Arthur J. Gallagher & Co. (AJG) 0 Q0 法說會逐字稿

Good morning and welcome to Arthur J. Gallagher & Company's first-quarter 2012 earnings conference call.

(Operator Instructions)

Today's call is being recorded.

If you have any objections, you may disconnect at this time.

Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws.

These forward-looking statements are subject to certain risks and uncertainties that will be discussed on the call and which are also 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 Junior, Chairman, President and CEO of Arthur J. Gallagher & Company.

Mr. Gallagher, you may begin.

Thank you, Rob.

Good morning, everyone.

Thank you for joining us this morning.

We appreciate your being on the call.

Today I'm joined by Doug Howell, our CFO as well as the leaders of our divisional operations.

As is our custom, I'm going to add some color to our press release and quarterly results.

I will make some comments and we will get pretty quickly to questions and answers.

Our core operating businesses delivered solid growth in the quarter.

18% revenue growth, 4.6% of that was organic, and 23% growth in adjusted EBITDAC, a solid quarter.

I'm very pleased with the quarter.

This is seasonally our smallest revenue quarter.

And you'll remember we had a terrific fourth quarter, so keeping the momentum going in the first is really good to see.

I think this just continues to show that our team's execution across all of our strategies is working extremely well.

We are focused on four things day-in and day-out.

The first is organic growth.

Our Brokerage segment and Risk Management segment combined for 4.6% organic growth.

I can't tell you how good that makes me feel.

I say often that Gallagher has a sales and service culture that is strong, and I think this shows that.

Everyone of us understands that our first priority is taking care of our clients and adding new clients to our list.

The first quarter proved that, once again, our talented teammates are very good at ringing the cash register.

Number two is mergers and acquisitions.

Our good work continues.

I'm proud of the dozens of colleagues who are actively engaged in helping us continue to buy the best brokers in the marketplace.

Thirdly, we are focused on productivity and quality.

We had margin expansion in the quarter, and we continue to focus on getting better every quarter, every year.

Fourth, we continue to foster and build on a our very unique culture, which is very important to us and I will make some more comments about that later.

Let me address a few other items about the Company in the quarter.

First, the property casualty rate environment continues to firm.

However, we are not in a classic hard market.

We can typically fill our clients' insurance needs, but the carriers are expecting to increase their rates to levels that give them a chance to improve their ROEs.

In particular, we are seeing property, especially CAT exposed property and work comp, firming at a pace of high single to low double digits.

Other lines are tending to be flat, to up 1% to 3%, however the market is still competitive for new business.

In other words, one carrier's firm renewal is another carrier's opportunity, but by and large, we are not seeing decreases.

Secondly, I continue to believe our clients' businesses are improving.

We are not seeing a lot of hiring of new employees, but the clients I have spoken with, over the last few months, do think the worst is behind them.

We're seeing additional premium audits and increasing exposure units.

Our temporary help customers' businesses appear to be very robust, so I hope that hiring can't be too far off.

So those two key headwinds that we faced for five years, rate, decreases, and economic decreases, are starting to feel a little bit like tailwinds.

I don't feel like I'm running up a down escalator right now.

We just came back from the RIMS conference in Philadelphia.

This is a conference where we have a chance to interact with our larger Risk Management accounts, both on the Brokerage side and on the Risk Management side -- the Gallagher Basset side.

And Gallagher continues to build significant brand awareness under both banners, and we came away with a number of great opportunities.

So the Risk Management space is opening up more to us.

Thirdly our Risk Management segment, Gallagher Basset, that business had a great quarter.

8% revenue gains, 7% of that is organic, 16% EBITDAC growth, virtually all of that organic.

Gallagher Basset used the conference in Philadelphia to announce some significant upgrades to our information system, which we call RISXFACS, which were extremely well received.

When you look at the cost of insurance, you realize that the greatest cost in anyone's cost of risk is in the claims.

Gallagher Basset continues to invest in people and technology to drive the best claim outcomes.

Helping our clients control their costs is at the heart of what we do.

Fourthly and finally, mergers and acquisitions.

We completed 12 transactions in the first-quarter with just over $30 million in revenue.

In 2011's first-quarter we did four transactions.

