Arthur J. Gallagher & Co. (AJG) 2013 Q2 法說會逐字稿

Good morning and welcome to Arthur J. Gallagher & Company's second-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 your lines 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 this call and which are described in the Company's reports forms 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, Brenda, and welcome, everyone, to our second-quarter call.

We appreciate you 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 around the world.

I'm very pleased with our second quarter and our first six months.

For our Brokerage segment on an adjusted basis, revenue in the quarter up 16%, 17% for six months EBITDAC up 20%, up 23% for six months; EPS up 13% in the quarter, up 16% year-to-date.

Margins improved in the quarter by 90 basis points and we did just short of 6% organic growth -- a really great quarter for Brokerage.

And for risk management as well, on an adjusted basis revenue was up 10%, 11% year-to-date; EBITDAC was up 14% in the quarter, 13% year-to-date; earnings per share of 11% and 11% year-to-date.

Our margins improved by 50 basis points and we had 10.4% organic growth in the quarter.

When look at our Brokerage and Risk Management units together, we produced 7% organic growth for the quarter -- all in all, a great quarter and a terrific first half of the year.

Mergers continue to be an important part of our growth story.

For the quarter, we completed five transactions for about $36 million in annualized total revenue.

Through June 30 we have completed nine transactions for about $41 million of revenue.

As I mentioned last quarter, the first half of 2013 is a little slower on the M&A front than we were in 2012, but the pipeline is very robust and we expect to have a number of mergers close in the second half of 2013.

I want to welcome and thank all of our new partners.

We are honored to have you join Gallagher.

I know you had choices and I am proud you chose to join our growing family.

Usually in these calls, I like to hit some high points on the four things we work on every single day, which is organic growth, mergers and acquisitions, productivity and margin improvement and culture.

I can tell you that in all four areas, we are firing on all cylinders.

So rather than go into detail there, I think our time is better spent drilling into what we're seeing in the rate environment.

First, I mentioned earlier that our Brokerage segment reported 5.9% organic growth in base commissions and fees in the second quarter.

Of that, slightly less than 1% came from rate.

The remainder was simply better new business and better retention of existing business.

Our professionals continue to help our clients find ways to mitigate the carriers' requests for rate increases by finding creative solutions in the structure of their insurance programs.

Less than 1% from rate is consistent with what we have seen for the last six quarters.

Second, let me give you some flavor from our July renewals in our domestic P/C units.

Compared to last year, renewals on the same accounts -- these are July 1 renewals -- property compared to July 2012, 55% of our renewals are showing rate increases; 22% renewed about flat and 22% had slight decreases.

In worker's compensation, this is a line that's troubled.

No matter how we are looking at it, carriers are looking for rates to repair the line.

Greater than 95% are showing rate increases over last year on July 1. Casualty other than work comp -- compared to July 12, 60% are showing rate increases, 30% are about and less than 10% are showing any decrease in rate.

Now let me give you some flavor as to how we see the momentum of rate through 2013 compared to other renewals in the first half.

So take, for instance, April 1 renewals versus what we are seeing in July.

Obviously, these are not the exact same accounts, but similar accounts.

Property compared to the first half, 60% we are seeing July rates being comparable to earlier in the year.

15% saw further increases and 25% were slightly down.

Workers' comp compared renewals to the first half -- 40% of the July renewals saw further increases, 50% were about comparable and only 10% are showing any kind of lower increase.

But there are still increases in work comp across the board.

Anyone that was flat with work comp had great loss experience.

In casualty other than work comp, 20% of the accounts renewed in July at further increases, 60% were comparable and 17% lower.

So we are seeing carriers ask for rate increases on most lines of coverage and in most geographies.

This is really a great environment for us; and, while we are seeing a bit of slowdown in the property area, the rest of the lines continue to have strong momentum.

Moving on to our international brokerage front, we continue to see strong organic growth, especially in our London wholesale business and continued merger opportunities throughout the world.

Our wholesale business, risk placement services, continues to see increasing submissions emanating from rate increase requests and new business startups and we are getting more orders as the standard markets withdraw from some lines that typically would be in the E&S market.

