Arthur J. Gallagher & Co. (AJG) 2015 Q2 法說會逐字稿

Good morning and welcome to Arthur J. Gallagher & Co.'s second-quarter 2015 earnings conference call.

Participants have been placed on a listen-only mode.

Your lines will be opened for questions following the presentation.

Today's call is being recorded.

(Operator Instructions)

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, 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, Chairman, President and CEO of Arthur J. Gallagher and Company.

Mr. Gallagher, you may begin.

Thank you, Rob.

Good morning, everyone.

Thank you for joining us this morning.

We appreciate you being on the line.

This morning I am joined by Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions.

I couldn't be more pleased with the quarter.

It was just a great quarter.

Brokerage results were strong again; adjusted revenue was up 24%, 4% of that organic.

Adjusted EBITDAC is up 28% and our margins expanded by 89 basis points.

In the risk management segment, we had an outstanding quarter.

Revenue is up 13%.

Virtually all of that is organic.

Adjusted EBITDAC is up 21% and our margins improved by 110 basis points.

So when I combine the operations, the way I like to look at the Company, adjusted revenue is up 22%.

Adjusted EBITDAC up 27%.

All-in organic growth, 5.8% and total Company adjusted EPS up 18%.

Really, really good work by the team; a great quarter and first half of the year.

This, I think, is a testament to our strong sales culture.

We work very hard to serve our clients and to aggressively pursue new ones.

We've invested heavily in our sales efforts.

We brought in sales training for all our people.

We use salesforce.com, we invested in our niche -- in product line capabilities.

We are very, very good at team selling.

I am pleased that our team has adopted our tools and feel we should continue to drive organic results.

Mergers and acquisitions continue to be a key strategy.

In the quarter, we completed 13 mergers, 11 in the brokerage segment, two in risk management, for approximately $90 million in new revenues.

The two risk management acquisitions were international, in New Zealand and the UK.

Our total in the first six months is 24 acquisitions and $120 million in new revenues, and our pipeline remains very robust.

Our 2014 larger acquisitions are integrating extremely well.

As I do every quarter, I'd like to stop and thank all of our new partners for joining us and to extend a very warm welcome to our growing family.

Let me move to the property casualty rate environment.

We did a midyear survey of our PC renewals.

We polled our brokers on the rate environment in the US, UK, Canada, Australia and New Zealand on our most prominent property and casualty lines.

So let me provide you some of that color.

On the domestic side, in property, 75% of our property accounts renewed down.

But most of those were slightly at single digits a quarter, were flattish to up just a little tiny bit.

Frankly, I don't think this is -- I don't think it's unreasonable at all, given the fact that we have not had major catastrophes in the last few years.

A little better story in international property, as we are seeing slightly more balanced results with half renewing about flattish to up a little and half down slightly, more flattish overall.

Underneath this, Australia/New Zealand are down the most.

UK is in line and Canada is flattish to up the most.

Turning to casualty lines, interestingly, a similar feel across our domestic and international operations.

Half u[ slightly single digits, half down single digits, mostly kind of flattish with some accounts getting greater than 10% discounts.

Domestically, commercial auto was more on the upside.

Workers comp and professional lines were flattish, and general liability and umbrellas were slightly down.

Internationally, Australia and New Zealand are seeing by far the most downward pressure, especially in auto.

And as I said earlier, UK similar to US.

Canada is flat to up a bit.

Our employee benefits team is very busy assisting our clients' businesses as they try to manage their benefits and HR needs as a result of increased complexity, higher costs and the war for talent.

Domestically, our customers continue to navigate the impact of the Affordable Care Act.

These market dynamics continue to present us with growth opportunities as we work to meet the needs of our clients.

In addition, our private-label insurance exchange, the Gallagher Marketplace, is seeing very high interest and a good number of clients have committed to moving to the exchange.

As I said earlier, the risk management business, Gallagher Bassett, had a great quarter with topline growth of 13%.

Our stated goal at Gallagher Bassett is simply to provide our clients globally with the best claims outcomes.

So, a great quarter; we are thrilled to have it in the books, a very good start of the year.