So by comparison, we are off to a great year.

Our pipeline both in the US and Internationally remains very robust.

I want to make a few comments on the largest deal we did in our history, which was last summer, the Heath Lambert acquisition in the UK.

This has become truly a transformational acquisition for us.

We have a number of people that we've been able to recruit to our Company in the UK because we get that deal, and our merger and acquisition pipeline is very strong, and the integration is going extremely well.

So we continue both in the US and Internationally to find great firms who believe that joining Gallagher will offer their people the right platform to grow, and all of these folks had choices.

I'm glad they joined our team, and I want to welcome them to our Company.

So all in all, I'm pleased with the start to 2012, and I will pass it over to Doug for some comments.

Thanks Pat and good morning, everyone.

It is nice to kick off the year with a good start.

Let's start on the first page of the earnings release in the Brokerage segment.

You will see $0.02 of Heath Lambert integration cost and $0.01 of severance, which is in line with our comments from the last conference call.

Integration is on track, as Pat talked about, and we're forecasting integration and severance costs will run about $0.02 to $0.03 a quarter for another four or five quarters.

Next, please flip to the second page to the Brokerage organic revenue table.

Let me break down organic for core commissions and fees for you at a little bit more detail.

In our domestic P&C unit, that's our US retail and wholesale unit, we are seeing the third quarter of sequential improvement.

These units posted about 5.5% positive organic growth here in the first quarter versus about 4.5% positive in the fourth quarter versus about 2% positive in the third quarter 2011.

To put that in perspective, we are still seeing -- we were still slightly negative in the first quarter of 2011.

So while we are only in the third quarter of positive territory, it is a fantastic trend compared to being in negative territory for all of 2008, 2009, 2010 and half of 2011.

International P&C is also in positive territory again this quarter, as it was all last year.

In our US employee benefits unit, we were flat this quarter versus up nearly 7% in positive organic in the first quarter of 2011.

Because of the first quarter last year was so strong, just holding organic flat should be viewed as great work.

Sure it impacts the math for overall organic, but we don't believe it is indicative of any underlying trends.

Moving down the table, we think supplementals and contingents coming in slightly up organically is excellent work by the team, given this changing environment.

And you can also see that our 2011 merger partners contributed nicely this quarter too.

Looking out over the next three quarters, we're not expecting supplemental and contingents to grow organically, nor do we expect merger partners to contribute much more either.

So modeling supplementals and contingents about flat with 2011, is probably a fair guess at this time.

Also, just a heads up, we are seeing some carriers starting to push to move from supplementals back to contingent.

Time will tell, but just something to keep in the back of your mind.

Moving to the bottom of page 2, to the Brokerage segment margin table.

We are really pleased to see margin expansion this quarter up 60 basis points or a full point without Heath.

About half of that favorable upside was from additional supplementals and contingents I just discussed, and the other half was from compensation expense discipline.

Moving to the top of page 3 to Risk Management.

You will see another quarter of excellent organic growth coming from -- and that came both domestically and Internationally.

When modeling future quarters, we suggest we apply your organic growth pick to the fee line only, then assume between $2 million and $4 million of performance bonus revenues per quarter, then grade down the New Zealand earthquake revenues to about $1 million in the fourth quarter and that should be a good guess.

Moving down on Page 3 to the Risk Management margin table.

We had an excellent quarter, but we think margins around 16% for the rest of the year will be about right.

Recall last quarter we discussed that GB is making some significant client centric investments, and you heard Pat talk about it just a couple minutes ago, about what we demonstrated at RIMS.

There are other similar efforts underway that will kick into high gear over the next few quarters.

Moving down to the bottom of page 3 of the Corporate segment.

Our first quarter was in line with what we told you in our last earnings release conference call.

In addition, we did a special conference call on April 11, to immerse in our clean energy investments.

If you missed it, please take some time to go to our website and listen to the call, as we think it is helpful background.

Here's an update for this quarter.

For the 17 plants that are producing under long-term contracts, production in the first quarter was as expected and the ramp-up period is progressing nicely.

As for the other 12 plants, most have been loosely earmarked for long-term locations, and we are in various stages of contract drafting, site engineering, and regulatory permitting.