On the benefits side, the Affordable Care Act continues to keep our consultants very busy.

Having the employer mandate the move back to 2015 has not really slowed the amount of help our clients need.

Businesses are realizing that a host of new regulations are going into effect in 2014 and they need our help.

We have invested substantially in tools our clients need to comply with the new law, and we know that this business will continue to be a growth business for throughout all of 2014.

On the Risk Management side, as I said earlier, a great quarter.

Our team in Australia continues their strong performance.

We have ramped up our business on the work comp program for South Australia, which is providing very nice organic growth.

Also, Gallagher Bassett hired a number of experts in analytics and Worker's Compensation in the quarter which has bolstered our client service capabilities.

So our growth story continues across all geographies.

In every business unit we continue to see growth and lots and lots of new business opportunities in the future.

Doug?

Thanks, Pat, and good morning, everyone.

Let's start on the first page with the Brokerage segment, which, as you heard Pat say, had another excellent quarter.

First is the Heath Lambert integration costs of $0.02, which is in line what will be guided last quarter.

Please recall that we expect about $0.03 to $0.04 of integration costs in the third quarter which relate to consolidating much of our combined London operations into new office space.

Then, the integration will be done.

Second, you'll see a couple of pennies of earnout-related adjustments.

Recall these adjustments arise when we change our estimates for the ultimate amount of earnouts, and those will also be a little bit volatile.

Moving down to Risk Management, a nice, clean quarter, also with excellent results.

So let's flip to the Brokerage segment organic growth tables on the lower half of page 2. Another very strong quarter, up 5.9%.

We saw about 5.7% domestically and about 6.5% internationally; and, as Pat said, a little less than 1% from rate, not much from exposure growth.

So it was really a nice new business in retention performance in the quarter.

Moving next to the bottom of page 3, you'll see our Brokerage segment expanded adjusted EBITDAC margins another 90 basis points.

This marks our seventh straight quarter of margin expansion.

In fact, as I look back, we have expanded margins 14 out of the last 18 quarters.

Let me spend a minute more on margin expansion relative to organic growth.

Stay on page 3, but go to the top; it's to the brokerage compensation table.

You will read in the note that incentive compensation is up 210 basis points in the second quarter.

On a year-to-date basis, that equates to incentive comp being up 130 basis points.

Our incentive comp is up through June 30 because our field folks are further along in achieving their objectives and, therefore, they are more likely to reach their bonus targets than they were at this time last year.

In fact, last year many didn't look like they would hit their bogies until we were well in the fourth quarter.

In other words, there's an element of timing here.

So if you levelize for this timing, we would've posted margin expansion for the quarter and year to date of well over 200 basis points.

Relative to organic growth in the 5%-plus range, we think that expansion is tremendous work by the team.

Let's move to the top of page 4, to the Risk Management organic table.

Gallagher Bassett had another terrific quarter, up organically over 10%.

Even without our new Australian client, to be up over 7% organically shows nice continued improvement in that business, even in an economy that isn't seeing much employment growth.

Also on page 4, our Risk Management segment continues to improve its compensation and operating ratios, resulting in EBITDAC margins 30 basis points above our full-year target of 16%.

Looking towards the third and the fourth quarters, we might ramp up some of our investment in product and service enhancements, which would cause us to give a little of that back.

So don't model more than 15.8% of margin in those quarters.

All right, let's turn to page 5 to the shortcut table for our Corporate segment.

Our clean energy investments also had a good quarter and, accordingly, the Corporate segment posted $0.10 of earnings, which was towards the upper end of the range we provided last quarter.

But please note that $0.01 or so of that is timing pulled into the second quarter from the third quarter.

Looking forward, we have again provided a range of estimates for the third and fourth quarter on page 14 of the investors' supplement that we posted on our website.

When compared to our last supplement, not much change related to the third quarter after you consider the timing I just discussed.

But if we look further out to the fourth quarter, we are getting revised production estimates from our utility partners which are lower than we provided before.

We are told these reductions are mostly due to possible routine maintenance outages.

Like we have seen before, we are subject a utilities change in production estimates that can cause a swing in our earnings estimates.