Over to you, Doug.

Thanks, Pat, and good morning, everyone.

Like Pat said, the second quarter was another terrific quarter for Gallagher.

Starting with the first page with the brokerage segment, adjusted EPS of $0.71 is up nicely over prior year.

As for foreign currency, you'll see about $0.03 this quarter.

Looking forward, we are forecasting $0.02 to $0.03 in the third quarter and about $0.01 or so in the fourth quarter as a result of the strengthening dollar.

As for integration, you heard Pat say our integration is moving along as planned.

Looking forward, we are seeing about $0.07 to $0.08 in the third quarter and about the same in the fourth quarter.

As for 2016, our integration costs should drop dramatically and I will have better numbers for you when we do our October conference call.

Same with brokerage, but turning to page 3 to the organic revenue table.

Let me give you some flavor behind the 4% organic growth.

Domestic retail was slightly better.

Domestic wholesale was actually a couple points better and international about 1 point lower.

Within that, we saw about 0.25 points net drag from rate and exposure.

The only larger deal that was not fully in our organic numbers this quarter was our Canadian businesses which we acquired on July 1, 2014.

And their organic looked slightly better than what we posted overall, but wouldn't have moved the average 4%.

As for modeling revenues, currently foreign currency seems to be the biggest modeling challenge.

To control for this, and assuming that current exchange rates, first reduce prior year revenues by about $25 million to $30 million in the third quarter and then about $15 million in the fourth quarter.

After you do so, apply your PIC for organic growth, and if you do that, if you don't do that, if you don't reduce prior year revenues first, you can't help but overshoot on current year and current quarter revenues.

And finally, when you're making your brokerage segment organic PIC for the third quarter, please remember that last year's third quarter, we disclosed and then discussed in our conference call that we had an unusually large number of larger account wins in the third quarter of 2014.

So you might want to moderate a bit your PIC for this coming third quarter to control for that comparable headwind.

As for acquired revenues, we have again provided a table on page 16 of the investor supplement, showing our range for rollover revenues for the next two quarters for mergers done in 2014 and in the first half of 2015.

You will need to add to that your PIC for newly acquired revenues in the third and fourth quarter, but please remember to weight those in the closing days of those new deals more towards the last month of the quarter.

Moving to page 4, to the brokerage segment adjusted EBITDAC margin table near the bottom of page.

You will see that we expanded margins by about 90 basis points.

20 basis points were from the roll in of the larger deals, just in the range that we estimated in our last call, and then 70 basis points came from our organic growth and expense control.

Now looking forward, last year our brokerage segment posted 26.8 points of adjusted margin in the third quarter of 2014.

We don't see more than that for the third quarter of 2015 for several reasons.

First, we won't get any meaningful further lift from roll in of larger deals because all of them were in our numbers last year in the third quarter.

Second, I just mentioned that we had unusual success in net larger account wins last year, and those few of margins last year, we are renewing those but it does make it harder to grow over.

And third, we believe our compensation costs in the UK will run a bit hotter in the near term as a result of having some senior management turnover that we discussed earlier in the year.

Finally, on the brokerage segment, let me also give you some non-cash estimates for the third and the fourth quarter from the brokerage segment.

For depreciation, assume about $15 million of expense per quarter; for amortization about $58 million; and for acquisition earn-out amortization, assume about $5 million.

Then, as we do more M&A for every dollar we spend, you will need to increase amortization by about 1% of the purchase price per quarter, and that will get you close.

Let's turn now to the risk management segment on page 5. Really a terrific quarter across the board.

Of the 13.4% organic growth, domestic was over 10% and international approached 20%.

Looking forward, recall that we have that large Australian account that goes into runoff this quarter.

So as you model the third and the fourth quarter, the impact of that runoff account will be more pronounced, meaning that you will see organic growth more in this mid-single digits and not in double digits.

You should also adjust prior year revenues downward for FX before you apply your organic PIC.

Assume FX of about $5 million in the third quarter and $3 million in the fourth, and that will get you close.

As for margins, in the risk management segment, you will see that we blew past our 16.5% margin target.

