Arthur J. Gallagher & Co. (AJG) 2011 Q4 法說會逐字稿

Good morning, and welcome to Arthur J. Gallagher & Company's fourth-quarter 2011 earnings conference call. Participants have been placed on 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 & Company. Mr. Gallagher, you may begin.

Thank you, Rob, and thank you, everyone, for joining us this morning on our fourth-quarter conference call. Pardon me -- appreciate you being here. We are sitting here in beautiful 45-degree weather in Chicago. A year ago, we were settled under 22 inches of snow. 2011 was a great year, and we finished with I think with a very, very strong quarter. At the beginning of 2011, things still looked to be really tough out there, but during the year, we continued to build significant momentum, which culminated in a very strong finish to the year.

I'm proud of our team's performance in the quarter and last year, and I want to cite some key highlights for the group this morning. All divisions, all of our operating divisions across the entire globe, contributed to our profit growth this year. Brokerage revenue, on an adjusted basis, was up 22%. We're back with positive organic growth at 5.2%, which is really, really good work. I'm pleased with those results. Remember, 2010, our organic revenues were down 2%, so a 7% turn around is great work by the team. Adjusted EBITDAC, up 27%.

If you look at that organic growth, it's a very simple calculation. We essentially had flat rates for the fourth quarter. We had a flat economy, zero really, decline from the economy, and the organic was made up of new business, less our lost business. Our risk management segment, adjusted revenues, up 13%. Organic growth was very strong at 12.6%, which Doug will make some comments on in a moment, very good work by the team. Adjusted EBITDAC in the Risk Management segment up 22%.

During the year, our merger and acquisition activity, we had a record year. We purchased $277 million of additional revenue. During the year, we did our largest acquisition ever, which was Heath in the UK, which is integrating very well. We finished, in the Risk Management segment, integrating the GAB acquisition. All those clients are now up and operating on our claim system, and our client retention is very strong.

2011 adjusted EBITDAC, with our Brokerage and Risk Management segments combined, we broke through the $400 million mark at $428 million. 2011 supplemental commissions and contingents came in over $94 million, which is outstanding work by our field management team. New business was strong throughout the year, but especially strong in the fourth quarter. We finished the year with 12,000 colleagues, and over $2 billion in revenue. During the second half of 2011, we finished 15 more clean coal plants that will contribute significantly to after-tax income in 2012 and beyond.

Total return to shareholders in 2011 was 20%. And, if you go back to 1/1/08, what we view as the start of the Great Recession, total shareholder return is 70% including our dividend, and our Board of Directors increased our quarterly dividend 3% at the last meeting. All in all, just a great year. I am very proud of our team. I think everyone contributed, from all over the globe.

Let me highlight three particular points that I'd like to add some color to, and those would be the property casualty rate environment, our economy, and mergers and acquisitions. I'll start with the PC rates. The Council of Insurance Agents and Brokers survey came out last week. It shows small accounts up 3.1%, medium accounts rates and costs going up about 3.5%, and large accounts about 1.8%, which averages out to 2.8%. And that's pretty much exactly what we're seeing.

There are some exceptions. Catastrophe-exposed properties, especially the big wind exposed accounts, are virtually in a hard market; in some instances, we've seen 100% rate increases. Property in general, across the board, is increasing more than the 3%. Work comp, as a line of coverage, needs significant rate adjustments, especially in California, Illinois, and New York. Management liability, directors, officers, et cetera, in particular, in the middle market is showing some firming. I think it's fair to say in general, carriers are resisting decreases. Now, having said that -- and I am not declaring a hard market here -- a great account, with a good loss record, one that hasn't shopped every year, is likely to receive a very competitive proposal.

Secondly, on the economy, I'm not an economist, but my own anecdotal evidence as I travel our network, shows that our clients' businesses are improving. I've talked to a number of clients, across many of our offices, whether it's a small contractor, or a medium-sized manufacturer, their businesses appear to be improving, and we are actually seeing additional premium audits. Finally, in mergers and acquisitions, as I have said already, 2011 was a great year. Our pipeline remains very, very full. It does look like capital gains tax rates may reset in 2013. So we think we're going to see a continued strong interest in joining our firm.