For example, even a few weeks of difference in forecasted production can swing our results by a couple pennies either way.

That said, stepping back, we are really pleased that we are still on track to more than double our clean energy earnings here in 2013.

The team is making great progress rolling out and ramping up our remaining plans.

This bodes well for even better results in 2014.

All right, those are my comments.

It's great to have a strong quarter on all fronts.

Back to you, Pat.

Brenda, I think we are ready for questions and answers -- hopefully, some answers.

(Operator instructions) Mark Hughes, SunTrust.

You talked about your producers more likely to be hitting their objectives earlier in the year.

It sounds like the rate impact is steady.

I think you described in your release that the customers were slowly getting better.

What accounts for the better productivity on the part of the broker force?

This is Pat, Mark, good morning -- hope you feel better.

We just had a very solid new business retention and retention first half of the year.

The team just did very, very well.

We are not seeing much in the way of exposure growth, but when we did our polling here for the July 1 renewals, our customers are saying that -- more of them than not are saying their business is growing.

And very few of them said that there's much contraction in the business.

Not necessarily on the employment front, but just in general, they are starting to grow.

We don't see it yet in our numbers, but exposure units look like they are not decreasing at this point.

Right.

Was there any new incentive program in place that countered spend?

No.

And, by the way, the charge we are talking about -- it's not just for the production folks; it's for the field management folks also.

So when you said that it was for producers, it's for all of the field, which would include the management layer also.

Right.

How about claims frequency on the Risk Management side -- what is going on in terms of underlying claims in worker's comp?

They are up about 2% to 3%.

Okay, great, thank you.

Arash Soleimani, KBW.

I just wanted to continue on the organic growth.

You mentioned most of that is coming from new business.

I just wanted to dig into that a bit more.

Is that market share gains, or what is that exactly stemming from?

Well, we will write about 12% to 13% new business, depending on the unit, against trailing revenues.

And we typically then will lose somewhere between 4% and 6%, depending again on the unit.

As long as rate is neutral to up slightly, we will show solid organic growth as long as we continue to have that kind of new business growth.

And we are a new business machine.

All of us are involved in production every single day; that's what we do.

So we are involved in helping clients solve problems; we are involved in bringing new clients on.

And as long as I said that the rate environment stays beneficial to us, we should continue to post solid organic growth.

Okay, great.

And you had mentioned that, again, exposure was -- exposure unit growth wasn't really causing much in the way of organic growth this quarter.

So my question there is, once that picks up, and let's assume new business wins and everything stays pretty consistent, should we expect the level of organics then to even expand further at that point?

There's a number of things that could impact that, Arash; and, yes I think you could.

If we start to get some really solid economic growth that then comes through in exposure units both in audits for our clients as well as having to increase their exposure units going forward on renewals, our team will work very hard to mitigate any increase in cost to our clients.

That's what we do.

That's why, although we are in a rate environment that's up 4% to 5%, you see less than 1% impact in our numbers.

And by the way, that less than 1% includes exposure units, so its exposures and rate are producing less than 1% of our organic.

But if that starts to move nicely, yes, I think you would see organic expand as well.

Okay, great, thanks.

In terms of the margin expansion, is that something -- I think you mentioned it's 6 or 7 quarters in a row where they have been expanding.

Is that something we should expect also to continue into 2014, or would you say most of the margin gains have already been realized?

No, let's go back.

I think that this year -- if you go back to my commentary in the past is, generally, we feel that anything below 3% organic growth, it's difficult to expand margin.

When you get above 3%, you can start taking some of that to the bottom line.

This year, because of the actions that we took at the end of last year, more of that is hitting the bottom line than would be normal going forward.

So I think that, if you model organic growth greater than 3% out in 2014 and beyond, there would be some margin expansion to that, but clearly not 250 basis points of that.

Thanks.

And just final question -- you had mentioned that the second half of 2013 should be a bit stronger on the M&A front.

Is there any guidance you can provide there?

No.

Okay, thank you.

Gregory Locraft, Morgan Stanley.

Another great quarter, congrats.

I wanted to just understand -- why do you think exposures are not moving up?

It seems like -- obviously, the team is killing it.

