Arthur J. Gallagher & Co. (AJG) 2013 Q1 法說會逐字稿

Good morning and welcome to Arthur J. Gallagher & Company first-quarter 2013 earnings conference call.

Participants have been placed on a listen-only mode.

Your lines will be open for questions following the presentation.

Today's call is being recorded.

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

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

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

Mr. Gallagher, you may begin.

Thank you, Melissa.

Good morning, everyone, and welcome to our first-quarter call.

We appreciate your being with us this morning.

Today I am joined by Doug Howell, our Chief Financial Officer, as well as the division heads that run our businesses across the world.

2013, as you saw in last night's press release, is off to a good start.

Last quarter I mentioned that a number of our actions and efforts undertaken in 2012 should carry over nicely for us in 2013.

And we are, in fact, seeing exactly that.

Brokerage adjusted revenue up 19%.

Adjusted EBITDAC up 28%.

EPS up 22%.

Margins up 130 basis points, and 4.8% organic growth.

Really good start on the brokerage side.

Risk management as well -- adjusted revenue up 11%.

Adjusted EBITDAC up 13%.

Earnings per share up 11%.

Margins up 30 basis points, with 11% organic growth in the quarter.

All of our divisions are contributing across all geographies.

All in all, a great start to the year.

So let me add some color to these numbers, and then I'll start with mergers and acquisitions.

We did four transactions in the quarter, a little bit of a slowdown from the fourth quarter, which, of course, is to be expected after the surge that we had in the fourth quarter of 2012.

But I will say, the reasons people join Gallagher have not changed one bit.

We offer our partners a deep expertise across all disciplines and the ability to operate in a culture that is team-based, focused on servicing clients and selling.

Just the type of environment that allows us to have 1 plus 1 equal 3, 4, or 5 opportunity for our merger partners.

Our partners all have choices, and as I do every quarter, I want to personally thank those who have joined us.

We are honored to have you as part of our expanding team.

Our pipeline is very robust, and we do expect to have a solid merger and acquisition year.

Let me turn to retail property/casualty.

The Council of Insurance Agents & Brokers survey reported that property/casualty rates continue to climb.

Average increases in the first quarter for all accounts were reported to be about 5.2%, and we are seeing carriers asking for similar levels of increases -- and even more in Workers' Compensation, which in many states is going to need substantially more rate to get back into a profitable position.

I'd remind you again, this is not a traditional hard market, but rather a continuation of carriers recognizing that in this environment, with no investment returns, they have to make money on underwriting.

This is not a balance sheet driven change.

Carriers are very aware of lost cost inflation and know that increases in their rates are necessary.

We are not seeing discipline weaken here.

We continue to believe this is actually a better environment for our customers.

All of us would rather help them work through 5% to 10% increases than have a huge leap in prices with significant cuts in coverage.

On the international side, our business had a strong quarter, with organic growth approaching double digits.

Our acquisitions are coming onboard as expected, and as I've said before, the Heath platform is doing exactly what we hoped it would do.

This has given us a great platform to continue to do acquisitions.

Our international expansion is very exciting, and it's a bright spot for the Company.

Our wholesale business was very strong in the first quarter.

Submissions are increasing as the rate environment continues to firm.

Our submissions are strong, and we are binding many of our quoted opportunities.

On the benefits front, we are running hard.

The Affordable Health Care Act is keeping us busy with clients, prospects, and mergers.

In my opinion, many businesses in America are just waking up to the reality that this Act is going in place in 2014, and frankly, they have failed to prepare.

Regulations are being issued.

We expect thousands of pages of regulations, and clients need to react, and they need help.

Our benefit merger and acquisition pipeline is particularly strong and growing as smaller brokers and consultants realize they need our expertise to help their clients deal with this new law.

Simply put, the smaller broker consultants cannot keep up.

We have invested in software that helps our clients calculate the cost of changes, and in training to help our professionals stay up to date, and in a private exchange and partnership with Liaison.

This will help all of our clients with choice, and we know we will see continued growth through 2013.

Our risk management segment, Gallagher Bassett Services, had a fantastic quarter.

We had adjusted organic revenue growth of 11%.

Growth was strong in the US, UK, and Australia.

Adjusted EBITDAC was up 13%.

We are fully ramped up in South Australia, and new business is off to a good start globally.