I believe 2012 has all the potential to be even a stronger year than 2011. As I have already said, rate reductions appear to be over. Organic growth is back, after three years of reductions. The economy does appear to be improving, and our merger and acquisition pipeline is strong. But, most importantly, our team is incredibly energized. We're winning, way more than we're losing. We're focused, we're turned on, and the team is producing. We have a strong new business culture. Everyone, from myself through the entire organization, is involved in serving our existing clients and producing new accounts. We all realize nothing happens until someone rings the cash register. Doug?

Thanks, Pat, and -- excuse me -- good morning, everyone. Hi, it's really nice to wrap up 2011 by delivering excellent financial results. Today, I am going to flip through the earnings release like I do, and I'll give you some flavor on a few items, and help with you some of your thinking, as it comes to building your 2012 models.

Okay. On the first page, looking at the Brokerage segment, the big item is the Heath Lambert integration cost of $0.04 per share, which is in line with what we were expecting. Looking forward to 2012, we anticipate about $0.08 of integration costs for the year in 2012, and then about $0.04 in 2013. Staying on the first page, but moving down to Risk Management, as we forecasted in the third-quarter call, we had about a $0.01of integration costs related to wrapping up GAB Robins. We're done and we don't expect any integration costs in 2012. I will also echo what Pat said earlier. The GAB Robins deal is really turning out -- really turned out to be a nice deal for us. We have lots of positive thoughts about Heath going forward, too.

Flipping to the organic revenue table on the second page, as you -- for the Brokerage segment. As you model 2012, please apply your organic growth pick to only the commission and fee line. Then, please think about supplementals and contingents, separate from core commissions and fees. At this point in the pricing cycle, we are not expecting supplemental and contingents to go up in 2012. Holding them flat in 2011 should be viewed as good work in this environment.

Now flip to page 3, to the Brokerage segment margin table. Posting margin expansion this quarter is consistent with what we have been telling you. If organic is over 3%, you will see a bit of margin expansion, assuming a low inflationary environment, but below 3%, don't expect margin expansion. Also, one other important modeling point for 2012 -- because our first quarter is seasonally our smallest revenue quarter, and Heath Lambert is also seasonally smallest in the first quarter, please do not expect any margin expansion in the first quarter of 2012.

Moving to the bottom of page 3, to Risk Management's organic table, we've added a line at the bottom of that table that shows you organic without both the performance bonus revenues, and without the New Zealand earthquake claim settlement revenues. Effectively, that is organic for core fees. We think that's a better number to focus on because performance bonus revenues can be lumpy, and we've been discussing that the New Zealand earthquake claims will begin to dry up later in 2012. So, when modeling 2012 revenues for Risk Management, apply your organic growth pick to the fee only -- the fee line only. Next, assume between $2 million and $4 million of performance bonus revenues per quarter. And finally, grade down the New Zealand earthquake revenues from about $4 million in the first quarter to about $1 million in the fourth quarter. And that should get you close.

Turn to page 4. I want to spend a little time on how we are viewing margins for the Risk Management segment. You've heard us say before that we are targeting adjusted EBITDAC margins between 15% and 16%. We've essentially hit the upper end of that range for last two years, and we hope to hit that again here in 2012. Let me explain why you shouldn't model margin expansion in this segment in 2012. First, remember the business model. As claim counts grow, we need to hire more adjusters. Accordingly, as a general rule of thumb, 20% to 25% of incremental revenues hit the bottom line. So, if you do the math, you'll see that organic growth before 5% would not move overall margins much at all, especially if you factor in a bit of inflation.

Even organic growth between 5% and 10% doesn't have that much impact on margins, if you comp -- again, if you contemplate a little bit of inflation. Second, also contributing to a flattish margin in 2012, is our risk management team is planning to invest about $5 million during 2012 to improve our service offering to our clients. Two examples include developing predictive models focused on medical management and fraud detection. Another example, is building some new litigation management and return-to-work tools. We think these client-centric investments will help us improve our retentions, and attract new customers over the long haul.

Let's flip to page 5 for a minute, and then I'll come back to the Corporate segment on page 4. On page 5, we provide a detailed update on all of our clean energy investments. In a nutshell, we successfully built and placed in service, all 15 of the 2011-era clean coal plants in the fourth quarter. Five of the new plants are burning coal under long-term contracts. We've got an agreement, in principle, for another plant, and we're making headway in deploying the remaining nine 2011-era plants and the remaining two 2009-era plants. It will take most of 2012 to get most of the other plants deployed, but progress is encouraging.