If we get some rate and we get some exposure, everything is going to continue to accelerate.

And I'm wondering, what is holding back exposure in your opinion; and, what would cause that to go higher?

I think the world is afraid to hire people, Greg.

I just think that our customers out there -- they are very cautious.

The 2008, 2009 downturn was incredibly painful.

We had clients in the construction world that were doing $100 million, $200 million of construction a year and that dropped to $25 million and $50 million.

Their companies survived, but I think that is -- I also think the Affordable Health Care act is going to keep employers doing every -- you are not going to have 51 employees.

That's not going to happen.

You will stop at 48.

So I think there's a ton of that going on as well.

I think people are -- the idea that this Affordable Health Care Act is somehow going to save us all money -- well, I'm looking at my budget for next year and I can tell you, we are not going to save any money.

It's going to be frightfully expensive.

And so I just think there's a lot of that going on.

People have long memories.

They are not going to add folks.

Has exposure been roughly flat for a while, then?

I'd say yes, and, Greg, actually up a skoshe.

We've said in the past, we've seen clients maybe up 1%, 1.5%, 2%.

But yes, I'd say it's relatively flattish over the last couple years.

Okay, so I guess -- and a lot of people -- we are all asking about organic, and organic was great in the quarter.

But it doesn't seem like you will get the tailwinds of price and exposure anytime soon.

At least, that's not in your base case, it sounds like.

It sounds like you are just going to continue to do very well in the new business front.

Well, let me be clear.

If we can have a property/casualty rate environment that is flat to up 3% or 4% for the rest of my career, I'd sign up for that right now.

This is a great environment for Gallagher.

We've got tremendous depth of capabilities.

Those capabilities we are very good at teaming on accounts and bringing the best resources to the point of sale.

And we are not competing with just the larger competitors every day, day in, day out.

We are competing across an entire spectrum of competitors and we are going to win more than they are when we compete with them head-to-head.

Okay, great.

And then one for Doug -- if there's one negative -- and again an excellent quarter -- it would just be the slippage on the clean energy side.

I guess the reason is the production schedules out of utilities.

I'm just wondering; as CFO, you put ranges and guidance and whatnot.

How do you bracket this?

How do you think about it as you put out numbers to us and whatnot?

I'm wondering the range of outcomes and possibilities as we think about this line into next year and beyond.

Well, I can tell you; it's with mixed emotion, if you ask me how I feel about it.

I think that I'm ecstatic and extremely happy that we are going to double what we did last year.

Am I a little disappointed that the estimates, the guesses of the future that are highly dependent on what's going on, on the utility, especially putting in an experimental new technology?

Sure, I would love to have the precision of forecasting that we have in other areas of our business.

On the other hand, during this roll-out and ramp-up period of all these plants, because we don't have all of them in running at ultimate levels yet, I don't have some of the shock absorbers that I will have in the future when we have 29 plants that we own less than 50% in the them.

So any one change in one plant should alter our estimates significantly.

So during this ramp-up period, I can understand why it's a little frustrating for you trying to take a guess at what we're going to make in the future.

I think you should look back to say, gee, they are well ahead of where they were last year.

There's more plants that could come online and, eventually, when we get to a portfolio of 29 on them, the volatility on that should go away, or at least be substantially less.

So I have mixed emotions about it.

I'm ecstatic that we are nearly on track to double.

But giving some guidance, I would love to be able to pick it to within $0.01 every time, but I don't think that's going to be possible.

Yes, okay, great.

And it seems like as I just track how the guidance has come in, like for the third quarter, you have been able to with one quarter forward have an excellent rate of precision on this, and then it gets more fuzzy as you move out.

Is that the right read?

Yes.

So we should feel real good about the third quarter, a little worse about the fourth, and then who does knows what will happen from there; you know, we are on our own?

Right.

But I think, when you look out for 2014, I think that the progress we are making should be better than what we are doing here in 2013.

So on a quarterly basis, I have -- your assessment is right; it's a little bit difficult.

But if you just step back and look at it, if we have the rest of our plants in and we get the operational tweaking done, we should have a much better 2014 than we do 2013, even.