We just returned from the RIMS Conference, where Gallagher Bassett rolled out our most updated version of our analytics workbench.

This product allows our clients to use our risk factor system to spot trends and analyze data in almost an unlimited array of reports customized at the click of a button, all focused on helping our clients get better and better at managing their cost of risk.

We believe these upgrades put GB clearly at the forefront of data analytics in the property casualty risk management world.

So pulling it all together, our combined brokerage and risk management segments -- adjusted revenue of 16%, coming in at $606 million.

Adjusted EBITDAC up 24%, coming in at $108 million.

EPS up 19% to $0.32, and margins improved over 100 basis points.

If the economy holds up, if rates continue to trend up, I expect the rest of 2013 to be another outstanding year.

Doug?

Thanks, Pat, and good morning, everyone.

It's nice to be off to a good start, especially given that our first quarter is seasonally our smallest.

We'll start on the first page with the brokerage segment.

First is the Heath Lambert integration costs.

We are still on track to wrap up the integration in the third quarter, so you will see a couple pennies of integration cost in the second quarter, and then about $0.03 to $0.04 in the third quarter, most of which relates to the consolidation costs when we consolidate our London operations into new office space near Lloyd's.

But then, by the end of the third quarter, we will be done with integrating Heath.

Moving slightly down to risk management.

Recall, last quarter we broke out the startup costs related to our new Australian client.

This quarter the team hit their startup targets, so you will see we received one-time fees to partially compensate for our ramp-up costs.

That was good work by the team.

Moving to Page 2, our brokerage segment and their organic growth table -- they had an excellent organic growth quarter, up 4.8%.

We saw around 4% domestically and over 9% internationally.

On the lower half of Page 2, you will see tables for our comp and operating expenses.

Please make sure you read the footnotes to those tables, because there is some noise between the two.

The punchline is some of our 2012 UK acquisitions run lower comp ratios and higher expense ratios.

That said, regardless of the geography, when you turn to the top of Page 3, you will see that we expanded EBITDAC margins by 130 basis points.

We are really pleased with that expansion here in our first quarter.

Moving down to the middle of Page 3 to the risk management organic table.

Gallagher Bassett, you heard Pat say, had a terrific quarter, up 11%.

But even without our new Australian client coming online, to be up nearly 7% organically shows acceleration in that business, even in an economy that isn't seeing much employment growth.

Turning to the middle of Page 4, you'll see that we also expanded margins in our risk management segment.

Recall that we are targeting about 16 points of margin, so to be above that is really good work by the team while they continue to make investments into product enhancements and client service improvements.

Let's move to the bottom of Page 4 to the shortcut table for the corporate segment.

In our last earnings call, in investor supplement we forecasted a $0.04 to $0.07 loss for the first quarter, but we actually posted $0.02 of earnings.

Two reasons explain the difference.

First, we were able to recognize about $0.02 more of tax credits than we had previously anticipated.

And second, in late March we closed a transaction that resulted in a one-time gain of about $0.05.

We had not contemplated closing that transaction until later in the year.

This gain arises because a co-investor lost their appetite for tax-advantaged investments, and we were opportunistic in repurchasing their share of the plans.

Next, turning to page 5, you'll see that we have evolved our disclosure to make it tabular rather than a page of words.

We hope this provides a more succinct way for you to quickly track the status as we roll out the plans.

That table also provides annual after-tax earnings estimates, but realize those are ultimate estimates, and there are many reasons a plant might not run at ultimate levels.

Accordingly, as you build your corporate segment models, please be sure to use Page 14 of our investor supplement that we post on our website.

That Page provides our range of estimates for the rest of the year.

When you compare this quarter's Page 14 to what we posted last quarter, you'll note that there is movement between quarters, and we have narrowed our full-year range.

This results partly because of the earlier recognition of the gain that I just discussed, and partly because we have received updated production estimates from our utility partners.

The biggest difference in production estimates from last quarter relates to one utility that is using a few of our plants.

They unintentionally purchased some lower-grade coal that causes some inefficiencies in their boilers, so their production estimates have come down.

The silver lining is they have decoded the issue, and they believe they could be back burning the better coal later in the year.

That said, when you really look closely at that table, we remain optimistic that here in 2013 we can generate more than double the amount of cash we made in 2012, which we will in turn use to help fund our M&A program.