But you will read in footnote 1 to those tables that we had a one timer for some additional performance bonus income of about $1.8 million related to that account going into runoff.

So if you remove that, that one timer, we would be about 20 basis points above our 16.5% margin target, which is more in line with our expectations.

As for risk management non-cash items, model about $6 million of depreciation in the third and the fourth quarter and you will get close.

All right, let's shift to page 6 to the corporate segment.

Just a small comment.

Really a nice quarter and right in line with the estimates we forecasted last quarter.

When you get to page 15 of the investor supplement, you will see that our outlook for the rest of 2015 is very close to what we gave you last quarter.

Finally, some comments on our M&A program.

First, we closed 13 mergers this quarter at a weighted average multiple of just over 7 times.

So we feel very good about continuing to do a lot of nice tuck-in mergers yet this year.

Second, looking out over the remainder of 2015 in terms of M&A funding, based on our current pipeline in mergers, we are seeing cash and debt funding much of it, plus using about 2 million to 3 million shares.

This means our forecasted fully diluted weighted shares outstanding for the third quarter will be about approximately 177 million shares.

All right, those are my comments.

And like I said to start, another terrific quarter.

Back to you, Pat.

Thank you, Doug.

Rob, we are ready for some questions.

(Operator Instructions) Sean Dargan, Macquarie.

Given the Willis Towers Watson tie up, Pat, I was wondering if I could get your thoughts on the future of your use of the liaison platform and the exchanges in general.

Sure.

We have a good -- a solid contract with Liaison.

The brokerage community is going to be very important them.

As you know, Tower spent a good bit of money on that asset.

And in order for it to play out, they are going to have to be creating with others outside of the Willis and the Towers Group.

We've been assured that that contract is solid.

But at the same time, I would be honest with you.

We've got our eye on others as well.

Okay, great, thanks.

And I'm not sure if I caught this, but in terms of being able to finance further acquisitions, is the [at the market] program over?

And is it going to be removed or does it have to be renewed?

There is about $15 million left on the program and at this time we have no plans to renew it.

Okay, great, thanks.

That's all I had.

Charles Sebaski, BMO Capital Markets.

Just a couple follow-ups, on that shares you mentioned for the M&A going forward, and the 177 million, is that 2 million to 3 million shares a quarter for 3Q and 4Q?

No, just in the third quarter.

Okay.

And then on that, on the overall M&A basis and pipeline, you guys obviously continue to have success in finding companies that want to join Arthur J. Gallagher.

Seven times multiple seems reasonable.

But if I listen to your competitors and people out there talking, it seems that there is a lack of opportunity out there and there is crazy prices being paid in the market.

And I would appreciate your thoughts on how you guys are able to continue being successful at seemingly very reasonable multiples, where competition might say pricing is getting too high or irrational or [appease] murking everything up and just how you see that.

Well, look, private equity has come strongly into our business.

I think it probably now consumes about half the acquisition activity that occurs, which is smart money coming into a great business.

I really can't complain about that.

And when you do get to sizable platform acquisitions, pricing is up.

But if you noticed, that we've done 24 acquisitions for about $120 million of total revenue, and so tuck-in acquisitions are very prevalent.

They are not as pricey and we continue to see great success in that regard.

I don't see our pipeline diminishing one bit.

Now, we are not also facing so far this year we have not had any opportunities like we had last year to do something that was of -- substantial in nature, but we have announced that we are going to do the William Gallagher Agency in Boston.

We are very excited about that.

That is a platform agency.

So I think the comments from others are accurate.

Private equity and some of the deals drives prices up.

You have to decide whether you want to play in that market or walk away.

I think we are very disciplined when it comes to that, and at the same time, I think we offer a terrific platform for people to come aboard, build their business, which in turn builds their income and have a great time building out their company.

Now, about the UK, you talked about obviously there is management change going on.

You talked about it coming into comp expense.

Have you seen any bleed-through to the rest of the organization with any other defections of senior brokers or relationship managers or has the headcount and the people there in the UK state as expected?

Our UK team has stayed put.

We are very pleased with Graham Shelton, who is our CEO.