Okay, okay, great.

Again, congrats on another great quarter.

Josh Shanker, Deutsche Bank.

Looking at obviously the acquisition pipeline, it has not been as robust this year as last year.

And I'm not asking you guys to opine on your stock price, but I would also like to hear what you think about the pipeline and the percentage of cash you would like to be allocating versus stock, given where your stock trades today.

I will Doug handle the financial side of that question and I'll take the pipeline.

We all knew that last year was an extraordinary year for acquisitions.

We did 60-plus of them.

That's one every four working days last year.

So we knew we were clearing the shelf a bit, and I think that was driven by two things -- the Affordable Health Care Act again, as well as the tax law changes.

So we had cleaned the cupboard a bit as we came into this year.

But we filled it up again, and we've got a very, very solid pipeline.

But, as you know, acquisitions are -- they are a sale.

They come at their own pace.

You can't say I start one in March, I finish it in June.

Each one is different; each one has its own personality and we've got a great pipeline.

We've got a number of people that are out talking to folks every single day.

And we think we will have a very good second half.

Doug, you want to talk about the stock price?

Yes.

In terms of stock price, generally the stock price is not an indicator of whether we use stock in an acquisition.

It usually is -- in fact, it's always the outcome of how much free cash do we have, how much borrowing capacity, and then we use the rest with stock.

Generally, the way you should think about it is that our free cash is first used to pay the dividends, second in order to buy brokers and risk managers.

Then we try to run somewhere around two times EBITDA in debt, so we'd borrow up to that, and the rest we'd use in stock and the deals.

There are exceptions to that.

If a seller wants to do a tax-free exchange, there are requirements of how much stock that you have to give in order for them to protect their tax-free re-org status.

So if they want stock, we will give them stock.

And then there are some sellers that really, really have a strong desire just to hold our stock, and of course we would be happy to have them be in the same boat with us when we are rowing together.

So the answer to your question is that we have $115 million to $125 million of free cash sitting on our balance sheet.

The first and second quarters are our smallest cash flow quarters.

We generate substantially more cash.

In fact, I think we generate about 75%-80% of our cash in the last two quarters.

So we'll have strong cash flows coming in the second half and we still have some borrowing capacity to keep us at less than two times EBITDA and the rest we would use in stock.

So if I'm understanding you correctly, if the acquisition pace were to taper -- obviously, compared to last year, but in general, you would be an all-cash acquirer.

You not use stock if you didn't have to nor to top things off?

That's correct.

And we really have not used any stock since about the third quarter last year.

Okay, that actually comes to my question.

I was trying to understand that better, so I appreciate the color.

Thank you and congratulations on the quarter.

Michael Nannizzi, Goldman Sachs.

Just a quick question, Doug, just following up on your comment about risk management margins in the back half of the year.

Can you just talk about the investments you are making, and how should we think about the offset of those investments in terms of margin expansion opportunities in 2014?

Listen, I think that if you go back and you look at the history for Risk Management, the team has just done a remarkable job of targeting investments that are delivering value to customers.

If you go back last year at this time, they launched into the analytic workbench toolbox that our clients are raving about; the prospects are looking at as being best in class.

They did these projects; these are $1 million to $2 million type projects where they go in and they reshape the (inaudible) service offering they do for their customers.

They have a list of those things that they would like to do and when they start hitting -- at the beginning of the year when we sit down and we say, listen, 16 points of margin is where you need to be for the year, let's see how we do in the first couple of quarters.

And now they are at the point of saying we would like to launch these continuous -- these other improvement projects.

So if they can do it without margins dropping below 15.8%, they should be able to bring the year in at 16%.

So that's the way we sit down and do it.

It's a continuous cycle and we're looking for opportunities to invest, but also making sure that we hit our target margin expectations.

This is Pat.

There is not the same leverage in the claims business as there is in the brokerage business.

When they get revenue, they get claims and they had better have the people on board, on deck to handle those claims when they start coming in.

There's a lag in time, but it's not a great deal of time.

You have got to get the bodies on board, trained and ready to go.

As you saw in some of our previous quarters, we had a substantial ramp up in South Australia.