As for capital management, you'll see at the bottom of Page 4 of our earnings release that we have committed to another $200 million of debt, and we expect to close that here in June.

So we are well positioned to favor cash and debt to fund future acquisitions.

But don't forget, if M&A activity is near last year's levels, or some transactions are structured as a tax-free exchange, then we will be back to use using some shares.

So those are my comments.

It's nice to kick off the year with a really good quarter.

Back to you, Pat.

Thank you, Doug.

Melissa, we are ready for questions if you want to open it up.

(Operator Instructions).

Michael Nannizzi, Goldman Sachs.

It's actually Eric Fraser for Mike.

First question is on the debt and the M&A pipeline.

I mean, do you have extra deals lined up?

Are these -- are you targeting more deals in the US versus the UK?

And do you have a preference for benefits brokers, or kind of straight P/C retail commercial brokers?

Well, Mike, the answer to that is all of the above.

We have an appetite for benefits brokers -- not a greater appetite than property/casualty, but there is more opportunity there, as I mentioned in my prepared remarks.

We are seeing that the smaller consultant and broker in the United States is recognizing that they really do need some help with this new Act.

And if they've got clients literally over 150 life cases, they are going to need help from someone like ourselves.

And so that pipeline remains very robust.

As you know, of the 60 acquisitions we did last year, 30 of them were in the benefits space.

Not all of them very sizable; we are very happy to pick up $2 million, $3 million, $4 million agencies as we go along.

That remains very robust.

We have a very, very strong appetite for good partners in the United States.

If you look at our investor slides at our website, you will see two slides that we use frequently -- one that shows where we are located in the United States and another that shows population centers over 100,000 where we are not.

And we covet those locations across the US.

And then, globally, we are very active.

We've been active, as you know, in the UK.

We've got good activity there.

We've been active in Australia.

We've been active in Latin America and in the Caribbean.

And those pipelines remain very, very strong.

So all in all, we think we are in a pretty unique position as an acquirer.

We are most interested in the people that will join us.

It's not geography -- it's not geographically driven.

We like to be able to add to some of the services and niches that we know that we are strong in, and it really comes down to the culture and the people.

So it's hard to predict when they are going to hit.

They are individual transactions that occur along the way, but we think we are going to have a very good year.

So you are confident you're going to be able to put that cash to work?

Yes.

Got you.

One follow-up on the risk management section.

Organic growth, a bit higher than it's been in a while.

Curious if you can also talk about -- you mentioned the impact of a lost client last quarter.

And what is the outlook for being able to continue to run at a margin that is above your target?

Well, Gallagher Bassett, yes.

Last quarter we mentioned that we did lose one client, and that was why we were a little bit lower on our organic.

And that's why we said we thought that 2013 would look a little bit more like 2012.

And it's turning out to be that way, to be at 7% organically.

The new client is the Australian -- one of the WorkCover Schemes there that we picked up.

That's a sizable client.

And I've said that we think that will add about $5 million of revenue per quarter above the -- whatever you pick for an organic number.

So we think that they are very well positioned for growth this year.

And just in terms of the margin being above -- can you run sustainably at above a 16% for the rest of the year?

We will have to take a look at that.

We have asked the team to hit at least 16% for the year, and I think they'll be able to do that easily.

How much above 16% -- it all comes down to how much more we want to invest in product enhancements and client service improvements.

This is a very well organized process.

And if it looks like our margins are moving up, we will make some more investments.

And, Eric, this is Pat.

This is a different business than the brokerage business.

Claims show up every day.

You better have people there to handle them.

This is not a business that's going to show great margin expansion.

As we grow top line, that means there is big-time claims coming in behind.

Right.

That's all for me.

Thanks so much.

Greg Locraft, Morgan Stanley.

Great quarter in the core.

So congratulations on the start to the year.

Thank you very much.

Just wanted to get a couple of clarifying items.

One is on the coal division.

Doug, I think you mentioned that there was one person that opted out.

Can you give us some color?

I mean, what is their view of the world versus your view of the world for the outlook in coal?

And then maybe a bit about how the accounting works so that you guys got the $5 million gain?

Yes.

One of our coinvestors for internal reasons decided that they no longer had an appetite for tax credits.

So they decided to have nothing to do with our plants or what we are doing.

It's just they don't want tax credits anymore.

So they chose to exit their investment.