The level of demand and pace is encouraging, but realize it will still take us 6 to 10 months to get those plants up and running.

So looking forward, here's what you should model for the Corporate segment.

All of these numbers are net after-tax amounts.

Assume about $7 million of interest and banking costs per quarter.

Assume about $1 million of acquisition cost per quarter.

About $2 million of Corporate costs per quarter, and then assume about $13 million to $15 million of clean energy investment earnings in each of the next three quarters.

When you get done, the Corporate segment should show about $0.03 to $0.05 of earnings in each of the next three quarters.

Clearly, these are approximates and a lot can change, especially when it comes to ramping up and rolling out our clean energy investments, but that should get you close.

For my last comment, remember our Brokerage segment has significant seasonality, and we believe the best way to model it is to use the quarterly financial supplement we post on our website.

Page 5 and page 6 of that supplement show adjusted numbers, which we believe you should be using as your baseline for projecting future results.

While there were very few adjustments between reported and adjusted numbers in the first quarter of 2011, there were significant adjustments in the last three quarters of 2011.

So please use page 5 and page 6 as your baseline.

Okay, Pat, those are my comments, back to you.

Thanks Doug.

I want to touch a little more on what I said was the fourth pillar in our strategy, and that is our culture, before we go to questions and answers.

OUr culture is alive and well.

Over the last two months I've spent time with most of all of our top producers and field management.

I can tell you that our team is fired up, we're selling a lot of new business, we're holding onto our clients, there's a bounce in our step, and as I said, the culture is strong, the team is very much together.

Also during the quarter, something I'm incredibly proud of, Gallagher was named as one of the world's most ethical companies for 2012 by the Ethisphere Institute.

Ethical corporate behavior is a significant topic in today's business environment, and has been a cornerstone here at Gallagher, of our behavior for over 85 years.

The whole team is excited to be recognized by the Institute as one of the world's most ethical companies, and this is another indicator of the fact that the culture is strong and one that we are so proud of.

With that, Rob, let's open it up for questions and answers.

Thank you.

The call is now open for questions.

(Operator Instructions)

Mark Hughes, of SunTrust.

Yes, thank you.

Good morning.

Good morning, Mark.

In the Risk Management segment you said it was opening up.

You gave some additional comments, but is that -- are more companies putting up their administrative work for bid?

Or is it new initiatives?

You just feel like your taking some share?

There's a couple things going on there that I'm pleased with.

I would not say that more companies are necessarily putting their work up for bid.

I do think that more Risk Management-size companies are looking at outsourcing claims work, where it typically, in many instances, is bundled with the insurance product.

More and more companies, and deeper into the Risk Management space, are recognizing that they can bifurcate the purchase from insurance and claim service.

There's another thing that's happening which I'm extremely pleased with, and I think it is going to be a huge move over the next decade or so, and that is insurance companies, risk takers, outsourcing their claims work to a third party.

If you look at some of the capital that's coming on shore from Bermuda, they are not going to build big infrastructure in the United States.

They would rather outsource that work to somebody that can do it for them professionally.

Right.

How about the claims frequency in Risk Management?

For your same accounts, are you seeing an increase there?

Yes, that's a big change from the recession.

Claim counts at Gallagher Bassett are up about 4.5%, including new business.

On existing clients, claim counts are up about 2%, and that's really a proxy for the economy.

Great.

Thank you.

Arash Soleimani, of Stifel Nicolaus.

Hi, how are you?

Thanks for taking my question.

Good morning, Arash.

Good morning.

Just a couple quick ones.

In terms of the margin improvement that we saw in Brokerage, should we basically be assuming similar year-over-year improvement going forward for the rest of the year?

And into 2013?

Or was this basically the largest that we should expect to see?

I think that you -- what -- to go back to our statements in the past.

If we get organic growth in excess of 3%, you will see some slight margin expansion.

So between 3% and 5% there would be some slight margin expansion.

Over 5% you might get a little bit more.

So as you -- it depends on what you're going to make as your organic pick for the rest of the year.

I would really encourage you, again, to go back to the supplements on pages 5 and 6, and look at the historical margins that we posted.

Kind of X all the noise that can distort those little bit.

But if you're assuming some margin -- if you are assuming growth in excess of 3%, you can allow that to go up a little bit, but not a lot.