Also, it's important to note, that the quarterly earnings estimates we provide on page 5 are ultimate run rate amounts. There will be some operational tweaking that happens during the first half of this year, so we don't expect to hit those numbers immediately out of the gate, here in 2012. Also, near the bottom of page 5, we've added a paragraph about forecasted earnings from our 42% investment in Chem-Mod Recall that Chem-Mod is the entity that owns the technology recipe used in the clean coal plants that we built, and is also being used in plants built by other unrelated parties. As of today, we believe we could earn $2 million to $2.5 million of net after-tax earnings per quarter from Chem-Mod. Looking forward, as we deploy our remaining plants into long-term contracts -- and other unrelated licensees do the same with their plants -- we expect our earnings from Chem-Mod to grow, but we are not in a position at this time to make an estimate.

All right, with that on the clean energy, let's turn back to page 4, and look at the Corporate segment. We believe that the best way to view the Corporate segment is the shortcut table we put on page 4. So, looking back, as for the fourth quarter, the interest line, clean energy line, and acquisition line, came right in where we forecasted in our October conference call. The corporate line beat by $0.02, and the legacy investment line beat by $0.01. The beat on both of those lines was because we favorably resolved some tax positions in the fourth quarter. So, you should view that beat as one-timers.

Looking forward to 2012, here's what you should model for the Corporate segment. And the numbers I'm going to give you here are net of tax, so the right column in that table. Assume about $7 million of interest and banking costs per quarter. Assume about $1 million of acquisition costs per quarter. Assume about $2.5 million of corporate costs per quarter. Now, assume about $9 million of clean energy earnings in the first quarter, and grade that up to about $17 million of earnings in the fourth quarter. And then I wouldn't assume anything for legacy investments at this point. Okay, when you get done with that, fact-check what you end up with. You'll end up with a Corporate segment that should about break even in the first quarter, show about $0.02 of earnings in the second quarter, $0.04 of earnings in the third, and $0.06 of earnings in the fourth. Clearly, a lot can happen to cause that -- those numbers to change, but that's our best guess, based on what we know now.

All right. For my last comment, just a reminder that our first quarter is seasonally our smallest. And, once again, I really encourage to you convert your models to closely follow our financial supplement that we posted on our website. When you do, please make sure you're using the adjusted numbers as your baseline for projecting future result. There's not that much difference between reported and adjusted in the first quarter 2011, but there are significant differences in the last three quarters. All right. Those are my comments, the team did obviously an -- a great job closing out 2011, and I'm looking forward to 2012. Back to you, Pat.

Thank you, Doug. Rob, we're ready for questions and answers, hopefully some answers.

Thank you.

(Operator Instructions).

Our first question is coming from Yaron Kinar for Deutsche Bank. Please proceed with your question.

Hi, good morning, everyone. Congratulations on a great quarter.

Thank you, Yaron.

I have question -- I mean the first question would be on the P&C markets and exposures -- listening to a lot of the underwriters, it seems like they are expecting additional improvements, and we're already at -- roughly 2%, 3% rate improvement. I think, Pat, you had mentioned in the past that you were expecting kind of a very slow and modest, but longer term improvement in this cycle. Do you still see that as the case? And if rates actually do improve more than, let's say, the 2%, 3% rate improvement that we're currently seeing, do you think that's going to start hurting your client's ability to buy insurance?

Yes, I think you raise a great question there. What we're seeing at the present time is, in fact the 3%s, 4%s, 5%s, 6% increases, where accounts have hurt underwriters. You can see more than that, But in fact, where the market is hard, as I mentioned in catastrophe-exposed, wind-exposed property on any of the coasts, we're seeing exactly what we predicted. If the rates are up 100%, they're dropping coverages 50%. I mean it's -- we do not think that our clients in this economic environment can take a spike recovery that we saw in 2001. And we are, in fact, seeing kind of a slow, steady increase in that 3% to 5% area.

And it's interesting. I've been to a number of our production meetings across the country, there have been times when carriers have asked for an increase. We've said, this doesn't seem warranted. We have gone out to the market, and in fact, bound the coverage back with the originating carrier. So rates are moving up slowly. But they are steady. It's across virtually all geographies and most classes of business, with some additional costs for property in some of those other areas I mentioned in my prepared remarks, but we don't think the economy and the clients can take a big spike.

Okay. And with that in mind, looking forward, should we expect like -- what mid-single digit organic growth then in brokerage? Now that you're also facing a little bit more difficult prior year comp, as opposed to in the last couple years?