I think he has done a great job of explaining to the people why they are in a great place.

And to answer your question about other senior management and senior leaders around the world, we've had absolutely no further defections.

Excellent.

And just finally, one numbers question.

In the risk management division, it seemed that the comp expense ratio was particularly low this quarter.

I'm wondering if there is something in that or is that kind of where we can expect it.

I have kind of 57.5% versus 59.5% last year and 60% last quarter.

Just wondering if I'm looking at that right and how you view that.

Well, I think the best thing to do is our margin target is 16.5% for the year for it.

Okay.

The geography between those two lines, we were lower this quarter but I think that might be as much a denominator issue, because I read through here we did have a small true-up of a prior year bonus, might have given us a little bit of earnings.

On the other hand we had some higher professional fees in the operating expenses.

So nothing sticks out in that.

That business is trending a little bit lower on the comp side.

Excellent, really appreciate the answers.

Mark Hughes, SunTrust.

On the talent front, you talked about the war for talent in the context, I think, of the exchanges, but in your own business are you seeing compensation expense?

Is there any upward pressure on that?

And alternatively, do you see any opportunity to step up recruiting with some of the merger activity that is going on?

Well, you know us very well.

We are always recruiting, always, always, always looking for new talent to bring into the Company.

And we bring that talent in in a whole number of different ways.

As I said in my comments, we had 250 kids in our internship this summer, very excited about that.

If I could recruit half of them I would be thrilled.

If I could do more than half, I would be thrilled.

We are constantly looking at seasoned players in the field that are competitors of ours, trying to get them to consider joining us.

And of course, our acquisition activity brings new blood into the Company every month, every quarter.

In terms of seeing upward pressure, not particularly.

I think remember, when it comes to our salesforce, we are one of the few larger players that still is very comfortable paying on a formula.

So you go out and sell some business, you are going to get a raise.

It's not really a big question mark.

I think on the service side of it, as you know there is competition for talent when it comes to some of the back office skills positions in IT, finance, HR, legal.

So there is some -- we were in a recession for eight years, so I think that kept the people staying put before they would look to other jobs.

So there was a little upward pressure there.

On the other hand, we do still have our offshore centers of excellence that allows us to mitigate some of those service costs.

We are not seeing wage inflation in India in particular.

We still have operating improvement opportunities to maybe offset some of that wage inflation.

So by and large, that is right about the producer level.

They work on a formula, so that takes care of itself.

In terms of the service layer there is a little wage inflation pressure there, but we think that we've got opportunities to mitigate that.

Pat, I'm sorry if you touched on this earlier, but are you going to be at any sort of competitive disadvantage by not having a big consulting operation?

No.

Mark, when we compete in the marketplace, 90% plus of the time -- we know this because we've got the systems to measure it now -- 90% of the time we compete against smaller competitors.

Now, we are very, very good at larger risk management accounts, don't get me wrong.

But when you look at our book of business and peel back the onion, 90% of our revenue comes from the commercial middle market and that is where we are really strong and we fight the smaller local agent most of the time.

So I don't feel at any kind of disadvantage at all.

Besides, I would say our consulting division, our benefits consulting division now is down to less than 35% being health and welfare.

The other business is all consulting.

Thank you.

Bob Glasspiegel, Janney.

This is a 20,000 foot question for you, Pat, as a very esteemed observer of the industry.

There seems to be an acceleration in consolidation as an important theme in the carriers that you deal with at a pace that you and I haven't seen before.

I think almost every company is questioning whether they've got the right scale, technology, spend, tax structure to compete in a new world.

I'm just curious whether you think this is a blip or a trend that is going to accelerate.

Do you prefer to deal or do you see that you're dealing with the bigger companies to a greater extent than the regionals?

And to what extent is technology and efficiency really important in you deciding what carriers that you deal with and is that trend going to continue or wheel off?

Bob, I'm going to break all 52 questions down to a few that I can answer.

First and foremost, I do think this is a trend that we are going to see.

I think the pressure for cost containment, IT spend, you hit right on those deals.

Tax structure is going to foster continued acquisition activity.