Okay.

And then in terms of the compensation expenses that relates -- as a percentage of commissions and fees, it looked like, despite the level of supplementals and contingents, that -- [end of] supplement would still stay pretty consistent so -- my question -- because I was always under the impression that the contingents would be sort of higher margins, same with the supplementals.

So I guess my question is, why is it that, that ratio would still say pretty consistent if that was the case?

In the first quarter, we booked a couple million dollars more of compensation expense overall.

As we get into an inflating environment, you will see formulas starting to perform kind of in stair step.

We don't want to get behind the rest of the year, so we did book a couple extra million dollars of bonus this quarter.

Okay.

Then my final question, looking at the organic growth within the Brokerage segment.

It looks like it was just on the core commissions and fees of about 3.2%.

And then we saw the 4.9% in 4Q '11, so obviously the 3.2% is still a very positive number, my question is just, that sequential decline.

Is there anything to read to in that or did 4Q just happen to be a particularly super quarter or --?

I think their combination of four or five things in there.

First and foremost, our first quarter is our smallest quarter.

Second of all, when we spoke about how the benefits quarter had such a great quarter last first year, first quarter -- our last year, first quarter -- so just the year over year, the math produces a little bit of a lower total, just the year-over-year comparison.

Second of all, we're 270 days into the time since we've started reporting positive organic growth across all of our Brokerage units.

So, while the expectation might be that rates -- that organic continues to move up sequentially, just posting two numbers around 4%, a little above and maybe a little below, we think is really good work, 270 days into this changing market.

Okay, no, agreed.

Thank you so much for taking a question.

Ray Iardella, of Macquarie Bank.

Thanks, and good morning, everyone.

Couple questions, first, thinking about Heath going forward, clearly about a year now it's been with Gallagher.

Just curious, I know you talked about the International growth rate, but maybe you can expand on what you're seeing as far as growth in Heath.

I know it is not in your numbers yet, but I guess it would start to flow through in the next quarter or so.

I think if you look at the growth at Heath, you have to look at it two ways, as you guys like to, and that's one, organic, and the other is what's going on with recruits and acquisitions.

Organic is probably flattish.

Rate environment in the UK continues to be more competitive than in the United States, we are still seeing rate decline there.

The economy in the UK is also, outside of London, more sluggish than we are seeing in the United States.

So flattish is probably good work there.

The most exciting thing about the Heath acquisition -- well, first of all, we've got a great platform, and we've got great people to join us in that acquisition.

And what that's done is create, literally, a keen interest in the new player in the UK.

So we have recruited probably a dozen top-flight production people just in the last six to eight months.

We have a pipeline of bolt-on or tuck-in acquisitions that we never would've had from just our London base a year ago.

So, it has totally taken our business in the UK from being predominantly a wholesaler to the world community, to a wholesaler in London and a very strong operating platform around the rest of the UK, which gives us a look that is much more similar to the United States.

So we are new player, it is a fresh look.

People are excited about having a new player.

The insurance companies in the UK are very excited about the new platform.

All in all, it is just a -- it is shaping up to be a terrific deal for us.

Great, that's helpful.

And then, one other question, I guess, regarding client behavior.

When -- as insurance are actually pushing for more and more rate, are you seeing more shopping?

Some of the insurance underwriters have talked about lower retentions in the face of higher rates.

Maybe just curious what you're seeing from your clients?

Absolutely.

Whenever rates move, clients want to check the market.

That's what we do for them.

I would tell you that when we are seeing a 1% to 3% to 5% increase, and you take a look at the CIAB -- which is the Council of Insurance Agents and Brokers -- rate survey every quarter, clients are buying insurance today at about 1999 prices.

So, when the insurance company wants 1%, 2%, 3%, there's not as big a push to shop.

But you've got problems with property right now and you've got problems with workers comp, and that is driving shopping behavior.

But, interestingly enough, the market is not showing decreases.

So, you can have that one-off situation where it gets very competitive and, yes, the price goes down.

And this does vary by line; our marine business is still very soft.

But by-and-large, when the carriers are asking for 1% to 5% increases, they are getting it.

Great.

Thanks.