Well, let me put it this way. Yes, I definitely -- if I get a flat economy and flat rates, you see exactly what the organic was in the fourth quarter. We're a new business machine. That's what we do every day. Every single one of us gets up every day and thinks about taking care of the clients we've got, and getting new ones. If I don't have the headwinds of a bad economy, and think about that -- 2008, 2009, many of our businesses lost 50% of their business. If I don't have a 5% to 6% to 7% rate decline, yes, I will maintain organic growth.

Okay. And then maybe one final question, again, on Brokerage. You have talked to the past, about how anything above 2% organic growth, and you should see some modest margin improvement or more. And I guess I was just a little bit surprised with that, with 5% organic growth, margins only improved like 50 basis points.

Well, I -- Yaron, this is Doug. I think actually, we improved basis points in the fourth quarter, 1.4% -- 140 basis points. If you exclude the Heath Lambert acquisition, we improved it 70 basis points -- if you include Heath Lambert, which we know has lower margins. So a point, 1 point, 1.5 point, with 5% organic growth, that hangs together pretty well. I think that --

Also, let's get this straight. What Doug's been saying to the Street forever is 3% organic, no margin expansion.

Right.

Not 2%.

Okay. Okay. And yes, the Heath Lambert, I did not factor that in. That's a good point. Well, thank you very much.

Thank you.

Our next question is coming from Adam Klauber of William Blair. Please state your question.

Thanks. Good morning, Pat.

Good morning, Adam.

Again, great growth. So in the first half, what was the -- first half of 2011, what was the headwind from rate and exposure?

Oh, boy, I --

I can pull that out.

Hold on, let Doug -- let Doug --

Do you have another question, let me pull that --?

Yes.

Go to the other question, and Doug will dig --

Sure. 5% net new, I mean, that's great. Any big wins in there, or is that just a lot of --?

No.

(Multiple Speakers). -- just plugging out?

Singles and doubles, across the whole network.

Great, great.

And I am very pleased. I think what we're seeing, Adam, is that we've talked a long time about our niche focus, understanding our clients' business, being out talking about our capabilities. Those things are really paying off.

I would have to imagine that RPS is doing really well in this environment. Did that help growth in this quarter, or is that something we'll see more in 2012 than 2011?

Helped very nicely in the quarter.

Okay. Okay.

Adam, the answer to your question is, is between exposure units and renewal, we are seeing negative 3, negative 2, if you combine those two numbers together, and we're flattish now between that. And in the past, we've said it was about 50/50. So I would say, that's probably a good guess for the first half.

Okay. And then, Heath Lambert, obviously, that's not included in organic, but how is that doing from an organic standpoint?

Right now, it's flattish. But it's hanging together very, very well. The integration is going well. It's a very -- it's a difficult integration. We've probably moved 400 people's desks in London alone; just where they sit, who they sit with, where they're located, what have you. So it's been a very active six months of integration. I think we've done a terrific job of making sure those people feel like a welcome part of the family. And we've worked very, very hard on that. I think things are settling in, and we'll start to see some new business production. We're also seeing some teams of people and other acquisition opportunities emanating out of that.

Right. And one last question. Expense, other expense growth in the Brokerage was materially less than revenue growth. That's great to see. Anything unusual in there, or can you keep other expense growth at a relatively low rate?

In the fourth quarter, we did tighten our belts on some travel in the fourth quarter. We just saw an opportunity to maybe pull back a little bit on that, compared to our first three quarters run rate. And the team did an excellent job of really targeting where they need to go, and who they need to see. And we also had some favorable business insurance experience in the quarter, too.

Okay. Great. Thanks.

Thanks, Adam.

Our next question is coming from Arash Soleimani of Stifel Nicolas. Please state your question.

Hi. How are you doing?

Good morning.

Good morning. Just a couple quick questions. Just looking back, it looks like natural gas usage has been increasing, while coal usage has been decreasing. Just looking forward into the future, I'm just trying to get an idea of how big of a risk you think that -- how big of a risk factor you think that is, when it comes to the clean coal tax credits going forward?

Good question. Well, there's a lot of different risks that affect our clean coal investments. So one of them is that coal could be displaced at a plant with natural gas.

Right.

In our case, I believe that the plants that we put in these -- that were put in the -- excuse me, the utilities that we're putting these plants in, have a good idea about whether they're going to immediately replace those plants with natural gas, and probably would not be putting these plants in place if they had that expectation.