So 16 points of margin has been a consistent direction that we have given to the street for literally a decade, and that's our target margin.

Are there any trends that you see the market that you think will lead to more outsourcing in terms of claims management, or maybe as companies look to try and move down policy size spectrum ahead of building infrastructure themselves?

Yes, I think you are hitting on something that we see as a huge opportunity, both from new capital, places like Bermuda coming onto shore and needing outsourcing help as well as from some standard mainline carriers that may want to open in different states, that may want to open with different lines.

And they are outsourcing that work to Gallagher Bassett.

When you start to take a look at the size of Gallagher Bassett versus some of the insurance companies we trade with, we are actually paying in some instances thousands and thousands more claims than they are.

So we have invested in systems, in people and expertise that is probably better outsourced by many insurance companies than it is being handled in-house.

When would we expect or could we expect to start to see that inflection point in terms of the top line?

Is that something that is just a gradual process or, just given how much alternative capital has permeated and the movement of carriers from one part of the market to the other, should we start to see some of that really flow through this year?

Or are you expecting that to happen more than you thought maybe six months ago?

Well, no, it is happening.

That's why we are up 10.4% organically.

That's included in the mix.

I got you.

So that's a big part of that change, then?

Yes.

Okay, great, thank you.

Robert Glasspiegel, Janney Capital Markets.

I'm on Josh's wavelength on acquisitions.

Heath, you said you have got all the hard work behind you, no more integration costs.

Where do you stand on your overall UK just integration?

Is there a desire to be bigger in that specific region?

Yes.

We are going to be very active in that region.

As you recall, one of the reasons we were excited about the Heath transaction, which did take us a good 18 months to integrate, there was a an awful lot of work there.

The team did great, great work.

But part of the reason for doing that was to give us good retail presence in the UK that we could now go bolt on other acquisitions.

And we did.

We did four acquisitions last year and bolted those in.

Those were mostly affinity acquisitions, but we bolted them into the Heath platform and they are going extremely well for us.

How big could UK be or Europe as a region?

How much bigger than your current state, and what sort of platform do you need that you don't have as far as product?

I'd say right now, Bob, we are probably weak in the UK as what we would do in the United States as standard commercial middle-market business -- you know, the local contractor, the local auto dealer, the grocery firm, that type of thing.

We are very good in the London wholesale specialty business.

That has grown extremely nicely for us.

We are very, very good energy and natural resources.

That's a global play.

We are very good at affinity in the UK and MGA and MGU business, but we are probably a light when it comes to just your standard middle-market fare.

Okay, well good luck in building it out, thank you.

Brett Huff, Stephens Incorporated.

It's John Campbell in for Brett Huff.

Congrats on another great quarter.

Back on the Brokerage segment, continued nice margin growth there.

It sounds like rate is providing some benefit, to some degree, as well as just a general uptick in exposure units.

But Doug, if you could just maybe give a little bit more color on the various pieces of that margin expansion, or just maybe more specifically just to what degree is cost take-out above and beyond actions you have taken last year a piece of that?

I think that the margin expansion -- you would have -- let's say a 5% organic growth and you would have a point of natural expansion just because of the larger -- more organic growth.

When you look at where we are seeing savings opportunities right now, obviously, as we get more productive we have shifted more work to our offshore centers of excellence.

That has helped us control our headcount here in the US and in the UK.

When it comes to operational savings in the op expense line, we are seeing some savings from rent.

That is probably being offset a little bit more by the travel costs that are going up.

Airlines and hotels are going up.

We do have some nice projects that we are working on now that will make us more productive in what we call the middle office and the back-office layer, but we are really not seeing the results of that yet.

We wouldn't see that until 2014 or 2015.

But those are efforts that would help us control inflation in our other operating expense line.

They are not going to be projects that drop a ton of money to the bottom line, but they could help us with controlling inflation.

We're not seeing wage pressure right now, except for maybe in some of the IT areas where there is more demand for certain resources there, so we are seeing some comp pressure there, but that's not a huge part of our payroll.

So that's the flavor of where we are seeing margin expansion coming.

Okay, great, thanks for that additional color.