I will re-queue for my other questions.

Adam Klauber, from William Blair.

Good morning, Pat, how are you?

Good morning, Adam, how are you?

How are some of the businesses doing?

How are benefits?

I think Doug mentioned it is a tough comparison, but aside from that comparison, how's the benefits doing?

How is RPS?

How is the construction practice now?

Thank you, Adam; I should have sent you that question.

These businesses are doing great.

What you see in the benefit space -- thank you to the new law -- is just incredible concern and very difficult compliance.

And so every single client out there needs help from our benefits professionals, and our team is so on top of this change, we don't really care whether the Supreme Court comes through and throws the law out or affirms the law.

It creates a tremendous amount of work for our folks.

I've never seen such a buying -- selling opportunity in my career.

We are holding seminars for clients and literally picking up broker record letters from clients as they walk out.

What that law has done, in my opinion, is put the small benefits broker out of business.

They are done.

They can't deal with the compliance.

They can't deal with the complexity.

And the law changes all the time.

At one point, to be grandfathered you had to stay with the carrier you were with, now you have to stay with the type of coverage that you have, but you can change carriers.

Some things are going to have to be 1099, now you don't have to 1099 them.

What is going to be considered the loss ratio for the carrier that's appropriate or not, I mean it is so darn complicated.

That business is on fire and will continue to be incredibly strong.

RPS, the most stable wholesaler in the marketplace right now, not the largest -- we started that business 15 years ago, literally this week, with one hire, and literally $600,000 of business.

Today, we are one of the largest wholesalers in the market.

We are very successful at our MGA businesses.

We are seeing very good return to the Wholesale community of accounts that were picked up by the regular carriers just four or five years ago, and we are seeing the economy expanding slightly with new start-up businesses, which also come into the Wholesale at MGA markets.

So that's very, very good.

Construction, Adam, is still slow.

The infrastructure folks are doing well.

The regular construction accounts out there are still hurting.

Hopefully, as we see the economy expand -- I've got a friend of mine that runs a very nice construction company here in the Chicago area.

Their business in 2008 was about $100 million in construction; I think in 2011, they did $25 million.

So you see the kind of pressure that sector has been under.

The practice that we have in construction is second to none.

I'm incredibly proud of those guys.

We pick up new accounts every quarter.

We are definitely taking share in that space.

So, thanks for the question.

You got any others?

Thanks, just a follow-up.

So with RPS doing pretty well, has that grown above your overall organic rate?

Yes.

They are about three points better than the retail PNC market.

Great.

Thanks a lot.

Brian DiRubbio, of Y/CAP Management.

Good morning guys, how are you doing?

Good, Brian.

How are you?

Going back to Risk Management, I know the first question was sort of about the claims count.

Should we then just simply deduct the growth in claims count from the overall growth, just to get a sense of what pricing is doing in that business?

Well, I will tell you what prices are doing.

In the domestic United States we are up about 2%.

Okay.

And International?

International pricing, Scott?

It is actually staying relatively flat.

There hasn't been -- both in the UK as well as in our Australian operations, no noticeable uptick like it has been here in the US.

Okay, and piggybacking on the question about RPS.

How should we think about the Company's profitability as business moves from [bit of lines] to the Wholesale market?

As you know, the Wholesale business is our most sensitive business to the cycle, right?

Yes.

Margins are compacted as business moves back to the standard markets.

Margins will expand as business moves out of the standard markets.

Depending on how hard the market gets, that business will see significant margin expansion.

The present market is up, let's call it 2% to 3%; flat to 2%.

And with that you're not going to see huge expansion, but as I said, we are high single-digits organic growth in our Wholesale business.

And so margins have improved a bit.

That business is not running as high a margin as our Retail PC operation, or as our Retail benefits operation in the United States.

If we start to see firming, Brian, that looks 15% to 20%, that margin will probably expand by a number of points; but, let's remember, that's a business that is about $200 million out of our $2 billion.

Understood.

Great, thanks, guys.

Dan Farrell, of Sterne Agee.

Good morning, Dan, are you there?

Oh, hi, good morning.

Sorry.

Could you talk a little bit about some of the margin headwinds at Heath Lambert?

I think the 40 [bits] of headwinds, is that kind of the integration costs?