Right.

So that's the first thing. Second thing, if they do displace coal with natural gas, those plants are movable.

Right.

And we would find another utility to put them in, or hope to find another utility to put them in and resume production. So it could take us out of service for a year --

Right.

-- on them. But at this point right now, we don't see that the current ones that we've got in place are high exposure to displacement of natural gas.

All right. So the numbers that you had provided on page 5 for the clean coal, are those the best case scenario or the quarterly after tax --?

I think that they're reasonable run rate expectations, based on the plants that we know.

Okay.

Based on their historical production rates. So it's a nice down the middle number.

Down the middle, okay. And then my next question is just onto Risk Management. I guess right now, I think CIAB had worker's comp rates around 7%, [Marcus Kahudman] has them around 3%. How high do those really need to get for to you see an uptick in business in Risk Management?

Well, it's a great question. I really don't know the answer to that. I think that the -- any time rates begin to run in the workers comp world, we see more people enter into self-insurance and the alternative market.

Right.

And that has been a historical fact for the last 40 years. Do I have a specific number like 5%, and then it's, Katy, bar the door? No. But what ends up happening in the work comp line is when it goes bad, it seems to get really bad. And those rates tend to not run 3s, 4s, 5s, but you tend to see customers really being pushed hard. And that's when they will jump to the alternative market. So any rate increase bodes well for Gallagher Basset.

Right. Okay. And then I guess the main reason for the lack -- I guess, the reason it's more difficult to see margin expansion within Risk Management, if that is just what you were saying before -- having to hire more adjustors, whereas in Brokerage you don't have to hire, necessarily more producers.

Yes, exactly. It's a very labor intensive business. With every dollar of revenue, comes claims work.

Right. Okay. That's all for me. Thank you so much.

Thank you.

Our next question is Bob Glasspiegel with Langen McAlenney. Please state your question.

Good morning, everyone.

Good morning, Bob.

A quick couple -- I guess three areas of questions. On your Risk Management, do we look at Q4 as a reasonable run rate, ex the extra Australia, New Zealand claims, or is there something else we should be considering, thinking about the quarter? Because that was certainly a mini break-out, relative to several years of results there.

Yes, I think, Bob, maybe a $0.01 worth. I mean, by the time you look at page 3 of 14 and you see the adjusting fees relating to international disasters, it's not all that rich in margin. The additional performance bonus fees, that's heavy margin business. So by the time you factor it out, yes, I'd say that Risk Management was a little hot this quarter.

Okay. On the tax line, if I use -- sorry about this, on page 6, if I divide the $17 million federal statutory rate into your -- my calculation of pretax, that gets to about a 36% rate before we get to the good guys. Was that that sort of $0.01 in Brokerage, that was a little bit lower that you sort of backed out or -- because you started saying 38% to 40% is the normal stat rate.

Bob, I'd have to retrace your math to see how you've gotten there, but that number is intended to be somewhere around 38% of the number.

Okay. My model says, that you had $47 million of aggregate pretax earnings. Actually, I can't find the complete pretax Company-wide model in all of your great releases.

I'll work on it, if you want to go to the next question.

And then we've got the $1.7 million and $3.8 million of other items. The $1.7 million is prior year and $3.8 million other net, what's in that?

The other net, we resolved some tax positions. And because of the mix of our business in certain states in the US as a result of our clean coal production efforts, and some other corporate realignments, it reduced our state taxes.

Okay. And that $5.5 million isn't broken out as a good guy on the front page, right? Because you only do that for Brokerage and Risk Management?

Pieces of those numbers are taken out. If it was in -- if it was released through the Brokerage or Risk Management segment, then we chiseled that out, and we put it on a separate line item.

So we're $0.02 isolated out, but there's another $0.03 in sort of Corporate, I guess?

Yes, that's what I said. If you look at the Corporate segment, there was $0.02 of beat in the Corporate line and $0.01 of beat in the legacy investment line, and that comprises the difference.

Okay. And last question, is your run rate for financial services for Q4, is that sort of a quarterly run rate into 2013, or is there some seasonality in the pace of that?

Say your question again, Bob, because you said '11, and then you went to '13, I thought?

You said 2, 4, 6 -- you break-even, 2, 4, 6, as sort of the financial services corporate trend line for 2012. So as we go into 2013, is that $0.06 quarterly run rate a good one, or is there seasonality in that $0.06?