So I think that when you account -- so we were opportunistic in buying that back.

And when you buy that back, there is a step up in basis with respect to your -- our ownership interest piece.

So what you do is you just run some of a fair valuation going forward.

You present value that back at a steep discount, and then you look at how the enterprise looks as a total fair value.

And then you step up your old historical basis to that.

And that's what created the gain.

Okay.

And just to clarify, their appetite for tax credits, what was precipitating their -- I assume at one point they went into this and said, this is a great thing.

And then, now it's not.

And you obviously were able get a good price out of them because of the gain.

I mean, what -- ?

I am speculating here, but usually when somebody loses their appetite for tax credits, it's two reasons.

The internal sponsor is no longer with the company; that happens.

Or they are no longer in a position tax-wise where they need the tax credits.

Okay.

And then last, are there any other kind of partners out there -- what is your visibility with regards to others that might go this way?

Because it sounds like you guys basically have a right to call, or what not.

How does it --

No.

We actually don't have a right to call.

Our other partners actually would love to buy these portions of our plants from us.

Okay.

So you guys stepped into the breach and just took them out of it.

Okay.

Yes.

There was no breach.

They just chose to exit.

Listen, they just lost their appetite.

That's what it is.

Yes.

Perfect.

Great.

Okay.

Just totally shifting gears, and this is a small thing, but the share count -- for some reason I seem to recall that -- you know, you guys are obviously issuing debt.

You actually did well on the free cash line relative to historical seasonality in the first quarter.

Is share count going to still be going up from here?

I seem to -- thought that maybe share creep wasn't going to be occurring anymore, just because you were going to use all your cash to buy businesses.

Yes.

We did not use shares in acquisitions, but just the natural increase that happens when the stock price moves from in the $30s to the $40s, you get more dilution on outstanding shares.

So when you look at the treasury stock method of accounting for outstanding shares, and then you have option exercises, you will have some creep in the shares that go up.

So that's what you're seeing this quarter.

So it's really purely related to options.

And then we also have a small employee stock purchase plan that we issue shares to, but that's not the lion's share of it.

Okay.

Great.

That's it for me.

The core results were excellent, so congratulations again.

Yes.

We are very happy with the quarter.

Thank you.

Ray Iardella, Macquarie.

Thanks and good morning.

So maybe touching on the M&A topic a little bit differently -- maybe, Pat, could you talk about the appetite of Gallagher reentering the reinsurance brokerage business in any material way?

No, we don't really have much of an appetite for that, Ray.

You're not going to see us go back into big-time competition with Guy Carpenter, Aon, Willis Re.

We do reinsurance and always have, even when we exited the heavy treaty stuff.

We've always been supportive of our captives with reinsurance, the pools that we do, and the programs that we run in London.

So we have reinsurance expertise, but you won't see us reformulating Gallagher Re.

Okay.

That's helpful.

And then, maybe, Doug, numbers question.

Just thinking about or setting the bar in terms of acquired revenue for the rest of the year, is there any way you can quantify sort of no acquisitions were to happen the rest of the year, what the impact might be on the rest of the year's revenues?

Well, we have such a great carryover from last year from the acquisitions that we did in 2013, so I don't think there would be much difference in our growth in revenues for this year, because we closed so many deals in the fourth quarter last year.

So this year is pretty good.

The impact of next year is easy to quantify.

I mean, we just pick how much you think we're going to do for the year, and then most of that will hit in the second half of this year or into next year.

So the actual impact of acquisition rollover -- I think that it will still put us into double-digit growth easily for the rest of this year.

Okay.

And last one and I will requeue.

Maybe just talk about strategy and how the state exchanges will work on the retail side.

And, more specifically, I guess, how can Gallagher generate revenue for potential business that might go into the state exchange?

I know it's not a big piece of your employee benefits business, but any thought there could help us out a lot.

Sure.

I'll touch on it.

And we have Jim Durkin in the room, if I want to throw you the ball maybe here, Jim, as well.

But the exchanges are still up in the air.

Some states are forming them on their own; some are relying on the federal government.

There are private exchanges, as we've done, being created.

Rules are being promulgated.

It was originally going to be a matter of choice.

Now the feds are saying that it looks like it will be one set of choices.

You're going to have clients that take a look at what we refer to as total reward.