And given the macro backdrop you talked about in the UK, what do you think the glide path of that is, as you continue to work through the integration there?

Yes, if you are harken back, Dan, to what we originally talked about when we did the deal, if memory serves me, around 15 --14 to 15 points of margin of what bought, and we thought that to move it to 20 points of margin we'd need GBP4 million to GBP5 million more of profitability, and we said we thought we could pick up about half of that from carrier relations and half of that from just consolidating expense initiatives.

We still have a great line of sight to that; we do believe that business can move up into the low 20s.

Frankly, by the time you push together all of our UK operations, whether it is Heath or whether what we had before, I think the team over there has a tremendous line of sight to margin improvement, in the UK.

So, at this point, we are still excited about the prospects of us hitting our original targets on that.

Great.

Thank you very much.

Brett Huff, with Stephens Inc.

Hey, guys, it is John Campbell in for Brett Huff.

Good morning.

So, Pat, appreciate the good color on the rate environment.

I would say you have been pretty positive on rate for a while now.

Can you talk maybe a little bit more about how that's progressed over the last three quarters?

Would you say the rate increases are sticking, maybe incrementally more than they did, say middle of last year?

Just trying to get a, I guess, a sense for the pace here.

Yes, sure.

I'm glad to comment on that, John.

What's interesting is that about three quarters ago, for the first time, incumbent carriers would ask for an increase.

Our production staff would say, sorry, I mean I have to shop this, and then the incumbent would receive the order.

And that had not happened for four years prior to that.

I mean, basically, if you took something out to market -- I'm talking about a good risk now, not something that's CAT exposed, had bad losses, whatever -- that account would move.

And we are seeing more of that.

It is not -- there's no cavalier attitude among our production staff anymore that just says, look, I will take it out and move it, that's just how it is going to be.

About a year, year and one-half ago, we would typically get out in front of a renewal by telling the carrier, if they give us 5% to 7% off, we thought we could lock that renewal up five to six months early, and just get a renewal order.

That's just not happening right now.

Carriers are saying, no, I'm not going to give you the 5% off to make sure that I get my renewal next August.

They are saying, I'm looking at this -- in particular in workers compensation, they've got to get rate.

Now, if you look at the investment environment, John, if the carriers write to 100% combined, they are not going to make any money.

They have to be in the low 90s to generate any kind of ROE, and they are not there, and they know it.

I think the difference between this cycle and the three other cycles in my career, is that the -- it is the first time in my career that insurance company CEOs are saying what they are saying, and that's exactly what we are seeing on the street.

That hasn't happened before; typically, the CEOs would be a little bit disconnected from what's actually happening at the underwriting desk.

They are spot on right now -- which tells me that they have good information systems, they know where they are making money, they know where they are losing money, and they are going to push for a return on equity.

We are seeing that in the environment.

This is not 25% rate increases.

It is not across the board, every account, every time.

But the decreases are pretty much history.

And where it needs to occur, especially in comp and property, there are significant increases.

Okay, great.

That's very helpful.

I guess it is safe to say that we are not necessarily in a hardening market right now, but losses are pretty much history?

What I would say is this -- the market is firming.

It is not -- a classic hard market in my experience, I've been at it for 38 years, is one day you wake up and rates are up 50%, then they are up 75%, then you can't buy the insurance, right?

Right.

So you take something that was placed 100% with one carrier, and the next thing you know you've got 10 carriers on it with tensions or deductibles are up 150%, prices are up 300%, and guess what, your clients are begging you to get more coverage for them.

That's not happening right now.

Right.

Which couldn't be, frankly, a better environment for us.

If I could get -- if you go to our investor slides at our website, and you take a look at our typical new business-loss business, and what happens to our Company, if we get a 2% rate hike and the economy expands 2%, and we continue to do what we typically do with new business-loss business, we will drive organic growth up 9%.

If this environment stays like this, for the next few years, it is going to be a very positive result for the Company.

Great.

That's great to hear.

I guess the second question here is just back to the Heath Lambert integration.

Sounds like it has been a great success thus far, and so do you feel like that integration is largely complete?

Or are there still ongoing cost initiatives and such?

Doug and I will both take that.