I also think investment returns are going to push that.

So I do see bigger players getting bigger.

We trade very well with the larger players.

But I would also say that, in many of our branches, those local regional carriers play very, very important roles, very important roles to for instance in Cincinnati, Ohio -- very important relationship with Cincinnati.

But, those that are consolidating, I will just take ACE and Chubb, two great companies, two great relationships with Gallagher and we wish them well, and hope that we can help them in terms of building up their company to help our clients.

In the end, what our job is is to pick the right carrier to recommend to our clients in that is influenced by things like efficiency and ability to communicate.

But in the end, it is making sure that the cover is right, the price is right and we are replacing this with a carrier we trust will meet their obligations.

And that is why we are trusted advisors.

Your top five to 10 relationships, has that grown as a percentage of your total book over the last 10 years or not?

And do you see that number increasing or staying about the same prospectively?

It has grown substantially and we see that continuing.

Thank you.

Dan Farrell, Piper Jaffray.

Just a question around margin, and Doug, you mentioned the comments on the third quarter and some of the comparison difficulties there.

I'm trying to think a little more longer-term.

If we look at the operating leverage of 70 bps that you got this quarter off of 3.9% organic, if organic trended at that level, is there any reason to think that you wouldn't be able to get that same kind of operating leverage?

Or was there something sort of unusual in second quarter?

I think that my standard [RAC] comment that we talked about for about the last 20 quarters is it's very hard to grow margin in our brokerage business when we don't have organic growth above 3%.

If we had consistent organic growth in the 4% to 5% range, we would still show what I would consider to be organic margin expansion.

So if we get into that fourth quarter, if we get into the next year and we are posting 4%, 4.5%, something like that, you would see some margin expansion on that.

I will say, however, though, that if you look back over the last four years, I just went back and I looked at the second quarter of 2011, we are up 4 margin points in the last four years.

And we are actually getting to the point in our margin level that margins don't grow on trees -- trees don't grow to the moon.

So we feel that our margins are good where they are now.

There could be some margin expansion.

We have a lot of terrific investment opportunities that we would like to do to hire more producers, to bring on more talent, to open up more product lines and opportunities.

So we feel that, and I'm sensing that we are already well-positioned in terms of the margins compared to the other publicly traded brokers, but our margins are in really, really good shape.

So we like the idea of investing for growth, so I say yes, it can happen if you are above 3%.

But I think we've got lots of investment opportunities going forward that we intend to make.

And so just a little bit like in our Gallagher Bassett unit, we are up in that 16.5% range and we feel comfortable with it.

So --.

Okay, thank you very much.

Adam Klauber, William Blair.

William Gallagher is a great franchise and a good strategic fit, really helps your New England presence.

Yes, you're right.

What did you guys pay for the deal?

The price on that is somewhere around $140 million to $150 million.

Okay, thanks.

And then will that close on the third quarter?

Yes, and actually we were hoping that maybe we could get the regulatory approval a little sooner that we're -- . But we are still closing -- but we hope to close in the next week or two.

Okay, okay.

Thanks.

And then as far as the acquisition charges, so for the first half you said around $0.09 per share and you're right on that $0.18.

But there is also workforce lease termination and acquisition-related adjustments that are roughly another $0.11 for the first half.

I guess, are those weighed to acquisitions?

How are they different than the integration charges?

Most of those have to do with just as we rationalize our workforce in other places.

Most of that relates to that, and a lot of it has to do with leases more than workforce termination.

Okay, that makes sense.

So then for the second half, I think you are saying around $0.20 of acquisition integration charges.

Will there be also workforce and lease termination or acquisition-related adjustments?

There could be some, but right now the way our real estate portfolio, we've got 63 leases under renewal process right now that we are working on.

I don't see any of them in large platform places like LA, San Francisco, etc.

So I don't see right now big work or lease charges as we move into new locations.

So I don't see that number in the next three quarters being nearly as big as it was in the first two.

Okay.

And then just to reconfirm what you said, so for 2016 we should look for all those charges to be materially lower than they were in 2015?

Is that correct?

That's correct.