So when you get over 100 to 150 lives in a group, it's not just about health insurance.

You've got to take a look at everything you're doing to compensate and maintain the relationship you have with your employee base.

And let's face it, we always talk -- all of us in most businesses talk about the fact that there is a war for talent.

Every single day we get paid for the people we put on the playing field.

And so we have to make sure that we do a good job of compensating them, rewarding them, and covering them with health insurance.

And our clients have the same problems.

So the exchanges, I think, will probably suck most of the business from the smaller end of the group business.

We think the 40, 50 life case tends to go that direction, maybe all the way up to 100 lives.

But when you get over that, we do see the employer maintaining a very active involvement in making sure that the healthcare cover for the clients are maintained in a way that reflects their total view of compensation.

Jim, do you want to add anything to that?

The only thing I would add is that there has been a strong indication by many of the state exchanges of willingness to pay commissions to brokers.

They see the value.

They understand that brokers will help them.

And so those brokers that -- where there are customers that might be using a state exchange, there is an opportunity to get a commission.

Then I guess, lastly, remember, our model is to provide advice, consulting services, and we're going to get paid for the work we do.

So if we help a customer who makes a decision to move to a state exchange, that's not a one-time decision.

They have to look at that each year, and we are going to be there to help them do that.

Plus, there are ancillary products that we'll continue to be involved in -- the life, the disability, retirement.

So there are opportunities to continue the revenue stream.

Okay.

Thanks so much for the color.

(Operator Instructions).

Brian DiRubbio, Yield Capital.

I've got two -- three questions.

The first one, Pat, could you give us any color of what the organic growth of the acquired revenue would have been if it was sort of there for the full year?

Because you're acquiring the revenue -- so to give a number of what it did in the last 12 months?

But that revenue is obviously doing better also.

So can you give a sense of how well that is growing?

About the same as our general book, Brian.

Okay.

And for risk management, two questions there.

Could you give us a breakdown of the organic growth rate versus change in claim counts?

I'll throw that to Scott.

On the rate itself -- and you're talking about the fee increase.

That's right.

We are still seeing a little bit of growth.

It's probably just around 2%.

And then the claim count growth would account for the remainder of it.

So it's still not -- it's very competitive pricing wise, so it's not much above 2%.

It changes a little bit, too, for our larger clients, where it is even more competitive.

So that may drop as low as 1% to 1.5%.

But you are seeing claim counts increasing?

Claim counts are increasing.

Combination of if you were to break the claim count growth down in two ways, too, it is -- from our existing book of business it's around, probably, 1.5% to 2%.

And then the remainder of the growth on claim counts comes from new business.

Great.

And just the final question on there.

Are you seeing any signs of customers moving to self-insurance, given the rate increases we've been seeing over the last 12 months?

Yes.

That's a really strong point, Brian.

Thank you for bringing that up.

I mean, this is our core expertise.

What built our Company is our ability to take clients that are in the traditional market and help them mitigate rate increases by assuming certain portions of risk themselves, by bringing Gallagher Bassett in with high retentions, and having them pay the claims in various forms of self-funding.

As a public entity, that might be a risk-sharing pool.

In a state that may be a group captive funded and founded in our Artex operation.

It may be just a state Worker's Compensation program going to self-insurance.

But that is always a big driver.

Now that also, Brian, mitigates our commission growth to a degree.

So you would be looking at these 5% and 6% rate increases across the board and wondering why Gallagher is benefiting to the tune of only 1 percentage point.

Well, our job is to mitigate that for our clients.

And one key way that we do that is help them enter what we refer to as the alternative market.

Great.

Thanks a lot, guys.

Brett Huff, Stephens Inc.

Two questions.

One on margin.

Doug, you had sort of given us a rule of thumb about margin growth relative to organic growth.

Any changes to that based on what we have seen again this quarter?

It seems margin expansion, at least relative for what we expected, is better than we thought.

Yes.

I think that the old rule of thumb was we needed 3% organic growth in the brokerage segment to show any margin.

We did 4.8% this quarter, and we dropped 130 basis points out of that into the margin.

I would say that growth above 3%, you could see kind of a third of that going to the margin line.

I think if you get down to 1% or 2%, we are seeing some inflationary pressures in certain lines.

We talked a lot about it on the last call that we had salary inflation.

We've had a little bit of pension inflation.