Let me take the operational side and I will let Doug touch on the numbers.

That deal is -- I do not want anybody on this call to underestimate the amount of work that's gone into making this thing successful.

I mean, starting off with the fact that the deal closed, the transaction closed at midnight on a Thursday, Friday morning there were pamphlets and brochures on every employee's desk welcoming them to Gallagher.

The first move was to get those people excited about the fact that they joined a company that's in this business to stay -- we are a Brokerage run by brokers, we know what we're doing, we are trying to sell insurance, and we wanted them to be excited about that deal.

We've probably moved 500 desks in the city of London, where people have had to join new teams, transfer across the street, come back together and meet, and get to know new colleagues.

It has been a gargantuan effort that our team has done an extremely good job of.

And what that's doing is putting a bounce in the Heath people's steps of, look, we now are with a company that knows how to do this, and it is attracting a tremendous amount of attention in the marketplace from people who might like to join a different culture.

Yes, that -- also though, when it comes to cost and the four part of my statement here, we are going to run about $0.02 to $0.03 of integration costs for the next four or five quarters.

But that is as expected, as planned, it is a measured approach.

What we are finding is, as we bring these two organizations together, that moving from private equity ownership into a broker owning this business, it is really nice to see that we can spend a little bit of money that will save us some money, but it will also bring some greater resources to bear for the folks that are coming over to us from Heath, and we think the combined team will do a tremendous job in that marketplace.

So, as expected, we are thinking $0.02 to $0.03 a quarter for the next four or five quarters, and then we should -- a year from now we should be done with that.

Okay, great.

Thanks, that's helpful.

Appreciate you guys taking our questions.

Scott Heleniak, from RBC Capital Markets.

Hi, good morning.

Good morning, Scott.

Just wondering if you could comment about your -- the Brokerage side -- your client retention levels, are there -- kind of where are those sitting right now?

Are they still improving?

And then, you talked about new business a little bit, but I was wondering if you could touch on a little bit more, what kind of growth you are seeing from new business versus retention?

When it comes to retention, across our entire Brokerage unit, Internationally, we are somewhere around 94% retention.

And then new business was somewhere around 10% to 11%.

Which is historically our norm.

If you look at, again, at the website, our investor presentation, we will do about 10% of trailing revenues and new business, 10% to 12% of trailing revenues in new business annually.

And we will lose new business either because it was project work, it was not expected to re-occur, or because we lost the account, we goofed up, of about 5% to 7%, depending on the quarter.

Okay.

And just wondering on M&A, obviously there's been a lot of activity in the sector.

Is there anything out there, that you see, that could kind of derail these trends?

I mean, its obviously very strong.

And where are you seeing the opportunities?

Is there any new place that you're kind of looking?

A new country, or where is the focus for M&A, mostly?

Well, the focus for M&A is both International and US.

In the United States, we have more people, and we have more brokerages, and so there's more opportunity to bring them aboard then you will see Internationally.

Our International pipeline is very robust, but it is probably one tenth of what we have in the pipeline in the United States.

We couldn't be in a better position when it comes to M&A, for a number of reasons.

Our business, if you think about it, over the last 26 years has been mergers and acquisitions, right?

And you take a look at the front of our press release, and, yes, we talk organic and all the rest of that; by and large, we had a quarter with 22% Brokerage revenue growth and 27% Brokerage EBITDAC growth.

We did 12 deals for $30 million -- that's less than $3 million on average per transaction.

How close can that -- how much of that is organic or not organic?

Really, what are we talking about?

We are talking about recruiting.

We're talking about bringing people in.

It is as close to an organic recruiting strategy as you can possibly have.

These are great entrepreneurs.

They've built business -- they built books of business that are incredibly creative.

We are not synergizing out their costs, we are bringing them on to a platform that we think should help them grow faster, and they join us because, of course, we priced the transaction appropriately.

But they join us because they want to be part of this team.

Every single one of them that joins us could quit tomorrow.

They've got the money.

So to me, that's the secret sauce.

If you want to look at Gallagher and say, do you think you can keep this up?

You want to take a look at our transactions and see if people are still joining us.

That's the bellwether.

Okay.

Fair enough.

Just one other question on the debt side.