Okay, okay.

Look, we are a year into our larger deals.

I think that if you go around the world, we are in really great shape.

The complexity is in the UK on really pushing Giles Oval, the old Heath Lambert, the old Arthur Gallagher businesses together over there.

And it just takes a long time.

I think at one point there was over 200 legal entities there, 40 different systems.

That's the place where integration is taking its time, and not just -- it's highly regulated.

There's a lot of processes you have to go through in order to get them integrated.

But they are on plan.

We are not trying to re-create a product or anything.

We know the systems, we know the -- it's more of a migration plan that it is trying to figure out a solution on it.

So we feel like we are on good pace for that and the team is doing a terrific job under the circumstances over there.

And but by and large, Australia/New Zealand, we pulled ourselves out of West Farmers down there.

That is pretty well done.

We hit our milestones in June.

Bollinger was a textbook integration in the Northeast, so we feel that thing is fully into our books and done.

Canada is doing a terrific job.

We have six different really kind of interlocked but independent agencies out there and brokers around Canada.

They are coming onto a common Canadian system, so that -- the team up there is doing a great job.

So all of this is moving along and we really haven't had any hiccups along the way.

So I don't have any issues.

But 2016 should be pretty much a lined up year for that.

Okay, that's helpful.

And then as far as clean energy, if I was right, it looks like you bumped up your numbers moderately for the fourth quarter.

Is that right?

Yes, a little bit there.

I think if you look on page 15 or 16 of the investor supplement, we provide a schedule in there that shows what generated in our outlook of expectation for the next -- and as we get closer to the end of the year, we are moving up the bottom end of the range a little bit on that.

And that is natural just because remember it's hard to improve the top end of that range because if they are running that optimal capacity at the top end of the range, the lower end of the range is where the sensitivity is, because if you take a plant down you get zero.

But you can't double a plant's capacity because that's just not the way it works.

So we are very pleased that the bottom end of that range is moving up.

Right, right, and that's fair in that it looks like, overall, that clean energy net earnings will be up roughly 10% or even a little bit more for the year, which is a nice improvement.

How should we think about 2016?

Is there a potential for further improvement in earnings or are we closer to being tapped out within clean energy?

Yes, I think if you look on that in the press release, we say that there is about eight plants that we are looking for homes on still, and permanent homes.

So we are getting good momentum on that.

The team that works on that has had some really nice uptick.

I would guess that we will see some more momentum on that in September.

You kind of get into the summer holiday season here, so I would expect to have some good news on that by the time we get to the third quarter.

Great, great, and size wise, are those plants around the average size of your other plants, larger, smaller?

I think they're larger.

Okay, okay great, thanks a lot.

Meyer Shields, KBW.

I came on a little late, I apologize if you covered this.

Did FX changes year-over-year have any impact on your margins?

We controlled for that in our margin computations, but let me flip to that page.

I don't think it had a significant impact in the margins.

Very little, as a matter of fact.

And, then, conceptually when you've got all this consolidation going on, I don't know whether either of these makes sense.

You could either have carriers look to squeeze the brokers as an expense management strategy or maybe pay a little bit more to ensure that there isn't a lot of spilled over revenue.

Are either of those relevant factors?

Not at this point.

Okay.

We haven't seen in the past where a carrier goes through consolidation is interested in disrupting its distribution system.

Right.

I mean, I think we've got terrific -- in particular the ACE-Chubb acquisition, which is I think what you are referring to, we've got terrific relationships with both of those incredibly fine companies.

And on the combined basis, we will be a very, very large player with the ongoing Chubb and, as I said, the relationship is very strong.

Doug is right.

You don't do something like that and then piss off your clients.

No, I'm wondering actually in part in the other direction, whether there is an unusual benefit like --.

No, I don't think so.

Okay, fair enough.

And then lastly, in general, when we model contingents in supplementals, should that sort of correspond to the percentage revenue growth from acquired from acquisitions?

That just depends, especially once we start doing some of these nice tuck-in acquisitions, their compensation programs can be all over the board.

So I don't think you can have a meaningful modeling assumption on that.