We've got some medical inflation.

The control of our headcount has helped control some of that.

But there are other inflationary pressures in our expense line.

But, by and large, we think we are well positioned this year that even with the organic growth above 1% or 2%, we should see some margin expansion.

Okay.

And then, Pat, I think this is more of a question for you.

Can you just comment a little bit on particular verticals in the US that were good or bad?

And then maybe also client sizes -- if you see any changes in the organic growth in those?

And then maybe also geography.

Is there anything notable maybe among those three parameters in the US business organic growth?

Yes, Brett.

We continue to be very, very strong in a number of the verticals that we talk about.

So higher education, religious and not-for-profit, construction, real estate, and hospitality all had very good starts to the year.

We follow that across other lines, such as directors and officers and professional liability lines.

That was a good start for us for the year.

So the verticals are doing well for us.

And those are our primary ones.

I mean, public entity, we are very, very strong.

As I said, higher education, construction, real estate, hospitality, and what have you.

All of those are off to a very good start.

I don't have any of the verticals that we report on that I would say are lagging.

We are not seeing a decrease in rate across any of those.

We are not seeing a lack of appetite by underwriters in any of those.

So we continue to be very focused on that and get stronger in those verticals every single quarter.

In terms of geography, I think the Midwest seems to be probably strongest in rate.

The West Coast seems to probably be weakest, but when I say weakest, you are probably seeing 90%-plus of your accounts in the Midwest and in the East receive some form of rate increase.

It's probably closer to 70% on the West Coast.

And I really don't know why that is.

And that doesn't tend to break much by size.

We are seeing pretty good discipline in the underwriting community across most sizes.

Yes, if you are a real large account taking a good portion of the risk yourself, you're probably going to be able to mitigate these increases a little better than that commercial middle market account in the Midwest.

But by and large, the increases are kind of across-the-board, with one exception being the strongest, which is Workers' Compensation.

The carriers really do recognize that they've got significant problems in that line, and they are taking remedial action.

We are seeing rate increases there approaching 10% pretty much across the country.

So I want to make sure, Brett, did I answer your question?

That's great.

It's exactly what I needed.

I appreciate the detail, and congrats again on a nice quarter.

Thank you very much.

Chris [Lincoln], William Blair.

Just two quick questions for you guys.

Doug, I just wanted to touch on contingency in supplementals, quickly.

It looks like they were up modestly for the quarter, but on an organic basis were pretty flat.

Any guidance for the rest of the year?

Do you expect that trend to continue?

I think that organically flat to maybe a touch up for the rest of the year.

And then when it comes to our acquisitions, we generally get most of that in the first quarter, because they are more contingent-based than supplemental.

So I would say flat to slightly up from last year.

Okay.

Great.

And then I just wanted to dig into the brokerage segment a little bit on the organic side.

I know from the spring meeting that you guys highlighted -- wholesale and benefits divisions were doing pretty well, and I might imagine maybe mid to upper single-digit organic.

Is there anything going on in the core domestic P/C brokerage business that might be a little bit less?

Or are they all sort of running around that 5% range?

No, the P/C US domestic business is running a little less than that.

Okay.

It's a little tough to judge in our first quarter.

I know it's comparatively the same size, but in our first quarter you can get some -- you know, one person moving from -- or one client moving from the traditional market into the alternative market can have an impact on our organic just because it's so small.

Okay.

That's helpful.

But benefits are really solid.

Benefits are solid, and then our domestic wholesaling is solid also.

We are seeing nice growth from those also.

Great.

And then just one number.

Do you have the end-of-period share count, by any chance?

Yes.

I think it's on the very last page of the press release.

Let me pull that out for you.

I think it's -- outstanding shares are 126.2 million.

I think I have that right.

Okay.

Perfect.

Thanks a lot.

(Operator Instructions).

Arash Soleimani, KBW.

Just a quick question on coal.

Once we are at -- fast forward to 2019, 2021, when the tax credits expire.

Obviously, Gallagher then has the interest in these plants.

Are you kind of on the hook for the disposal costs at that point, or what's the process there?

Yes.

The answer to that is twofold.

If they convert, which that we hope they do, to pure mercury control at that time, which is the reason why they are doing it in the first place, is because of environmental control.

But those plants would continue to be used.

If they decide that they no longer want to use it, at that point there would be a demolition and disposal.