I'm not giving any guidance on '13 yet, but that -- those numbers that I gave you have no new plans being signed up under long-term contracts.

Okay. So could even go higher than that, in future years or lower depending on --?

It could go either way, Bob.

Okay. Appreciate it.

Okay, Bob.

Our next question is from Brian DiRubbio of Y/CAP Management. Please state your question.

Good morning. How are you doing?

Good morning, Brian, how are you?

I'm okay. A couple of questions for you. On Risk Management, Pat, how much of that was from increased claims activity, versus new business that you brought in?

I'm going to throw that to Scott Hudson.

Okay.

A significant percent was rated to the claim increases -- I mean, we were seeing through the fourth quarter somewhere in the neighborhood of 2 plus percentage points, just in claim count increases. Also we're seeing marginal increases in rates with existing clients, somewhere in the neighborhood of 2% to 2.5%. So a lot of that is on the existing book. If you think about the new business, it takes a while that, to take hold. So even though it was coming throughout the year, and we had a good new business year, we won't see the majority of the effects of that until this coming year.

Got you. And now is -- and you have to forgive me, I'm fighting a little bit of a head cold this morning -- the 2% claims increases, is that the biggest that you've seen in a while? Because, I mean, claims have been sort of flat to down in that business.

Oh yes, claim counts were going down through 2008, '09, '10.

Yes. So is this the inflection, Pat, that you have been sort of looking for?

Yes.

Okay, and --

Brian, that hangs together, the business insurance came out this week, and talked about more frequency in the worker's comp line so.

It's another one of my anecdotal areas, where I look at the economy, Brian.

Yes.

Because one of the big reasons for claim count drops, was the fact that you are going from 3 shifts to 2 to 1.

Got you. And that makes a lot of sense. And then, Doug, as I was going through the release, are we now more comfortable with, I guess, Heath Lambert's contributing to lower overall tax rate in Brokerage?

Well, yes. So we -- if you go to top of 6 of 14, we've actually moved it down a full percentage point. We used to give a range of 39% to 41% for that segment. We're down to 38% to 40%. And if that business starts to contribute more, it will have the impact of bringing the rate down slightly, even more maybe in '13 or '14.

Got you. So maybe longer out, we can think, maybe 37% to 39%?

I am not willing to go there yet, but you're welcome to think what you want. (Laughter).

Got you. And just finally, was there any FX headwinds for you in the quarter, with the dollar strengthening?

Nothing of significance.

Great. Thanks a lot.

Thanks, Brian.

Our next question is from Dan Farrell, Sterne Agee. Please state your question.

Hi, good morning.

Hi, good morning, Dan.

Could you just comment on current trends in the employee benefits business? And if organic growth is materially different from the overall organic in the brokerage segment. And then also just your outlook for that area going forward?

Yes, we're very bullish on the benefits business. Our benefits business has had a higher organic than the PC business, even -- including in the fourth quarter. I have said many times that the new law that we're all facing now under the healthcare regs is providing us with tremendous amounts of additional work. Our clients are now having to face up to the fact that these regulations are coming into being. It's, I think, putting tremendous pressure on the smaller agents and brokers out there, which is helping us with our mergers and acquisitions. And underlying costs in health and welfare accounts are up. So our organic there is a little bit stronger than the PC business.

Okay. Great. Thanks. And then just another question, just on the clean energy. Doug, when you are coming up with your estimates for what these can generate, I'm assuming you have some assumptions for what you think coal price will be versus the other commodities? And is there any sensitivity that you do around the fluctuations? And then, any sort of ranges that we can think about tracking ourselves, from the outside looking in?

There are two things to think about. Longer term, tax credits can go away if coal prices get too high, compared to a reference price. So there is a phase-out that we're well below that number at this point. It's not a real easy number to track. And at some point, I'll have to figure out a way to be able to provide you guys that information, so you can just monitor. It's not like can you pick up the Wall Street Journal and find the reference price. So there is that sensitivity, but really that doesn't impact the production of the coal. That's a risk for the credit to go away. In terms of -- did you have a second part of the question?

No, I think that essentially hit it, we can (Multiple Speakers). --

Yes, I think right now, we believe coal prices are well below any type of phase-out level at this point. And so we think that we should have a clear sight to produce over the next few years so.

Okay. All right. Thank you very much.