Debt to CAP is sitting around 36% or so now.

Is there a targeted range that you have for debt to CAP?

Or do you say, how high can that go?

Is it in your comfort zone now?

We typically look at it as a relationship to EBITDA, and we'd like to be south of 2 times EBITDA on that.

We're well below that now, and we like that position.

We think that, debt, we may pull down some this year a little bit, given this rate environment, but nothing significant at this point.

And, second of all, with the cash flows that could be generated by our clean energy investments, we don't think we will need to be in debt market at this point, over the next couple of years.

Okay.

By the way, my comment on M&A wasn't specific to you, it was specific to the sector, not questioning your ability to --

Oh no.

Thank you for the question.

Here's the deal.

In the sector, and these are not our numbers, we believe there's about 18,000 agents and brokers in America, right?

If you look at Business Insurances, July issue, to be a top 100 agent or broker in America, you do about $20 million in total revenue.

So you can imagine just the diversity and the fragmentation of our industry in the United States.

Probably 90% of the owners of those firms are baby boomers.

They are my age.

I'm 60.

It is their biggest asset.

It is worth more than their home.

They are getting close to needing to do something, and there are very few buyers in the market.

So, the opportunity for M&A over the next 25 years is absolutely astronomical.

And if you add -- if you look at the entire insurance Brokerage market, so you start with homeowners all the way to the Fortune 1000, if you add Marsh, Aon, Willis, Gallagher, and then the largest private firms together, we have no market share.

Is that an opportunity?

Right.

Well, [like] sellers and buyers out there, so that helps you and everybody else so --

The most important thing though, and this is key, Scott, is you've got to bring the people onboard and keep them.

This is a people business.

They bring their relationships with their clients and we honor that.

Yes.

Thanks.

Alison Jacobowitz, of Bank of America.

Thanks.

Just wondering if you could comment some on the pricing that you're M&A targets are looking for.

Are they looking for higher prices with things changing, and what are you seeing there?

Yes, they are up a smidge, Alison, but we are still paying between 5 and 7 times.

Thanks.

(Operator Instructions)

Follow up from the line of Ray Iardella, Macquarie Bank.

Thanks for taking my follow-up.

Sure.

I guess just one quick one on the tax rate, for Doug.

Looks like it was revised down slightly, 38% to 41%, now 38% to 40%, is that just a refinement or is that -- should we read into something about the profitability of the International operations?

I think it is just the International tax rate is bringing it down.

When you're looking at the UK that is in the 25%, 26% range right now.

As we get more heavily weighted Internationally -- Australia is even less than that -- it will naturally bring that Brokerage segment rate down.

And then as we grow Internationally in Gallagher Bassett, the Risk Management segment will come down too, as we are doing business in lower tax locations.

Okay.

That's helpful.

And then, could you comment on the interest following your conference call on the clean energy side?

Certainly you talked a little bit about some increased interest, I would think, or loosely, some agreements that might be coming into place.

Did you see a pickup in interest or maybe you can comment on that a little bit?

I don't believe that our call caused any more interest in the pipeline for Section 45 plants.

I think that it probably has caused a few calls, with respect to Chem-Mod, the recipe company that we have, that has the clean energy recipe.

But, by and large, the demand that's out there is because of the relationships that we've built over the last 20 years.

Then the other partners that have come to us, as we've built these out over the last couple of years.

But interest is high, the number of plants that are available is low.

But we want to do business with those people that we've done business with in the past, and picking the right partners to do these ventures with this is very important.

We are going to be with them for the next 10 years or more with these plants, and we want to make sure we pick and choose the right partner that has the same aligned interest with us.

But the call was well received by a few folks, and I think that the team is energized in working hard on getting the rest of these plants put into permanent production.

Okay.

Thanks, Doug, I appreciate the color.

Thank you.

We've come to the end of our question-and-answer session for today.

I will turn the floor back to Mr. Gallagher for closing comments.

Thanks, everybody, for being with us again.

We really do appreciate it.

I think, as you can probably tell from Doug's comments and my comments, we feel very good about the start to the year.

We look forward to continuing to build on our success throughout 2012.

And right now, frankly, it is good to be us.

Thanks for being with us.

This concludes today's teleconference.