But these are pretty small.

You need to realize that, if you recall from any of our presentations, most of these plants are about the size of a semi tractor-trailer.

So there's not a ton of machinery to dispose of at that time.

So it's not a big cost at all for us.

And when you say -- they are used in the utility partners, or -- ?

State your question again.

When you said if they are still interested in running it, did you mean the utility partners?

Yes.

The host utility at that point, if you believe that the MACT standards, mercury control standards, come in in 2016, they will have to replace our system with some other type of mercury control system or continue to use our system.

If they continue to use our system, there would be no disposal with respect to these plants.

We would work on a royalty at that time and without the benefit of the tax credits, but that's the objective, is to commercialize as many of these locations using the Chem-Mod solution so that there's an after-tax credit life that continues to generate royalty income for us.

Okay.

That's helpful.

Thanks for your time.

Mark Hughes, SunTrust.

The better growth in the international -- how much of that is a function of a strength in those operations?

Are the markets stronger?

Or now that you have had them in hand for some time, you've been able to improve, and so it's more of an internal improvement?

I don't know if you could make that distinction.

No, I think I can make that distinction.

I think in Australia, you have a very strong economy, and that's helping with economic growth and with just the increase in premium income in the environment.

Plus, we are doing a fantastic job in Australia on new business.

Our team is very strong in Perth, Sydney, and I'm talking on the P/C side now.

That's been a very, very strong bright spot for us.

I can't say enough about what the acquisitions have done for us in the UK in terms of positioning us for great organic growth there.

The Heath acquisition, in particular, but as you know, we did 4 additional mergers in that space over the past year.

We look to have another one probably done soon in the UK as well.

And those are all very additive to the effort.

The economy in the UK when you get outside of London is not very good.

It's probably better than the European continent, which we have virtually no exposure to.

But what's happening is the folks that we have brought on are just doing an outstanding job of generating new business and new opportunities.

Do you have a particular focus on expanding into other countries?

Is that a priority, or is it going to be just as the opportunities emerge?

It's both.

I think, as you saw with the move that we made in the fourth quarter with our partners in Latin America, we are excited to now have a platform on Mexico with the Casanueva family.

We own 21% of that business, and we'll continue to expand through Latin America.

We have a very good appetite for continued acquisition activity in the UK and in Australia.

As you know, we completed the 80% purchase of CGM in the Caribbean, so we feel pretty good about that.

And if there were places in the Caribbean that we could do bolt-ons and roll-ins, we would do that.

So it's both.

It's geographically focused.

We like Canada; we like the UK; but it is also opportunistic in the fact we are trading in over 100 countries, with independent brokers in our Gallagher Global Alliance.

As those families and partners decide that they'd like to take some equity off the table, we are opportunistically looking at that.

One final question.

In the risk management business, the underlying claims increases of 1.5% to 2% -- could you give us a little context for how does that look now, versus what you were seeing a year ago, versus three or four years ago?

Any cyclical commentary on that number?

Yes.

That number is a direct proxy for the economy.

You go back to 2008, and we were humming with that number, and clients were doing three shifts, and things were wonderful.

Crash in 2009 comes, and claim counts fell off the table.

And they are making their way back slowly.

But 1.5% to 1% is going to be a bit of a proxy for what you are seeing in the US economy.

Right.

So that's not necessarily some separate frequency cycle in Workers' Comp; that's more influenced by the economic activity.

Correct.

Yes, not -- yes.

Okay.

Great.

Thank you very much.

Great.

I think that's our last question.

Melissa, anybody else on the line?

No.

That was our final question, sir.

Just make a closing couple of remarks here.

Thanks again, everyone, for being with us this morning.

We appreciate it.

Obviously, we are excited about our franchise.

We just have had a great quarter.

There is no doubt that every single quarter and every single month, we are adding to the tools that we provide for our clients to help them deal with their areas of risk.

Just as importantly, it's abundantly clear to the people at this table that our commitment to our culture and to selling is as strong as ever.

In addition, you might have noticed that on March 6, the Ethosphere Institute announced that Arthur J. Gallagher & Company for the second year in a row was recognized as one of the World's Most Ethical companies.

And we are very, very proud of that.

We are excited about the start of the year, and we are looking forward to the rest of 2013.

We really do believe we are just getting started.

So thanks for being with us.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.