Overall, you can see over the last 12 or 13 quarters that, by and large, our organic growth in those kind of stays pace with our base commissions and fees.

They will get some geography between the two lines for everything, but I would model those as a growth number that is not all that different than our base commissions and fees.

Okay, perfect, thanks so much.

Ken Billingsley, Compass Point.

I wanted to ask about -- this is page 3 of the press release -- and specifically the organic change in contingent commission being down 10% and specifically what's driving that.

I know this may be more of a (technical difficulty) the carriers sales, but is this loss performance changes here may be where the decline is coming?

No, listen, I think the geography between contingents and supplementals is something.

If you look at the two together, you will see a number there that grows about what the base organic.

We did have a contract flip that we thought was going to be a contingent that moved up into a supplemental, just by the nature of it.

And again, the lines on those two continue to become blurred.

They were much more pronounced on what a supplemental was and what a contingent was.

When you go back into the 2008, 2009, 2010 era.

But by and large, we are indifferent to whether it is a supplemental or a contingent.

And what works what best for the carrier and what works best for us we are happy to do it.

There are some black and white lines that we draw in where we classify it, but there is nothing there that I would consider to be noteworthy.

It's more semantics then it is anything else.

Okay.

So obviously we can't use the numbers may be to infer what's going on, so let me just ask kind of penetrating a little bit of the veil then.

Can you talk about maybe performance contingents or are those -- how are the carriers doing?

And are you getting the full amount on profit contingent?

Or are those coming in a little bit lower than expected (multiple speakers) market conditions?

It's a bit of a mixed bag.

If you take a look at Cincinnati's numbers this week, they hit the ball out of the park.

So they are a very prominent carrier with us, so they are very -- those that are doing well seem to be doing very well in this environment and we are benefiting from that with our contingents.

But it is something that you are right to be looking at that line, because they are indeed contingent.

And if, in fact, this market softens to any great extent, and those results begin to fall, we will feel pressure on the contingent line.

Great.

The other question I had is on M&A and the opportunity.

You discussed about the competitive market domestically in North America just in general.

But the UK, Europe and Australia/New Zealand geographies, are you seeing the same competition?

Or is that a nice greenfield for you to still look for growth?

There is good competition, but it's not as fierce as it is in the United States and it is greenfield for us.

We've got a building pipeline in Australia.

New Zealand is a smaller market but there is a building pipeline there.

We've got a very nice pipeline building in Canada and we've got a very nice pipeline that has been built and is continuing to build in the UK.

So those are a little bit of a greenfield opportunity for us for sure.

But you have to look at our business and really, it's almost hard to get your head around it.

According to one consulting firm that we work with, Reagan Consultants, they believe there is 30,000 agents and brokers in America and that is firms, that's not people.

Now Business Insurance put out their Top 100 just a couple weeks ago and to be number 100 in the United States, you did $26 million in total revenue.

I mean there are thousands and thousands of these agents that do $2 million, $3 million, $4 million that we offer a terrific home to.

These are typically run by the entrepreneurs that built those businesses.

If we do our job and we pick the right ones, these are people that want to stay in the business.

They love the business, they like to take care of clients and they love to go out and sell.

And with our platform capabilities and ability to team with people, we give them a great place to land.

So I see terrific opportunities going forward.

Is there competition?

Sure there is.

I believe we compete very favorably with the private equity model especially for those that want to fold in, take advantage of the capabilities and aren't necessarily looking for the next flip.

It's one thing to join us and go after accounts that you could have never talked to before, even some of those being your good friends.

But at the same time, knowing that you are at a stable platform, you are at a stable place.

You can make the sale that private equity is great because they are going to pay you this, keep a little equity in, flip it, get a second bite and then flip it again, and maybe a second bite there and then flip it again and before you know it you don't know where the hell you are.

Very good, well, thank you for taking my questions.

Mark Hughes, SunTrust.

Doug, I wonder whether you might sharpen up your outlook in the corporate segment, the potential out there, you think you mentioned the eight plans, assuming you get some reasonable success, what does that mean in terms of the EPS in corporate notionally as we think about 2016?

