably most prominent UK brokers in the London market.
And I'm really proud of those guys.
They've done a great job.
Three years ago we started from scratch on energy and natural resources play that business will be nicely profitable, probably over $20 million in revenue this year from a dead start three years ago.
And that is one of probably eight examples of where we've done that in the UK so that's been terrific.
In Australia we've been in Australia four years.
Frankly there were times there when we were struggling both with profitability and for growth.
We were lucky enough to do an acquisition in Perth a year ago.
We took about a 40% position in SBA in Perth, Australia we completed in 2010 a 100% acquisition of that equity.
That brought a terrific team again focused on natural resources, oil and energy and that has really boosted our recruiting in Sydney, as well as in Perth.
So that business is done quite well and in Canada we've done extremely well in oil and energy so we really have a global play on will energy and natural resources that have come together extremely well and provided us with the lion share of our growth this quarter.
Dan Farrell - Analyst
Thank you that's helpful.
And then could you also comment on your outlook for the acquisition pipeline maybe both near-term and longer-term and then just update us on what you're targeting for a mix of stock versus cash in deals going forward?
Patrick Gallagher - Chairman, President and CEO
I'll let Doug type that the deals all, but the pipeline I get the good news to give the bad.
The bottom line is I think that we are in a spot at we are probably the best acquisition pipeline we've ever had and that's both in quality of operations we're looking at as well as quantity.
The people that have joined us over the last two years outstanding operations, people that are turned on to in a great job of using the Gallagher platform and remember what we're really selling out there is, we're not looking to retire in anybody.
Our whole model is to find people that love this business that fit our culture that can use the niches and the capabilities that we've built to expand their business.
We are not buying shops out there and synergizing a bunch of costs out, what we're looking for is the opportunity to hire more production talent he and expand the niches that this people are ready doing and to use the expertise that they had to expand what we do.
I just have never been more pleased with what we're seeing in terms of the quantity as well as the quality for the first time in many instances really looking at possibly joining another firm.
Doug Howell - CFO and VP
Dan in terms of paying for the deals I guess that's my bet responsibility we have $200 million in cash on the balance sheet right now it's available to do deals.
As you know our cash flow at the end of the first quarter seasonally our lowest between now and the end of the year we could generate another $100 million to $150 million of cash that can be used in acquisitions.
So in 2011 we have the ability to use $350 million in cash in deals.
We believe that in certain deals we will still use stock with some of our merger candidate.
There is a desire to take our stock.
There's a desire to hold it.
We like to bring others into our business with that so we're all working toward the same goal.
So we'll balance that out.
It's a little harder to use stock in certain jurisdictions around the world so we'll tend to favor cash and certain foreign countries but domestically we'll probably still want to do 50% to 70% in stock.
If we have free cash flow still be of the buyers stock back so it's not, it really end ups being a cash deal if we end up buying the stock back in the market.
So we've got a lot of dry powder right now I think we've got a pretty good currency and we'll just have to look at it on a deal by deal basis.
Dan Farrell - Analyst
Great, thank you.
Operator
(Operator Instructions)
Our next question is from the line of Mike Grasher of Piper Jaffray, please state your question.
Mike Grasher - Analyst
Good morning everyone.
Question on the ENS market.
If you could elaborate on your comments beyond the state of Florida?
Patrick Gallagher - Chairman, President and CEO
Well I think what we're seeing in term of ENS pressure or soon-to-be ENS pressure is anything that's Exposed so the California earthquake international excess and surplus placement had the tact read placement anything that's got catastrophe exposure underwriters are looking very, very hard at it right now and let's face it they should.
They've taken a beating.
Mike Grasher - Analyst
Okay.
And then just as a follow-up to the M&A pipeline on that, if you go back say 12 or 18 months I think a lot of folks were concerned about taxes and that as a reason for their potential sale.
Have reasons for sales changed at all?
Patrick Gallagher - Chairman, President and CEO
You know I think that's a good question because sitting around my table we kind of predicted that there would be a slowdown with the extension of the tax law for two laws years.
We thought, "well okay, the pressure is kind of off".
I think that potential sellers looked and said "I almost missed the window.
I'm not doing that again so I've got two years to really consider what I'm doing", and I believe that the view that the tax law will change in 18 months is actually helping us to continue to proceed with some of our talks.
Doug Howell - CFO and VP
It just depends upon Mike to pile on their.
If you look at our benefits page I think what you heard Pat say in the are beginning we've got a lot of great merger candidates on the employee benefit space because they realize they've got great relationships with their customers, they are highly professional brokers but they need a larger trading platform in order to be successful.
They need our resources to continue to service their clients.
These are really good people out there and I think they understand that coming into the Gallagher fold, trading off of our name with our resources and more importantly within our culture, these folks love the outer tunic the to sit there and say "hey I really don't see much downside of this at all", and so I think we're seeing that on the benefit space.
When you get into the wholesale space I think we're seeing similar things there on our retail PNC space in the US being part of the Gallagher franchise actually accelerates their entrepreneurialism and doesn't really cause too much problem and how they, well everything is going to change when they come to us for this so to be able to go out and sell and do a great job with her client so they see the value coming together.
They may have woken up to this value because of the tax lot but they're really coming back because of what we can provide to them.
Patrick Gallagher - Chairman, President and CEO
There's another point I'd make with Doug here.
Most of the people that are selling their business now, Mike, are baby boomers and they are close to my age.
I'm 59.
And they're looking at what they're going to do for their team there people and how they're going to perpetuate basically the culture that they've got.
They find our cultural to be one that's agreeable but they also by the opportunity to expand their business as Doug said not just in the benefit space in the property-casualty arena.
We've got so much capability inside our company to be able to help people solve problems for their client and get new business, and the people that we're trying to find to join us are the ones that love to go out and sell insurance every day.
Mike Grasher - Analyst
Okay thanks for that color and just as a follow-up to that.
Doug if you look at the current headcount as it is any anticipation or expectations given path outlook for adding certain non-producing staff?
Doug Howell - CFO and VP
First of all everybody knows will higher producer any day of the week if we had a days in the week we higher eight days of the week for our producers.
When it comes to back-office support a lot of the hard work we put in over the years should allow us to be able to bring produces on without having to add substantial back-office support.
Our centers of excellence around the world that are providing services are doing tremendous, tremendous work.
If we're going to, if we have to expand in the middle office are back-office support area we can do this in some of our offshore locations and the cost to do that is not that much more .
Is a very low cost expansion in a high-quality environment.
So we can bring on a lot of business without hiring too terribly many in the middle or
Mike Grasher - Analyst
Okay thanks
Operator
Thank you, there are no further questions at this time.
I would like to turn the floor back over to Mr.
Gallagher.
Patrick Gallagher - Chairman, President and CEO
Thank you, Robin.
Thank you again everybody for being with us today.
As I said I'm pleased with our quarter our sales culture has never been stronger.
We've built a team of professionals who deliver highly effective risk management solutions to our clients every day.
Our merger and acquisition pipeline is very deep and we're working hard to make 2011 our best year ever.
Thank you for being with us this morning.
Operator
This does conclude today's teleconference you may disconnect your lines at this time.