Our next question is from the line of Ray Iardella with Macquarie Banks. Please proceed with your question.

Good morning, a quick question, I guess on the M&A front. I know you had mentioned in your prepared remarks that 2012 could be a pretty active year, from an M&A standpoint. And it already seems like you are off to a good start. But just curious, I mean, how much cash do you have, do you think you have available to do acquisitions in 2012?

Well, we think that now that we've got significant amounts of tax credits coming in also -- we think that a pretty good proxy for that is half of our reported EBITDA, is what we generate.

Okay.

For -- it could be used for acquisitions.

Okay. That's helpful.

Maybe 40% is a better number.

Okay. And then just one other quick question. And looking at your balance sheet, it looked like AOCI declined a little bit. I mean is there something, maybe pension related? I know you said FX wasn't a big deal in the quarter. And maybe can you just remind us about your pension plan, and kind of your assumptions there? That would be useful.

Yes, that's great. A good question. Yes, we did have -- if you look at the other comprehensive income line in our balance sheet, it's a negative $47 million, $15 million of it relates to FX, and the balance of it relates to underfunded pensions liability. The reason why that changed, and this is going to impact probably the rest of the world too, is the discount rate assumption. We moved down from 5.5% down to 4.5%. And that produced a -- basically an underfunded pension by $30 million, which is really kind of peanuts in our environment here. We froze that plan in 2005, which in retrospect looks like a good move. But that's difference you are seeing there, right.

Okay, great. And then, return assumptions on the assets. I mean, do you -- did that change year-over-year, or is that something you are keeping consistent?

Not dramatically. The recovery of the equity markets probably took a little pressure off of that line. The number is 7.5% is our return expectation. And I think that is pretty well in the middle point of the range for what people will be using, again because of the equity balance in the portfolio.

Okay. Thanks a lot.

(Operator Instructions).

Our next question is from Mark Hughes of SunTrust Robinson. Please state your question.

Good morning, thank you.

Good morning, Mark.

Anyway you can shape up for us, perhaps the other opportunities within the clean coal technology? I think you had talked about the -- you expect maybe Chem-Mod to make more of a contribution, but you can't shape it up right now. Could you give us a sense of the magnitude of the of the business that you are pursuing, maybe what your historical win rate has been, just something to shape it up for us a little better?

Mark, I think that anything I gave you on that right now, would be subject to such a wide range of possibilities, I would rather not do it now. I think I can give you a better answer in our April call. So I think that I would rather just wait to see. We're a little downstream on that, because Chem-Mod, while we manage that company here, and that's why we consolidated, even though it's only 42% owned, we really, the licensees -- that the other third-party licensees of that, they report to us on a lag basis. And they're not all that forthcoming in how their pipeline looks, because to a certain extent, we compete with them, because we have other plants that we're going to put in place. So I really can't give that to you now until April. But we have some cautious optimism on that.

Okay. How about the -- do you have a number for cash from Ops for the full-year?

Cash generated from operations?

Yes, exactly.

Let me see if I can dig that out. Do you have another question?

No, I think that was it.

Okay. Well, we'll dig for that answer. And Rob, let's move on to the next question.

Thanks, sir. Our last question is from Scott Heleniak from RBC Capital Markets. Please state your question.

Hi, good morning.

Good morning, Scott.

The first question I had was on M&A. Obviously, the entire sector, there has been a lot of consolidation going on, and I am just wondering if you are seeing any newer players in there, banks and private equity, and some of the other guys that haven't been as active coming back in? And if so, what is that doing to multiples in general, that are paid for deals? Are you seeing any kind of big movements? I would think that the multiples have to be going up a little bit.

No, actually we're not seeing a lot of multiple move. You've got the usual -- our usual competitors. You have a very interesting kind of market out there, when you look at M&A. As I said in my remarks, there is 18,000 agents and brokers or some number like that -- we get that number from Hales & Associates -- in the United States alone. So you have got to at least have double that globally, and we are active in the acquisition world globally. And most of these businesses are run by baby boomers. There's probably five very active acquirers, and there are others as well.

There is some private equity activity, very little activity on the side of the banks, with maybe one exception with Wells. So really, what you've got is a huge supply of interested parties. I don't want to diminish the amount of work this takes. You've got -- we've got people out working hard every single day. And every deal we do, even if it is a $3 million or $4 million deal, is, in fact a marriage that has taken a lot of courting to get it done. So our people are working very, very hard.