Just as a follow-up, I would see a common theme that we have been seeing in just 2Q earnings just across the market in general, it's just sluggish international results, particularly out of the UK.

So if you guys could maybe talk a little bit about UK results in 2Q, and then of those results were relatively sluggish then to what degree is that priced into margins?

Actually, we had 6.5% growth in our international operations on the Brokerage side.

Our UK operations in our view is performing at a level of expectation or higher than expectation, which is a high expectation.

That includes Australia as well.

Yes, and Australia is doing well too.

But the transformative Heath acquisition that we did over there has provided some energy the UK.

It has provided new opportunities for us, and our organic growth is 6.5%.

So we are not seeing sluggish operations coming out of the UK.

We don't have a lot of exposure to mainland Europe, so we see tremendous results coming from those folks right now.

Okay, great, thank you.

Adam Klauber, William Blair.

A couple different questions.

How did RPS do?

Was their growth above or below what the average was for the brokerage?

It was above.

Okay, so another good quarter.

It was a very solid quarter.

What is the rate outlook in surplus lines property versus casualty for the rest of the year?

If you take a look, the property market is squishy.

Cat exposed stuff in Florida is flat to down.

Oklahoma and that region is in a full-on hard market.

Regular middle-market commercial properties probably flattish to up a bit.

Okay, that's helpful.

On the benefits side, I know you have been doing more and more business there.

Has the mix been shifting more towards consulting or is it still predominantly the traditional placement business?

No, I would say, Adam, over the last decade that has switched almost 100% to consulting.

While we get paid on commission because clients are comfortable with that, we have been completely transparent in that business since ERISA, and it's a consulting play.

Okay, okay.

And then on the healthcare exchange, I know it's very, very early, early stage.

But are you seeing any traction for enrollment for next year and any way you could quantify that would be great.

We don't have any traction at this point.

We've seen -- there's interest, but we don't really have any orders to speak of at this point.

Okay, okay.

We've got a good partner in Liaison, we think we've got a good product offering.

It is going to be an important part of the product offering.

We will not have one exchange; we will trade with a lot of exchanges across the country, whether they are run by the state or whether they are private.

And it will be part of the mix.

But at this point in time, it hasn't grabbed a lot of traction.

Okay, thanks a lot.

(Operator instructions) Alison Jacobowitz, Bank of America.

I don't think I heard it, and I don't know if I ever heard it, and I'm just curious and I don't know if you can answer it.

But do you have a range or something, an outlook of what the clean air facilities could produce if everything was up and running and everything was working perfectly, what kind of earnings that would produce?

Yes.

I think if you were to look at page 5 of the earnings release, over there we try to provide the ultimate after-tax earnings estimate for the plans that we currently have up and running or are on the drawing board.

And if you add that up, the number get somewhere around $100 million of after-tax annual profits.

We did $33 million last year; we are on target to $67 million to $71 million this year.

Granted, those plants won't all run at ultimate levels.

That's what the footnote says there.

But that gives you a size indicator of how much Gallagher could earn off of those plants.

There are other plans that we haven't put in place yet.

There's another six of them and I couldn't tell you whether those are going to go into big locations or small locations at this point.

That's why we put not estimable on there.

But that's probably a good guide point post.

Will we be at that level starting 1/1/14?

I don't know, we will see.

We have a little bit of lull that happens generally in the summers as utilities are producing a substantial amount of electricity.

They are not so willing to put in new technologies during the summer.

We saw this last year and then we had a nice uptick of activity in September and October.

So hopefully by October I will be able to start giving you some more feel for next year.

But as of now, I would guess that we are going to be better than the $67 million to $70 million that we did this year.

Thank you.

It seems there are no further questions at this time.

I would like to turn the floor back over to Pat Gallagher for closing comments.

Thanks, everyone, for being with us this morning.

We appreciate it.

We are very pleased with the two great quarters that we have had this year.

The team is very turned on.

We are helping our clients, we are selling a lot of the business and we think we are on track for a very strong finish to 2013.

Thank you for being with us this morning.

We appreciate it.

This does conclude today's conference call.

You may disconnect your lines at this time.