I don't know if I will be able to do the math in my head right here, but I think what we said, when you go back to what our commentary -- and I'm going by memory here -- we thought that there might be a flattish to a small step up in 2015 and it looks like we might step up maybe 10% in clean energy this year overall.

Next year you might have another step up of 15% to 20%, based on, I think -- based on what we're seeing right now.

So that is when I look at next year, 15% to 20% step up if we get the plants in.

Not all of them will come in at the beginning of the year.

That would be something that would come in over the year.

So 15% to 20% is probably the right number.

And when we think about the EPS impact of that, is that 15% to 20% on the EPS number?

Well, listen, I think that if you look at clean energy that is on pace, if you go into our guidance and our supplement here, clean energy is on pace this year to do somewhere around $100 million to $105 million, something like that.

So if you take another 20% on that at the top end of the range you might pick up another 20 million out of 170 million shares outstanding.

Maybe you pick up another 9 million, is that how the math works?

Yes, thank you for that.

And then secondly on the risk management, Pat, some commentary on workers comp claims frequency and I know you're picking up business and so you have some additional growth.

But sort of on an underlying basis, what is your -- or what do you hear lately about workers comp claim frequency?

And then is there any loss inflation?

Has that picked up at all?

First of all, on the claims frequency side, workers comp is the bulk of what we do in the United States.

Those claim counts are up about 3%, which is good.

That is a proxy for the economy.

When shifts come back online, claim counts tend to go up.

In terms of cost inflation, we are -- we see some of that on the liability side, not so much on the workers comp side.

People are taking up our managed-care offerings to a great degree and that is helping us get people back to work quickly.

That is the key to a comp claim.

The key to a comp claim is getting it reported quickly, interacting with the client -- with the claimant very quickly, getting them to the right physicians and the right people and the right nurse case managers and getting them back to work.

That is how you drive the outcome.

Thank you.

Kai Pan, Morgan Stanley.

Just wanted to follow up one more question with M&A.

In terms of organic, just specifically in Canada and New Zealand/Australia, taking UK out of there, just on the international side, is that acting a little bit of a headwind right at the moment?

Or kind of where are you at and what do you want it to be looking like going forward out of those two regions?

Good question.

I think if you go around the world, Canada's terrific.

Just realize that Canada is going to perform at the levels that you are going to see the overall average at, at least that is our indication right now.

Australia/New Zealand, it's tough.

Kind of double whammy down there.

You have got rates falling off.

I will call that a true soft market, not a moderating market down there.

And I think that as you know, Australia -- New Zealand is a terrific franchise.

It's doing well.

And Australia is starting to get its legs under it after our acquisition.

But there's pressure in both of those economies, not only from rate but also from economic activity.

So if I just look at those two together, for the full quarter, remember we didn't own them for the full quarter.

We only own them for two weeks of the quarter.

And the measurement systems on organic could be a little different between their old systems and our new systems.

So -- but if you look at that, it's about flat between Australia and New Zealand in terms of organic growth.

Most of that has to do with rates and exposure, not necessarily new business less lost wins.

If I break them apart, you are seeing New Zealand subsidize Australia by maybe 3 to 4 points, something like that.

So that -- if you look at those two numbers there, but Canada has been terrific.

Great, great organic growth in Canada and we do especially on the retail side, have organic growth in the UK.

Thanks guys, that is perfect.

No further questions.

There are no further questions at this time.

Would you like to make any closing statements?

Yes, thank you.

Just one quick wrap-up comment, and we will let everybody get going.

You might recall at the outset of our call I mentioned that I was pleased with our organic growth.

All in, 5.8% is a very strong result and let me tell you, this is no accident.

Over the past decade, we've invested heavily in our new business and retention strategies.

We brought in sales training, sales management systems.

As I mentioned, this summer we have 250 interns learning about this great business.

Our cross-selling efforts between our wholesale property-casualty and benefit teams are at all-time highs.

Our international and US teams are working seamlessly on all types of new business.

It's safe to say that our aggressive sales culture is alive and well.

So thank you all for being with us this morning.

We will talk to you in a quarter.