Having said that, what's interesting about the process, is the five main acquirers, we do, each of us have very unique personalities as companies. And through the process, we generally get to a point where that seller has decided where he or she wants to land. And we're very lucky and very pleased with those people that have decided to join our company. But that has produced no shortage of opportunities for our competition. So I look out over the next decade, frankly, and see just a tremendous amount of consolidation that's going to occur, both because of the baby boomer age situation, as well as the fact that the buyers, the clients, are demanding a higher level of expertise. It's just no longer going to be -- I think a decade from now, just that relationship purchase is going to be far diminished from what it is today. So lots and lots of opportunities, and no, we are not seeing a lot of expansion in multiple.

Okay. The next question I had was on the -- you mentioned in Risk Management, the increase in the claims count, up 2%. I was wondering, obviously, you see a lot of the claims activity that comes in. Was wondering if there's -- was there any particular class that we are seeing frequency uptick more so than others? Obviously, worker's comp in the market -- we've kind of heard that anecdotally -- is there anything -- any particular class where the trend is kind of going much higher?

No. The major line of business that we adjust is worker's compensation, but it is across all client types.

Okay. And then I was wondering, the $4.6 million amortization write-down from the two acquisitions -- I was wondering if you could touch on that a little bit more, when those two acquisitions happened, and do you expect any additional write-downs for 2012 at all, based on what you see here?

Okay, first of all, let me go back to Mark's question. We had $283 million of cash generated from operations. And then now let's go to -- the $4.6 million write-down was 2 or 3 deals that we took small impairment charges on their amortization -- unamortized intangible. Probably $3.5 million to $4 million of it related to one particular broker that we bought. He's still with us; he's a tremendous deliverer. They were selling a product, a life Insurance product that was dependent on borrowing some leverage from banks. That borrowing -- that availability of lending has dried up for the time being. We expect that product to be back. It's a nice product used for estate planning. It's not viacticals. So it just -- it didn't meet the recoverability test. So I would say this is as much of an accounting write-down, as it is a -- it's not a bad deal, he just has to wait for lending to become a little looser for him to get back into selling these products.

Okay. That makes sense. And then, my last question was just, Pat, you mentioned a comment about some of the clients that you're seeing around the country feeling better about their businesses. Was there any particular sector, geography where that was true more so this quarter than last quarter, and any change in customer buying behavior as a result?

I think probably where I've had the most opportunity to interact with clients has been in the midwest. And I think the midwest has sort of led the improvement. But we are seeing improvement in a number of our businesses, across all of our geographies. The buying pattern that we are seeing that is important to note, is that where we are seeing a spike in pricing -- and this is particularly catastrophe exposed property, clients are buying less cover. And that's what we've been saying all along. If this thing spikes, as it did in 2001, if we had a violent rate increase environment, clients are going to buy less coverage.

All right. Thanks for the answers.

Okay, Scott. Thanks. Anybody else, Rob?

And we have no further questions, Mr. Gallagher.

All right. Then I'd like to make just a few quick wrap-up comments. Again, thank you, everybody, for being with us this morning. I want to just remind all the listeners that we are very focused on four things strategically. Number one, organic growth, number two, mergers and acquisitions, number three, productivity and quality, and finally maintaining what we know as a very unique culture. And I want to touch on each of those very briefly. As it relates to organic growth, every single office, every division, every person, every day, is taking care of clients and looking for new ones. When it comes to mergers and acquisitions, I've already mentioned the fact that the pipeline is very full. Most of these are baby boomers, but more importantly, I think it's the capabilities that we've built as a Company that are attracting people, because they know once they have joined Gallagher, they can actually grow their business significantly. That pipeline is strong. As it relates to productivity and quality, if you go all the way back to 2008, which is essentially what we believe the beginning of the Great Recession, we've built our high-quality service centers offshore, and we've actually increased our margin in this very difficult economic time.

And fourthly, we work very hard to maintain what we know as a unique culture. This company has something special. It is the ball team. We're together. It -- this culture keeps us together in good times and in tough times. And good times and bad times, we've stayed focused on those four strategies that we continue to believe will create growth for our shareholders. We have never wavered in that belief. And that's what we're concentrating, on as we go into 2012, which we believe, we can build on the success of 2011 very well. So we're looking forward to 2012. We appreciate you being with us this morning. Thanks very much, and have a great day. Thanks, Rob.

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